Contract Farming – Whether Agricultural income?

Short Overview Income from contract farming done by assessee cannot be treated as agricultural income and that the assessee is not eligible to claim exemption under section 10(1) in respect of such income.

Assessee-company was in business of cultivation, production and marketing of hybrid seeds. It earned revenue from 3 kinds of activities, namely, (i) growing, processing and sale of seeds from owned lands and leased lands; (ii) growing, processing and sale of seeds from contract farming and; (iii) purchase and sale of imported seeds purchased from market. AO disallowed the assessee’s claim of exemption under section 10(1), which was confirmed by CIT(A). 

It is held that  The High Court in assessee s own case for earlier assessment years held that contract farming done by assessee cannot be treated as agricultural income and that the assessee is not eligible to claim exemption under section 10(1) in respect of such income. In instant case, admittedly, the assessee carried out the activities under the same 3 categories, as considered in preceding assessment years by the High Court and the only income upheld by the High Court to be in the nature of business income was revenue generated from contract farming. However, during assessment year under consideration, the assessee did not provide any details regarding the revenue generated out of each 3 streams. Therefore, the matter was remanded to AO for fresh consideration. Further, the assessee was directed to categorize the income earned by it under the 3 categories and the AO was directed to disallow the deduction claimed under section 10(1) only in respect of the income earned from growing, processing and sale of seeds from contract lands as per the observation of the High Court in the assessee s own case.

Decision: Matter remanded.

 

IN THE ITAT BANGALORE

B.R BASKARAN, A.M. & BEENA PILLAI, J.M.

Namdhari Seeds (P). Ltd. v. Dy. CIT

ITA No. 830-831/Bang/2018

23 September, 2021

Assessee by : Suman Lunkar, C.A

Revenue by : Pradeep Kumar, CIT (DR)

ORDER

Beena Pillai, J.M.

Present appeals arises out of separate orders dated 31-1-2018 passed by the learned Commissioner (Appeals)-5, Bangalore for assessment year 2011-12 and 2012-13 on following grounds of appeal:

ITA No. 831/B/2018

1. The learned assessing officer had erred in passing the order in the manner passed by him and the learned Commissioner (Appeals) has erred in partially confirming the same. The impugned orders being bad in law are required to be quashed.

2. 1 The learned assessing officer has erred in disallowing the exemption claimed Under section 10(1) of the Act to the extent of Rs. 10,16,14,493.00 and the learned Commissioner of Income tax (Appeals) has erred in confirming the same. The exemption as claimed by the appellant is to be allowed as claimed for.

2.2 In any case, the authorities below have erred in not following the binding directions of the Honorable High court and erred in denying the benefit of exemption claimed under section 10(1) of the Act by the appellant. On proper appreciation of facts and the judicial decision rendered by the honorable High court, the appellant is eligible for substantial relief with respect to agricultural income and same is to be granted to the appellant.

2.3 In any case and without prejudice, the various observations made/conclusions drawn by the authorities below being totally contrary to available facts and the law applicable are to be ignored.

3. The learned assessing officer had also erred in levying Interest under section 234B and Interest under section 234D of the Income Tax Act, 1961. The interest having been levied erroneously has to be deleted.

4. In view of the above and on other grounds to be adduced at the time of hearing, it is requested that the exemption/deduction under section 10(1) be allowed, relief as granted by the Honourable High court be allowed to the appellant and interest levied be also deleted.

ITA No. 831/B/2018

1. The learned assessing officer had erred in passing the order in the manner passed by him and the learned Commissioner (Appeals) has erred in confirming the same. The impugned orders being bad in law are required to be quashed.

11 The learned assessing officer has erred in disallowing the exemption claimed under section 10(1) of the Act to the extent of Rs. 14,61,47,901.00 and the learned Commissioner (Appeals) has erred in confirming the same. The exemption as claimed by the appellant is to be allowed as such.

2.2 In any case, the authorities below have erred in not following the binding directions of the Honourable High court and erred in denying the benefit of exemption claimed under section 10(1) of the Act by the appellant. On proper appreciation of facts and the judicial decision rendered by the Honorable High Court, the appellant is eligible for substantial relief with respect to agricultural income and same is to be granted to the appellant.

2.3 In any case and without prejudice, the various observations made/conclusions drawn by the authorities below being totally contrary to available facts and the law applicable are to be ignored.

3.1 The learned assessing officer had erred in making disallowance under section 14A read write Rule 8D of the Income Tax Act, 1961 to the extent of Rs. 44,33,206.00 and the learned Commissioner (Appeals) has erred in confirming the same.

