1,394 total views
Whether income from mushroom cultivation is Agricultural income?
operations carried out by assessee on land/soil, being human skill and labour
were basically agricultural operation and as such just because mushrooms are
grown in controlled conditions it does not negate claim of assessee that income
arising from sale of such mushrooms was agricultural income and thus exempt
under section 10(1).
In assessee’s favour.
CIT v. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC), CIT v. Sri Venkateswara Hatcheries Pvt. Ltd. (1999) 237 ITR 174 (SC), CIT v. Soundarya Nursery (2000) 241 ITR 530 (Mad) and Asstt. CIT v. KF Bio Plants (P) Ltd. (Pune Bench ‘A’ ITA No. 1110/PN/20111.
Applied: Dy. CIT v. Best Roses Biotech Ltd. (2012) 144 TTJ 645 (Ahd-Trib).
Blue Mountain Food Products Ltd. (1985) 14 ITD 254 (Bang), Chander Mohan v. ITO (2015) 67 SOT 28 (Chd-Trib), CIT v. Kokine Dairy (1938) 6 ITR 502 (Rangoon), K. Lakshmansa & Co. v. CIT (1981) 128 ITR 283 (Karn), Blue Mountain v. ITO (1985) 14 ITD 254 (Bang) and Asstt. CIT v. Malhotra Mukesh Satpal (2008) 115 ITD 467 (Pune-Trib).
THE ITAT, HYDERABAD ‘B’ SPECIAL BENCH
MANMOHAN, V.P., J. SUDHAKAR REDDY, A.M. & P. MADHAVI DEVI, J.M.
Dy. CIT v. Inventaa Industries (P.) Ltd.
IT Appeal Nos. 1015 to 1018 (Hyd.) of 2015
A.Ys. 2008-09 to 2012-13
9 July, 2018
Appellant by: K. Mamata Choudary, Sr. Standing Counsel
Respondent by: S. Rama Rao and K. Gopal
J. Sudhakar Reddy, A.M.
Hon’ble President ITAT, constituted this Special Bench to decide the following
question and appeals vide order dt. 25-7-2017 —
“Merely because instead of horizontal use on soil, vertical
space is used, does the growth of mushrooms stand apart from agricultural
the time of hearing, both the parties objected to the question framed. The
learned 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 learned 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. 10-4-2018, 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
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:
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 income from growing mushrooms as “income from
agriculture” and hence exempt under section 10(1) of the Income Tax Act,
1961 [Act]. A survey operation under section 133A of the Act was conducted on
23-9-2013, at the mushroom growing unit of the assessee-company located at
Kallakal – Village, Toopran – Mandal, Medak – District, Telangana. The learned
assessing officer (AO) records that the survey was conducted to verify the
process of mushroom growing by the assessee-company. During the course of
survey, statements were recorded from Mr. K. Jagadish, Vice President
(Operations) and Mr. C. Rajesh, another Vice President of the company. During
the course of scrutiny proceedings, in reply to the queries raised by the
assessing officer, the assessee made various submissions. The gist of the
submissions as summarized by the learned assessing officer are set out in para
8, page 9 of the assessment order, the extract of which is as under :–
“8. The gist of the submissions of the assessee is as under
Whether cultivation of mushrooms is agriculture or not is a
question of fact.
Operations are conducted on land which is agricultural land and
the operations are agriculture in nature. Mushroom is a nutritious vegetable.
The spawn is grown on soil.
The operations are akin to nursery which has been recognized by
the Act as agriculture by insertion of Explanation 3 to section 2(1A).
Various Government authorities, Banks/FIs, World organizations
and food organizations, Excise Department and others treat mushrooms as
Mushroom growth is a natural agricultural activity and assessee
is only a facilitator. Therefore, the decision of the Apex Court in the case
of M/s. Venkateswara Hatcheries Pvt. Ltd. (1999) 237 ITR 174 (SC) applies.
In the said decision, the Supreme Court held that a natural product can be
produced only through natural process and the facilities provided by human
effort is not relevant and the production would always 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
assessing officer :
The findings of the learned 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
(b) The Hon’ble Supreme Court in the case of CIT v. Raja
Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC) 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 under section 2(1A) of the Act. In the case of CIT v.
Kokine Dairy (1938) 6 ITR 502 (Rangoon), 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
(c) Rule 7A, 7B and 8 of the Income Tax Rules, 1962 were
referred to in support of the contention that unless income is derived from
performing basic operations on the land, the same could not be construed as
(d) Section 80JJA of the Act inserted by the Finance Act, 1979
with effect from 1-4-1980 provided a deduction in respect of profit and gains
from business of growing mushrooms and Circular No. 258, dt.
14-6-1979 and the explanatory Memorandum to the Finance Act, 1979,
and Circular No. 372/1983 were relied upon to conclude that intent
and understanding of the Legislature is that growing of mushrooms is not in the
nature of agriculture income but is reckoned as income from business. He
rejected the contention of the assessee that the withdrawal of this section
80JJA of the Act was because the Government was of the view that the income
earned from growing of mushrooms is agriculture income and hence exempt from
tax. Therefore, no further deduction was required, on the ground that this is
far-fetched and illogical.
(e) There is no dispute regarding the various processes
mentioned in the letters dt. 10-1-2014 and 17-2-2014 written by the assessee
setting out the various stages involved in the growing of mushrooms. It is
important to note that no operations are carried out on land. In the detailed
submissions made by the assessee, which ran into several pages, there is no
categorical assertion by the assessee that some of the basic operations are
carried out on land. On the reliance placed by the assessee on the definition
of ‘land’ as given in the Black’s Law Dictionary, he held that soil could be
construed as ‘land’, as per the dictionary meaning, if and only if, it remains
attached to the earth. He held that the argument that soil even if removed from
land would still be land, does not hold water.
(f) Regarding exemption of income derived from saplings or
seedling grown in soil in pots, he held 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
(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 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
under section 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 remotely connected with land.
(k) The Bangalore Bench of ITAT in the case of Blue
Mountain Food Products Ltd. (1985) 14 ITD 254 (Bang) held that
mushroom growing is a business activity.
(l) The statement recorded from the Managing Director of the
assessee-company demonstrates that the main layer bed is compost which is not
soil and that ballclay is obtained by the assessee from M/s. Nyvelli Lignite
Corporation, Nyvelli. The Casing layer is only another layer of manure mixed
with coirpith, nutrients and ballclay, which helps in growth of mushrooms. The
Managing Director did not give specific answers to the issue as to whether use
of land was involved at any stage in the growth of mushrooms and whether the
mushrooms in question are grown under controlled conditions.
2.2 At paras 40
& 41, the learned assessing officer concluded as follows :–
“40. From the above discussion, it is clear that either
during the production of Spawn or in the preparation of Compost or Spawning the
Compost no operations involving land or soil are carried out. The only instance
of use of soil is when clay and coir pith is used as top dressing for providing
moisture to the mushroom which are already sprouting or growing in the Compost.
Hence, the operations carried out by the assessee in the growth of mushrooms do
not meet the test of agricultural operations laid by the Hon’ble Supreme Court
in the case of CIT v. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC).
Even the explanation 3 under section 2(1A) is not of any help to the assessee
as no operations are carried out by it on land or in soil. Use of soil at a
subsequent stage in the operations cannot be said to be carrying out of basic
operations in the soil/land as discussed in the judgment supra.
41. In view of the detailed reasons mentioned above, I hold that
income derived by the assessee from growing of mushrooms is not agricultural
income and I proceed to assess the same as income under the head “Business
or Profession”. Addition Rs. 12,13,05,430.”
assessee carried the matter in appeal before the learned Commissioner (Appeals)
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 assessing
officer for the assessment years 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.
the learned Commissioner (Appeals) 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 1½
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 v. Sri Venkateswara
Hatcheries Pvt. Ltd. (1999) 237 ITR 174 (SC) 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 of law relied upon by the assessee. The findings of
the learned assessing officer were sought to be rebutted by the assessee in its
submissions before the learned Commissioner (Appeals).
his rejoinder to these submissions, the learned assessing officer for
strengthening his findings that the cultivation of mushroom is not agricultural
activity and that it is ‘fungi’ culture, relied on a report issued by PENN
STATE College of Agricultural Sciences with regard to basic procedures for
mushroom growing, wherein two different methods of growing mushrooms are given.
of the learned Commissioner (Appeals) :–
After considering the rival submissions, the learned First
Appellate Authority has held as follows :–
(a) The reopening of assessments is valid in law.
(b) He relied on the definition of ‘Land’ and ‘Soil’ given in
the Black’s Law Dictionary and in Random House dictionary and held that the
word ‘land’ includes any soil, and hence the prepared soil is land. That soil
is the basis for production of mushroom as initial mushrooms spawn is prepared
and the spawn is then cultured in a similar type of prepared soil, to be used
as seed for cultivation of mushroom. Thereafter the same is removed from the
soil and is spread over the soil arranged in giant size trays, the depth of
which is up to 8 inches. These trays contain soil and trays are kept vertically
on the land and the watering of the soil is done through coir pith to maintain
the required moisture. The learned Commissioner (Appeals) relied on the
literature published by the “Director of Mushroom Research” of
“Indian Council of Agricultural Research” (ICAR) and came to a
conclusion that usage of soil in these trays can be considered as usage of
land. The learned Commissioner (Appeals) also stated that ‘even for cultivation
of other crops, the land in the form of ground cannot be used and that only the
upper layer of the soil is to be prepared for tilling, ploughing, watering and
manuring’. As preparation of soil is required for production of mushroom, he
concluded that edible mushroom is grown on land.
(c) The learned Commissioner (Appeals) 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 learned Commissioner (Appeals) 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
(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
assessing officer is not relevant as this provision of law is no longer in
(g) On the reference to the material available in Wikipedia by
the assessing officer, the learned Commissioner (Appeals) held that though
several thousands of species of mushrooms are there, only those which are grown
on “soil” are “edible”.
(h) The learned Commissioner (Appeals) referred to the judgment
of the Hon’ble Supreme Court in the case of CIT v. Sri Venkateswara
Hatcheries (P) Ltd. (1999) 237 ITR 174 (SC) 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 learned Commissioner (Appeals) observed that just
because the assessee-company is using the land vertically by using large trays,
for producing mushroom, by adopting a natural agricultural process and by
cultivating the soil, it cannot be said that land is not used for production of
mushroom. It is a fact that the land is used for production, the sub-strata of
which is soil. The ingredients of agricultural operations are embedded in the
production of mushroom and the entire activity is similar to the production of
any other vegetable and to the process of any other agricultural produce.
(j) The decision of the Bangalore Bench of the ITAT in the case
of Blue Mountain Food Products Ltd. (1985) 14 ITD 254 (Bang) is
not relevant, as the question before the Bench was, whether depreciation can be
allowed for determining the income or not and that this decision of the
Bangalore Benches was given when the provision of section 80JJA of the Act, was
in existence in the statute and that a decision with reference to a section
which was later repealed, cannot be a precedence.
(k) The views of various Government authorities and financial
institutions, wherein mushroom is treated as a vegetable is relevant for the
purpose of determining the issue.
(l) He relied on various decisions of the Hon’ble Supreme Court
for the proposition that incentive provisions have to be liberally interpreted
and held that section 10(1) of the Act has to be liberally interpreted.
(m) He held that the decision of the Chandigarh Bench of the
Tribunal in the case of Chander Mohan v. ITO (2015) 67 SOT 28
(Chandigarh-Trib) is distinguishable as the process for production
followed in that case is different from the process followed by the assessee
and that the type of mushroom produced in that case is different from those
produced by the assessee.
6. The learned
Commissioner (Appeals) concluded that production of mushroom is a process of
agricultural production and income derived from such a process is agricultural
income eligible for exemption under section 10(1) of the Act. The learned
Commissioner (Appeals) did not adjudicate the grounds of the assessee relating
to its claim of depreciation.
Revenue has filed these appeals against this finding of the learned
Commissioner (Appeals) that income from production of mushroom is agricultural
income. The assessee has filed cross-objections for the assessment years
2008-09 and 2010-11 on the issue of reopening and for all the four assessment
years on the issue of claim of depreciation.
Sr. Standing Counsel Smt. K. Mamata Choudary supported the order of the learned
assessing officer 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
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
Online extract of Balck’s Law “Land”
UOI v. V Krishnamurthy 1994-2-L.W 452 (Mad HC)
(Noscitur a sociis) — State of Bombay &
Ors. v. Hospital Mazdoor Sabha AIR 1960 SC 610 @ pa 9.
The interpretation of ‘land’ for the purposes of section 2(1A)
assumes importance as it goes to the root of the legislative competence of the
Parliament to tax such income. Entry 82 of List I of the Seventh Schedule read
with Entry 46 of List II of the Seventh Schedule of the Constitution of India
reserves the right to tax agricultural income with the States and outside the
purview of the Union. Article 366(I) defines Agricultural Income to mean
agricultural income as defined for the purposes of the enactments relating to
Indian income tax.
CIT v. Williamson Financial Services (2008) 2
SCC 202 @ pa 18-30
Contextually, ‘land’ under the Income Tax Act is the real immovable
property as can be seen from its use in relation to rent, income, capital
asset, etc. To clothe it with the interpretation as sought to be advanced by
the assessee would be contrary to the legislative use of such word in the
An exemption provision presumes the ability to tax certain types
of income but such income being kept out of the scope of tax liability. The
exclusion of agricultural income from the total income under section 10(1) of
the Act is not an exemption, as commonly perceived, as it is excluded on
account of the Parliament having no power to tax agricultural income.
The Hon’ble Supreme Court has held in CIT v. Raja Benoy
Kumar Sahas (1957) 32 ITR 466 (SC) (and reaffirmed time and again)
that the primary activities of cultivation of the land such as tilling, sowing,
planting, etc. have to be carried out on the land itself in order it to be
treated as agriculture or as agricultural income. Undisputedly, 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
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.
Explanatory Note to Finance Act, 1979
CBDT Circular No. 258 of 1979, dt. 14-6-1979
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(1A) 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
Explanatory Note to Finance Act, 2008
Manisli Trivedi v. State of Rajasthan (2014)
14 SCC 420 @ pa 14
The ITAT has, though in different contexts, consistently
considered income from production of mushrooms as not to be agricultural
income. In fact, the ITAT, in Blue Mountain Foods, rejected the Revenue’s
contention that mushroom production is agriculture and allowed depreciation.
Blue Mountain v. ITO (1985) 14 ITD 254 (Bang)
Chander Mohan vs. ITO (2015) 67 SOT 28
(Chandigarh) @ pa 12-13
ACIT v. Malhotra Mukesh Satpal (2008) 115 ITD
467 (Pune) @ pa 3.24-3.27
The ratio of judgment of the ITAT in Rachna Dogra v.
ITO does not pertain to the issue on hand and the observation therein
as to production of mushrooms being agricultural must therefore be one of
sub-silentio and therefore not binding.
Sub silentio — Municipal Corporation of Delhi
v. Gurnam Kaur (1989) 1 SCC 101 @ pa 11.
The reliance sought to be placed by the assessee on various
organisations, banks and departments’ classification of mushroom production as
agriculture is not tenable as such classifications are not in pari material
with that of the Income Tax Act and hence cannot be relied upon.
Maheshwari Fish Seed Farm v. TNEB (2004) 4 SCC
705 @ pa 10-16
The submission that the definition of mycelium is the vegetative
part of the fungi and therefore is a vegetable is not tenable, as what is meant
by vegetative part is the reproductive part of the fungus and not its
classification as a vegetable.
9. Learned Counsel
for the assessee Shri S. Rama Rao, relied on the order of the learned
Commissioner (Appeals) and in support thereof made the following submissions
That mushrooms are broadly of two different categories, those
which are edible and those which are not edible. Mushrooms grow spontaneously
and among the edible mushrooms, 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 assessing officer 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 learned 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 includes material on the earth. That the
words ‘soil’ and ‘land’ are used interchangeably based on the requirement.
Reference was made that the definition of the word ‘soil’ in
Random House dictionary and the definition of the word ‘agriculture’ in Black’s
Law Dictionary, and it was argued that the actual crux is for carrying out
operations to make soil suitable for growth and for production.
He submitted that the soil/compost is prepared by mixing of
paddy stock or other cellulose material, nitrogen and other ingredients in soil
and that this is called ‘land’. That the entire land held by the assessee is
used for the production of mushrooms, as structures are erected upon the land
and trays with soil have been placed in these structures, which are used for
growing of mushrooms. That all the components like straw etc., degenerate and
become soil and as specific type of soil is required for good growth of mushroom,
clay is purchased by the assessee and after enriching the clay, it is used for
production of mushrooms.
He further submitted that the term ‘controlled conditions’ has
to be viewed as opposed to wild growth and that the conditions of growth are
“controlled” by way of supplying water at the required time and in
quantity, enriching the soil with fertilizers, manure and such other material,
to suit the crop which is sought to be grown. Pesticides are used to control
pests from damaging the crop etc. He submitted that with the improvement of
technology in agricultural operations, the degree of control has increased in
agricultural activity and simply because advanced technology is used for
agricultural production, the operation does not cease to be an agricultural
operation. It is submitted that mushrooms are grown on soil with 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 learned 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 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 learned 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 of either plant or fungi, it is called
‘agriculture’. Such basic operations performed on the land may be done for
production of either the plant or fruit or vegetables or flowers or any other
item and the term ‘Floriculture’ etc., have come into use. The word ‘Fungi
Culture’ is used to denote the process of agriculture undertaken to produce
“fungi” instead of “plant” and that mushroom is considered
as an agricultural product. Reference is made to the report of ‘Directorate of
Mushroom Research’ that mushroom production is considered as diversification of
agricultural activities for meeting the challenges of providing food the
nutritional security to people. He relied on certain articles published in
certain journals for the proposition that mushrooms are edible vegetables.
On the reliance placed by the Revenue on section 80JJA, it was
submitted that it supports the case of the assessee as only income derived from
the business of growing mushroom was considered for the purpose of grant of
exemption and if income derived from growth of mushroom, is not of agricultural
activity, the exemption would not be available.
On the statements recorded from the officers and staff during
the course of survey, it was submitted that the questions were misleading. In
response to such misleading questions, the employees had given replies and that
these replies have been quoted by the Revenue authorities out of context and
that affidavits were filed before the assessing officer, explaining the
statements and rebutting the conclusions of the assessing officer.
That the reliance placed on the Transfer of Property Act for the
definition of immovable property is not relevant to the facts of this case.
On the reliance placed on the decision in the case of Chander
Mohan v. ITO (2015) 67 SOT 28 (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
“(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
(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.”
the cross-objections, learned Counsel for the assessee Sri K. Gopal submitted
that the reasons for reopening were not provided to the assessee despite
several reminders. The learned Standing Counsel pointed out that reasons for
reopening were furnished to the assessee and that the copy of the same were
placed by the assessee in its Paper Book. No other arguments were advanced by
the learned Counsel for the assessee on this issue of re-opening. This ground
on the issue of reopening of assessment under section 147 of the Act arises for
the assessment years 2008-09 and 2010-11 only. As the argument of the learned
Counsel for the assessee is found to be factually incorrect, these grounds of
cross-objections are dismissed.
other grounds taken up by the assessee in the cross-objections for all the four
assessment years have not been pressed for the reason that, relief was granted
to them by the learned Commissioner (Appeals) during the course of 154
proceedings. Hence these grounds are dismissed.
her rejoinder, Smt. Mamata Choudary reiterated her contention that, for an
income to be an agricultural income, it should be derived by performing basic
operations on land which is an immovable property. On a query from the Bench,
she submitted that the Revenue does not dispute that what is spread in the
trays is ‘soil’ on which mushroom is grown.
12. We have
carefully considered the submissions of both the learned Counsels, the orders
of the learned assessing officer, as well as learned Commissioner (Appeals),
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 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
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.
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 “controlled
conditions”, does it cease to be agricultural operation resulting in the
income derived therefrom not being agricultural income?
12.3 Before we go
into these questions, we reproduce section 2(1A) of the Act :–
“(1A) “agricultural income” means —
(a) any rent or revenue derived from land which is situated in
India and is used for agricultural purposes;
(b) any income derived from such land by-
(i) agriculture; or
(ii) the performance by a cultivator or receiver of rent-in-kind
of any process ordinarily employed by a cultivator or receiver of rent-in-kind
to render the produce raised or received by him fit to be taken to market; or
(iii) the sale by a cultivator or receiver of rent-in-kind of
the produce raised or received by him, in respect of which no process has been
performed other than a process of the nature described in paragraph (ii) of
this sub- clause;
(c) any income derived from any building owned and occupied by
the receiver of the rent or revenue of any such 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:
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 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
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 v. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466
(SC) 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 land itself. There are
however other operations which have got to be resorted to by the agriculturist
and which are absolutely necessary for the purpose of effectively raising the
produce from the land. They are operations to be performed after the produce
sprouts from the land, i.e., 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, tending, pruning, cutting, harvesting, and rendering the produce
fit for the market. The latter would all be agricultural operations when taken
in conjunction with the basic operations above described, and it would be
futile to urge that they are not agricultural operations at all.
The term ‘agriculture’ is understood as comprising within its
scope the basic as well as subsequent operations in the process of agriculture
and the raising on the lands of products which have some utility either for
consumption for 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
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
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
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 rearing, watering, fencing and protection of such
trees and the gathering of their fruits during the annual seasons should not be
held to be agriculture”. There is some kind of cultivation or prodding of
the soil at the inception when the planting is done and subsequently also at
intervals. In the case of coffee grown on hiss slopes, there is no ploughing or
tillage as in the case of wet and dry fields, but it cannot be maintained that
growing coffee is not an agricultural operation.”
Hon’ble High Court as far back as in the year 1950, held that operations on
land does not necessarily mean ploughing, tillage and can be of some other kind
also. The operation would depend on the requirements of the circumstances of
the case. A wide meaning has been given to the term agricultural
12.8 Though the
learned assessing officer has held that the compost used for production of
mushroom by the assessee is not “soil”, the learned St. counsel, in
reply to a specific query from the Bench, 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 learned
Standing Counsel referred to the decision of the Hon’ble Madras High Court in
the case of Union of India v. 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:
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
The word “soil” as per Random House Dictionary — The
Unabridged Edition to include “any place or condition providing the
opportunity for growth or development”.”
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 learned
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.
terms ‘Noscitur a Sociis’ is related to legal doctrine and
statutory interpretation of laws.
Latin the term ‘Noscitur a Sociis’ means ‘the meaning of a
word may be known from accompanying words’. It is also used for interpreting
questionable words in statutes. When a word is ambiguous, its meaning may be
determined by reference to the rest of the statute. It is one of the rules of
the language used by the courts that helps to interpret legislation. For the
case with “noscitur a sociis” the questionable
meaning of a word or doubtful words can be derived from its association with
other words within the context of the phrase. This indicates that words in a
list which is within a statute have meanings that are related to each other.
principle of Noscitur a Sociis is a rule of construction. It
is used by the court to interpret legislation. This means that the meaning of
an unclear word or phrase must be determined by the words that surround it. In
other terms, the meaning of a word must be judged by the company that it keeps.
The questionable meaning of a doubtful word will be derived from its
association with other words. It is used wherever a statutory provision
constitutes a word or phrase that is capable of bearing more than one meaning.
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.
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 learned 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
term ‘Land’ in our view has to be interpreted by using the principles of
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
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.
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 was obviously intended,
the construction which would defeat the ends of the Act must be rejected even
if the same words used in the same section, and even the same sentence, have to
be construed differently. Indeed, the law goes so far as to require the Courts
sometimes even to modify the grammatical and ordinary sense of the words if by
doing so absurdity and inconsistency can be avoided.”
Mal v. Kay Iron Works (P) Ltd., the Hon’ble Supreme Court while
reiterating that courts will have to follow the rule of literal construction,
which enjoins the court to take the words as used by the Legislature and to
give it the meaning which naturally implies, held that there is an exception to
that rule. The Court observed :–
“That exception comes into play when application of literal
construction of the words in the statute leads to absurdity, inconsistency or
when it is shown that the legal context in which the words are used or by
reading the statute as a whole, it requires a different meaning.”
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 learned 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 learned 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.
now consider the arguments on the explanation 3 to section 2(1A) of the Act.
The assessee relies on Explanation-3 to section 2(1A) which reads as follows
“3. For the purposes of this clause, any income derived
from saplings or seedlings grown in a nursery shall be deemed to be
what is not otherwise agricultural income, is deemed under the explanation as
P. Chidambaram, the then Hon’ble Finance Minister, while presenting Union
Budget for 2008-09 at para 167 stated as follows :–
“Agriculture income is exempt from income tax. However,
courts have ruled the growing saplings or seedlings of land is agriculture. But
growing them in pots is not agriculture. This does not seem to be fair. Hence,
I propose to exempt from tax income arising from saplings or seedlings grown in
a nursery.” (Emphasis on)
introducing explanation 3 to Section 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 sub-section (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
13.2 The Hon’ble High
Court of Madras in CIT 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, 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
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 the
term ‘agriculture’. This judgment was delivered in the year 1998, August 5th,
much before the introduction of explanation 3 to Section 2(1A) of the Act in
the year 2008. Similar is the judgment in the case of CIT, Chennai v.
K.N. Pannerselvam (2016) 243 Taxman 219 (Madras). The judgment of the
Hon’ble Allahabad High Court in H.H. Maharaja Vibhuti Narayan Singh v.
State of U.P. (1967) 65 ITR 364 (All), was considered by the Hon’ble Madras
High Court in the case of Soundarya Nursery (supra) at para 6
of the judgment. The Court held that the observation of the Hon’ble Allahabad
High Court was clearly an obiter.
judgment in the case of Soundarya Nursery (supra) required
basic objections to be performed on land for the income to be exempt as
agricultural income. Before the introduction of Explanation 3 to section 2(1A)
of the Act, growing plants in pots was interpreted as agricultural activity 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
13.4 The Ahmedabad
Bench of the ITAT in the case of DCIT v. Best Roses Biotech Ltd. (2012)
144 TTJ 645 (Ahmedabad) 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 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 dipper is required.
The watering of rose plants are also a technical method to avoid excessive
watering so that the roots of the rose plants should not get damaged. The
commercial greenhouse, i.e., “bent canopy” is used for various
benefits so that the sun-light and the humidity level both can be maintained.
For meeting the international demand, it is explained, that the
assessee-company adopted best measure to ensure best quality of rose.
6.2 Conditions of Agriculture operation : From the side of the
respondent-assessee there was detailed discussion about the growing of rose
plants and other connected agricultural operation carried out by the assessee.
However, the objection of the Revenue was that the rose plants were not grown
on the land, therefore the generation of income was not directly connected with
the operation of land. Somehow we are not agreeing with the said proposition 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
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 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
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
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 :–
The word “Spawn” is defined by Collins dictionary as
the Spawn is a soft, jelly-like substance containing the eggs of fish, or of
animals such as frogs, When fish or animals such as frogs spawn, they lay their
1. To produce or deposit (eggs, sperm, or young)
2. To bring forth or be the source of (esp. something regarded
with contempt and produced in great numbers)
3. Horticulture to plant with spawn, or mycelium noun
4. The mass of eggs or young produced by fish, mollusks,
crustaceans, amphibians, etc.
5. Something produced, esp. in specific, numerous offspring or
progeny great quantity; usually contemptuous
6. The mycelium of fungi, esp. of mushrooms grown to be eaten
The word “spawn” is defined by Random House Dictionary
— The mass of eggs deposited by fishes, amphibians, mollusks, crustaceans etc
2. Bot, the mycelium of mushrooms, esp of the species grown for
3. To plant with 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).
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 v. 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
(b) A thing or person that is the result of an action or
(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 harvested. They draw their nourishment from the soil
only. The product mushroom does not arise from any secondary agricultural
operation. Unlike in the