Case Law Details
RELEVANT PARAGRAPH
52. From the nature of activity of the assessee as explained by the assessee, it is seen that the assessee in India is engaged in the business of the production and sale of various varieties of parent seed sold to its Joint Venture Company. During the year under consideration, the assessee has produced 1,81,319 kgs of seeds having opening stock of seed at 41,998 kgs, out of which 66,635 kgs of seeds (including seeds for own consumption of 1765 kgs) have been sold to its joint venture company leaving a closing stock of seeds at 1.15.995 kgs. For production of parent seed in large quantities, the first requirement is the availability of “breeder seed” which would be then sown for raising crops of parent seeds. The “breeder seeds”‘ are developed by the assessee as an on going research and development programme. As per assessee, it takes about 8-10 year to develop successful hybrid breeder seed of a desired quality. It is important to note that the parent seeds or breeder seeds of desired quality produced by the assessee are meant for supplying it to joint venture company of the assessee to enable the joint venture company to produce hybrid commercial seeds. The hybrid commercial seeds are sold in the market for agricultural production by farmers. For production and development of “breeder seed”, the assessee at the first stage raises different crops by sowing seeds of distinct identifiable traits. The sowing and planting a vast variety of seeds individually with distinct identifiable traits is done after preparing the land for this purpose. The progress made by each plant along with inputs of fertiliser is stated to be recorded in the field book. Bach plant is harvested individually, and various traits of the grain obtained is stated to be recorded. Thereafter, based on commercial need for developing certain types of hybrid seeds of desired traits, a seed is selected which has a particular trait optimally but may not have another desired trait which may be found in another seed. The two seeds having different traits to each other are crossed over a certain number of generations of crops until the two traits of desired level or result are uniformly fixed in one seed. Thus, the two seeds with distinct identifiable traits are developed into a single hybrid seed, which is different from the original two seeds. Similar exercise is carried out for fixing other desired trails, in this manner, aii desired traits thus get concentrated in a few elite hybrid germplasms. This process of enhancing various traits and concentrating them in a few elite hybrid germplasms and thus producing “elite hybrid germplasms” or “breeder seeds” is carried out year after year as an ongoing research programme. It is stated that it takes anywhere from seven to ten year to develop an elite hybrid germplasm or breeder seed. About two to three hundred new combinations are developed every year. Every generation or re-generation of crop is claimed to be go though normal procedure of sowing/planting, sprouting and of normal coming of age of the plant and then only it is harvested and the grains so obtained are used as seeds for next crop and so on.
53. From the above- mentioned stages of producing breeder seeds carried out by the assessee, it becomes clear that at the first level, the assessee produces seeds or grains containing one particular trait. The seeds or grains produced at the first level may contain a particular trait optimally but may not have another desired trait, which may be found in another seed or grain or plant. In other words, the seeds or grains so produced by the assessee have distinct identifiable traits to each other. Thereafter, two seeds or grains so obtained and having distinct identifiable traits are crossed and used as seeds for next crop and so on until the two traits of desired level or result are uniformly fixed in one seed. This makes it clear that at the first level of its producing breeder seeds, the assessee raises or produces iron the land, one kind of seed or grain with a particular trait, and, thereafter, two seeds or grains having different trait to each other are crossed and a new crop is raised repeatedly so as to obtain two or more traits of desired level or result in one single seed or grain. At this juncture, a very pertinent and significant question arises as to whether after raising a particular produce from the land, it is necessary that two seeds or grains with two distinct identifiable traits should be crossed and re-sown or regenerated by raising a next crop by using grains produced in one crop as seed for next crop and so on to obtain a seed of desired quality so as to treat the process as one which is ordinarily employed by a cultivator doing “agriculture” or to render the produce raised by him fit to be taken to market? The answer, in our opinion, would invariably be in the negative. In our considered view and in the light of the definitions of “Agricultural Income” given in section 2(1 A) as explained in the above-referred cases, once an agriculture produce is raised by a cultivator from agricultural land used for agricultural purposes to render the produce raised by him fit to be taken to market, it is not necessary for him to cross and to regenerate over a number of crops year after year the two variety of seeds or grains, containing two identifiable distinct traits, which have been produced by him in the first crop. This process of re-cultivating the produce already raised by the assessee from the agricultural land with a view to concentrate two or more traits in one single seed or grain after two grains having two distinct identifiable traits are crossed-over cannot, by any stretch of imagination, be said to be a process which is ordinarily employed by a cultivator to render the produce already raised by him fit to be taken to market. The various seeds having distinct identifiable trails produced