Agricultural Income from Nursery: Delhi ITAT Reaffirms Exemption and the Principle of Consistency
Agricultural income enjoys a special position under the Income-tax Act, 1961. While Section 10(1) provides exemption in respect of agricultural income, the real controversy often lies in determining whether a particular receipt actually qualifies as “agricultural income” under Section 2(1A).
A recent ruling of the Delhi Bench of the Income Tax Appellate Tribunal provides useful guidance, particularly for taxpayers engaged in nursery activities. The Tribunal has also reiterated an equally important principle: when the Revenue has accepted a similar claim in subsequent years and there is no change in facts, it cannot arbitrarily take a completely different view for an earlier year.
The decision is in M/s. Grow More v. DCIT, ITA No. 6989/Del/2026, order dated 19 August 2026.
The Issue: Is Income from a Nursery Agricultural Income?
The assessee was engaged in running a nursery where saplings were grown and subsequently sold in the open market.
During the relevant assessment year, the assessee earned income of ₹30,98,899 from such nursery activities and claimed the amount as exempt agricultural income under Section 10(1).
The Assessing Officer, however, did not accept the claim.
The principal objection of the AO was that the assessee had not satisfactorily established that the income was actually derived from agricultural activities. The exemption was consequently denied.
The matter travelled before the CIT(A), who also confirmed the action of the Assessing Officer.
The assessee therefore approached the ITAT.
What Did the ITAT Consider?
One of the significant aspects before the Tribunal was the treatment given by the Revenue itself in the immediately succeeding assessment years.
The Tribunal noticed that the assessee had made a similar claim of agricultural income in the two succeeding years, and those claims had been accepted by the Revenue.
This became important in deciding whether the entire claim for the year under consideration could simply be rejected.
The Tribunal held that where the nature of the agricultural activity and the surrounding facts remain similar, the Revenue cannot completely disregard the position accepted in subsequent years without demonstrating a material change in facts or circumstances.
Thus, the principle of consistency came into play.
Res Judicata Does Not Apply – But Consistency Does
There is an important distinction here.
Strictly speaking, the principle of res judicata does not apply to income-tax proceedings. Each assessment year is generally a separate unit of assessment.
However, this does not mean that the Revenue is free to adopt completely inconsistent positions on identical facts from one year to another.
The principle of consistency requires that where a particular factual and legal position has been accepted in one year, the Revenue should ordinarily maintain that position in subsequent or preceding years where the facts remain unchanged, unless there is a valid reason for taking a different view.
Therefore, consistency is not the same thing as res judicata.
This distinction is particularly relevant in recurring businesses such as agriculture, nursery operations, manufacturing activities and other continuing businesses where the nature of activity remains substantially the same year after year.
Nursery Income Has a Specific Statutory Recognition
The case also highlights an important statutory provision that should not be overlooked.
Section 2(1A) defines “agricultural income”. The definition includes income derived from agricultural operations, subject to the conditions prescribed by the Act.
More importantly, Explanation 3 to Section 2(1A) specifically provides that income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.
This statutory deeming provision is significant.
Therefore, income from nursery operations cannot be examined merely by asking whether the taxpayer is cultivating traditional agricultural crops on agricultural land.
The statutory definition itself recognises income from saplings and seedlings grown in a nursery as agricultural income, subject to the conditions of the provision.
The Tribunal Did Not Grant the Entire Claim
Interestingly, the ITAT did not simply allow the entire ₹30,98,899 claimed by the assessee.
The Tribunal found that the assessee had not been able to substantiate the entire agricultural income with adequate supporting documentary evidence.
Consequently, while rejecting the approach of the Revenue in denying the claim in its entirety, the Tribunal restricted the addition to ₹10 lakh.
The assessee therefore received relief of approximately ₹20.19 lakh.
This is an important aspect of the ruling.
The judgment does not mean that every receipt described as “nursery income” automatically becomes exempt. The taxpayer must still establish the underlying activity and substantiate the income.
A Balanced Approach by the ITAT
The ruling demonstrates a balanced approach.
On one hand, the Tribunal did not accept the Revenue’s approach of treating the entire claim as non-agricultural merely because the assessee could not produce sufficient evidence for the whole amount.
On the other hand, it also did not accept the taxpayer’s claim in full where supporting evidence was inadequate.
