Income from the sale of foundation seeds qualifies as agricultural income and is exempt from tax.

Issue

Whether income derived from the production and sale of foundation seeds can be classified as “agricultural income” and thus be eligible for exemption under Section 10(1) of the Income-tax Act.

Facts

The assessee, a company involved in the research, production, and marketing of hybrid seeds, claimed that its income from selling foundation seeds was agricultural income.
The Assessing Officer (AO) disagreed, contending that producing foundation seeds is not an agricultural activity and, therefore, the income from their sale is taxable.
Crucially, in previous assessment years, the Income Tax Appellate Tribunal had consistently ruled in the assessee’s favor on the very same issue.

Decision

The court ruled in favour of the assessee, holding that the income from the sale of foundation seeds is indeed agricultural income and must be allowed exemption under Section 10(1). Since the facts were identical to previous years where the claim was allowed, the principle of consistency was applied.

Key Takeaways

Seed Production is Agriculture: The process of cultivating and producing seeds, including foundation seeds, is considered a fundamental agricultural activity.
Principle of Consistency: Tax authorities should not deviate from a position taken in prior years if the facts and legal circumstances have not changed.
Substance Over Form: The nature of the activity (cultivation from land) determines its classification as agricultural, not the final product (seeds vs. crops).

Failure to furnish the mandatory Form 3CK is fatal to a claim for weighted deduction on R&D expenses.

Issue

Can an assessee claim a weighted deduction for research and development (R&D) expenditure under Section 35(2AB) without providing the necessary certification in Form 3CK from the prescribed authority?

Facts

The assessee claimed a weighted deduction under Section 35(2AB) for its R&D expenses.
While the assessee had obtained approval for its R&D facility in Form 3CM, it failed to furnish Form 3CK, which is the mandatory certificate from the competent authority that quantifies the amount of expenditure eligible for the weighted deduction.
The Assessing Officer (AO) and the Commissioner (Appeals) both disallowed the claim due to the absence of this crucial document.

Decision

The court ruled in favour of the revenue, upholding the disallowance. It held that furnishing Form 3CK is a mandatory condition for claiming the weighted deduction under Section 35(2AB). Without this specific evidence, the claim cannot be allowed.

Key Takeaways

Strict Compliance for Deductions: Claims for special deductions, such as the weighted deduction for R&D, are subject to strict compliance with all prescribed conditions and documentary requirements.
Form 3CK is Non-Negotiable: The approval of an R&D facility (Form 3CM) is only the first step. The actual amount eligible for the deduction must be certified in Form 3CK, and this document is indispensable.
Burden of Proof is on the Assessee: The onus is entirely on the taxpayer to provide all the necessary evidence to substantiate their claim for a deduction. Failure to do so will result in the claim being rejected.

IN THE ITAT HYDERABAD BENCH ‘B’

Deputy Commissioner of Income-tax

Vibha Agrotech Ltd.

VIJAY PAL RAO, Vice President
and MANJUNATHA G, Accountant Member

IT Appeal Nos. 289 and 331 (Hyd.) OF 2016
[Assessment years 2011-12]

SEPTEMBER 24, 2025

Dr. Narendra Kumar Naik, CIT-DR for the Appellant.

ORDER

Manjunatha G., J. – The above cross-appeals are filed by the Revenue and Assessee Company against the Order dated 31.12.2015 of the learned Commissioner of Income Tax-(Appeals)-5, Hyderabad, relating to the assessment year 2011-2012.

2. The Revenue has raised the following grounds in the instant appeal ITA.No.289/Hyd./2016 :

“The Commissioner of Income Tax (Appeals) has erred both on facts and in law.

The Hon’ble CIT(A) erred in upholding the claim of the assessee to treat the income on the sale of foundation seeds as agricultural income and allow exemption under section 10(1) of the Act, when the assessee is not entitled for the said claim.

The Hon’ble CIT(A) erred in upholding the claim of the assessee to treat the income on the sale of foundation seeds as agricultural Income and allow exemption under section 10(1) of the Act, when the assessee has not maintained separate books of accounts and has bifurcated the net profit into income from agriculture and income from business according to its own convenience to show more of agricultural income which is exempt

Any other ground that may be urged at the time of hearing.”

3. The assessee pleads the following grounds in the instant appeal ITA.No.313/Hyd./2016 :

The Ld. Commissioner of Income Tax (Appeals) 5, Hyderabad erred in dismissing the appeal of the assessee filed against the order passed by the A.O u/s 143(3) of the Act, both on facts and in law.

The Ld. CIT (A) erred in not allowing the Income admitted by the assessee in the Revised Return of Income as cultivation income.

2.a

The Ld. CIT(A) erred in denying the exemption u/s 10(1) of the Act for which the assessee is legally entitled to, merely on technical grounds which is not correct and not justified.

2.b

The Ld. CIT (A) ought to have appreciated the fact that total income of Rs.76,18,96,236/ is agricultural income which is exempt u/s 10(1) of the Act

2.c

The Ld. CIT (A) ought to have appreciated the fact that the foundation seeds or hybrid seeds produced on contract farming will be the result of agricultural operations and the profit arising out of such activities shall be treated as agricultural income.

The Ld. CIT(A) erred in disallowing proportionate R & D Expenditure of Rs.21,07,77,694/ using the provisions of section 14A of the Act without appreciating the fact that the assessee has already added back such expenses to the profit in the computation for the year under consideration.

The Ld. CIT (A) ought to have appreciated the fact that assessee is eligible for weighted deduction u/s 35(2AB) of Rs.27,41,89,918/- for the reason that scientific research unit of the assessee has been approved by DSIR and such approval is valid up to 31.03.2016.

4.a

The Ld. CIT(A) ought to have appreciated the fact that when the assessee has complied with the provisions of section 35(2AB) of the Act by making an application for grant of Form 3CM & 3CL, then the exemption 35(2AB) cannot be denied.

4.b

The Ld. CIT (A) erred in disallowing the deduction claimed u/s 35(2AB) without appreciating that the assessee has followed the procedure as prescribed under the Act.

4.c

The Ld. CIT (A) ought to have seen the substance and not the form in deciding an issue concerned with allowance granted by the statute by adopting liberal interpretation.

The assessee may add, alter, or modify or substitute any other points to the Grounds of appeal at any time before or at the time of hearing of the appeal.”

4. Brief facts of the case are that, the assessee company is engaged in the business of research, cultivation, production and marketing of hybrid seeds. The assessee company had filed it’s return of income for the assessment year 2011- 2012 on 24.09.2011 declaring total income of Rs.1,83,13,205/-. The return of income filed by the assessee company has been processed under section 143(1) of the Income Tax Act, 1961 [in short “the Act”] and intimation under section 143(1) of the Act has been issued on 27.01.2012. The case of the assessee company has been selected for scrutiny and notice under section 143(2) and 142(1) of the Act were issued. In response to notice under section 142(1) dated 14.03.2014, the assessee has enclosed copy of revised return filed on 19.02.2014 declaring total income at Rs.NIL. The Assessing Officer rejected the revised return filed by the assessee on the ground that, the said return has been filed beyond the due date provided under section 139(5) of the Act. Further, during the course of assessment proceedings, the Assessing Officer called-upon the assessee to furnish relevant evidences in support of claim of agriculture income. The Assessing Officer had also called-upon the assessee to file relevant evidences in support of weighted deduction claimed under section 35(2AB) of the Income Tax Act, 1961 [in short “the Act”] towards research and development expenditure. The Assessing Officer after considering the submissions of the assessee, rejected the agricultural income claimed towards sale of foundation seeds on the ground that, the foundation seeds produced by the assessee company are the result of intensive research and other technical inputs and further, the activity of research was inextricably linked and interwoven with the process of growing of foundation seed and both activities, therefore had to be considered together. Production of foundation seeds is not agriculture activity and that, the income derived from sale of foundation seeds cannot be exempt under section 10(1) of the Act. Accordingly, the Assessing Officer rejected the claim of agriculture income and made addition of Rs.67,08,72,176/-to the total income of the assessee company. Similarly, the Assessing Officer rejected the claim of weighted deduction claimed under section 35(2AB) of the Act on the ground that, the assessee company has not fulfilled the conditions prescribed under Rule 6(4) of I.T. Rules, 1962 including furnishing of relevant Form-3CL from the Competent Authority for approval of in-house research and development expenditure and thus, made addition of Rs.27,58,38,297/-.

5. Aggrieved by the assessment order, the assessee preferred appeal before the learned CIT(A). Before the learned CIT(A), the assessee submitted that, the issue of disallowance of agriculture income is covered by the decision of ITAT, Hyderabad Benches, Hyderabad in appellant’s own case for assessment year 2009-2010, where the Tribunal after considering the relevant submissions, has allowed the claim of agriculture income under section 10(1) of the Act. The assessee had also challenged the addition made by the Assessing Officer towards disallowance of weighted deduction claimed under section 35(2AB) of the Act. The learned CIT(A) after considering the relevant submissions of the assessee and also by following the decision of ITAT, Hyderabad Bench in assessee’s own case for earlier assessment year, deleted the addition made by the Assessing Officer towards disallowance of agriculture income. Further, the learned CIT(A) upheld the addition made by the Assessing Officer towards disallowance of weighted detection under section 35(2AB) of the Act, on the ground that, the assessee has failed to furnish relevant approval from the Competent Authority in Form-3CL to claim deduction.

6. Aggrieved by the order of the learned CIT(A), the Assessee and Revenue are now, in appeal before the Tribunal.

7. The only issue that came-up for our consideration from grounds of appeal of Revenue is, deletion of addition made by the Assessing Officer towards agriculture income. Dr. Narendra Kumar Naik, Learned CIT-DR for the Revenue submitted that, the learned CIT(A) erred in upholding the claim of the assessee to treat the income from sale of foundation seeds as agriculture income and allowed exemption under section 10(1) of the Act, when the assessee is not entitled for the said claim. Learned CIT-DR further submitted that, to treat the income on the sale of foundation seeds as agricultural income and allow exemption under section 10(1) of the Act, the assessee must maintain separate books of accounts and furnish bifurcation of income from agriculture activity and non-agricultural activity. In the present case, the assessee has not furnished any details and the learned CIT(A) without appreciating the relevant facts, has simply deleted the addition made by the Assessing Officer. Therefore, he submitted that, the Order of the learned CIT(A) on this issue should be set-aside and addition made by the Assessing Officer should be upheld.

8. None appeared for the assessee. We have heard the learned CIT-DR, perused the material on record and had gone through the orders of the authorities below. The assessee is engaged in the business of plant breeding, research, cultivation, production and marketing of hybrid seeds, foundation seeds and production and marketing of well yielding hybrid seeds and various commercial crops. The assessee has claimed exemption under section 10(1) of the Act on income derived from sale of foundation seeds. The Assessing Officer disallowed exemption claimed by the assessee u/sec.10(1) of the Act on the ground that, the said activity does not fall under agriculture activity and income derived from sale of foundation seed cannot be exempted under section 10(1) of the Act. The CIT(A) deleted the addition made by the Assessing Officer towards disallowance of agriculture income by following decision of ITAT, Hyderabad Benches, Hyderabad in assessee’s own case for the earlier assessment year, where the claim of exemption under section 10(1) of the Act towards income derived from sale of foundation seed has been allowed. The relevant findings of the learned CIT(A) are under :

9. Before us, the learned CIT-DR for the Revenue fairly conceded that, the issue is covered in favour of the assessee by the decision of ITAT, Hyderabad Benches, Hyderabad in assessee’s own case for the assessment years 2002-2003 to 2005-2006. However, strongly refuted the findings of the CIT(A) on the basis of facts brought on record by the Assessing Officer and argued that, sale of foundation seeds cannot be considered as agriculture activity and consequently, income derived from sale of foundation seeds cannot be considered as agriculture Income. In our considered view, there is no difference between the facts considered by the Assessing Officer for the year under consideration and facts considered by the Tribunal for the earlier assessment years in respect of exempt income claimed by the assessee towards agriculture income being income derived from sale of foundation seeds. Since, there is no difference in facts, when compared to the earlier years, in our considered view, there is no error in the reasons given by the learned CIT(A) to allow exemption claimed by the assessee under section 10(1) of the Act towards income derived from sale of foundation seeds as agricultural income. Thus, we are inclined to uphold the findings of the learned CIT(A) and dismiss the appeal filed by the Revenue.

ITA.No.331/Hyd./ 2016 – A.Y. 2011-2012 :

10. Coming back to the assessee’s appeal ITA.No. 331/Hyd./2016. The assessee challenged disallowance of weighted detection claimed under section 35(2AB) of the Act in respect of research and development expenditure incurred by the assessee.

11. None appeared for the assessee. We have heard the Learned DR, perused the material on record and the orders of the authorities below. The Assessing Officer disallowed the weighted deduction claimed by the assessee under section 35(2AB) of the Act on the ground that, the assessee has not satisfied the conditions prescribed for claiming deduction by filing necessary evidences including Form-3CK issued by the Competent Authority, certifying the amount eligible for deduction. We find that, the provisions of Section-35(2AB) of the Act mandates that, where a company is engaged in the business of bio-technology or any business of manufacturing and production of article, which is not in the list of 11^th Schedule and incurred any expenditure on scientific research, not in the nature of any cost of land or building, on in-house research and development facility which has been approved by the Prescribed Authority which is the Secretary, DSIR, Government of India, then, the assessee shall be allowed sum equal to one and half times of the expenditure so incurred as deduction. Provisions of sub-section (4) provides that, Prescribed Authority shall submit it’s report in addition to approval of the said facility to the Director General of income Tax in such form and within such time, as may be prescribed. Further Rule 6 of Income Tax Rules, 1962 lays down procedure for making application and approval in the prescribed form which is Form-3CK and the Prescribed Authority is required to grant approval in Form-3CM. Further, after approval, the assessee shall furnish relevant details of expenditure every year to the Competent Authority and the Competent Authority after satisfying the conditions shall issue Form-3CK, certifying the amount eligible for deduction. In the present case, going by the facts available on record, we find that, the assessee except furnishing approval in Form-3CM, but, could not furnish relevant Form-3CK from the Competent Authority for quantifying the amount of eligible deduction for the year under consideration. Since, the assessee has failed to furnish relevant evidences for claiming weighted deduction under section 35(2AB) of the Act, in our considered view, there is no error in the reasons given by the learned CIT(A) to sustain the addition made by the Assessing Officer towards disallowance of weighted deduction claimed under section 35(2AB) of the Act. Therefore, we uphold the Order of the learned CIT(A) on this issue and dismiss the appeal filed by the assessee.

12. In the result appeal of the Revenue and appeal of the Assessee are dismissed. A copy of this common order be placed in the respective case files.