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TMI Blog2018 (11) TMI 267X X X X Extracts X X X X X X X X Extracts X X X X ..... nly as a grower and hands over the entire agricultural produce of foundation and breeder seeds to the assessee at the end. Grower never sold the agricultural produce to the assessee etc. Thus, the activity constitutes agricultural activity as the assessee constitutes an agriculturist and the entire activity of production and growing of said seeds becomes an agricultural activity. The solitary evidence gathered by the AO in the solitary case of Shri Bhuma Bala Narasimha Reddy does not hold good considering the fact that the said evidences was not put to the assessee in a settled perspective of legal proceedings. Therefore, procurement of seeds from the landlords-cum-growers is not the transaction of purchase of seeds for trading activity. Thus the claim made by the assessee is proper. The decision of CIT(A) is fair and reasonable and does not call for any interference. - Decided in favour of assessee. Disallowance u/s.14A r.w. Rule 8D(2) - Held that:- It is a settled issue that the said provisions are not applicable when the exempt income is not includes in the total income of the assessee. Accordingly, relevant grounds in the assessment years under consideration are required to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sts withthe assessee company. 3. Whether on the facts and in the circumstances of the case, the Ld.CIT(A)was correct in holding that the seeds growers were producing the seeds for the assessee only whereas as per information received u/s.133(6) of the Actrevealed that some of the growers were producing the grains at their own level,i.e. independently and in view of the above, the seeds procured by the assesseefrom growers is nothing but purchases from the seeds growers in question. 4. Whether on the facts and in the circumstances of the case the Ld.CIT(A)was correct in accepting assessee's version of agricultural operation based oninvalid documentation making the entire operation sham. 5. Whether on facts & circumstances of the case the Ld.CIT(A) was correctin appreciating that converting seeds into certified seeds is an agriculturalactivity. 6. On the facts and in the circumstances of the case, the order of the AO berestored and that of the CIT(A)-1 be vacated. 7. The appellant craves leave to add, amend or alter all or any of theGrounds of Appeal." On facts, the issues raised in Ground Nos. 4 & 5 has genesis in the outcomeof the enquiries/investigation by the AO in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed writtensubmissions and explained the facts relating to (a) leasing of lands from theland owners across width and breadth of the country; (b) giving ofagricultural advances to the said landlords or growers of seeds forundertaking the agricultural activity under the control and management ofthe assessee who has expertise in growing (a) nuclear seeds; (b) the breederseeds; (c) the foundation seeds and finally (d) the certified seeds. Assesseefurther submitted that the certified seeds are finally sold for higher rate andtherefore, all these procedures involve scientific methods and innovations onone side and the control and management of the assessee's technical staffsuch as Agricultural graduates . According to the assessee, the landlords arenot employees of the assessee. They work on contractual basis. 6. On considering the same, the AO rejected the contention of the assessee. Accordingly, AO held that the lease-land documentation, being anunregistered ones, is not a reliable ones. They are typed ones on theunregistered documents; they are stereo-typed ones and they suffer fromcredibility. Further, AO held that the assessee failed to demonstrate that the assessee discharged the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding activity only. However, AO did not find them relevant for considering the case of the assessee. Eventually, AO denied the claim of agricultural income and treatedthe same as income from business activities as per the discussion given inPara Nos. 5.8 and 5.9 of his order and the same are extracted here under : "5.8…….. However, in the case of Namdhari Seeds Pvt. Ltd., Hon'ble High Court ofKarnataka reported in 17 Taxmann 83, (2011) has considered the judgmentscited supra and held that where assessee company engaged in production ofhybrid seeds, entered into agreement with farmers for production of total hybridseeds on their land for its own benefit income arises to assessee from sale ofsuch seeds grown by farmers could not be agricultural income for the purpose ofexemption u/s.10(1) of the I.T. Act. The court also stated that entire reading ofterms of agreement could only indicate that assessee company was interestedonly to have healthy foundation seeds grown process of converting same ascertified seeds and Hon'ble Court held that the entire income amounts tobusiness income