DEPUTY COMMISSIONER OF INCOME-TAX vs. FUTURA BIOPLANTS PVT. LTD., PUNE

आदेश आदेश / ORDER आदेश आदेश

PER D. KARUNAKARA RAO, AM :

The main appeal is filed by the Revenue vide ITA No.1271/PUN/2015 against the order of CIT(A)-1, Pune dated 19-06-2015 for the A.Y. 2011-12. Assessee also filed cross objections vide C.O. No.41/PUN/2017 against the appeal filed by the Revenue.

2 ITA No.1271/PUN/2015 & CO No.41/PUN/2017 M/s. Futura Bioplants Pvt. Ltd.,

“1. The order of Ld.CIT(A) is contrary to law and to the facts and circumstances of the case. 2. The Ld.CIT(A) grossly erred in directing the AO to treat the assessee’s income as agricultural income u/s.2(1A)(b)(ii) of the I.T.Act, 1961 and to exclude the said income u/s.10(1) of the Act. 3. The Ld.CIT(A) grossly erred in ignoring the fact that the activity of the assessee consisted mainly of flowering plants developed out of imported mother plants in a tissue culture laboratory and not grown in a nursery or any land, and, moreover, the said activity had none of the ingredients of basic operations integral to agriculture. 4. The Ld.CIT(A) grossly erred in failing to appreciate and correctly apply the ratio of the decision of the Hon’ble Supreme Court in the case of CIT Vs. Raja Benoy Kumar Sahas Roy, 32 ITR 466, wherein carrying on of basic operations by expending human skill and labour on land had been held as an essential perquisite of agriculture land and, as per the said ratio the assessee’s activity would not amount to agriculture at all. 5. The Ld.CIT(A) grossly erred in failing to appreciate that the green house itself does not constitute land/earth Explanation 3 of section 2(1A) would apply irrespective of whether the basic operations have been carried out on land or not, is not only extraneous to the said Explanation but also does not flow therefrom.”

issue of relief granted by the CIT(A) in connection with the

assessee’s claim of exemption in respect of income earned out of

the Saplings/Flowering plants grown out of the tissue culture

laboratory. Assessee is engaged in the business of import of

mother plants and growing of saplings/seedlings out of culturing

of the plants in the laboratory using the tissue cultivation

techniques. The income earned by the assessee out of this activity

was claimed as exemption u/s.10(1) of the I.T. Act. AO denied the

claim holding that the said activity is not done in a nursery or on

any land. Therefore, the ingredients of basic operations integral to

the agriculture are not met.

3 ITA No.1271/PUN/2015 & CO No.41/PUN/2017 M/s. Futura Bioplants Pvt. Ltd.,

relief to the assessee in view of various decisions. Contents of Para

No.4.4.6 are relevant for the conclusion of the CIT(A). The same

reads as under :

“4.4.6 For the foregoing reasons, the Assessing Officer is not justified in treating the subject income derived by the appellant from floriculture and tissue culture as non-agricultural income. However, the actual amount of exemption admissible to the appellant under sec.10(1) of the I.T. Act would be quantified hereinafter while adjudicating Ground of appeal No.3 raised by the appellant. Grounds No. 1 and 2 of appeal stand partly allowed.”

giving relief to the assessee has relied on following decisions

mentioned at Para No.4.3.5 of his order :

assessee on sale of saplings constitute deemed agricultural income of

the assessee vide Explanation 3 to section 2(1A) of the Act.

appeal before us with the grounds extracted above.

However, he fairly submitted that the issue now stands covered in

favour of the assessee and the amended provisions of Explanation 3 to

section 10(1A) and the arguments of the assessee.

the case filed the following written submissions which are summarized

as under :

4 ITA No.1271/PUN/2015 & CO No.41/PUN/2017 M/s. Futura Bioplants Pvt. Ltd.,

“Assessee submitted that he produces variety of species in flower of Phalaenopsis Orchids. He submitted that the process involves through the selection of mother plants through import or procuring them from local sources. He explained the soil has to be prepared in such a manner through an intensive process. After preparation of the soil as per the requirement, the assessee uses the process of layering by putting the mother plant in the soil. The plant propagation is carried out in a controlled environment taking care of diseases to the plant. The propagation process takes minimum 8-10 weeks and maximum 18 weeks in the plant growth room varying with the nature of species. When the plants reach a particular size they are removed entirely from the soil, along with the roots. The plants are either packed in plastic pots or trays for the purpose of delivery.

