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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 ..... tural product. Whether mushroom is a “fungi” and not “vegetable” - Held that:- 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. Mushroom, like vegetables and other crops or plants are grown on soil/land and are always attached to the soil until harvested. They draw their nourishment from the soil only. The product mushroom does not arise from any secondary agricultural operation. Unlike in the case of CIT vs. Kokine Dairy (1938 (4) TMI 3 - RANGOON HIGH COURT) relied on by the Ld.AO it cannot be said that production of mushroom is remotely connected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peals vide order dt.25-07-2017 Merely because instead of horizontal use on soil, vertical space is used, does the growth of mushrooms stand apart from agricultural operations? At the time of hearing, both the parties objected to the question framed. The Ld. Counsel for the assessee, Shri S. Rama Rao, submitted that the question, as framed, does not arise from the grounds raised by the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remain as natural product and cannot be attributed to any other process or activity associated or undertaken by human effort. ● The term land and soil are interchangeable and soil is nothing but land. The assessee also quotes dictionary definitions of land and soil. ● Reliance on section 80JJA is of no use as the section is repealed and perhaps it was the intention of legislature to treat mushroom cultivation as agriculture 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that this is a deeming provision introduced by the statute by way of explanation 3 to Section 2(1A) of the Act and hence cannot be extended to the assessee who is in the business of growing mushrooms. g. Mushroom cultivation is not agriculture and falls under the category of Fungi Culture . Reference was made to information available in Wikipedia, on the website http://www.americanmushroom.org / agaricus.pdf. He held that Mushroom is not a vegetable as argued 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 ₹ 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sess the same as income under the head Business or Profession . Addition ₹ 12,13,05,430/- 3. Aggrieved, assessee carried the matter in appeal before the Ld.CIT(A) challenging, for all the Assessment Years, the findings of the Assessing Officer that income derived from production of mushroom is not agricultural income. It also challenged the reopening of the assessments by the AO for the AYs. 2008-09 and 2010-11. The issue of non-grant of depreciation by the Assessing Officer, 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 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 propositio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r production of mushroom, he concluded that edible mushroom is grown on land. c. The Ld. CIT(A) held that the reference to Rule 7A, 7B and 8 of the Income Tax Rules, 1962 do not have any relevance to the facts of the assessee s case. d. On the issue as to whether mushroom is a plant or fungi , the Ld.CIT(A) held that the questions in this case as to whether the process of production is agriculture or not and whether the produce grown is plant or fungi are not relevant and that the relevant 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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion u/s. 10(1) of the Act. The ld. CIT(A) did not adjudicate the grounds of the assessee relating to its claim of depreciation. 7. Aggrieved, Revenue has filed these appeals against this finding of the Ld. CIT(A) that income from production of mushroom is agricultural income. The assessee has filed cross-objections for the AYs. 2008-09 and 2010-11 on the issue of reopening and for all the four Assessment Years on the issue of claim of depreciation. Revenue s submissions: 8. Ld. Sr. Standing Counsel Smt. K. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sputedly, in the present case, no such primary activities are carried out on the land and the land is only the premise from where such activity is carried on. Classification of the land as agricultural land for land revenue purposes would not automatically lend the character of an agricultural income to activities carried out on it. Agricultural income would necessarily, by statutory definition, mean income from land actually used for agricultural purposes. The legislative intent and understanding had expressly been stated to treat production of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rooms, the assessee produced a variety called Edible white button mushrooms which normally grow spontaneously in certain districts of Andhra Pradesh on Ant Hills. That the AO considered a variety of mushroom which is called Shiitake Mushroom which is normally grown on wood and trees and therefore is not relevant to the facts of the assessee s case. That ballclay is a type of soil and that this soil is cultured by way of adding paddy straw, chicken manure, and other manure which degenerates into the soil. That the terms earth , land and soil have to be understood in the right perspective and that the 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 become ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the expenditure of human, labour and skill and that technology is used to aid the natural growth of this agricultural produce. Referring to the argument of the Ld. Standing Counsel that what is used is spawn seed which means a group of eggs of fish, he submitted that spawn by definition is also the mycelium of fungi, especially of mushroom grown to be eaten. He referred to mycelium as defined in Random House dictionary and submitted that it is the vegetative part or thallus of fungi being composed of one or more filamentous elements or hyphae and that the use of the word spawns does not decide whether the process 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mohan Vs. ITO [52 taxmann.com 203] (Chandigarh- Trib ), he submitted that the assessee appeared