2025 (11) TMI 1776 - HC - Income Tax

Tissue culture plant sales held agricultural income under Sections 2(1A) and 10(1), modernization still agriculture

M/s. A.G. Biotech Laboratories (India) Ltd. Versus Income Tax Officer, Ward-1 (1), Hyderabad.

HC held that income from sale of tissue-cultured plants constitutes 'agricultural income' under Section 2(1A) of the Act and is exempt under Section ... Agricultural income - whether the employment of advanced scientific techniques and laboratory-based processes necessarily transforms what is essentially an agricultural activity into a commercial or business operation? - HELD THAT:- Essence of the assessee's activity remains rooted in agriculture, the cultivation of mother plants on land through basic agricultural operations, followed by the multiplication and propagation of plant material through tissue culture technology. The fact that sophisticated scientific methods are employed to enhance efficiency and productivity does not alter the agricultural character of the underlying operation. Just as the use of modern machinery, hybrid seeds, or advanced irrigation systems does not convert traditional farming into a non-agricultural activity and the application of tissue culture technology which is merely an advanced form of plant propagation cannot be said to denature the agricultural foundation of the enterprise. This Bench finds considerable merit in the learned counsel for the appellant’s contention that tissue culture operations represents a natural evolution and modernization of traditional agricultural practices. The cultivation of mother plants on land involves all the basic agricultural operations contemplated under Section 2(1A) of the Act i.e. tilling, planting, nurturing, and harvesting. The subsequent laboratory based multiplication process is essentially an extension and intensification of the propagation that would otherwise occur naturally or through conventional vegetative methods such as grafting, layering, or cutting. The legislature, in defining agricultural income did not intend to freeze the concept of agriculture in a time warp or restrict it to primitive methods of cultivation. Agriculture, like all human endeavors, evolves with technological advancement and the introduction of tissue culture technology serves the same purpose as traditional agricultural methods, the production of plant material for cultivation, but achieves this objective with greater efficiency, uniformity, and disease-free quality. To deny the agricultural character of such operations merely because they employ modern scientific techniques would be ignoring the reality of contemporary agricultural practices and would create an arbitrary distinction that finds no support in the statutory language or legislative intent. Considering production of agricultural products through modern scientific methods, we hold that the income earned by the assessee from the sale of tissue cultured plants constitutes agricultural income within the meaning of Section 2(1A) of the Act and is therefore exempted from tax u/s 10(1) of the Act holding that mother plants are grown on land owned or leased by the assessee through basic agricultural operations and the tissue culture process that follows is merely an advanced method of propagating and multiplying the plant material derived from those mother plants. The fact that the multiplication occurs in a controlled laboratory environment rather than in open fields does not sever the essential connection to agriculture or transform the character of the income. This Bench is of the considered opinion that the income derived from tissue culture operations by the assessee qualifies as agricultural income which is exempted u/s 10(1) of the Act. Accordingly, question of law stands decided in favour of the assessee. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether income derived from the sale of tissue culture plants is 'agricultural income' within the meaning of Section 2(1A) of the Income-tax Act, 1961 and consequently exempt under Section 10(1), or is taxable business income. 1.2 Whether the extensive use of laboratory-based tissue culture and advanced scientific methods in plant propagation severs or preserves the requisite nexus with 'basic agricultural operations on land' for purposes of classification as agricultural income. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Characterisation of income from tissue culture operations as 'agricultural income' under Section 2(1A) and exemption under Section 10(1); impact of laboratory and scientific processes on the agricultural nexus Legal framework 2.1 The Court referred to the statutory scheme under Section 2(1A) defining 'agricultural income' as income derived from land used for agricultural purposes, and its exemption under Section 10(1). It also considered the Explanatory Notes to the Finance Act, 2008, which clarified that income from saplings or seedlings grown in a nursery is deemed to be agricultural income irrespective of whether basic operations are carried out on land, applicable prospectively from assessment year 2009-10. 2.2 The Court relied on judicial exposition of 'agriculture' and 'agricultural operations' in the decision of the Supreme Court in CIT v. Raja Benoy Kumar Sahas Roy, holding that: (i) agriculture in its primary sense denotes cultivation of land (tilling, sowing, planting and similar basic operations on land involving human skill and labour); (ii) subsequent operations such as weeding, digging, tending, pruning, cutting, harvesting and rendering the produce fit for market are agricultural when taken in conjunction with such basic operations; and (iii) the essential sine qua non is cultivation of land, and subsequent operations unconnected with basic operations cannot, by themselves, constitute 'agriculture'. 