For carrying out the abovementioned activities, the efforts of human labour are indispensable. Assessee hires human labour on a daily/ weekly basis, depending on the requirement in the business. It is also submitted that, during the said year, on a monthly basis the Assessee had employed approximately 110 labours to carry out the agricultural activities of the Assessee out of total monthly employees/ labour having total strength of 124. The cost/ wages incurred towards them amounts to approx. 67% of the employee remuneration.

Assessee also submits that various certificates are also being issued by Central/State Govt. viz., (1) Registration-cum membership certificates issued by Agricultural And Processed Food Products Export Development Authority ('APEDA') which indicates that the assessee is a manufacturer of floriculture product, (2) Certificate of recognition under National Certification System For Tissue Cultured Raised Plants ('NCS- TCP') issued by Department of Biotechnology of Ministry of Science & Technology; and (3) Grower Certificate issued by Agro-Processing & Planning, Commissionerate of Agriculture, Pune, which states that Assessee is engaged in growing of flowers and plants.

In the said submissions, he also drew our attention to the main objects of the company as per Memorandum of Association, applicability of Explanation 3 to section 2(1A) of the Act, Budget Speech of the Hon’ble Finance Minister etc.

Assessee also relied on the following judicial precedents : 1. Raja Benoy Sahas Roy (1957) (32 ITR 466) 2. K.F. Bioplants – ITA No.146/PN/2009 dated 26-03- 3. Best Roses Biotech (P) Ltd (2012) (144 TTJ 645) (Ahd)

5 ITA No.1271/PUN/2015 & CO No.41/PUN/2017 M/s. Futura Bioplants Pvt. Ltd.,

department in view of the above written submissions and elaborate

discussion by the CIT(A) analyzing each and every aspect on this issue.

earned on export sales of the saplings grown in the tissue culture

laboratory constitute agricultural income or not we find the same is

now decided in favour of the assessee by various decisions relied upon

by the Ld. AR for the assessee. Details of the decisions are also

narrated in Para No. 4 to 6 of the order of CIT(A). We also proceed to

extract the contents of Explanation 3 to sub-section 2(1A) of the Act

which was inserted by the Finance Act, 2009.

“3. For the purposes of this clause, any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.”

Circular No.1/2009 dated 27-03-2009 and the contents of Para No.

4.1 and 4.2 are extracted here as under :

“4.1 "Agricultural income" is defined in sub-section (1A) of section 2 of the Act to mean, inter alia, income derived from land which is situated in India and is used for agricultural purposes. Such agricultural income is exempt from tax under sub-section (1) of section 10 of the Income-tax Act, 1961. It has been held by judicial authorities that whether income from nursery operations constitutes agricultural income or not, will depend on the facts of each case. If the nursery is maintained by carrying out basic operations on land and subsequent operations are carried out in continuation of the basic operations, then income from such nursery would be agricultural income not liable to tax under section 10. However, if the nursery is maintained independently without resorting to basic operations on land, then income from such nursery would not be agricultural income and would be liable to be included in the total income.

4.2 With a view to giving finality to the issue, an Explanation in section 2 of the Income-tax Act, has been inserted providing that any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income. Accordingly, irrespective of whether the basic operations have been carried out on land, such income will be treated as agricultural income, thus qualifying for exemption under sub- section (1) of section 10 of the Act.”

6 ITA No.1271/PUN/2015 & CO No.41/PUN/2017 M/s. Futura Bioplants Pvt. Ltd.,

income arising from the saplings and seedlings constitute the exempt

income within the meaning of the Explanation 3 to section 2(1A) r.w.s.

10(1) of the Act irrespective of the fact whether basic operations have

been carried out on land. Such income is deemed as an exempt

agricultural income, thus qualifying for exemption u/s.10(1) of the Act.

Accordingly, grounds raised by the Revenue stand dismissed.

Therefore, order of the CIT(A) does not call for any interference on this

issue. Accordingly, the grounds raised by the Revenue stands

dismissed.

