2023 (11) TMI 798 - AT - Income Tax

Eligibility of exemption u/s 10(1) - Agriculture income - income earned from the sale of hybrid seeds - Agriculture process - AO held that the ownership or lawful possession of land is a basic prerequisite for claiming exemption u/s 10(1) and thus the assessee should have derivative interest in land either as an owner or as a tenant or mortgagee with possession and not merely as a license holder to enter upon the land - HELD THAT - It is evident from the record that the AO as well as the CIT(A) placed reliance upon the decision of Namdhari Seeds Pvt. Ltd. 2014 (7) TMI 1348 - KARNATAKA HIGH COURT wherein it was held that where the taxpayer entered into an agreement with farmers for production of open hybrid seeds on the land for its own benefit income arising to the taxpayer from sale of hybrid seeds grown by farmers would not be agricultural income. Having considered the decisions passed by various Hon ble Courts/Tribunal we are of the considered view that each case has been decided on its own facts and accordingly the Hon ble Court/Tribunal came to the conclusion regarding the eligibility of exemption u/s 10(1). As noted above in the assessee s own case the Hon ble jurisdictional High Court affirmed the findings of the coordinate bench of the Tribunal granting benefit of section 10(1) to the assessee in respect of income earned from growing and selling of hybrid seeds jointly with the farmers. Therefore reliance on any other decision is not of much importance in the present case as the issue has been consistently considered in assessee s own case for the past 18 years i.e. from the assessment year 1990-91. As noted above in the present case the lower authorities came to the conclusion that the AO has brought on record material to prove that the assessee has not carried out any agricultural operations therefore this year is different from the preceding years. However as we have found above the new material as sought to be relied upon by the AO does not support the case of the Revenue and therefore we are of the considered view that the said material cannot be the basis to deviate from the previous decisions rendered in assessee s own case wherein similar allegations of the Revenue were rejected. It is pertinent to note that the coordinate bench of the Tribunal vide its order dated 26/11/2007 for the assessment year 1993-94 etc. apart from placing reliance upon the decision of another coordinate bench in Namdhari Seeds Pvt. Ltd. also considered the factual aspect involved in the appeal including the rule of consistency as in the assessment years 1990-91 to 1992-93 a similar issue was decided in favour of the assessee. Therefore basis on which the Revenue denied the exemption claimed u/s 10(1) in the present case are only the different facets of the same argument that the assessee has not carried out agricultural operations as are normally undertaken by the cultivator. Since the manner in which the agricultural process as undertaken by the assessee in the year under consideration is similar to the preceding years respectfully following the judicial precedents in assessee s own case we are of the considered view that the assessee is entitled to claim exemption u/s 10(1) in respect of income earned from growing and selling of hybrid seeds. Accordingly the only issue arising in the present appeal is decided in favour of the assessee. Employee Stock Option Plan ( ESOP ) expenses - AO disallowed the deduction primarily on the basis that the expenditure incurred is not real expenditure and is notional in nature so as to claim deduction u/s 37(1) - HELD THAT - We find that similar contentions of the Revenue were rejected in CIT v/s Biocon Ltd 2013 (8) TMI 629 - ITAT BANGALORE wherein the Hon ble High Court dismissed the appeal filed by the Revenue and upheld the decision of the Special Bench of the Tribunal in Biocon Ltd. 2020 (11) TMI 779 - KARNATAKA HIGH COURT - we find no infirmity in the impugned order passed by the learned CIT(A) in allowing the claim of deduction of ESOP expenses under section 37(1) of the Act. Accordingly grounds no. 1 to 6 raised in Revenue s appeal are dismissed. Disallowance u/s 14A r.w.r. 8D - submissions of the assessee that substantial dividend income was earned without incurring any expenditure - HELD THAT - After rejecting the submissions of the assessee that substantial dividend income was earned without incurring any expenditure whatsoever including management or administrative expenses the AO held that the investment decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. The AO further held that the assessee could not establish that the expenses debited to the profit and loss account do not relate to the investment activity. Accordingly by applying the computation mechanism as provided under Rule 8D(2)(iii) the AO inter-alia computed the disallowance u/s 14A of the Act i.e. 0.5% of the average value of the investment. It is further pertinent to note that even the disallowances as computed by the assessee during the assessment proceedings are on an ad hoc basis by considering 25% of the cost of the Treasury Department without taking into consideration the involvement of the Board of Directors for which administrative expenses are also incurred. In view of the above we find no merits in the submission of the learned AR. Accordingly we are of the considered view that the action of the AO in computing the disallowance u/s 14A read with Rule 8D(2)(iii) is in conformity with the provisions of the Act and is therefore upheld. As a result grounds raised in assessee s appeal are dismissed.

Summary

Issues Involved:
1. Denial of agricultural exemption under section 10(1) of the Income Tax Act.
2. Allowability of ESOP expenses as revenue expenditure.
3. Disallowance under section 14A read with Rule 8D of the Income Tax Rules, 1962.

Issue 1: Denial of Agricultural Exemption under Section 10(1) of the Income Tax Act:
The assessee challenged the denial of exemption under section 10(1) of the Act on income from the sale of hybrid seeds. The AO denied the exemption, arguing that the assessee did not carry out basic agricultural operations and lacked lawful possession of the land. The CIT(A) upheld the AO's decision, citing new facts and reliance on the Karnataka High Court's decision in Namdhari Seeds Pvt. Ltd. However, the Tribunal found that the manner of agricultural operations was consistent with previous years, where exemption was allowed. The Tribunal held that ownership or possession of land was not a prerequisite for claiming exemption and decided the issue in favor of the assessee, allowing the exemption under section 10(1) of the Act.

Issue 2: Allowability of ESOP Expenses as Revenue Expenditure:
The Revenue challenged the CIT(A)'s decision to allow ESOP expenses as revenue expenditure. The AO had disallowed the ESOP expenses, considering them notional and contingent. The CIT(A) relied on the Special Bench decision in Biocon Ltd. and allowed the expenses. The Tribunal upheld the CIT(A)'s decision, citing the Karnataka High Court's ruling in Biocon Ltd., which recognized ESOP expenses as an ascertained liability and deductible under section 37(1) of the Act. Therefore, the Tribunal dismissed the Revenue's appeal.

Issue 3: Disallowance under Section 14A Read with Rule 8D of the Income Tax Rules, 1962:
The assessee contested the disallowance under section 14A read with Rule 8D, arguing that the AO did not record satisfaction with the assessee's claim. The AO computed the disallowance as per Rule 8D, rejecting the assessee's revised disallowance. The CIT(A) deleted the disallowance under Rule 8D(2)(ii) but upheld the disallowance under Rule 8D(2)(iii). The Tribunal found that the AO had duly considered the assessee's submission and recorded satisfaction before applying Rule 8D. Consequently, the Tribunal upheld the AO's computation of disallowance under section 14A read with Rule 8D(2)(iii).

Conclusion:
- The assessee's appeal for the assessment year 2009-10 was allowed, granting exemption under section 10(1).
- The Revenue's appeal for the assessment year 2012-13 was dismissed, upholding the allowability of ESOP expenses.
- The assessee's appeal for the assessment year 2012-13 was partly allowed, with the Tribunal upholding the disallowance under section 14A read with Rule 8D(2)(iii).