Sale of Edible white button mushroom held as agricultural income exempt u/s 10(1)

Sale of Edible white button mushroom held as agricultural income exempt u/s 10(1). Soil even when separated from land continues to be a specie of it – ITAT

ABCAUS Case Law Citation:
ABCAUS 2419 (2018) 07 ITAT

The Hon’ble President ITAT had referred the following question to the Special Bench;

“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?”

The assessee company derived income from growing of “Edible white button mushrooms” under the name and style of ‘Premier Mushroom’. The assessee was treating the income from growing mushrooms as “income from agriculture” and hence exempt u/s. 10(1) of the Income Tax Act, 1961 [Act].

A survey operation u/s 133A of the Act was conducted to verify the process of mushroom growing by the assessee-company. The AO found that Mushrooms were grown by the assessee in ‘growing rooms’ under ‘controlled conditions’ in racks placed on shelves above land and on Compost (manure) which was prepared with paddy straw, Horse manure, Chicken manure, Gypsum and Urea which is not land.

The AO noted that as held by the Hon’ble Supreme Court to qualify as agriculture income exempt u/s 2(1A), it should be derived from some measure of cultivation of land with some expenditure of human skill and labour. Also as held the term ‘agriculture’ does not cover activities remotely connected with land when the assessee had not performed the basic operations on land.

Referring to the Rule 7A, 7B and 8 of the Income Tax Rules, 1962 (The Rules) he held that unless income is derived from performing basic operations on the land, the same could not be construed as ‘agriculture income’.

The AO relied upon section 80JJA of the Act inserted by the Finance Act, 1979 w.e.f. 01- 04-1980 which provided a deduction in respect of profit and gains from business of growing mushrooms. He also referred to Circular No. 258, dt. 14-06-1979 and the explanatory Memorandum to the Finance Act, 1979, and Circular No. 372/1983 to conclude that intent and understanding of the Legislature was that growing of mushrooms was not in the nature of agriculture income but was reckoned as income from business. He rejected the contention of the assessee that the withdrawal of 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.

The CIT(A) concluded that production of mushroom is a process of agricultural production and income derived from such a process is agricultural income eligible for exemption u/s. 10(1) of the Act.

The tribunal observed that the process followed by the assessee for production of “Edible white button mushroom” was as under:

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.

On the basis of the above the Tribunal observed that the following relevant issues arising  for consideration.

  1. “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?
  2. 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?

The tribunal observed that as held by the Hon’ble Supreme Court, 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 such operation.

The Tribunal further observed that the Hon’ble High Court as in 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 operation.

It was observed that the Assessing Officer had held that the compost used for production of mushroom by the assessee was not “soil” and the assessee replying to a specific query from the Bench, stated that the compost on which mushroom is grown was soil. Hence, the undisputed facts were that, mushrooms were grown on “soil”. Certain basic operations were performed on such “soil” which required “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” had utility for consumption, trade and commerce.  

The Tribunal rejected the interpretation, as argued by the Revenue that 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. The ITAT opined that 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 not make a difference.

The Tribunal held 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

The Tribunal noted that the Hon’ble High Court had given 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’. The judgment was delivered much before the introduction of explanation 3 to Section 2(1A) of the Act.

It was observed that the judgment of the Hon’ble High Court 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. However the explanation expanded this interpretation further. It lays down that the basic operations are not necessary in nurseries. Hence, even without this explanation, the income from plants grown in pots was held as agricultural income by the courts.

The ITAT opined that as the explanation is a deeming provisions, it could not be applied to the assessee. But as the assessee performed basic operations on soil, the ratio of the judgment applied to the facts of the case.

The conclusions drawn by the Tribunal were as under:

  • The “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.
  • The Mushroom on the facts and circumstances of the case was an agricultural product raised from land.
  • just because mushrooms were grown in controlled conditions it did not negate the claim of the assessee that the income arising from the sale of such mushrooms was agricultural income.

The Tribunal held that in the instant case, the basic operations were performed by expenditure of human skill and labour on land by the assessee, which resulted in the raising of the ‘product’ called “Edible white button mushroom” on the land and as this product has utility for consumption, trade and commerce, the income arising from the sale of this product was agricultural income and hence exempt u/s 10(1) of the Act. 

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