2011 (8) TMI 499 - AT - Income Tax

Assessment under section 147/148 - Income derived from sapling and seedling in a nursery - agricultural income or not - The very fact that a survey operation was carried out at the farm of the assessee, a nursery and the bonsai plant grown in the farm had been physically verified by the Assessing Officer was therefore only an exercise by the Assessing Officer and the learned CIT(A) to bring on record the case law to be distinguished by assessee before the authorities below - The substantial question therefore of the assessee having carried out agricultural operation in the impugned assessment years is merely on the basis of presumptions and assumptions in the minds of the assessing authorities to the extent that nature which is full of surprises and bounty has been subjected to consideration when income was proposed to be considered as non-agricultural - A farmer nurtures a plant or saplings which it gets after sowing seeds is also done by the assessee when it is to grow till such time it gets the fruit of labour as a miniature to be considered as carrying out agricultural operations for the produce to generate agricultural income and has been returned with appropriately by the assessee and is therefore, setting aside the impugned order of the learned CIT(A), direct the Assessing Officer to consider the same as exempt under the provisions of section 10(1) of the Income-tax Act,1961 - Decided in favour of assessee.

Issues Involved:
1. Determination of whether income from the sale of bonsai and other plants constitutes agricultural income.
2. Applicability of Explanation 3 to section 2(1A) of the Income-tax Act, 1961.
3. Interpretation and application of the Supreme Court's decision in CIT v. Raja Binoy Kumar Sahas Roy [1957] 32 ITR 466.
4. Assessment of agricultural operations carried out by the assessee.

Issue-wise Detailed Analysis:

1. Determination of whether income from the sale of bonsai and other plants constitutes agricultural income:
The primary issue raised by the assessee was whether the income from the sale of bonsai and other plants should be considered agricultural income and thus exempt under section 10(1) of the Income-tax Act, 1961. The assessee argued that the agricultural operations carried out included both primary and secondary operations, such as tilling, planting, manuring, watering, pruning, and cutting. The Tribunal found that these operations were indeed agricultural in nature. The Tribunal concluded that the basic agricultural operations were carried out on the soil, and the subsequent nurturing of the plants did not change the nature of the income from agricultural to non-agricultural.

2. Applicability of Explanation 3 to section 2(1A) of the Income-tax Act, 1961:
The assessee contended that the insertion of Explanation 3 to section 2(1A) by the Finance Act, 2008, which states that any income derived from saplings or seedlings in a nursery shall be deemed to be agricultural income, should be applicable to the assessment years in question. The Tribunal agreed with the assessee, stating that the explanation was clarificatory in nature and thus applicable to earlier years as well. This explanation supported the assessee's claim that the income derived from the nursery operations should be considered agricultural income.

3. Interpretation and application of the Supreme Court's decision in CIT v. Raja Binoy Kumar Sahas Roy [1957] 32 ITR 466:
The Assessing Officer and the CIT(A) relied on the Supreme Court's decision in Raja Binoy Kumar Sahas Roy to deny the exemption, arguing that the subsequent operations performed by the assessee did not qualify as agricultural operations. However, the Tribunal found that this decision had been misinterpreted. The Supreme Court had stated that agricultural operations include both primary operations (such as tilling and planting) and subsequent operations (such as nurturing and harvesting) if they are part of an integrated agricultural activity. The Tribunal held that the assessee's operations fell within this definition, as they involved significant human skill and labour in both the primary and subsequent stages.

4. Assessment of agricultural operations carried out by the assessee:
The Tribunal examined the nature of the operations carried out by the assessee, including the cultivation of bonsai plants, which involved planting in soil, performing primary and secondary agricultural operations, and nurturing the plants in a controlled environment. The Tribunal concluded that these activities constituted agricultural operations. The Tribunal also noted that the plants were grown on agricultural land owned by the assessee and that the income was derived from these agricultural operations. Therefore, the Tribunal held that the income from the sale of bonsai and other plants should be considered agricultural income and exempt under section 10(1) of the Income-tax Act, 1961.

Conclusion:
The Tribunal allowed the appeals of the assessee, holding that the income derived from the sale of bonsai and other plants constituted agricultural income and was exempt under section 10(1) of the Income-tax Act, 1961. The Tribunal directed the Assessing Officer to consider the income as exempt, setting aside the order of the CIT(A).

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