2018 (11) TMI 267 - AT - Income Tax

Allowability of exemption u/s.10(1) in respect of the claim of agricultural income - agricultural activity - assessee claims to be engaged in production of specialized seeds in the leased lands, (1)making of certified seeds; (2) undertaking other processing activities and finally (3) trading of the said certified seeds. Assessee also engaged in the trading activity of the said seeds too - Held that - On the facts of assessee entering into an agreement with the agricultural landlords-cum-growers for growing the foundation and breeder seeds as per the terms and conditions and also the scientific specifications provided by the assessee, when the assessee bears all the expenditure on land development, irrigation, fertilizers, pesticides, transportation etc., when the assessee pays the land rent and also for the labour, when the landlord acts only as a grower and hands over the entire agricultural produce of foundation and breeder seeds to the assessee at the end. Grower never sold the agricultural produce to the assessee etc. Thus, the activity constitutes agricultural activity as the assessee constitutes an agriculturist and the entire activity of production and growing of said seeds becomes an agricultural activity. The solitary evidence gathered by the AO in the solitary case of Shri Bhuma Bala Narasimha Reddy does not hold good considering the fact that the said evidences was not put to the assessee in a settled perspective of legal proceedings. Therefore, procurement of seeds from the landlords-cum-growers is not the transaction of purchase of seeds for trading activity. Thus the claim made by the assessee is proper. The decision of CIT(A) is fair and reasonable and does not call for any interference. - Decided in favour of assessee. Disallowance u/s.14A r.w. Rule 8D(2) - Held that - It is a settled issue that the said provisions are not applicable when the exempt income is not includes in the total income of the assessee. Accordingly, relevant grounds in the assessment years under consideration are required to be allowed in favour of the assessee.

Summary

Issues Involved:
1. Allowability of exemption under section 10(1) of the Income Tax Act, 1961, for income from seed production activity.
2. Validity and implications of unregistered lease agreements.
3. Nature of transactions with seed growers and whether they constitute agricultural activity.
4. Classification of subsequent processing activities as agricultural or business activities.
5. Disallowance under section 14A read with Rule 8D(2) of the Income Tax Rules, 1962.

Issue-wise Detailed Analysis:

1. Allowability of Exemption under Section 10(1):
The primary issue is whether the income derived from seed production qualifies as agricultural income exempt under section 10(1) of the Income Tax Act, 1961. The assessee, engaged in seed production, claimed exemption for agricultural income. The Assessing Officer (AO) contested this, arguing that the activities involved were more akin to manufacturing and trading rather than agricultural. The AO's stance was based on the nature of the processes involved and the unregistered lease agreements. However, the CIT(A) and the Tribunal, relying on precedents such as the Pune Bench's decision in ACIT vs. M/s. Ajeet Seeds Ltd., concluded that the activities constituted agricultural operations and thus qualified for exemption under section 10(1).

2. Validity and Implications of Unregistered Lease Agreements:
The AO questioned the validity of the lease agreements due to their unregistered status, arguing that this undermined the claim of agricultural activity. However, the Tribunal noted that the agreements were acted upon by both parties, with substantial expenses incurred by the assessee on agricultural activities. The Tribunal emphasized that the absence of registration did not invalidate the agreements, especially when they were executed in good faith and acted upon. The Tribunal dismissed the AO's objections as procedural and upheld the validity of the lease agreements.

3. Nature of Transactions with Seed Growers:
The AO argued that the transactions with seed growers were mere purchases, not agricultural activities. This was partly based on a letter from a grower, Mr. Bhuma Bala Narasimha Reddy, which indicated a sale transaction. However, the Tribunal found that the AO failed to provide this evidence to the assessee or allow cross-examination, thus violating principles of natural justice. The Tribunal also noted that most growers confirmed the agricultural nature of their activities and the contractual relationship with the assessee. Consequently, the Tribunal held that the transactions were agricultural in nature and not mere purchases.

4. Classification of Subsequent Processing Activities:
The AO classified the subsequent processing of seeds as manufacturing/business activities, thereby disqualifying the income from exemption. However, the Tribunal, referencing the decision in ACIT vs. Ajeet Seeds Ltd. and other relevant judgments, held that these activities were integral to agricultural operations. The Tribunal distinguished the case from others like Namdhari Seeds Pvt. Ltd., emphasizing that the assessee's activities involved significant agricultural operations and scientific methods, qualifying them as agricultural activities.

5. Disallowance under Section 14A read with Rule 8D(2):
For the assessment years 2013-14 and 2014-15, the AO made disallowances under section 14A read with Rule 8D(2), arguing that the assessee had incurred substantial interest expenditure on investments. The Tribunal, however, noted that the assessee did not earn any exempt income during these years. Citing various judicial precedents, the Tribunal held that disallowance under section 14A is not applicable when no exempt income is earned. The Tribunal upheld the CIT(A)'s decision to delete the disallowances.

Conclusion:
The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s decisions. It confirmed that the assessee's seed production activities qualified as agricultural operations exempt under section 10(1), validated the unregistered lease agreements, recognized the agricultural nature of transactions with growers, and ruled out disallowances under section 14A in the absence of exempt income.