Mushroom cultivation on soil-based substrate qualifies as agricultural income and is exempt under the Income-tax Act.

Income from cultivation and sale of white button mushrooms was treated as agricultural income exempt under section 10(1) of the Income-tax Act, 1961. The Tribunal applied the principle that mushroom cultivation on prepared soil or composite substrate remains land-based agricultural activity, even where carried on in trays, vertical beds, or controlled conditions, because the crop is raised from soil by human skill and labour and derives nourishment from the soil. On that basis, the receipts were not assessable as business income, and the alternative claim for cultivation expenditure and depreciation was not separately examined.

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Issues: Whether income from cultivation and sale of white button mushrooms is agricultural income exempt under section 10(1) of the Income-tax Act, 1961, or business income.

Analysis: The Tribunal followed the Special Bench view that mushroom cultivation on prepared soil/composite substrate satisfies the requirement of land-based agricultural activity, since soil is part of land and cultivation does not cease to be agricultural merely because it is carried out in trays, vertical beds, or controlled conditions. The Tribunal noted that the product is raised from land/soil by human skill and labour, draws nourishment from the soil, and has utility for consumption and trade, so it qualifies as an agricultural product. The alternate claim for deduction of cultivation expenditure and depreciation was not separately examined after the income was accepted as agricultural income.

Conclusion: The income from cultivation and sale of white button mushrooms was held to be agricultural income and exempt under section 10(1) of the Income-tax Act, 1961, in favour of the assessee.

Final Conclusion: The assessment was set aside to the extent it treated mushroom cultivation receipts as business income, and the assessee's claim for agricultural exemption succeeded.

Ratio Decidendi: Cultivation carried out on soil-based substrate, even in controlled conditions or vertical trays, remains agricultural where the product is raised from land/soil by human skill and labour and derives nourishment from the soil.

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