Validity of Revision order under section 263 if it is erroneous and prejudicial order
Short Overvivew : Assessment order being erroneous but not prejudicial to the interest of revenue, could not be subjected to revision under section 263.
CIT held assessment order to be erroneous and prejudicial to the interest of revenue on the ground that AO failed to examine the fact that whether production of seeds by adopting planned, scientific and specialized procedure in departure from basic agricultural operation in assessee’s case could still be claimed as agriculture.
it is held that No doubt, AO asked for relevant information, but, there was no record that assessee had actually submitted that before AO. It clearly showed that AO had not made enquiry but, merely accepted contention of the assessee. However, it is also an admitted fact that seeds could not be produced without basic agricultural activities. Accordingly, assessment order might be erroneous but not prejudicial to the interest of revenue and, therefore, order under section 263 was set aside.
Decision: In assessee’s favour.
Relied: Prabhat Agri Biotech Ltd., vide ITTA No. 88 of 2014.
Referred: Malabar Industrial Co. Ltd., (2000) 243 ITR 83 (SC) : 2000 TaxPub(DT) 1227 (SC) and CIT v. Green World Corporation (2009) 314 ITR 81 (SC) : 2009 TaxPub(DT) 1713 (SC).
IN THE ITAT, HYDERABAD BENCH
P. MADHAVI DEVI, J.M. & S. RIFAUR RAHMAN, A.M.
Pravardhan Seeds (P) Ltd. v. ACIT
ITA No. 667/Hyd/2017
30 January, 2019
Assessee by: C.S. Subramanyam
Revenue by: YVST Sai
S. Rifaur Rahman, A.M.
This appeal filed by the assessee is directed against the order of Commissioner – 4, Hyderabad, dated, 24-3-2017 for assessment year 2012-13, passed under section 263 of the Income Tax Act, 1961 (in short ‘the Act’).
2. Brief facts of the case are, assessee-company engaged in the business of seed production of cotton and other crops, filed its return of income for the assessment year 2012-13 on 27-9-2012, declaring a loss of Rs. 3,42,17,916, while book profit under section 115JB was admitted at Nil. assessing officer passed the assessment order under section 143(3) of the Act on 30-3-2015 accepting the loss returned.
3. On perusal of assessment records and return of income submitted by the assessee, the Commissioner – 4, exercising powers vested under section 263 of the Act, held that the order passed by the assessing officer is erroneous and prejudicial to the interests of revenue, for the reason that the assessing officer while passing the order under section 143(3) allowed the agricultural relief under section 10(1) without making inquiries or verification, which should have been made in respect of the claim of agricultural relief allowable under section 10(1) of the Act. Accordingly, a notice under section 263 of the Act issued to the assessee.
4. In response to the said notice, the assessee filed written submissions on 20-1-2017, in which, it was contended that the nature of activity carried out by the assessee-company, the operation constituting the agricultural activity, the role of the assessee etc., had been explained before the assessing officer.
4.1 The assessee referred to the decision of the Hon’ble High Court of AP in the case of Prabhat Agri Biotech Ltd., a group company to submit that the activities of the assessee were exactly similar to the said company.
4.2 The assessee further submitted that since the assessing officer had examined the information submitted and come to a conclusion that the income from sale of hybrid seeds was not taxable in view of the said judicial pronouncement, and, therefore, the order passed by him was not erroneous and prejudicial to the interests of revenue.
5. After considering the submissions of the assessee, the Commissioner observed that the assessing officer did not examine the fact that whether the production of seeds by adopting planned, scientific and specialized procedure in departure from basic agricultural operation in the instant case could still be claimed as agriculture. Further, he observed that he did not even call for the details of contracts to examine their nature or any other details to examine that the activities undertaken by the assessee were identical to those that of any farmer would carry in his own land. In view of the above observations, the Commissioner set aside the order of assessing officer and directed to redo the assessment after duly examining the above issue, reiterating the reason that the assessing officer passed the order without making enquiries or verification as should have been made to examine the claim in respect of agricultural relief made under section 10(1) of the Act.
6. Aggrieved by the order of Commissioner, the assessee is in appeal before us raising the following grounds of appeal :–
“1. The order of the learned Commissioner is against law, weight of evidence and probabilities of the case.
2. The learned Commissioner erred in holding that the assessment order passed under section 143(3) of the Income Tax Act, 1961 in the case of the assessee for assessment year 2012-2013 is erroneous in so far as it is prejudicial to the interests of revenue.
3. The learned Commissioner having appreciated inquiry and detailed response by the assessee during the assessment proceedings, erred in holding that assessment has been completed without making enquiries or verification as should have been made to examine the claim in respect of agricultural relief under section 10(1) and thus erred in holding that the order passed is erroneous.
