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TMI Blog2011 (10) TMI 488X X X X Extracts X X X X X X X X Extracts X X X X ..... tions must necessarily be in conjunction with and a continuation of the basic operations. Subsequent operations performed to make produce fit for market can also be termed as agricultural operations. It means if the agricultural produce is taken to a market after making it as a marketable produce, it would also be considered as agricultural produce. Further, the section does not contemplate the sale of an item or a commodity which is different from what is cultivated and processed. If commercially a different article or commodity results after processing, then it would be a manufacturing activity. In present case, except supplying the foundation seeds and giving scientific advice from time to time, either at the time of sowing or pollination or harvesting, none of the normal activities of agriculture are undertaken by the assessee-company. The assessee-companies neither have derivative interests in the land nor actually cultivate the land. Even if they cultivate the land, they are not lessees of the land in view of terms of agreement eliminating such relationship. At the most, they cultivate the land on behalf of the farmer or owner. The entire terms of agreement only in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeds Private Limited filed its income for the assessment year 2001-02 declaring an income of Rs. 7,68,860/- as taxable income and also declared Rs. 7,27,25,130/- as agricultural income generated by sale of hybrid seeds said to be obtained from agricultural operations. The assessment order came to be passed on 29.3.2004 treating a sum of Rs. 3,84,13,288/- as non-agricultural income stating that income generated from the lands taken on lease for the purpose of agricultural activity in the State of Karnataka as not eligible to be treated as agricultural income. So far as lands taken on lease situated outside the State of Karnataka, as Assessing Authority has accepted the contention of the appellant that income generated therefrom was agricultural income. 4. Aggrieved by the order of assessment, an appeal came to be filed before the Commissioner of Income-Tax (Appeals), who by his order dated 11.8.2004 allowed the claim of the assessee holding that abovestated income of Rs. 3,84,13,288/- as agricultural Income and accordingly exempted the same under Section 10(1) of the Act. So far as treating the income from agriculture in respect of lands situated outside the State of Karnataka by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rived by the assessee as agricultural income for the above mentioned years. 8. In respect of the abovementioned assessment years, the assessee has also filed ITA Nos. 19/2008 and 474/2008 apart from ITA 284/2007. 9. As similar questions are arising in all the above appeals, we are disposing of these appeals by a common judgment. 10. In the appeals filed by the Revenue except in ITA No.75/2007, the following substantial question of law came to be formulated by this Court: Whether the Appellate Authorities were correct in holding that the activity carried on by the assessee by trading in processed seeds would amount to agricultural activity on land taken on lease and is contract farming considered as agricultural income exempt under Section 10(1) of the Income Tax Act ('Act' for short) by following the view expressed in earlier cases ? 11. This Court admitted ITA No.75/2007 on the following substantial questions of law: "(1) Whether the Tribunal was right in holding that the income derived by the assessee from manufacturing of seeds and sale of the same would amount to agricultural income which would be exempt under Section 10(1) of the Act. (2) Whether the Tribunal wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Seeds Private Limited and Indo American Exports was that the assessees were cultivating the lands which were taken either on lease or as per the 'contract farming agreement'. The Assessing Officer held that income derived by the assessees under the agreement referred to above is not agricultural income and should be treated as income from business. As already stated above, the Tribunal has treated 90% of the income of the assessees as income from agriculture and gave exemption under Section-10(1) of the Act and insofar as balance 10% of the income, it was treated as income from business. 16. So far as the appeals filed by the Revenue and to the appeals filed by the assessees, learned counsel Mr. M.V. Seshachala appearing for Revenue contends that none of the activities carried on by the assessee would fall within the ambit of the provisions of Section-2(1A) of the Act as the main activity of the assessee-company is trading in processed seeds. None of the terms of the agreement according to him would indicate the character of the assessees as agriculturist or a cultivator who would derive any rent or revenue from the land which is situated in India. According to him, none of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t give the assessee a status of agriculturist. According to the Revenue, neither the basic activity nor the subsequent activity carried on at the land either in terms of Section 2(1A)(b)(i) or (ii) is carried on by the assessee. Therefore question of any income by sale of certified seeds derived by the assessee will not attract any exemptions contemplated under Section 10. According to the Revenue, when no basic activity of agriculture is done on the land in question, subsequent so-called activity of the appellant-assessee by converting the foundation seeds to certified seeds cannot form part and parcel of agricultural activity of the farmer. According to him, by the process of converting the seeds either manually or mechanically, it looses the basic nature of the product and the process of conversion cannot be an agriculture activity so far as the appellant's business trading in seeds. He places reliance on the decision in the case of Aspinwall Co. Ltd. v. CIT [2001] 251 ITR 323 (SC). 