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TMI Blog2023 (4) TMI 570X X X X Extracts X X X X X X X X Extracts X X X X ..... ent : Shri. Y. Sridhar , FCA ORDER PER G. MANJUNATHA , ACCOUNTANT MEMBER: These appeals filed by the Revenue are directed against separate, but identical orders of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, both dated 12.09.2022 and pertains to assessment years 2017 -18 2018-19. Since, facts are identical and issues are common, for the sake of convenience these appeals are heard together and are being disposed off, by this consolidated order. 2. The Revenue has more or less raised common grounds of appeal for both assessment years. Therefore, for the sake of brevity, grounds of appeal filed for assessment year 2017-18 are reproduced as under: 1. The order of the CIT(A) is contrary to law, facts and circumstances of the case. 2. The learned CIT(A) erred in by considering the income from production and sale of mushrooms as 'agricultural income' overlooking the definition of agricultural income u/s 2(1A) of the Income Tax Act, 1961. 3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decision of the Hon'ble ITAT Hyderabad Bench in the case of DCIT V Inventaa Industries Pvt Ltd. It is pertinent to note here that the case has not reached its finality since the department has filed further appeal before the Hon'ble High Court of Andhra Pradesh which is pending. i) Even the assessee company originally filed return declaring the income as business income and later on as an afterthought claimed as exempt of income on account of agricultural activity. So far assessee was declaring taxable income in its ROl consistently for earlier years. ii) The views of various Government and financial institutions should not influence interpretation of the statue and the same should be interpreted based on the language used in the statue and not based on the views of other institutions.l t is also to be noted that the classification adopted by central government for GST purposes does not necessarily apply for income tax purposes as the governing ACTS are different. Now edible button mushroom is neither a plant nor a fruit or vegetable but a fungus in its strict sense of scientific classification. Further as per GST prawns are also classified as agricultural produce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om Karur Vysya Bank and in the Loan application before Karur Vysya Bank dated 27.07.2016, assessee has mentioned that it is under manufacturing industry having a factory in Puludivakkam. Relevant pages of the scanned loan application is reproduced below- From the above it is clear that the assessee is engaged in manufacturing operation which is quite evident from Assessee's fixed asset schedule, where Plant and machinery makes around 50% of total fixed asset. Vii) Purchase of raw packing material, significant expense towards advertisement for promoting the brand, professional and managerial expenses, interest expense on working capital requirement, management of large amount outstanding with respect to creditors and debtors, packaging and Selling product directly to secondary market/ Traders, Branding and trade Marking on own packaged and canned product - all this facts suggest that the operation of the assessee is non-agricultural in nature. ix) Reliance is also placed on the case of Chander Mohan vs. ITO in ITA No. 377 389 (Chd.) of 2012, where the Hon'ble Chandigarh Tribunal on 28.10.2014 has decided that - Assessee claimed growing of mushroom as agricultur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducts raised on the land is immaterial. The word 'agricultural' means 'of or pertaining to agriculture; connected with husbandry or tillage of the ground'. CITv. Green Gold Tree Farmers (P.) Ltd. 2007 Tax LR 609 (Uttaranchal) The terms 'agriculture' and 'agricultural purposes' not having been defined in the Indian Income-tax Act, one necessarily has to fall back upon the general sense in which they have been understood in common parlance. 'Agriculture' in its root sense, means a gear, a field and cultivation of field which of course implies expenditure of human skill and labour upon land. By applying the above rationale in this instant case- since edible button mushroom is neither a plant nor a fruit or vegetable but a fungus in its strict sense of scientific classification and also in the process of growing it in trays makes the use of field, tillage of land operation non-existent and artificial environment conditioning has been used for production and quality control, the entire operation is far from the definition of agricultural income u/s 2(1A) but closely associated with production and manufacturing. Reliance is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Mountain Food Products Ltd vs ITO in ITA No. 1128/(Bang)/1983, and held that the term agriculture cannot be confined merely to the production of grain and food products for human beings and beasts, but, must be understood as comprising all the products of land which have some utility either for consumption or for trade and commerce and would also include forest products such as timber etc. Since, cultivation of white button mushrooms is in the nature of agricultural activity and any income derived from said activity is agricultural income which is exempt from tax. The relevant findings of the CIT(A) are as under: 5.22 I have perused the above observations of the A.O. The observation of the assessing officer is very general in nature and has been made without any analysis of the books of accounts of the appellant. Neither the books of account has been rejected nor any substantial evidence has been brought on record which indicated