4. The learned Commissioner erred in concluding that the assessing officer wrongly applied the ratio laid down by the judgments relied upon by the assessee.
5 The learned Commissioner erred in concluding that the assessing officer failed to make enquiries in order to ascertain the real nature of the income claimed as received from agricultural operations.
For the above grounds and such other grounds that may be urged at the time of hearing, the appellant prays that the appeal be allowed. The appellant craves leave to add to, amend or modify the above grounds of appeal either before or at the time of hearing of the appeal, if it is considered necessary.”
7. The learned Authorised Representative of the assessee reiterated the submissions as made before the revenue authorities and filed written submissions before us, which were submitted before the revenue authorities in the paper book.
8. Learned Departmental Representative, on the other hand, filed synopsis of arguments, in which, he relied on various cases and referring to the Explanation 2 to section 263(1) (inserted with effect from 1-6-2015), submitted that if in the opinion of the Principal Commissioner, any order passed without making inquiries or verification or passed allowing relief without enquiring into the claim shall be deemed to be erroneous in so far as it is prejudicial to the interests of revenue. He, therefore, submitted that in the instant, case, there was a valid opinion formed by the Pr. Commissioner that the exemption under section 10(1) was granted without enquiry, hence, the revision under section 263 is a valid revision.
9. Considered the rival submissions and perused the material on record. As submitted before the assessing officer as well as before the Commissioner by the assessee, the activities undertaken by the assessee in growing and production of seeds are as under :–
(i) Selection of fields, service provider through farm supervisors to enter in to agreement.
(ii) Issue of foundation seeds and cultivation and farm cultivation inputs.
(iii) Land preparation, sowing, transplanting, roughing, data selling, pest and fertilizer application, internal cultivation, irrigation, weeding ploughing and pollination.
(iv) Inspection of fields by production staff
(v) Harvesting and produce supply to processing units (own or third party units)
(vi) Seed quality testing, drying, ginning, delinting, chemical coating, packing including labelling as per the Seed Act,1966.
(vii) Packed seed distribution and sales.
9.1 It was the submissions of the assessee that since seeds are derived from mother plants grown on land, they are considered as agricultural produce, hence, the production of seeds by farming is an agricultural activity of the company. Further, since the company gets cultivation done under its supervision and at its own cost and risks as stated above, the company can be said to be a grower of agricultural produce and hence is considered as an “agriculturist”. Since the risk and rewards associated with the agricultural operations lies with the company and are borne by the Company and the company has an insurable interest on the farm produce, “the activities carried on by the company was in the nature of agricultural activities” and” the sale of the agricultural produce falls within the scope of agricultural income”. Since the above satisfy the condition mentioned in sub clause(iii) of clause of (b) of section 2(1A) of the Income tax Act, 1961, the income arising there from would fall within the ambit of “agricultural income” as was held by the Apex Court in “CIT v. Raja Benoy Kumar Sahar Roy, (1957) 32 ITR 466 (SC) : 1957 TaxPub(DT) 152 (SC)“.
9.2 The production of seeds and marketing is regulated by The Seeds Act, 1966 and the seeds cannot be marketed unless they are processed, tested and labelled.
9.3 On agricultural processing, the Apex Court had an occasion to consider the import and scope at the “process ordinarily employed by the cultivator”. In “Dooars Tea Company Ltd. v. CIT of Agriculture, Income Tax, (1962) 44 ITR 6 (SC) : 1962 TaxPub(DT) 167 (SC)“ and “K. Lakshmanan & Co. & Ors. v. CIT (1999) 157 CTR 449 (SC) : 1999 TaxPub(DT) 404 (SC)“ the Apex Court held that the process should be to make produce rarketable. It should not change the character and nature of the produce without resulting in an altogether new product. Then it would be agricultural income.
9.4 Applying the above principles, it can be construed that the processing carried on by the Company is ordinary process ’employed by the cultivator to be fit for marketing, for the following reasons :–
–The processes carried on; by the Company are much normal process carried on by a cultivator and as required on a statute i.e., The Seeds Act, 1966.
–The products remain the same even after processing where we remove unfilled seeds and foreign matter.
–The seeds remain as seeds remain after processing.
–It retains its nature and character as seeds as produced on plants in field.
–No new product has evolved or emerged from the seeds on account of the processing.
Therefore, the operations carried out by the Processing Division of the Company falls within sub-clause (ii) of clause (b) of section 2(1A) of the Income Tax Act, 1961.
9.5 In view of the foregoing, since the activities carried on by the company was in the nature of agricultural activities and the income arising there from falls within the ambit of “agricultural income”, the company is eligible for claim of exemption under section 10(1) of the Income Tax Act, 1961.