by the assessee at the very fist stage of its over all integrated activity of producing hybrid seeds can be considered to be agricultural produce fit to be taken to market, subject to only that process which is ordinarily employed by a cultivator 10 render the produced raised by him fit to be taken to market as contemplated under sub-paragraph (ii) and (iii) of clause (b) of section 2(1A) of the Act. In view of the provisions contained in sub-paragraph (ii) and (iii) of clause (b) of section 2(1 A) of the Act, it is beyond any doubt that the process referred to therein must be one which is usually or ordinarily employed by the cultivator, and this process must have been employed with the object of making the produce marketable. It may be simple manual process or it may involve the use and assistance of machinery. It is, however, clear that the employment of process contemplated under the said provisions of sec. 2(1 A) of the Act must not alter the character of the produce. The produce must retain its original character and the only change that may have been brought about in the produce is to make it marketable. The change in the condition of the produce is only intended to make the produce a saleable commodity in the market. It is significant to note that the sale to which subparagraph (iii) of clause (b) of section 2(1 A) of the Act refers must be the sale of produce which has not been subject to any process other than that contemplated by sub-paragraph (ii), i.e. it must subject to the process ordinarily employed by the cultivator for making the produce marketable or for rendering the produce raised by the cultivator fit to be taken to the market as so laid down by the Honourable Supreme Court in the ease by the Honourable Supreme Court in the ease of Dooars Tea Co. J.td. vs. CAIT (supra) wherein the scope and effect of clause (i) o (iii) of section 2(1)(b) of the Indian Income Tax Act, 1922 (corresponding to present section 2(1 A)(b) of 1961 Act) has been explained and analysed. 54. The Id. senior counsel for the assessee has contended that the provisions of section 2(1A)(b)(ii) & (iii) come into play only after the crop is harvested or detached from the land for being sold in the market, and the question as to whether a process to which the “agricultural produce” is subjected to is a process ordinarily employed by a cultivator, would arise only if such process is applied to the produce after it has been detached from the land. From the various components and stages of developing or producing breeder seeds or hybrid parent seeds as explained by the assessee, it is clear that the assessee used to sow and plant a vast variety of seeds individually, and the crop so raised are harvested individually, and thereafter the seeds so harvested were again re-cultivated or re-planted after the two seeds having different traits are crossed over number of generations of crops until a desired result is obtained and it takes about number of years. The grains or produce raised or obtained after the first crop is harvested is used as seeds for next crop and so on. In this process, we find that the provisions of section 2(1 A)(b)(ii) and (iii) came into play immediately after the first crop was harvested and grains or produce were obtained by the assessee. We, therefore, have to see whether the process to which the said grain or produce obtained by the assessee in the first crop were subjected to is a process ordinarily employed by a cultivator to render the produce raised by him fit to be taken to the market as contemplated under section 2(1A)(b) and (iii) of the Act. In the instant case before us, the grains or seeds produced in first crop were used as seed for next crop and so on until a seed of desired trait is obtained by the assessee. Applying the principles enunciated in the judgement of Honourable Supreme Court in the case of Dooars Tea Co. Ltd. vs. CAIT (Supra) to the facts of instant case, it is clear that the aforesaid process of regenerating seeds by the assessee where two kinds of seeds or grains or produce raised by the assessee are crossed over a number of generations of crops until the two or more traits of desired level or result are uniformly fixed in one plant cannot be regarded as an agricultural process which is ordinarily employed by the cultivator doing “agriculture” or rendering the seed already produced or raised by the assessee fit to be taken to market. Where two seeds or grains are developed into a single seed or grain, which is different from the original two seeds or grains produced by the assessee at the first level, nobody can say that in respect of the seeds or grains originally produced by the assessee, the assessee has performed such process which is ordinarily employed by a cultivator to render the said original produce raised by the assessee fit to be taken to market. In the instant ease, what has been ultimately produced by the assessee is a. seed of desired result, which has altogether a rent character and trail than that of the seeds or grains originally produce the assessee at the first stage. The produce originally raised or produced by the assessee at the first level does not retain its original character and trait. The process of generating seeds or grains has brought about a complete change in the character of the produce originally produced by the assessee. It is nobody’s case that the seeds originally produced by the assessee having only one distinct identifiable trait were not marketable. Therefore, the change so brought by the assessee to the produce or crops originally produced or raised by it by using them as seed in the next crop and so on through re-generating of the produce over number of times to obtain desired level of traits in one seed does not come under the ambit of “agriculture” or the process which is ordinarily employed by a cultivator to render the produce raised by him fit to be taken to market.
