TARIQ SALEEM SHEIKH, J.--- This is a reference under Section 136 of the repealed Income Tax Ordinance, 1979 (the "Repealed Ordinance") in which the Income Tax Appellate Tribunal (the "Appellate Tribunal") has submitted the following question of law for the opinion of this Court:-- Whether on the facts and in the circumstances, the Tribunal was justified to bifurcate the end product if viewed under the concept of ordinary process and extraordinary process?
2. Facts relevant for the purpose of the instant, opinion are that the Applicant (Pioneer Pakistan Seeds Limited) is the subsidiary of Pioneer Holding Company Limited, USA. It derives income from cultivation and sale of corn seed, vegetable seed, cotton seed etc. The parent company specializes in production of high quality hybrid seeds. The Applicant filed its income tax return for the Assessm ent Year 1998-99 declaring agricultural income of Rs. 86,372/- on which exemption was claimed under Clause (1) of Part-I of the Second Schedule to the Repealed Ordinance. The Taxation Officer, vide order dated 30.06.2001, rejected the Applicant's claim for exemption holding that it was not covered by Clause (1) of Part-I of the Second Schedule. The Applicant preferred an appeal before the CIT (Appeals) which was dismissed vide order dated 24.01.2002. The Applicant then filed second appeal before the Appellate Tribunal which was partially accepted vide order dated 23.09.2003. The Appellate Tribunal bifurcated the end product into 20:80 ratio with the observation that 20% value added would be treated as commercial/business while 80% would be reckoned as agricultural income and would thus qualify for exemption. Being aggrieved with the said order both the parties filed (separate) reference applications before the Appellate Tribunal which has proposed the above-mentioned question to this Court.
3. The Applicant in this case had claimed exemption under Section 2(1) of the Repealed Ordinance read with Clause (1) of Part-I of the Second Schedule thereto. We reproduce the said provisions hereunder for ready reference:--- Section 2(1)
2. Definitions.-- In this Ordinance, unless the context otherwise requires:---
(1) "agricultural income" means:---
(a) any rent or revenue derived from land which is situated in Pakistan and is used for agricultural purpose;
(b) any income derived from such land by:---
(i) agriculture; or
(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or (iii)the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii);
(c) .....
Part-I of the Second Schedule Exemptions from total income: Incomes, or classes of income, or persons or classes of persons enumerated below, shall be exempt from tax subject to the condition and to the extent specified hereunder:---
(1) Agriculture income
(2) Provided that...
(3) Provided further that
4. From the above reading it follows that an assessee would be entitled to claim exemption on agriculture if it fulfils the following conditions:---
(i) The agricultural land should be situated in Pakistan;
(ii) The aforesaid land should be used for agricultural Purposes; (iii)The income from the aforesaid land should be derived by:---
(a) agriculture; or
(b) a process which should ordinarily be employed by a cultivator to render the produce raised by him fit to be taken to market; or
(c) sale by a cultivator of the produce.
5. The contention of the Applicant is that although it uses various types of machinery for production on an industrial scale, the process is the same which is employed by an ordinary cultivator. Further, "processing" does not change the nature of the product. On the other hand, the contention of the Respondent is that the process used by the Applicant is highly sophisticated and is not ordinary.
Similarly, the end-product is not the same in quality as that of an ordinary cultivator who uses common techniques.
6. The question as to whether the process used by the Applicant is "ordinary" or not involves a factual inquiry. The CIT (Appeals) described this process in detail in his order dated 24.01.2002 and taking benefit of the same we reproduce it hereunder:-- "(i)Hybrid Seeds are imported from USA.
(ii)The imported seed is partly sold in the market.
(iii)The remaining seed is retained by the Appellant and is cultivated in the agricultural lands which have been acquired on lease for agricultural purposes.
(iv)The crop when ready for harvesting is harvested and brought to the business premises of the Appellant after sun drying.
(v)After sun drying the process of shelling employed.
(vi)The Appellant company owns state-of-the-a shelling equipment which is very sophisticate and is owned by very few concerns in Pakistan who can be counted on finger tips.
(vii) The next process employed is of grading and cleaning, which against is carried out by the Appellant in very sophisticated and advanced machinery, which again is owned by a small number of concerns in Pakistan.
(viii) The next process employed is of treating seed so that it is distinguishable from the other seed.
This process is necessary because the Appellant company applies fungicides to the seed.
Thereafter is coated, coloured and is packed in bags of different quantities.
(ix) It is after going through the above process that the seed supplied by the Appellant becomes marketable."
7. As shall be seen from the above, the process employed by the Applicant for its produce is highly sophisticated and far from ordinary. The process adds real value to the product and distinguishes it from that which is produced by a common man. It has a different quality altogether which cannot be obtained by ordinary agriculture process.
8. For the above reasons, we hold that the Applicant does not qualify for exemption under Section 2(1) of the Repealed Ordinance read with Clause 4 of the part I of the Second Schedule thereof. The apportionment conduct into 20:80 ratio treating 20% value addition as commercial/ business income while the remaining 80% as agricultural income is arbitrary and has no legal basis. The reference is answered accordingly and the reference petition is dismissed. Office shall send a copy of this judgment under the seal of the Court to the Appellate Tribunal.