ORDER
R.M. Mehta, Accountant Member
1. The following effective ground is raised in this appeal preferred against the order of the CIT(Appeals):
The learned CIT(A) has erred in law in holding that the assessee company satisfies the conditions prescribed under Section 80HHA(2) and under Section 80-1 (2) of the I.T. Act.
2. The respondent in this case is a Private Limited Company and the asst. year involved is 1983-84 with the previous year ending 30th September, 1982. The ITO in the course of the assessment proceedings rejected the claim for deduction under Sections 80-1 and 80HHA of the I.T. Act, 1961. In doing so he recorded the following reasons:
3. The company has claimed deduction Under Section 80-1 and 80HH of I.T. Act. The company has claimed that their business is of processing of seeds and therefore they are eligible for deduction. The company has given a detailed note about its activities. It is stated that the company purchase foundation seeds and sell it to farmers for growing hybrid seeds. The company renders technical advice and managerial guidance. After the produce is harvested, the samples are collected and tested for purity, viability and moisture content If samples are approved, the seeds are purchased. If seeds are than graded and claimed by mechanical process and sorted out in three categories, they are then treated with mixture of chemicals and mixed mechanically as a result of which chemical mixed is coated on seeds. The seeds are then packed.
4. It is claimed that their work is covered by processing of goods and therefore they are eligible for deduction under Section 80-1.
5. From the above facts, it is seen that there is no manufacture or processing activity is involved. Raw material and finished produce remains the same it seeds. Besides growing of foundation seeds on field is done by farmers. It cannot be taken as an activity of the company. The company has sold foundation seeds and has purchased hybrid seed. This activity is only a trading activity. The activity of the company only starts from purchase of hybrid seeds. The only activity done is senting of seeds and mixing with chemicals. This activity cannot be called by processing or manufacturing activity. As the company has not carried out any processing or manufacturing activity, it cannot be called an industrial undertaking engaged in manufacture or processing of an article or a thing. As primary condition is not fulfilled no deduction under Section 80-1 is admissible. Besides, conditions for 80HH are also similar. Claim for deduction under Section 80HH is also rejected.
3. The CIT (Appeals) however accepted the assessee’s claim on both the points and directed the ITO to allow the necessary relief. In doing so he observed as under:-
The matter has been discussed at length with company’s representative. The facts of the case are like this. The company purchases foundation seeds (male and female) and as per the agreement these are distributed to the farmers on contract basis. The supervision of the appellant company and that of the State Government on these farmers does also exist. The chemicals are purchased in mixing with seeds by the appellant company. The technical know-how about the processing aspect is also controlled by the company. The perusal of the profit and loss account also shows that the appellant company has debited expenses incurred by it for the purchase of chemicals as well as on processing of the seeds. This has been done from year to year. During this year since the company has no machinery of its own, it took machinery on hire and got the processing done in its own factory premises. Whereas in the subsequent year the company has installed the plant and machinery in its own factory building for the purposes of processing the seeds. I have also gone through the Memorandum and Articles of Association of the appellant company as well as the nature of the contract and agreement with the farmers. I have also gone through the sequence of operations, stages of processing and details of various chemicals and acids purchased by the appellant company. There is no doubt that the company is doing the processing work. It cannot be said that the company is doing only the trading activity. In this background, the appellant is entitled for relief under Section 80HHA and 80 I of the Act.
4. It is in the aforesaid circumstances that the Revenue has come up in appeal before the Tribunal. The learned DR at the outset supported the order of the ITO. He in fact made submissions thereafter on lines identical to those as had weighed with the ITO in rejecting the claims of the assessee. He highlighted the fact that the assessee was not engaged in any processing or manufacturing activity and all that it did was to purchase and sell seeds. According to him the fact that some consultation and guidance was provided to the farmers in the growing of the seeds did not make any difference whatsover since this by itself did not bring into existence any processing or manufacturing activity. He made an impassioned plea for the rejection of both the claims and the confirmation of the order of the I.T.O.
