TaxTMI 
TaxTMI 
2023 (4) TMI 570
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.... CIT(A) is contrary to law, facts and circumstances of the case. 2. The learned CIT(A) erred in by considering the income from production and sale of mushrooms as 'agricultural income' overlooking the definition of agricultural income u/s 2(1A) of the Income Tax Act, 1961. 3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored." 3. The brief facts of the case are that, the assessee is a company, filed its return of income for the assessment year 2017-18 on 05.11.2017, declaring a total income of Rs. 6,76,24,270/-and said return has been revised on 31.10.2018, declaring total income of Rs. Nil. In the revised return, the assessee has declared agricultural income and claimed the said income as exempt from tax. The case was selected for scrutiny and during the course of assessment proceedings, the AO noticed that the assessee has declared agricultural income from sale of white button mushrooms. Therefore, called upon the assessee to explain as to why income generated from sale of white button mushrooms cannot be treated as incom....
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....sed on the language used in the statue and not based on the views of other institutions.l t is also to be noted that the classification adopted by central government for GST purposes does not necessarily apply for income tax purposes as the governing ACTS are different. Now edible button mushroom is neither a plant nor a fruit or vegetable but a fungus in its strict sense of scientific classification. Further as per GST prawns are also classified as agricultural produce and exempt from GST but income derived from it is not agricultural income as per IT ACT and not exempt from taxation. iv) As per section 80JJA of Income tax Act which was included in Finanace act 1979, it is Stated that under section 10(1). agricultural income is exempt from income-tax. For this purpose "agricultural income" includes any income derived from land situated in mra and used for agricultural purposes. Mushrooms are generally grown in a closed chamber and not necessarily in an open field. Its raw material is a composite made of Wneat straw, poultry manure, calciumn carbonate, gypsum and other fertilizers. Dimerent layers of artificial soil are prepared in wooden trays and temperature is Controlle....
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....spect to creditors and debtors, packaging and Selling product directly to secondary market/ Traders, Branding and trade Marking on own packaged and canned product - all this facts suggest that the operation of the assessee is non-agricultural in nature. ix) Reliance is also placed on the case of Chander Mohan vs. ITO in ITA No. 377 & 389 (Chd.) of 2012, where the Hon'ble Chandigarh Tribunal on 28.10.2014 has decided that - Assessee claimed growing of mushroom as agricultural income - It was observed that there was no land on which tilling operations etc., was carried out, and same was basic operation for carrying out agricultural activities - mushrooms were grown under controlled conditions - since assessee had failed to explain basic agricultural operations carried out in mushroom production, income from growing of said mushroom to be treated as non-agricultural income. Now some land mark judgement on Agricultural income is given below CITv.Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 (SC) 'Agriculture' in its primary sense denotes the cultivation of the field and is restricted to cultivation of the land in the strict sense of the term, meaning thereb....
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....this instant case- since edible button mushroom is neither a plant nor a fruit or vegetable but a fungus in its strict sense of scientific classification and also in the process of growing it in trays makes the use of field, tillage of land operation non-existent and artificial environment conditioning has been used for production and quality control, the entire operation is far from the definition of agricultural income u/s 2(1A) but closely associated with production and manufacturing. Reliance is placed on the ITAT Bangalore decision in the case of M/s Blue mount food Products Limited vs. ITO in ITA No. 1128 (BANG.) OF 1983 dated 06.05.1985 where it has been held that- GROWING MUSHROOMS UNDER CONTROLLED CONDITIONS COULD BE TREATED AS A BUSINESS ACTIVITY AND SHED USED FOR GROWING THEM AS FACTORY BUILDING SO AS TO ENTITLE ASSESSEE TO CLAIM DEPRECIA T/ON AT 15 PER CENT In view of the detailed foregoing discussions it is construed that the income claimed as agricultural income is factually wrong as assessee. is engaged in trading of multiple products including mushroom manufactured by it. Hence the income of Rs. 6,76,24,270/- is brought to tax as Profits a....
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....the A.O. The observation of the assessing officer is very general in nature and has been made without any analysis of the books of accounts of the appellant. Neither the books of account has been rejected nor any substantial evidence has been brought on record which indicated any adverse finding in the books of account of the appellant. The assessing officer has brought nothing on record to suggest that the investment made in the plant and machinery has not been put to use in the cultivation of mushrooms and the depreciation claimed by the appellant is on some other activity. There is nothing on record to establish that the plant and machinery to the extent of 50% of the total fixed assets has not been used for the business of the appellant or has been used for some other businesses of the appellant company. 5.23 Same applies to the observation of the AO in regard to the expenses claimed by the appellant company on account of Purchase of raw packing material, expense towards advertisement for promoting the brand, professional and managerial expenses, interest expense on working capital requirement, et cetera and the mentioning of the activity of the assessee as manufacturi....
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....unt the general character of the land (as agricultural land) and not the use to which it may be put at a particular point of time. It is difficult to impute to Parliament the intention that a piece of land should, so long as it is used to produce certain things, be governed by and descend according to laws framed under List 2, but that when the same parcel of land is used to produce something else (as often happens in this country), it should be governed by and descend according to laws framed under List 3". (12) Similarly, in AIR 1944 Mad 401, Patanjali Sastri, J., stated:- "..........it would be somewhat grotesque to suppose that Parliament intended that lands devoted to the production of one kind of crop should devolve according to laws passed by Provincial Legislatures, while those used for growing another kind should pass according to laws made by the Central Legislature, or that the circumstances in which the cultivation is carried/on' (per/Reilly J. in 'Chandrasekara Bharati Swamigal v. Duraiswami Naidu, ILR 54Mad 900(AlR 1931 Mad 659)) should determine the law which governs the devolution of the land. Nor could it have been intended that succession to ....
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....-taxable as it is agricultural in nature." In its order of 1-1-1962, the Tribunal has stated that "admittedly no agricultural operations are being performed. on the forest lands. Sri I. Vishnu Rao denies that the assessee made any such admission. Be that as it may, we find nothing on the record to suggest that the forest lands were being ordinarily used either for the purpose of agriculture or for purposes subservient to or allied to agriculture by the valuation date. It follows that our answer to the first question must be in the negative." 5.28 So the case was decided for the question that whether the impugned Forest Land was agricultural Land or not. Entirely on a different issue and therefore has no relevance here. 5.29 AO has further relied on the case of Syed rafquar Rahaman Vs CWT reported in 75 ITR 318 Patna. I have perused the decision. In this the case, again in connection with the WT Act, it was held, on the facts of that case, that the land in question was not agricultural land. Again, this judgment is of no help to the AO because the facts were different. 5.30 AO has then relied upon on CIT Vis Green Gold Tree Farmers (P) Ltd. 2007 T....
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.... in the case of Inventaa (supra), on the deleted provisions of section 80JJA, the said decision has no application to the facts of the present case. 5.34 On perusal of the decision in the case of DCIT vs Inventaa (supra) it is noted that the Hon'ble Bench has discussed several judgements of the Jurisdictional High Court of Madras while deciding the case. Two of such cases are CITv. K.E. Sundara Mudaliar [1950] 18 ITR 259 (MAD.) and Commissioner of Income-tax v. Soundarya Nursery (2000| 241 TR 530 (Madras) . Consideration of the above two cases of jurisdictional High Courts in length in the decision of DCIT Vs Inventaa (supra) becomes relevant in comparison to the decision of non jurisdictional High Couts and Tribunal on different facts. 5.35 In view of the above discussion and respectfully relying upon the decision of the Hon'ble Hyderabad Tribunal Special Bench in the case of DCIT v. Inventaa Industries Private Limited (supra), it is held that the agricultural income of Rs.6,76,24,270/, arising from the sale of white button mushroom is 'agricultural income' and hence exempted us 10(1) of the Act. 5.36 AO is therefore, directed to delete t....
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....ivation as an agricultural activity. He further referring to RTI reply received from National Horticultural Board submitted that even National Horticultural Board recognized mushroom cultivation as agricultural activity. Further, Goods and Service Tax Act has classified mushroom as a vegetable for the purpose of human consumption. He further, submitted that Hon'ble Finance Minister while introducing explanation (3) to section 2(1A) of the Act, clarified that income arising from saplings and seedlings grown in a nursery is also exempt from tax. From the above, it is very clear that in a modern day of developed agriculture, vertical form of farming in a green house or a temperature controlled facility can be considered as agricultural activity, in case such activity is involved in carrying out certain basic and subsequent operations of agriculture as defined under the Act. Since, the assessee is carrying out various basic operations and cultivates mushroom in a soil, said activity falls under the agricultural activity and income derived from said activity is only an agricultural income, which is exempt from tax. In this regard, he relied upon the decision of ITAT Special Bench in the....
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.... growth from the land. Some of the said operations are tilling of land, sowing of the seeds, planting and similar operations on the land. Besides the basic operations, there are certain subsequent operations which are performed after they produce sprouts from the land which includes weeding, digging the soil around the growth, removal of undesirable undergrowths and all operations which foster the growth and preserve the same not only from insects and pests but also from depredation from outside. Further, cultivation of the land does not comprise merely raising the products on the land, in the normal sense of the term like tilling of the land, sowing of the seeds, planting and similar works done on the land which also includes a subsequent operation like weeding, digging etc. The Hon'ble Supreme Court, further observed that agriculture does not merely imply raising the food and grains for the consumption of men and animals, it includes a product from the performance of basic as well as subsequent operations on land. These products for instance may be grain, vegetable or fruits including plantation of groves etc. From the above observation of the Hon'ble Supreme Court, it is very cl....
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....ts and machinery employed and financial assistance from banks, we find that even agricultural operations are carried out by employing various agricultural implements and machineries in a modern day and also financial assistance is taken from banks and financial institutions for the purpose of making agriculture a systematic activity and more profitable. Merely because the assessee has employed plant and machinery and borrowed loan from bank, it does not change the nature of activity carried out by the assessee and product grown therein. Therefore, we are of the considered view that observations of the AO in light of plant and machinery employed by the assessee and bank loan facility to come to the conclusion that said activity is a business activity is devoid of merits. 12. Further, the Hon'ble Finance Minister has clarified while introducing explanation (3) to section 2(1A) of the Act, in light of certain divergent judicial precedence and clarified that even income derived from saplings or seedlings in a nursery is exempt from tax. Further, various Government authorities have clarified that cultivation of white button mushroom is an agricultural activity. The assessee has filed....
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....nd adding sufficient water 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, mush....
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....- building, and (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, urbanization 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....
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....tivation 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 plants ....
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....'ble 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 opportun....
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....e general 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....
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....h an interpretation may be adopted". 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, ....
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....me will be treated as agricultural income, thus qualifying for exemption under subsection( 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....
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.... we cannot apply the same to the assessee. But 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 gathe....
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.... As far as ingredients of basic operation is concerned 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....
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....ngi. Ld. Standing Counsel submits that vegetative part does not mean that the classification 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....
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....ural operation involves certain procedures and protocols. Certain conditions are necessary for natural growth of the product. The degree of control 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 ITA....
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....nds from State Bank of Hyderabad with guidance provided by National Bank for Agriculture and Rural Development (NABARD) and the loans sanctioned are agricultural loans. * 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 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....
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....aw in the facts and circumstances of the case. In any event, the type of mushroom grown in that case and the place at which it was grown and the fact that the process of growth was not properly explained. As the division Bench has not agreed with this view of the Pune Bench of the ITAT, this issue was referred to this larger Bench. 16.6. Hence as basic operations are performed by expenditure of human skill and labour on land by the assessee, which results in the raising of the 'product' called "Edible white button mushroom" on the land and as this product has utility for consumption, trade and commerce, the income arising from the sale of this product is agricultural income and hence exempt u/s 10(1) of the Act. 16.7. Thus we uphold the order of the Ld. CIT(A) on this issue. 17. In view of the above discussion, we answer the question referred to us by the Hon'ble President in the affirmative, in favour of the assessee." 14. The Hon'ble Madras High Court in the case of CIT vs Soundarya Nursery [2002] 123 Taxman 372 (mad) had considered an identical issue and held that income from plants grown in pots and income from sale of seeds is an agricultural inco....