any adverse finding in the books of account of the appellant. The assessing officer has brought nothing on record to suggest that the investment made in the plant and machinery has not been put to use in the cultivation of mushrooms and the deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land means land ordinarily used for the purpose of agriculture or for purposes subservient to or allied to agriculture. (11) SirI. Vishnu Rao strongly relies on certain observations of the Federal Court in Megh Raj v. Allah Rakhia, AIR 1942 FC 27 and of the Madras High Court in Sarojini Devi v. Sri Krishna, AIR 1944 Mad 401. In AIR 1942 FC 27, after referring to the conflict of authorities as to the connotation of agriculture Varadachariar, J. said:- lt may on a proper occasion be necessary to consider whether for the purposes of the relevant entries in Lists 2 and 3, Constitution Act, it will not be right to take into account the general character of the land (as agricultural land) and not the use to which it may be put at a particular point of time. It is difficult to impute to Parliament the intention that a piece of land should, so long as it is used to produce certain things, be governed by and descend according to laws framed under List 2, but that when the same parcel of land is used to produce something else (as often happens in this country), it should be governed by and descend according to laws framed under List 3 . (12) Similarly, in AIR 1944 Mad 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in each case. If for instance, an agricultural land as we have interpreted above, is left fallow in a particular year owing to adverse seasonal conditions or to some other special reason, it would not cease to be agricultural land. (14) The Tribunal has observed in paragraph 8 of its statement of the case that the contention as to the forest lands in question being agricultural lands was put forward for the first time during the appeal to the Tribunal. This may not be correct because, as pointed out by Sri I. Vishnu Rao, even in her return dated 19-5-1958 the assessee stated referring to the forest I claim it non-taxable as it is agricultural in nature. In its order of 1-1-1962, the Tribunal has stated that admittedly no agricultural operations are being performed. on the forest lands. Sri I. Vishnu Rao denies that the assessee made any such admission. Be that as it may, we find nothing on the record to suggest that the forest lands were being ordinarily used either for the purpose of agriculture or for purposes subservient to or allied to agriculture by the valuation date. It follows that our answer to the first question must be in the negative. 5.28 So the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was that the assessee is carrying on business of manufacture of canned products, fruits and mushrooms, etc. He claimed depreciation at 15 per cent on the shed in which mushrooms are grown. The ITO allowed depreciation at 7.5 per cent as applicable to third class building negativing the assessee's claim that the shed as a factory building was entitled to depreciation at twice the normal rate. 5.33 Moreover, on perusal of the judgment it is found that the assessment year involved is 1980-81 when the provisions of Sec.80JJA were in existence. In view of the observation of the Spl Bench in the case of Inventaa (supra), on the deleted provisions of section 80JJA, the said decision has no application to the facts of the present case. 5.34 On perusal of the decision in the case of DCIT vs Inventaa (supra) it is noted that the Hon'ble Bench has discussed several judgements of the Jurisdictional High Court of Madras while deciding the case. Two of such cases are CITv. K.E. Sundara Mudaliar [1950] 18 ITR 259 (MAD.) and Commissioner of Income-tax v. Soundarya Nursery (2000| 241 TR 530 (Madras) . Consideration of the above two cases of jurisdictional High Courts in length i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that a similar issue had been considered by the Special Bench of Tribunal and after considering relevant facts held that growing white button mushrooms is an agricultural activity and income derived from said activity is agricultural income which is exempt from tax. The ld. Counsel for the assessee, further referring to various documents including reply received from Directorate of Mushroom Research, Solan ICAR and letter issued by Ministry of Agriculture and Co-operation, Ministry of Agriculture, Government of India submitted that all the authorities have treated mushroom cultivation as an agricultural activity. He further referring to RTI reply received from National Horticultural Board submitted that even National Horticultural Board recognized mushroom cultivation as agricultural activity. Further, Goods and Service Tax Act has classified mushroom as a vegetable for the purpose of human consumption. He further, submitted that Hon ble Finance Minister while introducing explanation (3) to section 2(1A) of the Act, clarified that income arising from saplings and seedlings grown in a nursery is also exempt from tax. From the above, it is very clear that in a modern day of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, one must necessarily fall back upon the sense in which they are understood in common parlance. Agriculture in its root sense means employing human skill and labour upon land. The Hon ble Supreme Court in the case of CIT vs RajaBenoy Kumar Sahas Roy [1957] 32 ITR 466 (SC), has explained the term Agriculture and agricultural purpose, and as per the observations of the Hon ble Supreme Court, in order to consider any activity as agricultural activity, some basic operations is essential which would