5. The learned counsel for the assessee, on the other hand, strongly supported the order of the CIT(A). At the outset he invited our attention to para 2 of the order of the CIT( A) (already reproduced earlier) for the submission that the facts stated therein had not been challenged on behalf of the Revenue. His subsequent arguments proceeded on lines identical to those as had been advanced before the first appellate authority. It was the submission that the company was engaged in a wide range of activities right from the time when it entered into an agreement with the farmers for growing seeds and up to the time when the seeds were put in the market as a marketable commodity. He invited our attention to pages 13 & 14 of his paper book wherein were appended the details of “processing expenses” amounting to Rs. 1,82,997 incurred by the assessee during the period under consideration. This was shown with a view to highlight the magnitude of the activities carried on by the assessee as also the nature of the activities, namely, not being merely confined to purchasing and selling seeds. The learned counsel also invited our attention to the Memorandum and Articles of Association of the company with a specific reference to the main object of the company. It was submitted that the aforesaid main object indicated numerous activities to be carried on by the company with a view to achieve the said main object and a reading of the same clearly showed that it was not merely an activity of purchasing and selling of seeds. The learned counsel also referred to the audited accounts for the period under consideration with specific reference to the following extracts from the Director’s report:
Production performance:
Your company produced hybrid seeds of Bajra, Jowar, Maize, Cotton and Castor to a total cost of Rs. 83.39 lacs during the year. This is 3.67-fold increase over previous year. The production programme were arranged in Gujarat, Maharashtra and Andhra Pradesh. It is significant to note that your company produced parent seeds of Bajra and Castor hybrids.
Sales performance:
Your company could achieve sales of Rs. 94.47 lacs during the year mainly hybrid seeds of Bajra, Jowar, Maize, Cotton and Castor. This is 4.39-fold increase over previous year. The marketing was undertaken in Gujarat, Maharashtra, Rajasthan, Delhi and Andhra Pradesh. The Rajasthan State Seeds Corporation Ltd., and Maharashtra State Seeds Corporation Ltd., were served by your company by providing certified seeds.
[Emphasis supplied by us]
6. The submission which was made thereafter was that the facts of the present case clearly indicated a wide range of activities being carried on by the assessee and which entitled it for the relief under both the sections, viz. 80HHA and 80-1. It was also the further submission that all other clauses of the said sections stood duly complied with and there was no dispute between the parties on that score. According to the learned counsel even if the activities of the company were categorised under the term “processing” it would still be entitled to the claims in question. The learned counsel in support of the facts of the case and his own submissions placed reliance on the following authorities:
(i) Tarai Development Corporation v. CIT [1979] 120 ITR 342 (All.).
(ii) CIT v. Marwell Sea Foods [1987] 166 ITR 624/34 Taxman 52 (Ker.).
(iii) GA. Renderian Ltd. v. CIT [1984] 145 ITR 387 (Cal.).
(iv) Hemsons Industries v. ITO [1987] 23 ITD 364 (Hyd.).
(v) Marwell Sea Foods v. ITO [1981] 11 TTJ (Coch.) 22.
(vi) Raj Kumar Singh & Co, v. ITO [1986] 24 TTJ (All.) 458.
(vii) Bajoria Family Trust v. First ITO [1985] 21 TTJ (Nag.) 277.
7. The learned DR in his reply contended that even on the presumption that the assessee was carrying on a processing activity, the crucial thing to be seen was whether it was engaged in any manufacturing or production activity. According to him the activities of manufacture and production assumed importance vis-a-vis the provisions of Sections 80HHA and 80-1. It was the further submission that the assessee itself was not engaged – in all the activities in question and this was a necessary prerequisite for entitlement to the claims in question. It was further stated that the assessee was merely engaged in doing the work of supervision and guidance and the “processing” activities alleged to be carried on by it were merely the putting of chemicals on the seeds and this was an activity of “preservation” and not that of “processing”. It was also the contention that the agreements for growing seeds with the farmers were placed for the first time before the CIT(A) and these had not been furnished to the ITO, The learned DR also made an attempt to distinguish the decision of the Allahabad High Court in the case of Tarai Development Corporation (supra) on the ground that in that case the farmers were the shareholders in the company but that this was not the situation as obtaining in the present case. In support of his arguments he placed reliance on the decision of the Madras High Court in the case of Addl. CIT v. Chillies Export House Ltd. [1978] 115 ITR 73.
8. We have examined the rival submissions and have also perused the orders of the authorities below. The paper book furnished by the assessee’s counsel as also the decisions cited by the parties have been duly considered. At the outset we may mention that after hearing the parties, we directed the learned counsel for the assessee to furnish a note detailing therein the factual aspects of the case. A copy of this note was also directed to be supplied to the DR. There has been no request from the side of the Revenue to be heard in respect of the said detailed note furnished on behalf of the assessee. In other words we proceed to record that the facts stated in the note remain unchallenged and are the accepted facts between both the parties. We now proceed to state these undisputed facts:
NAVBHARAT SEEDS PRIVATE LIMITED, a company registered on 23rd April, 1981 under the Companies Act 1956 having its registered office at 4, Sarvodaya Commercial Centre, Salapose Road, Ahmedabad. The company is engaged in production, processing and marketing of various hybrid seeds of different crops such as hybrid Bajra, hybrid cotton, hybrid jowar, hybrid maize and hybrid castor etc. The activities of the company comprises of the following:-
(1) Production of hybrid seeds
(2) Processing of hybrid seeds
(3) Testing and quality control
(4) Marketing of seeds.
