The Commissioner Of Income Tax,Non-Corporate Circle -2,Chennai – 34 v. K.n.pannirselvam

IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated: 01.09.2016CORAM THE HONOURABLE MR. JUSTICE S.MANIKUMAR and THE HONOURABLE MR. JUSTICE D.KRISHNAKUMAR Tax Case Appeal No.338 of 2016 The Commissioner of Income Tax,Non-Corporate Circle -2,Chennai – 34. .. Appellant/Appellant Vs. K.N.Pannirselvam .. Respondent/Respondent PRAYER: Appeal filed under Section 260A of the Income Tax Act1961 against the order of the Income Tax Appellate Tribunal,Bench “A”, Chennai, in I.T.A. No. 667/Mds/2015 for theassessment year 2007-08 againt the order of the Commissioner ofIncome Tax (Appeals)-2, Order dated.26.12.2014 and made in IT.and TR.No.312/2013/14/A-2,New Rc.ITA.47/C1 TR-2/2013-14 AA forthe A7 2007-08. against the order of the Asst. Commissioner of Income TaxCircle II, Chennai order dated 22.03.2013, made inPAN/GIR.No.AA.OPP.8632M for the Assessment years 2007-2008. For Appellant : Mr.T.Ravikumar, Senior Standing Counsel for Income Tax DepartmentFor Respondent : Mr.M.P.Senthilkumar JUDGMENT (Judgment of the Court was delivered by D.KRISHNAKUMAR, J)This Appeal has been filed by the revenue under Section260A of the Income Tax Act 1961 against the order of the Income https://hcservices.ecourts.gov.in/hcservices/ Tax Appellate Tribunal, “A” Bench, Chennai, in I.T.A. No.667/Mds/2015 for the assessment year 2007-08. 2. The facts of the case in nutshell are as follows:- The respondent herein is the assessee. Therespondent/assessee was carrying on agricultural operation inthe agricultural land owned by him at Velichai Village nearKelambakkam and derived income from sale of replanted trees,flowers and creepers, saplings and seeds, rent for agriculturalland, share of profit and interest on capital from a firmengaged in agricultural operations. He filed the return ofincome for the Assessment Year 2007-2008 on 24.10.2007 declaringhis taxable income as Rs.3,47,238, from plantscape business andagricultural income of Rs.51,89,480/- from agriculturaloperation, in the nursery owned by the assessee in VelichaiVillage near Kelambakkam. The assessment was completedu/s.143(3) on 11.12.2009 on the assessed income ofRs.10,47,616/- and agricultural income of Rs.51,89,4380/-. Thecase was reopened by issuance of notice u/s.148 on 31.03.2011and assessment was completed u/s.143(3) r/w S.147 of the Act on22.3.2013 computing net taxable income at Rs.62,37,096/-. TheAssessing Officer raised a demand of Rs.26,23,900/- by treatingthe agricultural income as business income. 3. Aggrieved by the order, the assessee filed an appealbefore the Commissioner of Income Tax (Appeals) inI.T.A.No.47/2013. The Commissioner of Income Tax (Appealsvide his order dated 26.12.2014, had allowed that the incomederived from agricultural land, as exempt u/s.10(1) of theIncome Tax Act, 1961, by giving a categorically factual findingthat the assessee had grown plants, in nursery on theagricultural land owned by him, at Velichai Village nearKelambakkam and at Chengalpattu, and derived income from sale ofsuch plants and held that Explanation 3 to Section 2(1A) of theIncome Tax Act, 1961, which includes nursery as agriculturalactivity is clarificatory in nature, even though it was insertedby Finance Act, 2008, w.e.f. 01.04.2009. Aggrieved by theorder of Commissioner of Income Tax Appeals, the revenue filedan appeal before the Income Tax Appellate Tribunal inI.T.A.No.667/Mds/2015. The Tribunal vide its order dated13.9.2015 upheld the order of Commissioner of Income Tax(Appeals), both on facts and in law, in respect of agriculturalincome. Aggrieved by the order of the Tribunal, the revenuehas preferred the present Appeal. 4. Mr.T.Ravikumar, learned Standing Counsel for therevenue would submit that the assessee was a landscapingarchitect running two business concerns – one is plantscape andthe other is flowers and petals. The assessee filed theoriginal return of income for the assessment year 2007-08 on24.10.2007, declaring a total income of Rs.3,47,328/- andagricultural income of Rs.51,89,480/-. The assessment wascompleted u/s.143(3) on 11.12.2009 on the assessed income ofRs.10,47,616/- and agriculture income of Rs.51,89,480/-. Thecase was reopened by issuance of notice u/s.148 dated 31.3.2011of the Income Tax Act, 1961 to the assessee as to whyagriculture income should not be treated as business of income.A notice under section 143(2) dated 23.9.2011 was also served onthe assessee. Further notice under section 142(1) dated4.2.2013 was also served on the assessee. 5. Based on the ratio laid down by the Hon'ble SupremeCourt in the case of Raja Vinay kumar Sahas Roy reported in 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 characterize them as agriculturaloperations, the assessing officer, after considering the replyof the assessee did not countenance the reasons adduced seekingto treat the income in question as agricultural income. TheAssessing Officer disallowed the claim of the assessee that theincome of Rs.51,89,480/- as agricultural income and treated thesame as business income vide order dated 22.3.2013. Aggrievedagainst this order, the assessee went on appeal before theCommissioner of Income Tax (Appeals) who has held that thedefinition of agriculture income prior to insertion ofExplanation 3 would include the activity of nursery also anddirected the Assessing Officer to treat the income received fromnursery as agricultural income and allowed exemption availableto such agriculture income u/s.10(1) of the Act, by its orderdated 26.12.2014 in ITA No.47/2013-14. Aggrieved against thisorder, the revenue preferred an appeal in ITA No.667 of 2015before the Income Tax Appellate Tribunal, Madras “A” Bench,Chennai, which dismissed the appeal preferred by the revenue andthe said order is impugned in the instant appeal. 6. Further, the learned Standing Counsel for therevenue would further submit that the Tribunal failed to notethat Explanation 3 to Sec.2(1A) was inserted by Finance Act,2008 with effect from 01.04.2009 and was applicable only from 6. Further, the learned Standing Counsel for therevenue would further submit that the Tribunal failed to notethat 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 therefore, notapplicable to the earlier assessment year. The Tribunal alsofailed to appreciate that, as per Section 2(1A) of the Act,agriculture income should be derived from land, and the landshould be used for agricultural purpose and the immediate sourceof income should be from the land. The Tribunal also failed tonote that the assessee without performing the basic operationslike tilling, sowing of seeds, planting etc., on the land butsubsequent actions like weeding, digging the soil around thegrowth, tendering, prunning, cutting etc., would not besufficient to categorise them as agricultural operations. Hewould also submit that the Tribunal has wrongly relied on thedecision in the case of Commissioner of Income Tax vs. SoundaryaNursery (241 ITR 530). In support of his contention, herelied on the decision rendered by the Allahabad High Court inthe case of H.H.Maharaja Vibhuti Narain Singh vs. State of UttarPradesh (1966) 34 CCH 0268 ALLHC : (1967) 65 ITR 0364 and thedecision 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, hewould submit that the order impugned shall be set aside and theAppeal shall be allowed. 7. Mr.M.P.Senthilkumar, learned counsel for therespondent/assessee would submit that the Assessing Officer haserroneously treated the agriculture income as business income.Actually, income from nursery is an agriculture income and thesame is exempted under section 10(1) of the Income Tax Act. Inthe appeal preferred before the Commissioner of Income Tax(Appeals) against the order of the original authority, the claimof the assessee was allowed relying on the decision rendered inCIT vs. Soundarya Nursery (2000) (241 ITR 531) dated 5.8.1998,wherein the decisions rendered in the case of Raja benoy KumarSahas Roy (Supra) and Maharaja Vibhuti Narain Singh (Supra),relied on by the Assessing Officer, has been considered, andheld that even the plants grown in pots is an agriculturalactivity as they involve all the activities of agriculturefarming like seeding, weeding, watering, manuring etc.,..Aggrieved by the order of the appellate authority, the appealpreferred by the revenue before the Tribunal was also rightlydismissed based on the ratio laid down by the Hon'ble SupremeCourt and this Honb'le Court in several cases. Hence, theorder of the Tribunal does not warrant any interference and theAppeal is liable to be dismissed. 8. Heard the learned Standing Counsel appearing for therevenue/appellant and the learned counsel appearing for the https://hcservices.ecourts.gov.in/hcservices/ assessee/respondent and perused the materials on record. 9. On 20.06.2016, this Court issued notice of motion onthe following substantial question of law:-Whetheronthefactsandcircumstances of the case, the Tribunal wasright in deleting the disallowance made onagricultural income on the ground that the samewas exempt under Section 10(1) of the IncomeTax Act? However, at this stage of final hearing, this Court deems it fitto add the following substantial question of law also:-Is not the finding of the Tribunalbad, especially, when Explanation 3 to Section2(1A) was inserted by Finance Act, 2008 witheffect from 01.04.2009 and was applicable onlyfrom the assessment year 2009-10 and not forthe earlier assessment year? https://hcservices.ecourts.gov.in/hcservices/ assessee/respondent and perused the materials on record. 9. On 20.06.2016, this Court issued notice of motion onthe following substantial question of law:-Whetheronthefactsandcircumstances of the case, the Tribunal wasright in deleting the disallowance made onagricultural income on the ground that the samewas exempt under Section 10(1) of the IncomeTax Act? However, at this stage of final hearing, this Court deems it fitto add the following substantial question of law also:-Is not the finding of the Tribunalbad, especially, when Explanation 3 to Section2(1A) was inserted by Finance Act, 2008 witheffect from 01.04.2009 and was applicable onlyfrom the assessment year 2009-10 and not forthe earlier assessment year? 10. The Case of the respondent/assessee is that heowns an agricultural land to an extent of 23.03 Acres atVelichai Village near Kelambakkam and 16.93 Acres inChengalpattu and derived income from sale of replanted trees,flowers and creepers, saplings and seeds, rent for agriculturalland, share of profit and interest on capital from a firmengaged in agricultural operation. The respondent filed hisreturn of income for the assessment year 2007-08 on 24.10.2007declaring taxable income of Rs.3,47,238/- from plantscapebusiness being landscaping architect business and agriculturalincome of Rs.51,89,480/- from agricultural operation in thenursery owned by the assessee in Velichai Village nearKelambakkam. The assessment was completed under section 143(3)on 11.12.2009 on the assessed income of Rs.10,47,616/- andagricultural income of Rs.51,89,480/-. 11. The assessing officer reopened the assessmentorder and issued notice under section 148 of the Act. As persection 2(1A) of the Income Tax Act, agricultural income shouldbe derived from the land and the said land should have been usedfor agricultural operation. Then, there should be somethingdone on the land by human and technical agency to produce out ofland any crop, tree plantation and other agricultural produce inorder to determine whether a certain income is agricultural income, the immediate and effective source of income must beland. If it is not land, the income cannot be considered asagricultural income. He referred to the decision of the Hon'bleSupreme Court in the case of CIT vs. Raja Benoy Kumar Sahas Roy(32 ITR 466) wherein it has been held that without theperformance 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, cuttingetc, 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 of land,sowing of seeds, plating and similar operation of land. He hasalso relied on the decision of the Allahabad High Court in thecase of H.H.Maharaja Vibhuti Singh vs. State of U.P. (65 ITR3640) wherein it has been held that income from nursery is notan agricultural income unless maintained by the farmers as anadditional or necessary adjunct to the primary process ofagriculture for example paddy, nursery, nursery of tomatoplants. He has also referred to the decision of the Punjab HighCourt in the case of CIT Vs. Raja Bahadur Karmakya Narain Singh(161 ITR 325) wherein it has been held that there must be nexusbetween the income, land and agricultural operation.Eventually, based on the aforesaid decision, the AssessingOfficer disallowed the agricultural income of Rs.51,89,480/- byorder dated 22.3.2013. 12. Against that order, the respondent/assessee filedan appeal in ITA No.312/13-14/A-2 before the Commissioner ofIncome Tax (Appeals), Chennai, challenging the validity ofreopening the assessment u/s.147 and disallowance ofagricultural income, treating the same as business income –Rs.51,89,480/-. The appellate authority dismissed the appealinsofar as the first ground is concerned, viz., reopening of theassessment, holding that it is valid in law. However, withregard to the issue of disallowance of agricultural income ofRs.51,89,480/-, the claim of the assessee was allowed holdingthat the income from nursery is an agriculture income. 13. 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 nursery onland belonging to the assessee constitute agriculture income.The appellate authority has also referred to the decision of aDivision Bench of this Hon'ble Court in CIT vs. Soundarya https://hcservices.ecourts.gov.in/hcservices/ Nursery (2000) (241 ITR 531) dated 5.8.1998, and held that eventhe plants grown in pots is an agricultural activity as theyinvolve all the activities of agriculture farming like seeding,weeding, watering, manuring etc.,. At Paragraphs 8 and 9 ofthe judgment, it has been held as follows:- 8. All the products of the land, whichhave some utility either for consumption or fortrade or commerce, if they are based on land,would be agricultural products. Hence, it isnot the case of the revenue that withoutperforming the basic operations, only thesubsequent operations, as described in thedecision of the Apex Court have been performedby the assessee. If the plants described inthe decision of the Apex Court have beenperformed by the assessee. If the plants soldby the assessee in pots were the result of thebasic operations on the land on exependinghuman skill and labour thereon and it is onlyafter the performance of the basic operationson the land, the resultant product grown orsuch part thereof as was suitable for beingnurtured in a pot, was separated and placed ina pot and nurtured with water and by placingthem in the green house or in shade and afterperforming several operations, such as weeding,watering, manuring etc.,. they are made readyfor sale as plants; all these operations wouldbe agricultural operations. All this involveshuman skill and efforts. Thus, the plantssold by the assessee in pots were the result ofprimary as well as subsequent operationscomprehended within the term 'agriculture' andthey are clearly the products of agriculture. 9. So far as the seeds are concerned, weare surprised that, that question should havebeen raised at all by the Revenue, as it is notpossible for the seeds to exist without themother plants, and the mother plant, it isnobody's case, was not grown on land. It isalso not the case of the Revenue that the seedswere the result of the wild growth and not onaccount of cultivation by the assessee. Theseeds were clearly a product of agriculture andthe income derived from the sale of seeds, wasagricultural income.” 14. 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 theincome from nursery as agricultural income and the same isusefully 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 deemed tobe agriculture income.This amendment came to force with effect from 01.04.2009 and thesame is applicable from the assessment year 2009-10 onwards. 14. 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 theincome from nursery as agricultural income and the same isusefully 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 deemed tobe agriculture income.This amendment came to force with effect from 01.04.2009 and thesame is applicable from the assessment year 2009-10 onwards. 15. Following the aforesaid decision of SoundaryaNursery's case (supra), the Income Tax Appellate Tribunal upheldthe order of the appellate authority and dismissed the appeal ofthe revenue. 16. The decisions relied on by the Assessing Officer,viz., Raja Benoy Kumar Sahas Roy (Supra) has been considered indetail by the Division Bench of this Hon'ble Court in CIT vs.SoundaryaNursery (2000) (241 ITR 531) dated 5.8.1998, and thereafter, atParagraph 7 of the Judgment, this Court held as follows:- “7. Our attention was then invitedby learned counsel to the decision of theSupreme Court in the case of CIT V. RajaBenoy Rumor Sahas Roy [(1957) 32 ITR 466],which is the leading case of “agriculture”.It was held therein that agriculture in itsprimary sense denotes the cultivation of thefield and is restricted to cultivation of theland in the strict sense of the term, meaningthereby tilling of the land, sowing of theseeds, planting and similar operations on theland and these are basis operations, whichrequire the expenditure human skill andlabour upon the land itself. The Apex Courtfurther held that besides the basicoperations, the subsequent operations wouldalso be comprehended within the terms ofagriculture, and such subsequent operationsare illustrated as weeding, digging the soilaround the growth, removal of undesirableundergrowth and all operations which foster the growth and preservation of the same notonly from insects and pets, but also fromdepradation, from outside, tending, pruning,cutting, harvesting and rendering the producefit for the market, which would all beagricultural operations, when are taken inconjunction with the basic operations. 17. Another decision relied on by the AssessingOfficer, viz., Maharaja Vibhuti Narain Singh (Supra), has alsobeen considered in detail by the Division Bench of this Hon'bleCourt in CIT vs. Soundarya Nursery (2000) (241 ITR 531) dated5.8.1998, and at Paragraph 6 of the Judgment, this Court held asfollows:- “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 cannever be regarded as agricultural operations.In support of that submission, counsel referredto the decision of the Allahabad High Court inH.H.Maharaja Vibhuti Narain Singh v. State ofU.P. ([1967] 65 ITR 364, wherein the Court madean observation which was clearly obiter thatagriculture cannot be carried on in pots, as inthat case, a large number of coconut plantswere nurtured on land in the nursery.” 18. In the explanation offered to the AssistantCommissioner of Income Tax, Business Circle – II, Nungambakkam,Chennai, the assessee/respondent herein has submitted that hehas been doing Landscaping Architect from 1981 and running twobusiness concerns viz., plantscape and Flower and Petals. He isgrowing plants in his lands and for that purpose, he hasincurred expenses for tilling of land, sowing of seeds, andpurchase of clay sand and fertilizers. As such, agriculturaloperations are carried on the land. 18. In the explanation offered to the AssistantCommissioner of Income Tax, Business Circle – II, Nungambakkam,Chennai, the assessee/respondent herein has submitted that hehas been doing Landscaping Architect from 1981 and running twobusiness concerns viz., plantscape and Flower and Petals. He isgrowing plants in his lands and for that purpose, he hasincurred expenses for tilling of land, sowing of seeds, andpurchase of clay sand and fertilizers. As such, agriculturaloperations are carried on the land. 19. From the materials on record, it could be seenthat, it is not the case of the Assessing Officer, at the firstinstance that the assessee has not produced any details of theexpenditure incurred in raising flowers and petals in pots. Asrightly pointed out by the learned counsel for the respondent,had the issue of expenditure been pointed out at the time ofassessment, the assessee was bound to explain. Assessmentorder does not disclose that because of the fact that theassessee did not prove expenditure, income from flowers andpetals was added. He has only said without performing basicoperations, income generated cannot be termed as agricultural income. Even during the appeal, the revenue has not raisedsuch issue. Such contentions are made for the first time,before this Court. The assessment order has to fall orsucceed on the contents of the order. A fact which was neverraised in the assessment proceedings cannot be introduced forthe first time, in an appeal under Section 260A, for an answer.Needless to state that questions of law arise on the factsconsidered by the authorities with reference to the provisionsand for the above reasons, we are of the view that the revenuecannot raise the said issue at this stage. 20. In the light of the concurrent findings of theappellate authority and the appellate Tribunal and in the lightof the above decisions, this Court is not inclined to interferewith the impugned order of the appellate Tribunal. Thesubstantial questions of law are answered against the revenue.The impugned order of the Income Tax Appellate Tribunal isconfirmed and the Tax Case Appeal is dismissed. No order asto costs. Sd/-Asst. Registrar./true copy/Sub Asst. Registrar. asvmTo The Commissioner of Income Tax,Non-Corporate Circle -2,Chennai – 34. 2 The Income Tax Appellante Tribunal,A Bench, Chennai 3 The Assistant Commissioner of Income TaxCircle II, Chennai +1 CC Mr. T. Ravi Kumar, Advocate Sr.No.49860+1 CC Mr. Philip George, Advocate Sr.No.49614 CTK (CO)MD : 22/10/2016