ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE - 1,, AURANGABAD vs. M/S. R.J. BIOTECH LTD,, AURANGABAD

The ld. Sr. D.R submits that the assessee did not conduct agricultural activities which are spread over in Maharashtra, Karnataka and Andhra Pradesh entered into Seed Production Agreement with various owners of the land. The assessee itself submitted that the farmers have done agricultural activities on behalf of the assessee. He argued that the assessee failed to establish its investment in any of the basic operation of agricultural, thereby the A.O held the same as business income. Further, the CIT(A) on the wrong premise held that the A.O failed to appreciate all the risk and rewards associated with agricultural operations, the assessee had borne all the agricultural expenses and had insurable interest in the farm. The assessee paid compensation to the land owners in three parts i.e. in lieu of land utilization, service charges for carrying out day to day activities and for re-reimbursement of expenses incurred by the land owners on behalf of the assessee which are all submissions of assessee and CIT(A) simply accepted the same and held wrongly that the seed production also an agricultural activity.

Agitating the finding of CIT(A), Shri Piyushkumar Singh Yadav, Sr. D.R drew our attention to the Schedule IV of Seed Production. The ld. D.R submits that no evidence relating to compensation or reimbursement of cultivation concerned was produced before the A.O and the CIT(A). The CIT(A) without going through such evidence and without examining the exact nature and purpose of reimbursement deleted the addition made by the AO by treating the activity of the assessee as agricultural activity. Further he drew our attention to clause 15 of the said agreement and submits that the clause 15 clearly shows that in the event of failure the second party therein i.e. (land owner) of delivery of produce in terms of agreement upon receiving request letter from the first party (i.e. assessee). He argued that Schedule IV and clause 15 of the said agreement does not in any way show that the assessee paid compensation, it is only the payment on failure to deliver agricultural produce.

Referring to page 40 of the paper book, he argued that no risk and reward was associated with the assessee. It is only the compensation payable for any losses, injury, damages resulting from the use or handing of breeder seed/foundation seed or manuring, nutrition patterns, irrigation techniques and parental material supplied by the first party, he argued vehemently that in no event the assessee is liable to pay any incidental, consequential, special or punitive damages to the land owner.

The ld. D.R drew our attention to the accounts of the assessee and submits that no breakup showing any expenditure of basic agricultural operations were shown in the accounts and referred to page 17 of the paper book. He argued that the assessee shows purchase of seeds of Rs. 16,88,35,662/- but in the absence of any break up, the reimbursement as contended by the assessee is to be dis-believed. He vehemently argued that the assessee failed to bring on record any evidence before all the authorities including this Tribunal. Further, he argued, the CIT(A) did not analyze the confirmation submitted by the land owner (farmers) and drew our attention to page No. 7 of Annexure pointing out many discrepancies.

Shri Piyush Kumar submits that none of the normal agricultural activities were undertaken by the assessee excepting supplying foundation seeds and giving scientific advice from time to time and referred the terms and conditions of the agreement. Further, he argued that the farmer is not entitled to grow, except sowing seeds given by the assessee and farmer had to return the unused seeds. He submits that the farmer conducted cultivation and the assessee allowed machinery and advised for achieving better results. The farmer is only entitled for compensation for preparation of bed, sowing of the seeds, cultivation and for harvesting. The activity of farmer only multiplying the foundation seeds by using land and labour and the input given by the assessee is only technical supervision. The ld. D.R argued, the assessee paid fixed price crop wise and drew our attention to pages 169 to 189. Further, the duty of the farmer is to ensure facilities of the land, suitability of the land, cultivation ofland, watering of the land, for which the farmer received compensation for producing hybrid seeds for the assessee.

He drew our attention to the judgment of Hon‟ble High Court of Karnataka in the case of Namdhari Seeds (P) Ltd. (2011) 16 taxmann.com 83 (Karn) and argued, the facts therein are similar to the facts of the present case and by referring to para 54 and 57 of the said judgment, submits that the Hon‟ble High Court held that the entire income amounts to business income and justified the order of the A.O. He submits that the facts in the case of Namdhari Seeds (P) Ltd. (supra) is similar to the facts on hand the AO correctly relied on the decision in the case of Namdhari Seeds (P) Ltd. (supra). He argued vehemently that the finding of Hon‟ble High Court of Karnataka is applicable to the present case and prayed to allow grounds raised by the Revenue.

