Section 10(1) – Cultivation of Mushroom, although in controlled condition using trays placed above land, is an agricultural activity and income derived there from is exempt u/s. 10(1).

DCIT vs.
Inventaa Industries (P.) Ltd. ITA No.:
1015 to 1018(Hyd.) of 2015 C.O. No.:
53 to 56 (Hyd.) of 2015 A.Ys.:
2008-09 to 2012-13 Dated: 9^th July, 2018

Section 10(1) – Cultivation of Mushroom,
although in controlled condition using trays placed above land, is an
agricultural activity and income derived there from is exempt u/s. 10(1).   

FACTS

 The assessee company was engaged in growing
Edible White Button Mushrooms and the income from the said activity was treated
as Agricultural Income claiming exemption u/s. 10(1).  Assessing Officer (AO) contended that as
Mushrooms were grown in ‘growing rooms’ under ‘controlled conditions’ in racks
placed above land and using compost manure which is not land and hence the said
activity was not an agricultural activity. CIT(A) ruled in assessee’s favor by
concluding that production of mushroom was a process of agricultural production
and income derived from such a process was agricultural income eligible for
exemption u/s. 10(1). The question before the Special Bench of the Hon’ble ITAT
(Hyderabad Bench) was, whether income from production and sale of Mushrooms can
be termed as ‘agricultural income’ under the Income Tax Act, 1961?

HELD

The Special Bench of the Hon’ble ITAT
supported the view of assessee that ‘soil’ is a part of the land, which is part
of earth. Mushrooms are grown on ‘soil’. Certain basic operations are performed
on it, which require ‘expenditure of human skill and labour’ resulting in
raising the mushrooms. When soil is placed on trays, it does not cease to be
land and when operations are carried

out on soil, it would be agricultural activity carried upon land itself.

In order to
claim exemption u/s. 10(1), use of land and performing activity on it, so as to
raise a natural product, is sufficient. If the strict interpretation is adopted
for the word ‘Land’ appearing in definition of “agricultural Income” u/s. 2(1A)
of the Act, then, when ‘soil’ attached to earth is cultivated, it would be
agricultural activity and when ‘soil’ is cultivated after detaching the same
from earth, it would not be agricultural activity. Such an interpretation is
unintended and unfair. It was concluded that ‘soil’, even when separated from
land and placed in trays, pots, containers, terraces, compound walls etc.,
continues to be a specie of land.

Further, on the question whether mushroom is
‘plant’ or a ‘fungus’ it was observed that one cannot restrict the word
‘product’ to ‘plants’, ‘fruits’, ‘vegetables’ or such botanical life only. The
only condition was that the “product” in question should be raised on
the land by performing some basic operations. Mushrooms produced by the
assessee are a product.

This product is raised on land/soil, by
performing certain basic operations. The product draws nourishment from the
soil and is naturally grown, by such operation on soil which require expenditure
of ‘human skill and labour’. The product so raised has utility for consumption,
trade and commerce and hence would qualify as an ‘agricultural product’ the
sale of which gives rise to agricultural income which is exempt u/s. 10(1) of
the Act.

Just because mushrooms are grown in
controlled conditions it does not negate the claim of the assessee that the
income arising from the sale of such mushrooms is agricultural income.
Accordingly, exemption u/s. 10(1)was allowed to the assessee.