Agriculture contract farming corporate income

The income generated by agri-business firms through their “contract farming” agreements with farmers cannot be treated as agricultural income eligible for waiver of income tax. In a recent judgment on petitions by Namdhari Seeds Pvt. Ltd., a Division Bench of the Karnataka High Court held that such income of agri-business firms come under the purview of business income which attracts tax under the provisions of the Income Tax Act.

In this case, the firm had claimed as agricultural income the amount generated by it from the sale of hybrid seeds grown on land belonging to various persons under “contract farming” agreements. As per the Income Tax Act, according to the firm, income derived from agricultural land qualifies as agricultural income and it is not necessary to own land to derive agricultural income.

Though the Income Tax Department had rejected this claim, the Income Tax Appellate Tribunal had, in its 2006 order, treated 90 per cent of the firm's income as agricultural income.

However, the High Court pointed out that the entire terms of agreement would indicate that the foundation seeds grown by the farmer would be purchased by the firm at the end for a certain price provided seeds fulfilled the specifications as per the agreement. “It (agreement) is nothing short of a fertile womb being offered by a surrogate mother for the growth of a child of someone else. The assessee firm supervises and oversees the sowing, cultivation right from the process of sowing till the end to get the qualified foundation seeds to carry on its trade in selling certified seeds. The firm also provides scientific advice. However, the firm is not carrying out none of the normal activities of farming.

“Such input or scientific method in giving advice to the farmer cannot be termed as either basic agricultural operation or subsequent operation ordinarily employed by the farmer or agriculturist. If the basic operations of agriculture are not carried out by the firm, then the harvested foundation seeds purchased by it, and converting them to certification seeds also cannot be termed as an integral part of the foundation activity of agriculture,” the court said while treating the entire income generated by the company as business income