2023 (4) TMI 570 - AT - Income Tax

Income from production and sale of mushrooms - 'agricultural income' or not? - Scope of definition of agricultural income u/s 2(1A) of the Income Tax Act, 1961 - HELD THAT - As following the decision of ITAT, Special Bench in the case of DCIT vs M/s. Inventaa Industries Pvt Ltd 2018 (8) TMI 69 - ITAT HYDERABAD we are of the considered view that cultivation and sale of white button mushroom is an agricultural activity and income derived from said activity comes under the head agricultural income, which is exempt from tax. CIT(A), after considering relevant facts has rightly deleted additions made by the AO towards income derived from cultivation and sale of white button mushroom and thus, we are inclined to uphold the findings of the ld. CIT(A) and dismiss appeal filed by the revenue.

Issues Involved:
1. Whether the income from production and sale of mushrooms can be considered 'agricultural income' u/s 2(1A) of the Income Tax Act, 1961.
2. Whether the cultivation of mushrooms in a temperature-controlled facility qualifies as an agricultural activity.

Summary:

Issue 1: Agricultural Income Definition
The primary issue raised by the Revenue was whether the income from production and sale of mushrooms should be treated as 'agricultural income' u/s 2(1A) of the Income Tax Act, 1961. The assessee argued that the cultivation of white button mushrooms involves agricultural activities, including preparation of soil and other operations necessary for growing mushrooms. The AO, however, contended that the activity was more akin to a business operation since it involved a temperature-controlled environment and various fixed assets. The AO relied on several judicial precedents to support the argument that mushrooms are not traditional agricultural produce.

Issue 2: Cultivation in Controlled Environment
The Revenue contended that growing mushrooms in a temperature-controlled facility does not qualify as an agricultural activity. The AO argued that basic agricultural operations such as tilling, sowing, and planting were not performed, and thus the income should be classified as business income. The assessee countered that modern agricultural techniques, including vertical farming and greenhouse cultivation, should be considered agricultural activities if they involve basic and subsequent operations as defined under the Act.

Judgment and Findings:
1. Agricultural Operations: The ITAT held that the cultivation of white button mushrooms involves basic and subsequent agricultural operations, including preparation of soil, sowing of seeds, and other necessary activities. The Tribunal referred to the Supreme Court's definition of agriculture in CIT vs Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 (SC), which includes both basic and subsequent operations on the land.

2. Controlled Environment: The Tribunal noted that modern agricultural practices often involve controlled environments, such as greenhouses, to optimize production. The ITAT emphasized that the use of technology and controlled conditions does not alter the nature of the activity from agricultural to business. The Tribunal cited the ITAT Special Bench decision in DCIT vs M/s. Inventaa Industries Pvt Ltd, which held that growing mushrooms in a controlled environment is an agricultural activity.

3. Judicial Precedents: The ITAT distinguished the case from earlier judgments cited by the AO, such as Blue Mountain Food Products Ltd vs ITO, by noting that the Special Bench in DCIT vs M/s. Inventaa Industries Pvt Ltd had already considered and overruled such precedents. The Tribunal also referred to various government authorities and judicial pronouncements recognizing mushroom cultivation as an agricultural activity.

4. Exemption u/s 10(1): The Tribunal concluded that the income derived from the cultivation and sale of white button mushrooms qualifies as agricultural income and is exempt from tax u/s 10(1) of the Income Tax Act. The ITAT upheld the CIT(A)'s decision to delete the addition made by the AO, treating the income as agricultural income.

Conclusion:
The appeals filed by the Revenue for assessment years 2017-18 and 2018-19 were dismissed. The ITAT confirmed that the income from the production and sale of white button mushrooms is agricultural income exempt from tax, as it involves basic and subsequent agricultural operations even when conducted in a controlled environment.

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