55. In the judgement of the Honourable Supreme Court in the case of K. Lakshmanan and Co. vs. CIT (1999) 239 ITR 597 (S.C.) it has been held and observed that from the reading of the statutory provision defining the expression “agricultural income” under section 2(1) of the 1922 Act, it is clear that what is taken to the market and sold must be the produce which is raised by the cultivator, and even though for the purpose of making it marketable or fit for sale, some process may have to be undertaken, the section docs not conic:: ate the sale of an item or a commodity which is different from what is cultivated and processed to make it marketable. In this view of the matter, the Honourable Supreme Court, therefore, held that feeding of mulberry leaves to silk worms was not a process ordinarily employed by the cultivator of mulberry leaves to make them marketable by way of producing silk cocoons. The Honourable Court further observed that had mulberry leaves been subjected to some process and sold in the market as such, then certainly the income derived therefrom would be regarded agricultural income. The Honourable Court further held that the agricultural produce of the cultivator will be mulberry leaves and by no stretch of imagination can the silk worms, and certainly not the silk cocoons, be regarded as the agricultural produce of the cultivator.
56. Applying the ratio of the said decision of Honourable Supreme Court in the above-referred case of K. Lakshmanan and Co. vs. CI 1 (supra; to the facts of the present case, it is clear that what was originally produced and raised by the assessee is the original seeds or grains with distinct identifiable traits and qualities produced and harvested at the first level. At the very first stage, the vast variety of seeds were sown and planted, and each plant was harvested individually. The stage of sowing to that of harvesting were completed by the assessee. and seeds or grains with distinct traits were obtained. What was remained to be done with reference to the seeds or grains produced in assessee at the first level was to perform the process ordinarily employed by a cultivator to render the said seeds or grams produced by the assessee fit to be taken to the market. After the produce is sprouted from the land, the subsequent operation to be resorted to by the agriculturist being absolutely necessary for the purpose of effectively raising the produce from the land in respect of any agricultural produce within the meaning of section 2(1 A) of the Act as explained by the Honourable Supreme Court in the case of CIT vs. Raja Berroy Kumar Sahas Roy(supra) are weeding, digging the soil around the growth remove of undesirable undergrowth and all operations which foster the and preserve 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. In the present case, the assessee had performed subsequent operations till the stage of harvesting the crop and raising the seeds or grains, when the first crop of vast variety of seeds was raised. Each plant was harvested individually, and seeds or grains with various distinct traits were obtained. In other words, the agricultural produce of the assessee would be the original seeds or gains which have been produced by the assessee from cultivation of vast variety of seeds planted at the very beginning. Had these original seeds or grains with their own particular trait and quality been subjected to some process ordinarily employed by a cultivator to render those produce raised by him fit to be taken u- Liu market, 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 is that the said seeds or grains with their particular traits and quality produced by the assessee at the first stage were crossed and re-generated over certain number of generations of crops until the two traits of desired level are uniformly fixed in one plant, and the two seeds with different traits are developed into a single hybrid seed which is different from the original two seeds and this exercise was repeatedly carried out over a number of years for fixing some other traits, and by way of this process, all desired traits get concentrated in a few elite hybrid seeds or germplasms. In our considered view, this process as claimed by the assessee cannot, by any stretch of imagination, can be regarded as a process ordinarily employed by a cultivator to render the said original seeds or grains produced by the assessee at the first stage fit to be taken to the market. The assessee’s activity of fixing desired traits available in different seeds or grains into one seed after two seeds are crossed and number of generations of crops were raised repeatedly over a number of years can be viewed in the same sense in which an activity of feeding of mulberry leaves to silk worms is understood in the case of K. Lakshmanan and Co. vs. CIT (supra). The produce “breeder seeds” and/or “hybrid parent seeds” wherein different traits of two or more seeds got concentrated by the assessee, is certainly a different from the original seeds cultivated and raised by the assessee at the stage of first crop cultivated by the assessee. In its explanation, the assessee has categorically admitted that the two germsplasms or seeds are developed into a single hybrid germplasm which is different from the original two germplasm, and similar exercise is carried out for fixing other desired traits in any single plant, and thus all desired traits get concentrated in a few elite hybrid germplasms. In this sense of the matter, it can not be, therefore, said that the ratio of the decision of Hon’ble Supreme Court in the case of K. Lakshmanan and Co. vs. C1T (supra) is not applicable to the present case. The contention of the learned counsel for the assessee that the authorities below have not correctly applied the ratio of the judgement in the case of K. Lakshmanan and Co. vs. CIT (supra) to the present case is, thus, rejected.
57. It is well settled that intention of the assessee is a material factor to decide the true and real character or nature of any activity carried out by him, and each case has to be decided on its particular facts. The only enquiry which is relevant in the present case is whether the income in question is agricultural income within the terms of the definition thereof as given in the Act and that is to be determined in this case having regard to the facts and circumstances of the instant case before us. We have to see whether the activity of re-generating seeds or grains and re-cultivating of the same over a number of generations of crops to obtain a desired level of trait uniformly in any single seed, during course of which two seeds or grains having distinct identifiable trait are developed into a single seed or gain, which is different from the original two seeds or grains produced by the assessee. is undertaken by the assessee with an intention of profit making in a systematic and organised business carried on by the assessee. If the object and intention of the assessee was merely to produce ordinary seeds with usual and normal distinct identifiable trait by doing agricultural operations on a land used for agricultural purposes and to make the said produce ordinarily raised by the assessee fit to be taken to market, the income from the said activity would have been certainly come within the ambit of ”agricultural income” as contemplated under section 2(1 A) of the Act. But, in a case where the seeds with distinct identifiable trait already produced by the assessee from the agricultural land are re-generated after the two seeds of different traits are crossed over a certain number of generations of crops until the two traits of desired level or result are uniformly fixed in one seed, and the two seeds are developed into a single hybrid seed, which is different from the original two seeds, and this process of enhancing traits and concentrating them in a few seeds and producing such breeder seeds is carried out year after year, and the final produce is then sold only to joint venture company for producing hybrid commercial seeds, which hybrid commercial seeds are in turn sold to ncrs for their cultivation, it is clear beyond any doubt that the assessee did all these activities with the object of profit-making by indulging and involving into a well designed and systematic business activity, which any ordinary cultivator is not expected to perform ordinarily in the course of any agricultural operations carried out by him on a land within the meaning of section 2(1 A) of the Act. In the present case, what is relevant and crucial to consider is what subsequent process has been employed by the assessee with regard to the produce or seeds or grains after the same were produced or raised by the assessee in the first crop. From the provisions contained in section 2(1A) of the Act, it is clear that, as already discussed above, the process that is to be employed by a cultivator with regard to the produce raised by him is to be one which is ordinarily employed by a cultivator to render the produce raised by him fit to be taken to market and nothing else. But, in the present case, the assessee instead of making the original seeds produced by it in the first crop as marketable, the assessee re-cultivated and re-generated them after two seeds were crossed over a certain number of generations of crops until the two traits available in two separate seeds were transformed into a single seed and such exercise was repeated so many times over a period of years till a desired result is obtained. Therefore, the very process undertaken by the assessee does not satisfy the test enumerated in sub paragraph (i), (ii) and (iii) of clause (b) of section 2(1 A) of the Act.
