The Income Tax Appellate Tribunal ( ITAT ) in Mumbai recently ruled that income from the sale of white button mushrooms cultivated indoors should be classified as “agricultural income” under Section 10(1) of the Income Tax Act ( ITA ), exempting it from income tax and not as “Business Income”.
This ruling, dated October 14, 2024, was given in an appeal by the assessee/ appellant Fresh Bowl Horticulture Pvt. Ltd., who contested an earlier assessment treating its income from mushroom cultivation as taxable “business income.”
Get a Handbook on TDS Including TCS as Amended up to Finance Act 2024, Click Here
The assessee-company, a private limited company incorporated in 2013, operates a 36.5-acre facility in Kurnool, Andhra Pradesh, where it cultivates white button mushrooms through a method of vertical farming within controlled environments. In its 2020 tax return, the assessee reported Rs. 22,27,04,010 in revenue from mushroom cultivation, claiming it as agricultural income and, therefore, exempt. However, during the assessment, tax authorities reclassified this income as business income, noting that the mushrooms were cultivated indoors on racks, not in traditional open soil fields. The Assessing Officer (AO) cited various judicial precedents, arguing that mushroom farming, due to its use of controlled conditions and its reliance on compost instead of land, constituted a business activity.
The AO’s determination referenced case law, arguing that the cultivation of mushrooms did not align with the classification of agricultural income as it did not involve tilling land or growing in an open environment. Specifically, the AO argued that mushrooms, scientifically classified as fungi rather than plants, do not fit within the standard agricultural framework as outlined in earlier judgments and thus, their sale should be treated as taxable business income. Consequently, the officer assessed the assessee’s earnings of Rs. 22,27,72,230 after adding back this amount as business income.
In its appeal, the assessee-company argued that it adhered to all statutory conditions under Section 2(1A) of the tax legislature, which defines agricultural income. The company demonstrated that it performed core agricultural operations on land to produce mushrooms, including preparing a soil substrate, using organic materials like paddy straw and manure, and managing the growing process within the controlled environment necessary for mushroom cultivation.
Get a Handbook on TDS Including TCS as Amended up to Finance Act 2024, Click Here
The assessee-company referenced the Ministry of Agriculture’s 1997 notification, which recognizes mushroom production as an agricultural activity. The assessee-company’s arguments highlighted its reliance on land for cultivation, asserting that the use of prepared soil and a controlled setting does not alter the agricultural nature of the operation.
The ITAT bench of Mr Amit Shukla and Mr Girish Agrawal reviewed the facts and examined the precedent set by the Special Bench in DCIT vs. Inventaa Industries Pvt. Ltd., which addressed similar issues. In that case, the Tribunal found that controlled cultivation practices do not preclude an agricultural classification when operations are fundamentally linked to soil use and the produce derives nutrition from it. The Tribunal held that, although mushrooms are grown in a controlled environment, their cultivation depends on a prepared soil substrate that aligns with agricultural operations as defined in tax law.
Get a Handbook on TDS Including TCS as Amended up to Finance Act 2024, Click Here
Thus, the ITAT concluded that the assessee’s activities constituted agricultural operations, with income from the cultivation and sale of mushrooms qualifying as agricultural income. Accordingly, the income claimed under Section 10(1) of the tax statute was deemed exempt, and the appeal was allowed in the assessee’s favor.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
