Income Tax Appellate Tribunal - Delhi
Sudisha Farm Nursery vs Income Tax Officer on 18 September, 2003
Equivalent citations: [2004]88ITD638(DELHI), (2003)81TTJ(DELHI)714
ORDER
K.C. Singhal, J.M.
1. Various grounds have been raised but in reality there is only one issue as to whether the income from the sale of plants grown by the assessee can be said to be agricultural income exempt under Section 10.
2. Briefly stated, the facts are these : The assessee, a partnership firm, was engaged in running a nursery w.e.f. 1st April, 1992. It had been declaring its income from agriculture since asst, yr. 1993-94 and claiming the same as exempt under Section 10 of IT Act, 1961 (in short Act). For asst, yr. 1998-99, if filed its return on 30th Oct., 1998, declaring income of Rs. 2,460 as interest income in addition to agricultural income of Rs. 5,61,826. The agricultural income was claimed as exempt from taxation under Section 10 of the Act. The case for this year was selected for scrutiny and consequently, the notices under Section 143(2) was issued. The assessee was asked to substantiate its claim of agricultural income. The assessee vide letter dt. 29th March, 2001, explained in detail the various activities carried on by it i.e., preparation of the soil beds and propagation of the plaints. The details of such activities will be referred to by us at the appropriate place in our order later on. However, not satisfied with the explanation of the assessee, the AO rejected the claim of the assessee by observing as under :
"Now the question comes what the agriculture is - the primary meaning of word is Agar field and cultra - cultivation i.e., cultivation of field, which means tilling of land, sowing the seeds, etc. The subsequent observation are weeding, digging of soil around the growth, removal of undesirable undergrowth etc. [CIT v. Raja Benoy Kumar Suhas Roy (1957) 32 ITR 466 (SC)]. The next point is there must be nexus between income, land and agriculture operation. As per Section 2(1A) an income to be "agriculture income" should be derived from land and the land should be used for agricultural purposes. Then there should be something done to land by human and technical agency to produce out of land any crop, tree plantation or other product, 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 an agricultural income [CIT v. Raja Bahadur Kamakhya Narain Singh (1948) 16 ITR 325 (PC)]. But in this case (Sudisha Farms and Nursery) the land at the best is used for germinating and growing of small plants to certain maturity afterwards the plants are shifted in pots and matured in controlled environment, hence the immediate and effective source of income is not land. The development of land is possible in multistoried complex with controlled environment. Development of Bonsai plant, Centctus etc. does not require the use of land at all and are developed in pots. Certain other methods employed by firm for developing plants are not required the use of land at all. For example, in the process "Gootying" a branch of mother plant is slit and that to that portion harmones are applied and covered with manure and soil and wrapped with jute/polythene. Roots emerged from that point and when sufficient roots come out these are planted on pots and kept at controlled environment. In this process land is seldomly used, hence, income from sale of plant developed by this process cannot be considered as agricultural income.
In the case of CIT v. Raja Benoy Kumar Suhas Roy (supra), it has been held that it is essential to carry some basic primary operations prior to germination of produce involving expenditure of human skill and labour on the land itself and not on the growth. Subsequent post germination operation would not constitute agricultural operation. Hence, for argument sake it is accepted that land is used by assessee for transplanting roots/stems developed by gootying, grafts etc. the same is post germination process and cannot be considered as agriculture operation.
In an another case H.H. Maharaja Vibhuti Narain Singh v. State of U.P. (1967) 65 ITR 364 (All) the Hon'ble Allahabad High Court held that income from nursery is not an agricultural income unless maintained by farmer as an aid or necessary adjunct to the primary process of agriculture for example peddy nursery, nursery of tomato plants. But the assessee is using the nursery for production of ornamental plants which cannot be considered adjunct to primary agriculture process. Moreover, the plants are developed further in pots by taking them out from land. Hence, income from the sale of such plants cannot be considered as agricultural income, therefore, the income of the assessee at Rs. 5,61,826 which is claimed exempt under Section 10(1) is treated as non-agricultural income and benefit of exemption under Section 10(1) is not allowable and income is added into taxation income of the assessee."