58. If basic operations and secondary operations as explained in the decision of Honourable Supreme Court in the case of CIT Vs Raja Benoy Kumar Sahas Roy (supra) are assumed to have been carried out by the assessee in the course of re-generating of the original seeds already produced by the assessee in the very first crop, after the two seeds with different traits produced or raised in first crop are crossed over a certain number of generations of crops until the desired result is obtained, those, basic and secondary operations would be immaterial and irrelevant in as much as one •has to look to the issue from the point of view as to whether these operations have been carried out by the assessee in the course of any agricultural operations ordinarily carried out by any cultivator. In the present case, all these operations with agri- genetic research has been carried out by the assessee in the course of carrying on business of producing hybrid parent seeds and not in the course of carrying out any agricultural operations ordinarily employed by a cultivator.
59. Let us now refer to the ratio of the judgement of the Honourable Madras High Court in the case of CIT Vs Stanes Amalgamated Estates Ltd. 232 ITR 443 (Mad) where it has been held that the sale proceeds of eucalyptus oil extracted by the assessee from the leaves of the eucalyptus tress grown by it would not be in the nature of agricultural income. The Honourable High Court held that in the case before them, the oil extracted from the eucalyptus leaves lost its original identity and the assesses w as not able to prove that the eucalyptus leaves had no market. The Court observed that “In order that an income might fall within the definition of agricultural income… two conditions had to be satisfied: (1) the process to which the agricultural produce is subjected whether manual or mechanical, should be one which is ordinarily employed by a cultivator; and (2) the said process should be employed in order to render the produce tit to be taken to market and not for any other purpose. The produce must retain its original character in spite of the process unless there is no market for selling it in that condition. In the present case before us. the assessee produced certain seeds and grains after raising a crop of variety of seeds in the field. These seeds or grains contained certain identifiable traits and quality. Thereafter, with a view to develop certain types of hybrid seeds of desired traits and qualities, the seeds originally produced by the assessee with a particular trait were crossed with another seeds, which were also produced by the assessee but having another trait, which trait was not available in the first mentioned kind of seed, and this process of cross was carried out over a certain number of generations of crops until the two traits of desired level or result are uniformly fixed in one single seed. It is thus seen that the original seeds or grains produced by the assessee by way of cultivation have lost their original identity, and two seeds or germplasms have been developed into a single hybrid germplasms or seed which is different from the original two deferent and distinct seeds which were originally produced by the assessee from the land. Thus, the produce originally produced by the assessee did nor retain its original character but have been transformed into a new produce with a different traits and quality. It is nobody’s case that the seeds or grains having one particular trait or quality produced by the assessee at the first level had no market. In order to render the seeds or grains originally produced by the assessee fit to be taken to market, it was not at all necessary to undertake such kind of process of regenerating them by way of repeated crops to obtain a produce of desired result as done by the assessee. The process to which the original seeds or grains were subjected, whether manual or mechanical, should have been one which is ordinarily employed by a cultivator in order to render the produce fit to be taken to market and not for an) outer purpose. But, in the present case, the process adopted by the assessee cannot be said to be one which is ordinarily employed by a cultivator and the purpose of the process adopted by assessee was not to render the original seeds or grains produced by the assessee fit to be taken to market but was to develop certain types of hybrid seeds of desired traits by way of such a highly technical process, where two seeds are crossed and then re-cultivated, re-planted, re-grown, re-harvested in a repeated crops until the desired traits are concentrated into a single hybrid germplasm or seed. Therefore, the hybrid seed or germplasm of desired trait and result could not be considered to !v an agricultural produce within the meaning of section 2(1A) of the Ac. In the light of the discussions made above, we, therefore, are of the view that the ratio of the aforesaid decision in the case of CIT vs. Stanes Amalgamated Estates Ltd. (supra) is squarely applicable to the facts of the present case, and in this view of the matter, the hybrid seed or elite germplasm or parent hybrid seed produced by the assessee cannot be regarded as agricultural produce within the meaning of section 2(1 A) of the Act.