19. Learned counsel for the Revenue also places reliance on the following decisions in support of his contentions: (1) CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 (SC) (2) Tarai Devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... long as the activity performed by the assessee has agriculture in nature, income derived from said activity on the agricultural lands qualifies as agricultural income. According to him, the three parts of Section 2(1A)(b) of the Act clarifies the position as Section-2(1A)(b)(iii) refers to ownership and the word, 'ownership' is absent in Sections 2(1A)(b)(i) and 2(1A)(b)(ii). According to him, when production of products like jute, hemp trees etc. are considered as agriculture in nature, seeds which are also grown on land irrespective of whether it is fit for consumption or not amounts to agriculture produce. The Explanation to Section 2(1A) of the Act according to him, includes the cultivation of sapling and seedling as agriculture activity and the income from said activity when consequently qualifies as agriculture income, the seeds produced on the agricultural land deserves to be treated as agriculture produce as in the case of seedling. According to him, Explanation-3 of Section-2(1A) ought to be taken as clarificatory as it only explains the existing position of law and generally such explanations have retrospective effect clarifying the existing position. He relies on the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture or personal expenditure of the assessee and relevant section is 28 of the Act. Section-37 deals with allowance of expenses. In the present case, it is not a question of claiming any expenditure, but the Revenue treating the income earned under Section 28 as non-agricultural income. Hence, Explanation to Section 37 cannot be read into the provisions of Section 28 of the Income Tax Act. He refers to the decision in the case of Dr. T.A. Quereshi v. CIT [2006] 287 ITR 547 (SC). 25. Learned counsel for the assessee also refers to the decision in the case of CIT v. Williamson Financial Services [2007] 297 ITR 17 (SC) to contend that agricultural income is outside the purview of total income unlike other exemptions under Chapter-VI of the Act and the above said decision also proposes that contravention of any other law could not be invoked as the constitutional mandate is to treat the definition of agricultural income as per Income Tax Act for all purposes. 26. Then coming to third issue, whether the activity of the assessee in making the hybrid seeds as marketable is an activity ordinarily carried on to make the produce marketable in order to treat such income as income from agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be done by an assessee to make the seeds marketable in accordance with law to have certification. The Tribunal ought to have made enquiry to know exact activity of the assessee for conversion of the hybrid seeds or foundation seeds to certification seeds. It had to understand whether there was necessity for the assessee to adopt this process to convert the seeds produced by him as per the mandate of law under the Seeds Act. In the extreme situation also the process contemplated under Section-2(1A) of the Act ought to be decided keeping in mind the law under Seeds Act. Therefore the Tribunal ought to have remanded the issue to the file of the Assessing Officer for determination. 30. Alternatively, learned counsel for the assessee contends that without prejudice to his contention that 10% of the income is also agricultural income, the apportionment made by the Tribunal is justified in view of the law laid down in Continental Construction Ltd. v. CIT [1992] 195 ITR 81/60 Taxman 429 (SC), CIT v. Best Co. (P.) Ltd. [1966] 60 ITR 11 (SC) and Williamson Financial Services case (supra). Learned counsel to substantiate his challenge to the arguments of the learned counsel for the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esseth, the terms and conditions agreed to between the parties for their mutual advantage. (1) The farmer agrees to place at the total disposal of the company in terms of this agreement one acre of land, earmarked for the purpose of cultivation of hybrid tomato seeds, out of the land belonging to him and more particularly described in the schedule herebelow for the period from June 2000 to 2001. During the said period the farmer shall have only the right to enter the land so earmarked for fulfilling his obligations in terms of this agreement and for none other. (2) The Farmer agrees that he will undertake for and on behalf of the company, cultivation of the open hybrid tomato seeds in the land so earmarked under the guidance, specifications and supervision of the company. (3) The farmer assures the Company that the land, more particularly described in the schedule hereinbelow, belongs to the farmer in his own right as Owner/Term Lessee and is in his possession and cultivation. (4) The farmer further assures the company that the land is suitable for cultivation of open-hybrid tomato seeds. (5) The farmer agrees to observe, all the conditions regarding the cultivation and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as may be specified all the hybrid seeds cultivated by him and not sell or part with or retain for himself any portion of the seeds cultivated by him. (11) Foundation seeds/stock seeds, and seeds derived out of this are the property of the company/company's overseas principals. The farmer only undertakes multiplication of this material using his land and labour. The multiplication is done under the technical supervision of the company at the mutually agreed price and will deliver the seeds to the specified