CO No.41/PUN/2017 (Arising out of ITA No.1271/PUN/2015) (By Assessee)

No.1271/PUN/2015 filed by the Revenue. The only issue raised in the

cross objection relates to allowability of the exemption u/s.10(1) r.w.

2(1A)(b)(ii) of the Act.

also registered loss on account of foreign exchange on various

accounts. Details are tabulated here as under :

Sr. Particulars Amount of foreign No. exchange gain/loss (Rs.) 1 Capital expenditure 1,19,514 2 Revenue Creditors (29,530) 3 Revenue Debtors 10,40,664 4 Revaluation at the year end 3,75,230 (unrealised gain) Total 15,05,878

7 ITA No.1271/PUN/2015 & CO No.41/PUN/2017 M/s. Futura Bioplants Pvt. Ltd.,

account of foreign exchange is due to fluctuation in the foreign

currency market and therefore, the same constitutes as derived from

the agricultural activities. Therefore, the sum of Rs.15,05,878/- which

formed part of the total income of Rs.1,00,83,467/- claimed as exempt

income u/s10(1) r,w,s, 2(1A)(b)(i) of the Act. AO rejected the claim of

the assessee. In the First Appellate proceedings, CIT(A) confirmed the

same by holding that the same is not derived from the agricultural

activities. Contents of Para No.5.1 to 5.4 and its sub-paragraphs are

relevant.

maximum attributable to agricultural activity but certainly not derived

from the agricultural activity of the assessee. Eventually, the CIT(A)

denied the claim of exemption on this part of income of

Rs.15,05,878/-. As stated above, this is the part of entire claim of

Rs.1,00,83,467/- u/s.10(1) of the Act.

us.

relates to the grounds raised by the revenue which are already

considered in connection with the appeal of the Revenue. Considering

our decision while adjudicating grounds raised by the revenue,

Grounds Nos. 1 to 3 of the cross objection becomes an academic and

therefore, these objections of the assessee are dismissed as academic.

the net foreign exchange gain as deemed agricultural income exempt

u/s.10(1) of the Act.

8 ITA No.1271/PUN/2015 & CO No.41/PUN/2017 M/s. Futura Bioplants Pvt. Ltd.,

submissions which are reproduced here as under :

“The Assessee imports mother plants for producing the orchid flowers/Tissue culture plants and also exports the final products during its normal business operations. The payments for the aforesaid import purchases and realizations for these export sales are done in foreign currency. Accordingly, the Assessee recognizes the foreign currency fluctuation i.e. the difference between the INR value of sales or purchases at the time of recording and realization of such transactions. The above treatment is in accordance with the "AS -11. The effect of changes in foreign exchange rates" issued by ICAI on this aspect. These foreign currency fluctuations are debited or credited to the profits and loss account in accordance with the accounting policy adopted by the company. The Assessee has recorded a gain of Rs 15,05,878 in the statement of profit & loss account for the year ended 31 March 2011. The learned AO in the final assessment order has contended that, foreign exchange fluctuation gain has resulted due to transactions related to import of raw materials and finished goods and on account restatement of creditors and debtors. Therefore the learned AO has concluded that aforesaid foreign currency fluctuation gain is purely business income. In this regard, the Assessee humbly submits before Your Honours that, if there is proximity between source and activity, income stream cannot be isolated. The table below illustrates the manner in which foreign currency fluctuation is recorded in the Assessee's books of account.

Sr. Transaction Type Invoice Conversion Amount No. Amount rate booked/paid (USD) (B) in INR (C) = (A) (A*B) 1 Import of Mother Plants : 1,000 63 63,000 2 Entry passed in books : RM Stock A/c (Dr) 1,000 63,000 To, Creditor A/c. (Cr) 1,000 63,000 3 At the time of payment 1,000 62.5 62,500 4 Gain realized (3-1) -- 0.5 500 5 Entry passed in books : Creditor A/c (Dr) 1,000 63,000 To, Bank A/c. (Cr) 1,000 62,500 To, Forex Fluctuation 500 Account (Gain) (Cr) 6 Sale of plants grown 1,500 61.5 92,250 7 Entry passed in books : Customer A/c (Dr) 1,500 92,250 To, Sales A/c (Cr) 1,500 92,250 8 1,500 62 93,000 9 Gain realized (8-6) 0.5 750 10 Entry passed in books : Bank A/c. (Dr) 1,500 93,000 To Customer A/c (Cr) 92,250 To Forex Fluctuation 750 Account (Gain) (Cr)

