2011 (10) TMI 488 - HC - Income Tax

Agricultural income - denial of exemption conversion of foundation seeds into certified seeds- assessee supplying foundation seeds to farmers owning land, who under directions issued by company cultivate such seeds and get compensation for it - Held that - The term agriculture cannot be confined merely to the production of grain and food products for human beings and beasts,but must be understood as comprising all the products of the land which have some utiliy either for consumption or for trade and commerce. It comprises within its scope the basic as well as subsequent operations in the process of agriculture. If this integrated activity which constitutes agriculture is undertaken and performed in regard to any land that land can be said to have been used for agricultural purposes and the income derived there-from can be said to be agricultural income . The mere fact that an activity has some connection with or is in some way dependent on land is not sufficient to bring it within the scope of the term. Subsequent operations must necessarily be in conjunction with and a continuation of the basic operations. Subsequent operations performed to make produce fit for market can also be termed as agricultural operations. It means if the agricultural produce is taken to a market after making it as a marketable produce, it would also be considered as agricultural produce. Further, the section does not contemplate the sale of an item or a commodity which is different from what is cultivated and processed. If commercially a different article or commodity results after processing, then it would be a manufacturing activity. In present case, except supplying the foundation seeds and giving scientific advice from time to time, either at the time of sowing or pollination or harvesting, none of the normal activities of agriculture are undertaken by the assessee-company. The assessee-companies neither have derivative interests in the land nor actually cultivate the land. Even if they cultivate the land, they are not lessees of the land in view of terms of agreement eliminating such relationship. At the most, they cultivate the land on behalf of the farmer or owner. The entire terms of agreement only indicate that the foundation seeds grown by the farmer would be purchased by the assessee at the end for a certain price provided seeds qualify the specifications as per the agreement. Such input or scientific method in giving advice to the farmer cannot be termed as either basic agricultural operation or subsequent operations ordinarily employed by the farmer or agriculturist. Even if the assessee has benefits under Section 80J or 80HHC of the Act treating the conversion of foundation seeds to certified seeds as manufacturing activity, assessee would not get benefit of total exemption u/s 10(1) of the Act. - Decided against the Assessee by holding as business income.

Issues Involved:
1. Whether the income derived by the assessee from manufacturing and sale of seeds amounts to agricultural income exempt under Section 10(1) of the Income Tax Act.
2. Whether the assessee could be considered as having agricultural land in view of Section 79-A of the Karnataka Land Reforms Act.
3. Whether the process of certification of hybrid seeds produced by the appellant is a process ordinarily employed by a cultivator to render the produce fit for market.

Detailed Analysis:

1. Agricultural Income Exemption under Section 10(1):
The primary issue was whether the income derived from the manufacture and sale of seeds by the assessee qualifies as agricultural income under Section 10(1) of the Income Tax Act. The Tribunal had previously ruled that 90% of the income should be treated as agricultural income and 10% as business income. The High Court, however, scrutinized the terms of the agreement between the assessee and the farmers, noting that the assessee provided foundation seeds and technical supervision but did not engage in the basic agricultural operations such as tilling, sowing, and harvesting, which were performed by the farmers. The Court concluded that the assessee's activities did not constitute agricultural operations as defined under Section 2(1A) of the Act, and thus, the entire income should be treated as business income.

2. Ownership and Agricultural Land under Section 79-A of Karnataka Land Reforms Act:
The Court examined whether the assessee could be considered to have agricultural land under Section 79-A of the Karnataka Land Reforms Act. The agreement between the assessee and the farmers explicitly stated that no lease was created, and any terms inconsistent with the Karnataka Land Reforms Act would be null and void. The Court found that the assessee did not have derivative interests in the land and was not a lessee or cultivator under the Act. Therefore, the assessee could not claim the status of an agriculturist or derive agricultural income from the land.

3. Certification Process of Hybrid Seeds:
The Court also addressed whether the process of certification of hybrid seeds by the assessee was a process ordinarily employed by a cultivator to make the produce marketable. The Tribunal had held that converting hybrid seeds to certified seeds involved processes not ordinarily employed by cultivators, thus treating 10% of the income as business income. The High Court agreed, noting that the certification process involved additional steps such as cleaning, grading, and testing, which were beyond the ordinary agricultural processes. Consequently, the Court ruled that the entire income from such activities should be treated as business income.

Conclusion:
The High Court concluded that the entire income derived by the assessee from the manufacturing and sale of seeds should be treated as business income and not agricultural income. The Court upheld the Assessing Officer's decision to treat the total income as business income, rejecting the assessee's claim for exemption under Section 10(1) of the Income Tax Act.

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