person at specified place. (12) The farmer further agrees that all information relating to the foundation seeds/stock seeds, as also the cultivation of open pollinated/hybrid seeds are confidential in nature and he would not part with any of the property or information relating to the company to outsiders or competitors. The farmer undertakes, to pay such damages as may be determined by the company for breach of these covenants. (13) The company agrees to pay the farmer compensation at the rate of Rs. 3200/ per kg/quintal for hybrid tomato seeds which answer to the specifications relating to moisture contents, physical purity, germination, hybridity, quality etc. as set o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arately from time to time by the company or through its representative/s orally or in writing. (b) He will ensure that there is sufficient water for raising the_________ crops. (c) He will ensure that the land should have not been used for Tomato crops cultivation during the previous season. Preferably the land should have been used for cultivation of ________ crops or ________ crops during the previous season. (d) He will ensure that within a radius of 800 mts./ _______ -ft. there would not be any other variety of _________ crops raised either for seed or for commercial production. (e) He will ensure that the land is prepared for sowing by applying 5-10 cart loads of farmyard manure per acre and the land ploughed thoroughly. He undertakes to apply soil amendments like lime, gypsum, etc., as per the company's recommendation. (f) He will inform the company officials the locations and his requirements of foundation seeds one day in advance of sowing. (g) He shall ensure that the foundation seeds supplied by the company are sown for cultivation in the specified field, in the presence of the representative of the company and none of them are misused or parted with to others ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India and is used for agricultural purposes; (b) any income derived from such land by - (i) agriculture; or (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or (iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause; (c) ** ** ** Explanation-1 ** ** ** Explanation-2 ** ** ** Explanation -3 For the purposes of this clause, any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income." 35. So far as the above definition, it is exhaustive and it refers to three kinds of income: 36. Section 2(1A)(a) refers to any rent or revenue derived from agricultural land which is situated in India and is used for agricultural purposes. Section 2(1A)(b)(i) refers to income derived from such land by agriculture. Section 2(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lthough the agricultural income will remain fully exempted. While Section-10(1) of the Act exempts agricultural income from income tax, one has to see why it is so. Constitution of India gives exclusive powers to the State Legislature to make laws with reference to tax on agricultural income. Entry-82 of List-I of 7th Schedule further clarifies this position by empowering the Parliament to levy taxes on income other than agricultural income. Central Government is not empowered to fax this source of income under Income Tax Act. 38A. With this background, one has to see what exactly happens if the activity of the nature claimed by the assessee is carried on in the lands of the owner/farmer in these matters by virtue of the agreement entered into between the parties. In order to understand different parts of Section-2(1A), one has to understand the terms of agreement to know who gets what. Sub-section (a)(i) refers to rent or revenue derived from the land and such land should be situated in India and the land must have been used for agricultural purpose. The rent could be paid either in cash or in kind or in money or money's worth. To know the nature of any income or revenue receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (13) ILD 1144 (sic) (xi) Havakkal Estate Co. v. CIT [1977] 109 ITR 59 (Mad.) (xii) CIT v. Maddi Venkatasubbayya [1951] 20 ITR 151 (Mad.) 40. The gist of the above citations is as under: In considering the connotation of the term "agriculture", we have so far thought of cultivation of land in the wider sense as comprising within its scope the basic as well as the subsequent operations, regardless of the nature of the products raised on the lands. These products may be grain or vegetables or fruits which are necessary for the sustenance of human beings including plantations and groves, or grass or pasture for consumption of beasts (livestock) or articles of luxury such as betel, coffee, tea, spices, tobacco etc, or commercial crops like cotton, flax jute, hemp, indigo etc. When such products could be raised from the land, the term, agriculture cannot be confined merely to the production of grain and food products for human beings and beasts. Therefore the term, 'agriculture' has to be understood as comprising of oil products of the land which have some utility either for consumption or for trade and commerce and would also include forest products such as timber, sal piyasal t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce from time-to-time to define agricultural income in any particular manner and that would be the meaning not only for tax enactments but also for the Constitution. Rule 8(1) of the Income Tax Rules states that composite integrated income shall be computed as if it was income derived from business. The composite income had an element of agricultural and business incomes which need to be separated by applying the rule of apportionment under Rule-8. That is because Agricultural income has no linkage with any of the enumerated heads in Section 14 of the Act though the non-agricultural element has such linkage. When income is derived from composite activity, such income shall be chargeable to income tax as business income. Here legal fiction comes into play and chargeability is assigned only to the non-agricultural part of the composite income which has linkage with one of the enumerated heads in Section-14 viz., business income. Mere fact that some of the operations required for raising the crop in question has been carried on by the farmer lessee up to certain date and subsequently carried on by the assessee would not make the income derived by the assessee by selling the produce a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome. According to the learned counsel for the assessee, the agreement between the parties (contract farming) not only indicates the assessee having some derivative interest from the land, but also derivative interest in growing the foundation seeds on the land. According to him, by virtue of terms of agreement, the assessee having some interest in the land in question, after employing a particular process ordinarily employed by a cultivator makes the produce raised or received by him fit to be taken to market. In other words, according to Mr. Shankar, the assessee not only produces foundation seeds by undertaking cultivation in the land under the agreement, but also converts the foundation seeds to certified seeds by a process so as to make the foundations seeds marketable. Hence according to the learned counsel for the assessee, the total activity of the assessee carried on by raising the foundation seeds and also making the foundation seeds marketable is an integrated activity carried on by them by virtue of terms of contract-farming agreement. 43. Learned counsel for the assessee relies upon the following decisions as well to substantiate his argument that the activity carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogical advancement, one has to change our thinking regarding concept like goods, merchandise and articles. The cultivation of sugarcane and the manufacture of sugar by the assessee constituted one single and indivisible business. The question was whether a part of the managing agency commission paid by the company could be disallowed on the ground that that part related to management of sugarcane cultivation, income from which was exempted from tax as agricultural income. The entire managing agency commission was laid out or expended for the purpose of the business carried on by the assessee and was allowable under section 10(2)(xv) of the Act When a question arose for consideration what exactly was the market value of agricultural produce would mean, it was held that the value of a property will be the price which it will fetch if sold in the open market. It is a well-known method of valuation adopted in the large number of statutes in England and also in India. There may or may not be an actual market where buyers and sellers congregate to purchase and sell goods. Therefore the word, 'market' would not mean actual market where there would be sellers and buyers to sell and buy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d poisonous substances to the foodgrain meant to be utilised as seeds, one of its basic character i.e. its consumption as food by human beings or animals or for extraction for the like purpose, gets irretrievably lost and such processed seeds become a commodity distinct from foodgrains as commonly understood. The raw seeds after processing the same were converted into seeds for cultivation. Such processed seeds would not be fit for human consumption or edible. The new article is different from raw material used. Then assessee is entitled for relief under Section 80-J. Processing of raw seeds through multiple stages resulting in a different commodity which is no longer edible and can be used only for cultivation amounts to manufacture or production entitling deduction under Section 80HH. 47. With the above case laws and arguments, one has to see the terms of the agreement between the parties in order to understand whether the so-called two activities of the assessee viz., supplying foundation seeds and in turn getting the foundation seeds from the farmer and later on making it as a marketable commodity amounts to integrated activity of agriculture. 48. The terms of agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and harvesting of hybrid seeds on the land earmarked in terms of the agreement, as if the company is a Lessee although all parties agree that no lease is created in terms of the agreement. It specifically says the terms of the agreement would bind both the parties except such terms which are inconsistent with the Karnataka Land Reforms Act and such terms shall be considered as null and void. The farmer undertakes to use the foundation seeds supplied by the assessee-company for cultivation and further assures that none of them would be misused or parted with to others not entitled to it and further undertakes to return to the assessee unutilised foundation seeds. The farmer further undertakes to hand over all the hybrid-seeds cultivated by him and not to sell or part with or retain for himself any portion of the seeds. It further makes clear all the seeds derived out of the foundation seeds by cultivation belongs to the company and the farmer has to undertake only multiplication of foundation seeds using his land and labour. However this multiplication of seeds is done under the technical supervision of the company at the mutually agreed price and the farmer has to deliver the seed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied field, in the presence of representative of the company. He further undertakes to cultivate the farm as per the instructions of the company right from sowing the seeds to the time of harvesting the crop. He undertakes to conform to the quality parameters mentioned in the annexure. He undertakes to receive payment at the rate of Rs. 3,200/-per quintal of processed seeds or at such rate as may be fixed by the company. Normally testing and processing would take 4 to 5 months. He further undertakes that any undersized seeds which pass through the sieve while processing shall remain as property of the company and the same will be sold in the market after due process and the amount if any realised will be paid to the farmer in due course. 