Further, without prejudice, the ld. D.R submits, processing of the raw seeds into finished seeds is manufacturing activity. Reliance placed in the case of CIT Vs. EID Parry (India) Ltd. (1996) 218 ITR 713 (Mad) and argued, if the order of the A.O is not restored, that the income from sale of processing raw seeds may be allowed as business income.

He drew our attention to page 9 and 17 of the paper book and submits, cost of material consumed is equal to purchase of raw seeds. He also drew our attention to page 16 of the paper book by referring to details of inventory. He argued that the assessee has not shown quantitative details in column No. 35 of the tax audit report but shown only inventory of raw-material and finished goods. Further, shown closing stock of cost of material consumed is only Rs. 13,90,10,447/-. Further he referred to Note No. 24 of P & L a/c at page 18 and argued that the specific expenditure on processing and designing charges as shown by the assessee clearly suggests converting raw seeds into finished products meaning the processing of raw seeds into finished goods is not an agricultural activity. He drew our attention to page 31 of depreciation chart regarding addition in machinery and plant and submits that farmer made addition only in tools to an extent of Rs.1,689/-. The said little expenditure indicates that these additional tools are not related to production of seeds by the farmer. The said little expenditure, he vehemently argued, is not sufficient for purchase of equipment such as sprinklers for irrigation, insecticide sprayers and weedicide sprayers and referred to point No. 9 of the seed purchase agreement.

The ld. A.R, Shri Nikhil Pathak submits that from the clause 4 in section 1 and clauses 3 and 5 of sec. 2 and clauses 2, 3, 9 and 15 of sec. 3, is clear that the farmer is cultivating the land on behalf of the assessee and produce belonging to the assessee. It is also clear that the assessee is required to pay compensation towards the use of land and the obligation performed by the farmer even if produce grown does not meet standard and the obligation of the agreement clearly indicates the farmer is cultivating the land on behalf of the assessee and it is not a case purchase of seeds from the farmer by the assessee. Further, he submits that the assessee is bearing/reimbursing the cultivation expenses, rent is paid for use of land and also service charges are being paid by the assessee and the farmer is growing seeds as per the terms and conditions of the agreement. He vehemently argued, all these constitute agriculturlal activities as the assessee is paying to the farmers for use of land, service charges and reimbursing the cultivation expenses, which was not the fact in consideration before the Hon‟ble High Court of Karnataka in the case of Namdhari Seeds (P) Ltd. (supra). He placed reliance on the decision of Hon‟ble High Court of Bombay in the case of Ajeet Seeds Ltd. and Nath Bio Genes (I) Ltd. (Tribunal). He submits that there were certain procedural defects regarding confirmation of farmer as agitated by the ld. D.R and the ld. A.R refers to pages 121, 126, 129, 136 and 144 and argued that all the amounts payable for use of land, service charges and reimbursement expenses to farmers and the final settlement of produce borne by the farmers.

Referring to decision of Hon‟ble High Court of Karnataka in the case of Namdhari Seeds (P) Ltd. (supra), he submits that the assessee is paying fixed price of Rs. 3,200/- per quintal or any other price depending upon the terms and conditions of the agreement. The assessee therein has not paid any amount towards labour for supplying any input to the farmer. The only payment made is compensation at a specified rate per quintal as agreed. In such circumstanes, the Hon‟ble High Court of Karnataka held that the entire terms of agreement would indicate the foundation seeds grown by the farmer would be purchased by the assessee at the end for a certain price provided seeds quality the specifications as per the agreement. The facts therein are entirely different to the facts of the present case and the said decision is not applicable to the facts of the case on hand. By referring to schedule IV of the agreement, he submits that the assessee is required to pay compensation for land use at Rs. 15,000/- per acre, service charges of Rs. 3,000/- per acre and also reimbursement of cultivation expenses etc. He argued that no fixed price per quintal which would be paid by the assessee to the farmer and the assessee is paying separately for use of the land also service charges to the farmer. Further in the present case, he submits the assessee is reimbursing cultivation expenses to the farmers. He referred to the decision of Namdhari Seeds Pvt. Ltd. (supra) and argued that the assessee therein was paying fixed price per quintal to the farmer and not for use of land or any service charges was paid. In the present case, the assessee is paying rent for use of land as well as service charges and there is no fixed price which would be paid to the farmer, the fact of which is very important distinguishing between the case of the assessee and that of Namdhari Seeds Pvt. Ltd (supra) and referred to the payment and reimbursement of expenses. He supported the order of CIT(A) and prayed to dismiss the grounds raised by Revenue.

