TaxTMI 
TaxTMI 
TaxTMI 
2023 (4) TMI 570
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....ces 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 income from business. In response, the assessee submitted that cul....
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....tions.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 Controlled to a specific degree by closing the inlets and outlets of air to provide the necessary....
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....ing 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 thereby tilling of the land, sowing of the seeds, planting and similar operations on the land. These are basic operations an....
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....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 and gains of business and assessed as such. Addition: Rs. 6,76,24,270/-" 5. Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A),....
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....as 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 manufacturing in the loan paper of Karura Vysya Bank.ln absence of any analysis/inquiries/investigations and to bring sufficient proof on record to rebut the claim of the assessee in regard to nature of th....
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....duce 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 such lands should depend on the degree of tillage or preparation of the soil or off skill and labour expended in rearing and maintaining the plants. We are of opinion that for the purposes of the relevant entries in Lists II and III of Sch. 7, the expres....
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....y, 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 Tax LR 609 (Uttaranchal). I have perused the judgement. The question framed in this case to decide was: "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was legally justified in confirming the view of the Commissioner of Income-tax (Appeals) ....
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....rt 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 the addition of Rs. 6,76,24,270 under the head business income. Consider the income of Rs. 6,76,24,270/ as 'agricultural income' and allow exemption u/s 10(1) of the Act on the same. Ground No. 1 to 8 are therefore ALLOWED." 7. The Ld. CIT-DR, Mr. M. Rajan, submitted that growing white button mushrooms cannot be treated as agricultur....
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....bmitted 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 case of DCIT vs M/s. Inventaa Industries Pvt Ltd (supra). 9. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The assessee is engaged in the activity of cultivation of white button mushroom in a temperature controlled facility. The assessee has explained the process of cult....
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.... 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 clear that in order to consider any activity as agricultural activity there should be some basic and subsequent operations in the land for the purpose of raising grains or vegetables or fruits including plantation or groves. In this case, if you go through the basic and subsequent operations carried out for production and sale of white button mushroom....
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....e. 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 RTI reply received from Directorate of Mushroon Research, Solan, ICAR where the authority has clarified that cultivation of white button mushroom is an agricultural activity. Similarly a copy of letter issued by Department of Agriculture and Co-operation, Ministry of Agriculture, Government of India dated 12.09.1997 addressed to various state governmen....
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....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 pins and mushrooms. The racks and shelves are unloaded and kept cleaned for next loading. The One batch Cycle in growing rooms takes about 45-53 days. 12.2. On these facts and circumstances, the following issues arise for our consideration which would answer the question referred to us. i. "Land" is immovable property. Soil is part of land. If "soil" is placed in trays or pots and w....
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.... 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 shall be deemed never to have included any income arising from the transfer of any land referred to in item (a) or item (b) of sub- clause (iii) of clause (14) of this section;]" 12.4. We now reproduce the relevant portions of the landmark judgment of the Hon'ble Supreme Court in the case of CIT Vs. Raja Benoy Kumar Sahas Roy (1957) [32 ITR 466] on agricultural issue. "The primary sense in which the term agriculture is understood is agar-field and cultra-cultivation, i....
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....ive 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 such as cotton, jut and linen and all plants used for dyeing purposes, such as indigo, etc., all timber trees, and flowering plants. I do not think this is the intention of the Act." The concurrent view in this very judgment of Shri Vishwantha Sastri.J., is that "There being no definition of "agriculture" and agricultural purpose in the Act the words have to be construed and understood in their popular sense and according to their ordinary meaning. It is a matter of ordinary experience at least in this part o....
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....ral 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 opportunity for growth or development." 12.11. "Soil" is the thin skin that covers the land. "Soil" is material in the top layer of the surface of the earth on which plants can grow and is a non-renewable resource. It takes ages for rocks to wither into soil and rich organic matter to build up. Land is a part of the earth, while soil refers to one part of the land. Land, as commonly understood means, the surface of the earth not covered by a body of water. Thus, the term land includes soil. In the definition referred above, "land" is defined in an inclusive manner. 12.12. The....
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....g 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 statutory and constitutional interpretation under which common law courts interpret an enactment (a statute, part of a statute, or a clause of a constitution) within the context of the law's purpose. Purposive interpretation is a derivation of mischief rule set in Heydon's Case, and intended to replace the mischief rule, the plain meaning rule and the golden rule. Purposive interpretation is used when the courts use extraneous materials from the preenactment phase of legislation, including early drafts, Hansard's committee reports, and white papers. The purposive interpretation invo....
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.... 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 accept the same. If the term 'Agri' is 'field', then 'field' can be on land or on a 'terrace' or on a 'pot', 'tray' etc., In view of the above discussions, we hold that it is important to distinguish between the meaning of the term 'soil' from 'land', because the cultured top strata of the earh's surface, which is fit for arable cultivation, is actually what is required for agricultural purposes and this top layer (being 'soil') is one on which actual agricultural growth takes place. In contrast, the meaning attributed to land (primarily as an immovable object) is of a wide import. For the purpose of understandi....
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....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 thereon and it was only after the performance of the basic operations on the land, the resultant product grown or such part thereof as was suitable for being nurtured in a pot, was separated and placed in a pot and nurtured with water and by placing them in the greenhouse or in shade and after performing several operations, such as weeding, watering, manuring, etc., they were made ready for sale as plants all these operations would be agricultural operations and all this involves human skill and effort. Thus, the plants sold by the assessee in pots were the result of primary as well as subsequent operations comprehended within the term 'agriculture' and th....
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....se 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 comprises of growing of rose by deploying hydroponics technique for the farming of best quality roses. It is stated that the assessee has deployed a budding technical plant. Further it was explained that root stocks were brought from the market and placed in the green house. The plantation and the generation of sapling was nothing but agricultural activity. The mother plant is otherwise reared on earth. For rearing of mother plant human labour is involved. The tilling of soil, watering and other primary agricultural activity is the basic requirement for the growing of the rose plants. Subsequently the saplings are planted on plastic trays, which were kept at the ....
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....h. 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 operation." 13.5. We agree with this view of the Tribunal. The process followed in the case of Best Roses Biotech (P.) Ltd., (supra) in similar tothe process followed by the assessee. 13.6. Hence, the view of the courts was that the income in question was agricultural income and the explanation only acknowledges this fact. We should not take a 'pedantic' view on this issue. The view of the legislature is more expansive and purposive than the view of the courts. 13.7. In view of the above discussion, we conclude that "soil", even when separated from land and placed in trays, pots, containers, terraces, compound walls etc., continues to be a specie of land and hence "land" fo....
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....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 as: a) an article of substance i.e. manufactured or refined for sale. b) A thing or person that is the result of an action or process. c) A product in modern times is also defined as a item or thing which is offered for sale. A product can be a service or an item. It can be physical or in virtual or cyber form. 14.6. It is clear that we cannot restrict the word "product" to 'plants', 'fruits', 'vegetables' or such botanical life only. The only condition is that the "product" in question should be raised on the land by performing some basic operations. Mushroom produced by the assessee is a product. This product is raised on land/soil, by performing certain basic operation. The product draws nourishment from the soil and is nat....
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....he 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 would not change merely because agricultural operation was carried out in a greenhouse under a controlled environment. The assessee in that case was engaged in the business of plant floriculture and tissue culture, and claimed exemption of income as being agricultural income under section 10(1) of the Act. The A.O. disallowed the exemption on the ground that basic operation was done in a greenhouse. The ITAT held that the involvement of a greenhouse and controlled environment would not change the nature of agricultural income. We endorse this view. 15.3. The ITAT Ahmedabad Bench 'A' decision in the case of DCIT v. Best Roses Biotech (P.) Ltd., (supra) has analyzed the advanced mechanism of growing rose plants in a controlled environment and held as under:....
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....dustries, 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 of India categorized Mushroom cultivation as the agricultural operation. Various Universities in India and abroad also treated the Mushroom cultivation as an Agricultural Operations. 16.1. The Ld. Standing Counsel submits that, the view of various Government and Financial Institutions, should not influence the interpretation of a statute. She submits that the statute has to be interpreted based on the language used therein and not based on views of universities and other organisations. 16.2. Words of the statute, when not defined, have to be construed and understood in their popular sense and according to their ordinary meaning. No doubt, statute cannot be interpreted based on the views of different Governmental Authorities and Financial Institutions, as their purpose and intent would be different, from the purpose and intent of the enactment in question. But the manner in which other Government authorities and agencies views this issue, can be gathered and und....
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....ursery [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 income. The relevant findings of the Hon'ble Madras High Court are as under: "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. 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 thereon and it was only after the performance of the basic operations on the land, the resultant product grown or such part thereof as was suitable for being nurtured in a pot, was separated and placed in a pot and nurtured with water and by placing them in the green house or in shade and after performing several operations, such as weeding, watering, manuring, etc., they were made ready for sale as plants. all these operations would be agricultural operations that involved human skill and effort. Thus, the plants sold by the assessee in pots were the result of primary as well as subsequent operations comprehended within the term 'agriculture'....