53. In the present case, the argument of the assessee is not only initial operations, but also subsequent operations having nexus with the initial operations, are carried on by the assessee on the lands belonging to the farmer or other owners. What exactly means, agriculture, agricultural operations, basic operations subsequent operations, agricultural purposes, agricultural income etc. came up for consideration before the Apex Court as long bac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of course implies expenditure of human skill and labour upon land. The term has, however, acquired a wider significance and that is to be found in the various dictionary meanings ascribed to it. It may be permissible to look to the dictionary meaning of the term in the absence of any definition thereof in the relevant statutes. As was observed by Lord Coleridge in R v. Peters (1886) 16 QBD 636. 80. We have, therefore, to consider when it can be said that the land is used for agricultural purposes or agricultural operations are performed on it. Agriculture is the basic idea underlying the expressions "agricultural purposes" and agricultural operations and it is pertinent therefore to enquire what is the connotation of the term "agriculture". As we have noted above, the primary sense in which the terms agriculture is understood is ager field and cuitra cultivation, i.e., the cultivation of the field, and if the term is understood only in that sense agriculture would be restricted only to cultivation of the land in the strict sense of the term meaning thereby, tilling of the land, sowing of the seeds, planting and similar operations on the land. They would be the basic operations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products of the land in the narrower sense of the term like tilling of the land, sowing of the seeds, planting and similar work done on the land but also includes the subsequent operations set out above all of which operations, basic as well as subsequent, form one integrated activity of the agriculturist and the term "agriculture" has got to be understood as connoting this integrated activity of the agriculturist. One cannot dissociate the basic operations from the subsequent operations and say that the subsequent operations, even though they are divorced from the basic operations can constitute agriculture operations by themselves. If this integrated activity which constitutes agriculture is undertaken and performed in regard to any land that land can be said to have been used for "agricultural purposes" and the income derived therefrom can be said to be "agricultural income" derived from the land by agriculture. 81. In considering the connotation of the term "agriculture" we have so far thought of cultivation of land in the wider sense as comprising within its scope the basic as well as the subsequent operations described above, regardless of the nature of the products raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubject matter of clauses (ii) and (iii) in section 2(1)(b) of the Act, the term "agriculture" used in clauses(I) of section 2(1)(b) must also be similarly restricted to the performance of the basic operations on the land and there is no scope for reading the term "agriculture" in the still wider sense indicated above. 54. From different terms and conditions of agreement, what we notice is except supplying the foundation seeds and giving scientific advice from time to time, either at the time of sowing or pollination or harvesting, none of the normal activities of agriculture are undertaken by the assessee-company. Except sowing the foundation seeds belonging to the assessee, farmer is not entitled to grow any other seeds in the land earmarked for the purpose of growing hybrid seeds and is not allowed to part with the seeds supplied to him to anyone else and so far as unused seeds, he had to give back the same to the company. Farmer conducts the cultivation and assessee-company only allots machinery and personnel for the purpose of achievement of better results in producing the quality hybrid seeds. Preparation of bed, sowing of the seeds, cultivation and harvesting of hybrid seed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner as the case may be. 56. The assessee-companies neither have derivative interests in the land nor actually cultivate the land. Even if they cultivate the land, they are not lessees of the land in view of terms of agreement eliminating such relationship. At the most, they cultivate the land on behalf of the farmer or owner. Not only under the Karnataka Land Reforms Act such lease is prohibited but the terms specify so, therefore it is not open to the assessee to contend that it is for the concerned authorities to question the same and not under the Income Tax Act. Then explanation to Section 37 of the Act also comes in the way. Even if the assessee has benefits under Section 80J or 80HHC of the Act treating the conversion of foundation seeds to certified seeds as manufacturing activity, it would not enure to the benefit of the assessee so far as Section 10(1) of the Act (total exemption). 57. The assessee is not paying any rent per acre to the farmer and is not giving anything in kind like produce to the farmer. The assessee only pays a fixed price of Rs.3,200/- per quintal or any other price depending upon the terms of the agreement for foundation seeds grown by the farmer. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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