2022 (11) TMI 518 - AT - Income Tax

Agricultural income - seeds production activity - whether the CIT(A) is justified in holding the seeds production activity as exempt u/s 10(1) as against the business income as held by the A.O? - whether the income derived by the assessee is from agricultural operations amounting to agricultural income? - HELD THAT - We find the AO denied the claim as agricultural income and treated the same as business income by placing reliance on the decision of Hon ble Supreme Court in the case of Raja Benoy Kumar Sahas Roy 1957 (5) TMI 6 - SUPREME COURT and case of Namdhari Seeds Pvt. Ltd. 2011 (10) TMI 488 - KARNATAKA HIGH COURT held every amount accrued to a person in whose hands agricultural produce passes through cannot become agricultural income and it is only when owner, landlord or farmer or persons having derivative interest in such lands receives income from land by performance of agricultural operations on it can be termed as agricultural income by placing reliance in the case of Raja Benoy Kumar Sahas Roy (supra). Therefore, the finding of Hon ble High Court of Karnataka Namdhari Seeds Pvt. Ltd. (supra) is applicable to the facts of the present case. Thus, the order of AO is restored. Grounds 1 to 6 raised by the Revenue are allowed.

Issues Involved:
1. Whether the seed production activity qualifies as agricultural income exempt under Section 10(1) of the Income-tax Act, 1961.
2. Whether the Assessing Officer (A.O) was justified in treating the income from seed production as business income.

Issue-Wise Analysis:

1. Seed Production Activity as Agricultural Income:
The primary issue in these appeals was whether the seed production activity conducted by the assessee qualifies as agricultural income exempt under Section 10(1) of the Income-tax Act, 1961. The assessee, a company engaged in the production and marketing of agricultural hybrid seeds, claimed agricultural income of Rs. 1,66,06,935/- as exempt. The A.O. disallowed this amount, treating it as business income. The CIT(A) reversed the A.O's decision, relying on a precedent where seed production was considered an agricultural activity due to the seed production agreement between the assessee and farmers.

2. Assessing Officer's Treatment of Income:
The A.O. contended that the assessee did not conduct the agricultural activities themselves but entered into agreements with farmers who performed these activities on behalf of the assessee. The A.O. argued that the assessee failed to establish its investment in any basic agricultural operations, thus treating the income as business income. The CIT(A) accepted the assessee's submissions without thorough examination, leading to the Revenue's appeal.

Detailed Analysis:

Seed Production Agreements:
The agreements between the assessee and farmers were crucial in determining the nature of the income. The agreements indicated that the farmers, referred to as the 'Second Party,' were responsible for all agricultural operations, including land preparation, irrigation, fertilization, pest control, and harvesting. The assessee, referred to as the 'First Party,' supplied foundation seeds and provided scientific advice but did not engage in basic agricultural operations.

Legal Provisions and Precedents:
The Tribunal examined Section 2(1A) of the Income-tax Act, which defines agricultural income. The provision emphasizes that income derived from land by agricultural operations can be termed as agricultural income only if basic operations like tilling, sowing, and planting are performed by the assessee. The Tribunal referred to the Supreme Court's judgment in Raja Benoy Kumar Suhas Roy, which clarified that subsequent operations must follow basic agricultural operations for income to be considered agricultural.

Tribunal's Findings:
The Tribunal found that the assessee did not perform any basic agricultural operations. The farmers conducted all cultivation activities, and the assessee's role was limited to supplying seeds and providing technical advice. The compensation paid to farmers was based on the quality of seeds produced, not on agricultural operations performed by the assessee. The Tribunal concluded that the assessee's activities did not constitute agricultural operations, and the income derived was business income.

Comparison with Other Cases:
The Tribunal distinguished the present case from other cases like Nath Bio Genes (I) Ltd. and Ajeet Seeds Ltd., where the assessee paid lease rent for land and engaged in agricultural operations. In the present case, the assessee did not have any derivative interest in the land nor performed any agricultural operations, thus making the income business income.

Conclusion:
The Tribunal set aside the CIT(A)'s order and restored the A.O's decision, treating the income from seed production as business income. The appeals for both assessment years 2013-14 and 2014-15 were allowed in favor of the Revenue. The Tribunal emphasized that only income derived from land by performing agricultural operations could be considered agricultural income, which was not the case here.

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