2025 (5) TMI 1962 - HC - Income Tax

Mushroom cultivation under controlled factory conditions not agricultural income under Section 2(1A) Income Tax Act

The Principal Commissioner of Income Tax-1, Chennai Versus M/s. British Agro Products (India) Pvt. Ltd.

The HC held that income from cultivation of white button mushrooms under controlled temperature conditions does not qualify as 'agricultural income' under ... “Agricultural Income” within the meaning of Section 2(1A) - Income generated from cultivation of white 'Button Mushrooms' under controlled temperature HELD THAT:- There are three parts to the definition of “Agricultural Income” in Section 2(1A) of the Act. Sub-clause (a) and (b) to Section 2(1A) of the Act deal with “rent” or “revenue” derived from land or income derived from such land. The common denominator in sub-clause (a) and (b) to Section 2(1A) of the Act is either “rent” or “revenue” derived from land or income derived from land used for 'Agricultural Purposes'. Sub-clause (c) to Section 2(1A) of the Act deals with income from building situated on “such land” and/or “any land”. Only these categories of income are “Agricultural Income” within the meaning of Section 2(1A) of the Act. The expression ‘Agricultural Purpose’ is not defined in the Act although the expression ‘Charitable Purpose’ has been speficically defined in Section 2(15) of the Act. We are not concerned with the definition of ‘Charitable Purpose’ in these cases. Therefore, we do not wish to expatiate on the same. Suffice to state that the case of the Respondent/Assessee does not fall within the purview of Sub Clause (a) as the income is not from the use of the land. The facts of the case makes it clear that income of the Respondent/Assessee does not comes within the purview sub-clause (a) to Section 2(1A) of the Act as admittedly the income of the Respondent/Assessee is not from the “land” used for “Agricultural Purpose”. Sub-clause (b) to Section 2(1A) of the Act is another species of “Agricultural Income” from “such land”. Use of the expression “such land” implies “Agricultural Land” used for “Agricultural Purpose”. The first sub-category in sub-clause (c) to Section 2(1A) of the Act would relate to income derived from “any building” either by the owner of the building i.e., receiver of rent or from revenue from any such land. Such buildings should be situated in the land meant for “Agricultural Purpose” to qualify as income from agriculture. Therefore, the first situation contemplated under sub-clause (c) to Section 2(1A) of the Act is not satisfied to treat the income from sale of “Button Mushroom” as Income from “Agriculture”. That apart, such income from the building has to be from such activity mentioned in paragraphs (ii) and (iii) of sub-clause (b) to Section 2(1A) of the Act. As far as the second and third situation in sub-clause (c) to Section 2(1A) of the Act are concerned, it would relate to any income derived from any building of “any land”. The second situation will relate to buildings occupied by the “cultivator”, while the third category would relate to buildings occupied by the “receiver of rent-in-kind”. Under both these circumstances also, the performance/sale contemplated in sub-clause (ii) and (iii) to clause (b) to Section 2(1A) of the Act has to be satisfied. In this case, there are no indication that income from sale of ‘Button Mushrooms’ would fall under any of the three situations that are contemplated in sub-clause (c) to Section 2(1A) of the Act. None of the situations specified above has been satisfied for the Respondent/Assessee to claim the benefit of Section 10(1) of the Act i.e., “Agricultural Income”. It would have been different, if mushrooms were grown by a farmer and thereafter processed by the Respondent/Assessee for making it marketable, in which case, the Respondent/Assessee could have claimed the income as ‘Assessable Income’ within the meaning of Section 2(1A)(c) of the Act. Therefore, income from sale of ‘Button Mushrooms’ from a factory under a controlled condition will not come within the purview of the definition of “Agricultural Income” within the meaning of Section 2(1A) of the Act for the purpose of Section 10(1) of the Act. Thus we are of the view that the decisions of M/s.Inventaa Industries Private Limited's case [2018 (8) TMI 69 - ITAT HYDERABAD] cannot be applied to the facts of the present case. Therefore, these appeals of the Appellant/Income Tax Department deserve to be allowed. The core legal questions considered by the Court in these Tax Case Appeals revolve around the classification of income derived from the cultivation and sale of white button mushrooms under the Income Tax Act, 1961. Specifically, the issues are:1. Whether income from cultivation and sale of white button mushrooms qualifies as 'agricultural income' exempt from income tax under Section 2(1A) and Section 10(1) of the Act, despite mushrooms being scientifically classified as fungi rather than plants, fruits, or vegetables.2. Whether the process of growing mushrooms in trays under controlled environmental conditions constitutes agricultural activity or amounts to manufacturing or business activity, thereby affecting the tax treatment of income derived.3. The interpretation and application of the definition of 'agricultural