Case Law Details
Profarm Seed India Private Limited Vs ITO (ITAT Hyderabad)
ITAT Hyderabad held that merely because the assessee took the land on lease for conducting their research operations to produce the foundation seeds of the hybrid varieties, such a lease cannot ipso facto make the operations of the assessee as contract farming.
Facts-
The assessee engaged in the business of producing foundation seeds, by conducting agricultural operations on agricultural lands and have been selling the same which are sold to various seed Companies like Godrej Seeds, Nath Seeds, Super Agri Seeds etc. According to AO, the assessee produces both foundation seeds and hybrid seeds and for the production of such hybrid seeds, the assessee carries out research and development activities which involve the scientific study of the parent seed and hybridisation of different varieties of parent seeds to evolve the high-yielding variety of hybrid seeds.
AO concluded that claim of assessee under section 10(1) to the tune of Rs. 2,39,14,201/- is business income of the assessee. CIT(A) deleted the said addition. Being aggrieved, revenue has preferred the present appeal.
Conclusion-
In this case there is no dispute that the assessee took the agricultural lands on lease and conducting normal agricultural operations to produce the hybrid variety of foundation seeds in order to sell them in the open market to the seed industries, and in that pursuit they engaged the labour, supervisors etc. Assessee produced voluminous record to show the engagement of labour and the payment of salaries to the supervisors apart from producing the agreements with the landowners. We have already referred to the contents of the agreements with the landowners which the learned Assessing Officer failed to appreciate in proper perspective.
Held that merely because the assessee took the land on lease for conducting their research operations to produce the foundation seeds of the hybrid varieties, such a lease cannot ipso facto make the operations of the assessee as contract farming.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
Aggrieved by the orders passed by the learned Commissioner of Income Tax(Appeals)-4, Hyderabad (“Ld.CIT(A)”) in the case of M/s. Profarm Seed India Private Limited (“the assessee”) for the assessment year 2014-15, both the assessee and Revenue preferred these appeals. Since both the appeals emanate from the very same order of the learned CIT(A) for the assessment year 2014-15, it would be just and convenient to dispose them of by way of this common order.
2. Brief facts of the case are that according to the assessee, they are engaged in the business of producing foundation seeds, by conducting agricultural operations on agricultural lands and have been selling the same which are sold to various seed Companies like Godrej Seeds, Nath Seeds, Super Agri Seeds etc. According to the learned Assessing Officer, however, the assessee produces both foundation seeds and hybrid seeds and for production of such hybrid seeds, the assessee carries out research and development activities which involve scientific study of the parent seed and hybridisation of different varieties of parent seeds so as to evolve the high yielding variety of hybrid seeds.
3. For the assessment year 2014-15, assessee filed the return of income on 29/11/2014 declaring an income of Rs. 18,49,643/- under the normal provisions of the Income Tax Act, 1961 (for short “the Act”) and nil income under the MAT provisions. As stated above, learned Assessing Officer is of the opinion that the assessee is producing both foundation seeds and hybrid seeds; that for production of hybrid seeds, the assessee carries out research and development activity which involves scientific study of the parent seed and hybridisation of different varieties of the parent seeds so as to evolve the high yielding variety of hybrid seeds; that sells such hybrid seeds in the market for agricultural production by farmers; that the hybrid seeds are so engineered that when the crop from it are used as seeds for subsequent cultivation by farmers, the yields are much less, thereby indicating that the hybrid seeds are generated by certain involved process, which the farmers cannot perform suo motu and have to revert back to the producer of the hybrid seeds for every season if similar results of high production and desired in subsequent crops; and that such activities carried out by the assessee are not natural but series of scientific and specialised processes. On this premise learned Assessing Officer while describing the various levels of process involved in producing the hybrid seeds concluded that the assessee departed from the basic agricultural operation and indulged into production of parent seeds by planned scientific and specialised procedures and therefore the claim of the assessee under section 10 (1) of the Act to the tune of Rs. 2,39,14,201/-, and treated the same as business income under section 28 of the Act.
4. Learned Assessing Officer further found that the assessee paid the amount of Rs. 4,33,892/- being the employees’ contribution to the provident fund beyond the due date specified and therefore, the learned Assessing Officer added the same to the income of the assessee. Further, the assessee was found to have paid TDS in respect of a sum of Rs. 24 lakhs towards Directors remuneration and another sum of Rs. 1.75 lakhs towards audit fee, beyond the due date and therefore, the expenditure of Rs. 25.75 lakhs was disallowed and added back to the income of the assessee. Learned Assessing Officer thereby concluded the assessment by order dated 8/11/2016 determining the income of the assessee at Rs. 2,87,72,736/-.
5. Aggrieved by such an action of the learned Assessing Officer, assessee preferred an appeal before the Ld. CIT(A) and by order dated 24/5/2017 the Ld. CIT(A) confirmed the addition of Rs. 25.75 lakhs disallowed under section 40(a)(ia) of the Act by following the decision of the Hon’ble High Court of AP in the case of CIT vs. M/s. Merilyn Shipping & Transports; while deleting the addition of Rs. 2,39,14,201/- towards income exempt under section 10(1) of the Act, and directed the learned Assessing Officer to verify the details in respect of the addition of Rs. 4, 33, 892/- towards delay in payment of provident fund while directing the learned Assessing Officer to verify the same and to allow.
6. Challenging the deletion of Rs. 2,39,14,201/- claimed under section 10(1) of the Act, Revenue preferred ITA 1436 /Hyd/ 2017 stating that the Ld. CIT(A) deleted the same without appreciating the fact that the activity of development and marketing of seeds is purely a commercial activity bereft of carrying of agricultural activity and the assessee itself did not undertake any agricultural operations but procured hybrid seeds from farmers and as such the activities carried out by the farmers can only be said to be agricultural activities and not those of the assessee. Ld. DR argued in this regard that the facts involved in this case are identical to the ones in the case of M/s Nuziveedu Seeds Ltd for assessment year 2011-12, which is pending before the Hon’ble High Court.
7. Aggrieved by the confirmation of the addition of Rs. 25.75 lakhs under section 40(a)(ia) of the Act and the direction in respect of the addition of Rs. 4,33,892/- towards the delay in payment of provident fund, assessee preferred ITA 1314/Hyd/2017 stating that for the assessment year 2014-15 the provisions under section 40(a)(ia) of the Act were not applicable on salaries and the provident fund amount was remitted before the due date of filing of return under section 139(1) of the Act, and therefore, such additions cannot be sustained.
8. We have gone through the record in the light of the submissions made on either side. The only basis for the learned Assessing Officer to deny the claim of the assessee for exemption under section 10 (1) of the Act is that the assessee is engaged in the production of foundation seeds as well as the hybrid seeds, as against the submission of the assessee that they are in the business of producing foundation seeds only by conducting agricultural operations on the agricultural lands and selling such seeds to the seed Companies like Godrej seeds, Nath Seeds, Super Agri Seeds etc., Learned Assessing Officer, however, did not bring anything on record to show that the assessee has indulged in the production of hybrid seeds as well.
9. A perusal of the assessment order shows that it was submitted by the assessee before the learned Assessing Officer that the assessee takes the agricultural lands on lease by entering into the lease agreements with the landlords and develop the foundation seeds, the germ-plasm procured from the public institutions during the start of research activities by the assessee and then those are regularly developed by the assessee itself in its research forms over the years of time and different product and breeder seeds are developed. The assessee further explained before the learned Assessing Officer that the assessee develops breeder seeds in their research firm by conducting the sowing operations and by planting a vast variety of seeds individually, the crop so sowed harvested and thereafter the seeds are so harvested were again re-cultivated or replanted after the two seeds having different traits are crossed over a number of generations of crops until a desired result is obtained after a considerable time. Assessee further explained that from the several research breeder seeds, the breeders which are best identified or developed into hybrids and shown to various seed companies like Godrej seeds and Genetics Ltd, Super Agri Seeds Pvt. Ltd, Nath Biogen Ltd etc., by displaying the same in the form and thereafter the foundation seeds of that particular hybrid variety were produced and supplied.
10. Assessee, therefore, explained before the learned Assessing Officer that basing on the selection and requirement of different Companies they produce the foundation seeds of a particular hybrid variety in volumes required, by engaging daily labour directly under their supervision, and on the leased forms, by conducting the operations like watering, using required fertilisers and manures etc., and, therefore, the whole process of production and multiplication is carried on the leased lands by implementing normal agricultural operations with the aid of improved/better farming activities. Further according to the assessee they are not in the business of selling, licensing, or otherwise transferring research material/Knowhow to any outside party nor do they carry out research for third party on job basis. The sum and substance of the contention of the assessee before the learned Assessing Officer was that they are growing breeder seeds by repeatedly cultivating and replanting the varieties of crops to produce the hybrid foundation seed, which they are producing in volumes according to the choice of the seeds Companies, and, therefore, the Revenue earned by them from the sale of foundation seed to seed Companies is agricultural income.
11. On the face of this particular submission made by the assessee, learned Assessing Officer referred to the terms of the agreement between the assessee and the farmers who let out their lands to the assessee, and having noticed that during the period of lease the assessee shall have all the rights to possession, cultivation and harvesting of hybrid seeds on the land and during such period the farmers shall not have any rights to lease, license, mortgage or sell the land to the others etc., learned Assessing Officer erroneously jumped to the conclusion that the nature of work conducted by the assessee falls under the category of contract. We do not know the basis for reaching this conclusion by the learned Assessing Officer.
12. Next the learned Assessing Officer describes the types of contract farming and while referring to the decision of the Hon’ble Apex Court in the case of CIT vs. Raja Binoy Kumar Sahas Roy (1957) 32 ITR 466 (SC) reaches another conclusion that the assessee has departed from the basic agricultural operation and indulged into the production of parent seeds by planned scientific and specialised procedures and production of hybrid seeds is different and not required in normal agricultural crop production and thus departing from the normal and ordinary agricultural operations. Next the learned Assessing Officer referred to the dominant and primary object and intention of the assessee to conduct R&D extensively for the development of new hybrid seeds for commercial exploitation he describes the academic part of the production of hybrid seeds. Ultimately the learned Assessing Officer without bringing any material on record jumps to the conclusion that the operations conducted by the assessee on the leasehold land do not answer the description of agriculture as contemplated in section 2 (1A) of the Act and therefore the assessee is not entitled to claim the exemption under section 10(1) of the Act.
13. Before the Ld. CIT(A) also assessee reiterated their stand to say that they are in the business of production/cultivation of foundation seeds and the same was proved by producing relevant records and the learned Assessing Officer erred in ignoring the production of foundation seeds and the production of hybrid seeds inasmuch as the production of hybrid seeds require a seed production from foundation seeds and processing it at a processing plant to market hybrid seeds, which activity the assessee has not been performing.
14. On a careful consideration of the assessment order in the light of the submissions made by the assessee, Ld. CIT(A) reached a conclusion that the assessee is in the business of production of foundation seeds, cultivating the same by conducting agricultural operations on the agricultural land and then selling the same to various seed Companies. Then the Ld. CIT(A) applied the decision of a Coordinate Bench of this Tribunal in the case of Prabhath Agri Biotech (2016) 68 com 391 (Hyderabad-Tribunal).
15. It is pertinent to note that in Prabhath Agri Biotech (supra), a coordinate Bench of this Tribunal referred to the decision of the Hon’ble High Court of Judicature of Andhra Pradesh at Hyderabad in assessee’s own case in ITA No. 88/2014 dt. 21/02/2014 on similar questions raised in AY. 2008-09 wherein the Hon’ble court held that,-
“We are unable to accept this farfetched idea that artificial production of seeds can be sold or used for commercial purpose. May be a few hybrid seeds could be produced by artificial method in a laboratory. The seeds so produced with non-agricultural activity again will have to be sown in the agriculture field to have a larger quantity for sale in the market. Accordingly, we hold that the seed is a product of agricultural activity. Therefore, the sale of the same cannot be brought under the provisions of the Income Tax Act. We, therefore, upheld the decision of the learned Tribunal in this matter”.
