Primcipal Commissioner of Income Tax-4, vs. M/S. PRABHAT AGRI BIOTECH LIMITED

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ITTA/31/2023HC TelanganaHBHC01065575202220 March 2023Bench: N.TUKARAMJI,UJJAL BHUYAN10 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the proposed question of law by the Revenue could not be termed as a substantial question of law. The Tribunal had affirmed the findings of the CIT(A), who had considered the seasonal nature of the business and the short shelf life of seeds. The CIT(A) had opined that it was imperative for the assessee to account for unsold seeds at the end of the year and their potential utility for the next season. Therefore, the provision for sales returns could not be treated as unascertained or unreasonable. The Tribunal had found the CIT(A)'s view to be reasonable and not perverse. Consequently, the Tribunal had dismissed the Revenue's appeal. The High Court found no error or infirmity in the Tribunal's view and was not inclined to entertain the appeal.

What were the facts?

The assessee, M/s. Prabhat Agri Biotech Limited, engaged in seed production and trading, filed its return for Assessment Year 2013-14. The Assessing Officer (AO) noted a single Profit and Loss Account for both businesses. Upon bifurcation, the AO found the assessee's method of apportioning common expenses based on the Cost of Goods Sold (CoGS) unacceptable, arguing it should be based on turnover. The AO recomputed expenses based on turnover, leading to a revised income. The Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, finding the assessee's CoGS method reasonable, especially given the seasonal nature of the business and the practice of accepting sales returns. The Revenue appealed to the Income Tax Appellate Tribunal (ITAT), which upheld the CIT(A)'s order and dismissed the Revenue's appeal. The Principal Commissioner of Income Tax-4, Hyderabad (Revenue) has now filed an appeal before the High Court.

What were the issues?

1. Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that expenditure for own product production and sale of seeds and trading in other seeds can be apportioned between both on the basis of Cost of Goods Sold (CoGS) as against the turnover of each for arriving at profits? (Question of law) Assessee's Contention (as reflected in CIT(A) and Tribunal's findings): The assessee argued that the CoGS method was reasonable and had been accepted by the Department in earlier years. They contended that sales promotion, administration, etc., are incurred jointly for both segments. The CIT(A) found the CoGS method acceptable due to the composite nature of hybrid seed sales, the practice of accepting sales returns, and the seasonal nature of the business with a short shelf life for seeds, necessitating the accounting of unsold stock for the next season. The Tribunal agreed with the CIT(A), stating that any method has limitations and the CIT(A)'s view was reasonable. Revenue's Contention (as reflected in the AO's actions and the appeal): The Revenue, through the AO, argued that common expenditures should be divided based on turnover, not CoGS, as expenditures are dependent on turnover and not CoGS. The Revenue's appeal to the Tribunal was based on disagreeing with the CIT(A)'s acceptance of the assessee's method.

Which sections of the Income-tax Act were involved?

Section 260A,Section 10(1)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAO MONDAY ,THE TWENTIETH DAY OF MARCH TWO THOUSAND AND TWENTY THREE PRESENT THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYAN AND THE HON'BLE SRI JUSTICE N.TUKARAMJI INCOME TAX TRIBUNAL APPEAL NO: 31 0F 2023 Appeal Under Section 260 A of the lncome Tax Act , 1961 against the order of the lncome Tax Appellate Tribunal, Hyderabad ,,8,' Bench , Hyderabad in l.T.A.No. 293 I Hl 2019 daled 29-06-2022 for A.Y. 2013-14 preferred againsr the order of the Commissioner of lncome Tax ( Appeals) 4, Hyderabad in Appeal No. 10017 I 2016 -171 ACIT , Cir-16 (1) / CtT (A) -4t{ydl.tS-19 dated 21-12-2019 preferred against the order of the Asst. Commissioner of lncome Tax , Circle 16 (l), Hyderabad dated 3t-03-2016 in pAN / GtR No. AABCpSSo.tc Between: Pflncipal Commissioner of lncome Tax-4, Hyderabad APPELLANT ANO M/S. PRABHAT AGRI BIOTECH LIMITED, 8-2-277t45, Road No 2. UBr Cotony, Banjara Hills, Hyderabad 500 034 .RESPONDENT counsel for the Appellant: sRl. J.vPRASADlsc FOR TNCOME TAx) Counsel for the Respondent: NONE APPEARED The Court Delivered the following: Judgment