9 ITA No.1271/PUN/2015 & CO No.41/PUN/2017 M/s. Futura Bioplants Pvt. Ltd.,

The Assessee had filed ledger account of the foreign exchange gain/(loss) showing transaction wise details before the learned CIT(A). Further, the Assessee has filed additional evidence containing sample copies of IRTT (i.e. inward remittance telegraphic transfer), invoices raised on Floricultura b.v. (i.e. debtor), SBI exchange rate card and airway bill in support of its claim and in continuance of the ledger account already filed before learned CIT(A) (enclosed herewith at Page 163 to Page 276 of the Paper Book). Further, the Assessee submits a summary of the foreign exchange gain earned by it in the subject assessment year.

Sr. Particulars Amount of foreign No. exchange gain/loss (Rs.) 1 Capital expenditure 1,19,514 2 Revenue Creditors (29,530) 3 Revenue Debtors 10,40,664 4 Revaluation at the year end 3,75,230 (unrealised gain) Total 15,05,878

Submissions on merits : The learned AO has grossly erred in concluding that, the gains arising on account of foreign currency fluctuation were purely business income. The contention of the learned AO was that the gains have resulted due to import of raw material and export of finished goods. The learned AO did not provide any justification for treating the foreign currency fluctuation gains as taxable business income.

The Assessee would wish to reiterate the facts that, the gains on account of foreign currency fluctuation has resulted from its normal course of business i.e. agricultural operations and the Assessee is not engaged in any other business activity. Thus, the aforesaid foreign currency fluctuation gain is incidental to the carrying on of agricultural activities. Further, the above gains have resulted from the transaction of import of mother plants and exports of flowers/plants. Thus, it is very clear from the above fact that, the foreign currency fluctuation is part of agricultural income as the Assessee does not carry out any other activity.

Section 2(1A) which defines agricultural income , used the phrase “...... derived from land....”. In various cases the word “derived” has been a subject matter of judicial scrutiny. Foreign exchange gain/loss in this case has a direct linkage with purchase of mother plants and sale of grown plants (which inextricably linked to foreign exchange), it cannot be disassociated from the agricultural activities carried out by the Assessee. This proposition has been accepted in the case of Liberty India Vs. CIT (2009) 317 ITR 218 (SC) by the Hon’ble Supreme Court.

The Assessee relies on the following judicial precedents in this regard which are in the context of section 80HHC of the Act :

• CIT Vs. Rachna Udhyog [2010] 230 CTR 72 (Bombay) (enclosed herewith at Page 305 to Page 306 of the Paper Book) • ACIT Vs. Prakash L. Shah [2008] 118 TT J 577 (Mumbai) (SB) (enclosed herewith at Page 307 to Page 322 of the Paper Book) • ACIT Vs. BMC Software (ITA No. 1423/PN/2008) (Pune ITAT) (enclosed herewith at Page 323 to Page 326 of the Paper Book) • Asia Pacific Marbles Pvt Ltd Vs. DCIT ITA No. 1217/Mum/2008

10 ITA No.1271/PUN/2015 & CO No.41/PUN/2017 M/s. Futura Bioplants Pvt. Ltd.,

(Mum ITAT) (enclosed herewith at Page 327 to Page 338 of the Paper Book)

The case of the Assessee is that, foreign exchange gain arising out of day-to-day agricultural activities i.e. realization of sales consideration on export sales is agricultural income, since it is directly derived from land, and whether realization of sales consideration for goods is made in foreign currency or INR, it does not alter the nature of revenue, as the same is derived from agricultural activity. In the aforementioned cases, it is held that, exchange gain arises out of and is directly related to the main activity of the assessee, and therefore, treated at par with the income earned by the assessee from its main activity. The assessee in the above mentioned cases were eligible for tax deduction under sections 80OB and 80HHC of the Act. Therefore, the exchange gain earned during the normal course of business activities were held business income and eligible for deduction.