of the assessee. Further, as a matter of fact, for previousassessment years the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above facts and discussion and in view of the ratio laiddown by the above referred decisions, I am of the considered view that the AOis not justified in making addition of ₹ 6,89,99,157/- by treating agriculturalincome of the appellant company as non-agricultural income. The addition ofRs.6,89,99,157/- is deleted. The AO is directed accordingly." From the above, it is evident that the CIT(A) relied heavily on the decision ofPune Bench of the Tribunal in the case of ACIT Vs. M/s.Ajeet Seeds Ltd. (supra) and allowed the appeals of the assessee for these years underconsideration. In the subsequent assessment years too, relief was granted tothe assessee. 9. Aggrieved with the same, the Revenue filed the present appeals for. 10. Regarding the appeal for A.Y. 2012-13 by the Revenue, the AO roped inthe additional points to deny the claim of exemption to the said agriculturalincome of ₹ 10.22 crores (rounded off). The said additional points includethe suspected and self-serving lease agreement of land, which is the soledocument in the possession of the assessee demonstrating the agriculturalnature of the activities. On these documents, as stated earlier, the AO foundthe s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic condition of agriculture. If the basic operation of agriculture are not carried on by the assessee company,then the harvested foundation seeds purchased by him and converting them tocertification seeds cannot be termed as integrated part of the foundation activityof agriculture. In addition to above, the court has also viewed that, income fromdeveloping/producing of breeder seed or hybrid germplasm or parent hybridseeds, cannot be treated as agriculture income at ₹ 10,22,21,189/- is herebytreated as its business income and the same is added to the total income ofassessee. However, as assessee company has recognition of in house R&Dunits (s) upto 31/03/2012, on aforesaid business income at ₹ 10,22,21,189/-,it is entitled for deduction u/s.35(2AB) of the Income tax Act, 1961. Initiatepenalty proceedings u/s.271(1)(c) of the Income tax Act, 1961, for furnishing ofinaccurate particulars of income." 11. Regarding the appeal for A.Y. 2013-14, assessee made similar claim asin the A.Yrs. 2011-12 and 2012-13 and claimed ₹ 12,02,03,945/- asagricultural income exempt from taxation. In this order, the AO made another addition of ₹ 7,71,422/- on account of disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dering the processing activities, the wholeexercise for the assessee becomes a manufacturing activity or thebusiness activity. (c) Miscellaneous Arguments : The verification thatlandlords/growers resulted in gathering of incriminating informationwhere a grower confirmed that he merely sold the agricultural produceto the assessee. Further, Ld. DR for the Revenue submitted that there is no issue aboutthe income or loss of the trading income. Further, on the apportionment ofthe indirect expenditure, Ld. DR submitted that the same becomes relevantonly if the revenue stand on the claim of exemption u/s.10(1) of the Act isconfirmed. Ld. DR for the Revenue filed the paper book containing the copies oforder sheet dated 12-01-2018, copies of show cause notices and othernotices, replies from the assessee, copies of the assessment/appellate orders,copies of the financial statement, details of expenditure claimed by the assessee on account of agricultural activities and other activities, copies ofthe lease agreements of land etc. 16. Ld. ARs Contentions : Per Contra, Shri N.R. Agarwal, Ld. Counsel forthe assessee relied heavily on the orders of CIT(A) for all the assessment yearsand also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... growers (assessee's contractors for production ofseeds), sales of the certified seeds. The fact that assessee incurred ₹ 36.19crores (rounded off) on account of agricultural activities and the same wasnot disturbed by the AOs. This amount was incurred directly on agriculturalactivities such as land preparation expenditure. Details are given on Page 3 of the assessment order for A.Y. 2011-12and the same are reproduced below : Sl.No. Expenses directly related to the activities Amount i. Land Preparation expenses 25909610 ii. Fertilizer & Pesticides 47621370 iii. Labour Wages 71045020 iv. Incentives to growers 13890456 v. Lease rent for agricultural land 62135400 vi. Other Farm Expenses 33146970 vii. Stores and Processing materials consumed (indigenous) 52604307 viii. Trading purchases 0 ix. Change in inventory 55530229 Total 361883362 Further, it is the claim of the assessee that sum of ₹ 33.45 crores(rounded off) was incurred on account of composite activities both for (1)agricultural activities; and (2) trading activities. ₹ 30.94 crores (rounded off)claimed to be pertaining to the agricultural activities. The