2012 (9) TMI 577 - AT - Income Tax

Exemption u/s 10 of agricultural income - contract farming - Assessee produce basic seeds in its own lands and hybrid seeds on the lands leased by it AO s objection are that the germplasm is generated out of scientific research and therefore it is not agricultural activity Held that - Simply because the basic seeds are not fit for human consumption it cannot be said that the produce is not agricultural produce. The assessee procures germplasm and sows in its own field and carries on all agricultural operations and produces the basic seeds. The Basic Seeds so harvested are again put through agricultural operations intimately connected with leasehold land for finally bringing out the Hybrid Seeds. Only for the reason that the Basic Seeds are sown in leasehold land and the manpower required are arranged through contract farming it does not mean that the operations carried out by the assessee are not agricultural operations. Assessee has carried out basic as well as secondary agricultural operations. Therefore entire such income of the assessee is agricultural in nature. Appeal decides in favour of assessee Depreciation on technical know-how fees Held that - As the Tribunal for the previous assessment year has directed the AO to consider the alternate plea of the assessee for allowance of depreciation on technical know-how fees if claim is in accordance with law. Subsequently the depreciation on technical-know-how fees treated as capital expenditure has been allowed. Therefore depreciation on technical-know-how fees should be treated as capital expenditure and depreciation allowed. Case remand back to AO

Issues Involved:
1. Determination of whether the income derived from the production of hybrid seeds qualifies as agricultural income exempt under Section 10 of the Income-tax Act, 1961.
2. Consideration of the genuineness of lease agreements with farmers.
3. Allowance of depreciation on technical know-how fees treated as capital expenditure.
4. Exclusion of profit on the sale of assets while computing total income.

Detailed Analysis:

1. Determination of Agricultural Income:
The primary issue was whether the income from producing hybrid seeds on leased lands qualifies as agricultural income. The Assessing Officer (AO) observed that the assessee's activities had not changed from the previous year and involved scientific research, thus not qualifying as agricultural operations. The AO held that the entire income should be treated as business income, rejecting the exemption claim under Section 10.

The CIT(A) supported the AO's view, stating that the assessee's activities, including scientific research for producing basic seeds, could not be considered agricultural. The CIT(A) also doubted the genuineness of the lease agreements with farmers, concluding that the entire income was taxable as non-agricultural.

The Tribunal, however, referred to its previous decision for the assessment year 2002-03, which favored the assessee. It was noted that the assessee procured germplasm from laboratories and cultivated basic seeds on its own or leased lands. The Tribunal emphasized that the cultivation of hybrid seeds by farmers under the assessee's supervision constituted agricultural operations. The Tribunal concluded that the income from these activities should be treated as agricultural income exempt under Section 10.

2. Genuineness of Lease Agreements:
The AO and CIT(A) questioned the genuineness of the lease agreements, suggesting they were drafted to claim agricultural income exemption. The AO noted that the assessee did not produce details of expenses for growing hybrid seeds on farmers' lands and that the assessee's name was not mentioned as a cultivator in the pahanis (land records).

The Tribunal, however, found that the farmers acted as agents of the assessee, cultivating seeds under the company's supervision. The entire produce was taken by the assessee, and the farmers received rent and reimbursement of cultivation costs. This arrangement was deemed genuine, and the activities were considered agricultural.

3. Depreciation on Technical Know-how Fees:
The assessee claimed depreciation on technical know-how fees treated as capital expenditure in an earlier year. The Tribunal referred to its decision for the assessment year 1995-96, where the AO was directed to allow depreciation if the claim was in accordance with the law. The Tribunal remanded this issue to the AO for reconsideration.

4. Exclusion of Profit on Sale of Assets:
The assessee claimed that the CIT(A) failed to adjudicate the exclusion of profit on the sale of assets while computing total income. The Tribunal remanded this issue to the CIT(A) for reconsideration, ensuring the assessee would have a fair opportunity of hearing.

Conclusion:
The Tribunal allowed the appeals for the assessment years 2003-04 and 2004-05, ruling in favor of the assessee on the primary issue of agricultural income exemption. The issues of depreciation on technical know-how fees and exclusion of profit on the sale of assets were remanded for reconsideration.

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