Heard both parties and perused the material available on record. In support of the contentions of ld. DR and AR, we shall examine the agreements between the assessee and the farmers which are filed by the assessee in its paper book from page Nos.33 to 167. As a lead agreement, we shall read the contents of Seed Production Agreement of Mr. C.H. Prabhakar Rao which are at page Nos.33 to 43 of paper book. We note that the said agreement is titled as „Seed Production Agreement‟ entered by the assessee and the farmers therein. The assessee is referred to as „First Party‟ and the farmers referred to as the „Second Party‟. Section (1) of the said agreement describes the First Party and Second Party, wherein we note that the First Party was established in India for the purpose of development, production and distribution of proprietary hybrid or variety seeds of various crops such as Cotton, Paddy, Bajra, Maize, Sunflower, mustard, various vegetables, etc. Further, it is described that the First Party is desirous to avail suitable agricultural land and services for the purpose of production of proprietary hybrid or variety seeds by entering into agreement with the Second Party. The Second Party declares that he is sole and absolute owner of five acres of agricultural land and agrees to enter into agreement to assist the First Party in production of hybrid or variety seeds / vegetables on the land as per the terms and conditions. Further, the Second Party agreed to perform certain agricultural operations including but not limited to the agronomy practices required for raising the good crop like irrigation, fertilization, pests / disease combat, weeding, harvesting, threshing, etc.

Section (2) of the said agreement provides definitions to various activities, wherein it is noted clause (3) defines „Produce‟ as the proprietary hybrid or variety seeds / vegetables cultivated on the land from the foundation seeds by the First Party by employing the services of Second Party. Section (3) provides terms and conditions between both the parties as agreed. Clause (1) explains the term of agreement commencing on the effective date mentioned at serial number 3 of Schedule 1 annexed thereon to, which is from June, 2012 to May, 2015. Clause (2) refers to compensation in consideration to the Second Party for granting exclusive right to use the land during the term of cultivating the produce and for agreeing to perform and carry out the agricultural operations on behalf of the First Party. Sub-clauses of clause (5) of section (3) refers to the services to be rendered by the Second Party that the Second Party shall devote its time and attention in accordance with the best industries standards, use reasonable skill and care in providing the services, to keep the First Party promptly informed and the farmer shall liable to pay all taxes, cess and other impositions such as land revenue vide clause 6 of section 3.

Further, we note from clause (11) of section 3 that the First Party shall pay the Second Party an amount calculated in the Schedule 4 attached thereon to for granting the exclusive right to use the land, for cultivating the produce and agreeing to render services. It is also agreed that the said compensation covers all expenses, costs, charges and all taxes that the Second Party may incur in relation to the services rendered to the First Party.

According to clause (16), we note that the First Party may make available for the cultivation costs incurred by the Second Party such as advance payments, fertilizers, pesticides or other similar materials, specialized equipments such as sprinklers for irrigation, insecticide sprayers and weedicide sprayers.

In view of our discussion above, we propose to examine the provision u/s 2(1A) for better understanding whether the income derived by the assessee is from agricultural operations amounting to agricultural income. Therefore, the provision u/s 2(1A) is reproduced herein below: “2 (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) 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.”

Section 2(1A)(a) explains, any rent or revenue derived from agricultural land used for agricultural purposes. Section 2(1A)(b)(i) explains, income derived from such land by agriculture. Section 2(1A)(b)(ii) explains, any income derived from such land by the performance of a cultivator or receiver of rent-in-kind of any process ordinarily employed by cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market. On careful reading of the above provisions that income from the land by the performance of agriculture on it can be termed as agricultural income only in the hands of the owner, landlord, farmer or persons having derivative interest in such land. Supporting the same, we may take an example that if a person on agreement with the owner, landlord, farmer or persons having derivative interest on land, buys standing crops raised by the above said persons, the profit earned from the sale of such standing crops cannot be claimed as agricultural income in the hands of such person who purchased standing crops in agreement with the above said persons.