nature of theseexpen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erelevant for the A.Y. 2011-12. Relying on various decisions, Ld. Counsel forthe assessee submitted that when the assessee was not confronted with theadverse information and the same violates the principles of natural justice. Ld. AR submitted that it is a case of use of evidence against the assessee andmaking the assessment at the back of the assessee. Therefore, such evidenceshould be treated as nonest. For this proposition, he relied on the judgmentof Gujarat High Court in the case of CIT Vs. D.M. Joshi & Others 239 ITR0315. DR - Not empowered to improve the case of the Revenue : Referring toother arguments made by the Ld. DR for the Revenue as well the additionalgrounds raised by the Revenue, Ld. Counsel for the assessee submitted thatthe same constitutes making a new case by the Revenue which is notpermitted in view of the judgment of Hon'ble Jurisdictional High Court in thecase of Asbestos Cement Ltd. Vs. CIT reported in 203 ITR 358, the SpecialBench Mumbai Bench decision in the case of ACIT Vs. DHL Operationsreported in 108 TTJ 151. DRs request for remanding : Further, referring to the request for remandingthe entire issue to the file of AO, Ld. Counsel for the assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntractors, Ld. Counsel forthe assessee submitted that the land owners are into a contractualarrangement with the assessee by virtue of the aforesaid leaseholdagreements. Both the parties acted upon the contents of the same. In thatcase, the mere non-registration is a procedural deficiency and that does notmake the arrangement invalid. Eventually, in view of the said agreement, the assessee obtained the right on the land for growing the crops in those lands. Assessee paid the remuneration undisputedly and directly to thegrowers/land owners for leasing out the same. AO did not doubt thegenuineness of the payments. Referring to the AO's allegation about theunregistered/unstamped lease agreements, Ld. Counsel submitted that thesaid lease agreements are completely valid as they are acted upon by both thesignatories of the agreements. While the assessee paid the rent to thelandlord, the landlord has allowed his land for growing the seeds as per thechoice of the assessee and handed over the harvest to the assessee as per theterms of the agreement. Ld. Counsel relied on the decision of the Tribunal inthe case of D. Venkata Suryanaraana Raju in ITA Nos. 68 & 69/Vizag/2014. Elaborating the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y them. Therefore, the growers constitute contract labourers/employees of the assessee for this purpose. AO's Case laws - Distinguishable on facts : Referring to the judgment in thecase of Pro-agro Seeds Company Ltd. (supra), Ld. Counsel submitted that AOrelied heavily on this judgment for the proposition that production of hybridseeds do not constitute agricultural activity. Distinguishing the same, Ld. Counsel submitted that the facts of the case are entirely different where the assessee leased the lands, employed the labourers to cultivate the land takenkeeping the entire risk with the assessee. Further, referring to anotherdecision relied on by the AO in the case of Pioneer Overseas Corporationreported in 35 SOT 467, Ld. Counsel submitted that the facts aredistinguishable. Referring to another decision in the case of TaraiDevelopment Corporation Vs. CIT (supra) as well as decision in the case ofNavbharat Seeds Pvt. Ltd., Ld. Counsel submitted that the same are againdistinguishable on facts. Mentioning that the assessee is also engaged in the trading activity, Ld. Counsel submitted that the assessee purchased seeds from the open marketto the tune of ₹ 8,01,51,000/- and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after going through cleaning, preservation process etc. are still firfor human consumption after washing. Hence do not change nature & no newcommodity came into existence. For example Mangoes are applied vax beforeselling. They are to be washed before consumption. Subsequent operationsafter basis operation should be understood in conjunction with basic operation. Settled issue legally : Finally, relying on the judgment in the case of M/s. Advanta India Ltd. Vs. DCIT 5 ITR 57 (Bang.) as well as well as M/s. Monsanto India Ltd. Vs. ACIT in ITA No.6093/Mum/2007, Ld. Counselsubmitted that growing seeds on leasehold land constitute agriculturalactivity and the income earned from such activity is exempt u/s.10(1) of theAct. Referring to the jurisdictional decision o the Tribunal in the case of M/s. Ajeet Seeds Ltd. (supra) as well as the judgment of Andhra Pradesh HighCourt in the case of Vibha Agrotech Limited vs. Income-tax Officer (2009) 120ITD 182 and Prashant Agro reported in 42 ITR 319 (Hyd.) Ld. Counselsubmitted that growing of agricultural seeds and marketing them constituteagricultural activity and therefore, exempt from taxation. Ld. Counsel