2015 (9) TMI 794 - AT - Income Tax

Income from Nursery Plant Sales via Tissue Culture Activities Deemed Agricultural Income

The Tribunal upheld the Commissioner of Income Tax (Appeals)' decision that the income derived from the sale of plants from a nursery through tissue ... Treatment to assessee's income - CIT(A) treated as agriculture income u/s 2(1A)(b)(i) and to exclude said income u/s 10(1) - assessee engaged in the business of production of nursery plants and banana plants, tissue culture activities etc - Held that:- We find no infirmity in the order of the CIT(A) following the decision of Hon’ble Madras High Court in the case of Soundarya Nursery (1998 (8) TMI 37 - MADRAS High Court)and the Explanation (3) to section 2(1A) of the Finance Act, 2008 held that the asessee’s activities involved basic agricultural operations and therefore income thereof constitutes agriculture income. Basic operations are carried out in the present case, which require human skill and labour, and subsequent operations, no matter how sophisticated, if that be used against the assessee, are only to foster the growth and to protect the produce, we find that the income from these operations can only be said to be agricultural income. Their Lordships were also dealing with a situation in which operations were carried on in a greenhouse. Therefore, merely because a greenhouse in involved, the nature of operations would not change - Decided in favour of assessee. Issues Involved:1. Whether the income derived from the sale of plants from a nursery constitutes agricultural income.2. Whether the activities carried out by the assessee involve basic agricultural operations.3. Whether the income from tissue culture activities can be treated as agricultural income under Section 2(1A) of the Income Tax Act, 1961.4. Interpretation and application of judicial precedents and statutory provisions.Issue-wise Detailed Analysis:1. Whether the income derived from the sale of plants from a nursery constitutes agricultural income:The assessee, a partnership firm engaged in the business of production of nursery plants and banana plants through tissue culture activities, claimed the income derived from these activities as agricultural income exempt under Section 10(1) of the Income Tax Act, 1961. The Assessing Officer (AO) disagreed, arguing that the income could not be considered agricultural since the assessee did not perform basic agricultural operations on the land, such as tilling, sowing, and planting. Instead, the AO noted that the activities were conducted in a controlled, artificial environment, which did not qualify as agricultural operations.The Commissioner of Income Tax (Appeals) [CIT(A)] overturned the AO's decision, referencing the Supreme Court's judgment in Raja Benoy Sahas Ray (32 ITR 466), which defined agricultural activities as involving both basic and subsequent operations. The CIT(A) concluded that the assessee's tissue culture process, which involved steps such as sowing seeds, growing mother plants, and transferring plants to soil, did indeed constitute agricultural operations. The CIT(A) also referenced the Madras High Court's decision in CIT vs. Soundarya Nursery (241 ITR 530), which held that income from the sale of plants grown in pots could be considered agricultural income if the plants were the result of basic operations on the land.2. Whether the activities carried out by the assessee involve basic agricultural operations:The CIT(A) carefully examined the stages involved in the tissue culture process and found that these stages included basic agricultural operations such as readying the land for sowing, sowing seeds, and watering. The CIT(A) noted that the primary source of the plants was the mother plant, which was reared on earth involving basic operations. Thus, the CIT(A) concluded that the assessee's activities did involve basic agricultural operations, contrary to the AO's findings.3. Whether the income from tissue culture activities can be treated as agricultural income under Section 2(1A) of the Income Tax Act, 1961:The CIT(A) also referenced Explanation (3) to Section 2(1A) of the Income Tax Act, inserted by the Finance Act, 2008, which includes income derived from saplings or seedlings grown in a nursery within the definition of agricultural income. The CIT(A) argued that the plantlets produced by tissue culture were labeled as seedlings, and therefore, the activity was covered by the newly inserted Explanation (3), making the income derived from the sale of seedlings agricultural income.4. Interpretation and application of judicial precedents and statutory provisions:The CIT(A) relied on several judicial precedents, including the Madras High Court's decision in Soundarya Nursery and the Pune ITAT's decision in KF Bioplants Pvt. Ltd., which supported the view that income from tissue culture activities could be considered agricultural income. The CIT(A) also noted that the Explanation (3) to Section 2(1A) was clarificatory and should be applied retrospectively.The Tribunal upheld the CIT(A)'s decision, finding no infirmity in the order. The Tribunal referenced its own decision in KF Bioplants Pvt. Ltd., which had held that income from floriculture/tissue culture was agricultural income. The Tribunal dismissed the Revenue's appeal, noting that the decision of the Tribunal in KF Bioplants Pvt. Ltd. had not been overturned by a higher court and was therefore binding.Conclusion:The Tribunal concluded that the CIT(A) was correct in treating the income derived from the sale of plants as agricultural income. The Tribunal dismissed the Revenue's appeals for both assessment years 2007-08 and 2008-09, upholding the CIT(A)'s orders. The Tribunal emphasized that the activities carried out by the assessee involved basic agricultural operations and that the income derived from these activities constituted agricultural income under Section 2(1A) of the Income Tax Act, 1961.