60. Further, in the case of Boggavarapu Peda Am Maiaha Vs CIT (1964) 541 ITR 578 (AP), it has been held that in the light of the language in section 2(l)(b)(ii) of the I.T. Act, as the operations of redyeing, stripping and grading were not essential to make tobacco marketable in India, though such operations were carried out to make it for export, such operations could not be regarded as process ordinarily employed by cultivators necessary to make the produce marketable. The income attributable to these operations cannot therefore be treated as agricultural income and should be treated as business income. Applying the same analogy to the facts of the present case, we hold that the assessee’s operations of re-generating seeds or grains by way of repeated cultivation after two seeds produced by the assessee at the first stage were crossed to obtain a hybrid gcrmplasms or seeds of desired quality, which operation were being carried out over a number of years until a desired result or trait is obtained, are not at all essential to make seeds or grains or produce originally produced or raised by the assessee fit to be taken to market though such operations were carried out on a land to produce or develop breeder seeds or hybrid germplasm with a desired traits concentrated therein. Therefore, the income attributable to these operations of developing/ producing breeder seeds or hybrid germplasm or parent hybrid seed containing desired traits cannot be treated as agricultural income and should be treated as business income.
61. In our considered view, applying the decision of Hon’ble Supreme Court in the case of CIT vs. Raja Benoy Kumar Sahas Roy (supra) and Dooars Tea Co. Ltd. vs. CIT (supra) and Andhra Pradesh High Court in Boggavarapu Peda Am Maiaha vs. CIT (supra) and Madras High Court in CIT Vs Stanes Amalgamated Estates Ltd (supra) to the facts of the present case, such a process of re-generating the produce already raised and produced by the assessee at the very first stage with a view to obtain hybrid parent seed of altogether different traits does not fall within the scope of process referred to in sub-paragraph (i), (ii) and (iii) of clause (b) of section 2(1 A) of the Act, ordinarily employed by a cultivator either doing agriculture or rendering the produce raised by him lit to be taken to the market. It is significant to note that the mere facts that the activity of regenerating the original seeds or grains already harvested and produced by the assessee with a view to develop breeder seeds and hybrid parent seeds of desired level and quality after raising number of crops car after year has some connection with or is in some way dependant upon the land cannot be by itself sufficient to bring it within the scope of the term “agriculture” and/or within the scope of integrated activity of the agriculturist or within the scope of process which is ordinarily employed by a cultivator to render the produce raised by him fit to be taken to the market. The CIT(A) has rightly and correctly analysed and examined the process undertaken by the assessee?s process of producing parent seeds, which does not involve any process ordinarily employed by a cultivator both at the pre-harvest and post-harvest stage of producing breeder seeds and parent seeds, and has rightly hold that the assessee’s activities does not fall into the definition of agricultural income within the meaning of section 2(1 A) of the Act. In this view of the matter, we therefore, hold that the parent seeds produced by the assessee by adopting such process as explained by the assessee and analysed above, cannot be regarded as “agricultural produce*’ within the meaning of section 2(1 A) of the Act. and the income derived from sale of such parent seeds is thus not an agricultural income under section 2(1 A) of the Act.
62. In the light of the discussions we made above, we do not find any cogent or justifiable reason to interfere with reasoning and observations made by the learned CTIYA) in para 4 to 4.4 of his order, which have already been reproduced above by us in para 17 of this order. The analysis made by the learned CIT(A) in para 4.4 of his order about the assessee’ process of development and production of parent seeds by hybridisation is not found faulted with, and is upheld with approval.
