VIBHA AGROTECH LIMITED v. INCOME TAX OFFICER
[Citation -2007-LL-0921-14]

Citation 2007-LL-0921-14
Appellant Name VIBHA AGROTECH LIMITED
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 21/09/2007
Assessment Year 2001-02
Judgment View Judgment
Keyword Tags adventure in nature of trade • extraction of timber • agricultural produce • income from business • investment allowance • revenue authorities • agricultural income • additional income • business activity • purchase price • closing stock • opening stock • profit motive • co-operative • raw material • use of land • nil income • rice mill • plant
Bot Summary: From the breeder seed, pre- basic seeds are developed and from the pre-basic seeds, the basic seeds are developed. The assessee is cultivating foundation seeds, selling the foundation seeds to farmers, buying finished/hybrid seeds produced by the farmer and selling the finished seeds after processing and packing. The cultivated foundation seed are sold to the farmers, after necessary secondary operations for further cultivating hybrid seeds; At hybrid seed production stage : the assessee purchases hybrid seed cultivated by farmer and a simple process of chemical treatment will be made and jpacked to suit and retain the traits of the seed. The learned counsel for the assessee while reiterating the same submissions as submitted before the AO and the learned CIT(A) further submits that the various stages involved in the processing of the seed are as follows : Breeder Prebasic Basic Hybrid Germplasm seed seed seed seed He further submits that the assessee obtained germplasm from research institute which is developed into imbred lines. Pollination under supervision, rearing of seeds and repetitive of the same process, the resultant product i.e., basic seed is grown the income derived by the assessee on the sale of basic seed is grown the income derived by the assessee on the sale of basic seed is an agricultural income. During the course of assessment, it was found that the sale of seeds was of two kinds i.e., sale of parent seeds and the sale of foundation seeds also called commercial seeds and hybrid seeds. Applying the ratio of the above decisions including the decision of the Tribunal in Progo Seeds Co. Ltd., wherein there was no dispute in treating the sale of parent seeds of Rs. 16,19,854 as an agricultural income, we find that in the present case the undisputed findings of the AO and learned CIT(A) are that the basic seeds are produced by the assessee by doing basic agricultural operations, we are clearly of the view that the assessee is doing agricultural operations and growing basic seeds on the lands.


Dinesh K. Agarwal, J.M. Order This appeal preferred by assessee is directed against order passed by learned CIT(A), dt. 21st Oct., 2004 for asst. yr. 2001-02. 2. Briefly stated, facts of case are that assessee company engaged in research, production and marketing of hybrid seeds, filed its return of income declaring nil income under normal provisions of IT Act ("the Act") and at income of Rs. 42,30,543 under s. 115JB of Act. During course of assessment proceedings, it was found that assessee, in revised computation of total income has claimed exemption of part of its income as agriculture income Rs. 20,39,618 under s. 10(1) of Act, as under : "Cultivation income 30,68,011 Add : Closing stock of seeds 24,83,760 55,51,771 Less : Opening stock of 9,45,093 cultivated seeds + Cultivation Expenses 25,67,060 35,12,153 Net agriculture income of 20,39,618" 3 . AO vide para 3 of assessment order observed that agricultural activities carried on by assessee are as under : "In first stage assessee purchases germplasm. Germplasm is group of seeding which can regenerate itself with similar characteristics. Any seed which is capable of passing on characters to next generation and is used as basic planting material in plant breeding is termed as germplasm seed. germplasm is evaluated for purpose of identifying characters. T h e activity involves identifying parental lines (female and male) and to identify competitive and superior hybrids. germplasm passes through quarantine and post-quarantine system of NBPGR and is planted in company s research farms in crop specific growing seasons. germplasm lines are evaluated and data is recorded on yield, maturity periods, insect and disease resistance, quality parameters, photo period sensitivity, etc. After evaluation, material is multiplied for more seeds and is moved to specific use in crop hybridization programme. germplasm is thus collected consists of pure inbreds and varieties that can be used for developing new hybrids. wild species and land races are used in hybridization for genetic enhancement and development of new varieties, CMS sources and for specifie traits. At next stage, breeder seed is produced from germplasm. From breeder seed, pre- basic seeds are developed and from pre-basic seeds, basic seeds are developed. In third stage, basic seeds are given to farmers for production of hybrid seeds on agricultural lands of farmers. basic seeds are taken by farmers and after cultivating them, produce which is hybrid seed is entirely purchased