The Tribunal therefore adopted a middle path:
Similar agricultural income accepted in subsequent years + statutory recognition of nursery income = Revenue cannot reject the entire claim merely on suspicion; however, unsupported portions may still be subjected to appropriate addition.
Why This Judgment Matters for Nursery Operators
The decision is particularly relevant to businesses engaged in:
• Plant nurseries;
• Sapling production;
• Seedling cultivation;
• Horticultural activities;
• Plantation-related activities; and
• Other agricultural activities involving cultivation and sale of plants.
Such taxpayers should maintain proper documentary evidence demonstrating the actual nature of their operations.
The mere description of an activity as a “nursery” may not be sufficient in every factual situation. Records relating to cultivation, purchase of seeds or planting material, labour, land, irrigation, fertilisers, pesticides, stock and sales can become important in establishing the character of the income.
Documentary Evidence Becomes Critical
The Grow More ruling also provides a practical lesson.
Even though the Tribunal recognised the significance of the assessee’s similar claims having been accepted in subsequent years, the absence of adequate supporting evidence resulted in a portion of the claim being sustained.
Taxpayers claiming agricultural income should therefore maintain a proper audit trail, including, wherever applicable:
Land records → Nursery activity → Seeds/Saplings → Agricultural operations → Labour and cultivation expenses → Stock records → Sale invoices → Bank receipts → Agricultural income computation
The stronger the documentary chain, the easier it becomes to establish that the receipt actually arose from agricultural operations.
Can the Revenue Change Its Stand?
The answer is: Yes, where facts or law have materially changed — but not merely because the Assessing Officer wishes to take a different view.
If the Revenue has accepted the character of similar income in subsequent years, and there is no material difference in the nature of activity, a sudden departure requires proper justification.
The principle can be particularly powerful where:
1. The business/activity is continuing from year to year;
2. The underlying facts remain substantially identical;
3. The Revenue has examined the issue in other assessment years;
4. The claim has been accepted in those years; and
5. There is no change in the statutory position.
In such circumstances, the taxpayer can legitimately rely upon the principle of consistency, while still recognising that every assessment year is technically a separate proceeding.
The Larger Principle
The judgment is a reminder that tax administration cannot operate purely on an assessment-year-by-assessment-year basis when the underlying facts are admittedly continuing and identical.
At the same time, consistency cannot become a substitute for evidence.
A taxpayer cannot argue:
“It was accepted last year, so accept it this year”
without demonstrating that the relevant facts continue to be the same.
Similarly, the Revenue cannot simply argue:
“Evidence is insufficient this year, therefore the entire income is taxable”
while ignoring its own treatment of substantially similar activity in immediately succeeding years.
The correct approach is to examine the nature of the activity, statutory definition, evidence available and treatment in other years collectively.
Key Takeaways
1. Nursery income can qualify as agricultural income
Explanation 3 to Section 2(1A) specifically recognises income derived from saplings or seedlings grown in a nursery as agricultural income.
2. Subsequent acceptance can be relevant
Although res judicata does not apply to income-tax proceedings, the principle of consistency remains relevant where facts and circumstances remain unchanged.
3. Entire exemption cannot be rejected mechanically
Where similar agricultural income has been accepted in subsequent years, rejection of the entire claim requires proper consideration of the factual position.
4. Evidence remains essential
Acceptance in another year does not eliminate the taxpayer’s responsibility to substantiate the claim for the relevant assessment year.
5. Partial relief is possible
Where the nature of the activity is accepted but the quantum is not fully supported by evidence, the Tribunal may determine an appropriate amount rather than mechanically accepting or rejecting the entire claim.
Conclusion
The decision in M/s. Grow More v. DCIT is useful not only for nursery operators but also for taxpayers involved in recurring activities where the Revenue has adopted a consistent position over several assessment years.
The statutory position is particularly significant because the Income-tax Act itself recognises income derived from saplings or seedlings grown in a nursery within the definition of agricultural income.
At the same time, the ruling sends a practical message to taxpayers: exemption may be available under the law, but documentation must support the claim.
For the Revenue, the message is equally clear: a claim accepted on substantially identical facts cannot be discarded in another year without examining the principle of consistency and the statutory framework governing the income.
In taxation, consistency may not be res judicata — but it certainly cannot be ignored.
The copy of the order is as under:
