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2015 (3) TMI 938 - AT - Income TaxQualify the income as exempt u/s. 10(1) - whether the assessee does not fall under agricultural operations? - Whether the assessee has departed from the basic agricultural operation and indulged into production of parent seeds by planned scientific and specialized procedures? - Held that - If we examine the operations carried out by the assessee in the previous year relevant to the assessment year in appeal, we find that the production of basic seeds as well as hybrid seeds are the' results of basic agricultural operations carried on by the assessee-company in its own land as well as in leasehold land. The method of contract farming does not take away the character of the basic operations carried out by the assessee-company which are agricultural in nature. The assessee-company procures germ plasm and sows it in its own fields, 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 is arranged through contract farming, it does not mean that the operations carried out by the assessee-company are not agricultural operations. As a matter of fact, it is to be seen that the assessee-company has carried out basic as well as secondary agricultural operations. Therefore, without any fear of contradiction, it is possible for us to hold that such entire income of the assessee is agricultural in nature which is to be excluded from the nature of total income. A similar issue again was decided by the Bangalore Bench of the Tribunal in favour of the assessee following assessee s own case for assessment year 2002-03, holding that the income derived by the assessee from the production of foundation/basic seeds as well as hybrid seeds constituted income eligible for exemption under S.10(1) of the Act, being agricultural income. - Decided in favour of assessee. Disallowance under S.14A rwr 8D - CIT(A) deleted the disallowance - Held that - As held in the case of Reliance Utilities Power Ltd (2009 (1) TMI 4 - HIGH COURT BOMBAY), if it is a case of mixed funds maintained by the assessee, there is a presumption that the own funds of the assessee are utilised for making the investment which has fetched the tax free income. Following this ratio and keeping in view the facts of the assessee, we are of the view that the investment of ₹ 20.30 crores having been presumably made by the assessee out of its own funds, no disallowance on account of interest expenditure under S.14A can justifiably be made. We therefore, uphold the impugned order of the learned CIT(A) deleting the disallowance of ₹ 1,48,00,979 made by the Assessing Officer on account of interest under S.14A read with Rule 8D. As regards the balance disallowance of ₹ 5,07,695 made by the Assessing Officer on account of other common expenses by applying clause (iii) of Rule 8D, we are of the view that the common expenses incurred by the assessee such as office and administrative expenses etc. can reasonably be attributed to some extent to the activity of making investment and the same therefore, are liable to be disallowed by applying the formula given in clause (iii) of Rule 8D. As such, the CIT(A), in our opinion, is not justified in deleting the disallowance made by the Assessing Officer in this behalf. We, therefore, modify the impugned order of the learned CIT(A) on this issue and restore the disallowance made by the Assessing Officer under Rule 14A read with Rule 8D to the extent of ₹ 5,07,695 - Decided partly in favour of revenue.
Issues Involved:
1. Exemption under Section 10(1) of the Income-tax Act for income from the production of seeds. 2. Disallowance under Section 14A read with Rule 8D of the Income-tax Rules, 1962. Issue-wise Detailed Analysis: 1. Exemption under Section 10(1) of the Income-tax Act for income from the production of seeds: The Revenue contended that the assessee's activities did not qualify as agricultural operations, arguing that the production of parent seeds involved planned scientific and specialized procedures rather than basic agricultural operations. The Assessing Officer (AO) disallowed the exemption under Section 10(1), asserting that the assessee was not directly involved in agricultural activities but rather procured hybrid seeds from farmers under specific agreements. The assessee, a company engaged in the research, production, and sale of agricultural seeds, claimed exemption for income derived from seed production, arguing that the operations involved agricultural activities. The assessee explained that it entered into agreements with farmers, who cultivated the seeds under the company's supervision and control, with the company bearing the risks and rewards associated with the agricultural operations. The assessee further argued that the activities, including R&D, were part of the agricultural process and that the use of technology did not disqualify the operations as agricultural. The Commissioner of Income-tax (Appeals) [CIT(A)] found merit in the assessee's submissions, relying on the Tribunal's decision in the case of Prabhat Agri-Biotech Ltd., which was affirmed by the Andhra Pradesh High Court. The Tribunal had consistently held that income generated from the cultivation of basic/foundation seeds was agricultural income eligible for exemption under Section 10(1). The Tribunal upheld the CIT(A)'s decision, noting that the issue was covered by various decisions, including those of the Andhra Pradesh High Court and the Bangalore Bench of the Tribunal. It was observed that the assessee's operations, including the production of hybrid seeds on leased lands, fell within the definition of agricultural income under Section 2(1A) of the Income-tax Act. The Tribunal emphasized that the assessee's activities, involving basic and secondary agricultural operations, qualified as agricultural operations, and the income derived therefrom was eligible for exemption under Section 10(1). 2. Disallowance under Section 14A read with Rule 8D of the Income-tax Rules, 1962: The AO disallowed Rs. 1,48,00,979 on account of interest and Rs. 5,07,695 on account of other common expenses, applying Rule 8D, as the assessee had received exempt dividend income but did not offer any disallowance under Section 14A. The CIT(A) deleted the disallowance, finding that the assessee had sufficient own funds to make the investment, relying on the Bombay High Court's decision in the case of Reliance Utilities Power Ltd. The Tribunal upheld the CIT(A)'s decision regarding the interest disallowance, agreeing that the assessee had sufficient own funds to make the investment, and thus, no disallowance on account of interest expenditure under Section 14A was justified. However, the Tribunal restored the disallowance of Rs. 5,07,695 made by the AO on account of other common expenses, holding that such expenses could reasonably be attributed to the activity of making investments. Conclusion: The Tribunal dismissed the Revenue's grounds related to the exemption under Section 10(1), affirming that the income derived from the production of seeds was agricultural income eligible for exemption. The Tribunal partly allowed the Revenue's appeal on the disallowance under Section 14A, upholding the deletion of interest disallowance but restoring the disallowance of common expenses. The appeal of the Revenue was thus partly allowed.
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