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