2011 (5) TMI 490 - AT - Income Tax

Agricultural income agricultural and non agricultural operations - assessee engaged in the business of growing and exporting of ornamental plants assessee also carrying on tissue culture methodology in laboratories - Held that - Plant tissue culture is used to reproduce clones of a plant in containers and required medium is not consisting of land or soil. Such multiple plants are then transferred to soil to be grown into mature plants. When the assessee is not carrying on the cultivation of land or plants in the soil in pots the operations cannot be called as agricultural operations. Neither the medium is soil nor basic operations are carried out. Of course once the sampling has been planted in the soil and is let to grow into a mature plant this operation is definitely agricultural operation and income there-from has to be treated as agricultural income. Thus the entire operation of the assessee is not agricultural and therefore the entire income cannot be treated as agricultural income. Therefore matter is remitted back to Assessing Officer for the purpose of making a field inspection of the assessee s site and thereafter if he finds that any of the agricultural activities are carried on in the laboratory then he shall compute the ratio of the expenditure between the agricultural and non agricultural operations and apportion the agricultural income in the same ratio. Both the appeals of assessee and Revenue are allowed for statistical purposes.

Summary

Issues Involved:
1. Classification of income as agricultural or non-agricultural.
2. Correct ratio for bifurcation of income between agricultural and non-agricultural activities.
3. Verification of operations carried out in the laboratory.

Detailed Analysis:

1. Classification of Income as Agricultural or Non-Agricultural:
The core issue is whether the income generated by the assessee company, engaged in the business of growing and exporting ornamental plants through tissue culture methodology, qualifies as agricultural income. The Assessing Officer (AO) concluded that not all activities carried out by the assessee are agricultural, leading to a bifurcation of income into agricultural and business income in the ratio of 70:30. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's finding but altered the ratio to 90:10, asserting that some activities are non-agricultural. The tribunal noted that agricultural income, as defined under Section 2(1A) of the Income-tax Act, must be derived from land through agricultural operations. The Supreme Court's ruling in CIT Vs. Raja Benoy Kumar Sahas Roy emphasized that agricultural operations must involve basic operations such as tilling, sowing, and planting on land.

2. Correct Ratio for Bifurcation of Income:
The AO initially bifurcated the income with 30% deemed as non-agricultural without a clear basis. The tribunal found this arbitrary and directed that the bifurcation should be based on the proportion of expenditure incurred on tissue culture operations versus traditional agricultural operations. The tribunal emphasized that operations not carried out on land cannot be classified as agricultural. Therefore, the AO's task is to determine the proportion of expenditure between these two types of operations and apportion the income accordingly.

3. Verification of Operations Carried Out in the Laboratory:
The assessee contended that laboratory activities were limited to preserving plants for demonstration purposes, not for growing them. However, the AO's findings and the tribunal's research indicated that tissue culture involves significant laboratory work, which cannot be classified as agricultural operations. The tribunal directed the AO to conduct a field inspection to verify the actual activities carried out in the laboratory. If the AO finds that any agricultural activities are performed in the laboratory, the income should be bifurcated based on the ratio of investment and expenditure between agricultural and non-agricultural operations.

Conclusion:
The tribunal remanded the case back to the AO for a detailed field inspection to ascertain the nature of operations carried out by the assessee. The AO is tasked with verifying the activities and then appropriately bifurcating the income based on the expenditure incurred on agricultural and non-agricultural operations. Both the assessee's and the Revenue's appeals were set aside for statistical purposes, pending this verification. The order was pronounced on 31st May 2011.