Taxation of income from hydroponic farming

1. Introduction

The Hydroponic farming is an emerging trend in Indian agricultural sector, which is far different from traditional agriculture activities carried on in the country. In this method plants are grown without using soil, by using mineral nutrient solutions in a water solvent. Further, in this method of farming plants are grown in plastic trays installed in a sophisticated greenhouse having temperature control facility.

However, in traditional agriculture plants are grown by using soil and which involves sowing seed, planting of pants on the earth.

The Income Tax Act, 1961 (‘the Act’) define the agriculture income among other things, which includes any income derived from such land by agricultural operations including processing of the agricultural produce. It is clear from this definition that there should be proper nexus between land and agricultural activities in order to qualify an income as agricultural income. Further, agricultural income is exempt from income tax.

As stated above in hydroponic farming plants are not directly grown in the land and hence it is worth analyzing judicial precedents to confirm, whether income from hydroponic farming is considered as agricultural income or not for the purpose of claiming exemption under the Act.

2. DCIT v Best Roses Biotech Pvt. Ltd (Ahmedabad ITAT)

i. Fact of the case

• The Assessee had taken agricultural land on lease from farmer for the purpose growing roses. These roses were grown in a greenhouse by employing hydroponic system, where rose plants are planted two feet above ground level with the use of MS stands and plastic trays.
• Further, the main reason behind developing hydroponic system for growing roses was due to the fact it requires well-aerated soil with drainage system. The plastic trays are filled with soil and rose plants are planted on such trays which has proper drainage system in order to avoid excess storage of water in such trays. Apart from planting the rose plants other agricultural activities like pest and disease control etc. were also carried out to ensure best quality of roses.
• The Assessee had claimed income from agriculture as exempt under the Act.

 ii. Assessing Officer (‘AO’) Contention

• The AO has observed that the rose plants were not planted on the land and no basic agricultural activities are carried on the land. As per the AO the entire agricultural activities must carried on land, including seed sowing, planting of pants on the land, watering of plants, pest control etc. in order to qualify an income as agricultural income.
• As the above said activities were not carried by the Assessee on land and hence denied exemption towards agricultural income, which was claimed in the return of income.

iii. Commissioner of Income Tax (Appeals) Order [CIT(A)] 

• Aggrieved by the order of AO, the Assessee preferred an appeal before the CIT(A).
• The CIT(A) had passed an in the favour of the Assessee by on the ground that the Assessee had established nexus between income, agricultural land and agricultural operations.

iv. The Income Tax Appellate Tribunal (‘ITAT’)

Observations 

• It was observed that the Assessee had carried out the agricultural activities on agricultural land which was taken on lease and not on the commercial land.
• The Assessee had developed a greenhouse for the establishment of a floriculture project. It was explained that for the plantation of rose a very well treated soil is required. Manures are mixed for preparing a base for growing the rose plants. The Assessee had also carried out agricultural activities like mixing of soil, water of plants and sprinkling of insecticides to save the plants from any disease.
• It was also explained that the root stocks of the rose plants are brought from the market and placed in the green house. The plantation and the generation of sapling was nothing but agricultural activities. The mother plants were grown on the land. For the purpose of rearing the mother plants human labour was involved. Further, the primary agricultural activities like tiling of soil, watering etc. for the purpose of growing mother plant. Subsequently these saplings were shifted the green house. It was explained that the purpose of growing the rose plants at the height is primarily avoid the pest and to develop in a controlled atmosphere.
• The ITAT had not agreed with the contention of the revenue that growing of plants was not connected with the land. As the Assessee carried out the agricultural activities on agricultural land and mother plants were grown on land by employing primary agricultural activities. Further, use of particular soil type, operations on soil, use of drainage system in order avoid harm to root plant, sprinkling of pesticides etc. are equated with basic agricultural activities like tiling of soil, sowing of seed, growing of plants, manuring, watering, weeding-out of weeds, so on and so forth. Further, an agriculturist has to perform subsequent agriculture operation namely tending of grown plants, pruning, cutting or shaping and finally harvesting the crop. The various courts have held that subsequent operation must be a continuation of primary agricultural operations.
• The ITAT had observed that the Finance Act,2008 had added explanation 3 to section 2(1A) of the Act (this section defines agricultural income), the said explanation provides that income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income. It also relied on Madras High Court decision in the case of CIT v Soundarya Nursery 241 ITR 530, where in the high court was held that income generated from growing of plants in pots and sale of seeds are agricultural income. In the instant case also mother plant was grown on the land but subsequently saplings were shifted to plastic trays which are placed inside the greenhouse. Accordingly, said explanation 3 to section 2(1A) of the Act squarely applies to Assessee’s case.

Ruling

• It was held that considering the advancement in technology and use of advanced equipment in cultivation, coupled with the conventional cultivation method, put together, made the operation carried out by the Assessee was agricultural income. Hence, income earned from growing of rose employing hydroponic system is qualifies as agricultural income under section 10(1) of the Act.
• Further, as held in the CIT(A) order, the Assessee had established proper nexus between agricultural land, agricultural operations and income earned from such activities.

3. Key take away 

• The important point emerging from the above case law is as long as there is nexus between the agricultural land and the income then such income can be considered as agricultural income, it does not matter whether income is earned by employing traditional agricultural method or by employing modern hydroponic farming.
• In order to qualify an income as agricultural income, agricultural activities must be carried on agricultural land. Further agricultural land need not to be owned by the Assessee, it can be taken on lease for the purpose carrying out the agricultural operations.
• At least certain basic agricultural activities should be carried on using the land, even if at a later stage the plants are shifted from land to green house for the purpose getting high quality output.
• There should be proper nexus between basic agricultural operations and secondary operations for the purpose qualifying an income as agricultural income.