2014 (7) TMI 637 - AT - Income Tax

Admission of additional grounds - Expenses attributable to agricultural income or not - Claim of weighted deduction u/s 32(2AB) of the Act - Exemption of agricultural income - u/s 10(1) of the Act - Applicability of section 40(a)(ia) of the Act Held that - The decision in M/s Advanta India Ltd., Versus The Asst. Commissioner of Income-tax, Circle-11(4), Bangalore 2012 (9) TMI 577 - ITAT, BANGALORE followed - the issues raised in additional grounds are the legal issues which go to the root of the matter and for deciding these legal issues no new facts are required to be considered as all the facts are already recorded in the orders there was no force in the contention of the revenue that the issue was not challenged before the AO, therefore, assessment was correctly made by the AO Relying upon National Thermal Power Co. Ltd. vs. CIT 1996 (12) TMI 7 - SUPREME Court the additional grounds are admitted. It is appropriate to remit the issue to the file of the AO to see whether the assessee taken land on lease from farmers, engaged the services of farmers for production of hybrid seed, took entire produce from the farmers, reimbursed the entire expenses of cultivation to the farmers and if the farmers are not given for the produce except reimbursement of the entire charges incurred by them and repayment of labour charges then only the assessee could be considered as it has carried on agricultural operations itself so as to treat income of the assessee as agricultural income Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Disallowance of R&D expenditure claim.
2. Apportionment of R&D expenditure between agricultural and commercial operations.
3. Claim for weighted deduction under section 35(2AB) of the Income-tax Act, 1961.
4. Classification of income as agricultural income exempt under section 10(1) of the IT Act, 1961.
5. Applicability of section 40(a)(ia) to payments made during the year.

Issue-wise Detailed Analysis:

1. Disallowance of R&D Expenditure Claim:
The assessee claimed R&D expenditure of Rs. 3,40,22,071, which was disallowed by the CIT(A). The CIT(A) held that R&D expenditure attributable to agricultural income cannot be allowed. The assessee argued that their scientific research unit was approved by DSIR and valid until 31.03.2016, making them eligible for weighted deduction under section 35(2AB). However, the CIT(A) followed the previous ITAT decision treating the income from the sale of foundation seed as agricultural income exempt under section 10(1), thus disallowing R&D expenditure attributable to agricultural operations.

2. Apportionment of R&D Expenditure Between Agricultural and Commercial Operations:
The CIT(A) directed that R&D expenditure should be apportioned between agricultural and commercial operations. The ITAT in its earlier order for the assessment years 2004-05 and 2005-06 had held that R&D expenditure incurred by the assessee was attributable to both divisions and should be allowed proportionately based on the turnover of agricultural and commercial divisions. Following this precedent, the CIT(A) directed the Assessing Officer to allow expenditure attributable to the commercial division proportionately, disallowing the expenditure attributable to the agricultural division.

3. Claim for Weighted Deduction Under Section 35(2AB):
The assessee claimed a weighted deduction of Rs. 18,19,42,296 under section 35(2AB), which was rejected by the Assessing Officer due to the absence of necessary approval from the DSIR. The CIT(A) noted that the research activity had been approved by DSIR, and recognition was granted up to 31.03.2016. However, since the assessee had not furnished Form No. 3CL certifying the amounts spent, the CIT(A) directed that the weighted deduction under section 35(2AB) would be given only upon receipt of Form No. 3CL from DSIR, and only for R&D expenditure attributable to the commercial division.

4. Classification of Income as Agricultural Income Exempt Under Section 10(1):
The assessee argued that their entire income of Rs. 79,67,82,429 was agricultural income exempt under section 10(1). The CIT(A), following the jurisdictional ITAT's earlier decision, directed the Assessing Officer to treat the income of Rs. 56,27,97,619 from the sale of foundation seed as agricultural income exempt under section 10(1). The AO had previously treated the entire income as business income, based on the decision in Pro-Agro Seeds Ltd. vs. JCIT, which held that the activities of the assessee did not qualify as agricultural operations. However, the CIT(A) and ITAT in earlier years had consistently held that the income from the sale of foundation seed was agricultural income.

5. Applicability of Section 40(a)(ia) to Payments Made During the Year:
The assessee raised an additional ground that the provisions of section 40(a)(ia) apply only to payments payable at the end of the year and not to payments already made during the year. The assessee relied on the decision in M/s Merilyn Shipping Transport & Others, where the Tribunal held that section 40(a)(ia) applies only to amounts payable as of 31st March and not to amounts already paid during the year. The CIT(A) had confirmed an addition of Rs. 1,47,52,389 under section 40(a)(ia). The Tribunal admitted this additional ground for consideration and remitted the issue back to the AO for fresh examination in light of the decision in Advanta India Ltd. vs. ACIT and the principles laid down in M/s Merilyn Shipping Transport & Others.

Conclusion:
The Tribunal partly allowed the assessee's appeal for statistical purposes, remitting the issue of classification of income as agricultural income back to the AO for fresh consideration. The Tribunal dismissed the Revenue's appeal and other grounds as infructuous due to the remittance of the main issue. The Tribunal emphasized the need for adequate opportunity for the assessee to present their case and directed the AO to re-examine the issues in light of relevant judicial precedents.