back by company. cultivation by farmer is carried out under supervision of company. fourth and final stage, hybrid seeds are purchased back from farmers and after suitable processing like leaning, fermentation, grading, etc. and packing hybrid seeds are marketed by company." Accordingly, assessee was asked to show cause as to why activities carried on by assessee company may not be treated as business in nature as it constitutes one indivisible activity, that of integrated and composite nature. In response, assessee made submissions which are reproduced by AO vide para 5 of assessment order as under : "..As explained to you earlier and as narrated in activity note submitted by us to you, production process of assessee company is involved in activity of research, production and marketing of hybrid seeds of various field crops. Each activity involves sequence of process. Research activity involves sequence of germplasm collection evolution. Multiplication and utilization, hybridization, initial evaluation of hybrids and varieties advance hybrid testing and on-farm testing. Production activity involves parent seed multiplication, foundation seed multiplication and labeled/certified hybrid/seed production. whole process of production and multiplication is carried on its own or on leased lands by implementing normal agricultural operations and with aid of improved/better farming practice. Agricultural income as defined under s. 2(1A) of IT Act : (i) Any rent or revenue derived from land, which is situated in India and is used for agricultural purposes. (ii) any income derived from such land by agricultural operations including processing of agricultural produce raised or received as rent in kind so as to render it fit for market. As assessee is engaged in cultivation upto basic seed stage (foundation seed) by undertaking all basic operations of agricultural on land, income derived by assessee on sale of foundation seed is definitely agricultural income, in support of assessee claim, we rely on decision in case of CIT vs. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC). Let us consider example of case of rice mill, assessee who is owner of rice mill and is cultivating paddy. options can be, (i) He might sell paddy in outside market after cultivation, then sale receipts are agricultural receipts. (ii) He might use paddy so cultivated for processing at rice mill and produce rice and sell rice. Here, since goods are used as raw material value of paddy that would have fetched will be taken as purchase price for rice mill and that amount will be treated as agriculture income. (iii) He might sell paddy so produced to third party and agree to process paddy on behalf of third party for supply of rice. Even here, income on sale of paddy is agriculture income and amount charged for processing of paddy is business income. above example exactly suits present case of assessee. assessee is cultivating foundation seeds, selling foundation seeds to farmers, buying finished/hybrid seeds produced by farmer and selling finished seeds after processing and packing. If there is sale and also purchase of product, then it cannot be termed as integral or composite activity, which is inseparable. Even in case where it is held to be integrated activity, income received comprising of both agricultural and non-agricultural elements are to be disintegrated, as decided in case of CIT vs. Maddi Venkatasubbayya & Anr. (1951) 20 ITR 151 (Mad) and CIT vs. Mahasamund Kissan Co-operative Rice Mill & Marketing Society Ltd. (1973) 103 ITR 499 (MP)." 4 . assessee made further submissions which are also reproduced by AO vide para 6 of assessment order as under : "6. assessee made further submissions on 22th March, 2004 which are reproduced below : Note on activity of company In continuation to discussion we had with you with regard to income claimed as agriculture income we hereby submit following in support of our claim : Production process of company : At research stage : germplasm is collected and planted in company s research farms in crop specific growing seasons. Then germplasm lines are evaluated for quality parameters. After evaluation material is multiplied for more seeds and is moved to specific use in crop hybridization programme. wild spices and land races are used in hybridization for genetic enhancement and development of new varieties, CMS sources and for specific traits. Hybrids developed from new germplasm are tested along with best available commercial hybrid/ varieties of other companies. hybrid that perform better than commercially available hybrids are selected. At foundation stage : assessee cultivates selected seeds and produce foundation seeds on its own or on leased lands by implementing basic agricultural operations. cultivated foundation seed are sold to farmers, after necessary secondary operations for further cultivating hybrid seeds; At hybrid seed production stage : assessee purchases hybrid seed cultivated by farmer and simple process of chemical treatment will be made and jpacked to suit and retain traits of seed. As per s. 2 (1) of IT Act, 1961, agricultural income means any rent or revenue