Growing of plants in nursery/Pots is an agricultural activity :HC

By | November 16, 2016
(Last Updated On: November 16, 2016)

The appellate authority has relied on the decision of CIT v. Green Gold Tree Farmers (P.) Ltd.[2008] 299 ITR 262 (Uttarakhand),wherein it has been held that sale proceeds of plants raised in nursery on land belonging to the assessee constitute agriculture income. The appellate authority has also referred to the decision of a Division Bench of this Hon’ble Court in Soundarya Nursery ,and held that even the plants grown in pots is an agricultural activity as they involve all the activities of agriculture farming like seeding, weeding, watering, manuring etc.

HIGH COURT OF MADRAS

Commissioner of Income-tax, Non-Corporate Circle-2, Chennai

v.

K. N. Pannirselvam

S. MANIKUMAR AND D. KRISHNAKUMAR, JJ.

TAX APPEAL NO.338 OF 2016

SEPTEMBER  1, 2016

T. Ravikumar, Standing Counsel for the Appellant. M.P. Senthilkumar for the Respondent.

JUDGMENT

D. Krishnakumar, J. – This Appeal has been filed by the revenue under Section 260A of the Income Tax Act 1961 against the order of the Income Tax Appellate Tribunal, “A” Bench, Chennai, in I.T.A. No. 667/Mds/2015 for the assessment year 2007-08.

2. The facts of the case in nutshell are as follows:—

The respondent herein is the assessee. The respondent/assessee was carrying on agricultural operation in the agricultural land owned by him at Velichai Village near Kelambakkam and derived income from sale of replanted trees, flowers and creepers, saplings and seeds, rent for agricultural land, share of profit and interest on capital from a firm engaged in agricultural operations. He filed the return of income for the Assessment Year 2007-2008 on 24.10.2007 declaring his taxable income as Rs.3,47,238, from plantscape business and agricultural income of Rs.51,89,480/- from agricultural operation, in the nursery owned by the assessee in Velichai Village near Kelambakkam. The assessment was completed u/s.143(3) on 11.12.2009 on the assessed income of Rs.10,47,616/- and agricultural income of Rs.51,89,4380/-. The case was reopened by issuance of notice u/s.148 on 31.03.2011 and assessment was completed u/s.143(3) r/w S.147 of the Act on 22.3.2013 computing net taxable income at Rs.62,37,096/-. The Assessing Officer raised a demand of Rs.26,23,900/- by treating the agricultural income as business income.

3. Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) in I.T.A.No.47/2013. The Commissioner of Income Tax (Appeals vide his order dated 26.12.2014, had allowed that the income derived from agricultural land, as exempt u/s.10(1) of the Income Tax Act, 1961, by giving a categorically factual finding that the assessee had grown plants, in nursery on the agricultural land owned by him, at Velichai Village near Kelambakkam and at Chengalpattu, and derived income from sale of such plants and held that Explanation 3 to Section 2(1A) of the Income Tax Act, 1961, which includes nursery as agricultural activity is clarificatory in nature, even though it was inserted by Finance Act, 2008, w.e.f. 01.04.2009. Aggrieved by the order of Commissioner of Income Tax Appeals, the revenue filed an appeal before the Income Tax Appellate Tribunal in I.T.A.No.667/Mds/2015. The Tribunal vide its order dated 13.9.2015 upheld the order of Commissioner of Income Tax (Appeals), both on facts and in law, in respect of agricultural income. Aggrieved by the order of the Tribunal, the revenue has preferred the present Appeal.

4. Mr. T. Ravikumar, learned Standing Counsel for the revenue would submit that the assessee was a landscaping architect running two business concerns – one is plantscape and the other is flowers and petals. The assessee filed the original return of income for the assessment year 2007-08 on 24.10.2007, declaring a total income of Rs.3,47,328/- and agricultural income of Rs.51,89,480/-. The assessment was completed u/s.143(3) on 11.12.2009 on the assessed income of Rs.10,47,616/- and agriculture income of Rs.51,89,480/-. The case was reopened by issuance of notice u/s.148 dated 31.3.2011 of the Income Tax Act, 1961 to the assessee as to why agriculture income should not be treated as business of income. A notice under section 143(2) dated 23.9.2011 was also served on the assessee. Further notice under section 142(1) dated 4.2.2013 was also served on the assessee.

5. Based on the ratio laid down by the Hon’ble Supreme Court in the case of CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466, wherein it has been held that without the performance of the basic operations such as tilling of land, sowing of seeds, planting and similar operations on the land, mere performance of subsequent operations such as weeding, digging the soil around the growth, tendering, pruning, cutting etc., would not be enough to characterize them as agricultural operations, the assessing officer, after considering the reply of the assessee did not countenance the reasons adduced seeking to treat the income in question as agricultural income. The Assessing Officer disallowed the claim of the assessee that the income of Rs.51,89,480/- as agricultural income and treated the same as business income vide order dated 22.3.2013. Aggrieved against this order, the assessee went on appeal before the Commissioner of Income Tax (Appeals) who has held that the definition of agriculture income prior to insertion of Explanation 3 would include the activity of nursery also and directed the Assessing Officer to treat the income received from nursery as agricultural income and allowed exemption available to such agriculture income u/s.10(1) of the Act, by its order dated 26.12.2014 in ITA No.47/2013-14. Aggrieved against this order, the revenue preferred an appeal in ITA No.667 of 2015 before the Income Tax Appellate Tribunal, Madras “A” Bench, Chennai, which dismissed the appeal preferred by the revenue and the said order is impugned in the instant appeal.

6. Further, the learned Standing Counsel for the revenue would further submit that the Tribunal failed to note that Explanation 3 to Sec.2(1A) was inserted by Finance Act, 2008 with effect from 01.04.2009 and was applicable only from the assessment year 2009-10 onwards and therefore, not applicable to the earlier assessment year. The Tribunal also failed to appreciate that, as per Section 2(1A) of the Act, agriculture income should be derived from land, and the land should be used for agricultural purpose and the immediate source of income should be from the land. The Tribunal also failed to note that the assessee without performing the basic operations like tilling, sowing of seeds, planting etc., on the land but subsequent actions like weeding, digging the soil around the growth, tendering, prunning, cutting etc., would not be sufficient to categorise them as agricultural operations. He would also submit that the Tribunal has wrongly relied on the decision in the case of CIT v. Soundarya Nursery [2000] 241 ITR 53 (Mad.). In support of his contention, he relied on the decision rendered by the Allahabad High Court in the case of H.H. Maharaja Vibhuti Narain Singh v. State of Uttar Pradesh [1967] 65 ITR 364 and the decision of Patna High Court in CWT v. Nathmal Jalan [1997] 224 ITR 175. Ultimately, in the light of the above facts and decisions, he would submit that the order impugned shall be set aside and the Appeal shall be allowed.

7. Mr. M.P. Senthilkumar, learned counsel for the respondent/assessee would submit that the Assessing Officer has erroneously treated the agriculture income as business income. Actually, income from nursery is an agriculture income and the same is exempted under section 10(1) of the Income Tax Act. In the appeal preferred before the Commissioner of Income Tax (Appeals) against the order of the original authority, the claim of the assessee was allowed relying on the decision rendered in Soundarya Nursery (supra), wherein the decisions rendered in the case of Raja Benoy Kumar Sahas Roy (supra) and G.H. Maharaja Vibhuti Narain Singh (supra), relied on by the Assessing Officer, has been considered, and held that even the plants grown in pots is an agricultural activity as they involve all the activities of agriculture farming like seeding, weeding, watering, manuring etc.,.. Aggrieved by the order of the appellate authority, the appeal preferred by the revenue before the Tribunal was also rightly dismissed based on the ratio laid down by the Hon’ble Supreme Court and this Hon’ble Court in several cases. Hence, the order of the Tribunal does not warrant any interference and the Appeal is liable to be dismissed.

8. Heard the learned Standing Counsel appearing for the revenue/appellant and the learned counsel appearing for the assessee/respondent and perused the materials on record.

9. On 20.06.2016, this Court issued notice of motion on the following substantial question of law:—

“Whether on the facts and circumstances of the case, the Tribunal was right in deleting the disallowance made on agricultural income on the ground that the same was exempt under Section 10(1) of the Income Tax Act?”

However, at this stage of final hearing, this Court deems it fit to add the following substantial question of law also:—

“Is not the finding of the Tribunal bad, especially, when Explanation 3 to Section 2(1A) was inserted by Finance Act, 2008 with effect from 01.04.2009 and was applicable only from the assessment year 2009-10 and not for the earlier assessment year?”

10. The Case of the respondent/assessee is that he owns an agricultural land to an extent of 23.03 Acres at Velichai Village near Kelambakkam and 16.93 Acres in Chengalpattu and derived income from sale of replanted trees, flowers and creepers, saplings and seeds, rent for agricultural land, share of profit and interest on capital from a firm engaged in agricultural operation. The respondent filed his return of income for the assessment year 2007-08 on 24.10.2007 declaring taxable income of Rs.3,47,238/- from plantscape business being landscaping architect business and agricultural income of Rs.51,89,480/- from agricultural operation in the nursery owned by the assessee in Velichai Village near Kelambakkam. The assessment was completed under section 143(3) on 11.12.2009 on the assessed income of Rs.10,47,616/- and agricultural income of Rs.51,89,480/-.

11. The assessing officer reopened the assessment order and issued notice under section 148 of the Act. As per section 2(1A) of the Income Tax Act, agricultural income should be derived from the land and the said land should have been used for agricultural operation. Then, there should be something done on the land by human and technical agency to produce out of land any crop, tree plantation and other agricultural produce in order to determine whether a certain income is agricultural income, the immediate and effective source of income must be land. If it is not land, the income cannot be considered as agricultural income. He referred to the decision of the Hon’ble Supreme Court in the case of Raja Benoy Kumar Sahas Roy(supra) wherein it has been held that without the performance of the basic operations such as tilling of land, sowing of seeds, planting and similar operations on the land, mere performance of subsequent operations such as weeding, digging the soil around the growth, tendering, pruning, cutting etc, would not be enough to characterise them as agricultural operations and found that the respondent/assessee had not submitted any document with regard to the expenditure incurred by him towards agricultural operations such as tilling of land, sowing of seeds, plating and similar operation of land. He has also relied on the decision of the Allahabad High Court in the case of H.H. Maharaja Vibhuti Singh (supra) wherein it has been held that income from nursery is not an agricultural income unless maintained by the farmers as an additional or necessary adjunct to the primary process of agriculture for example paddy, nursery, nursery of tomato plants. He has also referred to the decision of the Punjab High Court in the case of CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 161 ITR 325 wherein it has been held that there must be nexus between the income, land and agricultural operation. Eventually, based on the aforesaid decision, the Assessing Officer disallowed the agricultural income of Rs.51,89,480/- by order dated 22.3.2013.

12. Against that order, the respondent/assessee filed an appeal in ITA No.312/13-14/A-2 before the Commissioner of Income Tax (Appeals), Chennai, challenging the validity of reopening the assessment u/s.147 and disallowance of agricultural income, treating the same as business income – Rs.51,89,480/-. The appellate authority dismissed the appeal insofar as the first ground is concerned, viz., reopening of the assessment, holding that it is valid in law. However, with regard to the issue of disallowance of agricultural income of Rs.51,89,480/-, the claim of the assessee was allowed holding that the income from nursery is an agriculture income.

13. In reaching his conclusion, the appellate authority has relied on the decision of CIT v. Green Gold Tree Farmers (P.) Ltd.[2008] 299 ITR 262 (Uttarakhand),wherein it has been held that sale proceeds of plants raised in nursery on land belonging to the assessee constitute agriculture income. The appellate authority has also referred to the decision of a Division Bench of this Hon’ble Court in Soundarya Nursery (supra),and held that even the plants grown in pots is an agricultural activity as they involve all the activities of agriculture farming like seeding, weeding, watering, manuring etc.,. At Paragraphs 8 and 9 of the judgment, it has been held as follows:—

“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. Hence, 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 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 operations would be agricultural operations. All this involves human skill and efforts. 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.

9. So far as the seeds are concerned, we are surprised that, that question should have been raised at all by the Revenue, as it is not possible for the seeds to exist without the mother plants, and the mother plant, it is nobody’s case, was not grown on land. It is also not the case of the Revenue that the seeds were the result of the wild growth and not on account of cultivation by the assessee. The seeds were clearly a product of agriculture and the income derived from the sale of seeds, was agricultural income.”

14. In the light of the aforesaid decisions, subsequently, the Ministry of Finance has amended Section 2(1A) of the Income Tax Act and thereby, Explanation 3 to Section 2(1A) was inserted by the by Finance Act,2008, to treat the income from nursery as agricultural income and the same is usefully extracted hereunder:-

‘2(1A) “Agriculture income means” – …………………………………….

Explanation 3 – For the purpose of this clause, any income derived from saplings or seedling grown in a nursery shall be deemed to be agriculture income.’

This amendment came to force with effect from 01.04.2009 and the same is applicable from the assessment year 2009-10 onwards.

15. Following the aforesaid decision of Soundarya Nursery’s case (supra), the Income Tax Appellate Tribunal upheld the order of the appellate authority and dismissed the appeal of the revenue.

16. The decisions relied on by the Assessing Officer, viz., Raja Benoy Kumar Sahas Roy (supra) has been considered in detail by the Division Bench of this Hon’ble Court in Soundarya Nursery (supra), and thereafter, at Paragraph 7 of the Judgment, this Court held as follows:—

‘7. Our attention was then invited by learned counsel to the decision of the Supreme Court in the case of CIT v. Raja Benoy Rumor Sahas Roy [(1957) 32 ITR 466], which is the leading case of “agriculture”. It was held therein that agriculture in its primary sense denotes the cultivation of the field and is restricted 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 and these are basis operations, which require the expenditure human skill and labour upon the land itself. The Apex Court further held that besides the basic operations, the subsequent operations would also be comprehended within the terms of agriculture, and such subsequent operations are illustrated as weeding, digging the soil around the growth, removal of undesirable undergrowth and all operations which foster the growth and preservation of the same not only from insects and pets, but also from depradation, from outside, tending, pruning, cutting, harvesting and rendering the produce fit for the market, which would all be agricultural operations, when are taken in conjunction with the basic operations.’

17. Another decision relied on by the Assessing Officer, viz., H.H. Maharaja Vibhuti Narain Singh (supra),has also been considered in detail by the Division Bench of this Hon’ble Court in Soundarya Nursery (supra), and at Paragraph 6 of the Judgment, this Court held as follows:—

“6. Learned counsel for the Revenue contended before us that the plants are only grown in pots and no matter the period for which they are so grown, that activity can never be regarded as agricultural operations. In support of that submission, counsel referred to the decision of the Allahabad High Court in H.H. Maharaja Vibhuti Narain Singh v. State of U.P. ([1967] 65 ITR 364, wherein the Court made an observation which was clearly obiter that agriculture cannot be carried on in pots, as in that case, a large number of coconut plants were nurtured on land in the nursery.”

18. In the explanation offered to the Assistant Commissioner of Income Tax, Business Circle – II, Nungambakkam, Chennai, the assessee/respondent herein has submitted that he has been doing Landscaping Architect from 1981 and running two business concerns viz., plantscape and Flower and Petals. He is growing plants in his lands and for that purpose, he has incurred expenses for tilling of land, sowing of seeds, and purchase of clay sand and fertilizers. As such, agricultural operations are carried on the land.

19. From the materials on record, it could be seen that, it is not the case of the Assessing Officer, at the first instance that the assessee has not produced any details of the expenditure incurred in raising flowers and petals in pots. As rightly pointed out by the learned counsel for the respondent, had the issue of expenditure been pointed out at the time of assessment, the assessee was bound to explain. Assessment order does not disclose that because of the fact that the assessee did not prove expenditure, income from flowers and petals was added. He has only said without performing basic operations, income generated cannot be termed as agricultural income. Even during the appeal, the revenue has not raised such issue. Such contentions are made for the first time, before this Court. The assessment order has to fall or succeed on the contents of the order. A fact which was never raised in the assessment proceedings cannot be introduced for the first time, in an appeal under Section 260A, for an answer. Needless to state that questions of law arise on the facts considered by the authorities with reference to the provisions and for the above reasons, we are of the view that the revenue cannot raise the said issue at this stage.

20. In the light of the concurrent findings of the appellate authority and the appellate Tribunal and in the light of the above decisions, this Court is not inclined to interfere with the impugned order of the appellate Tribunal. The substantial questions of law are answered against the revenue. The impugned order of the Income Tax Appellate Tribunal is confirmed and the Tax Case Appeal is dismissed. No order as to costs.

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