Section 2(1A)(b) suggests instances of income derived from performance of some agricultural processes. The said agricultural process should be usually employed by the cultivator or receiver of rent- in-kind. The first significant process must be one which is usually adopted by the cultivator and the second significant process is with the object of making agricultural produce marketable. The issue of agriculture, agricultural operations, basic operations, subsequent operations for agricultural purposes, income, etc. came up before the Hon'ble Supreme Court in the case of Raja Benoy Kumar Suhas Roy (1957) 32 ITR 466 (SC). The Hon'ble Supreme Court held the primary significance of agriculture is that of cultivation of land, the process of agriculture and products raised upon the land, meaning thereby, the cultivation of land includes the tilling of land, sowing of seeds and planting are the basic operations and after the produce sprout from the land, the process of weeding, digging the soil around the growth, removal of undesirable under-growths and all operations that are preserving the growth from insects, pests, harvesting and rendering the produce fit for market are subsequent operations. The Hon'ble Supreme Court held that if the basic operations are there, the rest of operations found themselves upon the same. In the absence of basic operations, the subsequent operations do not acquire the characteristic of agricultural operations. Therefore, in our opinion, if that composite activity constitutes agriculture undertaken and performed in regard to any land that land can be said to have been used for agricultural purposes and the income derived thereon can be termed as agricultural income derived from the land by the agriculturists.

In the present case as we gathered from the terms and conditions from the seed production agreement i.e. pages 33 to 43 that the assessee, we note except supplying breeder or parent or foundation seeds or parental material for the purpose of cultivation of the produce and giving scientific advice from time to time, none of the basic operations are subsequent operations undertaken by the assessee. Further, we note from the agreement that the land owner conducts the cultivation and the assessee gives instructions for the production of proprietary hybrid or variety seeds / vegetables. The said land owner by using such foundation seeds follows the due process including the normal agronomic practices required for raising a good crop, like land preparation, irrigation, fertilization, pests and disease combat, weeding, harvesting, threshing, etc. which is evident from clause (4) of section (2) of the agreement. Admittedly, the land owner while involving all such normal agricultural processes uses his land and labour and also ensures the fertility of land, suitability of land, cultivation of land, watering of land, use of seeds supplied by the assessee and resulting gives agricultural produce to the assessee for which the assessee pays the compensation proportionately taking into best quality seeds.

We note that the assessee has no derivative interest in the land nor actually cultivate the land nor lessee of the land. Admittedly, the payment of compensation is subjected to the produce grown on the land meeting the specifications and standards of the assessee which is evident from clause (15) of section (2) of the agreement. Further, in clauses 26 and 27 of section (2) that if the rejected seeds are failed to meet the specified quality standard as per Schedule 5, the assessee is at the discretion to dispose of the same and disburse the proceeds proportionately taking into account the usage of land, services and expenses incurred by the land owner which is clear from the clause 29 of section (2) of the agreement. Therefore, we note the only interest of the assessee is to get best quality of hybrid seeds produced by the farmer meeting the specifications as described by the assessee, providing input or scientific instructions by way of an advice to the land owner, in our opinion, cannot be termed as either basic agricultural operations or subsequent operations ordinarily employed by the farmer or agriculturist. As laid down by the Hon'ble Supreme Court that if the basic operations of the agriculture are not carried on by the assessee, then the hybrid seeds produced / purchased by way of compensation taking into account, usage of land services and expenses incurred by the land owner cannot be termed as integrated part of the foundation activity of agriculture. Therefore, the detailed reading of the agreement titled „Seed Production Agreement‟ would only establishes that the assessee was interested for the purpose of development, production and distribution of proprietary hybrid or variety seeds of various crops which is evident from clause (1) of section 1 of the agreement, therefore, entire income amounts to business income as rightly held by the AO.

