Advanta India Ltd. v. Deputy Commissioner of Income-tax

Dr. O.K. Narayanan, Vice-President —This appeal is filed by the assessee. The relevant assessment year is 2002-03. The appeal is directed against the order of the Commissioner of Income-tax (Appeals)-II, Hyderabad, dated February 15, 2005.

2. The appeal arises out of the assessment completed under section 143(3) of the Income-tax Act, 1961.

3. The appeal was initially filed before the Income-tax Appellate Tribunal, Hyderabad Bench. Thereafter in pursuance of rule 4 of the Income-tax (Appellate Tribunal) Rules, 1963, the hon'ble President, Income-tax Appellate Tribunal, transferred the case file from Hyderabad Bench to Bangalore Bench in the light of the appropriate petition filed before his honour. This is how the matter has been placed before us.

4. The assessee is a company engaged in the business of production and sale of hybrid seeds. The company is engaged in the research, development, processing and marketing of hybrid seeds. The assessee-company carried out studies and researches to find out the most suitable genetic composition of seeds in the respective local environment. The assessee procures germplasm prototype of the hybrid seeds from laboratories for employing the same in its subsequent operations. The germplasm is sown in fields which grows into what is called the basic seed. The basic seeds are again replanted to grow the hybrid seeds. The hybrid seeds are sold by the assessee-company, to farmers at large. This is the frame of operations carried on by the assessee during the previous year relevant to the assessment year in appeal. In the past, the assessee had carried out business in different formulations like distributing basic seeds to farmers to grow into hybrid seeds and buying them back from the farmers, etc. But those business dynamics are not relevant for the impugned assessment year. As far as the impugned assessment year is concerned, the assessee itself is growing basic seeds as well as hybrid seeds.

5. Up to the basic seed activity, all the primary operations are performed by the assessee in its own lands or lands leased by it, under its own direct supervision and guidance engaging casual labour. The hybrid seeds are grown by the farmers in their own lands but leased out to the assessee-company. The entire cost of production was to be reimbursed by the assessee to the farmers. Therefore, de facto speaking the hybrid seed operations was carried on by the assessee in its leasehold lands.

6. In the computation of total income, the assessee claimed deduction of Rs. 1,88,38,838 under rule 7 of the Income-tax Rules, 1962. The deduction has been claimed by the assessee on the ground that the income is partially agricultural and partially from business. But in the note enclosed to the computation of income, the assessee has further stated that the company reserves the right to contend at the time of hearing that the entire income of the company is fully exempt since it is agricultural income as per the Income-tax Act.

7. The Assessing Officer relying on the decision of the Income-tax Appellate Tribunal, Delhi in the case of Proagro Seeds Co. Ltd., v. Joint CIT in I.T.A. No. 90/Delhi/2000, dated November 11, 2002, noticed the assessee on why the claim for partial deduction should not be denied. The assessee replied that the entire income was in the nature of agricultural income and relied on the judgment of the hon'ble Supreme Court rendered in the case of CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 and other cases.

8. But anyhow the Assessing Officer did not accept any of the contention of the assessee and treated the entire income as business income mainly on the following premises :

(i)The profit derived by the assessee arose mainly on account of international technology, marketing expertise assisted by the agricultural operations carried on by the growers mainly on their own lands.

(ii)The assessee does not undertake any agricultural activity by relying on the decision of the Income-tax Appellate Tribunal, Delhi in Proagro Seeds Co. Ltd., v. Joint CIT in I.T.A. No. 90/Delhi/2000, dated November 11, 2002.

9. On the issue of agricultural character of income, the Commissioner of Income-tax (Appeals) confirmed the order of the assessing authority. The Commissioner of Income-tax (Appeals) held that the income of the assessee is neither wholly nor partially agricultural income. It is against the above, the assessee has come in the second appeal before us.

10. Even though the assessee has raised twenty-two grounds of appeal, the issue in short is whether the entire income earned by the assessee out of production of hybrid seeds is agricultural in character or not. The alternative contention of the assessee is that at least income attributable to the production of basic seeds is agricultural in nature.

11. We heard Shri. P.J. Pardiwala, the senior counsel appearing for the assessee and Smt. Swathi S. Patil, learned counsel appearing for the Revenue.

12. An exactly similar issue was considered by the Income-tax Appellate Tribunal, "B" Bench of Bangalore in the cases of Indo American Exports and Namdhari Seeds (P.) Ltd., in their common order dated July 14, 2006, passed in I.T.A. No. 1040/Bang/2002 and I.T.A. No. 3102/Bang/2004. After considering the facts and rival contentions in detail, the Tribunal held as follows :

"5.4. After hearing both the sides, we are of the view that the only question to be decided by the Tribunal is as to whether the seeds produced by the assessee and sold in market generates agricultural income or is it a business income. The provision of section 2(1A) of the Income-tax Act is quoted below :

'(1A) "agricultural income" means :—

(a)any rent or revenue derived from land which is situated in India and is used for agricultural purposes ;

(b)any income derived from such land by—

(i)agriculture ; or

(ii)the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or

(iii)the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause ;

(c)any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and ( iii) of sub-clause (b) is carried on :

Provided that—

(i)the building is on or in the immediate vicinity of the land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the land, requires as a dwelling house, or as a store-house, or other out-building, and