in court in person and relied on a circular of Government of Himachal Pradesh, which was referring to certain type of mushrooms and not to Edible white button mushroom , grown by the assessee and that the process of growing mushrooms was not explained and the production in that case was done within the city in residential houses. On a query from the Bench, the assessee filed the photographs of mushrooms and of the green house cultivation of fruits and vegetables. In brief a summary of the submissions of the assessee are as follows: ( 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; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xing. Then, transferred to bunkers for further decomposition under aeration. Stage-II After five days the compost is transferred from bunkers to tunnels for pasteurization and conditioning. Stage-III. The above prepared compost is transferred to growing rooms with SPAWN (seed) and placed in the shelves. This layer will be of about 200 mm thickness. The SPAWN run (i.e., spreading of SPAWN) takes about 12 days to 20 days. This is done under controlled conditions in the growing rooms. Stage-IV After the SPAWN Run, the beds are cased with casing soil of about 50 mm thickness. The casing soil is prepared by mixing Coir Pith, Ballclay with suitable other micro nutrients and SPAWN. Then Case Run is allowed for the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such or where the land is not so assessed to land revenue or subject to a local rate, it is not situated-(A) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; or ( B) in any area within such distance, not being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in item (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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agar i.e. field/land. Agricultural activity requires expenditure of human skill and labour, upon the land itself and this should result in effectively raising a product from the land. The product should have some utility either for consumption, for trade and commerce. The term Agriculture receives a wider interpretation both with regard to its operations as well as the results of such operation. 12.6. The horizon of interpreting the term agriculture was given a more adaptive width by the High Court of Madras in CIT v. K.E. Sundara Mudaliar [1950] 18 ITR 259 (MAD.) , wherein the court stated as under: In Panadai Pathan v. Ramasami Chetti [1922] ILR 45 Mad Spencer. J., at page 713 stated his conclusion in these words: In my opinion agriculture connotes the raising of useful or valuable products which derive nutriment 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 lin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Union of India Vs. Krishna Murthy (supra) wherein at para 14, Mullah s commentary on Transfer of Property Act has been extracted along with definition of immovable property under General clauses Act , and argued that land is immovable property and once soil is detached from land, it ceases to be land. Definitions as relied upon by the parties are extracted for ready reference: LAND In the Black s Law Dictionary, free online legal dictionary, 2nd Edition, land is defined as: In the most general sense, comprehends any ground, soil or earth whatsoever; as meadows, pastures, woods, moors, waters, marshes, furzes and heath.Co.Litt 4a. The word land included not only the soil but everything attached to it, whether attached by the course of nature, as trees, herbage, and water, or by the hand of man, as buildings and fences. land is the solid 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that of the less general. This principle needs a word or phrase or even a whole provision that stands alone has a clear meaning, will be given quite a different meaning while viewed in the light of its context. 12.13. No doubt the term land , as argued by the Ld. Sr. Standing Counsel, is generally understood as immovable property, under the Income Tax Act and under the T.P. Act. But in the case on hand, the context and purpose for which the term Land has been used by the legislature has to be understood. Use of land and performing activity on land itself, is the requirement specified for a natural product that raises from land itself, to be an agricultural product, the income from which is exempt from tax. If the question to be answered is whether land is used for production or not, then in our view strict interpretation cannot be applied. 12.14. The term Land in our view has to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of earth. The upper strata of the land is soil and this is cultured and made fit for production of crops, vegetables and fruits etc., by enriching the soil. When such soil is placed on trays, it does not cease to be land and when operations are carried out on this soil , it would be agricultural activity carried upon land itself. 12.16. If the strict interpretation, as argued by the Ld. Standing Counsel is accepted then, when Soil attached to earth is cultivated, it is agricultural activity and when Soil is cultivated after detaching the same from earth, it is not agricultural activity. Such an interpretation in our view, would be unintended and unfair. The only part of the land that is cultivable, and which is useful for agricultural activity is Soil which is the top layer of land. Then whether such soil is attached to land or is placed in containers above the land should in our humble view, not make 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 ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. (Emphasis ours) 13.1. It is true that this Explanation 3 to Section 2(1A) of the Act, is a deeming provisions in the Act. It is also true that deeming fiction cannot be extended and should be strictly restricted to the fiction created. The impression that this amendment was brought into the statute to nullify certain judicial pronouncements is factually incorrect. The courts have decided that income from nursery is agricultural income. 