derived from land, which is situated in India and is used for agricultural purposes. Any income derived from such land by agricultural operations including processing of agricultural produce raised or received as rent in kind so as to render it fit for market. prima sense in which agricultural is understood, is root meaning ager = field + culture = cultivation, that is to say, field cultivation of grounds, in sense tilling of land, sowing of seeds, planting and similar operations of land. These are called basic operations of agricultural and demand for expenditure of human labour and skill upon land itself. assessee has conducted all basic and secondary operations of agricultural in cultivating foundation seed, which is claimed as agricultural income. From plain reading of Act nature of produce had no relevance to agricultural operations. produce which is result of cultivation might cater to needs of human or animal or cater to needs of industry. Accordingly, agricultural could expand to cultivation of all commodities of (1) Food value such as sugarcane, tea, coconut, etc. (2) Artistic and decorative value such as flowers and creepers (3) Trade or commercial value such as cotton, indigo, jute, rubber, etc. (4) Housing value such as bamboo, timber, etc. (5) Fuel value such as casuarinas and medicinal and health value such as cardamoms, betel, etc. Different Courts have given different rulings regarding character of agricultural operations, apex Court of land has given its decision in case of CIT vs. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC) discussed about numerous examples of agricultural operations. It has held even growing of forest trees by performing basic agricultural operations shall be treated as agricultural and income shall be agricultural income. In entire judgment of referred case apex Court is of option of that use of crop need not be considered to say that income is agricultural or not. Scientific agricultural research activity As explained to you and from note on cultivation of foundation seeds submitted to you, it is evident that assessee company cultivates foundation seeds for purpose of sale and to procure hybrid seeds only on taking satisfactory/marketable variety at research level. From this it is clear that there is no much research is really being carried at cultivation stage of foundation seed but for implantation of better forming practices. With changes in techniques and methods developed in various segments, even better forming practices are developed and implemented in process of cultivation, implementation and use of better farming practices need n o t disqualify basic operations of agricultural and income so generated to be claimed as agricultural income. basic object of business All products of land which has some utility either for consumption or for trade, if they are based on land, would be agricultural products. If assessee has sold seeds which were result of basic operations on land, on expending human skill and effort labour and it is only after performing basic and subsequent operations comprehended with term agricultural (like weeding, water, manuaring, etc.) on land, resultant product grown (seed) after performing such operations are clearly products of agriculture. Thus, we submit that though assessee is in business of sale of commercial seeds, they need not be deprived of claiming income as agricultural income for income earned by them from such agricultural operations." However, AO was of view that activity of assessee is composite in nature. In initial stages assessee was doing extensive research activity and producing basic seeds. No doubt, assessee had been utilizing land to achieve its goal of producing hybrid seeds. assessee s contention that part of its activity is agriculture income, is not tenable. assessee s activity in initial stage involves more of research activity rather than agricultural activity. According to AO, following activities are research activities : I. Germplasm collection (i) Acquisition of lines and (ii) Local collections II. Genetic resources evaluation includes activities such as introduction, maintenance, evaluation and conservation. III. Development of hybrids (crossing program) IV. Logical sequence of hybrid testing : (i) Initial Hybrid Trial (IHT) (ii) Advance Hybrid Trial (AHT) and (iii) Multi- location testing of AHT & IHT V. Strip testing/On farm testing/Test marketing. AO further observed that company has research farms in and around Hyderabad. small satellite farms were formed deliberately to manage isolation, power supply, labour and irrigation water. These facilities are helping company to raise crops. In addition to these main breeding centers, company has testing centers to test adoptability, stability and specific resistances. farms are developed to have precision fields for conducting yield trials, getting good agronomic and genetic expression, and for testing genetic purity. 