DECIDED BY: ITAT HYDERABAD BENCH ` B ‘, HYDERABAD , IN THE CASE OF: DCIT Vs. Vibha Agrotech Ltd., APPEAL NO: ITA No. 469/H/2008, DECIDED ON June 18, 2010
Per : Chandra Poojari, Accountant Member
These six appeals are cross appeals directed against the different orders of the CIT(A)-IV for the assessment year years 2002-03, 2004-05 and 2005-06.
2. The Revenue in its appeal in ITA Nos.469, 470/Hyd/2008and 76/Hyd/2009 raised the common grounds as follows:
The CIT(A) erred in allowing the income from sale of foundation seeds as income from agricultural activity and exempted u/s 10(1) of the Act
The CIT(A) ought to have considered that the production of basic seeds and sale of hybrid seeds is an integral activity undertaken for the ultimate sale of hybrid seeds and income should be treated as income earned out of business activity.
The CIT(A) relied upon Viz. Advantage (India) Ltd. ITAT, Hyderabad B Bench the basic question i.e. whether growing of basic seeds is an agricultural activity was not before ITAT as held by CIT(A). The issue has been answered in favor of Revenue in the case of Pro Agro Seeds Ltd., by ITAT, Delhi Bench.
3. In assessee appeals in ITA Nos. 480, 481/Hyd/2008 and234/Hyd/2009, raised the ground that the learned CIT(A) has erred holding that no research and development expenditure can be allowed against the business income of the assessee in view of the provisions of Sec.14A of the IT Act and accordingly directed the assessing officer to disallow the research expenditure claimed by the assessee.
4. The issues raised in the Revenue appeals has been squarely covered by the order of the Tribunal in assessees own case for the assessment year 2001-02 reported in 314 ITR (AT) 231 Hyderabad wherein it was held that :
The assessee was carrying on agricultural operations and growing basic seeds on the lands. It was not the case of the Revenue that without performing the basic operations, the subsequent operations had been carried on by the assessee. The basic seeds were sold by the assessee only as a result of the basic operations that had been carried on by it and on expending human skill and labour thereon and only after performing operations such as weeding, watering, manuring, etc. the resultant product was 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 and the income there from was agricultural income as provided u/s 2(1A) of the Act to exemption u/s 10(1) OF THE Act. The assessing officer was to treat the income from basic seeds as agricultural income and allow exemption u/s 10(1) of the Act.
5. In view of the above order of the Tribunal, we are inclined to agree with the findings of the CIT(A) on this issue and accordingly the appeals of the Revenue are dismissed.
6. Now coming to the assessee appeals, brief facts of the case are that the assessee claimed research and development expenditure towards capital research and development expenditure not debited to the profit and loss account. Though the assessing officer has rejected the claim of agriculture income and treated and such income as business income, he proceeded to examine the allowability of all research expenses in case the assessee’s claim of such income being accepted as M/s Vibha Agrotech Ltd., Hyderabad In ITA No.469, & other 5 appeals agriculture income. He therefore, required the assessee to explain as to why the claim should not be disallowed as research relates to agricultural activity and not relate to its business. It has argued by the assessee that research pertained as much to hybrid seeds as to foundation seeds and therefore related to business as well. The assessing officer however, opined that there is no genetic difference between a foundation seed and a hybrid seed and the only difference in nomenclature comes from scale of production. As per assessing officer, hybrid seeds merely foundation seed produced in mass scale and what the scientist works on its only on the foundation seed which serves as proto type for hybrid seeds. He observed that if a proto type is not found satisfactory it would be subject to further research and only then it would be released for production of hybrid seeds. He, therefore, found the argument of the assessee that research is done for both foundation seeds and hybrid seeds as unacceptable. He further observed that the expenses are also hit by Sec.14A as the same had been incurred for earning income which is claimed by the assessee as exempted u/s 10(1) of the IT Act. However, since the entire income of the assessee was treated by him as business income, the expenses claimed u/s 35 were allowed and no dis allowance was said made. On appeal to CIT(A), since he directed the assessing officer to treat the income from basic seed as agriculture income and allow exemption u/s 10(1) thereupon, he directed the assessing officer that no R & D expenditure to be allowed against the business income in view of the presence of 14A of the Act. Against this findings of the CIT (A) the assessee is in appeal before us.
