TaxTMI 
TaxTMI 
2018 (8) TMI 69
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...., does not arise from the grounds raised by the revenue in these appeals. The Ld. Senior Standing Counsel, Ms. K.Mamata Choudary, submitted that the question does not reflect the grievance of the revenue, raised in its appeal. Both the parties requested the Bench to re-frame the question to be decided by the Special Bench and filed a combined memo in this regard suggesting a draft question. We are in agreement with the reframed question suggested by both the parties. This re-framed question was referred to the Hon'ble President, ITAT, who vide his order dt. 10th April, 2018, referred this re-framed question, to this Special Bench for disposal, along with the appeals as well as the cross objections for Assessment Years 2008-09, 2010-11, 2011-12 and 2012- 13:- The question referred is as follows: "Whether in the facts and circumstances of the case, the income from production and sale of Mushrooms can be termed as 'agricultural income' under the Income Tax Act, 1961?" Facts in brief: 2. The assessee is a company engaged in the business of manufacture of bulk drugs. It also derives income from growing of "Edible white button mushrooms" ( Mushroom) under the name and s....
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....ection is repealed and perhaps it was the intention of legislature to treat mushroom cultivation as agriculture and hence repealing of the section. 2.1. Findings of the A O : The findings of the Ld. Assessing Officer ( A.O.) are summarised as follows: a. Mushrooms are grown by the assessee in 'growing rooms' under 'controlled conditions' in racks placed on shelves above land and on Compost (manure) which is prepared with paddy straw, Horse manure, Chicken manure, Gypsum and Urea which is not land. Hence the activity is not agricultural activity. b. The Hon'ble Supreme Court in the case of CIT Vs. Raja Benoy Kumar Sahas Roy (1957) [32 ITR 466] held that, income derived from some measure of cultivation of land with some expenditure of human skill and labour, renders the profit derived from the 'product' agriculture income which would be exempt u/s. 2(1A) of the Act. In the case of CIT Vs. Kokine Dairy (1938) [6 ITR 502], it was held that the term 'agriculture' does not cover activities remotely connected with land and when the assessee has not performed the basic operations on land, the income derived was held not to be agriculture income. Some of such ins....
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....e was made to information available in Wikipedia, on the website http://www.americanmushroom.org / agaricus.pdf. He held that Mushroom is not a vegetable as argued by the assessee, but is a fungus. In outdoors, mushrooms grow on wood and the activity is not akin to that of a nursery. h. The claim of the assessee that it owns 33 acres of land is not in dispute but the mushroom growing activity is not performed on this land. When the assessee is in possession of 33 acres of agricultural land, it was not necessary to purchase ballclay at Rs. 1 per Kg from M/s. Nyvelli Lignite Corporation, Nyvelli for use in growing of mushrooms. Thus, land was never involved in the process of growing of mushrooms. i. Classification by or views of various Government and public sector agencies on whether growing of mushroom is an agricultural activity or not is of no consequence and does not help the assessee in claiming exemption u/s. 10(1) of the Act. j. The statements recorded from the two senior functionaries of the assessee-company proves the fact that no agricultural operations were carried out on the land by the assessee, let alone basic operations on land. Even from th....
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....roduction of mushroom is not agricultural income. It also challenged the reopening of the assessments by the AO for the AYs. 2008-09 and 2010-11. The issue of non-grant of depreciation by the Assessing Officer, in respect of the assets held for production of mushrooms, was also challenged for all the four Assessment Years. 3.1. Before the Ld.CIT(A) assessee reiterated that growing of mushroom is an agricultural activity. It was submitted that, mushrooms are grown manually on the land in a specified atmosphere. It was contended that the assessee was producing a nutritious vegetable called mushroom which grow over a period of 1 ½ months on certain types of soil. A chart giving comparison between growing of mushroom and other crops was furnished. Reliance is placed on the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Sri Venkateswara Hatcheries Pvt Ltd [237 ITR 174] on the proposition that growth of mushroom is a natural and biological process and hence mushrooms are not articles or things. Reliance was placed on the views of various governmental departments such as NABARD, State Bank of Hyderabad, Ministry of Commerce and Industry, Central Excise Departme....