6. Thus, AO was of view that main activity of assessee is development of high yielding crop hybrids through research and development and hybrid seed production for commercial purposes. In order to attain its ultimate objective of sale of hybrid seeds, it is producing foundation seeds in lands which are multiplied into hybrid seeds. Production of foundation seed is subservient to and incidental to its main activity of sale of hybrid seed. In such circumstances, foundation seed production cannot be "agricultural activity" and income derived from it, cannot be treated as agricultural income for claiming exemption under s. 10(1) of Act. He further observed that assessee s activity is integrated and composite one, right from research and development to final marketing/sale of hybrid seeds which involves several stages and first few stages cannot be isolated and termed as agricultural activity, just because they are produced in fields leased in by assessee company. 7 . AO further observed that assessee ventures into this activity with ultimate aim of selling hybrid seed. profits earned by company are primarily commercial and not agricultural. Upto production of basic seed assessee carries on extensive research activity on lands owned by it or leased by it and thereafter under its supervision, basic seed is developed into hybrid seed by farmers. entire hybrid seed cultivated by farmer is taken back by assessee and after processing it, same is marketed under its brand name. entire activity of assessee is nothing, but, business activity as essential ingredients like adventure in nature of trade, continuous and systematic activity and profit motive are present. 8. AO further observed that plant breeding is art and science of changing and improving heredity of plant so as to increase its production and productivity. technique of plant breeding lies in ability of plant breeder (the scientist) to observe plant differences, which have got economic value. At end of successful research which goes on for 9 to 10 years or even more, handful of seed which is 100 per cent genetically pure, known as "nucleus seed" is produced. This nucleus seed is multiplied by plant breeder himself under strict controlled conditions to develop what is known as "breeder s seed", which is also 100 per cent genetically pure. breeder s seed multiplication gives rise to foundation seed . In instant case, assessee through its research activity, is developing foundation seed in its leased fields. Once foundation seed is produced, it is distributed to farmers for further multiplication, in latter s own fields, of course, under technical supervision of scientist (in this case, assessee) with help of field assistants which result in production of what is known as certified (hybrid) seed . entire process is highly technical and research oriented involving in depth knowledge of plant genetics, physiology and agronomy. 9. According to AO, definition of agriculture as contemplated in s. 2(1A) of IT Act, 1961 does not cover activity of foundation seed production by assessee, just because assessee is undertaking basic agricultural operations like sowing, weeding, irrigation, inter-cultivation, etc. These agricultural activities are only incidental to main activity of assessee, i.e., foundation seed production. Agriculture, on other hand, is art and science of cultivating land and growing and harvesting crops. AO relying on decision of Tribunal, Delhi, in Proagro Seeds Company Ltd. vs. Jt. CIT in ITA Nos. 90/Del/2000, 4899/Del/1997 and C.O. No. 53/Del/2000, dt. 11th Nov., 2002 for asst. yrs. 1996-97 and 1994-95 was of view that even though assessee s initial activities may be akin to agriculture but major portion i.e., R & D, technological inputs involved in seed production like in breeding, artificial self-pollination, artificial crossing between male and female lines and sale of foundation seed are not agriculture and that income from sale of foundation seed cannot be treated as agriculture income, even partially. foundation seeds produced by assessee are result of intensive research and other technical inputs. activity of research was inextricably linked with process of growing of foundation seed and both activities, therefore, had to be considered together. Foundation seed would not be possible only through normal agricultural operations, but involvement of research based scientific techniques have to be invariably there in process. According to AO, foundation seed production is "non-agriculture" and is clear commercial activity. Therefore, he treated income from sale of foundation seed as income from business and after rejecting exemption claimed under s. 10(1) of Act, assessed income from production of foundation seed amounting to Rs. 20,39,618 as non-agricultural income and added same to income of assessee and accordingly completed assessment after set off of carry forward loss, at income of Rs. 13,38,180 vide order dt. 29th March, 2004, passed under s. 143(3) of Act. ??? 1 0 . assessee preferred appeal before CIT(A). learned CIT(A) while holding that there is no denying fact that foundation seed is produced by appellant by doing basic agriculture operations, upheld order of AO and dismissed appeal. 