alsorelied on various other decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clude that the assessee in theA.Y. 2011-12 entered into contractual agreements with land owners/growers,The list is available on pages 1 to 240 of Paper Book No.3. As part of theagricultural activity, assessee incurred ₹ 2.59 crores for preparation of thelands owned by the landlords. Assessee used these lands for growing theseeds and provided basic seeds for use by the landlords-cum-growers. In thiscontext, the assessee incurred ₹ 4.76 crores in supply of the fertilizers andpesticides. ₹ 7.10 crores was spent on the labour wages. ₹ 2.21 croreswas incurred by the assessee on account of lease rent paid to the landlords. In addition, ₹ 3.32 crores was spent on other farm expenses. ₹ 5.26 croreswas spent on supply of processing material. Thus, the AO never doubted thegenuineness of the expenditure on all the heads of expenditure enlisted in theschedules extracted in the tables given in the preceding paragraphs of thisorder (land preparation expenses, fertilizers and pesticides, labour, wages,incentive growers, land rent, other form expenses, stores and materialconsumed etc). The genuineness of these expenses were undoubted by theAO. Additionally, &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee as lessor. On this assessee submits that it is a cumbersome processconsidering the huge lands quantitatively and also large number of thelandlords. Regarding the genuineness of the payments, AO accepts the factthat the payments were made substantially through the banking channels. Itis also undisputed that the said land lease documents were acted upon in itsspirit by both the assessee as well as the land owners-cum-growers. All thesefacts demonstrate the genuineness of the land lease documents. Therefore,we are of the opinion that it is not appropriate to describe the said land leasedocuments as not reliable and disallow the claim of the assessee relating totaxability of Agricultural income. 19. Therefore, it is a case that the leased lands are used for agriculturalactivity of the assessee, huge expenditure was incurred by the assessee forthe said activity, sales of the agricultural produce was undoubted, claim ofthe assessee was allowed upto the A.Y. 2010-11 on similar facts etc. Thus,we are of the opinion that the assessee's failure to get the land leasedocuments registered u/s.17(1A) of the Act (supra) cannot be a ground for theRevenue to withdraw the claim of agri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the letter of Mr.Bhuma Bala Narasimha Reddy dated 27-03-2015(translated in English) and the same reads as under : "…………. ………….. We have received payment for selling the Jowar Crop, which we have cultivatedin our farm, to the above mentioned company. …………..." From the above, it is evident that Mr.Bhuma Bala Narasimha Reddyclaimed the transaction between the assessee and him as sales of the seeds. With due respect to the procedural lapses discussed in the preceding paras ofthis order, we find the above piece of evidence could have been handled bythe AO in a different fashion. It is borne on records that the assessee iscertainly engaged in trading activity of the seeds also. Harmony with thesame, AO could have identified the profits of this transaction and taxed thesame as income of the assessee in that A.Y. 2012-13, the year of receipt ofsale of seeds instead of using the same for extrapolations to the entiregenuine transactions of the four assessment years under consideration. Therefore, AO is directed to take necessary action & tax the relevant profitsattributable to the said purchase of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. Thus the CIT(A)following the ratio laid down in the case of Advanta India Ltd., Indo AmericanExports and Namdhari Seeds Pvt. Ltd. (supra) (sic) held that the AssessingOfficer was not justified in treating agricultural income in respect of sale ofbreeder seeds and foundation seeds as non-agricultural income. Nothingcontrary was brought to our knowledge on behalf of the Revenue. Under thefacts and circumstances, the CIT(A) has rightly deleted the addition ofRs.10,14,138/-, ₹ 33,25,158/-, ₹ 26,99,190/-, ₹ 5,53,670/-,Rs. 5,53,166/-, ₹ 4,70,272/-, ₹ 7,79,837/- for A.Ys. 2002-03 to 2008-09,respectively. This factual and legal finding needs no interference from our side. We up hold the same." 21.2 When the matter travelled to the Hon'ble Bombay High Court by theRevenue, the Hon'ble High Court of Judicature at Bombay, AurangabadBench passed the judgment dated 18-06-2015 confirming the order of theTribunal. Para No.7 of the said judgment is relevant and the same isextracted as under : "7. Coming back to the question, as to whether growing breeder andfoundation seeds would amount to 'agriculture', the answer has to beaffirmative. It is not denied t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax, Central Circle, Bangalore Vs. NamdhariSeeds (P) Ltd. (supra). We have carefully gone through the judgment and foundthis. Placing reliance on this judgment, is taking the discussion in an incorrectdirection." 