9.6 The assessee relied on the decision of the Hon’ble High Court of AP in the case of assessee’s sister concern, Prabhat Agri Biotech Ltd., vide ITTA No. 88 of 2014, wherein the Hon’ble Court held as under :–
“In this case, we find that the assessee claimed for exemption under section 10(1) of the Income Tax Act, 1961 treating the income generated from the sale of basic/foundation seeds as agricultural income. Therefore, the question is whether the income arising from out of the sale of seeds can be treated to be income otherwise than the agricultural income. No one can dispute that the seed is the product of agricultural activity and the seeds cannot be sold commercially, unless it is produced by agricultural activity.”
9.7. Though the order of assessing officer is cryptic, but, after obtaining the information from the assessee and relying on the decision of the Hon’ble AP High Court in assessee’s sister concern, the assessing officer allowed the claim of the assessee under section 10(1) of the Act. Hence, the findings of the Commissioner that the assessing officer allowed relief under section 10(1) without making inquiries or verification. are not proper.
9.8. As regards learned DR’s reference to Explanation 2 to section 263(1), we rely on the decision of of the Mumbai Benches of ITAT in the case of Shri Anil L. Todarwal v. Pr. CIT in ITA No. 3498/Mum/2017 vide Order, dt. 2-1-2018 wherein the coordinate Bench has held as under :–
“9. We are not oblivious of the fact that the legislature, vide the Finance Act, 2015, by making available Explanation 2 to section 263 on the statute with effect from 1-6-2015, had therein provided certain circumstances, under which the order passed by the assessing officer, if, it is in the opinion of the Principal Commissioner or Commissioner so, shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue. However, exercise of such deemed powers conferred on the revisional authority as per Explanation 2 have to construed by strictly confining and subject to satisfaction of the conditions contemplated therein. We are of the considered view that to the extent making of inquiries and verification which in the opinion of the Commissioner the assessing officer should have made, as contemplated in Clause (a) Explanation 2, though gives an edge to the opinion of the Commissioner as regards the inquiries and verifications which the assessing officer should have made, but then, such inquiries and verifications are not only required to be relevant for adjudication of the issue, but also should point out as to how the view arrived at by the assessing officer by not taking recourse to such inquiries and verification, can be faulted with and held to be wrong. We thus are of the considered view that now when the assessee had in the course of proceedings before the assessing officer proved that the foreign commission was paid to the foreign commission agents for services rendered abroad, which thus did not cast any obligation on the assessee to withhold tax while making such payment, therefore, the observation of the Principal Commissioner that the assessee had neither submitted an order under section 195 of the Act, nor the prescribed certificate in Form No. 15CA of the Chartered Accountant, specifying that the deduction at source on such commission paid was not required to be made, in itself is rendered as redundant. Thus, in the absence of any statutory obligation on the assessee for withholding tax on the aforesaid payment, neither of the aforesaid verifications as were sought by the Principal Commissioner did survive any more. We are of the considered view that the Principal Commissioner in the backdrop of the aforesaid facts as emerges from the record, and was also pleaded by the assessee before him, had however not shown as to how the view taken by the assessing officer was found to be erroneous. We thus are of the considered view that as in the case of the present assessee, the necessary inquiries or verifications for leading to the conclusion that the claim of the assessee as regards the payment of foreign commission on the export sales was in order, were made by the assessing officer, therefore, it can safely be concluded that the order passed by him was not without making inquiries or verifications which should have been made. Still further, as regards the payment of local commission of Rs. 33,000, we have perused the material which was furnished by the assessee during the course of the assessment proceedings, as well as his reply to the notice under section 133(6). We find that the assessee had through out been claiming that the amount of Rs. 33,000 was paid to Shri Pratap Singh towards supervision charges and formed part of his salary. We have given a thoughtful consideration to the aforesaid facts in the backdrop of the material available on record and are of the considered view that the assessing officer only after necessary deliberations on the aforesaid claim of the assessee had accepted the same. We are of the considered view that now when the assessing officer after necessary deliberations had accepted that the payment made to Sh. Pratap Singh was by of salary, therefore, the provisions of section 194H contemplating an obligation for deduction of tax at source on payment of commission was not attracted. We are of the considered view that the observation of the Principal Commissioner that the amount paid to Sh. Pratap Singh was by way of commission and not salary, on which the assessee had defaulted to deduct tax at source, without pointing out as to on what basis he had so concluded, and as to what all inquiries or verification the assessing officer should have made, thus, cannot be accepted. We are of the view that now when a plausible view had been arrived at by the assessing officer