THE HON'BLE THE CHIEF JUSTICE UJJAL BHTTYAN AND THE {ON'BLE SRI JUSTICE N. TUKAR.,IIIJI I.T.T.A.No.3l of 2023 JUDGMENT: t\,.tt t ti. t t)k,ttt'( ttu'i .Justtcp LtJieL Bhua(n) Heirrcl \4r. .J.V.Prasad, learned Standing ()ounsel, Incomc Trr-x f)'partmcnt for the appellant. ). Rr' errrre hzrs lilecl this appeal urLder liection 260A o[ the [nconrt' Irx Act.. l()6 I (briefly referrecl to hereir after as 'the Act') agrri rs,t t hc orcle'r dated 29.06.2022 ptts sec by thc lncornt 'l-r1.. A Ppellrrtt' Tr-iirunal, Hyderzibad Ilench 'B Hyclr:rab:rl qlrr re[1r r-elcr rt'cl to hereinafter as 'the Tt'ibrrnal') in ITA No.2(t.l/ll d/:101() lor thc assessment year 2Cl3-14 3 l lr, aPpczLI lrirs been preferreC pr)F,osrng the follou'ir-rg rs sL l):it:[ntiirl qr-testton of lau, \\Ihc hrrr on thc lzrcts and in the circutnslan les ol tlr'' < a: e. l'ril'lunirl rr as justified ln holdi np1 ti-rat ( KI)cnclitLrrc lbr os n productiolt and sal( o[ COm ti lol

HCJ & NTRJ I.T.T.A. No.3 1 of 2023 Respondent is an assessee under the Act havit-lg 2 seeds and trading in other seeds can be apportioned between both on the basis of Cost of Goods Sold (CoGS) as against the turnover of each for arriving at profits? 4 the status of a comPanY. 5. As already pointed out above, the assessment -\'ear under consideration is 2013- 14. 6. Assessee is engaged in the business of sced production, research, marketing of field and vegetable crops and s'ind power generation. Assessee is deriving incomc from ou'n production of seeds as well as from trading in sccds' Assessee is claiming deduction under Section 10(1) of tl-re Act for the income arising out of own production ol seeds bcttrg an agricultural income. 7. Assessing officer noted that assessee had sub mitted single Profit and Loss Account lor both the a businesses. On request made by the assessing olficer'

I,'CJ & NTRJ I.T'1'.A.No 31 of 2O23 assesisec Lra, I submittecl biltrrcated Profit ar d Loss Account for tl-rc tu c L usinesses. Ho\\'('\'cr, assessinq c,fil,:er noted that comrnorr er<p lnditures betu,ccn o\vn produ( tion rr d l.rading of seeds $,er(r c ivided bascd on tltc Cost ol (ioods liokl (CoGS) ( II i Accordingl'i, income frorn :rgricrrltural activit.r !,'as errrived at Rs.40,2'1,04, j39.00 an(l irlcomc lrom triLding :rctrvity was arrived .rt .:1,. 8,35,06,c)5().00. llou,ever, assessing of icer held not acceprta blc becalrse lrrrsiness ope.ratio rs lor own that clivision of cxpcncliturc b:rsccl on cost of gooCs sold was production t f sr:eds arc r:r'rtir-r,h' diflerent 1io:n trading rn seeds. E:pt nditr:rcs :rrr: rnostlv dcpendent on turnover of agriculturai >usiness iLrrrl norr lrgrrcultural bus n:ss but not on the cc,st ,rf goocls solrl. After pointing tut certain anomalies rn the irbovc 1>rrtcerlure, assessinE officer re comprrtr'cl thc crpetrclitr.rrc cltrirncd b!' tlre ass(iss(le in the ratio of ILlrn( \,(]r of tracicrl gootls anrl sale of ou n production l.e I 0.i'3')i, , rncl 8!1.27'1i,. It r,r'as thcrcafter thztt t ctal income of the ersscss L,(. \\'as cornplltccl on the basrs cl' tl e aforesaid turnovcr rirt o. Whilt, tiLxitl;lt' income u,zrs assr:ssed at I : 5 I I t i i i

HCl & NTRJ I.T.T.A.No.31 of 2023 Rs.8,87, 17,57O.OO, agricultural lncome was computed at Rs.32,O5,38,505.00. 8. Being aggrieved by the above, assessee preferred appeal before the Commissioner of Income Tax (Appeals) 4, Hyderabad i.e., (briefly referred to hereinafter as 'CIT(A)'). By the appellate order dated 2l.l2.2ola, CIT(A) disagreed with the vies's expressed b1' the assessing officer. He opined that the method adopted by the assessee is acceptable for the follou'ing reason s: 4 '(it lt rs to l)c urdcrstood that the activity of selling hybrid st ccls rs :r urmposite activity. The sale of hybrid seeds tornpriscs o[ sccds produced on own and sceds 1rur-chast:cl from outside. All the activities of sales promotion, adrnit.tistration, etc. are incurred jointly for lroth tlrc scgments. Hencc, it is necessary that a rcason:rblc basis should be adopted to apportion the c\pcnscs bets'cett the two scgments. For all the earlier \cars. tlrc appcllant company adopted the basis of Cost ol- (loods Sold as a reasonable method of irpl)ort ion mcr1t. which was accepted by the Dcpirrl rn( rtt ttt lhc earlicr years. As thc:rppcllant lollows ccrtain uniform procedurcs o[ allouing (liscounts to customers. The expenditure on pcrsonrrcl consists of salaries and other bcnefits tcr (ii) II

1 i) I {(U & NTRJ I T'.'.-.1 . Nr ..31 of 2023 II t I I i P orluction ttncl salt s manpo\\'e r. Sritll-Ir,''rLe fll s t( salcs p'rsonncl is prctlorninlrrrt in th(: tot;rl [,cr:i()rIlle cost. T rc (:ost of qoorls sol(l lel)rcscrts LlLt: <'< st o[ p orlur,-tr<;n as acllrLstccl to lllc ol)c rinq :ur 1 c losing s ock rtf sc'erts Ir.r otlrt,'r rvrlrrls it r-eUct ts he (]lirntity of s, ies at (osl l)rr( r' ,.\s irgiunst sellrrtll 1:ri,:c 'vhich c( nsists of a nr:trgut on the cost. lre rr:c the: c: pr:nrlitrtre iilloc attrl b('1\\( ( n agrit' rllttraI rrrtcl non al ,ri,rullrlral bast'rl ,rn ('(,st ol go(,(ls .i()l(i rr'llccts l1t )pl-ol)rlitt(t iiII()r'Irtt,rtt 0l_c ontrrton cos Ii 'elv rnt tllo(ir)loq\ oi cslinratiorr sr Te -s from hr nitation. Strc:lr lrrnrtatrorrs ( irrtsnllj r.itri.rtic,Lrs I any ar c smoothcn('(l ()n ( ollslst( rrL appLrt'r tio-'t ol- same pr inciple." from tradin.g ,rctivity \\':..s rno(lilied (iii) 9. Ir iieiv of the alro,.'e, CIT(A) clirlct,:rl tlre ;rssessing officer to arc( ept tlre appellrrnt's rnctllocl o zippor lio rmerrt of common € KpenditLlrc \.hcr-ea{-tcr a::sessinrl officer's computatic,n of income frorn agricrrltLlretl irL--tivit.rr :rn11 income 10. A: striling thc :rlirrcs:ricl ordcr ol tne ( llT(A) dated 2) .12.2O18, -evenLIC f ilccl irppeal bt'lore tlrc 'I'rirrunal u,hich [ \\'( ) I , was heard al rng rt'itl'r othcr .rppeals lilccl bv rhc revenue ssu(' [)ertalninq to tr\o otiler zr:jsessrr]111 \'ears. on the szlm c

HC] & NTRJ I.T.T.A.No.31 of 2023 1 1. At the outset, Tribunal observed that any of the methodolog,, be it either on the basis of cost of goods sold or on the turnover of different activities would suffer certain limitatior-rs. Each method will have its own variance of the estimate. [t u'as tl-rcreafter Tribunal held as follows: " I l. Wc h:rr.c perused the impugned order. It is a fact that thc asscsscc strpplics sccds to its distributors located in the stillcs of [rt:rirla. An<lhr-a Pradesh and Karnataka and after thc scason rs r:or.n1;k'tc the sales distributors identify the stock of scccls o[ rariorrs rarictics which are not sold by the end of Ruby scason of pliurtation. As a matter of fact Ld. CIT(A) noted that tlrc drstrbutors how to return the unsold stock after the cnrl oI tlrc scnson artd if such receipts are to be sold s rr l;sc<1 rrt' r r t lv t lrcr ncecl approl;riate preservation and chemical [r('irtrn('nt t() sr.rstitin rts utilit)'; and that the stock of seeds is srrlrscrllrcrrtlv rt-t:t'n ctl in April, May, June and July; that at tll(' trrrrc of rcccrpt o[ tltc stock the sceds are taken into stock rvitlr ill)[)r ()l)rrirlc :rdJustmcnt to the customers/sales rlistrilrlrLors orr t sl irnclir.r g balance ald such a practice is part of tlrt' saicl business iurd is driven more by the seasonal nature of tlrr' lrusrrrcss antl i{so on account o[ short shelf life of the st ctls. In tllc cuculllstanccs Ld. CIT(A) satisfied that, rrrirsmrrch as irll tlrc sa[cs rcturns are subsequently taken into stotk in tlrc lrooks of thc assessee, the provision for salcs r('tLrrn cilnllot bc trcatcd zrs an asset and iiability. t2. llrc Ld We clo not linct anvthing pcn crsity in the findings of CIT(A). In Vicu of thc scasonal nature of the business 6 ti I i I i \

I I I i tI , I 7 ] ICJ 8,, NTRJ 1l i.. \. N, r 3 1 o.f 2023 anrl also iTSSCSSCC thc ertd utilrtJ'ar circum st retu nl s l the rn:rtl upholc t 29a lHycl hc short shclf lrlc of the seccls, i[ is irrtl;t'rr,1 r. e or thc Io tzrke lnto .rccouDt the quantitv rI Ltrsc,l,l s ats at rl the year rrnd thc need to rerali:l:rtc tl< ir ltrrthcr 'l to tak('them into stock in the n,'xt se,rs,)n. In the rnces it cannot be said that the p,ror isi,r' Io, salcs i unascertained or trnre asonablc. Wrth -lr s r icu oI -:r rve allou, the contcntions oI hc ;r: s, sscc ancl rc findings of the Lcl. CIT(A). Ac, or,lin3h I'l A No. /2019 is also ciismissecl 13. I r rlisrni sscr the result, all t l.ri. appc:rls of LIrc I.r r cnrre :rre 12. 'l hus from the above it is sce;r that itccording to the Tribuna, view' taken bv CIT(A) \\':ts :1 L-ei sontrltl,r one and cannot b(: e,'med as per\rerse. More so. irr Yir $' ol the scilsonal na ure of tht: business carricd i Ll[ l). he assessee and the sho t shelf liler ol thc seed s. Tnl)Lrnal ltil:i h,:lcl tl'rat it is imperatir e for the asscssee to tal(e urto 1c( olutt the qLtantitv of r rnsold seeds at the encl of thr \car i n(l the tleed to re validat I thcir ft-lrther Lttilit\' ?tltci to [zrke Ltr,: n rnto stock for the next sezrson. Tltereforc, ir cannc,t )c s ricl that the I I provision lbr sales returns is r-rnasccrtaine d rr u1l'easonablc Aliirming th I lindings rr rittcn bv CIT(A), Iribrrrrrrl rlismissed the zLppcal o the re ven Lre

HCJ & NTRJ I.T.T.A.No.31 of 2023 13. On due consideration, we do not find any error or infirmity in the view taken by the Tribunal. The question proposed by the revenue in our opinion cannot be termed to be a question of law, much less a substantial question of law. L4. In the circumstances, we are not inclined to entertain the appeal 15. Appeal is accordingl,y dismissed. However, there shall be no order as to costs 16. As a sequel, miscellaneous applications pending, if any, in this Appeal, shall stand closcd. Sd/. B,S.CHIRANJEEVI JOINTREGISTRAR //TRUE COPY// To SECTION OFFICER 8 ( L The lncome Tax Appeflate Trih_r,nal. Hyderatad..B" Bench . Hyderabad 2. The Commissroner ot Income rax 1 ffiearst +, z; nooi, :ai. gfo"k,. lncome , Tax Towers, A C Guards. Hyderabad SOO OOa. - -- " 3. The Asst. Commissioner of tncome Tax , C,rcf e f O f f l, Hyderabad 4. one cc to SRt. J.v.pRASAq(sc Foi tilaoMt iixi'a[Jo""t. 1oeuc1 5. Two CD Copies KUL DL k I

HIGH COTJF T DATED:20/( 312023 JLJI)GNIENT lTTA.No.31 of 2023 4:,-:,.--':. / . -:.2 -' tj.- i -f -t- !: I -\l l)lS\llSSINai IIJI: f TA \\,I IIIoLI'I (1]STS {/ th ,h b

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