2005 (8) TMI 36 - HC - Income Tax

Whether Tribunal was right in law in holding that HPS groundnuts exported by the assessee did not come within the ambit of expression agricultural primary commodities in section 80HHC(2)(b)(i) of the Income-tax Act, 1961, and that deduction under section 80HHC(i) of the Act was allowable? - The view adopted by the Tribunal that agricultural primary commodities are groundnuts in shell and the kernels that are ultimately exported after processing of groundnuts would cease to be agricultural primary commodities , cannot be faulted. The Tribunal was, therefore, justified in holding that HPS groundnuts exported by the assessee did not come within the ambit of the expression agricultural primary commodities appearing in section 80HHC(2)(b)(i) of the Act, and that, the assessee was entitled to deduction under section 80HHC of the Act. The question in each of the three references is accordingly answered in the affirmative, i.e, in favour of the assessee and against the Revenue

Issues Involved:
1. Whether HPS groundnuts exported by the assessee fall within the expression "agricultural primary commodities" under section 80HHC(2)(b)(i) of the Income-tax Act, 1961.
2. Whether the assessee is entitled to deduction under section 80HHC of the Act.

Issue-wise Detailed Analysis:

1. Definition of "Agricultural Primary Commodities":
The key issue was whether HPS groundnuts are considered "agricultural primary commodities" under section 80HHC(2)(b)(i) of the Income-tax Act, 1961. The term "agricultural primary commodities" is not defined in the Act, but it implies that the commodity should be both agricultural and primary. The term "agricultural" denotes that the commodity is a product of agricultural operations, which was agreed upon by both parties. The dispute centered around whether HPS groundnuts could be termed as a "primary commodity." The Revenue argued that HPS groundnuts remained groundnuts and thus were primary commodities obtained from agricultural operations. The Tribunal, however, held that a commodity ceases to be a primary commodity once it undergoes processing, although it may still remain an agricultural commodity.

2. Processes Undertaken by the Assessee:
The Tribunal found that the processes undertaken by the assessee, which included mechanical decortication, sieving, grading, and testing for aflatoxins, transformed the groundnuts from their original form. The Tribunal concluded that these processes resulted in the commodity ceasing to be an "agricultural primary commodity," even though it remained an agricultural commodity. The Tribunal's decision was based on the evidence presented, including expert certificates, and the finding that the exported HPS groundnuts were not agricultural primary commodities.

3. Legal Precedents and Interpretation:
The Revenue cited the Supreme Court decisions in CIT v. Cynamid India Ltd. and Belsund Sugar Co. Ltd. v. State of Bihar to argue that the groundnuts remained agricultural primary commodities. In contrast, the assessee relied on the same case of CIT v. Cynamid India Ltd. and Aspinwall and Co. Ltd. v. CIT to support their position that the processed groundnuts were a different commodity. The Tribunal applied the test from Aspinwall and Co. Ltd. v. CIT, which states that if a commodity undergoes a process that results in it being recognized as a new and distinct commodity in the market, it ceases to be a primary commodity.

4. Market Recognition and Commercial Distinction:
The Tribunal also considered how the commodity is treated in the market. It concluded that neither agriculturists nor traders would regard HPS groundnuts as a primary commodity after the processing. The test for determining whether a commodity has been manufactured into a new product was applied, and it was found that HPS groundnuts were commercially recognized as a different commodity from unshelled groundnuts.

5. High Court of Hyderabad's View:
The judgment referenced a similar view adopted by the High Court of Hyderabad in the case of Kishenlal Oil Mills v. CST, where it was held that the term "groundnut" generally refers to unshelled groundnuts and not the kernels, supporting the Tribunal's decision.

Conclusion:
The Tribunal's view that HPS groundnuts exported by the assessee did not fall within the expression "agricultural primary commodities" under section 80HHC(2)(b)(i) of the Act was upheld. Consequently, the assessee was entitled to the deduction under section 80HHC of the Act. The court answered the question in the affirmative, in favor of the assessee and against the Revenue, disposing of all three references accordingly.

Final Note:
The court also noted numerous printing errors in the paper book supplied and warned that future errors could result in costs being levied on the applicant.

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