3.2 On the facts and circumstances of the case the provisions of section 14A read write Rule 8D are not applicable to the appellant. The disallowance as made by applying provision of section 14Abeing erroneous is to be deleted.

3.3 In any case and without prejudice the disallowance is excessive.

4. The learned assessing officer had also erred in levying Interest under section 234B and Interest under section 234D of the Income Tax Act, 1961. The interest having been levied erroneously has to be deleted.

5. In view of the above and on other grounds to be adduced at the time of hearing, it is requested that the suitable exemption/deduction under section 10(1) be allowed and disallowance made under section 14A of Income Tax Act, 1961 be deleted and consequential relief as granted by the Honourable High Court be allowed to the appellant and interest levied be deleted.

Brief facts of the case are as under:

2. The assessee is in the business of cultivation, production and marketing of hybrid seeds. It earns revenue from following 3 kinds of activities:

1. Growing, processing and sale of seeds from owned lands and leased lands;

2. Growing, processing and sale of seeds from contract farming and

3. Purchase and sale of imported seeds purchased from the market.

2.1 At the outset, the learned Authorised Representative submitted that, identical issue has been dealt by coordinate bench of this Tribunal for assessment year 2000-01. She submitted that except for the quantum of disallowance, facts in the present case are same and the issue of disallowance of deduction under section 10(1) was the subject matter of appeal before this Tribunal, which travelled till Hon ble Karnataka High Court and pending before Hon ble Supreme Court at the behest of assessee. She placed reliance on the facts narrated by coordinate bench of this Tribunal by order dated 29-10-2018 in ITA No.1949/Bang/2018 for assessment year 2000-01. For the sake of convenience we are reproducing the facts narrated by this Tribunal as under:

At the outset, it is necessary to record the brief history of the present appeal which is as under:

1. Learned assessing officer passed the original assessment order under section 143(3) on 29-3-2004 making an addition of Rs. 3,84,13,288 by denying exemption under section 10(1) of the Act in respect of agricultural income from contract farming. Learned assessing officer also disallowed provision for guarantee amounting to Rs. 16,21,8. Relevant order placed at page 21-36 of appeal memo

2. Against order passed by learned assessing officer, assessee preferred appeal before learned Commissioner (Appeals) disputed the disallowance made by learned assessing officer in respect of alleged agricultural income of Rs. 3,84,13,288. Learned Commissioner (Appeals) allowed the claim of assessee. Relevant order is placed at page 92-96 of paper book filed on 10-7-2019.

3. Revenue preferred appeal before this Tribunal against the order of learned Commissioner (Appeals). This Tribunal while considering the claim of assessee s observed that 10% of the said income is only attributable to the business of assessee and the balance 90% amounts to agricultural income. This Tribunal thus restricted the disallowance to 10% of Rs. 3,84,13,288 in its order dated 14-7-2006. Relevant order is placed at page 99 to 133 of paper book filed on 10-7-2019.

4. Revenue and assessee further carried the issue before Hon ble High Court. Revenue alleged treatment of Rs. 3,84,13,288 by this Tribunal. The question raised before Hon ble High Court by revenue was as under:

whether the appellate authorities were correct in holding that the activity carried on by the assessee by trading in imported seeds agricultural activity on land taken on lease and contract farming considered agricultural income which was exempt under section 10 (1) of the Act

5. Hon ble High Court in ITA No. 75/2007 (being revenue s appeal) for assessment year 2001-02 has summed up the issue alleged in para 3-6 of its order at page 198 of paper book. Hon ble court framed the question of law to be answered as under:

1. Whether the Tribunal was right in holding that income derived by the assessee from manufacturing of seeds and sale of the same would amount to agricultural income which would be exempt under section 10 (1) of the Act?

2. Whether the Tribunal was right in not taking into consideration the fact that assessee could not have had agricultural land in view of the provision of section 79-A of Karnataka Land Reforms Act?

6. In appeal filed by assessee being ITA No. 284/2007 following question of law was admitted by Hon ble High Court:

whether the Tribunal having held that hybrid seeds produced by the appellant was agricultural produce and income there from these agricultural income, was right in law in holding the process of certification of hybrid seeds produced by the appellant to make it marketable could not be held to be a process originally employed by the cultivator and to that extent the income derived could not be treated as agricultural income as defined under section 2 (1A) of the act?

7. Hon ble High Court while considering the 1st question in revenue s appeal and the question admitted in assessee s appeal opined that, entire amount earned by assessee is to be treated as business income and assessing officer was justified in treating the said sum as income under the head business income. Categorical observation by Hon ble High Court is in para 58 at page 280 of paper book.