11. Being aggrieved by order of learned CIT(A), assessee is in appeal before us. 12. Ground Nos. 1 to 4 read as under : "1. order of learned CIT(A) is erroneous both on facts and in law. 2. learned CIT(A) erred in holding that activity carried on by assessee in producing hybrid seed does not represent agricultural activity and further erred in holding that income of Rs. 13,38,180 derived during year under consideration from out of said activity is not exempt from tax. 3. learned CIT(A) ought to have held that total income assessed for year under consideration of Rs. 29,14,750 as determined by AO is not taxable under IT Act, 1961, as it represents agricultural income. 4. learned CIT(A) erred in treating Rs. 20,39,618 as income upto sale of basic seed and in holding that said income is not exempt as representing agricultural income." 1 3 . learned counsel for assessee while reiterating same submissions as submitted before AO and learned CIT(A) further submits that various stages involved in processing of seed are as follows : Breeder Prebasic Basic Hybrid Germplasm seed seed seed seed He further submits that assessee obtained germplasm from research institute which is developed into imbred lines. imbreds are crossed in field trials to determine superiority and performance. Those imbreds found to be superior are promoted. This particular hybrid is increased in number and foundation seed is produced in field in isolated conditions. foundation seed is sold to farmers for further hybrid seed production. seeds supplied to farmers are purchased back and after processing like cleaning, fermentation, grading, etc. and packing, hybrid seeds are marketed by company. He further submits that assessee is engaged in cultivation upto basic seed stage by undertaking all basic operations on land like weeding, watering, manuring, etc. on expanding human skill, effort and labour and it is only after performing basic and subsequent operations i.e., planting seeds, growing up of plants. pollination under supervision, rearing of seeds and repetitive of same process, resultant product i.e., basic seed is grown, therefore, income derived by assessee on sale of basic seed is grown, therefore, income derived by assessee on sale of basic seed is agricultural income. He further submits that language of s. 2(1A)(b)(ii) of Act did not warrant conclusion that process contemplated must be of such character as just to make produce marketable and that additional income derived from any further process, is not exempt as agricultural income. true test is whether process employed in particular case was one ordinarily employed by cultivator. 14. He further submits that just because formation of basic seed involves process which is research and technical oriented, it cannot be disqualified as agricultural operation. These days highly technical equipment and operations are employed in farms for production of crops, but, that does not make them non-agricultural produce. Implementation and use of better farming practices need not disqualify income generated from basic agricultural operations from being claimed as agricultural income. Basic seed is definitely produced through normal agricultural operations with involvement of research based scientific techniques. In today s time of advanced technology and support from companies, farmers definitely have more knowledge and specialized skill than could have ever been dreamt of few years ago. Thus, AO s allegation that normal farmers do not have knowledge about development of foundation seed is no longer true. When activity of appellant can clearly be divided into agricultural process till basic seed formation and further into commercial activity in marketing hybrid seeds, question of integrated, composite and indivisible activity being involved does not arise. He further submits that assessee has undertaken all agricultural operations to produce foundation seeds which can definitely be separated from subsequent procedure of formation of hybrid seeds, so there is no reason whatsoever as to why initial process of basic seed formation which is clearly agricultural process cannot be separated from ultimate sale of hybrid seed which may be treated as business income. 15. He further submits that learned CIT(A) has also agreed that foundation seed is produced by appellant by doing basic agricultural operations. This fact has not been disputed in appellate order also. He reiterated that for each stage of foundation seed production, there was activity of planting seeds, growing up of plants, pollination under supervision and rearing of seeds. Thus, produce of seeds is clearly products of agricultural activities undertaken by assessee. 16. learned counsel for assessee while relying on decision of Tribunal, Hyderabad Bench, in case of Advanta (India) Ltd. vs. Jt. CIT in ITA Nos. 512, 513/Hyd/2002 and ITA Nos. 136, 236/Hyd/2001, dt. 30th June, 2003 for asst. yrs. 1996-97, 1997-98 and 1998-99, and decision of Hon ble Madras High Court in CIT vs. Soundarya Nursery (2000) 160 CTR (Mad) 319 : (2000) 241 ITR 530 (Mad) submits that basic agricultural operations were performed by assessee for production of basic seeds. It is not case where without performing basic operations, only subsequent operations were performed. basic seeds sold by assessee were result of basic operations on land on expending human skill and labour thereon and it was only after performance of basic operations on land, resultant product was grown after performing several operations. Thus, basic seeds sold by assessee were result of primary as well as subsequent operations comprehended within term "agriculture" and they are clearly products of agriculture.The reliance was also placed on decision of Hon ble Supreme Court in Raja Benoy Kumar Sahas Roy vs. CIT (1957) 32 ITR 466 (SC). He, therefore, submits that agricultural income shown by assessee amounting to Rs. 20,39,618 be exempted under s. 10(1) of IT Act. 1 7 . On other hand, learned Departmental Representative while strongly relying on order of AO and learned CIT(A) submits that foundation seeds produced by assessee are result of intensive research and other technical inputs. activity of research was inextricably linked with process of growing of foundation seed and both activities, therefore, had to be considered together. Foundation seed would not be possible only through normal agricultural operations, but involvement of research based scientific techniques have to be invariably there in process. Therefore, production of foundation seed is non-agriculture and is clear commercial activity and hence, income from sale of foundation seed is income from business within meaning of s. 2(13) of IT. Act. He, therefore, submits that order passed by AO and confirmed by learned CIT(A), be upheld. reliance was also placed on decision in Pro Agro Seed Co. Ltd. vs. Jt. CIT (supra) and decisions reported in case of K.Lakshmanan & Co. & Ors. vs. CIT (1999) 157 CTR (SC) 449 : (1988) 239 ITR 597 (SC), Aspinwall and Co. Ltd. vs. CIT (2001) 170 CTR (SC) 68 : (2001) 251 ITR 323 (SC), CIT vs. Abdul Ahad Najar (2001) 169 CTR (J&K) 273 : (2001) 248 ITR 744 (J&K). 18. We have carefully considered submission of rival parties and perused material available on record and also case law cited at Bar. Sec. 2(1A) of IT Act, 1961 defines agricultural income. relevant part of definition reads thus : "(1A) "agricultural income" means (a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes. (b) any income derived from such land by (i) agriculture; or (ii) performance by cultivator or receiver of rent-in-kind of any process ordinarily employed by cultivator or receiver of rent-in-kind to render produce raised or received by him fit to be taken to market, or (iii) sale by cultivator or receiver of rent-in-kind of produce raised or received by him, in respect of which no process has been performed other than process of nature described in paragraph (ii) of this sub-clause;..." From careful perusal of s. 2(1A)(a), it is apparent that there are three requisite conditions for attracting application of sub clause, viz., : (i) rent or revenue should be derived from land; (ii) land should be situated in India; and (iii) land should have been used for agricultural purposes. In order to constitute agricultural income, under s. 2(1A)(b) of 1961 Act, two conditions have to be satisfied, viz., (i) land must be used for growing all or any of commercial crops, and (ii) that income should be derived from such land by agriculture vide Consolidated Coffee Estates (1943) Ltd. vs. Commr. of Agri. IT (1970) 76 ITR 29, 33 (Mys). 19. Before proceeding further, it is apt to consider two decisions relied on by learned Departmental Representative which are as under. 2 0 . In Aspinwall and Co. Ltd. vs. CIT (supra), question was as to whether Tribunal is right in law and facts in holding that assessee s activity of curing coffee amounts to manufacturing and assessee is entitled to relief under s. 32A of IT Act ? It has been held by Hon ble Supreme Court that conversion of raw berry into coffee beans was manufacturing activity. assessee was, therefore, entitled to investment allowance under s. 32A. 2 1 . In CIT vs. Abdul Ahad Najar (supra), assessee, lessee, was engaged in business of forest exploitation. assessee claimed deduction under s. 80J for asst. yr. 1995-96. AO held that process of converting trees into logs did not involve any manufacturing process and hence negatived assessee s claim. Tribunal upheld claim of assessee. On reference, it has been held by their Lordships that activity of forest lessees of extraction of timber from forest and conversion of same into logs and planks was manufacturing process and hence assessee was eligible for deduction under s. 80J. 2 2 . Both decisions relied on by learned Departmental Representative are on different provisions of Act and not on impugned issue at all, therefore, decisions therein cannot determine course of decision making in instant case, hence, not applicable. 23. Hon ble Supreme Court in case of CIT vs. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC), has considered term agriculture and held at p. 466 (headnotes) as under : Agriculture in its primary sense denotes cultivation of field and is restricted to cultivation of land in strict sense of term, meaning thereby tilling of land, sowing of seeds, planting and similar operations on land. These are basic operations and require expenditure of human skill and labour upon land itself. Those operations which agriculturist has to resort to and which are absolutely necessary for purpose of effectively raising produce from land, operations which are to be performed after produce sprouts from land, e.g., weeding, digging soil around growth, removal of undesirable undergrowth, and all operations which foster growth and preservation of same not only from insects and pests but also from degradation from outside, tending, pruning, cutting, harvesting and rendering produce fit for market, would all be agricultural operations when taken in conjunction with basic operations.." 24. In K. Lakshmanan & Co. & Ors. vs. CIT (1999) 157 CTR (SC) 449 : (1999) 239 ITR 597 (SC), it has been held at p. 598 (headnotes) as under : "Held, dismissing appeals that had mulberry leaves been subjected t o some process and sold in market as such, then certainly income derived therefrom would be regarded as agricultural income, but case of assessee before authorities, and in Supreme Court, had been that mulberry leaves could not be sold in market and they could only be fed to silk worms. agricultural produce of cultivator would be mulberry leaves and by no stretch of imagination could silk worms, and certainly not silk cocoons, be regarded as agricultural produce of cultivator. income derived by assessee from sale of cocoons could not in law be regarded as agricultural income." 25. In CIT vs. Soundarya Nursery (2000) 160 CTR (Mad) 319 : (2000) 241 ITR 530 (Mad), it has been held at p. 533 that : "..thus, plants sold by assessee in pots were result of primary as well as subsequent operations comprehended within term agriculture and they are clearly products of agriculture ." It has been further held that "...the seeds were clearly product of agriculture and income derived from sale of seeds was agricultural income." 2 6 . In Progo Seeds Co. Ltd. vs. Jt. CIT and vice versa in ITA Nos. 90/D/2000, 4899/D/97 and C.O. No. 53/D/2000, vide order dt. 11th Nov., 2002 for asst. yrs. 1996-97 and 1994-95, assessee company was engaged in growing various kinds of hybrid seeds and earning income from their sale. income from sale of seeds was claimed as exempt under s. 10(1) of IT Act. During course of assessment, it was found that sale of seeds was of two kinds i.e., sale of parent seeds and sale of foundation seeds also called commercial seeds and hybrid seeds. In terms of money assessee had shown t h e sale of parent seeds at Rs. 16,19,854, sale of hybrid seeds at Rs. 54,21,23,398 and sale of discarded seeds at Rs. 38,52,866. It was further observed by AO that total sale includes sale of parent seeds amounting to Rs. 16,19,854 to M/s. Hybrid Rice International (P) Ltd. and there was another sale in respect of germplasm seeds of paddy for amount of Rs. 6,95,00,000 to same party. remaining sale pertained to commercial hybrid seeds. AO after detailed discussion treated receipt of Rs. 6.95 crores pertaining to sale of germplasm seeds as non-agricultural receipt and brought same to tax. On appeal, learned CIT(A) after rejecting stand of assessee, approved, ultimately, view taken by AO to treat income of Rs. 6.95 crores as non-agriculture. On further appeal to Tribunal, Tribunal while confirming order of learned CIT(A) held vide paras 38 and 39 of its order as under : "38. No doubt, there have been technological scientific advances over years, but in exempting from tax agricultural income what has been kept in mind and contemplated is that income which arises from use of land for agricultural purposes by conventional methods. Sec. 2(1A) has defined term agricultural income and it must be emphasized that reference is to cultivator , produce which is, fit to be taken to market , sale is of produce raised or received by cultivator and in respect of which no process has been performed other than process of nature described in para (ii) of sub-cl. 2(1A)(b)(ii) . Sub-cl. (ii) talks of any process ordinarily employed by cultivator or receiver of rent-in-kind to render produce raised or received by him fit to be taken to market . In present case, we are talking of hybrid seeds/germplasm seeds, production of which has come about as result of huge expenditure running into crores of rupees including that on research amounting to Rs. 3.56 crores. Can it be said on facts of present case that assessee has employed conventional methods in producing seeds ? answer is emphatic No . judgment of Hon ble Supreme Court in case of Raja Benoy Kumar Sahas Roy (Supra), is squarely applicable in spite of fact that it was rendered in 1957 and we are few decades away as of today, but no decision to contrary has been brought to our notice on behalf of assessee and some of decisions cited are not at all applicable having been rendered in different contexts. 39. CIT(A) in her order has very rightly observed that whereas some part of activities of assessee may pertain to field , major operations are of mechanical nature ruling out role of nature. It has been very aptly emphasized that agriculture is art and science of cultivating land and growing and harvesting crops . These are operations like weeding, irrigating and tending. crops, however, are left to grow and mature by forces of nature. It is apparent that in assessee s case initial activities may be akin to agriculture, but major portion therefor is not and therefore, sale proceeds of Rs. 6.95 crores cannot be treated as agriculture income. action of CIT(A) is confirmed." 2 7 . In Advanta (India) Ltd. vs. Jt. CIT and vice versa in ITA Nos. 512, 513/Hyd/2002, ITA Nos. 136 and 236/Hyd/2001, dt. 30th June, 2003 for asst. yrs. 1996-97, 1998-99 and 1997-98, assessee company was incorporated on 24th Jan., 1994. main object of company is to carry on business of development, production, processing and sale of hybrid seeds for agricultural purposes. Revenue authorities had treated activity of assessee upto basic seeds level as agricultural activity. production activity from level of basic seeds to level of hybrid seeds, was treated as non-agricultural activity of assessee which has been upheld by earned CIT(A). On second appeal to Tribunal, Tribunal after considering various decisions including decision of Tribunal, Delhi Bench, in Progo Seeds Co. Ltd. (supra), has held vide paras 16 and 17 of its order as under : "23. In case on hand, basic seeds are given to farmers by sale or otherwise. farmers cultivate these seeds and hybrid seeds produced by them are sold back to company, as mandated by contract. But, for agreement prohibiting farmers from selling this produce to anybody else than company, there would have been market by itself for these hybrid seeds as well as for basic seeds. terms of agreement which are stringent have been elaborated in latter part of order and it is this agreement that prevents farmers from selling hybrid seeds. Our conclusions and reasons for findings are set out in later part of this order. Once there is sale and also purchase of product, then it cannot be termed as integral or composite activity, which is inseparable. Even in case where it is held to be integrated activity, income receipts comprising of both agricultural and non-agricultural elements should be disintegrated. [See Bomford vs. Osborne 23 Tax Cases 642 (NHL) : (1942) 10 ITR (Suppl) 27 (HL) and CIT vs. Maddi (1951) 20 ITR 151 (Mad) and CIT vs. Mahasamund Kissan Co-operative Rice Mill & Marketing Society Ltd. (1976) 103 ITR 499 (MP)]." 23. On issue as to whether profit earned by assessee company upto this stage of basic seed production is agricultural income or not, though Revenue has advanced elaborate arguments and also filed judgment of Delhi Bench D of Tribunal in case of Proagro Seeds Co. Ltd. and also furnished material as to what is genetic engineering, etc., issue does not arise in these appeals as both AO and CIT(A) have concurrently upheld claim of assessee that income in question i.e., upto stage of production of basic seeds is agricultural income. Thus, we refuse to give finding on this issue, as same is not subject-matter of appeal. 24. Coming to second issue as to whether production of hybrid seeds is agricultural production of assessee company or not, on careful consideration of facts and circumstances of case, we are of considered opinion that stand of Revenue is correct and same has to be upheld...." 28 . Applying ratio of above decisions including decision of Tribunal in Progo Seeds Co. Ltd. (supra), wherein there was no dispute in treating sale of parent seeds of Rs. 16,19,854 as agricultural income, we find that in present case undisputed findings of AO and learned CIT(A) are that basic seeds are produced by assessee by doing basic agricultural operations, we are clearly of view that assessee is doing agricultural operations and growing basic seeds on lands. It is not case of Revenue that without performing basic operations, subsequent operations, have been carried on by assessee. If basic seeds are sold by assessee, same is result of basic operations on land on expending human skill and labour thereon and it is only after performing several operations, such as, weeding, watering, manuring, etc., resultant product is grown and made ready for sale in form of basic seeds. Thus, basic seeds sold by assessee were result of primary as well as subsequent operations involving huge skill and efforts as defined under s. 2(1A) of IT Act and same is agricultural income as provided under s. 2(1A) of Act, entitled to exemption under s. 10(1) of IT Act. Accordingly, AO is directed to treat income from basic seeds Rs. 20,39,618 as agricultural income and allow exemption under s. 10(1) of IT Act. grounds taken by assessee are therefore, allowed to extent indicated above. 29 . ground No. 5 reads as under : "The learned CIT(A) erred in confirming addition made by AO of Rs. 5,16,124 without considering various explanations submitted before him." 3 0 . After hearing rival parties, perusing material available on record and in absence of any supporting material placed on record by assessee and also keeping in view that impugned issue does not arise from order of learned CIT(A), ground taken by assessee is devoid of any merit and accordingly, same is rejected. 31 . In result, appeal of assessee stands partly allowed. *** VIBHA AGROTECH LIMITED v. INCOME TAX OFFICER
Report Error