income' under Section 2(1A) of the Act, including the relevance and scope of Explanation 3 to Section 2(1A) relating to saplings or seedlings grown in nurseries.4. The significance of the physical use of land or soil in mushroom cultivation and whether soil detached from land and placed in trays retains character as 'land' for agricultural purposes.5. The weight to be given to views and classifications by governmental bodies and financial institutions regarding mushroom cultivation as an agricultural activity.Issue-wise Detailed Analysis:Issue 1: Whether income from cultivation and sale of white button mushrooms is agricultural income exempt from tax under Section 2(1A) and Section 10(1) of the Act.The Court examined the statutory definition of 'agricultural income' under Section 2(1A) of the Act, which includes income derived from land used for agricultural purposes, income from agriculture, and income from certain processes performed by cultivators or receivers of rent-in-kind. The Court emphasized that the income must be derived from land used for agricultural purposes and that the product must be raised on land by performing some operation involving human skill and labour.Precedents considered include the Special Bench decision in DCIT Vs. M/s. Inventaa Industries Pvt. Ltd., where mushroom was held to be an agricultural product raised from land, and the Madras High Court decision in Commissioner of Income-tax Vs. Soundarya Nursery, which expanded the definition of agricultural products to include plants grown in pots if basic agricultural operations were performed on land.The Court noted that mushrooms, although scientifically classified as fungi and not plants, are produced by performing basic agricultural operations on soil, draw nourishment from the soil, and have utility for consumption and commerce. Therefore, the nature of the product (fungus vs. plant) is irrelevant so long as it is raised on land by human skill and labour. The Court rejected the Revenue's argument that mushroom cultivation is not agricultural activity because mushrooms are fungi and the cultivation is in trays rather than open land.Applying these principles, the Court concluded that income from cultivation and sale of white button mushrooms qualifies as agricultural income exempt from tax under the Act.Issue 2: Whether cultivation of mushrooms under controlled conditions in trays constitutes agricultural activity or manufacturing/business activity.The Court analyzed the degree of control exercised in agricultural operations, noting that all agriculture involves some degree of control over conditions such as soil quality, watering, and pest control. The use of greenhouses, trays, or controlled environments does not negate the agricultural character of the activity.Precedents from ITAT Pune Bench (Asst. CIT Vs. KF Bio Plants) and ITAT Ahmedabad Bench (DCIT Vs. Best Roses Biotech Ltd.) were relied upon, where cultivation in greenhouses and controlled environments was held to be agricultural activity.The Court held that the fact that mushrooms are grown in trays under controlled temperature and humidity does not convert the activity into manufacturing or business. The controlled conditions are part of modern agricultural practices aimed at optimizing production. Hence, mushroom cultivation under such conditions remains agricultural activity.Issue 3: Interpretation and application of Explanation 3 to Section 2(1A) of the Act relating to saplings or seedlings grown in nurseries.Explanation 3 deems income from saplings or seedlings grown in nurseries to be agricultural income, even if basic operations are not performed on land. The Court clarified that this is a deeming provision intended to provide finality to disputes relating to nursery income.However, the Court observed that in the present case, the assessee performs basic operations on soil, so the deeming fiction of Explanation 3 is not strictly applicable. Instead, the broader judicial interpretation from Soundarya Nursery applies, recognizing income from plants grown in pots as agricultural income if basic agricultural operations are performed on land.The Court emphasized that Explanation 3 cannot be extended beyond its scope and that the income in question qualifies as agricultural income based on performance of basic operations on soil.Issue 4: Whether soil detached from land and placed in trays retains character as 'land' for agricultural purposes.The Court undertook an extensive interpretative exercise on the terms 'land' and 'soil'. It noted that 'land' in legal and popular sense includes soil and that soil is the thin skin covering the land, essential for cultivation.The Court rejected the Revenue's strict interpretation that soil detached from land ceases to be land for agricultural purposes. It held that the cultured top layer of earth (soil) placed in trays remains 'land' for the purpose of agricultural activity.Applying principles of purposive interpretation and the legal doctrine of noscitur a sociis, the Court held that the term 'land' must be interpreted in a manner consistent with the purpose of the statute, which is to exempt income derived from agricultural activities involving land or soil.Therefore, mushroom cultivation on soil placed in trays qualifies as cultivation on land