2018 (8) TMI 69 - AT - Income Tax

Mushroom Cultivation Income Deemed Agricultural by Tribunal, Reopening Assessments Valid

The Tribunal held that income from mushroom cultivation qualifies as agricultural income under Section 10(1) of the Income Tax Act, 1961. The Tribunal ... Agricultural income - exemption u/s 10(1) - Merely because instead of horizontal use on soil, vertical space is used, does the growth of mushrooms stand apart from agricultural operations? - Held that:- The process followed in the case of Best Roses Biotech (P.) Ltd.[2011 (11) TMI 373 - ITAT AHMEDABAD] in similar to the process followed by the assessee. Hence, the view of the courts was that the income in question was agricultural income and the explanation only acknowledges this fact. We should not take a ‘pedantic’ view on this issue. The view of the legislature is more expansive and purposive than the view of the courts. In view of the above discussion, we conclude that “soil”, even when separated from land and placed in trays, pots, containers, terraces, compound walls etc., continues to be a specie of land and hence “land” for the sole purpose of determining whether activity performed on such land is for production of an agricultural product. Whether mushroom is a “fungi” and not “vegetable” - Held that:- It is clear that we cannot restrict the word “product” to ‘plants’, ‘fruits’, ‘vegetables’ or such botanical life only. The only condition is that the “product” in question should be raised on the land by performing some basic operations. Mushroom produced by the assessee is a product. This product is raised on land/soil, by performing certain basic operation. The product draws nourishment from the soil and is naturally grown, by such operation on soil which require expenditure of “human skill and labour”. The product so raised has utility for consumption, trade and commerce and hence would qualify as an “agricultural product” the sale of which gives rise to agricultural income. Mushroom, like vegetables and other crops or plants are grown on soil/land and are always attached to the soil until harvested. They draw their nourishment from the soil only. The product mushroom does not arise from any secondary agricultural operation. Unlike in the case of CIT vs. Kokine Dairy (1938 (4) TMI 3 - RANGOON HIGH COURT) relied on by the Ld.AO it cannot be said that production of mushroom is remotely connected with land. This product arises from land and is attached to land during growth and thereafter, just like ‘plants’ or a ‘crop’. Comparison made by the Ld.AO with sale of silk cocoons by relying on the judgment in the case of K.Lakshmansa & Co. vs. CIT [1980 (11) TMI 36 - KARNATAKA HIGH COURT] is wrong, as on facts silkworms feed on mulberry leaves and are not products which are raised from land. Mulberry leaves which are product arising from land, are fodder to silk worms. Hence, we conclude that Mushroom on the facts and circumstances of this case is an agricultural product raised from land. Whether agricultural production done under “controlled conditions”, results in the ‘product’ so raised not being a ‘product from agricultural activity’? - Held that:- ITAT Pune Bench in the case of Asst. CIT v. KF Bio Plants (P.) Ltd. [2012 (9) TMI 1105 - ITAT PUNE] held that the nature of agricultural income would not change merely because agricultural operation was carried out in a greenhouse under a controlled environment. The assessee in that case was engaged in the business of plant floriculture and tissue culture, and claimed exemption of income as being agricultural income under section 10(1) of the Act. The A.O. disallowed the exemption on the ground that basic operation was done in a greenhouse. The ITAT held that the involvement of a greenhouse and controlled environment would not change the nature of agricultural income. As basic operations are performed by expenditure of human skill and labour on land by the assessee, which results in the raising of the ‘product’ called “Edible white button mushroom” on the land and as this product has utility for consumption, trade and commerce, the income arising from the sale of this product is agricultural income and hence exempt u/s 10(1) of the Act. - Decided in favour of the assessee. Issues Involved:1. Whether the income from the production and sale of mushrooms can be termed as 'agricultural income' under the Income Tax Act, 1961.2. Validity of reopening assessments.3. Non-grant of depreciation by the Assessing Officer.Detailed Analysis:1. Agricultural Income Classification:- Background: The assessee, engaged in the business of bulk drugs, also derives income from growing mushrooms, treating it as agricultural income exempt under Section 10(1) of the Income Tax Act, 1961. A survey operation was conducted to verify this claim.- Assessee's Argument:- Cultivation of mushrooms is agriculture, conducted on agricultural land, and mushrooms are treated as vegetables.- Operations are akin to nursery activities recognized as agriculture under Explanation 3 to Section 2(1A).- Government authorities and various organizations treat mushrooms as vegetables.- The Supreme Court's decision in M/s. Venkateswara Hatcheries Pvt Ltd supports that natural products remain agricultural despite human facilitation.- Assessing Officer's Findings:- Mushrooms are grown in controlled conditions on racks and compost, not directly on land.- Supreme Court's decision in CIT Vs. Raja Benoy Kumar Sahas Roy emphasizes that agricultural income requires basic operations on land.- Rule 7A, 7B, and 8 of the Income Tax Rules, 1962, and Section 80JJA indicate that mushroom cultivation is a business activity, not agriculture.- Statements from company officials confirmed no agricultural operations were carried out on land.- CIT(A) Findings:- Reopening of assessments is valid.- Mushrooms are grown on soil, which can be considered land. The process involves basic agricultural operations.- The term 'land' includes soil, and the prepared soil in trays is akin to land.- Reference to Rule 7A, 7B, and 8 is irrelevant.- The decision in Blue Mountain Food Products Ltd. is not applicable.- Government and public sector views support the assessee's claim.- Tribunal's Decision:- Land and Soil: Soil, even when placed in trays, continues to be land for agricultural purposes. The operations performed on this soil qualify as agricultural activities.- Nature of Mushrooms: Mushrooms are fungi, not vegetables, but this distinction does not negate their classification as agricultural products if grown through basic operations on soil.- Controlled Conditions: Agricultural production under controlled conditions does not change the nature of the activity. Advanced technology and controlled environments are common in modern agriculture.- Government and Institutional Views: While not determinative, these views support the classification of mushroom cultivation as agricultural.- Section 80JJA: Historical provisions and their repeal do not change the fundamental nature of mushroom cultivation as an agricultural activity.The Tribunal concluded that the income from mushroom cultivation is agricultural income and upheld the CIT(A)'s order.2. Validity of Reopening Assessments:- The assessee challenged the reopening of assessments for AYs 2008-09 and 2010-11.- Tribunal's Decision: The reasons for reopening were provided to the assessee, and the reopening was found to be valid. This ground of cross-objections was dismissed.3. Non-Grant of Depreciation:- The issue of non-grant of depreciation by the Assessing Officer was not pressed by the assessee as relief was granted during the course of Section 154 proceedings.Conclusion:The Tribunal upheld that the income derived from the production and sale of mushrooms is agricultural income under Section 10(1) of the Income Tax Act, 1961. The appeals of the revenue and cross-objections of the assessee were dismissed for all the four assessment years.