The Commissioner Of Income Tax,Chennai v. K.n.pannirselvam

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM THE HONOURABLE MR. JUSTICE S.MANIKUMARandTHE HONOURABLE MR. JUSTICE D.KRISHNAKUMAR Tax Case Appeal No.618 of 2016and CMP.No.12681 of 2016 The Commissioner of Income Tax,Chennai. Vs. .. Appellant K.N.Pannirselvam .. Respondent PRAYER: Appeal filed under Section 260A of the Income Tax Act1961 against the order of the Income Tax Appellate Tribunal,Bench“B”,Chennai,dated29.01.2016inI.T.A.No.2109/Mds/2015 for the assessment year 2005-06 arisingagainst the order in ITA.Nos.45&46/13-14 dt.11.8.2015 by theCommissioner of Income Tax- (Appeals)-2, 121, Mahatma GandhiRoad, Chennai-34, against the Assessment order U/s. 143(3)r.w.s. 147 of the Assessment-order U/s. 143(3) r.w.s for theassessment years 2005-2006 dated 22.03.2013 by AssistantCommissioner of Income Tax, Cricle -VI, Chennai. For Appellant : Mr.T.Ravikumar, Senior Standing Counsel for Income Tax Department JUDGMENT (Judgment of the Court was delivered by D.KRISHNAKUMAR, J) The present appeal has been filed by the Revenueunder Section 260A of the Income Tax Act 1961 against theorder of the Income Tax Appellate Tribunal, “B” Bench,Chennai, in I.T.A. No. 2109/Mds/2015 for the Assessment Year2005-06. 2. The facts of the case in nutshell are as The respondent herein is the assessee. Therespondent/assessee was a landscaping architect and wasrunning two business concerns, viz., plants scape and flowershttps://hcservices.ecourts.gov.in/hcservices/and petals. He filed the return of income for the Assessment Year 2005-06, declaring his taxable income as Rs.2,01,586/-from plant scape business and agricultural income ofRs.15,75,041/- from agricultural operation. The assessment wascompleted under Section 143(3) and the case was reopened byissuance of notice under Section 148 dated 31.03.2011.Thereafter, notice under section 143(2) dated 23.09.2011 hasbeen served on the assessee. Further notice under Section 142(1) dated 05.02.2013 has also been served on the assessee. Inresponse to the same, the assessee's Authorised Representativeappeared and submitted his explanations. The Assessing Officerhas determined the taxable income as Rs.17,76,630/-. 3. Aggrieved by the order, the assessee filed anappeal before the Commissioner of Income Tax (Appeals), who,vide his order dated 11.08.2015, had partly allowed the appealby holding that the income derived from the nursery fallswithin the definition of 'Agricultural income' and hence, thesame was exempted under Section 10(1) of the Act. Aggrieved bythe same, the Revenue filed an appeal before the Income TaxAppellate Tribunal in I.T.A.No.2109/Mds/2015. The Tribunalvide its order dated 29.01.2016 upheld the order ofCommissioner of Income Tax (Appeals), both on facts and inlaw, in respect of agricultural income and dismissed theappeal. Challenging the same, the Revenue has preferred thepresent Appeal. 4. Mr.T.Ravikumar, learned senior Standing Counselfor the appellant would submit that the Assessing Officer hasnot countenanced the reasons adduced by the assessee seekingto treat the income in question as agricultural income,relying on the ratio laid down by the Hon'ble Supreme Court inthe case of Raja Vinay kumar Sahas Roy reported in 32 ITR 466,wherein it has been held that without the performance of thebasic operations such as tilling of land, sowing of seeds,planting and similar operations on the land, mere performanceof subsequent operations such as weeding, digging the soilaround the growth, tendering, pruning, cutting etc., would notbe enough to characterize them as agricultural operations.Accordingly, the Assessing Officer disallowed the claim of theassessee, by treating the agricultural income as businessincome. 5. Learned senior Standing Counsel for the Revenuewould further submit that the Tribunal has failed to note thatExplanation 3 to Sec.2(1A) was inserted by Finance Act, 2008with effect from 01.04.2009 and was applicable only from theassessment year 2009-10 onwards and not for the earlierassessment years. However, the Tribunal without consideringthe same, has dismissed the appeal filed by the Revenue. TheTribunal has also failed to note that the assessee withouthttps://hcservices.ecourts.gov.in/hcservices/performing the basic operations like tilling, sowing of seeds, planting etc., on the land but subsequent actions likeweeding, digging the soil around the growth, tendering,pruning, cutting etc., would not be sufficient to categorisethem as agricultural operations. He would also submit thatthe Tribunal has wrongly relied on the decision in the case ofCommissioner of Income Tax vs. Soundarya Nursery (241 ITR530). In support of his contention, he relied on the decisionrendered by the Allahabad High Court in the case ofH.H.Maharaja Vibhuti Narain Singh vs. State of Uttar Pradesh(1966) 34 CCH 0268 ALLHC : (1967) 65 ITR 0364 and the decisionof Patna High Court in Commissioner of Wealth Tax vs. NathmalJalan (1996) 64 CCH 0635 PatHC : (1997) 142 CTR 0399.Ultimately, in the light of the above facts and decisions, hewould submit that the order impugned shall be set aside andthe Appeal shall be allowed. 