involve expenditure of human skill and labour upon the land itself and not merely on the growth from the land. Some of the said operations are tilling of land, sowing of the seeds, planting and similar operations on the land. Besides the basic operations, there are certain subsequent operations which are performed after they produce sprouts from the land which includes weeding, digging the soil around the growth, removal of undesirable undergrowths and all operations which foster the growth and preserve the same not only from insects and pests but also from depredation from outside. Further, cultivation of the land does not comprise merely raising the products on the land, in the normal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ultural produce in a green house or temperature controlled facility, it cannot be said that such activity is commercial activity, but not agricultural activity, for the purpose of taxation of income derived from such activity. Thus, when assessee carried out basic and subsequent operations involved in agricultural operations for cultivation of grains, vegetables and fruits, even if such activity is carried out in green house and temperature controlled facility, said activity can be considered as agricultural activity. In so far as, the observations of the AO with regard to various plants and machinery employed and financial assistance from banks, we find that even agricultural operations are carried out by employing various agricultural implements and machineries in a modern day and also financial assistance is taken from banks and financial institutions for the purpose of making agriculture a systematic activity and more profitable. Merely because the assessee has employed plant and machinery and borrowed loan from bank, it does not change the nature of activity carried out by the assessee and product grown therein. Therefore, we are of the considered view that observations of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tural income which is exempt from tax. The relevant findings of the Tribunal are as under: 12. We have carefully considered the submissions of both the Ld. Counsels, the orders of the Ld.AO, as well as Ld.CIT(A), case law cited by both the parties and material placed before us, as well as before the Revenue authorities. 12.1. The process followed by the assessee for production of Edible white button mushroom is as follows:- Stage-I Preparation of compost involves taking the ingredients such as Paddy Straw, Chicken manure, Gypsum and some Ammonia compound and adding sufficient water and mixing. 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 thickn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch land, or occupied by the cultivator or the receiver of rent- in- kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub- clause (b) is carried on: 1 Provided that- (i) the building is on or in the immediate vicinity of the land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of rent- in- kind, by reason of his connection with the land, requires as a dwelling house, or as a store-house, or other out- building, and (ii) the land is either assessed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r trade and commerce, it will be seen that the term 'agriculture' receives a wider interpretation both in regard to its operations as well as the results of the same. Nevertheless there is present all throughout the basic idea that there must be at the bottom of its cultivation of land in the sense of tilling of the land, sowing of the seeds, planting, and similar work done on the land itself.(Emphasis ours) 12.5. This judgment makes it clear that the term agriculture is cultra i.e. cultivation of the 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 Chett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated that this compost on which mushroom is grown is soil . 12.9. Hence, the undisputed facts are that, mushrooms are grown on soil . Certain basic operations are performed on such soil which require expenditure of human skill and labour on the soil resulting in raising a product called Edible white button mushroom . The product Edible white button mushroom has utility for consumption, trade and commerce. 12.10. The Ld. Standing Counsel referred to the decision of theHon'ble Madras High Court in the case 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n with other words. It is used wherever a statutory provision constitutes a word or phrase that is capable of bearing more than one meaning. This rule is explained in the Maxwell on the interpretation of statutes in the 12th edition in following words When two or more words susceptible of analogous meaning are coupled together, they are understood to be used in their cognate sense. The words take their color from and are quantified by each other, the meaning of the general words being restricted to a sense analogous to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ading the statute as a whole, it requires a different meaning. In Mangin v. Inland Revenue Commission the Privy Council held: The object of the construction of a statute, be it to ascertain the will of the legislature, it may be presumed that neither injustice nor absurdity was intended. If, therefore a literal interpretation would produce such a result, and the language admits of an interpretation which would avoid it, then such an interpretation may be adopted . 