Prayer : In light of the above facts, we humbly pray before your Honours that, the aforesaid gains on foreign currency fluctuation be considered as agricultural income and accordingly, eligible for exemption u/s.10(1) read with section 2(1A)(b)(i) of the Act. Therefore, the assessee prays before your Honour to kindly direct the Ld. AO to consider the aforesaid income as agricultural income.”

our attention to the “Table - summary of the foreign exchange gain

earned” and submitted various submissions against each item of the

said foreign gain/loss.

account of “Capital Creditors”, Ld. AR fairly submitted that assessee

has no objection if the claim of exemption on the foreign exchange

earnings of Rs.1,19,514/- (capital expenditure account) is denied. He

fairly submitted, the same is derived in the context of import of the

fixed assets and certainly not relatable to the sale of the

saplings/seedlings.

Ld. AR for the assessee and without going into the other arguments of

the Ld. AR, we find the order of CIT(A) does not call for any

11 ITA No.1271/PUN/2015 & CO No.41/PUN/2017 M/s. Futura Bioplants Pvt. Ltd.,

interference on these receipts and for the said reason. We direct the

AO to tax the same as non-agricultural income, a taxable revenue in

the hands of the assessee for the year under consideration.

assessee with regard to (1) loss of Rs.29,530/- earned on account of

“Revenue Creditors” (2) Rs.3,75,230/- the earnings on the foreign

exchange deposited in the Exchange Earners Foreign

Currency Account ( in short ‘EEFC’) of the assessee. On these two

issues, like in the case of capital expenditure account, the foreign

exchange gain/loss is due to revaluation of the balance of foreign

exchange appearing in the credit of the assessee in the said account.

AO is directed to tax these receipts of three types (Rs.1,19,514

+3,75,230 (-)29,530) as non-agricultural income.

of Revenue Debtors, it is the case of the assessee that these amounts

represents gains accrued to the assessee and directly derived from the

sale proceeds payable to the assessee by the debtors. The same

constitutes gains derived from the sale of the saplings/seedlings.

Therefore, the same should be considered as derived from agricultural

activity of the assessee. Ld. AR for the assessee brought our attention

to the various decisions which are of course decided in the context of

80IB/10A of the Act. However, they are delivered in the context of the

crucial expression “derived” and the same should help the Bench in

taking the decision.

was considered as derived from the sales activity receivable from the

Debtors and the said gain is found eligible for claim of deduction

12 ITA No.1271/PUN/2015 & CO No.41/PUN/2017 M/s. Futura Bioplants Pvt. Ltd.,

u/s.80IB/10A of the Act. The expression “derived” is used commonly

in all these sections including the Explanation 3 to section 2(1A) of the

Act. In our view, the same logic and reasoning is applicable when it

comes to the provisions of section 10(1) r.w. Explanation 3 to section

2(1A) of the Act. Accordingly, the claim of the assessee on the income

of Rs.10,40,664/- is allowed in favour of the assessee. To that extent,

the order of the CIT(A) stands reversed and therefore, this part of the

grounds raised by the assessee are allowed.

allowed.

objection of the assessee is partly allowed.

Order pronounced in the open court on this 17th day of January,

2018.

Sd/- Sd/- (VIKAS AWASTHY) (D. KARUNAKARA RAO) �याियक �याियक सद�य �याियक �याियक सद�य सद�य /JUDICIAL MEMBER लेखा सद�य लेखा लेखा सद�य लेखा सद�य सद�य / ACCOUNTANT MEMBER सद�य पुणे Pune; �दनांक Dated : 17th January, 2018. सतीश आदेश क� �ितिलिप अ�ेिषत आदेश क� �ितिलिप अ�ेिषत/Copy of the Order forwarded to : आदेश क� �ितिलिप अ�ेिषत आदेश क� �ितिलिप अ�ेिषत

अपीलाथ� / The Appellant 1. ��यथ� / The Respondent 2. 3. CIT(A)-1, Pune 4. CIT-1, Pune िवभागीय %ितिनिध, आयकर अपीलीय अिधकरण, “A Bench” 5. Pune; गाड� फाईल / Guard file. 6. आदेशानुसार आदेशानुसार/ BY ORDER,स आदेशानुसार आदेशानुसार

स�यािपत �ित //True Copy// Senior Private Secretary //True Copy// आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune