Agricultural Operations Cannot Be Dubbed As ‘Commercial Activity’ Merely For Commercially Selling Hybrid Seeds And Open Pollinated Seed Varieties: ITAT

The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) has held that when agricultural activity is conducted and seeds are produced, merely because the seeds were sold commercially, the basic agricultural operations also cannot be dubbed "commercial activities" and not ‘agricultural activities’.

The bench of K. Narasimha Chary (Judicial Member) and Rama Kanta Panda (Accountant Member) have observed that hybrid and open-pollinated seeds are products of agricultural activity.

The respondent/assessee is in the business of producing hybrid seeds and open-pollinated seed varieties of various crops like cotton, paddy, maize, sunflower, bajra, wheat, jowar, vegetables, etc. It is carrying out agricultural operations in the whole of India. Since it is not possible for the assessee to own all the land as required for the purpose of its agricultural operations, it has accordingly taken certain land on lease from farmers and has also availed itself of the services of farmers by entering into seed production agreements for the usage of their land. The farmers are provided with foundation seeds for carrying out agricultural activities and cultivation for the multiplication of seeds under the guidance, specifications, and supervision of the assessee.

The farmers are required to deliver the final hybrid seeds, including unutilized foundation seeds, to the assessee. In lieu of the activities, the assessee agrees to pay the farmers compensation for land usage and reimbursement of cultivation expenses and service charges as per the terms of the agreement, and the entire risk and reward of growing the hybrid seeds with regard to the agricultural activities and cultivations are entirely borne by the assessee.

The Assessing Officer was of the opinion that the assessee only carried out scientific and technological processes on the seeds and multiplied them in farmers’ fields so as to derive commercial income from the sale of such modified and processed seeds. In order to aid the process of multiplication in larger quantities, the assessee entered into an agreement with farmers to carry out such a specialized job through a contract.

The assessee company is neither cultivating the seeds nor deriving income from agriculture. The activity of the assessee is integral and composite, right from the research and development to the final marketing and sale of hybrid seeds, which involves several stages, and the first few stages cannot be isolated and termed in by the assessee company. The definition of agriculture as contemplated in Section 2(1A) does not cover the activity of foundation seed production by the assessee, just because the assessee is undertaking basic agricultural operations like sowing, weeding, irrigation, inter-cultivating, etc., and that such agricultural activities are only incidental to the main activity of production of foundation seed.

According to the Assessing Officer, the assessee departed from the basic agricultural operations and indulged in the production of the parent seeds by planned scientific and specialized procedures, apart from the fact that the assessee itself is not carrying out the agricultural operations, but the farmers are carrying out the activity of multiplication of parent seeds under the contractual obligation with the assessee. The Assessing Officer disallowed the claim of deduction under Section 10(1).

The tribunal dismissed the appeal of the assessee and noted that the complaint of the learned Assessing Officer is that merely because the assessee is conducting activities like sowing, weeding, irrigation, inter-cultivation, etc., the same cannot be considered agricultural operations under Section 2(1A) of the Act because the assessee conducts activities as incidental to the main activity of producing foundation seeds, which is a commercial activity in nature.

Case Title: Dy. Commissioner of Income Tax Versus M/s. Pravardhan Seeds Pvt. Ltd.

Case No.: ITA No. 2091/Hyd/2017

Date: 26/04/2023

Counsel For Appellant: P. Murali Mohan Rao

Counsel For Respondent: Sunku Srinivas