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2009 (11) TMI 82 - AT - Income TaxActivity of regenerating seeds or grains and recultivating - Income from Production and Sale of Parent Seeds - elite hybrid germplasm - Deemed to be Agricultural Income u/s 2(1A) or Business income - Exempt u/s 10(1) Or Not - HELD THAT - The seed developed and produced by the assessee in the present case is elite hybrid germplasm which are sown to produce large quantity of parent seeds of hybrid nature. Thus, the assessee's case is not of producing ordinary basic seeds but is of developing and producing elite hybrid germplasm and then parent hybrid seeds in large quantity as it would be clear from the various components and stages of process carried out by the assessee as explained and narrated by the assessee itself. Thus, the nature of assessee's activity of producing elite hybrid germplasm or breeder hybrid seeds to develop a parent hybrid seed supplied to joint venture company are exactly similar and identical to that of producing hybrid germplasm seeds in the case of Proagro Seeds Co. 2002 (11) TMI 780 - ITAT DELHI decided by the Tribunal. Therefore, the decision of the Tribunal in the case of Proagro Seeds Co. is squarely applicable to the issue involved in this appeal of the present assessee. In the present case, it is an admitted position that the grains or seeds originally produced or raised from the very first crop harvested by the assessee has been used or utilized for developing or producing hybrid parent seeds or breeder seeds. Therefore, the grains so originally produced would constitute agricultural income under s. 2(1A)(b)(i) of the Act. It is the assessee's case that number of generations of crops were carried out from year to year until the two traits of desired level are concentrated or fixed in a single seed and this, process takes anywhere from seven to ten years to develop an elite germplasm or hybrid parent seed known as breeder seeds. However, at this moment, we are only concerned with the question whether any part of income can be attributed to very grain or seed produced by the assessee at the first level. The assessee's overall activity of producing or developing hybrid parent seeds comprises mainly of process where two seeds are cross over a certain number of generations of crops to obtain a seed of desired quality, and this process of enhancing various traits and concentrating various traits in a few germplasms is carried out over a number of years running from seven to ten years, by spending huge expenses. Thus, the major income from sale of hybrid parent seeds to joint venture company is mainly arising to the assessee from the said process of concentrating various traits in one single seed. The comparative price of hybrid parent seeds realized by the assessee from joint venture company and the price of hybrid commercial seed sold by joint venture company to farmers as furnished by the assessee. The average price of all variety of seeds charged by the assessee for hybrid seeds is about 16 times more than the market price of the hybrid commercial seeds sold by joint venture company to the farmer. The price of basic seeds produced by the assessee at the first level before hybridization would even be lower than the price of hybrid commercial seeds sold to farmers. The income which can be attributed to the very first activity of producing grains or seeds raised in the very first crop before the two seeds are crossed can hardly be estimated at 10 per cent (ten per cent) of the total income earned by the assessee from its single integrated activity of sale of hybrid parent seeds. In the light of the provisions contained in r. 7(1)(a), the 10 per cent (ten per cent) of the income shown by the assessee can be treated to be the price at which the grains or seeds originally produced in first crop would have been sold during the relevant previous year. We, therefore, hold that only 10 per cent (ten per cent) of the total income shown by the assessee from sale of parent seeds to its joint venture company be regarded as agricultural income within the meaning of s. 2(1A) r/w s. 10(1) of the Act. The AO shall modify the assessment order accordingly. In the result, the appeal filed by the assessee is partly allowed.
Issues Involved:
1. Whether the income from the sale of parent seeds is agricultural income as claimed by the assessee. 2. Whether the activities carried out by the assessee qualify as agricultural operations within the meaning of section 2(1A) of the Income-tax Act, 1961. 3. Whether the assessee's activities are distinct and separate between research and production units. 4. Whether the process used by the assessee in producing parent seeds is one ordinarily employed by a cultivator. 5. Whether the income derived by the assessee from the sale of parent seeds should be treated as business income or agricultural income. Issue-Wise Detailed Analysis: 1. Whether the income from the sale of parent seeds is agricultural income as claimed by the assessee: The primary contention of the assessee was that the income derived from the production and sale of parent seeds should be classified as agricultural income under section 2(1A) of the Income-tax Act, 1961. The assessee argued that the activities involved in producing parent seeds constituted agricultural operations, thereby qualifying the income for exemption under section 10(1) of the Act. 2. Whether the activities carried out by the assessee qualify as agricultural operations within the meaning of section 2(1A) of the Income-tax Act, 1961: The Tribunal analyzed the nature of the activities carried out by the assessee, including the development of hybrid parent seeds (breeder seeds) and the subsequent production of parent seeds in large quantities. It was noted that the process involved highly technical steps, including crossing different varieties of seeds over successive generations to achieve desired traits, which departed from the basic agricultural operations ordinarily employed by a cultivator. 3. Whether the assessee's activities are distinct and separate between research and production units: The Tribunal examined the assessee's claim that its research unit (developing breeder seeds) and production unit (producing parent seeds) were distinct and separate activities. However, it was found that both activities were interlinked and interdependent, forming part of a single integrated activity aimed at producing parent seeds for supply to the joint venture company. The Tribunal concluded that the activities could not be dissociated from each other. 4. Whether the process used by the assessee in producing parent seeds is one ordinarily employed by a cultivator: The Tribunal referred to the definition of agricultural income under section 2(1A) and relevant case law, including the landmark decision in Raja Benoy Kumar Sahas Roy's case. It was held that the process employed by the assessee, involving sophisticated research and development to produce hybrid parent seeds, was not a process ordinarily employed by a cultivator. The process went beyond the basic and subsequent operations typically associated with agriculture. 5. Whether the income derived by the assessee from the sale of parent seeds should be treated as business income or agricultural income: The Tribunal concluded that the income from the sale of parent seeds, developed through a series of technical and scientific steps, could not be classified as agricultural income. The activities carried out by the assessee were more in the nature of research and development rather than traditional agricultural operations. Consequently, the income derived from these activities was treated as business income and not agricultural income. Conclusion: The Tribunal upheld the decision of the CIT(A) and the Assessing Officer, concluding that the assessee's activities did not qualify as agricultural operations under section 2(1A) of the Income-tax Act. The income from the sale of parent seeds was thus treated as business income, and the assessee's claim for exemption under section 10(1) was denied. The Tribunal also noted that only a small portion (10%) of the total income could be attributed to agricultural activities, which was allowed as agricultural income. The appeal filed by the assessee was partly allowed to this extent.
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