2014 (7) TMI 1348 - HC - Income Tax

Claim for exemption u/s 10 - Agricultural income - processes undergone on hybrid seeds - whether the income derived by the assessee by sale of seeds constitutes agricultural income or business income? - HELD THAT - Under the provisions of the Karnataka Land Reforms Act lease of the agricultural land is totally prohibited except to the extent provided in Section 5 of the Act. Though each State has passed such Land Reforms Act its provisions vary from State to State. The main policy before this agrarian reforms is to abolish absentee land lords and to confer tiller the ownership of the land. It is in this back ground when we look at the provisions of the Income Tax Act and the exemption granted to agricultural income and the agricultural income having been defined specifically the said provisions required to be interpreted in the light of the agrarian reforms. In case where the assessee ploughs the land and in case where the law permits taking agricultural leases of land and if the assessee cultivates the land raises the crops and seeds and hence income derived therefrom will fall within the definition of agricultural income and the assessee would be entitled to the benefit of Section 10(1)(a) of the Act. If the assessee is not owning the land and in law he cannot take the land on lease but still he enters into contract with the land owners gives them the monitory assistance and those land owners physically cultivate the land and grow the crops and when the assessee contends that crops grown belongs to him and he is selling them and therefore it is an agricultural income the question arises as to whether the exemption under Section 10(1) is attracted to such income? Though several judgments were cited contending that it is an agricultural income we do not see in any of those judgments they have taken note of this agrarian reforms. Most of the judgments are anterior to agrarian reforms. At any rate the authorities have not applied their minds to these fundamental facts which are in the nature of jurisdictional facts before valid order is passed under the said Act. In the absence of the authorities applying their minds to these facts it would be inappropriate for this Court to record any findings on the basis of the submissions made at the Bar or by looking into the documents now being produced. Therefore we are of the view that the proper course would be to set-aside all the impugned orders remit the matters back to the Assessing Authority so that Assessing Authority would formulate proper points for consideration give an opportunity to the assessee to produce evidence in support of their contention. The Assessing Authority would look into agrarian reforms passed in each State which is relevant for passing the assessment order and then pass an order keeping in mind all the decisions relied by the parties. In our view it would meet the ends of justice. Assessing Authority shall record a finding on facts as What is the extent of land these assessees hold in the States where they are growing seeds and then looking into the relevant Land Reforms Act to find out whether they are entitled to hold such land or if so under what provisions of the Act. Consequently what would be the legal effect in respect of excess land held by them and in cases where there is a total prohibition of taking the land on lease if the assessee has entered into an arrangement with the land owners irrespective of the nomenclature given whether the income derived from such agricultural operation would be construed as an agricultural income as defined under Section 2(1)(A) of the Act to be eligible for exemption under Section 10(1) of the Act? - Also whether the processes undergone by hybrid seeds before it is sold in the market would in any way take away the character of an agricultural produce of the seeds to be kept away from the application of the provision of Section 2(1)(A) of the Act? Entitled to deduction u/s.43B - belated remittance of employees contribution towards ESI - employees contribution is income of the assessee u/s.2(24)(x) of the Act and allowable as deduction u/s.36(1)(va) of the Act if remitted within the due date prescribed under the ESI Act and recorded a perverse finding - HELD THAT - Issue decided in favour of assessee as relying on M/S ESSAE TERAOKA PVT LTD 2014 (3) TMI 386 - KARNATAKA HIGH COURT .

Summary

Issues involved:
1. Determination of whether income derived from the sale of seeds by two different entities constitutes agricultural income or business income.
2. Interpretation of statutory provisions under the Income Tax Act regarding agricultural income and exemptions.
3. Analysis of the impact of agrarian reforms on the classification of income derived from agricultural operations.
4. Examination of whether the treatment of seeds with chemicals affects their classification as agricultural produce.
5. Consideration of deductions and benefits applicable to income classified as agricultural income.

Analysis:
1. The appeals involved a common question of law regarding the classification of income derived from the sale of seeds by two entities, one being a partnership firm engaged in seed cultivation and the other a public limited company involved in seed development. The Tribunal's decisions differed for each entity based on the facts of their operations.
2. The contention of the assessees was that the income from seed operations should be classified as agricultural income under Section 10(1) of the Income Tax Act. The Tribunal held in favor of one entity but against the other based on the applicability of previous judgments and differences in their operations.
3. The High Court emphasized the importance of considering agrarian reforms in interpreting provisions related to agricultural income. It highlighted the significance of land ownership and cultivation practices in determining whether income qualifies as agricultural income under the Act.
4. The Court directed the Assessing Authority to re-examine the classification of income in light of relevant judgments and agrarian laws. It stressed the need to assess the impact of processes like chemical treatment on seeds and whether they affect the agricultural nature of the produce.
5. The Court outlined specific factors for the Assessing Authority to consider, including land ownership, lease agreements, and the nature of operations performed on the land. It also addressed the apportionment of income if part of the operations involved activities beyond traditional agriculture.
6. Additionally, a separate issue regarding the deduction of employees' contributions towards ESI was addressed, with the Court affirming the Tribunal's decision in favor of the assessee based on previous judgments.

In conclusion, the High Court remanded the matters back to the Assessing Authority for a detailed examination considering agrarian reforms, land ownership, and the nature of operations to determine whether the income derived from seed sales qualifies as agricultural income or business income. The Court's comprehensive analysis emphasized the need for a thorough assessment based on legal provisions and factual considerations to ensure a just decision.