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....as to whether mushroom is a "plant" or "fungi", the Ld.CIT(A) held that the questions in this case as to whether the process of production is agriculture or not and whether the produce grown is "plant" or "fungi" are not relevant and that the relevant factor to be determined is the process of production. e. He held that the word 'agro' means "land" and this definition includes soil which means all types of soils. The process of enriching the "soil" by adding fertilizers and wastages etc., is "culture of the soil" and when the soil is used for production of edible product, it is called as an agricultural product. f. The reference to provisions of Section 80JJA by the AO is not relevant as this provision of law is no longer in existence. g. On the reference to the material available in Wikipedia by the Assessing Officer, the Ld. CIT(A) held that though several thousands of species of mushrooms are there, only those which are grown on "soil" are "edible". h. The Ld.CIT(A) referred to the judgement of the Hon'ble Supreme Court in the case of CIT Vs. Sri Venkateswara Hatcheries Pvt Ltd [237 ITR 174] for the proposition that merely because the conv....
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....e Ld. CIT(A) that income from production of mushroom is agricultural income. The assessee has filed cross-objections for the AYs. 2008-09 and 2010-11 on the issue of reopening and for all the four Assessment Years on the issue of claim of depreciation. Revenue's submissions: 8. Ld. Sr. Standing Counsel Smt. K. Mamata Choudary supported the order of the Ld.AO and made detailed arguments. The brief submissions filed by her, stated succinctly are as follows: * Mushrooms are fungus which are produced from spawn and not plants or crops and hence not agriculture. They are grown in trays of prepared soil in climate controlled rooms for commercial purposes. Even if certain activities are akin to cultivation, it cannot be treated as an agricultural income. * A fundamental characteristic of land is that it is immovable and is a fixed part of the topography. Soil is a component of land/ earth but loses its identity of land once removed from it. Therefore soil ought not to be treated synonymously with land. * The reliance placed by the Assessee on the incomplete and selective definition of "Land" in Black's Law Dictionary to include soil and thereby equatin....
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.... * Classification of the land as agricultural land for land revenue purposes would not automatically lend the character of an agricultural income to activities carried out on it. Agricultural income would necessarily, by statutory definition, mean income from land actually used for agricultural purposes. * The legislative intent and understanding had expressly been stated to treat production of mushrooms under controlled conditions as business income and sought to briefly incentivise such business by providing for certain deductions under the then Section 80JJA. * Section 80 JJA * Explanatory Note to Finance Act 1979 * CBDT Circular No. 258 of 1979 dt 14.06.1979 * Controlled conditions are commonly understood to mean that the climatic/environmental factors such as humidity, temperature, carbon dioxide, etc. are controlled. * Explanation 3 to Section 2(lA) relating to income from seeds and saplings grown in nurseries would not aid the case of the assessee as the income from such nurseries have been included in the scope of 'agricultural income' by way of a deeming fiction. A deeming provision is enacted for the purpose....
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....row spontaneously in certain districts of Andhra Pradesh on Ant Hills. * That the AO considered a variety of mushroom which is called "Shiitake Mushroom" which is normally grown on wood and trees and therefore is not relevant to the facts of the assessee's case. * That ballclay is a type of soil and that this soil is "cultured" by way of adding paddy straw, chicken manure, and other manure which degenerates into the soil. * That the terms 'earth', 'land' and 'soil' have to be understood in the right perspective and that the top layer of earth, of about 8" to 10", is "soil" and this "soil" is only useful for the purpose of any agriculture. That in any type of cultivation, this top 8" to 10" of land, which is "soil", is what the farmer uses and that this is ploughed and cultured and prepared for agriculture production. * Referring to the argument of the Ld. Standing Counsel that land is immovable property and that the soil attached to such land, when cultured and used for production of plants is agriculture, he submitted that when the top layer of the land which is, "soil" becomes unfit for agriculture due to salinity, barrenness or otherwise, it i....
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....and that technology is used to aid the natural growth of this agricultural produce. * Referring to the argument of the Ld. Standing Counsel that what is used is spawn seed which means a group of eggs of fish, he submitted that "spawn" by definition is also the mycelium of fungi, especially of mushroom grown to be eaten. He referred to 'mycelium' as defined in Random House dictionary and submitted that it is 'the vegetative part or thallus of fungi' being composed of one or more filamentous elements or hyphae and that the use of the word 'spawns' does not decide whether the process in question is an agricultural process or not. He claimed that the activity involved in production of mushroom is agricultural operation. * A comparative chart of the process of growth of mushrooms and process of growth of vegetables and fruits was given to demonstrate that basic agricultural operations are performed in the production of mushroom * That the assessee possesses Ac. 33.50 Guntas of agricultural land at Kallakal - Village, Toopran - Mandal, Medak - District as well as 27.1 acres of agricultural land at Peddapuram, East Godavari District of Andhra Pradesh and that at....
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.... Mohan Vs. ITO [52 taxmann.com 203] (Chandigarh- Trib), he submitted that the assessee appeared in court in person and relied on a circular of Government of Himachal Pradesh, which was referring to certain type of mushrooms and not to "Edible white button mushroom", grown by the assessee and that the process of growing mushrooms was not explained and the production in that case was done within the city in residential houses. * On a query from the Bench, the assessee filed the photographs of mushrooms and of the green house cultivation of fruits and vegetables. * In brief a summary of the submissions of the assessee are as follows: "(a) The assessee's object is to produce a nutritious vegetable required for the increased population. (b) For production of Mushrooms agricultural lands are used; (c) The lands held by the assessee are agricultural lands and are treated as such by the Banking authorities and also the revenue authorities. (d) The base for production is land/soil prepared with Paddy straw, manure and other ingredients; (e) The soil so prepared is cultivated by providing manures, pesticides, water and other nece....
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....er and mixing. Then, transferred to bunkers for further decomposition under aeration. Stage-II After five days the compost is transferred from bunkers to tunnels for pasteurization and conditioning. Stage-III. The above prepared compost is transferred to growing rooms with SPAWN (seed) and placed in the shelves. This layer will be of about 200 mm thickness. The SPAWN run (i.e., spreading of SPAWN) takes about 12 days to 20 days. This is done under controlled conditions in the growing rooms. Stage-IV After the SPAWN Run, the beds are cased with casing soil of about 50 mm thickness. The casing soil is prepared by mixing Coir Pith, Ballclay with suitable other micro nutrients and SPAWN. Then Case Run is allowed for the SPAWN to spread. It may take 6-8 days. After this venting is done by giving Air, Temperature, C02 and moisture to SPAWN upon which it starts forming, Pins (primodia). Stage- V After the Pins, the mushroom grows into Harvesting in 13-21 days. The Harvesting is done in 2-3 flushes (picking). Stage- VI After the 2-3 flushes, the growing room is cooked out i.e., heated up to 65 C Degrees to kill the remaining mycelium, mushrooms ....
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.... (ii) the land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such or where the land is not so assessed to land revenue or subject to a local rate, it is not situated-(A) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; or (B) in any area within such distance, not being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in item (A), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification 2 in the Official Gazette.] 3 Explanation.- For the removal of doubts, it is hereby declared that revenue derived from land shall not include and shall be deemed neve....
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....i.e. cultivation of the "agar" i.e. field/land. Agricultural activity requires expenditure of human skill and labour, upon the land itself and this should result in effectively raising a "product" from the land. The "product should have some utility either for consumption, for trade and commerce. The term "Agriculture" receives a wider interpretation both with regard to its "operations" as well as the "results" of such operation. 12.6. The horizon of interpreting the term 'agriculture' was given a more adaptive width by the High Court of Madras in CIT v. K.E. Sundara Mudaliar [1950] 18 ITR 259 (MAD.), wherein the court stated as under: " In Panadai Pathan v. Ramasami Chetti [1922] ILR 45 Mad...Spencer. J., at page 713 stated his conclusion in these words: In my opinion agriculture connotes the raising of useful or valuable products which derive nutriment from the soil with the aid of human skill and labour;...Ramesam. J., at page 714 was against placing a narrower interpretation upon the word for he says: To give a narrower interpretation to the term and to confine it to the raising of products used as food for man and beast will exclude all cultivation of fibrous plant....
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....e Madras High Court in the case of Union of India Vs. Krishna Murthy (supra) wherein at para 14, Mullah's commentary on Transfer of Property Act has been extracted along with definition of immovable property under "General clauses Act", and argued that land is immovable property and once soil is detached from land, it ceases to be land. Definitions as relied upon by the parties are extracted for ready reference: "LAND In the Black's Law Dictionary, free online legal dictionary, 2nd Edition, "land" is defined as: In the most general sense, "comprehends any ground, soil or earth whatsoever; as meadows, pastures, woods, moors, waters, marshes, furzes and heath.Co.Litt 4a. The word "land" included not only the soil but everything attached to it, whether attached by the course of nature, as trees, herbage, and water, or by the hand of man, as buildings and fences. "land" is the solid material of the earth, whatever may be the ingredients which it is composed of whether soil, rock or other substance ." 'SOIL' The word "soil" as per Random House Dictionary - The Unabridged Edition to include "any place or condition providing the opport....
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....al words being restricted to a sense analogous to that of the less general. This principle needs a word or phrase or even a whole provision that stands alone has a clear meaning, will be given quite a different meaning while viewed in the light of its context. 12.13. No doubt the term 'land', as argued by the Ld. Sr. Standing Counsel, is generally understood as immovable property, under the Income Tax Act and under the T.P. Act. But in the case on hand, the context and purpose for which the term 'Land' has been used by the legislature has to be understood. Use of land and performing activity on land itself, is the requirement specified for a natural product that raises from land itself, to be an agricultural product, the income from which is exempt from tax. If the question to be answered is whether land is used for production or not, then in our view strict interpretation cannot be applied. 12.14. The term 'Land' in our view has to be interpreted by using the principles of 'Purposive Interpretation'. The purposive approach (sometimes referred to as purposivism, purposive construction, purposive interpretation, or the modern principle in construction) is an approach to ....
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....dopted". 12.15. 'Soil' is a part of the land. Land is also part of earth. The upper strata of the land is soil and this is cultured and made fit for production of crops, vegetables and fruits etc., by enriching the soil. When such soil is placed on trays, it does not cease to be land and when operations are carried out on this "soil", it would be agricultural activity carried upon land itself. 12.16. If the strict interpretation, as argued by the Ld. Standing Counsel is accepted then, when 'Soil' attached to earth is cultivated, it is agricultural activity and when 'Soil' is cultivated after detaching the same from earth, it is not agricultural activity. Such an interpretation in our view, would be unintended and unfair. The only part of the land that is cultivable, and which is useful for agricultural activity is 'Soil' which is the top layer of land. Then whether such soil is attached to land or is placed in containers above the land should in our humble view, not make a difference. Though these strong arguments of the Ld. Standing Counsel appealed to us ab-initio on an analysis of the purpose for which the term is to be interpreted, we are unable to persuade ourselves to a....
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....l income, thus qualifying for exemption under sub-section(1) of Section 10 of the Act." (Emphasis ours) 13.1. It is true that this Explanation 3 to Section 2(1A) of the Act, is a deeming provisions in the Act. It is also true that deeming fiction cannot be extended and should be strictly restricted to the fiction created. The impression that this amendment was brought into the statute to nullify certain judicial pronouncements is factually incorrect. The courts have decided that income from nursery is agricultural income. 13.2. The Hon'ble High Court of Madras in Commissioner of Income-tax v. Soundarya Nursery [2000] 241 ITR 530 (Madras), in which the court observed as under: "8. All the products of the land, which have some utility either for consumption or for trade or commerce, if they are based on land, would be agricultural products. Here, it is not the case of the revenue that without performing the basic operations, only the subsequent operations, as described in the decision of the Apex Court have been performed by the assessee. If the plants sold by the assessee in pots were the result of the basic operations on the land on expending human skill and labour t....
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.... as the assessee performs basic operations on soil, the ratio of the judgment in the case of Soundarya Nursery (supra) applies to the facts of this case. 13.4. The Ahmedabad Bench of the ITAT in the case of DCIT vs. Best Roses Biotech Ltd. (2012)17 taxmann.com 56 (Ahd.) has held as follows:- "6.1 Activity in question : The company had developed a greenhouse for the establishment of a floriculture project. The company had grown good quality of rose flowers and also exported them abroad. It was explained that for the plantation of roses a very well treated soil is required. The quality of the soil is therefore tested. Manures are mixed for preparing a base for growing the rose plants. The company has installed a proper drainage system. Certain operations such as mixing of soil and watering of plants through drainage are explained. Then the activity of pruning and bending of growing plants carried out to get best size of rose buds. It has also been explained that pest control is also required. Insecticides are sprinkled to save the plants from any disease. From the facts as emerged from the compilation filed we have gathered that within greenhouse the floriculture activity....
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....cerned the assessee's case is that the technology deployed is (i) use of soil and operation on soil (ii) use of particular soil type contents i.e. coco peat, manure, etc. present in the soil, (iii) drainage system as over watering harms the roots as well as quality (iv) bending shoots for maximizing the quality of roses, and (v) pest and diseases control for providing protection to roses. Therefore we hold that the activity which is connected with the land cultivation , such as ploughing of field, leveling of field, sowing of seed in the ploughed and leveled field, growing of plants, as case the may be, plantation, manuring, watering, weeding-out of weeds, so and so forth. These agriculture operations are said to be 'basic cultivation activity' and thereafter an agriculturist has to perform 'subsequent agriculture operation', namely tending of grown plants, pruning, cutting or shaping and finally harvesting of crop. We have to clarify, as held by few honourable courts as well, that the subsequent operations ought to be a continuation of basic Agriculture operation. The fundamental requirement is that it should remain connected with the basic agriculture operatio....
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....sification is vegetable and it only refers to the reproductive feature of the "fungi". "A mushroom or toadstool, is the fleshy, spore-bearing fruiting body of a fungus, typically produced above ground on soil or on its food source and the scientific classification is Kingdom; Fungi, Division. Basidiomycota" (Wikipedia). 14.2. On a careful consideration of the material on record, we conclude that mushroom, is not a 'vegetable' 'plant' or an 'animal' but a 'fungus'. 14.3. The contention of the assessee is that, what is produced by performing basic operations on the soil, is an agricultural product, even though the product is not a 'plant' or the 'flower' or a 'vegetable' or a 'fruit'. It was emphasized that the nature of the product is irrelevant as far as it is produced by performing some basic operations on the soil. 14.4. In the case of CIT vs. Raja Benoy Kumar Sahas Ray (supra), as already stated, it is laid down that the "product" should be "raised on the land" by "performing some operation on land by expenditure of human skill and labour" and that the "product" should be "of some utility for consumption, for trade and commerce". 14.5. The term "product" is defined a....
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....rol and the type of scientific input differs from product to product. The type of soil to be used, the nature of agricultural operations to be undertaken, material required to be used to enrich the soil, the timing of sowing, transplanting, harvesting etc., the quantity and quality of inputs such as water, fertilizer, pesticides etc. to be used and the timing at which they have to be used, are all controls that a farmer exercises in every type of agricultural activity. There can be no agriculture without controlling the conditions of production by human intervention. Just because the degree of control of the conditions are greater in some cases, as compared to others, the product produced out of such process would not cease to be an agricultural product. 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. This is true with the use of greenhouse technologies. 15.2. The ITAT Pune Bench in the case of Asst. CIT v. KF Bio Plants (P.) Ltd. [Pune Bench 'A', ITA No. 1110/PN/2011] held that the nature of agricultural income wo....
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.... * NABARD conducted survey and observed that mushrooms are fruiting bodies of some members of lower group of plants. They are fleshy spore bearing structures containing numerous spores which are functionally similar to seeds of higher plants. They are used in reproduction of mushrooms. After conducting the studies, the NABARD certified Mushroom cultivation as an agricultural operation and kept the same under "agricultural" segment. * That for the purpose of commencement of production activity, the assessee requires a certification from the Ministry of Commerce and Industry, Govt. of India. The said Ministry also categorized activity as "other agricultural industry". The assessee is also granted licence by the Fruit products Order, 1995 by the Ministry of Food Proceedings Industries, Government of India . * The the Central Excise Department classified in chapter 7 that the Mushrooms are Edible Vegetables and did not levy any tax on the assessee. * The Ministry of Agriculture, Government of India categorized Mushroom cultivation as the agricultural operation. Various Universities in India and abroad also treated the Mushroom cultivation as an Agricult....