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I-T - Even if soil separated from land and put in containers it continues to be specie of land and income from growing mushrooms in such containers under controlled environment is agri income exempt u/s 10(1): ITAT Special Bench

By TIOL News Service

HYDERABAD, JULY 16, 2018: THE ISSUE BEFORE THE SPECIAL BENCH IS - Whether income earned by a manufacturer from selling mushrooms, are eligible to be treated as 'agricultural income' exempt u/s 10(1), irrespective of the fact that they are grown in a controlled environment. YES is the Answer.

Facts of the case:

The assessee is a company engaged in the business of manufacture of bulk drugs, and it also derives income from growing of "Edible white button mushrooms" under the name and style of 'Premier Mushroom'. The assessee was treating the income from growing mushrooms as "income from agriculture" and hence exempt u/s 10(1). In the meanwhile, a survey operation was conducted at the mushroom growing unit of the assessee-company located at Kallakal Village, Telangana, to verify the process of mushroom growing by the assessee. During the course of survey, statements of the Vice President of the company was recorded, pursuent to which the AO came to the conclusion that Mushrooms were grown by the assessee in 'growing rooms' under 'controlled conditions' in racks placed on shelves above land and on Compost, which was not land, and hence the activity was not agricultural activity. Rule 7A, 7B and 8 of the Income Tax Rules, were referred to in support of the contention that unless income was derived from performing basic operations on the land, the same could not be construed as 'agriculture income'. Regarding exemption of income derived from saplings or seedling grown in soil in pots, he held that this was a deeming provision introduced by the statute by way of explanation 3 to Section 2(1A) and hence could not be extended to the assessee who was in the business of growing mushrooms. Thus, with the help of statement recorded from the two senior functionaries of the assessee-company, the AO also observed that Mushroom cultivation was not "agriculture" and falls under the category of "Fungi Culture". Accordingly, he proceeded to assess the income derived by assessee from growing of mushrooms as business income and hence made addition Rs. 12,13,05,430/-. The AO also denied depreciation in respect of the assets held for production of mushrooms.

On appeal, the CIT(A) observed that soil was the basis for production of mushroom as initial mushrooms spawn was prepared and the spawn was then cultured in a similar type of prepared soil, to be used as seed for cultivation of mushroom. Thereafter the same was removed from the soil and was spread over the soil arranged in giant size trays. The CIT(A) further relied on the literature published by the "Director of Mushroom Research" of "Indian Council of Agricultural Research" and came to a conclusion that usage of soil in these trays could be considered as usage of land. He therefore concluded that just because the assessee-company was using the land vertically by using large trays, for producing mushroom, by adopting a natural agricultural process and by cultivating the soil, it could not be said that land was not used for production of mushroom. It was a fact that the land was used for production, the sub-strata of which was soil. Hence, he held that production of mushroom was a process of agricultural production and income derived from such a process was agricultural income eligible for exemption u/s 10(1). The CIT(A) however, did not adjudicate grounds relating to its claim of depreciation.

Special Bench held that,

++ it is not disputed that the term 'land', as argued by the Revenue's counsel, is generally understood as immovable property under the Income Tax Act as well as under the Transfer of Property Act. However, in the present case, 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 strict interpretation cannot be applied. The term 'Land' in our view has to be interpreted by using the principles of 'Purposive Interpretation'. The purposive approach is an approach to statutory and constitutional interpretation under which common law courts interpret an enactment within the context of the law's purpose. If the strict interpretation, as argued by revenue's 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 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 not make a difference. Explanation-3 to Section 2(1A) provides that: "For the purposes of this clause, any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income." Thus, what is not otherwise agricultural income, is deemed under the explanation as agricultural income;

++ it is true that Explanation 3 to Section 2(1A) 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 High Court of Madras in Commissioner of Income-tax v. Soundarya Nursery [2000] 241 ITR 530 (Madras), gave breadth to a more expansive definition of the term 'agricultural products' by including within its meaning all products of land, having some utility either for consumption or for trade or commerce and also, inferred that plants sold by the assessee in pots to be comprehended within the term 'agriculture'. This judgment in the case of Soundarya Nursery, required basic objections to be performed on land for the income to be exempt as agricultural income. Before the introduction of Explanation 3 to Section 2(1A), growing plants in pots was interpreted as agricultural activity by the courts. What this explanation does is to expand this interpretation further. It lays down that the basic operations are not necessary in nurseries, as required by the judgment in the case of Soundarya Nursery. Hence, even without this explanation, the income from plants grown in pots was held as agricultural income by the courts. As this explanation is a deeming provisions, 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 applies to the facts of this case. In view of these discussions, 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" for the sole purpose of determining whether activity performed on such land is for production of an agricultural product;

++ the second issue is whether mushroom is a "fungi" and not "vegetable". The Revenue relied on the word 'spawn' while the assessee relied on the word 'mycelium'. The counsel for assessee submitted that mycelium is a vegetative part of the fungi. However, the Revenue's 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. On a careful consideration of the material on record, we conclude that mushroom, is not a 'vegetable' 'plant' or an 'animal' but a 'fungus'. 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. In the case of CIT vs. Raja Benoy Kumar Sahas Ray, 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". It is therefore 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 naturally grown, by such operation on soil which require expenditure of "human skill and labour". The product so raised has utility for consumption, trade and commerce and hence would qualify as an "agricultural product" the sale of which gives rise to agricultural income. Hence, it is concluded that Mushroom on the facts and circumstances of this case is an agricultural product raised from land;

++ the third issue is whether agricultural production done under "controlled conditions", results in the 'product' so raised not being a 'product from agricultural activity'. It is to be noted that each and every agricultural 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. It is seen that wih the advancement of modern technology, most of the crops, fruits, vegetables and flowers are being grown in controlled conditions, in green houses and in pots. In these advanced scientific agricultural techniques, soil is removed from the land and is placed in different containers such as pots, trays and stands etc. and agricultural operations are performed on them to yield the desired results of production of products which have some utility. In view of this discussion, it is held that, just because mushrooms are grown in controlled conditions it does not negate the claim of the assessee that the income arising from the sale of such mushrooms is agricultural income. 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.

(See 2018-TIOL-1080-ITAT-HYD-SB)


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