A perusal of the financial statements of the Respondent-assessee placed at page Nos.1 to 27 would reveal that the assessee only deals in seeds which means that it purchases seeds from the farmers and sells. In the Schedule No.19 forming part of the financial statements in the Schedule of cost of material consumed, it is clearly shown that the Respondent-assessee made purchase of seeds worth Rs.16,88,35,662/- and made sales of Rs.28,68,11,084/-, which means that the assessee company is not engaged in the production of seeds by cultivation of lands, but merely deals in seeds. On a specific query from the Bench, the Respondent-assessee was unable to produce any evidence to show that the assessee company had carried on the agricultural operations on the leased lands from the farmers. Thus, the assessee company had failed to discharge the onus of proving the agricultural income. The form in which the financial transactions presented also clearly indicates that it is only a dealer in the seeds. The ratio of judgment of Hon‟ble High Court of Karnataka in the case of Namdhari Seeds (P) Ltd. (supra) is squarely applicable to the facts of the case.

The ld. AR placed reliance on the decision in the composite order passed by this Tribunal in the case of M/s. Nath Bio Genes (I) Ltd. in order dated 02.11.2018 and argued that on similar issue, this Tribunal held the entire activity of production of growing of seeds is an agricultural activity constituting agricultural income and drew our attention to para 23 of the said order. Further, he argued that this Tribunal placed reliance in the case of Ajeet Seeds Limited which held the growing of breeder and foundation seeds and making certified seeds on the lands owned by the landlords-cum- growers amounts to agricultural activity. He submits that the Hon‟ble High Court of Bombay at Aurangabad confirmed the order of Tribunal in the case of Ajit Seeds Limited vide order dated 18.06.2015. On perusal of the order of this Tribunal in the case of M/s. Nath Bio Genes (I) Ltd. (supra), it is noted that the assessee therein incurred an expenditure of Rs.2.21 crores on account of lease rent paid to landlords vide para 18 and held the activity constitutes agricultural activity as the assessee constitutes an agriculturist when the assessee pays land rent and also for labour.

The Pune Tribunal in the case of Ajeet Seeds Limited upheld the order of CIT(A), who in turn placed reliance in the case of Advanta India Limited reported in (2010) 5 ITR 57 (Bang. Trib) which held the foundation seeds or hybrid seeds produced in own lands or lands taken on lease will be the result of agricultural operations and the profits arising out of such activities shall be treated as agricultural income. The Hon‟ble High Court of Bombay was pleased to upheld the order of Tribunal vide its order dated 18.06.2015. Therefore, it is clear the facts in the case of M/s. Nath Bio Genes (I) Ltd. (supra) and Ajeet Seeds Limited (supra) are similar, therefore, the Tribunal held the profits arising out of activity of production of foundation seeds or hybrid seeds produced in own land or lands taken on lease as agricultural income. As we discussed above, that is not the fact in the present case that the assessee herein paid only compensation taking into consideration the best quality of seeds and proportionate compensation on rejected seeds. The ld. AR could not point out any term or condition showing the assessee paid rent or lease amount to the farmers. Therefore, the finding of this Tribunal in the cases of M/s. Nath Bio Genes (I) Ltd. (supra) and Ajeet Seeds Limited (supra) is not applicable to the facts of the case. Therefore, the order of CIT(A) is not justified and it is set aside. We find the AO denied the claim of Rs.1,66,06,935/- as agricultural income and treated the same as business income by placing reliance on the decision of Hon‟ble Supreme Court in the case of Raja Benoy Kumar Sahas Roy (supra) and the Hon‟ble High Court of Karnataka in the case of Namdhari Seeds Pvt. Ltd. (supra) held every amount accrued to a person in whose hands agricultural produce passes through cannot become agricultural income and it is only when owner, landlord or farmer or persons having derivative interest in such lands receives income from land by performance of agricultural operations on it can be termed as agricultural income by placing reliance in the case of Raja Benoy Kumar Sahas Roy (supra). Therefore, the finding of Hon‟ble High Court of Karnataka Namdhari Seeds Pvt. Ltd. (supra) is applicable to the facts of the present case. Thus, the order of AO is restored. Grounds 1 to 6 raised by the Revenue are allowed.

Now, we shall take up for A.Y. 2014-15 filed by the Revenue.

We find the issues raised in the appeal are similar to the issues raised in A.Y. 2013-14, since we have taken a decision allowing all the said grounds in for A.Y. 2013-14 in the aforementioned paragraphs and the finding therein is equally applicable in this appeal also. Thus, grounds raised in this appeal are also allowed.

In the result, both the appeals of Revenue are allowed.