2.2 The Hon ble Karnataka High Court in assessee s own case for assessment year 1998-99 to 2004-05 reported in (2012) 341 ITR 342 (Karn) : 2011 TaxPub(DT) 1959 (Karn-HC) had held that contract farming done by assessee cannot be treated as agricultural income and that assessee is not eligible to claim exemption under section 10(1) of the Act in respect of revenue generated from contract farming. For the sake of convenience we reproduce para 58 of the order passed by orderable Karnataka High Court in this regards:

58. Therefore the view of the 1st appellate authority that hundred percent of the operations up to conversion of the foundation seed as agricultural activities conducted by the assessee company and therefore income deserves to be exempted from tax under section 10(1) of the act is erroneous. Similarly exemption given by the tribunal for 90% of the income is also erroneous. We opine that the tribunal was justified in treating 10% of the income as business income which involved in processing foundation seeds to certified seeds. In that view of the matter, we hold that the entire income amounts to business income of the assessee and assessing officer was justified in treating the total income as business income.

..

2.3 Adverting to the present facts of the case for year under consideration, it is noted that the authorities below in the present facts of the case made categorical observation that assessee has not provided any details regarding about the revenue generated out of each streams of land. Admittedly, assessee still carries out the activities under the same 3 categories, as has been considered in the preceding assessment years by Hon ble High Court. The only income upheld by Hon ble High Court to be in the nature of business income in the preceding years, is the revenue generated from contract farming.

2.4 We note that the issue needs to be remanded to the learned assessing officer for years under consideration for categorising the income earned by assessee under the 3 categories. For that assessee is directed to file the bifurcation of income generated from growing, processing and sale of seeds from owned and leased lands as well as contract lands. The learned assessing officer is then directed to disallow of the deduction claimed under section 10 (1) in respect of the income earned from growing, processing and sale of seeds from contract lands as per the observations of Hon ble Karnataka High Court (supra) in assessee s own case.

In view of the above discussion, we remand grounds 2.1-2.2 and 4 for assessment year 2011-12 and ground 2.1, 2.2 for assessment year 2012-13 back to the learned assessing officer for recomputing the disallowance under section 10(1), keeping in view the ratio of Hon ble Karnataka High Court (Supra) in assessee s own case

2.5 We note that Ground no.3 for assessment year 2011- 12 is consequential in nature and therefore do not require any adjudication.

3. Ground No. 3.1-3.2 for assessment year 2012-13:

3.1 The assessee raised issue in respect of disallowance made under section 14A read with Rule 8D(iii) of the Act.

It is been submitted that for the year under consideration assessee earned dividend income of Rs. 9,20,744. Assessee did not make any suo moto disallowance in respect of the dividend earned during the year under consideration. The learned assessing officer accordingly, disallowed 0.5% of the average value of investment in the hands of assessee.

3.2 Aggrieved by the order of learned assessing officer, assessee preferred appeal before the learned Commissioner (Appeals).

3.3 The learned Commissioner (Appeals) upheld order of the learned assessing officer by observing that, assessee did not determine any expenditure against the dividend income from the investment, and that the investment was earned on share from a significant share of the total asset of assessee for the year under consideration.

3.4 Before us, the learned Authorised Representative submitted that, the disallowance to be restricted to the dividend income earned by assessee as these investments are old investments and assessee has not made out any fresh investments during the year under consideration.

3.5 On the contrary the learned Commissioner Departmental Representative placed reliance on observations of the authorities below.

3.6 We have perused submissions advanced by both sides in light of records placed before us.

3.7 We note that no suo moto disallowance was made by the assessee towards earning of exempt income. It is also submitted that assessee had not made any fresh investments during the year under consideration that has yielded any dividend income. We are therefore of the view that this disallowance under section 14A read with Rule 8D shall not exceed exempt income earned for the year. This principle is supported by the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd. v. CIT reported in (2015) 378 ITR 33 (Del) : 2015 TaxPub(DT) 3520 (Del-HC), where it was clearly held that disallowance of expenditure under section 14A shall not exceed exempt income earned for the year. Respectfully following the same we direct the learned assessing officer to restrict the disallowance under section 14A read with rule 8D to the extent of dividend income earned by assessee during the year under consideration. Accordingly, this issue raised by assessee stands partly allowed.

Accordingly this ground raised by assessee stands partly allowed.

In the result appeals filed by assessee for assessment years under consideration stands partly allowed.

Order pronounced in the open court on 23-9-2021