3. The matter was carried in appeal before the CIT(A), who also confirmed the order of AO by holding that running of nursery by the assessee was a commercial activity which could not be treated as agricultural activity in view of the Hon'ble Allahabad High Court judgment in the case of H.H. Maharaja Vibhuti Narain Singh v. State of U.P. (1967) 65 ITR 364 (All) wherein it has been held that nursery income is not necessarily agricultural income unless is maintained by the farmers as an aid or necessary adjunct to the primary process of agriculture. Further, reliance was placed on another judgment of Allahabad High Court in the case of Smt. Anand Bala Bhushan v. CIT (1996) 217 ITR 144 (All) wherein it was held that sale proceed to leechi fruit was not an agricultural income. He also relied on the judgment of Hon'ble Madras High Court in the case of CIT v. Stanes Amalgamated Estate Ltd. (1998) 232 ITR 443 (Mad) wherein it was held that sale proceeds of eucalyptus oil extracted by the assessee from the leaves of the tree grown by it was not agricultural income. Aggrieved by the same, the assessee is in appeal before the Tribunal.
4. Both the parties have been heard at length. At the outset, the learned counsel for the assessee drew our attention to pp. 38 to 65 of the paper book containing the computation of income, statement of accounts and acknowledgement of income-tax returns pertaining to asst. yrs. 1993-94 to 1998-99 to point out that the claim of the assessee regarding agricultural income has always been accepted by the AO and, therefore, considering the rule of consistency, the claim of the assessee could not be rejected. He relied on the decision of Supreme Court in the case of Radha Saomi Satsang v. CIT (1992) 193 ITR 321 (SC). When assessee's counsel was asked to file the copies of the assessment order, it was stated by him that all assessments were completed under Section 143(1), A query was raised from the Bench as to whether rule of consistency could be applied where assessments are not completed under Section 143(3). In response to the same, it was submitted that intimation under Section 143(1) amounts to assessment order as held by the Punjab & Haryana High Court in the case of Vipin Khanna v. CIT (2002) 255 ITR 220 (P&H). He has also relied on two decisions of the Tribunal reported as Fisons Ispat Ltd. v. Asstt. CIT (1992) 42 ITD 365 (Del) and Puranmall Narayan Prasad Kedia (HUF) v. Asstt. CIT (1994) 48 ITD 439 (Cal). It was also submitted that Department has not resorted to any action either under Section 143(2) or under Section 147 or under Section 263. Hence, all such assessments have become final. In view of the same, it was contended that it would make no difference if the assessment is made either under Section 143(1) or under Section 143(3). He also drew our attention to the recent unreported judgment of the Hon'ble Delhi High Court in the case of Rajiv Grinding Mills copy of which is placed on record wherein according to him, the rule of consistency has been followed despite assessments under Section 143(1). On the other hand, the learned Departmental Representative opposed the contentions of the learned counsel for the assessee by contending that principle of res judicata do not apply to the income-tax proceedings since each year is an independent year and, therefore, finding, if any, recorded in one year would not be binding in the subsequent year. Reliance we also placed on the decision of Punjab High Court in the case of Jamna Das Rameshwar Das v. CIT (1952) 21 ITR 109 (Punj). It was also submitted by her that rule of consistency would not apply where returns are processed under Section 143(1) since such process has to be carried out without application of mind in view of Board circular wherein the AOs have been advised to dispose of the returns under Section 143(1).
5. After considering the rival submissions of the parties, we are not inclined to agree with the stand taken by the learned counsel for the assessee. In our opinion, rule of consistency which is based on the theory of res judicata presupposes the formation of a particular view on the basis of the material placed on record. As a general rule, the principle of res judciata is not applicable to the decisions of IT authorities and, therefore, any decision given in one assessment year would be final and conclusive between the parties in relation to that year itself. Reference can be made to the judgment of the larger Bench of the Hon'ble Supreme Court in the case of ITO v. Murlidhar Bhagwan Das (1964) 52 ITR 335 (SC). However, this rule is subject to the limitations that there should be finality and certainty in all litigations including arising out of the IT Act and the earlier decision on the same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due enquiry, if no fresh facts are placed before the IT authority giving the later decision and if the IT authority giving the earlier decision has taken into consideration all material evidence. This view is fortified by the judgment of Hon'ble Bombay High Court in the case of H.A. Shah & Co. v. CIT & EPT (1956) 30 ITR 618 (Bom) wherein their Lordships observed as under :
"As a general rule the principles of res judicata is not applicable to decisions of IT authorities. An assessment for a particular year is final and conclusive between the parties only in relation to the assessment for that year and the decisions given in an assessment for an earlier year are not binding either on the assessee or the Department in a subsequent year. But this rule is subject to limitations, for there should be finality and certainty in all litigations including litigations arising out of the IT Act, and an earlier decision on the same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due inquiry, if no fresh facts are placed before the Tribunal giving the later decision, and if the Tribunal giving the earlier decision has taken into consideration all material evidence."
The above view was endorsed by the Hon'ble Punjab High Court in the case of CIT v. Dalmia Dadri Cement Ltd (1970) 77 ITR 410 (P&H) at p, 420. The other limitation is that the effect of revising the earlier decision should not lead to injustice. Reference can be made to the judgment of Orissa High Court in the case of CIT v. Belapur Refractiories Ltd. (1991) 128 ITR 610 (On) at p. 613. The Hon'ble Supreme Court in the case of Radha Saomi Satsang (supra) on which reliance has been placed by the learned counsel for the assessee, has also expressed the similar view. The relevant observations of their Lordships are quoted below :
"Strictly speaking, res judicata does not apply to income-tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following year; where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year."
6. The perusal of all the above authorities clearly shows beyond doubt that rule of consistency can be applied only where earlier decision has been taken after due application of mind to the relevant materials placed on the record, where fresh facts are brought on record in the subsequent year then such rule would be inapplicable. The Hon'ble Supreme Court has clearly stated that a fact must be found to exist in the earlier proceedings. A fact can be said to be found if some authority applies his mind to the relevant material and evidences on record and then a finding is recorded. Therefore, in our opinion, where assessment in made without application of mind with reference to permeating aspect then the rule of consistency would become inapplicable.
7. In view of the above discussion, the question arises whether rule of consistency can be applied to the present case. The issue before us is whether income derived by the assessee from the sale of plant could be considered as agricultural income, being exempt under Section 10. The material placed before us shows that assessee-firm came into existence on 1st April, 1992, and since then returns were being filed declaring the entire income as agricultural income and claiming exemption under Section 10. However, admittedly no assessment was ever made under Section 143(3) in respect of either of the preceding assessment years. Even the copies of the intimation under Section 143(1) are not placed in the paper book, The claim of the assessee is that such returns are deemed to have been accepted in the absence of notices under Section 143(2). In our opinion, it cannot be said that any conscious decision has been taken by the Department in assessee's case. The issue was examined in detail only in the year under consideration. At the best it can be said that the returns for the earlier years were processed by the AO under Section 143(1), without examining any material, in conformity with Board Circular which provided not to make any scrutiny in most of the cases. The question whether the assessee is carrying on agricultural activity or not can be answered only after taking into consideration various materials and evidences on the record which should stand to the test laid down by the Hon'ble Supreme Court in the case of Raja Binoy Kumar Suhas Rai (supra). Such exercise was never carried out by the AO in the past since returns were processed under Section 143(1). Hence, no conscious decision can be said to be taken by the tax authorities in this regard in the earlier years. Consequently, the ratio of Supreme Court in the case of Radha Saomi Satsang (supra) cannot be applied to the facts of the present case. The contention of assessee's counsel is, therefore, rejected.
8. Before parting with this aspect, we would like to mention about certain decisions relied on by the learned counsel for the assessee. He relied on two Tribunal decisions reported as (1992) 42 ITD 365 (Del) (supra), (1994) 48 ITD 439 (Cal) (supra) and the decision of Hon'ble Punjab & Haryana High Court in the case of Vipin Khanna (supra) for the proposition that assessments under Section 143(1) amounts to the order of assessment and, therefore, the claim of the assessee regarding agricultural income in the preceding assessment years stands accepted. As far as Tribunal decisions are concerned, we find that assessments were made under the unamended provisions of Section 143(1). Prior to the amendment effective from 1st April, 1988, the AO had power to assess under Section 143(1) but after the amendment the power to assess is missing. Therefore, the Tribunal decisions relied upon by the counsel are distinguishable. Further, the contention of the learned counsel for the assessee that intimation under Section 143(1) amounts to an assessment order also cannot be accepted in view of the judgment of Hon'ble Delhi High Court in the case of Mahanagar Telephone Nigam Ltd. v. Chairman, CBDT & Am. (2000) 246 ITR 173 (Del) wherein it has been held that intimation under Section 143(1)(a) cannot be treated to be an order of assessment. Even otherwise, the Punjab & Haryana High Court judgment in the case of Vipin Kumar (supra) does not lay down that intimation under Section 143(1)(a) is an order of assessment. What has been held therein is that assessment proceedings gets terminated if notice under Section 143(2) is not served within the stipulated time and the matter becomes final. Finality is only with reference to that year but acceptance of the return under Section 143(1), in our opinion, does not mean that any conscious decision is taken by the AO on any matter relating to the return. Their Lordships have also clearly stated "Thus, although technically no assessment is framed in such a case, yet the proceedings for assessment stands terminated". These observations clearly show that no assessment is actually made where return is processed under Section 143(1). Hence, in our opinion, intimation under Section 143(1) does not conclude a matter as far as past years are concerned and consequently, rule of consistency would not be applicable in such cases.
9. The learned counsel for the assessee has also relied on the judgment of Hon'ble Delhi High Court in the case of Rajiv Grinding Mills (supra). We have gone through that judgment and find the same to be distinguishable on facts. In that case, the assessment year involved was asst. yr. 1993-94. It was found by the Tribunal that similar issue was decided by the first appellate authority in , respect of two earlier assessment years i.e., 1991-92 and 1992-93. Therefore, in that case, assessments were completed in the earlier years after examining the issue in detail. But in the present case, no such assessment was framed. Hence, that decision does not advance the case of the assessee.
10. Coming to the merits of the case, the learned counsel for the assessee heavily relied on the written submissions filed before the CIT(A). The arguments made by him can be summarized as under :
1. That the AO had failed to appreciate that assessee-firm owned 7.04 bigas of land situated at Village Satbarihi which was used for cultivation and the plants were grown thereon.
2. The main activity of the assessee is to prepare seedlings on scientific basis, grow plants on prepared beds and after several operations carried on the land viz, cutting, layering, gootying and inarching such plants are transferred/transplanted either in suitable containers or re-planted in land at an appropriate position considering the requirement of sunshine, shade etc. The plants so transferred/transplanted in containers/pot are again placed on land so that with the growth of plant in such pots, the roots of such plant passes through the hole provided beneath such pot/container. Further, in such process, the plant takes its nourishment from soil provided in the pot and mainly from the land beneath such pot which help such plant to grow at faster rate in comparison to a plot placed at concrete platform.
3. That it had incurred a sum of Rs. 2,15,406 in the cultivation and plantation.
4. That the plants sold were the result of the basis 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 with water and by placing them in the green house or in shade and after performing several operations, such as weeding, watering, manuring, etc. and as such they do not cease to be the agricultural income.
5. That in the instant case, the assessee has sold the plant grown from mother plants and it was nobody's case as has been noted by their Lordships in (2000) 241 ITR 530 (Mad) (supra) that mother plant can be regarded as not grown on land, It is worth appreciating where seed is an agricultural commodity how can it be held that the plant is not an agriculture produce as the seeds are the products from, plants.
6. Reliance was placed on the judgment of Madras High Court in the case of CIT v. Soundarya Nursery (2000) 241 ITR 530 (Mad) wherein on similar facts, the income from nursery was held to be agricultural income.
7. The observations made by the learned ITO that development of Bonsai and Cactus, etc. does not require use of land at all and can be developed in pots, in any case, is not the subject-matter of dispute in the instant case and is besides the issue.
8. That the case law relied upon by the lower authorities were distinguishable on facts.
9. That the judgment of Hon'ble Supreme Court in the case of Raja Binoy Kumar Suhas Roy (supra) covers the issue before the Tribunal. Particular attention was drawn to pp. 482, 484, 510 and 511.
10. That the land of the assessee was visited by the Inspector of Income-tax and nothing adverse to the assessee was found.
11. That it was never the case of the assessee that plants were grown in conditioned or controlled atmosphere. No such expenses were debited to P&L a/c. The finding of the AO in this regard is merely based on suspicion. Further, mere putting the plants in shades is not adverse to agricultural activity. Similarly, transferring of plant from soil beds to the pots is nothing but continuation of agricultural operation adjunct to the basic operation.
In view of the above arguments, it was prayed that the income from nursery be declared to be agricultural income.
11 On the other hand, the learned Departmental Representative has relied on the orders of lower authorities. According to her, major operations were carried out not on the soil but in pots and, therefore, it was a mere commercial activity not amounting to agricultural activity. Further, it was argued by her that plants grown by the assessee were ornamental plants unfit for human consumption and, therefore, cannot be considered as agricultural produce.
12. In reply, the learned counsel for the assessee has submitted that plants are plants and, therefore, any distinction is irrelevant. Once these are grown from seeds by basic operation on soil, the same has to be considered as agricultural produce. Even in the case before the Madras High Court, the flower plants were grown.
13. Submissions of the rival parties have been considered carefully. The question for consideration is whether the income arising from the sale of plants grown by the assessee in its nursery/farm can be said to be agricultural income as defined in Section 2(1A) of the Act, According to this section, any income derived from land, which is situated in India and is used for agricultural purposes, by agriculture would be agricultural income. The AO has rejected the claim of the assessee on the ground that activities carried on by the assessee do not fall within the scope of the word "agriculture". The meaning of the word "agriculture" is no more res integra in view of the judgment of the Hon'ble Supreme Court in the case of Raja Binoy Kumar Suhas Rai (supra). The relevant portion of the judgment is being reproduced as under :
'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. These are basic operations and require the explanation of human skill and labour upon the land itself.
Those operations which the agriculturist has to resort to and which are absolutely necessary for the purpose of effectively raising produce from the land, operations which are to be performed after the produce sprouts from the, land, e.g., 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 pests but also from depredation from outside, tending, pruning, cutting, harvesting and rendering the produce fit for the market, would all be agricultural operations when taken in conjunction with the basic operations. The human labour and skill spent in the performance of these subsequent operations cannot be said to have been spent on the land itself.
The mere performance of these subsequent operations on the products of the land, where such products have not been raised on the land by the performance of the basic operations, would not be enough to characterise them as agricultural operations; in order to invest them with the character of agricultural operations these subsequent operations must necessarily be in conjunction with and in continuation of the basic operations which are the effective cause of the products being raised from the land. The subsequent operations divorced from the basic operations cannot constitute by themselves agricultural operations.
Only if this integrated activity which constitutes agriculture is undertaken and performed in regard to any land can that land be said to have been used for 'agricultural purposes' and the income derived therefrom be said to be 'agricultural income' derived from the land by agriculture, under Section 2(1) of the Indian IT Act, 1922.
Agriculture comprises within its scope the basic as well as the subsequent operations described above regardless of the nature of the products raised on the land. These products may be grain or vegetable or fruits which are necessary for the sustenance of human beings, including plantations and groves, or grass or pasture for the consumption of beasts or articles of luxury such as betel, coffee, tea, spices, tobacco, or commercial crops like cotton, flax, jute, hemp, indigo. All these are products raised from the land but the term 'agriculture' cannot be confined merely to the production of grain and food products for human beings and beasts; it must be understood as comprising all the products of the land which have some utility either for consumption or for trade and commerce and would also include forest products such or for trade and commerce and would also include forest products such as timber and sal and piyasal trees, casuarina plantations, tendu leaves and horra nuts.
There is no warrant at all for extending the term 'agriculture' to all activities which have some relation to the land or are in anyway connected with the land, for the term 'agriculture' cannot be dissociated from the primary significance thereof, which is that of cultivation of the land. The extension of the term 'agriculture' to denote such activities as breeding and rearing livestock, dairy farming, butter and cheese-making, and poultry farming, is an unwarranted distortion of the term."
A carefully reading of the above clearly shows that unless the assessee has carried out the basic operations upon the land i.e., tilling of the land, sowing of the seeds planting, etc. requiring the expenditure of human skill and labour upon the land, it cannot be said that the income earned by the assessee is agricultural income. Further, reveals that subsequent operations would also be agricultural operations if taken in conjunction with basic operations. However, subsequent operations by itself would not be considered as agricultural operations. Hence, if any income is earned by carrying out the subsequent operations without carrying out the basic operations then such income would not be considered as agricultural income. It further declares that the nature of the product is irrelevant. The agricultural product would not only include products for sustenance of human being but also products of utility for a trade and commerce.
14. In view of the above legal position, let us now adjudicate the issue in the light of the facts of the case. The AO has rejected the claim of the assessee merely on the ground that activity carried on by the assessee does not amount to agriculture. It would be appropriate at this stage to go through the activities carried out by the assessee. The assessee, vide letter dt. 29th March 2001 has referred to in detail about the activities carried out by it. The same are being reproduced as under :
"1. That process of growing plants has been explanded in brief to you in our several submissions and in detail to your inspector on his visit to the nursery of the assessee. However, for your fresh consideration the same is explained hereunder :
(i) Preparation of soil beds. For preparation and growth of plants, land has to be prepared. Soil is softened by tilling of soil and after soil so dugged is dried so that insects below the soil level are killed by sunheat. Manure of various kinds, e.g. urea, gobbar khad, bonemeal, pesticides, sand, etc. are mixed with the soil and such mixture is spread on the land. Soil bed are kept at a level of 4-6 inches above the surrounding ground level and such soil beds are prepared generally of 2 to 3 feet wide and 10 to 15 feet long so that weeding, watering mannuring, etc. can easily be carried out. On such soil beds seeds are sown to germinate.
For putting the cutting/gooty soil beds are prepared 6 inches to 1 feet wide and again 10 to 15 feet long. After germination of seed and/or gooty/cutting, when the plant is established on such soil bed, they are shifted either in pots or in land depending upon the requirement of heat, water, shade, etc.
(ii) Propagation of plants.
There are several methods/ways from which plants are prepared.
(a) From seed : The process require for germination of seed has been explained in brief in para (i) above.
(b) Cutting : A cutting is taken from the mother plant and planted in the prepared soil bed. Roots from such cutting germinates in few months. When plant is established, the same is transferred from such soil bed to either pot or at appropriate place in the land for its further growth.
(c) Gootying : On a branch of a mother plant a slit is made and on that portion harmones are applied and covered with manure and soil and wrapped with jute/polythene. The wrapped portion is watered regularly till roots emerges at that point. When there are sufficient roots it is cut and transferred to land/pot for its own separate growth for its onward sale.
(d) Layering : A branch of the mother plant is bent down and a slit is made in the stem and some harmones are applied. This is presented into soil so that the slit stem is under the soil. Watering is done regularly. From such slit portion roots start emerging. When there is a reasonable growth of roots, that portion is cut from the mother plant and it becomes a new plant, the plant so prepared is fully established, it is again shifted to either in pot or appropriate place in land.
(e) Inarching/grafting : There are several methods or grafting. In rose graft is taken from the portion of stem which is about to break for a new stem and the same is placed by putting a slit in the ordinary rose plant and is tied up from up and down side by polythene. After a month or two a new branch from that portion emerges. That new branch is of the quality of rose from which cut and the new plant is of good quality rose. In other process, seedlings prepared in soil bed which are transferred to pots are taken to the mother trees for inarching i.e., a branch of mother plant is bent and tied with the seedling after both branches are slit. The slit branches are tied with jute/coconut fibre. That portion is watered regularly and the new plant is separated after 3 to 4 months. The plant so prepared is of the same species that of mother plant irrespective of the quality of the seedling.
(f) There are few plants in which sprouting takes place from its root level, For such purposes harmones and special manures are provided to such plans for better development of such process. Sprouts so generated are taken out, in the month of July and/or February only, by losening the roots of mother plant and such small sprouts are separated from mother plant to become new plant.
In the process of propagation mortality rate of plants is very high.
2. That at no place it has been stated that plants purchased during the year have been grown in conditional atmosphere for their onward sale only. Plants have been purchased for the requirement of adding the variety and/or for faster propagation of new plants. At no place sale of plants can be corroborated with its purchases. Details of few plants have already been submitted for your verification along with all sale bills whereas copies of purchase bills are already on your file.
3. All plants have been prepared only on land owned by the assessee. They have not been grown in the pots directly, but they are, after several operations carried out in the land, as explained in brief in above paras, transplanted in suitable containers including pots and are kept at the appropriate places, i.e., shade, green house, and sunny areas and the trees were grown on the land directly. The approximate area of land is 4 acres.
As it has been explained earlier that without ploughing of land, no growth of plant is possible except that of required small seized soil beds i.e., each bed measuring 2 to 3 feet wide and 10 to 15 feet long and number of such beds are required along with other type of soil beds for growing, cutting, gooty, etc. For ploughing such sized soil beds, conventional tractor etc. are riot required. Further, it has been explained that seed/cutting/gooty are sown in the land to take new plants. When plants are established only then they are shifted in suitable containers or appropriate place in land.
In view of above it is quite evident that the assessee-firm is not doing any trading of plants and it has been developing and growing the plant from its birth to the point sale. Therefore, the assessee firm has been carrying out agricultural activities and its income is agricultural income. The fact is established in earlier years also."
