Skip to content


Andhra Pradesh State Seeds Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Hyderabad
Decided On
Judge
Reported in(1983)5ITD624(Hyd.)
AppellantAndhra Pradesh State Seeds
Respondentincome-tax Officer
Excerpt:
.....departments in andhra pradesh state while all interstate sales are effected through national seeds corporation. under the four party agreement. it further deploys all its technical staff engaged in seed production technology which visits the farms of the seed growers from the stage of sowing seed, through the highly sophisticated technical aspect of crosspollination and hybriding and ensures that the grain is harvested under ideal conditions. at this stage, the processing staff of the corporation come into picture. it attends to shelling the shanks, dehydrating the seeds, drying them in mechanical dryers and separation of good and bad seeds through the specific gravity separators and treat the seed with poisonous chemicals, under highly scientific conditions. then the certification.....
Judgment:
1. IT Appeal No. 792 (Hyd.) of 1981 is filed by the assessee whereas IT Appeal No. 888 (Hyd.) of 1981 is filed by the department. Since the issues involved in both these appeals are common, they are taken up together and disposed of by this common order for the sake of convenience.

2. The first common ground in these appeals relates to relief under Section 35C of the Income-tax Act, 1961 ('the Act'). For the assessment year 1978-79, the assessee contended that it is entitled to weighted deduction at 120 per cent of the expenditure incurred on processing of seeds. In the assessee's case weighted deduction is claimed in respect of total expenditure of Rs. 13,81,187 and trading and processing expenses of Rs. 5,88,957. The expenditure includes trading and processing expenses, establishment expenses, selling expenses, etc. All the expenditure is debited to profit and loss account and the assessee's sales amounted to Rs. 1,63,86,164 and receipts in respect of services amouted to Rs. 2,32,962. The consideration is fixed taking into account the cost of purchase, trading expenses and other expenses.

The profit and loss account shows a profit of Rs. 1,57,537 after providing for depreciation and income-tax. Hence, according to the ITO, the total expenditure incurred by the assessee is received back in the shape of sale consideration. Further according to him the intention of Section 35C was also explained by Circular No. 6P(LXXVI-66), dated 6-7-1968 [See Taxmann's Direct Taxes Circulars, 1980 Edn., Vo1. 1, p.

186] that where the company received any consideration or compensation for the goods, services or facilities provided whether from the cultivator, grower or producer or from any other source, the expenditure qualifying for the weighted deduction will be computed after excluding such consideration or compensation. He was also of the view that the weighted deduction has been provided only in the case of companies engaged in agro-based industries, i.e., those which use as raw material or process the products of agriculture, etc. and the companies which are engaged in agro-industries such as those manufacturing fertilisers, seeds, pesticides, etc., are not eligible for the weighted deduction envisaged under Section 35C. The ITO was also of the view that the company does mere grading, sorting, cleaning, etc., of the seeds which will not fall under the definition of manufacture or process. According to the ITO relief under Section 35C is eligible only if the concern is manufacturing one. Accordingly, he disallowed the claim made by the assessee under Section 35C.3. On appeal, the Commissioner (Appeals) was of the view that the ITO is not correct in stating that Section 35C would not be applicable to the assessee's case. The Commissioner (Appeals) was of the view that so far as the supply of processed seeds to agriculturists is concerned, the benefit of Section 35C would not be available to the assessee as under the Explanation to Section 35C the amount, if any, received in consideration of such seeds would have to be deducted. The Commissioner (Appeals) further held: However, the benefit under Section 35C would still be available to the appellant so far as other services rendered to agriculturists after deducting from the cost of such services the amount, if any, received by way of consideration for such services or facilities. As the Income-tax Officer held that Section 35C was wholly inapplicable, he did not examine the details filed by the appellant.

As in my view Section 35C would be applicable to the extent of services rendered, the Income-tax Officer should compute the expenditure incurred towards such services after deducting any consideration received and compute the allowance due under Section 35C. The company would not be entitled to Section 35C benefit in respect of depreciation as it is not an expenditure though it is deductible in arriving at the profit. Similarly the company also would not be entitled to the benefit in respect of interest and other overhead expenses and what can be considered under Section 35C would only be the services and facilities rendered to agriculturists and the direct cost in respect of the same. The Income-tax Officer would compute such relief as per the guidelines indicated above and allow the same.

4. Aggrieved, the assessee filed the present appeal contending that the Commissioner (Appeals) erred in not fully allowing the weighted deduction towards the expenditure claimed by the appellant under Section 35C. It was further contended that the Commissioner (Appeals) misconstrued the provisions of Section 35C while observing in para 1 of the appellate order that the depreciation, interest and other overhead expenses were not entitled for weighted deduction.

5. Being aggrieved by the order of the Commissioner (Appeals), the department also filed an appeal before us. The revenue contended that the Commissioner (Appeals) erred in directing the ITO to compute the expenditure incurred towards services rendered to agriculturists after deducting any consideration received and compute the allowance due under Section 35C.6. The assessee is a company in which the public are substantially interested. The assessee claimed deduction under Section 35C with regard to expenses involved in the following activities and functions during the year ending 30-6-1977 as under: According to the assessee, the seeds purchased from the growers and stored in the godowns of the company are processed to see that the seeds are of assumed quality and have potential to germinate and sold to mainly the Government departments in Andhra Pradesh State while all interstate sales are effected through National Seeds Corporation. under the four party agreement. It further deploys all its technical staff engaged in seed production technology which visits the farms of the seed growers from the stage of sowing seed, through the highly sophisticated technical aspect of crosspollination and hybriding and ensures that the grain is harvested under ideal conditions. At this stage, the processing staff of the corporation come into picture. It attends to shelling the shanks, dehydrating the seeds, drying them in mechanical dryers and separation of good and bad seeds through the specific gravity separators and treat the seed with poisonous chemicals, under highly scientific conditions. Then the certification agency certifies, if only the seed produced satisfies several exacting standards laid down by the Central certification agency regarding the physical and genetic purity, moisture percentage, inert matters, etc.

Otherwise the seed produced would be rejected and condemned. Till then the seed belongs only to the growers but not to the corporation. The corporation procures the seeds only after it passes through certification. As such all the services rendered and the entire expenditure incurred in that regard are in the nature of and towards services rendered by the corporation acting as services agency for the growers. In a case where a company is engaged in the processing of any article which is made from or used in such processing as raw materials, any product of agriculture, the benefit under Section 35C would be available to such a company. The learned counsel appearing for the assessee relied upon a decision of the Allahabad High Court in the case of Tarai Development Corporation v. CIT [1979] 120 ITR 342. In that case the Allahabad High Court held that : Therefore, an undertaking engaged in processing of seeds is an industrial undertaking and the income derived from the processing of seeds would be entitled to relief under Section 80J of the Act....

(p. 342) Yet another judgment relied upon by the learned counsel appearing for the assessee was that of the Calcutta High Court as in the case of Indian Leaf Tobacco Development Co. Ltd. v. CIT [1982] 137 ITR 827, wherein it was held that depreciation debited in the accounts was expenditure entitled to weighted deduction under Section 35C. The learned counsel further relied upon the decision in the case of Sri Venkateswara Hatcheries (P.) Ltd. v. ITO [1982] 1 ITD 1077 (Mad.). In that case, the Tribunal allowed the assessee's claim for deduction of agricultural development allowance under Section 35C as the assessee was using raw material product of poultry farm, i.e., eggs. The Tribunal in that case rejected the revenue's contention that the assessee was not manufacturing or producing.

7. On the other hand, the learned departmental representative contended that the judgment of the Allahabad High Court in the case of Tarai Development Corporation (supra) will not be applicable to the facts of this case inasmuch as the judgment therein was rendered in view of Section 80J of the Act. Similarly, the learned departmental representative further pointed out that the case of Sri Venkateswara Hatcheries (P.) Ltd. (supra) will not also be applicable to the facts of this case inasmuch as the facts dealt therein are related to poultry farms. He relied upon the Explanation to Sub-section (1) of Section 35C which reads as under: In computing the expenditure with reference to which deduction under this section is to be allowed, the amount, if any, received by the company or co-operative society in consideration of, or as compensation for, such goods, services or facilities shall be deducted.

The total expenditure incurred by the assessee is received back in the shape of sale consideration. He further argued that the weighted deduction has been provided only in the case of companies engaged in agro-based industries, i.e., those which use as raw material or process, the products of agriculture, etc. and the companies which are engaged in agro-industries such as those manufacturing fertilisers, seeds, pesticides, tractors, implements, etc., are not eligible for the weighted deduction under Section 35C. Hence, he contended that the assessee is not entitled to weighted deduction under Section 35C.8. We have heard the submissions made by the parties. The assessee-company purchases seeds from agriculturists and subject to the same through a process of cleaning, grading and separating them veriety-wise, Chemicals were also applied for safe preservation. It attends to shelling shanks, dehydrating the seeds, drying them in mechanical dryers and separation of good and bad seeds through the specific gravity separators and treat the seed with poisonous chemicals under highly scientific conditions. Accordingly, it was contended that the assessee should be treated as engaged in the activity of processing and manufacturing seeds. The question is whether this processing amounts to manufacture or production of the article found by the assessee, viz., processing of seeds. Neither the word 'manufacture' nor the word 'production' has been defined in the Act. There is an inherent indication in the Act which shows that in its context, processed seeds must be treated as falling either in the category of manufacture or production. One of the articles or things which are treated to be manufactured or produced for purposes of Section 33 of the Act as set out in the Fifth Schedule is 'processed seeds' which finds place at item 28 thereof. 'Processed seeds' is thus treated as an article which is obtained by the process of manufacture or production for purposes of Section 33 also. Furthermore, Section 80B of the Act and the Sixth Schedule also treat 'Processed seeds' as an article obtained by the process of manufacture or production. And again Section 80-1 of the Act which granted relief to specified industries including those which sold 'processed seeds' occurred in Chapter VI-A of the Act along with Section 80J. Therefore, interpretative uniformity supports the view that 'processed seeds' should be taken as an article which is obtained either by the process of manufacture or production for purposes of Section 80J. This was the view taken by the Allahabad High Court in the case of Tarai Development Corporation (supra). Thus, the assessee-company purchased seeds from agriculturists and tested the purity, viability and moisture content in the laboratory. The seeds purchased are again tested and if found suitable, approved for processing. The seeds are then graded and cleaned by mechanical process and sorted out in categories. The approved category is treated with mixture of various chemicals and then passed to a mixing tank where the seeds and chemicals are mixed mechanically as a result of which the chemical mixed is coated on each grain and thereafter it is bagged and kept in godowns where precaution is taken to avoid any damage by pest.

9. Section 35C provides that where a company is engaged in the manufacture or processing of any article which is made from, or uses any product of agriculture or dairy farming, etc. and has incurred, after 29-2-1968, any expenditure in the provision of any goods or services to a person who is a cultivator or producer of any such product in India, the company shall be allowed a weighted deduction of a sum equal to one and one-fifth times the amount of such expenditure.

Thus, the companies which are eligible for weighted deduction are those which use the products of agriculture, animal husbandry or dairy or poultry farming as raw materials for their industry or process of such products. The expenditure which will qualify for the weighted deduction is that incurred by the company after 29-2-1968 in the provision of any goods or facilities. The expenditure in the provision of any goods or services or facilities will qualify for the weighted deduction only where they are provided to independent cultivators, growers or producers. Where the company receives any consideration or compensation for the goods, services or facilities provided, whether from the cultivator, grower or producer or from any other source, the expenditure qualifying for the weighted deduction will be computed after excluding such consideration or compensation. The weighted deduction has been provided only in the case of companies engaged in agro-based industries, i.e., which use as raw material or process, the products of agriculture, animal husbandry, dairy or poultry farming.

Accordingly, the assessee in the present case processed seeds to make it fit for cultivation. In that view of the matter, we consider that looking into the ratio of the decision of the Allahabad High Court in the case of Tarai Development Corporation (supra) and also the intention of the Legislature, while adopting the meaning of the word 'process' in various sections occurring in the Act, we consider that the assessee is entitled to weighted deduction under Section 35C. To this extent, we are in agreement with the order passed by the Commissioner (Appeals).

10. The assessee in the present case claimed weighted deduction under Section 35C in respect of four items, viz., trading and processing expenses, establishment expenses, administration expenses and depreciation. To what extent the appellant is entitled to weighted deduction in terms of various items claimed by the appellant under this section has got to be ascertained separately. In doing so, relief has got to be calculated in accordance with Explanation to Section 35C. In the matter of services rendered, the Commissioner (Appeals) directed the ITO to recompute the expenditure incurred towards such services after deducting any consideration received. We are also in agreement with the Commissioner (Appeals) to the extent to which this direction is given. With regard to the conclusions arrived at by the Commissioner (Appeals), in the matter of other three items we are not in agreement with the Commissioner (Appeals). Accordingly, we set aside his findings and direct the ITO, while recomputing the expenditure with regard to services rendered as directed by the Commissioner (Appeals) also to redo the assessment by taking into consideration to what extent the assessee is entitled to the relief under Section 35C in the matter of other three items claimed by the assessee in view of the ratio of the judgment of the Allahabad High Court in the case of Tarai Development Corporation (supra) and dispose of the matter in accordance with law.

11. The next ground in the appeal filed by the assessee relates to depreciation in respect of immovable properties at Vijayawada and Tanuku. The company acquired capital assets worth Rs. 26,66,640.90 from the National Seeds Corporation Ltd. However, sale deeds for the immovable properties at Vijayawada and Tanuku valued at Rs. 13,41,432 are yet to be executed in favour of the company. As the ownership over these assets is not vested with the corporation, depreciation on these items was disallowed by the ITO. Before the Commissioner (Appeals) on appeal, it was contended that the sale deeds were executed and registered in January 1980. The assessee also relied on the Allahabad High Court's judgment in the case of Addl. CIT v. U.P. State Agro Industrial Corporation Ltd. [1981] 127 ITR 97 and stated that even though the purchase documents were not executed and registered still depreciation should be granted. But, however, the Commissioner (Appeals) was of the view that this decision was not applicable to the facts of the present case inasmuch as the facts herein are different.

The Commissioner (Appeals) was of the view that ownership is a condition precedent for granting depreciation. He was further of the view that the decision in the case of CIT v. Hindustan Cold Storage & Refrigeration (P.) Ltd. [1976] 103 ITR 455 (Delhi) will be clearly applicable to the facts of this case. Accordingly, he justified the order passed by the ITO. Aggrieved, the assessee filed the present appeal before the Tribunal.

12. The assessee contended before us that the learned Commissioner (Appeals) should have allowed depreciation at Rs. 1,36,953 claimed by the appellant on the building, etc., bought and taken over from the National Seeds Corporation Ltd., in terms of Clause 20 of the quadripartite agreement. It was further contended that the possession and enjoyment of buildings, machinery, etc., on which depreciation was claimed, was with the appellant corporation during the relevant period and having regard to Section 53A of the Transfer of Property Act, 1882, the appellant's claim should have been allowed.

13. On the other hand, the learned departmental representative supported the order passed by the Commissioner (Appeals).

14. We have heard the rival submissions made by the parties. The ITO declined to grant depreciation in respect of the properties at Vijayawada and Tanuku on the ground that the appellant had not become the owner of these properties as the sale deeds were not executed. Even the sale considerations for these properties have not been made. There were only book entries debiting the property accounts and crediting the National Seeds Corporation. The sale deeds were stated to be executed and registered in January 1980. The appellant before us contended that in terms of Clause 20 of the four party agreement the National Seeds Corporation Ltd. transferred buildings with the plant and machinery, etc., to the assessee-company in 1977 and since then the assessee-company was de facto owner enjoying use and possession of the buildings, plant and machinery, etc. Since the Central Government and the Andhra Pradesh Government are also parties to the four party agreement under which the assets were transferred to the assessee-company and keeping in view the decision in the case of U.P.State Agro Industrial Corporation Ltd. (supra) and Section 53A of the Transfer of Property Act, depreciation on buildings should be allowed for the assessment year 1979-80. It was further contended that the delay in execution of the title deeds is purely of technical nature and should not on principle of natural justice also stand in the way of allowing the depreciation claimed by the assessee.

The learned Commissioner (Appeals) has pointed out that the decision in the case of U.P. State Agro Industrial Corporation Ltd. (supra) deals with a case where the seller was the State Government of U.P. which passed an order in respect of the property and transferred the possession. But the four party agreement, the Central and State Governments are also parties in the matter of transferring the properties. Hence, it cannot be said, according to the appellant, that no Government is involved in the matter of transferring the properties.

He, therefore, relied upon the decision of the Allahabad High Court in the case of U.P. State Agro Industrial Corporation Ltd. (supra). The learned Commissioner (Appeals) relied upon the decision of the Delhi High Court in the case of Hindustan Cold Storage & Refrigeration (P.) Ltd. (supra). In that case, on similar facts the Delhi High Court came to the conclusion that the words 'being the property of the assessee' appearing in Section 10(2)(vi) of the 1922 Act had the same meaning as the words 'owned by the assessee' appearing in Section 32(1) of the 1961 Act and these words merely clarified the position that already existed under Section 10(2)(vi). The interest which a person had in a property by virtue of Section 53A of the Transfer of Property Act did not amount to ownership of the property. The value of the properties in the present appeal is more than Rs. 100. Accordingly, the learned departmental representative submitted that the title thereto would not pass to the assessee in the absence of a registered sale deed.

Admittedly no sale deed was executed in favour of the assessee-company during the relevant assessment year. Hence, according to him the title of the said properties does not pass to the assessee-company.

15. On the other hand, the learned counsel appearing for the assessee relied upon a decision of the Tribunal Amritsar Bench in IT Appeal No.49 (Asr.) of 1980 for the assessment year 1977-78 in the case of ITO v.Golden View Electrical Industries (P.) Ltd. In that case the Tribunal held that- The departmental representative had assailed the order of CIT on the basis of our order passed in the case of Hotel Skylark and Restaurant (P.) Ltd. in IT Appeal No. 342 (Asr.) of 1979 where relying on the decision of the Delhi High Court in the case of CIT v. Hindustan Cold Storage & Refrigeration (P.) Ltd. [1976] 103 ITR 455 (Delhi) the Tribunal held that it was necessary that a building must be registered in the name of owner assessee before he could claim depreciation thereon under Section 32. The AR, has referred to a decision of Allahabad High Court in the case of Addl. CIT v. U.P. State Agro Industrial Corporation Ltd. [1981] 127 ITR 97 (All.) where a contrary view has been taken. Similarly Rajasthan High Court in the case of CIT v. Amber Corporation [1981] 127 ITR 29 (Raj.).

Both High Courts have interpreted that the term 'owned' by the assessee does not refer to ownership arising under a registered sale deed. If the asset is used by the assessee for his business and is under his unfettered dominion or control, the requirement of Section 32 is fulfilled. It is not necessary that transfer must be recorded by a registered purchase deed when Section 32(1A) permits depreciation on capital expenditure incurred by the assessee where the land or building belongs to another person, it would be unreasonable to refuse the claim for depreciation where the assessee is not only in actual possession of the building but is owner for all practical purposes except that the document of transfer is not registered. In any case of the two views about ownership, the view favourable to the assessee will have to be adopted for this reason.

We are unable to draw support from our decision in IT Appeal No. 342 (Asr.) of 1979 and hold that the assessee was for all practical purposes a person who 'owned' the building within the meaning of Section 32 and was accordingly, entitled to claim depreciation.

CIT's finding is accordingly upheld and the appeal of the revenue on this point is dismissed. (pp. 16-17) In view of the fact that in terms of Clause 20 of the four party agreement, the assessee-company was de facto owner enjoying use and possession of the building, plant and machinery, etc. and the said properties were also shown as properties belonging to the assessee in the balance sheet by respectfully adopting the view taken by the Tribunal in the aforesaid order and keeping in mind that the sale deeds were ultimately registered in January 1980 we consider that the assessee's claim with regard to depreciation should be allowed.

Adopting the principle laid down by the aforesaid order of the Tribunal, we are also of the opinion that the view favourable to the assessee should be taken into consideration in granting relief to the claim made by the assessee. In that view of the matter, we set aside the order passed by the authorities below on this point and allow the appeal filed by the assessee with regard to depreciation claimed in respect of the properties situated at Vijayawada and Tanuku.

16. The last ground raised by the assessee in its appeal relates to disallowance of alleged liability of Rs. 3,42,504, being the amount debited as for 'price insurance'. It is stated by the assessee that the amount is calculated at 2 1/2 per cent of the net interstate sale proceeds as stipulated in Clauses 12 and 13 of the four party agreement entered into between the Government of India, Government of Andhra Pradesh, National Seeds Corporation and the assessee. Therefore, the assessee claimed it to be an expenditure. According to the ITO inasmuch as this is not outgoing, he rejected the claim made by the assessee of Rs. 3,42,504. On appeal, the Commissioner (Appeals) confirmed the view taken by the ITO. Aggrieved, the assessee filed the present appeal before the Tribunal challenging the order passed by the authorities below.

17. Before us the appellant contended that the Commissioner (Appeals) erred in not allowing the said amount of Rs. 3,42,504 under Section 37(1) of the Act as it is laid out wholly and exclusively for the purpose of business. It was further contended that the authorities below failed to appreciate the fact that this expenditure was incurred solely in pursuance of Clause 12 of the quadripartite agreement dated 8-10-1976.

18. On the other hand, the learned departmental representative supported the order passed by the Commissioner (Appeals).

19. We have heard the rival submissions made by the parties. In terms of agreement, dated 8-10-1976, between the Ministry of Agriculture, State Government of Andhra Pradesh, the National Seeds Corporation and the assessee, under Clause 12, a 'price insurance account' was to be created and credited with 2 1/2 per cent of the sale proceeds; In the said agreement it was stated that if in any year there are losses on account of unsold stock or sales below cost price, the losses shall be shared equally by the assessee and the National Seeds Corporation out of the receipt of 'price insurance account'. If the provisions cannot fully absorb losses, the balance of such losses would be shared equally by the two corporations. Therefore, it was considered by the authorities below that this is only a contingent liability and not an accrued or ascertained liability. It was further pointed out by the ITO that during the previous year under consideration such contingency, for which the provision was made, did not occur. The amount provided is kept with the assessee. It is also not payable to any other corporation and it definitely, therefore, cannot be considered to be an outgoing for this year. This amount is kept only to be adjusted against future losses if any. Under such circumstances the authorities below disallowed the claim made by the assessee. Inasmuch as the price insurance account does not represent a liability to third party who is a creditor of the appellant and inasmuch as the funds had remained with the assessee-company itself representing a reserve for future contingencies, the authorities below were of the view that it does not represent availability which accrued in the year or an enforceable debt by a third party against the appellant. Considering the facts arising in this case, we are of the view that there is no infirmity in the order passed by the Commissioner (Appeals) on this point. We are, therefore, not inclined to interfere with his order on this point.

20. The last ground raised by the assessee is with regard to interest under Section 215 of the Act. This was not pressed before us.

21. In the result, the appeal filed by the department is dismissed while the appeal filed by the assessee is allowed in part.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //