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TMI Blog2018 (8) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue in these appeals. The Ld. Senior Standing Counsel, Ms. K.Mamata Choudary, submitted that the question does not reflect the grievance of the revenue, raised in its appeal. Both the parties requested the Bench to re-frame the question to be decided by the Special Bench and filed a combined memo in this regard suggesting a draft question. We are in agreement with the reframed question suggested by both the parties. This re-framed question was referred to the Hon'ble President, ITAT, who vide his order dt. 10th April, 2018, referred this re-framed question, to this Special Bench for disposal, along with the appeals as well as the cross objections for Assessment Years 2008-09, 2010-11, 2011-12 and 2012- 13:- The question referred is as follows: "Whether in the facts and circumstances of the case, the income from production and sale of Mushrooms can be termed as 'agricultural income' under the Income Tax Act, 1961?" Facts in brief: 2. The assessee is a company engaged in the business of manufacture of bulk drugs. It also derives income from growing of "Edible white button mushrooms" ( Mushroom) under the name and style of 'Premier Mushroom'. The assessee was treating the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure and hence repealing of the section. 2.1. Findings of the A O : The findings of the Ld. Assessing Officer ( A.O.) are summarised as follows: a. Mushrooms are grown by the assessee in 'growing rooms' under 'controlled conditions' in racks placed on shelves above land and on Compost (manure) which is prepared with paddy straw, Horse manure, Chicken manure, Gypsum and Urea which is not land. Hence the activity is not agricultural activity. b. The Hon'ble Supreme Court in the case of CIT Vs. Raja Benoy Kumar Sahas Roy (1957) [32 ITR 466] held that, income derived from some measure of cultivation of land with some expenditure of human skill and labour, renders the profit derived from the 'product' agriculture income which would be exempt u/s. 2(1A) of the Act. In the case of CIT Vs. Kokine Dairy (1938) [6 ITR 502], it was held that the term 'agriculture' does not cover activities remotely connected with land and when the assessee has not performed the basic operations on land, the income derived was held not to be agriculture income. Some of such instances are income from coconut thopes, income from sale of cocoons, income from sale of eucalyptus oil etc. c. Rule 7A, 7B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued by the assessee, but is a fungus. In outdoors, mushrooms grow on wood and the activity is not akin to that of a nursery. h. The claim of the assessee that it owns 33 acres of land is not in dispute but the mushroom growing activity is not performed on this land. When the assessee is in possession of 33 acres of agricultural land, it was not necessary to purchase ballclay at Rs. 1 per Kg from M/s. Nyvelli Lignite Corporation, Nyvelli for use in growing of mushrooms. Thus, land was never involved in the process of growing of mushrooms. i. Classification by or views of various Government and public sector agencies on whether growing of mushroom is an agricultural activity or not is of no consequence and does not help the assessee in claiming exemption u/s. 10(1) of the Act. j. The statements recorded from the two senior functionaries of the assessee-company proves the fact that no agricultural operations were carried out on the land by the assessee, let alone basic operations on land. Even from the description of the activity, as evidenced from the website of the assessee-company, soil is only used for the purpose of providing stable bed in the trays and such activity is rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of the assets held for production of mushrooms, was also challenged for all the four Assessment Years. 3.1. Before the Ld.CIT(A) assessee reiterated that growing of mushroom is an agricultural activity. It was submitted that, mushrooms are grown manually on the land in a specified atmosphere. It was contended that the assessee was producing a nutritious vegetable called mushroom which grow over a period of 1 ½ months on certain types of soil. A chart giving comparison between growing of mushroom and other crops was furnished. Reliance is placed on the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Sri Venkateswara Hatcheries Pvt Ltd [237 ITR 174] on the proposition that growth of mushroom is a natural and biological process and hence mushrooms are not articles or things. Reliance was placed on the views of various governmental departments such as NABARD, State Bank of Hyderabad, Ministry of Commerce and Industry, Central Excise Department and Ministry of Agriculture on the proposition that Government of India has treated mushroom production as an agricultural production. Reliance was placed on a number of judgments in support of the proposition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant factor to be determined is the process of production. e. He held that the word 'agro' means "land" and this definition includes soil which means all types of soils. The process of enriching the "soil" by adding fertilizers and wastages etc., is "culture of the soil" and when the soil is used for production of edible product, it is called as an agricultural product. f. The reference to provisions of Section 80JJA by the AO is not relevant as this provision of law is no longer in existence. g. On the reference to the material available in Wikipedia by the Assessing Officer, the Ld. CIT(A) held that though several thousands of species of mushrooms are there, only those which are grown on "soil" are "edible". h. The Ld.CIT(A) referred to the judgement of the Hon'ble Supreme Court in the case of CIT Vs. Sri Venkateswara Hatcheries Pvt Ltd [237 ITR 174] for the proposition that merely because the conventional method of production is given a go by and artificial production is introduced, it would not change the character of production which is natural. i. The Ld.CIT(A) observed that just because the assessee-company is using the land vertically by using large trays, for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mamata Choudary supported the order of the Ld.AO and made detailed arguments. The brief submissions filed by her, stated succinctly are as follows: * Mushrooms are fungus which are produced from spawn and not plants or crops and hence not agriculture. They are grown in trays of prepared soil in climate controlled rooms for commercial purposes. Even if certain activities are akin to cultivation, it cannot be treated as an agricultural income. * A fundamental characteristic of land is that it is immovable and is a fixed part of the topography. Soil is a component of land/ earth but loses its identity of land once removed from it. Therefore soil ought not to be treated synonymously with land. * The reliance placed by the Assessee on the incomplete and selective definition of "Land" in Black's Law Dictionary to include soil and thereby equating soil to land is misleading, misplaced and contrary to the principles of noscissur a sociis. In fact the definition of "Land" as occurring in the 8th Edn. of Black's Law Dictionary makes it clear that land is the immovable portion of the earth's surface. * Extract of "Land "from Black's Law Dictionary (8th Edn.) * Onli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mushrooms under controlled conditions as business income and sought to briefly incentivise such business by providing for certain deductions under the then Section 80JJA. * Section 80 JJA * Explanatory Note to Finance Act 1979 * CBDT Circular No. 258 of 1979 dt 14.06.1979 * Controlled conditions are commonly understood to mean that the climatic/environmental factors such as humidity, temperature, carbon dioxide, etc. are controlled. * Explanation 3 to Section 2(lA) relating to income from seeds and saplings grown in nurseries would not aid the case of the assessee as the income from such nurseries have been included in the scope of 'agricultural income' by way of a deeming fiction. A deeming provision is enacted for the purpose of assuming the existence of a fact which really does not exist. Hence, by necessary corollary, it would mean that the fact is that income from such nurseries is not agricultural income. A deeming fiction can only apply to the particular fiction it creates and cannot be expanded to any other type of activity. ● Explanatory Note to Finance Act, 2008 ● Manisli Trivedi vs. State of Rajasthan (2014) 14 SCC 420 @pa 14 * Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he top layer of earth, of about 8" to 10", is "soil" and this "soil" is only useful for the purpose of any agriculture. That in any type of cultivation, this top 8" to 10" of land, which is "soil", is what the farmer uses and that this is ploughed and cultured and prepared for agriculture production. * Referring to the argument of the Ld. Standing Counsel that land is immovable property and that the soil attached to such land, when cultured and used for production of plants is agriculture, he submitted that when the top layer of the land which is, "soil" becomes unfit for agriculture due to salinity, barrenness or otherwise, it is a common practice that soil is brought from river beds or some other sources and filled on top of the barren land and used for cultivation. Traditionally "soil" was being excavated from one place and transported and used for cultivation in certain other place depending on the requirements. * That the argument that land is immovable property and once soil is detached from the land, it does not retain the character of the land, is not correct. The word 'land' as per the definition of Black's Law Dictionary, 6th edition is synonymous for soil and include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in question is an agricultural process or not. He claimed that the activity involved in production of mushroom is agricultural operation. * A comparative chart of the process of growth of mushrooms and process of growth of vegetables and fruits was given to demonstrate that basic agricultural operations are performed in the production of mushroom * That the assessee possesses Ac. 33.50 Guntas of agricultural land at Kallakal - Village, Toopran - Mandal, Medak - District as well as 27.1 acres of agricultural land at Peddapuram, East Godavari District of Andhra Pradesh and that at both the places the land is classified as agricultural lands, as per Revenue records. He submitted that land is used for cultivation of mushrooms. He listed out the various operations undertaken and argued that it is not correct to state that land is not used for cultivation of mushrooms. * The Ld. Counsel submitted that whether mushrooms are 'fungus' which are produced from spawn and not plants or crops, is not relevant as the term 'agriculture' refers to systematic production by performing basic operations on land. Once soil is cultured and certain basic operations are performed for the production ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "(a) The assessee's object is to produce a nutritious vegetable required for the increased population. (b) For production of Mushrooms agricultural lands are used; (c) The lands held by the assessee are agricultural lands and are treated as such by the Banking authorities and also the revenue authorities. (d) The base for production is land/soil prepared with Paddy straw, manure and other ingredients; (e) The soil so prepared is cultivated by providing manures, pesticides, water and other necessary ingredients; (f) The process of production is the same as in any other agricultural produce/plant. (g) Seeds are obtained from the matured mushroom; they are spawn over the processed soil; watering is done periodically; the growth is observed and harvesting is done. (h) The whole cycle is like growing any other vegetable plant; (i) The Govt. departments; financial institutions; world organization; the Food Organisations treated mushroom as agriculture." 10. Cross objections: On the cross-objections, Ld. Counsel for the assessee Sri K. Gopal submitted that the reasons for reopening were not provided to the assessee despite several reminders. The Ld. Standing Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e SPAWN to spread. It may take 6-8 days. After this venting is done by giving Air, Temperature, C02 and moisture to SPAWN upon which it starts forming, Pins (primodia). Stage- V After the Pins, the mushroom grows into Harvesting in 13-21 days. The Harvesting is done in 2-3 flushes (picking). Stage- VI After the 2-3 flushes, the growing room is cooked out i.e., heated up to 65 C Degrees to kill the remaining mycelium, mushrooms pins and mushrooms. The racks and shelves are unloaded and kept cleaned for next loading. The One batch Cycle in growing rooms takes about 45-53 days. 12.2. On these facts and circumstances, the following issues arise for our consideration which would answer the question referred to us. i. "Land" is immovable property. Soil is part of land. If "soil" is placed in trays or pots and when operations are carried out on this "soil", which is detached from land, for production of mushroom, could such activity be termed as agricultural activity? ii. Is mushrooms a "fungi" or "vegetable or plant"? Is the income derived from the production and sale of mushroom, agricultural income if the product is a 'fungi'? iii. When agricultural production is done in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em (A), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification 2 in the Official Gazette.] 3 Explanation.- For the removal of doubts, it is hereby declared that revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in item (a) or item (b) of sub- clause (iii) of clause (14) of this section;]" 12.4. We now reproduce the relevant portions of the landmark judgment of the Hon'ble Supreme Court in the case of CIT Vs. Raja Benoy Kumar Sahas Roy (1957) [32 ITR 466] on agricultural issue. "The primary sense in which the term agriculture is understood is agar-field and cultra-cultivation, i.e., the cultivation of the field, and if the term is understood only in that sense agriculture would be restricted only to cultivation of the land in the strict sense of the term meaning thereby, tilling of the land, sowing of the seeds, planting and similar operations on the land. They would be the basic operations and would require the expenditure of human skill and labour upon the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the soil with the aid of human skill and labour;...Ramesam. J., at page 714 was against placing a narrower interpretation upon the word for he says: To give a narrower interpretation to the term and to confine it to the raising of products used as food for man and beast will exclude all cultivation of fibrous plants such as cotton, jute and linen and all plants used for dyeing purposes, such as indigo, etc., all timber trees, and flowering plants. I do not think this is the intention of the Act." The concurrent view in this very judgment of Shri Vishwantha Sastri.J., is that "There being no definition of "agriculture" and agricultural purpose in the Act the words have to be construed and understood in their popular sense and according to their ordinary meaning. It is a matter of ordinary experience at least in this part of the country that mango, coconut, palmyra, orange, jack, arecanut, tamarind and other trees are planted usually in an enclosed land and that these trees do not yield any fruit or crop in the early years of their growth. They remain on the land for a long number of years yielding fruit only after their maturity. There is no reason why the planting rear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id material of the earth, whatever may be the ingredients which it is composed of whether soil, rock or other substance ." 'SOIL' The word "soil" as per Random House Dictionary - The Unabridged Edition to include "any place or condition providing the opportunity for growth or development." 12.11. "Soil" is the thin skin that covers the land. "Soil" is material in the top layer of the surface of the earth on which plants can grow and is a non-renewable resource. It takes ages for rocks to wither into soil and rich organic matter to build up. Land is a part of the earth, while soil refers to one part of the land. Land, as commonly understood means, the surface of the earth not covered by a body of water. Thus, the term land includes soil. In the definition referred above, "land" is defined in an inclusive manner. 12.12. The Ld. Standing Counsel relied on the principles of "Noscitur A Sociis' for interpretation the word 'Land'. She also argued that contextually The Indian Income Tax treats land as real immovable property. The terms 'Noscitur a Sociis' is related to legal doctrine and statutory interpretation of laws. In Latin the term 'Noscitur a Sociis' means 'the meaning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be interpreted by using the principles of 'Purposive Interpretation'. The purposive approach (sometimes referred to as purposivism, purposive construction, purposive interpretation, or the modern principle in construction) is an approach to statutory and constitutional interpretation under which common law courts interpret an enactment (a statute, part of a statute, or a clause of a constitution) within the context of the law's purpose. Purposive interpretation is a derivation of mischief rule set in Heydon's Case, and intended to replace the mischief rule, the plain meaning rule and the golden rule. Purposive interpretation is used when the courts use extraneous materials from the pre-enactment phase of legislation, including early drafts, Hansard's committee reports, and white papers. The purposive interpretation involves a rejection of the exclusionary rule. Supreme Court in Tirath Singh v. Bachittar Singh approved and adopted the said approach. In Shamrao V. Parulekar v. District Magistrate, Thana, Bombay the Court reiterated the principle from Maxwell: "If one construction will lead to an absurdity while another will give effect to what commonsense would show wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake a difference. Though these strong arguments of the Ld. Standing Counsel appealed to us ab-initio on an analysis of the purpose for which the term is to be interpreted, we are unable to persuade ourselves to accept the same. If the term 'Agri' is 'field', then 'field' can be on land or on a 'terrace' or on a 'pot', 'tray' etc., In view of the above discussions, we hold that it is important to distinguish between the meaning of the term 'soil' from 'land', because the cultured top strata of the earth's surface, which is fit for arable cultivation, is actually what is required for agricultural purposes and this top layer (being 'soil') is one on which actual agricultural growth takes place. In contrast, the meaning attributed to land (primarily as an immovable object) is of a wide import. For the purpose of understanding the nexus between an agricultural operation and an agricultural land, what needs to be inferred from the term 'land' is that, the cultured top layer of the earth, which is fit for any sort of cultivation, is land for this purpose. Hence, in our opinion, the soil which is placed on the vertical space above the land in trays, in one sense of the term, is also land. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been performed by the assessee. If the plants sold by the assessee in pots were the result of the basic operations on the land on expending human skill and labour thereon and it was only after the performance of the basic operations on the land, the resultant product grown or such part thereof as was suitable for being nurtured in a pot, was separated and placed in a pot and nurtured with water and by placing them in the greenhouse or in shade and after performing several operations, such as weeding, watering, manuring, etc., they were made ready for sale as plants all these operations would be agricultural operations and all this involves human skill and effort. Thus, the plants sold by the assessee in pots were the result of primary as well as subsequent operations comprehended within the term 'agriculture' and they are clearly the products of agriculture." 13.3. Thus, the Hon'ble High Court 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... save the plants from any disease. From the facts as emerged from the compilation filed we have gathered that within greenhouse the floriculture activity comprises of growing of rose by deploying hydroponics technique for the farming of best quality roses. It is stated that the assessee has deployed a budding technical plant. Further it was explained that root stocks were brought from the market and placed in the green house. The plantation and the generation of sapling was nothing but agricultural activity. The mother plant is otherwise reared on earth. For rearing of mother plant human labour is involved. The tilling of soil, watering and other primary agricultural activity is the basic requirement for the growing of the rose plants. Subsequently the saplings are planted on plastic trays, which were kept at the height 2-3 ft. placed on MS stand. It was explained that the purpose of growing the rose plants at a height is primarily to avoid the pest and to develop in a controlled atmosphere. By this method, the rose plant is protected from climate, pest, as well as other disease, to minimize the possibility of damage. The drainage system for watering the plants with the help of dip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntinuation of basic Agriculture operation. The fundamental requirement is that it should remain connected with the basic agriculture operation." 13.5. We agree with this view of the Tribunal. The process followed in the case of Best Roses Biotech (P.) Ltd., (supra) in similar to the process followed by the assessee. 13.6. Hence, the view of the courts was that the income in question was agricultural income and the explanation only acknowledges this fact. We should not take a 'pedantic' view on this issue. The view of the legislature is more expansive and purposive than the view of the courts. 13.7. In view of the above discussion, 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. 14. 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 definitions are extracted for ready reference: SPAWN: The word "Spawn" is defined by C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade and commerce". 14.5. The term "product" is defined as: a) an article of substance i.e. manufactured or refined for sale. b) A thing or person that is the result of an action or process. c) A product in modern times is also defined as a item or thing which is offered for sale. A product can be a service or an item. It can be physical or in virtual or cyber form. 14.6. It is 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. 14.7. Mushroom, like vegetables and other crops or plants are grown on soil/land and are always attached to the soil until har ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of agricultural income would not change merely because agricultural operation was carried out in a greenhouse under a controlled environment. The assessee in that case was engaged in the business of plant floriculture and tissue culture, and claimed exemption of income as being agricultural income under section 10(1) of the Act. The A.O. disallowed the exemption on the ground that basic operation was done in a greenhouse. The ITAT held that the involvement of a greenhouse and controlled environment would not change the nature of agricultural income. We endorse this view. 15.3. The ITAT Ahmedabad Bench 'A' decision in the case of DCIT v. Best Roses Biotech (P.) Ltd., (supra) has analyzed the advanced mechanism of growing rose plants in a controlled environment and held as under: "7.2 Considering the advancement of technology and the use of the advanced equipment in cultivation coupled with the conventional cultivation method put together, it has to be held that the operation carried out by the assessee was agricultural operation in nature. Therefore, the income in question was an agricultural income. It cannot be included in total income being with the ambits of the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Standing Counsel submits that, the view of various Government and Financial Institutions, should not influence the interpretation of a statute. She submits that the statute has to be interpreted based on the language used therein and not based on views of universities and other organisations. 16.2. Words of the statute, when not defined, have to be construed and understood in their popular sense and according to their ordinary meaning. No doubt, statute cannot be interpreted based on the views of different Governmental Authorities and Financial Institutions, as their purpose and intent would be different, from the purpose and intent of the enactment in question. But the manner in which other Government authorities and agencies views this issue, can be gathered and understood from this material. A common man's view, as expressed by the organisations, have some use in coming to a conclusion on this issue. It would not be appropriate to hold that different arms of the Government have contrary views on the same issue. 16.3. Now we consider the argument of the Ld. Standing Counsel by placing reliance on Section 80JJA of the Act. The assessee relies on explanation 3 inserted in Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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