The perusal of the above clearly shows that the assessee not only carried out the basic operations but also the subsequent operations. Such subsequent operations were carried out in continuance of basic operations. The above said letter of the assessee also shows that the Inspector of income-tax had visited the nursery of the assessee and no adverse comments had been made about the correctness of such activities in the assessment order. Therefore, in our considered opinion, all operations were agricultural operations as held by the Hon'ble Supreme Court. The only contention of the learned Departmental Representative is that all operations were not carried out on the land itself as the plants grown on the land were shifted to plots and, therefore, the same could not be considered as agricultural operations. This contention of the Department cannot be accepted in view of the Madras High Court judgment in the case of Soundarya Nursery (supra) wherein on similar facts it was held as under :
"All the products of the land which have some utility either for some consumption or for trade or commerce if they are based on land would be agricultural products. If the plants sold in pots were the result of basic operations on the land expending human skill and labour thereon and if after performance of the basic operations on land the resultant product grown or such part thereof was suitable for being nurtured in a pot with water or by placing them in the green house or in shade or after performing several operations such as weeding, watering, manuring, etc., and are made ready for sale, all these operations are agricultural operations and the plants are products of agriculture,"
15. The CIT(A) has decided the issue against the assessee for the reasons that activity of the assessee was by way of business. In our opinion, the claim of the assessee cannot be rejected on this ground. Once the assessee had shown that the agricultural operations were carried out then income from the sale of agricultural produce would amount to agricultural income. There is nothing in the Act which may allow to tax such income on the reasoning adopted by the CIT(A). In our considered opinion, once the income falls within the scope of expression 'agricultural income', it has to be excluded from the total income of the assessee in view of Section 10 of the Act. This view of ours is also fortified by the decision of the Tribunal, Jaipur Bench in the case of Balwant Singh v. ITO (1996) 54 TTJ (Jp) 560 : (1995) 55 ITD 363 (Jp).
16. The judgment of Allahabad High Court in the case of Maharaja Vibhuti (supra) is distinguishable inasmuch as in that case necessary facts were not on the record for reaching a particular conclusion. At p. 369, their Lordships referred to two types of nurseries-one which may be maintained by a farmer as an aid or necessary adjunct to the primary process of agriculture while the other one which may be maintained and run as a business quite independently of agriculture. After such discussion, they went on to mention that there was no discussion of the type of nursery involved. In view of the same, the answer to the question was given in negative. Hence, that case does not help the Revenue.
17. However, we are in agreement with the observations of their Lordships of Allahabad High Court in as much as the income from all nurseries cannot be considered as agricultural income. It would depend on the facts of each case, If the nursery is maintained by carrying out basic operations and subsequent operations in pots are carried out in continuation of basic operations then, in our considered opinion, income from such nursery would be agricultural income not liable to tax under Section 10 of the Act. However, if the nursery is maintained independently without resorting to basic operations on the land then income from such nursery would be liable to be included in the total income. Similarly, where a part of the activity of a nursery involves purchases and sales of the plants then profits arising from such tracing would also be assessable to tax. The judgment of Allahbad High Court in the case of Anand Bala Bhushan v. CIT (1996) 217 ITR 144 (Ker)(FB) relied on by the CIT(A) is also distinguishable on facts inasmuch as the claim of the assessee was disallowed on the ground that the land was not assessable to land revenue while in the present case it is nobody's case that the land in question was not assessed to land revenue.
18. The decision of Madras High Court in the case of Stanes Amalgamated Estates (P) Ltd. (supra) relied upon by the CIT(A) is also distinguishable on facts. In that case, the question was whether the income derived from the sale of oil extracted from the leaves of eucalyptus trees was agricultural income. That was a case of post agricultural activity. It was held by the Court that the trees by itself had a commercial market and, therefore, it could not be said that the process of extraction of oil was necessary to make the agricultural produce fit for marketing. We are not concerned with such a case and, therefore, the same is clearly distinguishable.
19. In view of the above discussion, it is held that activities carried out by the assessee amounted to agricultural operations and consequently, the income derived from such operations was agricultural income not liable to tax under Section 10. However, we find from the reply of the assessee dt. 29th March, 2001, that assessee had purchased certain plants for sale (para 2). Since no basic operations were carried out with reference to such plants, the profits on sale thereof would be trading profits even though such plants were maintained in the nursery for some time. Particulars of such purchase and sale are not available on record and, therefore, requires verification. The order of the CIT(A) is, therefore, set aside and the AO is directed to restrict the addition only with reference to the profits arising from the sale of plants which was purchased by the assessee.
20. In the result, appeal of the assessee is partly allowed.