The Income Tax Appellate Tribunal (ITAT), Rajkot Bench, has held that income earned from producing hybrid seeds on agricultural land taken on lease is agricultural income exempt from tax when the seed company exercises effective control over the land, bears the cultivation expenses and risks, supervises the agricultural operations and owns the entire produce.
The Bench of Dr. Dinesh Mohan Sinha (Judicial Member) and Dr. Arjun Lal Saini (Accountant Member) observed that the use of scientific and technically advanced methods for producing hybrid seeds does not change the agricultural character of the activity. It stated that agriculture cannot be restricted to primitive or conventional methods of cultivation and must be understood in light of technological advancements.
“The use of modern machinery, hybrid seeds, or advanced irrigation systems does not convert traditional farming into a non-agricultural activity,” the Tribunal observed, holding that the essential character of the company’s operations remained rooted in agriculture.
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The appellant/assessee filed its income tax return for Assessment Year 2023-24 declaring a total income of ₹4.34 crore. The return was subsequently selected for scrutiny through the Computer Aided Scrutiny Selection system.
The stated grounds for scrutiny were high creditors or liabilities and substantial payments made to entities not registered under the Goods and Services Tax regime.
During the assessment proceedings, the Assessing Officer accepted that no variation was required on the issue of payments to entities not registered under GST. The company had explained that it was engaged in the production and processing of seeds, including seeds produced through farmers who were not registered under GST, and that seeds were not subject to GST.
The Assessing Officer, however, examined the agricultural income declared by the company. The company had disclosed gross agricultural receipts of ₹104.21 crore and claimed expenditure of ₹90.51 crore, resulting in net agricultural income of approximately ₹13.69 crore.
The officer treated this amount as business income, reasoning that the agricultural activity formed an integral part of the company’s commercial seed business.
In addition, the officer made an addition of ₹23,643 under Section 68 for outstanding creditors, an addition of ₹8.95 lakh relating to differences in creditor balances and a disallowance of ₹6,444 under Section 40(a)(ia) of the Income Tax Act.
The Commissioner of Income Tax (Appeals) upheld the additions, following which the company approached the Tribunal.
Before the ITAT, the company submitted that it was engaged in producing, processing and selling hybrid seeds of grains, pulses and vegetables. It also maintained an in-house research and development facility for developing hybrid seeds, approved by the Department of Scientific and Industrial Research.
For producing seeds, the company entered into seed production agreements with landowners and took agricultural land on lease. Farmers and labourers carried out cultivation under the company’s directions and supervision.
The company claimed that it incurred expenses relating to land preparation, irrigation, sowing, fertilisers, pesticides, labour, crop protection, harvesting and other agricultural operations. It also appointed coordinators and production supervisors to monitor the cultivation process.
According to the company, it exercised control over the area placed under cultivation, the quantity and pattern of seeds to be sown, soil testing, cultivation inputs, detasseling and the monitoring of crops.
The entire agricultural produce belonged to the company under the agreements. The landowners and growers had no right or lien over the produce. The company also bore the risk of crop failure, including losses caused by adverse weather conditions, floods or heavy rainfall.
The company contended that the farmers and labourers performed the agricultural operations exclusively on its behalf. Therefore, the fact that the physical work was performed through farmers or labourers did not mean that the company had not undertaken agricultural operations.
The Revenue opposed the exemption and argued that the company had not itself performed the basic agricultural operations of tilling, sowing and harvesting.
It alleged that the seed production agreements were colourable devices intended to present a commercial procurement operation as agricultural activity. According to the Revenue, the company merely provided technical instructions or supervision and procured seeds from farmers at predetermined prices.
The Revenue further contended that the agreements did not give the company sufficient possession or derivative interest in the agricultural land. Reliance was placed on decisions including CIT v. Namdhari Seeds Private Limited and the Supreme Court’s ruling in CIT v. Raja Benoy Kumar Sahas Roy.
After examining the seed production agreements, the Tribunal found that the farmers had agreed to provide the company exclusive use of their agricultural land for producing crops.
The company paid lease rent for the land and reimbursed the growers for agricultural expenditure relating to land preparation, irrigation, sowing, fertilisation, pesticides, weeding, harvesting and threshing.
The agreements also permitted the company to direct the farmers to perform agricultural activities considered necessary for producing better-quality seeds. Coordinators appointed by the company supervised and directed the farmers and growers.
The Tribunal noted that the company had beneficial use of the land for carrying out agricultural operations. The produce belonged entirely to the company, while the financial and production risks were also borne by it.
According to the Tribunal, these terms established that the company had effective control over the land and the agricultural operations. It was not necessary for a person claiming agricultural income to own the land. A sufficient interest in leased agricultural land, coupled with actual agricultural operations, was enough.
The Tribunal said that the company paid water expenses, labour charges, fertiliser expenses, growing expenses, harvesting expenses and other expenditure required for cultivation. It also had the exclusive right to use the land.
The Bench accordingly held that the company was an agriculturist for the purposes of the Income Tax Act and that the income arising from the agricultural operations could not be assessed as business income.
The Assessing Officer had argued that the basic agricultural operations were performed by independent farmers and not personally by the company.