6. Heard the learned Senior Standing Counselappearing for the appellant and perused the materials onrecord. 7. The substantial questions of law that arise forconsideration in this appeal are as follows:-(i)Whetheronthefactsandcircumstances of the case, the Tribunal wasright in deleting the disallowance made onagricultural income on the ground that thesame was exempted under Section 10(1) of theIncome Tax Act?(ii) Is not the finding of the Tribunalbad, especially, when Explanation 3 toSection 2(1A) was inserted by Finance Act,2008 with effect from 01.04.2009 and wasapplicable only from the assessment year2009-10 and not for the earlier assessmentyears? 8. The respondent/assessee was a landscapingarchitect and was running two business concerns viz., Plantsscape and flower and petals. The respondent filed his returnof income for the assessment year 2005-06 declaring taxableincome as Rs.2,01,586/- from plantscape business andagricultural income as Rs.15,75,041/- from agriculturaloperation. After completion of the assessment under section143(3), the assessing officer reopened the same and issuednotices under sections 143(2) and 142(1) of the Act to theassessee. 9. As per section 2(1A) of the Income Tax Act,agricultural income should be derived from the land and thesaid land should have been used for agricultural operation.https://hcservices.ecourts.gov.in/hcservices/Then, there should be something done on the land by human and 9. As per section 2(1A) of the Income Tax Act,agricultural income should be derived from the land and thesaid land should have been used for agricultural operation.https://hcservices.ecourts.gov.in/hcservices/Then, there should be something done on the land by human and technical agency to produce out of land any crop, treeplantation and other agricultural produce in order todetermine whether a certain income is agricultural income, theimmediate and effective source of income must be land. If itis not land, the income cannot be considered as agriculturalincome. He referred to the decision of the Hon'ble SupremeCourt in the case of CIT vs. Raja Benoy Kumar Sahas Roy (32ITR 466) wherein it has been held that without the performanceof the basic operations such as tilling of land, sowing ofseeds, planting and similar operations on the land, mereperformance of subsequent operations such as weeding, diggingthe soil around the growth, tendering, pruning, cutting etc,would not be enough to characterise them as agriculturaloperations and found that the respondent/assessee had notsubmitted any document with regard to the expenditure incurredby him towards agricultural operations such as tilling ofland, sowing of seeds, plating and similar operation of land.He has also relied on the decision of the Allahabad High Courtin the case of H.H.Maharaja Vibhuti Singh vs. State of U.P.(65 ITR 3640) wherein it has been held that income fromnursery is not an agricultural income unless maintained by thefarmers as an additional or necessary adjunct to the primaryprocess of agriculture for example paddy, nursery, nursery oftomato plants. He has also referred to the decision of thePunjab High Court in the case of CIT Vs. Raja Bahadur KarmakyaNarain Singh (161 ITR 325) wherein it has been held that theremust be nexus between the income, land and agriculturaloperation. Eventually, based on the aforesaid decisions, theAssessing Officer disallowed the agricultural income, by orderdated 22.03.2013. 10. Against that order, the respondent/assesseefiled an appeal before the Commissioner of Income Tax(Appeals), Chennai, challenging the validity of reopening theassessment under Section 147 and disallowance of agriculturalincome, treating the same as business income. The appellateauthority dismissed the appeal insofar as the first ground isconcerned, viz., reopening of the assessment, holding that itis valid in law. However, with regard to the issue ofdisallowance of agricultural income, the claim of the assesseewas allowed holding that the income from nursery is anagriculture income. 11. In reaching his conclusion, the appellateauthority has relied on the decision of CIT v. Green Gold TreeFarmers P Ltd., (2008) 167 Taxman 151 (Uttarakand), wherein ithas been held that sale proceeds of plants raised in nurseryon land belonging to the assessee constitute agricultureincome. The appellate authority has also referred to thedecision of a Division Bench of this Hon'ble Court in CIT vs.Soundarya Nursery (2000) (241 ITR 531) dated 5.8.1998, andhttps://hcservices.ecourts.gov.in/hcservices/held that even the plants grown in pots is an agricultural activity as they involve all the activities of agriculturefarming like seeding, weeding, watering, manuring etc. AtParagraphs 8 and 9 of the judgment, it has been held asfollows:- 11. In reaching his conclusion, the appellateauthority has relied on the decision of CIT v. Green Gold TreeFarmers P Ltd., (2008) 167 Taxman 151 (Uttarakand), wherein ithas been held that sale proceeds of plants raised in nurseryon land belonging to the assessee constitute agricultureincome. The appellate authority has also referred to thedecision of a Division Bench of this Hon'ble Court in CIT vs.Soundarya Nursery (2000) (241 ITR 531) dated 5.8.1998, andhttps://hcservices.ecourts.gov.in/hcservices/held that even the plants grown in pots is an agricultural activity as they involve all the activities of agriculturefarming like seeding, weeding, watering, manuring etc. AtParagraphs 8 and 9 of the judgment, it has been held asfollows:- 8. All the products of the land, whichhave some utility either for consumption orfor trade or commerce, if they are based onland, would be agricultural products.Hence, it is not the case of the revenuethatwithoutperformingthebasicoperations, only the subsequent operations,as described in the decision of the ApexCourt have been performed by the assessee.If the plants described in the decision ofthe Apex Court have been performed by theassessee. If the plants sold by theassessee in pots were the result of thebasic operations on the land on exependinghuman skill and labour thereon and it isonly after the performance of the basicoperations on the land, the resultantproduct grown or such part thereof as wassuitable for being nurtured in a pot, wasseparated and placed in a pot and nurturedwith water and by placing them in the greenhouse or in shade and after performingseveral operations, such as weeding,watering, manuring etc.,. they are madeready for sale as plants; all theseoperations would be agricultural operations.All this involves human skill and efforts.Thus, the plants sold by the assessee inpots were the result of primary as well assubsequent operations comprehended withinthe term 'agriculture' and they are clearlythe products of agriculture. 9. So far as the seeds are concerned, weare surprised that, that question shouldhave been raised at all by the Revenue, asit is not possible for the seeds to existwithout the mother plants, and the motherplant, it is nobody's case, was not grown onland. It is also not the case of theRevenue that the seeds were the result ofthe wild growth and not on account ofcultivation by the assessee. The seedswere clearly a product of agriculture andthe income derived from the sale of seeds,was agricultural income.” 12. In the light of the aforesaid decisions,subsequently, the Ministry of Finance has amended Section 2https://hcservices.ecourts.gov.in/hcservices/(1A) of the Income Tax Act and thereby, Explanation 3 to Section 2(1A) was inserted by the by Finance Act,2008, totreat the income from nursery as agricultural income and thesame is usefully extracted hereunder:- “ 2(1A) “ Agriculture income means”- ....................................................................... Explanation 3 – For the purpose of thisclause, any income derived from saplings orseedling grown in a nursery shall be deemedto be agriculture income. This amendment came to force with effect from 01.04.2009 andthe same is applicable from the assessment year 2009-10onwards. 13. Following the aforesaid decision of SoundaryaNursery's case (supra), the Income Tax Appellate Tribunalupheld the order of the appellate authority and dismissed theappeal of the Revenue. Section 2(1A) was inserted by the by Finance Act,2008, totreat the income from nursery as agricultural income and thesame is usefully extracted hereunder:- “ 2(1A) “ Agriculture income means”- ....................................................................... Explanation 3 – For the purpose of thisclause, any income derived from saplings orseedling grown in a nursery shall be deemedto be agriculture income. This amendment came to force with effect from 01.04.2009 andthe same is applicable from the assessment year 2009-10onwards. 13. Following the aforesaid decision of SoundaryaNursery's case (supra), the Income Tax Appellate Tribunalupheld the order of the appellate authority and dismissed theappeal of the Revenue. 