12.15. Soil is a part of the land. Land is also 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 uninte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(1A) of the Act, in the explanatory note at para 4.2. It is stated as follows:- With a view to giving finality to the issue, and Explanation in Section 2 of the Income-tax Act, has been inserted providing that any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income. Accordingly, irrespective of whether the basic operations have been carried out on land, such income will be treated as agricultural income, thus qualifying for exemption under subsection( 1) of Section 10 of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivity by the courts. What this explanation does is to expand this interpretation further. It lays down that the basic operations are not necessary in nurseries, as required by the judgment in the case of Soundarya Nursery (see explanation note). Hence, even without this explanation, the income from plants grown in pots was held as agricultural income by the courts. As this explanation is a deeming provisions, we cannot apply the same to the assessee. But as the assessee performs basic operations on soil, the ratio of the judgment 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 dr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Revenue-department because on due consideration of the activity as explained to us, it is not justifiable to say that the growing of rose plants at all is not connected with the utilization of land. It is not in dispute that the agricultural land was acquired by the assessee from agriculturists. It is also not in disputed that mother plats are always been grown on the agricultural land. As far as ingredients of basic operation is concerned the assessee's case is that the technology deployed is (i) use of soil and 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 culti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp of the species grown for the market 3. To plant with mycelium Mycelium: The word Mycelium is defined by Random House Dictionary as The vegetative part or thallus of the fungi, being composed of one or more filamentous elements, or hyphae. 14.1. Ld. Counsel for the assessee submitted that mycelium is a vegetative part of the fungi. Ld. Standing Counsel submits that vegetative part does not mean that the classification is vegetable and it only refers to the reproductive feature of the fungi . A mushroom or toadstool, 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 irrelevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ushroom on the facts and circumstances of this case is an agricultural product raised from land. 15. The third issue is whether agricultural production done under controlled conditions , results in the product so raised not being a product from agricultural activity . 15.1. Each and every agricultural operation involves certain procedures and protocols. Certain conditions are necessary for natural growth of the product. The degree of control and the type of scientific input differs from product to product. The type of soil to be used, the nature of agricultural 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come. 16. We now discuss the other contentions raised by the parties. The assessee submits that the Govt. authorities and Financial Institutions treated growing of mushrooms as agriculture. That for the purpose of Mushroom cultivation, the Assessee Company borrowed funds from State Bank of Hyderabad with guidance provided by National Bank for Agriculture and Rural Development (NABARD) and the loans sanctioned are agricultural loans. NABARD conducted survey and observed that mushrooms are fruiting bodies of some members of lower group of plants. They are fleshy 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 produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant, as the observations on the issue in question are one of sub silentio . 16.5. The Chandigarh A Bench of the ITAT in the case of Chander Mohan v. ITO in ITA No. 389.377/Chd/2012, order dt. 28.10.2014, in our view, does not lay down the correct law in the facts and circumstances of the case. In any event, the type of mushroom grown in that case and the place at which it was grown and the fact that the process of growth was not properly explained. As the division Bench has not agreed with this view of the Pune Bench of the ITAT, this issue was referred to this larger Bench. 16.6. Hence as basic operations are performed by expenditure of human skill and labour on land by the assessee, which results in the raising of the product called Edible white button mushroom on the land and as this product has utility for consumption, trade and commerce, the income arising from the sale of this product is agricultural income and hence exempt u/s 10(1) of the Act. 16.7. Thus we uphold the order of the Ld. CIT(A) on this issue. 17. In view of the above discussion, we answer the question referred to us by the Hon ble President in the affirmative, in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the considered view that when Special Bench decision is in favour of the assessee on the very similar activity, then question of following the ratio laid down by other bench of Tribunal on the very same issue does not arise, more particularly, when the Special Bench has considered the earlier decision of Tribunal and overruled said decision. 16. In this view of the matter and considering facts and circumstances of the case and also by following the decision of ITAT, Special Bench in the case of DCIT vs M/s. Inventaa Industries Pvt Ltd (supra), 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. The Ld. 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. 17. In the result, appeal filed by the revenue for assessment year 2017-18 is dismissed. ITA NO : 970/CHNY/2022 : 18. The facts and issues inv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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