for agricultural purposes.Issue 5: Weight of governmental and institutional classifications of mushroom cultivation as agricultural activity.The Court acknowledged that various government departments, financial institutions (including NABARD), and ministries have classified mushroom cultivation as agricultural activity and treated loans for mushroom cultivation as agricultural loans.While the Court agreed that statutory interpretation must be based on the language of the statute and legal principles rather than administrative views, it observed that consistent recognition of mushroom cultivation as agricultural by different arms of the government supports the conclusion that the activity is agricultural in nature.Additional Observations and Application of Law to Facts:The Court examined the facts that the assessee initially declared income from mushroom sales as business income but later revised returns to claim exemption as agricultural income following the Special Bench decision in Inventaa Industries.The assessment orders disallowed exemption treating income as business income, leading to appeals.The Court dissected the statutory definition of agricultural income under Section 2(1A), emphasizing that income must be derived from land used for agricultural purposes and the product must be raised by performing basic operations on such land.The Court found that the assessee's mushroom cultivation involves human skill and labour on soil, resulting in a product with commercial utility, satisfying the statutory requirements.The Court rejected the Revenue's contention that mushroom cultivation in a factory under controlled conditions is not agricultural income, holding that controlled environment cultivation is a recognized form of agriculture.The Court distinguished the facts from cases where products are not raised on land, such as silk cocoons, which are not agricultural products.The Court also noted that the Special Bench decision in Inventaa Industries, heavily relied upon by the Tribunal, had not examined the issue strictly from the perspective of the statutory definition of agricultural income, and therefore, the Court preferred to apply the statutory definition directly to the facts.Competing Arguments and Treatment:The Revenue argued that mushrooms are fungi, not plants, and that cultivation in trays under controlled conditions is akin to manufacturing, not agriculture, thus income should be taxable.The assessee argued that the scientific classification is irrelevant; what matters is that the product is raised on land/soil by human skill and labour and has utility for consumption and trade.The Court sided with the assessee, holding that the nature of the product (fungus) does not exclude it from being an agricultural product and that controlled cultivation is still agricultural activity.The Revenue's reliance on strict literal interpretation was rejected in favor of purposive interpretation to avoid absurdity and to give effect to the legislative intent of exempting agricultural income.Conclusions:The Court concluded that income from cultivation and sale of white button mushrooms is agricultural income within the meaning of Section 2(1A) of the Income Tax Act and is exempt from income tax under Section 10(1) of the Act.The Court held that soil placed in trays retains character as land for agricultural purposes, and controlled environment cultivation does not negate agricultural character.The Court affirmed the orders of the Appellate Commissioner and the Tribunal dismissing the appeals filed by the Income Tax Department.Significant Holdings:'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.''The term 'Land' in our view has to be interpreted by using the principles of 'Purposive Interpretation'... If the term 'Agri' is 'field', then 'field' can be on land or on a 'terrace' or on a 'pot', 'tray' etc.''Just because mushrooms are grown in controlled conditions it does not negate the claim of the assessee that the income arising from the sale of such mushrooms is agricultural income.''Income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income. However, as the assessee performs basic operations on soil, the ratio of the judgment in the case of Soundarya Nursery applies to the facts of this case.''The nature of the product is irrelevant as far as it is produced by performing some basic operations on the soil.''The degree of control is irrelevant in arriving at a conclusion on this issue. With the advancement of technology, every aspect of production is monitored and controlled, so as to obtain optimum use of the produce.''The view of the legislature is more expansive and purposive than the view of the courts.''We hold that it is important to distinguish between the meaning of the term 'soil' from 'land', because the cultured top strata of the earth's surface, which is fit for arable cultivation, is actually what is required for agricultural purposes.''The income arising from the sale of this product is agricultural income and hence exempt u/s 10(1) of the Act.'In conclusion, the Court answered the substantial questions of law in favor of the assessee, holding that income from cultivation and sale of white button mushrooms under controlled conditions is agricultural income exempt from tax under the Income Tax Act, 1961.