2024 (11) TMI 564 - AT - Income Tax

Characterization of income - income derived from cultivation and sale of white button mushrooms - business income v/s agricultural income u/s 10(1) - HELD THAT - Respectfully following the decision of Inventaa Industries (P.) Ltd. 2018 (8) TMI 69 - ITAT HYDERABAD under identical fact pattern, we allow the claim of the assessee for treating the cultivation and sale of white button mushroom as agriculture activity resulting in the agriculture income exempted u/s. 10(1) of the Act. Accordingly, grounds taken by the assessee in this respect are allowed.

Summary

Issues Involved:

1. Whether the income derived from the cultivation and sale of white button mushrooms should be classified as business income or agricultural income under Section 10(1) of the Income-tax Act.
2. Whether the expenditure incurred in the cultivation of mushrooms and depreciation should be allowed if the income is treated as business income.

Detailed Analysis:

1. Classification of Income from Mushroom Cultivation:

The primary issue in this case was whether the income from the cultivation and sale of white button mushrooms should be treated as agricultural income, which is exempt under Section 10(1) of the Income-tax Act, or as business income, which is taxable. The assessee, a private limited company, argued that the income should be considered agricultural because the mushrooms were cultivated on land owned by the company using soil-based vertical farming methods. The company contended that all necessary agricultural operations were performed, including preparation of soil, fermentation, pasteurization, and controlled environment cultivation.

The Assessing Officer, however, classified the income as business income, arguing that mushrooms are grown in controlled environments and do not require traditional land-based farming. The AO relied on several case laws to support the view that mushroom cultivation is not an agricultural activity.

The Tribunal, after reviewing the facts and submissions, referred to the decision of the Hon'ble Special Bench in the case of DCIT vs. Inventaa Industries (P.) Ltd., which dealt with similar issues. The Special Bench had concluded that mushroom cultivation qualifies as an agricultural activity because the mushrooms are grown on soil, which is part of the land, and the operations performed are akin to those in traditional agriculture. The Tribunal found that the facts of the present case were identical to those in the Inventaa Industries case and thus ruled in favor of the assessee, treating the income as agricultural and exempt under Section 10(1).

2. Allowance of Expenditure and Depreciation:

The assessee also raised an alternative argument that if the income were to be treated as business income, then the expenditure incurred in the cultivation process and depreciation should be deductible. However, since the Tribunal ruled the income as agricultural and exempt, this alternative issue became infructuous and was not adjudicated upon.

Conclusion:

The Tribunal allowed the appeal of the assessee, ruling that the income from the cultivation and sale of white button mushrooms is agricultural income and thus exempt under Section 10(1) of the Income-tax Act. The alternative grounds regarding the allowance of expenditure and depreciation were not addressed, as they became irrelevant following the primary ruling. The decision underscores the significance of the nature of agricultural operations and the interpretation of "land" and "soil" in determining the classification of income for tax purposes.