(ii)the land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such or where the land is not so assessed to land revenue or subject to a local rate, it is not situated—'

It may be appreciated that agricultural income includes any rent or revenue derived from the land which is used for agricultural purposes. The issue is whether the revenue derived from such land by the assessee is agricultural income or not. For the purpose of deriving income from agricultural land there is no necessity that such land should be owned by the assessee. If the assessee has derivative interest in the land for the purpose of conducting agricultural operations on the said land, then the revenue generated from such land would be agricultural income. This has been so held by the hon'ble Madras High Court in [1951] 20 ITR 151 (CIT v. Maddi Venkatasubbayya) . Here it may be appreciated that the assessee entered into a lease agreement with various agricultural land owners for the purpose of obtaining lands for doing the process of agricultural operations. The Government of Karnataka has also granted registration to the asses-see thereby permitting the assessee to take up production and distribution of various seeds and crops. The assessee's representatives are there on the land to supervise the manual labour operations and to protect the assessee's interest and it may be appreciated that the sowing, growing and protecting the crop and the produce is also taken by the assessee and the assessee alone. Here the kind attention of the hon'ble Tribunal is drawn to the decision of the Allahabad High Court reported in [1989] 177 ITR 428 (Commissioner Of Income-Tax v. Associated Metals Co.) wherein it has been held that the assessee-company therein had entered into an agreement with bhumidhars of land for sowing and growing and protecting crops and thereafter the major share of the profit was to be of the company therein. In that case it was held the income of the company was agricultural income. The assessee's case herein stands on a much better footing. It may also be appreciated by the hon'ble Tribunal the assessing authority himself does not dispute the fact that the assessee is undertaking the agricultural operations. In fact the assessing authority himself has accepted the agricultural income declared by the assessee on the contract production done outside the State of Karnataka. It is only in regard to the State of Karnataka that the assessing authority has held that as per the Land Reforms Act the assessee is not entitled to the benefit of exemption under section 2(1A) of the Act. The bar levied by the Karnataka Land Reforms Act would no more hold good in so far as the Government of Karnataka has granted certificate to the assessee for production and distribution of the specified hybrid seeds and plants. Here it may also be appreciated that the nexus between the income claimed by the assessee as not includible in the total income and the agricultural operations conducted by the assessee and the lands from which the income as so generated have not been disputed by the Revenue. The immediate source of the income is the agricultural operations conducted by the assessee on the land and land alone and consequently the same is liable to be treated only as agricultural income."

13. Finally the Tribunal in the said order has concluded as follows :

"In view of such discussion, foundation seeds or hybrid seeds produced in own land or lands taken on lease, i.e., on contract farming will be the result of agricultural operations and the profit arising out of such activities shall be treated as agricultural income."

14. Therefore, it is to be seen that the issue raised in the present appeal is squarely covered by the abovementioned decision of the Bangalore "B" Bench in the cases of Indo American Exports and Namdhari Seeds (P.) Ltd.

15. The hon'ble Supreme Court in the case of CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 has considered comprehensively the concept of agricultural income for the purpose of the Income-tax Act. The court held that agriculture in its primary sense denotes the cultivation of the field and is restricted to cultivation of the land in the strict sense of the term meaning thereby tilling of the land, sowing of the seeds, planting and similar operations on the land. These are basic operations and require the expenditure of human skill and labour upon the land itself. The court further held that the performance of subsequent operations like tending, pruning, cutting, harvesting, etc., would not be enough to characterise them as agricultural operations. In order to invest them with the character of agricultural operations, subsequent operations must necessarily be taken in conjunction with and in continuation of the basic operations which are the effective cost of the produce being raised from the land.

16. If we examine the operations carried out by the assessee in the previous year relevant to the assessment year in appeal, we find that the production of basic seeds as well as hybrid seeds are the results of basic agricultural operations carried on by the assessee-company in its own land as well as in leasehold land. The method of contract farming does not take away the character of the basic operations carried out by the assessee-company which are agricultural in nature. The assessee-company procures germplasm and sows it in its own fields, and carries on all agricultural operations and produces the basic seeds. The basic seeds so harvested are again put through agricultural operations intimately connected with leasehold land for finally bringing out the hybrid seeds. Only for the reason that the basic seeds are sown in leasehold land and the manpower required is arranged through contract farming, it does not mean that the operations carried out by the assessee-company are not agricultural operations. As a matter of fact, it is to be seen that the assessee-company has carried out basic as well as secondary agricultural operations. Therefore, without any fear of contradiction, it is possible for us to hold that such entire income of the assessee is agricultural in nature which is to be excluded from the nature of total income.

17. The assessee is successful in its appeal.

18. As the main ground of the assessee itself is decided in its favour, we have not considered the alternative contention regarding application of rule 7 and proportionate exemption of income.

19. The reasons pointed out by the assessing authority to deny the claim of exemption made by the assessee-company are that the assessee is following international technology, marketing expertise, integrated scientific and commercial activity, etc. These are all matters strange to the strict code of income-tax. Those premises do not have any role in deciding the nature of income within the framework of the Income-tax Act, 1961. The reasons pointed out by the Assessing Officer are by and large issues to be decided by the policy makers in the Government.

20. In result, appeal filed by the assessee is allowed.

21. The order pronounced on Thursday, the 29th day of June, 2010, at Bangalore.