Nature of Agricultural income would not change merely because operation were done in a greenhouse

Asst. CIT Vs. KF Bio plant Pvt. Ltd. (ITAT Pune)

The issue in the present case is whether the income derived from the business of plant floriculture / tissue culture is exempt under section 10(1) of the Act.

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 is 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 green house or in shade and after performing several operations, such as weeding, watering, manuring, etc., they are made ready for sale as plants all these questions would be agricultural operations all this involves human skill and effort. Thus, the plants sold by the assessee in pots were the result of primary as well as subsequent operations comprehended within the term “agriculture” and they are clearly the products of agriculture.

Basic operations were carried out on land in greenhouse, which require human skill and labour, and subsequent operations, no matter how sophisticated, were only to foster the growth and to protect the produce, therefore, income from these operations can only be said to be agricultural income. Therefore, merely because a greenhouse was involved, the nature of operations would not change.

Full Text of the ITAT Order is as follows:-

This appeal filed by the Revenue is emanating out of the order of Commissioner (Appeals)-I, Pune date 30-5-2014 for the assessment year 2010-11.

The relevant facts as culled out from the material on record are as under :-

2.1 Assessee is a company stated to be engaged in the business of plant floriculture / tissue culture. Assessee electronically filed its return of income for assessment year 2010-11 on 1-10-2010 declaring total income at Rs. 3,53,273. The case was selected for scrutiny and thereafter the assessment was framed under section 143(3) of the Act vide order date 27-2-2013 and the total income was determined at Rs. 10,14,79,040. Aggrieved by the order of assessing officer, assessee carried the matter before learned Commissioner (Appeals), who vide order date 30-5-2014 (in appeal No.PN/CIT(A)-I/ITO Wd.11(3)/Pn/47/2013-14) granted substantial relief to assessee. Aggrieved by the order of learned Commissioner (Appeals), Revenue is now in appeal before us and has raised the following grounds :

“1. The learned Commissioner (Appeals) grossly erred in directing the assessing officer to treat the assessee’s income as agricultural income under section 2(1A)(b)(i) of the Income Tax Act, 1961 and to exclude the said income under section 10(1) of the Income Tax Act, 1961.

2. The learned Commissioner (Appeals) erred in ignoring the facts that there is no basic place in a green house and tissue culture laboratory which cannot be termed as land or nursery for growing plants.

3. The learned Commissioner (Appeals) grossly erred in ignoring the facts that sale of the assessee consisted mainly of flowering plants developed out of imported mother plants in a tissue culture laboratory and not grown in a nursery.

4. For the facts and such other reasons as may be urged at the time of hearing, the order of learned Commissioner (Appeals) may be vacated and that of the assessing officer be restored.”

3. Before us, at the outset, learned Departmental Representative submitted that though Revenue has raised various grounds but the sole issue is whether the income earned by the assessee is exempt being agricultural income.

4. During the course of assessment proceedings, assessing officer noticed that assessee had shown agricultural income of Rs. 10,04,85,506 and it was claimed to be exempt under section 10(1) of the Act being from agricultural activities. Assessing officer noted that in assessment year 2004-05, the contention of the assessee of the income being agricultural income was not accepted and the income was held as business income and not from agricultural activities. He has noted that the order for assessment year 2004-05 was also confirmed by learned Commissioner (Appeals). He thereafter held that since the facts and circumstances of the case for the year under consideration were similar to assessment year 2004-05, he therefore for similar reasons, concluded that assessee was not engaged in any agricultural activity and accordingly the income of Rs. 10,04,85,506 that was declared as agricultural income has to be assessed as profit and gains of business from non-agricultural business activities. Aggrieved by the order of assessing officer, assessee carried the matter before learned Commissioner (Appeals), who decided the issue in favour of assessee by holding as under :

“4.3.4 For rejecting the claim of agricultural income made by the appellant for the assessment year under appeal, the assessing officer has solely replied on the findings. Conclusions drawn in the assessment year 2004-05 which have been now reversed by the Hon’ble Tribunal in their order as discussed above. On the same issue, the appeal filed by the revenue against the order of the Commissioner (Appeals) for the assessment year 2009-10 in appellant’s case was also dismissed by the ITAT, Pune in ITA No. 2217/PN/2012 dated 24-12-2013 by relying on the decision of the Tribunal for the assessment year 2004-05. Since nothing has been brought on record to show that the factual situation for the assessment year under appeal differs from that existed in the assessment year 2004-05 and assessment year 2009- 10, I am constrained to follow the decision of the ITAT on the issue. Accordingly, respectfully following the decision of the ITAT, Pune in appellant’s own case for the assessment year 2004-05 and assessment year 2009-10, the assessing officer is directed to treat the income derived from floriculture and tissue culture as agricultural income and exclude the said income from total income under section 10(1) of the Act, for the assessment year under appeal. Ground No. 1 and 2 of appeal are allowed.”

Aggrieved by the order of learned Commissioner (Appeals), Revenue is now in appeal before us.

5. Before us, learned Departmental Representative supported the order of assessing officer. Learned Authorized Representative on the other hand, reiterated the submissions made before assessing officer and learned Commissioner (Appeals) and further submitted that assessing officer while deciding the issue against assessee assessing officer had mainly followed the reasoning of the assessing officer for assessment year 2004-05. He submitted that when the matter for assessment year 2004-05 was carried before Tribunal, the Hon’ble Tribunal decided the issue in favour of the assessee. He further submitted that in assessment year 2009-10, the Co-ordinate Bench of the Tribunal, following the order in assessee’s own case for assessment year 2007-08 had decided the issue in favour of the assessee. He pointed to the relevant findings of the order that are placed in paper book. He therefore submitted that in such circumstances the order of learned Commissioner (Appeals) needs to be upheld. He thus supported the order of learned Commissioner (Appeals).

6. We have heard the rival submissions and perused the material on record. The issue in the present case is whether the income derived from the business of plant floriculture / tissue culture is exempt under section 10(1) of the Act. We find that identical issue arose in assessee’s own case in earlier years. While deciding the issue in assessment year 2009-10, the Co-ordinate Bench of the Tribunal (vide order date 24-12-2013 in ITA No. 2217/PN/2012) and following the decision of Co-ordinate Bench of the Tribunal in assessee’s own case for assessment year 2007-08 (in ITA No. 1110/PN/2011 date 25-9-2012) had decided the issue in favour of assessee by holding as under :

“4. We have heard the parties. We find that this issue has already been decided in favour of the assessee by the ITAT, “B” Bench, Pune being ITA No. 146/PN/2008 order dated 26-3-2009. The said decision has been followed by the Tribunal in assessee’s own case for the assessment year 2007-08 in ITA No. 1110/PN/2011 order dated 25-9-2012. The operative part of the said decision on this issue is as under:

3. We find that the Tribunal has allowed the identical claim of the assessee on the identical set of facts in the assessment year 2004-05. The said order of the Tribunal is followed in the other years also being assessment years 2001-02, 2003-04 and 2005- 06 and 2006-07 being ITA Nos. 1274 to 1278/PN/2010, common order dated 22-2-2012. The operative part of the order of the Tribunal in ITA Nos. 1274 to 1278/PN/2010 dated 22-2-2012 is as under:

“7. We find that the Tribunal in the case of assessee for the A.Y. 2004-05 has discussed an identical issue in detail before deciding the same in favour of the assessee. The Tribunal while deciding the issue has taken strength from several decisions including decision of Hon’ble Supreme Court in the case of CIT v. Raja Benoy Kumar Sahas Roy (Supra), Hon’ble Madrash High Court in the case of CIT v. Soundarya Nursery, 241 ITR 530 (Mad.) and of Hon’ble Allahabad High Court in the case of Jugal Kishore Arora v. DCIT, 269 ITR 133 (Allhad.). The relevant para Nos. 33 to 40 of the decision of the Tribunal in the case of the assessee for assessment year 2004-05 (supra) are being reproduced hereunder for a ready reference :

“33. In our considered view, therefore, the operations carried out on the facts of the case before us are agricultural operations in nature. The objections taken by the authorities below are devoid of any legally sustainable merits/. Applying the ratio of the Hon’ble Supreme Court’s judgment in the case of Raja Benoy Kumar Sahas Roy (supra), the income from these operations has to be treated as agricultural income.

34. We would also like to deal with Hon’ble Madras High Court’s judgment in the case of CIT v. Soundarya Nursery (supra) at this stage. As far as the facts of the case were concerned, Their Lordships, inter alia, noted as follows: The Tribunal, after considering all the relevant facts, as also the applicable law, concluded that the assessee’s activities are to prepare seedlings on scientific lines: that the other plants are grown on prepared beds on lands owned by it and the plants are then grafted or budded; that’ the resulting grafts are transplanted in suitable containers and are reared in green houses or in shade and after they take root, they are transmitted to large containers filed with top soil and manure, etc, till they establish themselves; and thereafter those plants are sold and that the primary source of the plant is the mother plant, which is reared on earth and for which activities, certainly contribution of human labour and energy are essential.

35. Their Lordships thus clearly noted “the primary source of the plant in the assessee’s activities was the mother plant, which is reared on earth and for which certainly contribution of human labour and energy was essential”.

These observations equally apply to assessee’s case as well.

36. In Soundarya Nursery’s case, Hon’ble Madras High Court, after taking note of the law laid down by the Hon’ble Supreme Court in the case of Raja Benoy Kumar Sahas Roy (supra) and the facts of the case, observed as follows: 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 is 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 green house or in shade and after performing several operations, such as weeding, watering, manuring, etc., they are made ready for sale as plants all these questions would be agricultural operations all this involves human skill and effort. Thus, the plants sold by the assessee in pots were the result of primary as well as subsequent operations comprehended within the term “agriculture” and they are clearly the products of agriculture.

37. When we apply the above tests to the facts of the present case, and we bear in mind our findings that basic operations are carried out in the present case, which require human skill and labour, and subsequent operations, no matter how sophisticated, if that be used against the assessee, are only to foster the growth and to protect the produce, we find that the income from these operations can only be said to be agricultural income. Their Lordships were also dealing with a situation in which operations were carried on in a greenhouse. Therefore, merely because a greenhouse in involved, the nature of operations would not change. Learned Commissioner (Appeals) has distinguished this precedent on the ground that in assessee’s case, basic operations have not been carried out on land. That premises itself, for the detailed reasons set out earlier in this order, rests on a unsustainable legal foundation. The basic operations have been, and can only be, carried out on the land. The fact that this land is in a greenhouse does not change the character of operations. The distinction was thus wrongly made out by the Commissioner (Appeals), in our considered view, the principles laid down by the Hon’ble Madras High Court’s judgment in the case of Soundaraya Nursery (supra) apply to the facts of the case before us as well.

38. We may also refer to Hon’ble Allahabad High Court judgment in the case of Jugal Kishore Arora v. DCIT (269 ITR 133). In this case, Their Lordships, after taking note of and analyzing the landmark Supreme Court judgment in the case of Raja Benoy Kumar Sahas Roy (supra), also observed that “the nature of produce raised has no relevance to the character that “the nature of produce raised has no relevance to the character of agricultural operation”. It was noted that cultivation of flowers of artistic and decorative value would also be included in the scope of agricultural operations. This observation will also apply to the facts of the present case.

39. We may mention that our attention was also invited to Explanation (3) to Section 2(1A) of the Act which has been inserted by the Finance Act, 2008. This Explanation provides that any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income and, therefore, irrespective of whether the basic operations have been carried out on land, such income will be treated as agricultural income qualifying for exemption under section 10(1) of the Act. Learned counsel has contended that this Explanation is retrospective in effect inasmuch as it is merely clarificatory in nature. We are taken through the budget speech by the Finance Minister, Explanatory Memorandum to the Finance Bill and other documents to support the contention that this amendment in law was merely clarificatory. Our attention was thus invited to several judicial precedents in which it is noted that even while an amendment is stated to be prospective in application, but held to be retrospective in effect. On the basis of these elaborate arguments, it was submitted that, in any event, based on this clarificatory amendment in law, basic operations having been carried out on land is no longer sine qua non for treating income as agricultural income. This plea was clearly an alternative plea. Since we have allowed the basic plea of the assessee and we have held that the basic operations were carried out on land, it is not really necessary to deal with this alternative plea which is only academic in the present content. We leave it at that.

39. In view of the above discussions, and for the reasons set out above, we are of the considered view that the authorities belong indeed erred in law and on facts of this case in holding that the impugned income is not agricultural income. We, therefore, direct the assessing officer to treat the said income as agricultural income under section 2 (1A)(b)(i) of the Act. As a corollary to this direction, the assessing officer shall also exclude the said income from the total income under section 10(1) of the Act. The assessee gets the relief accordingly.” Since the issue raised is fully covered by the decision of Pune Bench of the Tribunal in the case of assessee itself for the assessment year 2004- 2005, under similar set of facts, we do not find infirmity in the first appellate order on the issue in favour of the assessee based on the said order of the Tribunal under similar facts during the assessment year under consideration. The same is upheld. The grounds involving the issue are thus rejected.”

4. As the issue is identical in this year, we find no reason to take different view. We, therefore, following the orders of the Tribunal in assessee’s own case referred (Supra), confirm the order of the learned Commissioner (Appeals) and dismiss all the grounds taken by the Revenue.

5. We, therefore, following the decisions of this Tribunal in assessee’s own case, confirm the order of the learned Commissioner (Appeals) on this issue.

6. In the result, the Revenue’s appeal is dismissed. Pronounced in the open Court on 24-12-2013.”

7. Before us, Revenue has not placed any material on record to demonstrate that the aforesaid decision of the Co-ordinate Bench of the Tribunal has been set aside by Higher Judicial Authorities nor has pointed any distinguishing feature in the facts of the case for the year under consideration and that of earlier years. In view of the aforesaid facts and respectfully following the decision of the Co-ordinate Bench of the Tribunal in assessee’s own case in assessment year 2009-10 and for similar reasons, we find no reason to interfere with the order of learned Commissioner (Appeals) and thus, the grounds of Revenue are dismissed.

8. In the result, the appeal of the Revenue is dismissed.