Mushroom cultivation in controlled sheds held manufacturing; shed treated as factory building, allowed 15% depreciation

The ITAT allowed the appeal, holding that mushroom cultivation under controlled conditions constitutes a manufacturing/business activity and the shed used for production qualifies as a factory building. The tribunal found the assessee's use of controlled environment and equipment transformed the activity into manufacturing, rejecting the revenue's agricultural characterization. Consequently, the shed was entitled to depreciation at 15% (factory building rate) rather than 7.5%, and the earlier disallowance was set aside.

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Issues:
Claim of depreciation at 15% on the shed used for growing mushrooms, classification of the shed as a factory building for depreciation purposes, whether growing mushrooms under controlled conditions constitutes a manufacturing activity or agricultural activity.

Analysis:
The assessee, engaged in the business of manufacturing canned products, fruits, and mushrooms, claimed depreciation at 15% on the shed where mushrooms are grown. However, the Income Tax Officer (ITO) allowed depreciation at 7.5%, considering it a third-class building, rejecting the claim that the shed, as a factory building, should be entitled to depreciation at twice the normal rate. The Commissioner (Appeals) upheld the ITO's decision, leading the assessee to appeal.

It was contended that growing mushrooms under controlled conditions is recognized as a manufacturing activity, implying that the shed should be classified as a factory building eligible for double the normal depreciation rate. The departmental representative argued against this, asserting that mushroom growing is an agricultural activity and no manufacturing or processing occurs to categorize the shed as a factory.

The introduction of Section 80JJA of the Income-tax Act, 1961, by the Finance Act, 1979, aimed at encouraging mushroom cultivation as a business activity rather than an agricultural one. The provision specified deductions for profits from growing mushrooms under controlled conditions, emphasizing the business aspect of mushroom cultivation. The tribunal noted that the ITO's acceptance of 7.5% depreciation on the shed indicated recognition of the assessee's business activity, refuting the revenue's claim that mushroom growing is agricultural.

Considering the shed's role in producing mushrooms for sale, the tribunal determined that the shed qualifies as a factory building due to the manufacturing nature of growing mushrooms under controlled conditions. Rejecting the revenue's argument that mushrooms grow naturally without manufacturing, the tribunal highlighted the controlled conditions and equipment used by the assessee, emphasizing the production of mushrooms as a business activity. Consequently, the tribunal allowed the assessee's claim for depreciation at 15% on the shed, recognizing it as a factory building and upholding the business nature of mushroom cultivation. Thus, the appeal was allowed.

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