13.2. The Hon ble High Court of Madras in Commissioner of Income-tax v. Soundarya Nursery [2000] 241 ITR 530 (Madras), in which the court observed as under: 8. All the products of the land, which have some utility either for consumption or for trade or commerce, if they are based on land, would be agricultural products. Here, it is not the case of the revenue that without performing the basic operations, only the subsequent operations, as described in the decision of the Apex Court have 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the case of Soundarya Nursery (supra) applies to the facts of this case. 13.4. The Ahmedabad Bench of the ITAT in the case of DCIT vs. Best Roses Biotech Ltd. (2012)17 taxmann.com 56 (Ahd.) has held as follows:- 6.1 Activity in question : The company had developed a greenhouse for the establishment of a floriculture project. The company had grown good quality of rose flowers and also exported them abroad. It was explained that for the plantation of roses a very well treated soil is required. The quality of the soil is therefore tested. Manures are mixed for preparing a base for growing the rose plants. The company has installed a proper drainage system. Certain operations such as mixing of soil and watering of plants through drainage are explained. Then the activity of pruning and bending of growing plants carried out to get best size of rose buds. It has also been explained that pest control is also required. Insecticides are sprinkled to 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 farm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd operation on soil (ii) use of particular soil type contents i.e. coco peat, manure, etc. present in the soil, (iii) drainage system as over watering harms the roots as well as quality (iv) bending shoots for maximizing the quality of roses, and (v) pest and diseases control for providing protection to roses. Therefore we hold that the activity which is connected with the land cultivation , such as ploughing of field, leveling of field, sowing of seed in the ploughed and leveled field, growing of plants, as case the may be, plantation, manuring, watering, weeding-out of weeds, so and so forth. These agriculture operations are said to be 'basic cultivation activity' and thereafter an agriculturist has to perform 'subsequent agriculture operation', namely tending of grown plants, pruning, cutting or shaping and finally harvesting of crop. We have to clarify, as held by few honourable courts as well, that the subsequent operations ought to be a continuation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , is the fleshy, spore-bearing fruiting body of a fungus, typically produced above ground on soil or on its food source and the scientific classification is Kingdom; Fungi, Division. Basidiomycota (Wikipedia). 14.2. On a careful consideration of the material on record, we conclude that mushroom, is not a vegetable plant or an animal but a fungus . 14.3. The contention of the assessee is that, what is produced by performing basic operations on the soil, is an agricultural product, even though the product is not a plant or the flower or a vegetable or a fruit . It was emphasized that the nature of the product is irrelevant as far as it is produced by performing some basic operations on the soil. 14.4. In the case of CIT vs. Raja Benoy Kumar Sahas Ray (supra), as already stated, it is laid down that the product should be raised on the land by performing some operation on land by expenditure of human skill and labour and that the product should be of some utility for consumption, for trade 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tural operations to be undertaken, material required to be used to enrich the soil, the timing of sowing, transplanting, harvesting etc., the quantity and quality of inputs such as water, fertilizer, pesticides etc. to be used and the timing at which they have to be used, are all controls that a farmer exercises in every type of agricultural activity. There can be no agriculture without controlling the conditions of production by human intervention. Just because the degree of control of the conditions are greater in some cases, as compared to others, the product produced out of such process would not cease to be an agricultural product. The degree of control is irrelevant in arriving at a conclusion on this issue. With the advancement of technology, every aspect of production is monitored and controlled, so as to obtain optimum use of the produce. This is true with the use of greenhouse technologies. 15.2. The ITAT Pune Bench in the case of Asst. CIT v. KF Bio Plants (P.) Ltd. [Pune Bench A , ITA No. 1110/PN/2011] held that the nature of agricultural income would not change merely because agricultural operation was carried out in a greenhouse under a controlled environment. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eshy spore bearing structures containing numerous spores which are functionally similar to seeds of higher plants. They are used in reproduction of mushrooms. After conducting the studies, the NABARD certified Mushroom cultivation as an agricultural operation and kept the same under agricultural segment. That for the purpose of commencement of production activity, the assessee requires a certification from the Ministry of Commerce and Industry, Govt. of India. The said Ministry also categorized activity as other agricultural industry . The assessee is also granted licence by the Fruit products Order, 1995 by the Ministry of Food Proceedings Industries, Government of India . The the Central Excise Department classified in chapter 7 that the Mushrooms are Edible Vegetables and did not levy any tax on the assessee. The Ministry of Agriculture, Government of India categorized Mushroom cultivation as the agricultural operation. Various Universities in India and abroad also treated the Mushroom cultivation as an Agricultural Operations. 16.1. The Ld. Standing Counsel submits that, the view of various Government and Financial Institutions, should not influence the int ..... X X X X Extracts X X X X X X X X Extracts X X X X
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