7. The learned Authorised Representative submitted that the research activity carried on by the assessee is for the purpose M/s Vibha Agrotech Ltd., Hyderabad In ITA No.469, & other 5 appeals production of hybrid seeds which is the end result of commercial activity of the assessee and therefore the entire expenditure is related to the assessee’s business and it is to be allowed as a deduction. The learned AR submitted that the assessee company has been carrying on an integral business of developing and producing hybrid seeds. The R&D activities are extremely essential to support the business carried on by the assessee company. It is not true to say that the assessee company has been carrying on the research activities to support the agricultural activities. The assessee company is producing and using the same parent seeds for both the activities of developing and producing hybrid seeds and selling the same to other dealers. A business may revolve various activities. That does not mean, the assessee is carrying on different business. What is carried out by the assessee company is different activities necessary for a single business pursued by the assessee company. Therefore, the lower authorities are not correct in holding that the two divisions of the assessee company that is agricultural and commercial divisions are separate business carried on by the assessee company. The assessee company has only one activity. That is to develop and sell hybrid seeds. The various activities carried on by the assessee company are different manifestations of the same business. Without undertaking extensive R & D activities, the assessee company could not effectively carry on the said business. The commercial seeds produced from farmers are made out of the parent seeds supplied assessee company. Therefore it is very apparent that there is clear nexus between the business income and R&D expenditure. Therefore, the assessee company is entitled to claim the said expenditure as a deduction in computing the business income liable to income tax. M/s Vibha Agrotech Ltd., Hyderabad In ITA No.469, & other 5 appeals.
7.1. The learned AR further submitted that the statutory provisions are in support of the claim made by the assessee company. As per section 35(1)(i) the expenditure incurred by the assessee on scientific research related to the business is to be allowed as deduction. And according to sec. 43(4)(i) scientific research means any activities for the extension of knowledge including in the field of agriculture. Therefore, the claim of the assessee is clearly admissible u/s 35(1)(i) read with sec. 43(4)(i). The learned counsel further submitted that the said expenditure could not be considered as agricultural expenses as evident from the rules presented for computing the agricultural income.
7.2. He relied on the following judgements:
1. ACIT Vs. Kanchanganga Seeds Co. P Ltd. 81 ITD 152 (Hyd.)
2. Waterfall Estates Ltd. Vs. CIT (1996) 219 ITR 563
3. CIT Vs. Maharashtra Sugar Mills Ltd. (1971) 82 ITR 452
4. CIT Vs, KCP Ltd. (1991) 192 ITR 648 (SC)
5. Addl. CIT Vs. Challapalli Sugars Ltd. (1979) 116 ITR 255 (AP).
8. The DR submitted that the research activity is aimed at development of foundation seed. Once the foundation seed is developed and tested, then only it is produced on a mass scale as per the production process, out of various hybrid seeds developed, the one which performs better than the commercially available hybrid only is selected, from which foundation seeds are cultivated further. These cultivated foundation seeds are sold to the farmers to produce hybrid seeds. The hybrid seed is merely foundation seed produced on a mass scale. The research and development process ends with the production of foundation seeds only. Since the income of the assessee was appeals bifurcated into agricultural income and business income as held by ITAT in the relevant assessment year 2001-02, no R & D expenditure could be allowed against such income in view of the provisions of Sec.14A. Further she submitted that provisions of Sec.43(4)(i) is not at all applicable to assessee case. So also order of the Tribunal in the case of ACIT Vs. Kanchanaganga Seeds (P) Ltd. 81 ITD 152 (Hyd.) because in that case, there was free supply of parent seeds to the willing farmers and thereafter it was supported by the R & D activities carried on by the assessee. And there was direct nexus between the R & D activities and commercial activities carried on by the assessee.
9. We have heard both the parties and perused material on record. The general principles to be applied in similar circumstances have been laid down by the courts in the decisions cited before us. In the decision cited by the learned Representative of the assessee in Waterfall Estates Ltd. case (supra), the assessee company was deriving income from tea and coffee estates and coffee company was deriving income from tea and coffee estates and curing works. That company was managed by managing agents. In this case, the assessee had to work out the net income from taxable and non taxable sources. For the assessment year 1968-69, the assessee company claimed the whole of the managing agency commission against income from tea. The Tribunal held that proper allocation of the managing commission was called for in proportion to the expenditure incurred in various activities such as tea plantation, coffee plantation and coffee curing works. The Tribunal held that the several activities carried on by the assessee constituted separate and distinct activities. Confirming the findings of the Tribunal, held that the several activities carried on the assessee constituted separate and distinct activities. Confirming the findings of the Tribunal, the Hon’ble SC held that various activities income from some of which was not taxable did not constitute a single business and therefore, common expenses have to be allocated in between different activities on a good proportion. In Maharashtra Sugar Mills Ltd. case (supra) against the issue was the deductibility of managing agency commission. In that case, the assessee company owned extensive lands on which it grew sugar cane and used the sugar case for manufacture of sugar in its factory. The question was whether a part of the managing agency commission paid by the assessee company could be disallowed on the ground that the part related to management of sugar cane cultivation, income from which was exempted from tax as agricultural income. The Tribunal found that the cultivation of sugar cane and the manufacture of sugar by the assessee company constituted one single and indivisible business and, therefore, the entire managing agency commission was laid out or expended for the purpose of the business carried or, by the assessee and therefore, the entire managing agency commission was laid out or expended for the purpose of business carried on by the assessee and was allowable as deduction. Upholding the said finding, the Hon’ble SC held that the fact that income from a part of the business was not eligible to tax under the act was not relevant circumstances. As pointed out by the learned counsel for the assessee, the court observed in that case that there is no basis for the view that only expenditure incurred in respect of business activity giving rise to income, profit or gain taxable under the income tax Act, can be allowed as deduction and not otherwise. The court held that to find out whether a deduction claimed is permissible under the Act or not, all that has to be done is to examine the relevant provisions of the Act. That equitable consideration are wholly out of place in constructing the provisions of taxing statute and provisions of the statute have to be taken as they stand. In KCP Ltd. case (supra) while affirming the decision of AP High Court in Challappali Sugar Ltd. case (supra), the Hon’ble SC reiterated the same view by applying the earlier decision in the case.
9.1. Now we have to examine the facts of the present case in the light of the above rulings given by various courts. We have already confirmed the fact that the assessee has been carrying two activities viz., agricultural activities and commercial activities. The objectivities of agricultural activities is pursued by development of parent seeds and commercial activities pursued by development of hybrid seeds from the parent seeds. The parent seed is developed by assessee by an act of agriculture. Thereafter the assessee selling the foundation seeds to the farmers for further multiplication and the farmers cultivate and multiply these seeds and the hybrid seeds so produced by them are sold back to the assessee company. The assessee company process the hybrid seeds so purchased to suit the desired quality and sell as finished seeds. These two are different transaction, there is no formal agreement with the farmer wherein the farmer is prohibited from selling the seeds so produced by them in the open market. From this, it is clear that the first transaction of sale is concluded, once the sale is took place. Once there is a sale and also a purchase of product, then it cannot be termed as integral or composite activity. Thus, the source of procurement for parent seed is own production i.e. agricultural activity. The sources of procurement of hybrid seed is the farmers. The policy and strategy for agricultural activity is different from commercial activities. One activity is cannot be said to be ancillary to other activity. Both are generate independent source of income and formulate distinct business. M/s Vibha Agrotech Ltd., Hyderabad In ITA No.469, & other 5 appeals
9.2 The next point to be considered is whether the R&D expenditure is exclusively attributable either to agriculture or commercial division or attributable to both the activities/divisions. In our opinion, the activities carried on by the assessee company as constituted distinct business activities of the assessee company and the R&D expenditure incurred by the assessee attributable to both the divisions. In such circumstances, the principle laid down by the Hon’ble Supreme Court in Waterfall Estates Ltd. (supra) should apply to this case in as much as the R&D Expenditure has to be apportioned between agricultural and non agricultural activities and the portion attributable to non agricultural activities allowed, as deduction in computing the taxable income. In the decisions cited by the learned counsel for the assessee viz., in Maharashtra Sugar Mills Ltd. (supra) and KCP Ltd. case (supra) the fact were different. In those cases, the assessee was not growing sugar canes as a distinct activity and independent source of income. Growing of sugar cane and manufacture of sugar constituted single and indivisible business. Therefore, those decisions are not applicable to the present case. The decision of the learned CIT(A) is in contravention of the provisions contained in Sec.35(1)(i) and section 43(4)(i) of the IT Act in view of these provisions that the CIT(A) should have allowed the proportionate expenditure as a deduction in computing the taxable income. Revenue insisted nothing to be deducted whereas assessee company canvassed for the deduction of the whole of R&D expenditure. In our opinion, the assessee company is entitled to deduction on account of R&D expenditure but the same has to be restricted in proportion to the turnover between the agricultural division and the commercial division, and the amount relatable to commercial division can alone be allowed as business expenditure. In the facts and circumstances, we direct the assessing officer to allow expenditure M/s Vibha Agrotech Ltd., Hyderabad In ITA No. 469, & other 5 appeals attributable to commercial division in proportion to the turnover between the agricultural division and the commercial division. This view of ours is fortified by the order of the Tribunal
10. in the case of ACIT Vs. Kanchanganga Seeds Co.(P) Ltd. (81 ITD 152 (Hyd.) Accordingly, this ground in assessee is partly allowed. 10. In the result, the appeals of the Revenue dismissed and those of assessee’s are partly allowed. Order pronounced in the Court 18.06.2010