Dismissed

The Commissioner of Income Tax v. Shri K.N. Pannirselvam

Madras HC1 Sept 2016TCA/619/2016

Case brief

AI extract

What is this about?

High Court dismissed Revenue's tax appeal seeking quashing of CIT(A) order allowing nursery income as agricultural. Court held Section 2(1A) Explanation 3 was not in force for the year; other precedents supported exemption.

What did the court decide?

Impugned order of Income Tax Appellate Tribunal confirmed; Tax Case Appeal dismissed.

The Commissioner of Income Tax Vs Shri K.N. Pannirselvam — Income Tax | Madras HC (2016)

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IN THE HIGH COURT OF JUDICATURE AT MADRAS

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Dated: 01.09.2016

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CORAM

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THE HONOURABLE MR. JUSTICE S.MANIKUMAR and THE HONOURABLE MR. JUSTICE D.KRISHNAKUMAR

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Tax Case Appeal No.619 of 2016 and CMP.No.12682 of 2016

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The Commissioner of Income Tax, Chennai. .. Appellant Vs.

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K.N.Pannirselvam .. Respondent PRAYER: Appeal filed under Section 260A of the Income Tax Act 1961 against the order of the Income Tax Appellate Tribunal, Bench “B”, Chennai, dated 29.01.2016 in I.T.A. No.2110/Mds/2015 for the assessment year 2006-07 against the order in ITA Nos.144 & 145/Circle)-2/2013-14 dated 11.08.2015 by the Commissioner of Income Tax (Appeals)-2, 121, Mahatma Gandhi Road, Chennai-34, against Assessment order dated 7.2.2014 U/s. 143(3), r.w.s 147 for the assessment year 200607 by the Deputy Commissioner of Income Tax Business CircleII, Chennai.

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For Appellant : Mr.T.Ravikumar, Senior Standing Counsel for Income Tax Department JUDGMENT

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(Judgment of the Court was delivered by D.KRISHNAKUMAR, J)

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The present 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, “B” Bench, Chennai, in I.T.A. No. 2110/Mds/2015 for the Assessment Year 2006-07. 2. The facts of the case in nutshell are as

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follows:-

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The respondent herein is the assessee. The respondent/assessee was a landscaping architect and was running two business concerns, viz., plants scape and flowers https://hcservices.ecourts.gov.in/hcservices/ and petals. He filed the return of income for the Assessment

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Year 2006-07, declaring his taxable income as Rs.4,37,527/from plant scape business and agricultural income of Rs.21,71,200/- from agricultural operation. The return of income was processed under Section 143(1) on 27.10.2007. As there was a reason to believe that income chargeable to tax, has escaped assessment and the assessee was claiming trading receipts of ornamental plants as agricultural income, notice under Section 148 dated 28.03.2013 was issued. Thereafter, notice under section 143(2) dated 8.1.2014 has been served on the assessee. Further notice under Section 142(1) dated 20.01.2014 has also been served on the assessee. In response to the same, the assessee's Authorised Representative appeared and submitted his explanations. The Assessing Officer has determined the taxable income as Rs.26,30,330/-.

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Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), who, vide his order dated 11.08.2015, had partly allowed the appeal by holding that the income derived from the nursery falls within the definition of 'Agricultural income' and hence, the same was exempted under Section 10(1) of the Act. Aggrieved by the same, the Revenue filed an appeal before the Income Tax Appellate Tribunal in I.T.A.No.2110/Mds/2015. The Tribunal vide its order dated 29.01.2016 upheld the order of Commissioner of Income Tax (Appeals), both on facts and in law, in respect of agricultural income and dismissed the appeal. Challenging the same, the Revenue has preferred the present Appeal.

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Mr.T.Ravikumar, learned senior Standing Counsel for the appellant would submit that the Assessing Officer has not countenanced the reasons adduced by the assessee seeking to treat the income in question as agricultural income, relying on the ratio laid down by the Hon'ble Supreme Court in the case of Raja Vinay kumar Sahas Roy reported in 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. Accordingly, the Assessing Officer disallowed the claim of the assessee, by treating the agricultural income as business income.