21.4 Thus, it is a settled legal proposition at the level of the Hon'ble HighCourt of Judicature at Bombay, Aurangabad Bench that the growing ofbreeder and foundation seeds would amount to agriculture. The said ratio ofthe judgment in the case of Ajeet Seeds Ltd. (supra) is binding on usconsidering the principles relating to the jurisdiction. We have alsoconsidered the facts relating to the case of Namdhari Seeds Pvt. Ltd. (NSPL)(supra) and find the said decision is delivered on different facts which is notapplicable to the facts of the present case. We proceed to extract the Heldportion as under : "Held, allowing the appeals, that the assessee neither had derivative interest inthe land nor did it actually cultivate the land. Even if it cultivated the land, itwas not a lessee of the land in view of the terms of the agreement eliminatingsuch relationship. The agreement showed that except supplying the foundationseeds and giving scientific advice from time to time, eit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vour of the assessee. 22.D. Ld. DR's request for remanding : Further, the other argument fromLd. DR for the Revenue include the argument of remanding to the file of AOfor fresh adjudication of the issue. Ld. DR requests for grant of one moreround to the Revenue for making the assessment for these assessment yearsunder consideration. It is settled legal proposition that setting aside the issueto the file of AO is valid provided the facts required for adjudication of theissue are not brought on to the records. DR failed to list out or demonstratethe missing of the said facts. On hearing both the parties, in the instantcase, no such case is made out by Ld. DR before us. Further, it is othersettled legal proposition that the DR cannot make out a new case which is notraised from the side of AO and the CIT(A). It is not the case of the AO that theinvestigation in all the assessments is incomplete from any angle. Therefore,we are of the opinion that, as per the said settled principle the argumentsraised by the Ld. DR for the Revenue are unsustainable. Hence, this part ofthe arguments are dismissed. Accordingly, the relevant grounds raised bythe Revenue in all these appeals of the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration. Further, CIT(A) confirmed thesame. 25. Before us, at the outset, Ld. Counsel for the assessee brought ourattention to the facts and submitted that the assessee never earned exemptincome by way of dividend from the said investments and the same neverformed part of the total incomes of the assessee. Further, Ld. Counsel for the assessee relied on various bindingdecisions to demonstrate that the provisions of section 14A of the Act has noapplication, when the dividend income is not earned out of the saidinvestments. 26. Per Contra, Ld. DR for the Revenue relied on the order of the AO. 27. We have heard both the parties on this issue of invoking the provisionsof section 14A of the Act r.w. Rule 8D of the I.T. Rules when the exemptincome is not part of the total income in the assessment years underconsideration. Further, we perused the orders of the Revenue on this issue. On perusal, we find that it is a settled issue that the said provisions are notapplicable when the exempt income is not includes in the total income of the assessee. Accordingly, relevant grounds in the assessment years underconsideration are required to be allowed in favour of the assessee. Onperusal o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9-10& 2010-11. This view is also supported by the decision of the Hon'ble Delhi High Court inthe case of Cheminvest Ltd. CIT in ITA No.749/2014 dated 02.09.2015wherein it was held that no disallowance U'/s 14A can be made in a year inwhich no exempt income had been earned or received by the assessee. Theexpression "does not form part of the total income" in Section 14A of theenvisages that there should be an actual receipt of income, which is notincludible in the total income, during the relevant previous year for the purposeof disallowing any expenditure incurred in relation to the said income. ThusSection 14A will not apply if no exempt income is received or receivable duringthe relevant previous year. In the present case, the appellant company has notreceived any dividend income in the year under reference. Moreover Section14A of Income Tax Act, 1961 does not apply to shares bought for strategicpurpose. The Chennai Tribunal in the case of EIH Associated Hotels Ltd. Vs DCIT has held that investments made by the assessee in the subsidiarycompany were not on account of investment for earning capital gains ordividend income. Such investments had been made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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