2.3 The Court further noticed the principles from decisions on nursery operations and seed production, including: (i) the Madras High Court decision in Soundarya Nursery, holding that plants grown on land and later nurtured and sold in pots remained agricultural produce when basic agricultural operations on land preceded subsequent operations; (ii) the Gujarat High Court in Shri Puransingh M. Verma, reiterating that basic operations on land are fundamental to agriculture and subsequent operations take their agricultural character only when founded upon such basic operations; (iii) the decision of the same High Court in Prabhat Agri-Biotech Ltd., holding seeds to be necessarily a product of agricultural activity and treating income from sale of such seeds as agricultural income; and (iv) this Court's recent decision in Nuziveedu Seeds Ltd., recognizing that hybrid seed income can be agricultural where cultivation on land is carried out under the assessee's supervision and control, despite extensive scientific research and technological processes. Interpretation and reasoning 2.4 On facts, the Court noted that the assessee: (i) cultivates mother plants on owned/leased agricultural land; (ii) performs all basic agricultural operations on such land-preparing and tilling the soil, planting, watering/irrigation, manuring, fertilizing, weeding, and maintaining the mother plants; (iii) extracts tissue from these mother plants and subjects it to micro-propagation in a sterile laboratory environment; and (iv) hardens, nurtures, and further grows the resultant plantlets in nursery/greenhouse conditions with continued agricultural operations before sale. 2.5 The Tribunal had treated the income as business income on the ground that the major part of the activity-multiplication of plant material through micro-propagation-was conducted in a laboratory using advanced scientific techniques and that land use for mother plants was only incidental. The Court re-examined this approach in light of the statutory definition and case law. 2.6 The Court held that the critical enquiry is whether the income-generating product is essentially rooted in basic agricultural operations on land involving human skill and labour, and whether subsequent scientific or technological processes are only an extension or intensification of plant propagation, or constitute an independent non-agricultural manufacturing activity. 2.7 Applying the tests from Raja Benoy Kumar Sahas Roy and nursery decisions, the Court found that the mother plants, grown through basic agricultural operations on land, were the primary source of all propagated plant material. The laboratory-based tissue culture was considered a sophisticated method of vegetative propagation (akin in purpose to grafting, budding, layering, or cutting) that enhances efficiency, uniformity, and disease-free quality but does not replace or negate the foundational agricultural activity on land. 2.8 The Court accepted the assessee's contention, supported by the comparative table between nursery and tissue culture operations, that both activities: (i) originate from mother plants reared on land through basic agricultural operations; (ii) involve subsequent nurturing, hardening, and growth of plantlets with continued agricultural operations (watering, manuring, weeding, etc.); and (iii) yield plants which are, in substance, products of agriculture. The presence of a greenhouse or controlled environment, or use of sterile containers, was treated as analogous to nursery practices already recognized as agricultural where rooted in basic operations on land. 2.9 The Court emphasized that agriculture is an evolving activity, not confined to traditional or primitive methods. Modern agriculture legitimately includes scientific applications such as biotechnology, hybrid seed development, controlled environments, and precision farming, so long as the essential element of cultivation of land remains. It rejected a narrow or archaic reading of Section 2(1A) that would exclude operations merely because they involve advanced laboratory techniques. 2.10 The Court drew support from the Finance Act, 2008 Explanation deeming nursery income from saplings/seedlings to be agricultural, reading it as indicative of a legislative intention to give a broad and final recognition to such activities as agriculture, even when carried out with scientific methods, though the specific deeming provision was prospectively operative from assessment year 2009-10. 2.11 The Court also found the reasoning in Nuziveedu Seeds Ltd. to be analogous: where basic agricultural operations on land form the foundation and scientific research and technological processes are integrated into the chain of plant production, the income may still bear the character of agricultural income. The Court held that tissue culture, as an advanced propagation methodology built upon agricultural cultivation of mother plants, falls within this rationale. 2.12 On the Revenue's contention that governmental and banking institutions treating tissue culture as agricultural for subsidy/credit purposes is irrelevant for tax classification, the Court implicitly accepted that income tax characterization must rest on the statutory definition and judicial interpretation. However, the Court considered the recognized agricultural nature of the activity by such authorities as corroborative of the essentially agricultural character of tissue culture operations, without treating those classifications as determinative or overriding the Act. 2.13 On the argument that social utility or contribution to farmers' welfare cannot convert business income into agricultural income, the Court agreed that tax classification must follow the statute and not policy sympathy. Nonetheless, it concluded on legal grounds that the assessee's operations satisfied the statutory tests for agricultural income because of their foundation in cultivation of land and integrated agricultural operations, and not merely because of their beneficial impact. Conclusions 2.14 The Court held that: (a) The assessee's tissue culture operations are fundamentally rooted in agriculture, beginning with cultivation of mother plants on land through basic agricultural operations and followed by propagative and nurturing processes (including laboratory micro-propagation) that are extensions of agricultural activity. (b) The use of sophisticated laboratory techniques and sterile conditions for micro-propagation does not break the nexus with land-based cultivation nor convert the activity into a purely commercial or industrial manufacturing process disentitled to agricultural income treatment. (c) Consistent with the principles in Raja Benoy Kumar Sahas Roy, Soundarya Nursery, Shri Puransingh M. Verma, Prabhat Agri-Biotech Ltd., and Nuziveedu Seeds Ltd., the resultant plants are products of primary and subsequent agricultural operations, and the income from their sale constitutes 'agricultural income' under Section 2(1A). (d) Such income is therefore exempt from tax under Section 10(1) for the relevant assessment years. 2.15 Consequently, the appeals were allowed, the question of law was answered in favour of the assessee and against the Revenue, and the assessee's income from sale of tissue culture plants for the concerned assessment years was held to be exempt as agricultural income.