Rejecting this reasoning, the Tribunal held that the farmers and seed growers carried out the agricultural activities on behalf of the company and in accordance with the guidance and supervision of its employees and coordinators.
The Tribunal observed that neither the law nor practical considerations require every agricultural operation to be physically performed by the person claiming the exemption.
The company was involved throughout the production process, beginning with the selection of suitable agricultural land and farmers. Its employees evaluated the quality of the land, soil, location and climatic conditions and conducted soil testing.
Foundation seeds were supplied to the farmers through production supervisors. The company provided cultivation inputs such as pesticides and insecticides and issued directions concerning the preparation of soil beds and the sowing of foundation seeds.
It also determined the area to be cultivated, the quantity of seed to be sown and the sowing pattern. Agricultural activity was continuously monitored by production supervisors and coordinators.
The Tribunal therefore held that the finding that the company had not carried out basic agricultural operations was without merit.
The Assessing Officer had also sought to distinguish hybrid seed production from conventional grain production on the ground that producing seeds involved highly technical methods.
The Tribunal rejected this distinction and observed that the statutory definition of agricultural income did not freeze agriculture in a “time warp” or confine it to primitive methods of cultivation.
It stated that modern agriculture encompasses scientific applications such as hybrid seed development, genetic selection, controlled-environment cultivation, precision farming and biotechnology.
The application of sophisticated scientific methods to improve productivity or efficiency does not alter the agricultural character of the underlying operation, the Bench held.
The Tribunal consequently found the contention that technically advanced seed production could not produce agricultural income to be legally unsustainable.
The Tribunal also referred to the agricultural production expenditure disclosed by the company.
The expenditure included approximately ₹21.21 crore towards agricultural land lease rent, ₹24.68 crore towards land preparation, ₹18.72 crore towards fertilisers and pesticides, ₹24.68 crore towards labour wages, ₹16.87 crore towards other farm expenses and ₹1.70 crore as incentives to labourers and farmers.
The total production expenditure was stated to be approximately ₹107.88 crore.
The Tribunal noted that the lease agreements separately quantified the rent and expenses relating to different agricultural activities. Details of receipts from the sale of different kinds of seeds were also disclosed in the schedules forming part of the audit report.
The Tribunal distinguished the Karnataka High Court’s decision in Namdhari Seeds Private Limited, which had been relied upon by the Revenue.
It noted that, in that case, the assessee had not taken agricultural land on lease, paid lease rent or incurred the cultivation expenditure. The risk relating to the quality, quantity and failure of the crop remained with the farmers.
In the present case, however, the company had taken land on lease, paid lease rent, incurred the complete cultivation expenditure, exercised control over the agricultural activity and bore the entire risk of crop failure.
The Tribunal also referred to several decisions concerning seed production, including ACIT v. Ajeet Seeds Limited, PCIT v. Nuziveedu Seeds Limited, Nath Bio-Genes (India) Limited, Bayer Crop Science Limited, Advanta India Limited and Profarm Seed India Private Limited.
It concluded that the issue was covered in favour of the company by decisions of various courts and tribunals concerning agricultural income arising from seed production.
“The seeds and other agricultural production were produced by way of agriculture and cultivation and cultivation was done under assessee’s supervision and at its own costs and risks,” the Bench observed.
Accordingly, the Tribunal allowed the company’s ground and deleted the addition of approximately ₹13.69 crore.
The ITAT also deleted the addition of ₹23,643 made under Section 68 in respect of two outstanding creditors.
The liabilities related to professional and compliance services obtained from KM Chauhan & Associates and SD Chotal. The amounts represented ROC filing work, Legal Entity Identifier-related work and government fees.
The company submitted ledger accounts, corresponding accounts and proof that the amounts were paid through banking channels in the subsequent financial year.
The Tribunal held that these were creditors for business expenses and not loans obtained by the company. Since the company had not received any loan from the two parties, the nature of the transactions did not justify the addition made by the Assessing Officer.
The subsequent payments also supported the genuineness of the expenditure. The Bench therefore directed the deletion of the Section 68 addition.
The Tribunal further deleted the addition of ₹8.95 lakh arising from differences between balances recorded in the company’s books and balances appearing in the accounts of four creditors.
The company explained that the differences arose because of discounts on purchases, freight expenses, loss of goods during transportation and invoices issued at the end of the financial year but recorded in the following year.
The Tribunal noted that the company had recorded a lower amount of liability in its books. It was not a case where an excessive liability had been recorded and subsequently written off.
It further observed that Section 41(1) could be invoked only where there was concrete evidence of remission or cessation of a liability. Remission would require a creditor to forgive the debt, but there was no evidence that any creditor had waived the amount payable by the company.
The differences arose from accounting and reconciliation issues rather than the extinguishment of any liability. The company had furnished reasons for the mismatches, which the Assessing Officer had failed to properly appreciate.
The addition of ₹8.95 lakh was therefore deleted.
The company did not press its challenge to the disallowance of ₹6,444 under Section 40(a)(ia), and that ground was dismissed. Its ground challenging the validity and expansion of the limited scrutiny was also dismissed because it was not argued by either party.
The appeal was consequently partly allowed.
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