All the above activities are conducted as per the “Indian Minimum Seeds Certification Standards” stipulated by Central Seed Certification Board, Department of Agriculture and Co-operation, Ministry of Agriculture, Government of India. The company is producing, processing and marketing certified seeds. Gujarat State Seeds Certification Agency inspect the seed production field, processing plant and test seeds in notified Government laboratories and issue tags for each and every bag.
(1) Production of Hybrid Seeds.
(a) Company is producing hybrid seeds through its contract growers. Contract growers are selected according to yield potentiality of the area, availability compact area irrigation facility and plots having no isolation problem (isolation distance). The contract is entered into with each and every sub-producer in the beginning of season. Accounting period for this is 1-10-81 to 30 9 82. However agreement with sub producer has got to be entered into before commencement of the season concerned. Accordingly two specimen agreements dt. 26 5 81 and 2681 which were effectively in force in this accounting year are enclosed herewith along with English Translation (appendix 1),
(b) After selection of contract growers and seed plots cropwise, company distribute foundation seed i.e. male and female parents through its technical staff, to the sub-producers. The foundation seeds are distributed to contract growers free of cost or at concessional rate or at cost depending on contractual agreement.
Actually it is not a sale but only an account adjustment for joint venture of seed production. Each and every seed plot so organised is to be registered with Government Seed Certification Agency in the name of Company as main producer and farmers as sub producer.
(c) Technical guidance: Alter distribution of foundation seeds, company’s technical staff give guidance to the farmers about the planting of male and female plants in rows (planting ratio) and inspect the seed plots so organised time to time. Company’s technical staff supervise the work of rogueing, crossing and other cultivation practices as per the crop. Rogueing, crossing and isolation is very important in seed producing good yield of superior quality. Such plots which meets minimum seed certification standards, prescribed by Government of India are harvested in the presence of company’s representative and Government Seed Certification Agency staff. The seeds thus produced is called as hybrid seeds that is produced by crossing of male and female seed plants. After harvesting threshing, the samples arc drawn by the staff of State Seed Certification Agency and tested at Government Seed Testing Laboratories for germination, physical purity and genetic purity. If this seed conforms to the standards prescribed by the Government of India in the Minimum Seed Certification Standards then it will be certified seed.
(2) Manufacturing Process:
Seed processing sequence and equipment:
(a) Moisture meter: Testing moisture content to decide need for drying.
(b) Air screen cleaner: to clean the seed.
(c) Gravity separator: To upgrade the quality of seed.
(d) Slurry treater: To treat the seed with chemicals for protection against insects & micro organisms.
On receipt of the raw seed from the farmer’s field the seeds are dried and tested for moisture content. Afterwards the seeds are cleaned on Air Screen cleaner. This process remove immature seed, dust particles, plant materials, off size seed diseased or insect damaged seed etc. After basic cleaning the seeds are upgraded on Gravity separator to improve the quality of seed by using weight component difference between seeds. The seed then treated with 1% mercurial fungicides and DDT in Slurry Seed Treater. This is done to protect seed against seed borne and soil borne micro-organisms.
In case of hybrid cotton seed raw hybrid seed is treated in a tank with concentrated H2SO4 This process will dissolve fuzz, lint and wax of seed coat. After that with lime solution the seed is neutralised. These process will make the seed free flowing. The same seed is then run on Air Screen Cleaner, Gravity separator and slurry treater to improve the quality of seed.
(3) Testing and quality control:
At each and every stage of seed production and processing technical staff of the company take appropriate quality control measures. The seed processed as above will be treated for:
(a) moisture content
(b) germination
(c) physical purity
(d) genetic purity
These testing is done by Gujarat State Seed Testing Laboratories (Government owned) as well as company’s own laboratory. On getting satisfactory test results the seed will be declared as “certified seed” by State Seed Certification Agency.
(4) Marketing:
The seed on getting satisfactory test results are marked with blue tag (Enclosure II) issued by Gujarat State Seed Certification Agency. As per seed Act, 1966 the Seed container and tag must have following:
On tag and bag:
DO NOT USE FOR FOOD, FEED AND OIL PURPOSE” “POISON TREATED WITH 1 % PMA FUNGICIDE.
The hybrid seeds are marked by the company mainly in the States of Gujarat and Maharashtra through its distributors/dealers network.
9. We also reproduce an English Translation of “Joint Agreement for Seed Production” between the assessee and a farmer:
Whereas the parties (Main producer and sub producer) have agreed to a scheme of seed production programme to be jointly undertaken, as per the following terms and conditions:
1. The sub-producer shall get apart his land for hybrid cottonseed production on an area of 0-10 gunthas survey No. 6 which will be known as the reserved area which will be made available in the Kharif season of year 1981.
2. The above referred seed production programme shall be registered with Gujarat State Seed Certification agency, in which main producer will be Navbharat Seed (P.) Ltd. and enjoined by Sub-producers. Registration charges for both will be paid by main producer.
3. The main producer undertakes the responsibility of providing technical guidance, arranging male and female foundation seed, certification work, arrangement for ginning and successful completion of the programme.
4. The Sub-producer shall set apart the required area of levelled, fertile land with facilities for healthy seed production.
5. Main producer will provide male and female foundation seed for this programme to the Sub-producer, which is to be used only for the above referred seed programme.
6. Sub-producer shall pay for the expenses for land preparation, irrigation, sowings, interculturing, fertilizers, plant protection, pesticides, rogueing, cross pollination and other expenses.
7. Main producer will provide guidance by technical personal to maintain the purity of the seed, and instructions from the seed certification agency shall be observed and implemented by the sub-producer and accordingly rogueing and removal of selfed bolls would be arranged and paid for by the sub-producer.
8. Sub-producer will co-operate and follow the instructions given for maintaining the purity of the above referred seed production, by the Seed Certification Agency and officials of the main producer.
9. Sub-producer will bring the seed of cotton at his cost for ginning and arrange for ginning and grading under supervision of main producer.
10. 5 samples each of 150 grams will be drawn from the seed for testing, out of which 3 samples will be for certification Agency, and one sample each for main producer and sub-producer.
11. The seed, meeting certification standards and obtaining the certification tag, would come to the share of main producer and other portion of the crop would go to the share of sub-producer.
12. Certification charges would be borne by the main producer. However, if the seed is not meeting the standard, the main producer will be entitled to get the reimbursement towards the expenses incurred at the rate of Rs. 5 per kg. from the sub-producer.
13. Sub-producer would be entitled to get an amount towards expenses incurred on rent of land, towards his labour and other expenses incurred from the main branch at the rate of Rs. 45 per kg. of certified seed. This amount would be in addition to the amount obtained in terms of clause 11 above in respect of other portion of the crop coming as his share.
14. In this production programme, main producer is involved right from the first stage and therefore he will be responsible for any legal responsibility arising out in future, as producer.
15. Main producer is free to dispose of certified seed which comes to his share. Similarly sub-producer is free to dispose of that portion of the crop which comes to his share.
16. In case of natural calamity if hybrid seed production fails, main producer and sub-producer will bear their respective expenses incurred by them and they would not make claims on each other for such expenses.
The above referred terms and conditions are mutually agreeable and binding on the main producer and sub-producer and their successors, heirs and assigns.
10. A reading of the aforesaid facts as also the agreement clearly shows that the activities carried on by the respondent are not merely confined to the purchase and sale of seeds. It is engaged in a wide range of activities starting from the growing of the seeds, their sampling categorisation, preservation as also the processing thereof. These aspects of the matter have been clearly brought out by the factual note furnished on behalf of the assessee (already reproduced). The respondent company in the course of the growing activity by the farmers not only provides guidance and assistance from day to day but even thereafter is engaged in the complicated activities of testing, quality control and the final activity of marketing the seeds through its distributors and dealers. The activities of the company are more or less identical to those as considered by the Allahabad High Court in the case of Tarai Development Corpn. (supra). The distinguishing feature sought to be brought out by the learned DR does not appear to be correct. The other arguments advanced by the DR are also not of any avail vis-a-vis the case of the revenue since these run contrary to the various other decisions relied upon by the assessee’s counsel including those of the Tribunal.
11. In the final analysis we uphold the order of the CIT(A) vis-a-vis the claims of the assessee under Sections 80HHA and 80-1.
12. The appeal is dismissed.