accepting the claim of the assessee that the amount paid to Shri Pratap Singh towards supervision charges was by way of salary, therefore, the order passed by the assessing officer could not have been faulted with by holding that the same was erroneous in so far as it was prejudicial to the interest of the revenue. We thus are of the view that the assumption of jurisdiction by the Principal Commissioner to revise the assessment order passed by the assessing officer, even in respect of the issue of payment of commission to Sh. Pratap singh cannot be sustained and is liable to be vacated. We thus in the backdrop of our aforesaid observations are of the considered view that now when the assessing officer after making necessary inquiries and verifications which should have been made by him in the course of the assessment proceedings and the queries raised vide notice under section 133(6), had arrived at a plausible view, which we are afraid the Principal Commissioner had not been able to show as to how the same was erroneous, nor as to what all inquiries and verification leading to a contrary view should have been made by him, therefore, are unable to persuade ourselves to be in agreement with the Principal Commissioner that the order passed by the assessing officer under section 143(3) was erroneous in so far it was prejudicial to the interest of the revenue, therein rendering it liable to be revised under section 263 of the Act. We may further observe that we are in agreement with the contention of the learned A.R that merely because the assessing officer had not referred about the inquiries and verifications carried out by him in respect of the issue under consideration in the body of assessment order, the same would not vest jurisdiction with the Commissioner to revise the order, as long as such exercise so carried out by the assessing officer can be gathered from the record. We find that our aforesaid view is fortified by the judgments of the Hon’ble High Court of Bombay in the case of CIT v. Fine Jewellery (India) Ltd. (2015) 372 ITR 303 (Bom) : 2015 TaxPub(DT) 1385 (Bom-HC), CIT v. Gabrial India Ltd. (1993) 203 ITR 108 (Bom) : 1993 TaxPub(DT) 1357 (Bom-HC) and MOIL Ltd. v. CIT-1, Nagpur (2017) 396 ITR 244 (Bom) : 2017 TaxPub(DT) 1548 (Bom-HC). We thus in the backdrop of our aforesaid observations are of a strong conviction that the Principal Commissioner had traversed beyond the scope of his jurisdiction and revised the order passed by the assessing officer under section 143(3), dated 29-1-2015, which as observed by us hereinabove, was passed by the assessing officer after making the necessary inquiries and verifications in respect of the issues under consideration.”
9.9. In view of the above discussion, we notice that the assessee has submitted the written submissions on agricultural activities and filed the case law claiming that the activities of the assessee are exactly similar to M/s. Prabhat Agri Biotech Ltd. (supra). This was not disputed by learned Commissioner. Further, assessee brought to our notice that assessing officer has asked for various details including the lease details on the date of hearing (email sent by the Authorised Representative to the company after hearing with the assessing officer on 6-1-2015). In our considered view, the assessment order need not discuss all the points, but, assessing officer or assessee should bring on record that assessing officer has made enquiry and relevant information was submitted before him. In our view, the claim of the assessee, on the agricultural activity particularly peculiar, as in the case of assessee, assessing officer should have called for the leased agreement with the farmers and evaluated how the activities of the assessee are exactly similar to M/s. Prabhat Agri Biotech. No doubt assessing officer asked for the information, but, there is no record that assessee has actually submitted that before the assessing officer. It clearly shows that assessing officer has not made enquiry in this case, but, merely accepted the contention of the assessee.
9.10 Further, in our view, no doubt, assessing officer has not applied his mind, but, the Commissioner has not established how the order of assessing officer is prejudicial to the interests of revenue. Looking at the facts submitted before us and the findings of Hon’ble Jurisdictional High Court that the seeds cannot be produced without basic agricultural activities, in our view, Commissioner should not stop merely on finding that the order is erroneous but also has to establish that the order of assessing officer is prejudicial to the interests of revenue.
In the given case, the only missing link is the verification of lease agreement with the farmers and activities whether it is similar to the Prabhat Agri Biotech or not. This could also be verified by learned Commissioner and established that it is prejudicial to the interests of revenue. Learned Commissioner has failed in this aspect. This is in line with the decision of Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd., (2000) 243 ITR 83 (SC) : 2000 TaxPub(DT) 1227 (SC) and CIT v. Green World Corporation (2009) 314 ITR 81 (SC) : 2009 TaxPub(DT) 1713 (SC). Therefore, in our view, no doubt, the assessment order is erroneous but not prejudicial to the revenue considering the case law submitted before us. As per the Hon’ble AP High court, seeds cannot be produced without basic agricultural activities. The assessee has sold the seeds and must have carried out the agricultural activities in order to produce the seeds. Hence, we set aside the order of Commissioner passed under section 263 of the Act and the order of the assessing officer is restored. Accordingly, ground raised by the assessee are allowed.
10. In the result, appeal of the assessee is allowed.