16. Further in this case there is no dispute that the assessee took the agricultural lands on lease and conducting normal agricultural operations to produce the hybrid variety of foundation seeds in order to sell them in the open market to the seed industries, and in that pursuit they engaged the labour, supervisors etc. Assessee produced voluminous record to show the engagement of labour and the payment of salaries to the supervisors apart from producing the agreements with the landowners. We have already referred to the contents of the agreements with the landowners which the learned Assessing Officer failed to appreciate in proper perspective. Merely because the assessee took the land on lease for conducting their research operations to produce the foundation seeds of the hybrid varieties, such a lease cannot ipso facto make the operations of the assessee as contract farming. Contract farming in the context of this case would be that if the assessee outsources the agricultural operations which they are doing for themselves now, to some other third party.
17. Apart from this, it could be seen from the record that vide letter dated 30/3/2016 the assessee, while explaining the modus operandi of their agricultural operations, invited the learned Assessing Officer to visit their farm and look at their activities so that the learned Assessing Officer can get the clarity on the issue and differentiate the operations conducted by the assessee with those conducted by other seed companies in the industry. Learned Assessing Officer does not think it fit to accept this request of the assessee to get the things clarified. However, the assessment order in its entirety is an academic exercise, without any material on record to connect such things with the operations conducted by the assessee on the lands took by them on lease.
18. Having regard to the circumstances in their entirety and appreciating the facts in the light of the decision of the Hon’ble High Court in assessee’s own case for the assessment year 2008-09, relied upon by the Ld. CIT(A), we do not find anything illegality or irregularity in the conclusions reached by the Ld. CIT(A) and accordingly uphold the same. Grounds of appeal of the Revenue are accordingly dismissed.
19. Now coming to the appeal of the assessee, ground No. 3 relates to the addition of Rs. 4,33,892/- towards delay in remittance of provident fund. There is no dispute on facts and as a matter of fact, learned Assessing Officer noted the due date for payment and the actual date of payment and thereby demonstrated that the remittance was beyond the due date specified in the Provident Fund Act. What all the Ld. AR said is that all the payments were made before the due date of filing of return of income under section 139(1) of the Act. This issue is, however, squarely covered by the decision of the Hon’ble Apex Court in the case of Checkmate Services Pvt. Ltd., Vs. CIT, Civil Appeal No. 2833/2016 by order dated 12/10/2022 against the assessee. Respectfully following the same, dismiss ground No. 3 of appeal of assessee.
20. Now coming to the disallowance of Rs. 25.75 lakhs is concerned, it consists of two amounts. One is towards the Director’s remuneration to the tune of Rs. 24 lakhs and the other is audit fee of Rs. 1.75 lakhs. Admittedly the TDS was effected on 7/2/2015. Since the TDS was effected beyond the due date, learned Assessing Officer disallowed both. Ld. CIT(A) following the decision in Marilyn shipping and transports (supra) confirmed the addition.
21. Ld. DR submitted that prior to the assessment year 2015-16, provisions of section 40(a)(ia) of the Act were not applicable to salaries. A perusal of the provision clearly shows that prior to the amendment by Finance Act 2 of 2014 w.e.f. 1/4/2015, only interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident are covered by the provisions under section 40(a)(ia) of the Act and it clearly does not mention the payment towards the salaries. It is only w.e.f. 1/4/2015 it is stated that if 30% of any sum payable to a resident on which tax is deductible at source, such amount shall not be deducted in computing the income chargeable under the head “profits and gains of business or profession”.
22. In view of the fact that prior to 1/4/2015 the amount payable towards the salaries is not covered by the provisions of section 40(a)(ia) of the Act, the addition of Rs. 24 lakhs on account of non-deduction of TDS on the remuneration paid to the Director cannot be sustained. Learned Assessing Officer is, therefore, directed to delete the same. The addition on account of audit fee of Rs. 1.75 lakhs is justified by the provisions of section 40(a)(ia) of the Act and, therefore, does not warrant any interference. Ground No. 2 of assessee’s appeal is allowed and ground No. 4 is dismissed.
23. In the result, appeal of the Revenue is dismissed and appeal of the assessee is allowed in part.
Order pronounced in the open court on this the 26th day of October, 2022.
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