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Learned senior Standing Counsel for the Revenue would further submit that the Tribunal has 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 not for the earlier https://hcservices.ecourts.gov.in/hcservices/ assessment years. However, the Tribunal without considering

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the same, has dismissed the appeal filed by the Revenue. The Tribunal has 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, pruning, 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 Commissioner of Income Tax vs. Soundarya Nursery (241 ITR 530). 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 vs. State of Uttar Pradesh (1966) 34 CCH 0268 ALLHC : (1967) 65 ITR 0364 and the decision of Patna High Court in Commissioner of Wealth Tax vs. Nathmal Jalan (1996) 64 CCH 0635 PatHC : (1997) 142 CTR 0399. 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.

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Heard the learned Senior Standing Counsel appearing for the appellant and perused the materials on record.

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The substantial questions of law that arise for consideration in this appeal are as follows:-

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(i)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 exempted under Section 10(1) of the Income Tax Act?

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(ii) 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 years?

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The respondent/assessee was a landscaping architect and was running two business concerns viz., Plants scape and flower and petals. The respondent filed his return of income for the assessment year 2006-07 declaring taxable income as Rs.4,37,527/- from plantscape business and agricultural income as Rs.21,71,200/- from agricultural operation. After completion of the assessment under section 143(1), the assessing officer reopened the same and issued notices under sections 143(2) and 142(1) of the Act to the assessee.

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https://hcservices.ecourts.gov.in/hcservices/

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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 CIT vs. Raja Benoy Kumar Sahas Roy (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 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 vs. State of U.P. (65 ITR 3640) 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 Vs. Raja Bahadur Karmakya Narain Singh (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 decisions, the Assessing Officer disallowed the agricultural income, by order dated 07.02.2014.

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Against that order, the respondent/assessee filed an appeal before the Commissioner of Income Tax (Appeals), Chennai, challenging the validity of reopening the assessment under Section 147 and disallowance of agricultural income, treating the same as business income. 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, the claim of the assessee was allowed holding that the income from nursery is an agriculture income.

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In reaching his conclusion, the appellate authority has relied on the decision of CIT v. Green Gold Tree Farmers P Ltd., (2008) 167 Taxman 151 (Uttarakand), wherein it has been held that sale proceeds of plants raised in nursery https://hcservices.ecourts.gov.in/hcservices/ on land belonging to the assessee constitute agriculture

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income. The appellate authority has also referred to the decision of a Division Bench of this Hon'ble Court in CIT vs. Soundarya Nursery (2000) (241 ITR 531) dated 5.8.1998, 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:-

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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 exepending 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.

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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.”

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https://hcservices.ecourts.gov.in/hcservices/

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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:-

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“ 2(1A) “ Agriculture income means” - ......................................... ..............................

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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.

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

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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.

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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 CIT vs. Soundarya

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Nursery (2000) (241 ITR 531) dated 5.8.1998, 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 depredation, from outside,

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https://hcservices.ecourts.gov.in/hcservices/

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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.

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Another decision relied on by the Assessing Officer, viz., Maharaja Vibhuti Narain Singh (Supra), has also been considered in detail by the Division Bench of this Hon'ble Court in CIT vs. Soundarya Nursery (2000) (241 ITR 531) dated 5.8.1998, and at Paragraph 6 of the Judgment, this Court held as follows:-

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“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.”

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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.

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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. 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 stated that 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 https://hcservices.ecourts.gov.in/hcservices/ reference to the provisions and for the above reasons, we are

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of the view that the Revenue cannot raise the said issue at this stage.

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In the light of the concurrent findings of the appellate authority and the appellate Tribunal and also 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. Consequently , connected Miscellaneous Petition is closed.

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Sd/-
Assistant Registrar(CS II)
//True Copy//
Sub Assistant Registrar
rk
To
1. The Registrar,
Income Tax Appellate Tribunal, Bench “B”, Chennai.
2. The Commissioner of Income Tax, Chennai.
3. The Commissioner of Income Tax (Appeals)-2,
121, Mahatma Gandhi, road, Chennai-34.

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The Deputy Commissioner of Income Tax Business Circle-II, Chennai.

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T.C.A.No.619 of 2016 SM(CO) Eu 2.12.16

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https://hcservices.ecourts.gov.in/hcservices/

The Commissioner of Income Tax v. Shri K.N. Pannirselvam

Case brief

What is this about?

What did the court decide?

The Commissioner of Income Tax v. Shri K.N. Pannirselvam

Case brief

What is this about?

What did the court decide?

What the court decided

A compact analysis

Issues for consideration

Cases cited

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