2010 (6) TMI 639 - AT - Income Tax

Summary

Issues Involved:
1. Whether the income from the sale of foundation seeds is agricultural income exempt u/s 10(1) of the Income-tax Act.
2. Whether research and development (R&D) expenditure can be allowed against the business income of the assessee in view of the provisions of section 14A of the Income-tax Act.

Summary:

Issue 1: Income from Sale of Foundation Seeds
The revenue contended that the CIT(A) erred in treating the income from the sale of foundation seeds as agricultural income exempt u/s 10(1) of the Income-tax Act. They argued that the production of basic seeds and sale of hybrid seeds is an integral activity and should be treated as business income. However, the Tribunal referred to its earlier decision in the assessee's own case for the assessment year 2001-02 (Vibha Agrotech Ltd. v. ITO [2009] 120 ITD 182 (Hyd.)), where it was held that the assessee was carrying on agricultural operations and the income from basic seeds was agricultural income exempt u/s 10(1). Consequently, the Tribunal upheld the CIT(A)'s decision and dismissed the revenue's appeals.

Issue 2: Allowability of R&D Expenditure
The assessee appealed against the CIT(A)'s decision to disallow R&D expenditure against business income u/s 14A. The assessee argued that the R&D activities were essential for its business of developing and producing hybrid seeds and should be allowed as a deduction. The Tribunal examined the facts and relevant case laws, including Waterfall Estates Ltd. v. CIT [1996] 219 ITR 563 (SC) and CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 (SC). It concluded that the assessee's activities constituted distinct business activities, and the R&D expenditure should be apportioned between agricultural and non-agricultural activities. The Tribunal directed the Assessing Officer to allow the expenditure attributable to the commercial division in proportion to the turnover between the agricultural and commercial divisions. Thus, the assessee's appeals were partly allowed.

Conclusion:
The appeals of the revenue were dismissed, and the appeals of the assessee were partly allowed.