Tissue Culture Cannot Be Isolated from Nursery Activity: ITAT Treats Entire Nursery Receipts as Agricultural Income Exempt u/s 10(1) [Read Order]

The Income Tax Appellate Tribunal (ITAT), Bangalore, in a recent decision, has ruled that income from nursery operations involving tissue culture must be treated as agricultural income exempt under Section 10(1) of the Income Tax Act, 1961. The ruling clarifies that tissue culture, when used as part of plant propagation in nursery farming, cannot be taxed as business income merely because part of the process occurs outside the soil.

The assessee, Satyendra Kumar Gutgutia, engaged in floriculture and nursery activities under the name “Florence Flora Farm,” owned extensive agricultural lands in Bangalore and Hassan districts. He cultivated plants, seedlings, and flowers for commercial sale and declared the corresponding receipts as agricultural income.

However, the AO observed that part of the nursery’s propagation involved tissue culture, a process of generating plants from tissues of mother plants in controlled laboratory conditions, and concluded that such operations did not constitute “agricultural activity” as they were not performed on land.

Relying on the ITAT’s earlier decision in Invitro International Pvt. Ltd., the AO held that tissue culture was a scientific process detached from basic agricultural operations such as tilling, sowing, or planting in soil.

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Consequently, ₹5.96 lakh attributable to tissue culture was treated as business income. The Commissioner (Appeals) upheld the AO’s view, emphasising that the absence of cultivation on the soil disqualified the income from agricultural exemption.

Before the Tribunal, the assessee argued that his operations were agricultural in nature and that tissue culture was merely an initial step aiding plant multiplication before transplantation to soil. It was contended that the process could not be separated from the overall cycle of plant growth and that nursery income had consistently been accepted as agricultural in previous years.

The assessee further relied on Explanation 3 to Section 2(1A), inserted by the Finance Act, 2008, which expressly deems income from saplings or seedlings grown in nurseries to be agricultural income, regardless of any direct nexus with land.

The two-member bench comprising Keshav Dubey (Judicial Member) and Waseem Ahmed( Accountant Member) sided with the assessee, distinguishing his case from Invitro International by observing that in Gutgutia’s case, the tissue culture was not a standalone commercial activity but an intermediate step in the larger cultivation process.

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The Bench emphasised that the nursery’s end products, plants, flowers, and seedlings originated from basic agricultural operations involving soil and human labour on farmland. Hence, segregating a single stage of tissue culture for taxation was unwarranted.

Referring to judicial precedents, including the Pune ITAT’s decision in Kisan Biotech and the Madras High Court’s ruling in CIT v. Soundarya Nursery, the Bench reiterated that income derived from nursery operations, even when aided by scientific techniques like tissue culture or greenhouse methods, retains its agricultural character.

The tribunal directed the AO to treat the income as agricultural income exempt under Section 10(1), noting that activities like tissue culture, though technologically advanced, remain inseparable from agricultural propagation when integral to nursery cultivation.

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