Whether sale proceeds of plants raised in nursery on land belonging to assessee consti­tutes income from agriculture – Held, yes

Green Gold Tree Farmers (P.) Ltd.

P.C. VERMA AND B.C. KANDPAL, JJ.

IT REFERENCE NO. 10 OF 2001

FEBRUARY 28, 2007

Order

1. By means of this reference, the Income-tax Appellate Tribunal has required the opinion of the High Court on the question, formulated as under :—

“Whether on the facts and in the circumstances of the case, the ITAT was legally justified in confirming the view of the CIT(A) who held that the sale proceeds of the plants raised in the nursery on the land constituted the income from agriculture ?”

2. The brief facts of the case are that the respondent assessee is a private limited company which was incorporated on 20-11-1986 and the first return of income was filed for the assessment year 1988-89 for the period from 20-11-1986 to 31-10-1987. The assessment in question is in respect of previous year 1-11-1987 to 31-3-1989 being transitional year of 17 months. The Assessing Officer noticed that the assessee-company was carrying on the activities of running of nursery and of extension service and deriving income therefrom. The assessee purchased plants in its nursery and reared them and then sold it to various parties including farmers. It provided extension service to those farmers who purchased ETPs. In respect on both the activities, separate P&L Account have been filed for the period from 1-11-1988 to 31-3-1989 yielding from nursery at Rs. 92,836 the period of five months ending with 31-3-1988, and Rs. 2,25,904 for the year ending 31-10-1988. Both the above amounts totalling to Rs. 3,18,740 were shown as agricultural income from the sale of poplar plants. The Assessing Officer issued a notice dated 19-11-1990 to the assessee as to why the said income from nursery business be not taken as income from business instead of income from agriculture as claimed by the assessee. According to the Assessing Officer, the assessee failed to show that primary agricultural processes were carried on upon the land. He viewed that the assessee’s action of preparing separate profit and loss account would not convert the activity into two activities, one being agriculture and the other business as such a separation into two activities was only an artificial one as could be seen from the facts that the agriculture requires the operations from rearing to harvesting and the assessee’s case was not so and that the assessee’s activity of nursery cannot be treated as agriculture in nature, particularly when the aim and object of the activity was business of providing extension service to the farmers and further that the P&L Account for nursery revealed all elements of business like advertisement, salary, discount and depreciation. Hence, income from nursery was treated as business income and profits computed by the Assessing Officer. The assessee has also further shown loss from extension service of Rs. 2,29,947 the period of five months ending with 31-3-1989 and Rs. 3,84,146 the period of 12 months ending with 31-10-1988. The accounts of extension service were in respect of the ETPs sold and the extension charges Rs. 11,10,343 for five months and Rs. 1,66,432 for 12 months have been received from the farmers stated to have been approved by the rural bank. The loss income under the head ‘Extension service’ was shown by the assessee as its business income. The state of affairs with the composite business was seen from the audited accounts for the period 1-11-1987 to 31-3-1989 besides quantitative details in respect of nursery account. It was found that as on 31-10-1988, closing of work-in-progress was shown at Rs. 24,743 cuttings and the assessee gave its working as required by the Assessing Officer. The assessee also gave working of closing of the work-in-progress of ETPs and also gave reconciliation besides the figures as per the auditors report pertaining to the quantitative details for the period ending with 31-10-1988 for 12 months and 31-3-1989 for five months. The Assessing Officer noticed inconsistencies therefrom and ultimately concluded that the profits returned at Rs. 3,18,740 (Rs. 92,836 + Rs. 2,25,904) referred to above did not reflect the true profit of the assessee and further that the facts and circumstances of the case are such that income could not be properly deducted. Hence, he viewed that profit from nursery business shown did not represent true income as the method employed was such that true profits could not be arrived at. In respect of extension service, the Assessing Officer found that the accounts thereof did not give correct income and the income was, therefore, arrived at by following proviso to section 145(1) of the Act.