14. The decisions relied on by the AssessingOfficer, viz., Raja Benoy Kumar Sahas Roy (Supra) has beenconsidered in detail by the Division Bench of thisHon'ble Court in CIT vs. SoundaryaNursery (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 theninvited by learned counsel to the decisionof the Supreme Court in the case of CIT V.Raja Benoy Rumor Sahas Roy [(1957) 32 ITR466], which is the leading case of“agriculture”. It was held therein thatagriculture in its primary sense denotesthe cultivation of the field and isrestricted to cultivation of the land inthe strict sense of the term, meaningthereby tilling of the land, sowing of theseeds, planting and similar operations onthe land and these are basis operations,which require the expenditure human skilland labour upon the land itself. The ApexCourt further held that besides the basicoperations, the subsequent operations wouldalso be comprehended within the terms ofagriculture, and such subsequent operationsare illustrated as weeding, digging thesoil around the growth, removal ofundesirable undergrowth and all operationswhich foster the growth and preservation ofthe same not only from insects and pets,but also from depredation, from outside,tending, pruning, cutting, harvesting andrendering the produce fit for the market,https://hcservices.ecourts.gov.in/hcservices/which would all be agricultural operations, when are taken in conjunction with thebasic operations. 15. Another decision relied on by the AssessingOfficer, viz., Maharaja Vibhuti Narain Singh (Supra), has alsobeen considered in detail by the Division Bench of thisHon'ble Court in CIT vs. Soundarya Nursery (2000) (241 ITR531) dated 5.8.1998, and at Paragraph 6 of the Judgment, thisCourt held as follows:-“6. Learned counsel for the Revenuecontended before us that the plants are onlygrown in pots and no matter the period forwhich they are so grown, that activity canneverberegardedasagriculturaloperations. In support of that submission,counsel referred to the decision of theAllahabad High Court in H.H.Maharaja VibhutiNarain Singh v. State of U.P. ([1967] 65 ITR364, wherein the Court made an observationwhich was clearly obiter that agriculturecannot be carried on in pots, as in thatcase, a large number of coconut plants werenurtured on land in the nursery.” 16. In the explanation offered to the AssistantCommissioner of Income Tax, Business Circle – II,Nungambakkam, Chennai, the assessee/respondent herein hassubmitted that he has been doing Landscaping Architect from1981 and running two business concerns viz., plantscape andFlower and Petals. He is growing plants in his lands and forthat purpose, he has incurred expenses for tilling of land,sowing of seeds, and purchase of clay sand and fertilizers. Assuch, agricultural operations are carried on the land. 16. In the explanation offered to the AssistantCommissioner of Income Tax, Business Circle – II,Nungambakkam, Chennai, the assessee/respondent herein hassubmitted that he has been doing Landscaping Architect from1981 and running two business concerns viz., plantscape andFlower and Petals. He is growing plants in his lands and forthat purpose, he has incurred expenses for tilling of land,sowing of seeds, and purchase of clay sand and fertilizers. Assuch, agricultural operations are carried on the land. 17. From the materials on record, it could be seenthat, it is not the case of the Assessing Officer, at thefirst instance that the assessee has not produced any detailsof the expenditure incurred in raising flowers and petals inpots. Assessment order does not disclose that because of thefact that the assessee did not prove expenditure, income fromflowers and petals was added. He has only stated that withoutperforming basic operations, income generated cannot be termedas agricultural income. Even during the appeal, the Revenuehas not raised such issue. Such contentions are made for thefirst time, before this Court. The assessment order has tofall or succeed on the contents of the order. A fact which wasnever raised in the assessment proceedings cannot beintroduced for the first time, in an appeal under Section260A, for an answer. Needless to state that questions of lawarise on the facts considered by the authorities withreference to the provisions and for the above reasons, we areof the view that the Revenue cannot raise the said issue atthis stage. https://hcservices.ecourts.gov.in/hcservices/ 18. In the light of the concurrent findings of theappellate authority and the appellate Tribunal and also in thelight of the above decisions, this Court is not inclined tointerfere with the impugned order of the appellate Tribunal.The substantial questions of law are answered against theRevenue. The impugned order of the Income Tax AppellateTribunal is confirmed and the Tax Case Appeal is dismissed.No order as to costs. Consequently , connected MiscellaneousPetition is closed. Sd/- Assistant Registrar(CS II) //True Copy// Sub Assistant RegistrarrkTo1. Registrar,The Income Tax Appellate Tribunal, Bench “B”, Chennai2. The Commissioner of Income Tax, Chennai.3. The Commissioner of Income Tax, (Appeals)-2, 121, MaharajaGandhi Road, Chennai.4. The Asst. Commissioner Tax of Income Tax, Businees Circle-II, Chennai.SM(CO)EU(2/12/2015)T.C.A.No.618 of 2016