M/S.A.G.BIOTECH LABORATORIES [INDIA] LTD vs. INCOME TAX OFFICER

7'. a 0 Page 3 of 32 THE HON'BLE SRI JUSTICE P.SAM KOSHY AND THE HON'BLE SRI JUSTICE ARSING RAO NANDIKONDA INCOME TAX TRIBUNAL APPEAL Nos.g1 and 92 Of 2OO8- COMMON JUDGMENT: (per the Hon'ble Sri Justrce P.Sam Koshy) Heard Mr. A.V.A. Siva Kartikeya, learned counsel appearing on behalf of Mr. A.V. Krishna Koundinya, learned counsel for the appellant; and Ms. Bokaro Sapna Reddy, learned Senior Standing Counsel for the Income Tax Department appearing for Mr. J.V. Prasad, learned Senior Standing Counsel for th'e Income Tax Department, for the respondent. 2. Income Tax Tribunal Appeal No.91 of 2008 is filed by the appellant / assessee under Section 2604 of the Income Tax Act, 1961 (for short the'Act') assailing the order passed by the Income Tax Appellate Tribunal, Hyderabad Bench 'B' Hyderabad (for short the 'ITAT') in I.T.A.No.1172/HVd/2006, for the assessment year 2OO2-O3, decided on 28.09.2007. Similarly, Income Tax Tribunal Appeal No.92 of 2008 is filed by the same assessee under Section 260A of the Act assailing the order passed by the ITAT, in

Page 4 of 32 I.T,A.No.1173 lHyd/2006, for the assessment year , 003-04, which also stands decided on 28.09.2007. 3. Since the issue involved in both the Appeals s one and the same, the parties to be dispute being the ';, me, and the contentions raised on either side also being the sar e, we proceed to decided the two Appeals by this common judgmer:. 4. For convenience, the facts in Income Tax l-ibunal Appeal No.91 of 2008 are discussed hereunder. 5. The appellant M/s.A.G. Biotech Laboratorre ; (P) Ltd. is engaged in the business of micro-propagation of )lants through tissue culture technology. The primary dispute in th 3 instant case is classification of income earned by the assessee f-r m the sale of tissue-cultured plants for the assessment year 2002-03. The assessee claimed that this income should be treate I as agricultural income exempt from tax under Section 10( 1) c f the Act. The lncome-tax Officer rejected this claim and treatec .he income as business income subject to taxation. The tissue ( rlture process adopted by the assessee involves taking tissue samples from mother plants grown on land, culturing these tiss r rs in a clinical .)

7 (O Page 5 ot 32 laboratory under sterile conditions, multiplying the plant material through micro-propagation techniques, and subjecting the cultured plants to various processes to make them suitable for withstanding normal atmospheric conditions before finally selling these plants in the market. Howevel the ITAT examined the entire process undertaken by the assessee and noted that through micro- propagation, a single explant can be multiplied into several thousand plants in less than one year, representing a significant technological advancement over traditional agricultural methods. The major part of the activities was performed in a laboratory under sterile conditions using sophisticated scientific technology and research, while land was used only incidentally to grow mother plants from which tissues were extracted. 6, Thus, the ITAT held that plant were not a direct result of basic agricultural operation on land but rather the outcome of advance scientific methods. 7. Now the question that arise for consideration by this Bench is "whether the resultant product sold in the market was a direct result of basic agricultural operations carried out on land involving human skill and labour, or whether it was primarily the outcome of '', ]ffi*

Page 6 of 32 scientific and technological processes conduc: d in clinical laboratories, thereby constituting business or prof€ isional income rather than aqricultural income?" 8. The primary contention of the learned (( unsel for the appellant was that their operations were roote(! in agriculture activities, as they cultivated mother plants on le,l ,ed agriculture land. These mother plants served as the source material from which tissues were extracted for micro-propa,l ltion process. Further, mother plants required the performanr:, of all basic agricultural operations like preparing and tilling tlt, soil, planting seeds or saplings, regular water,ng and irrigatior, application of manures and fertilizers, weeding, and ongoing rr; intenance and care. Without these foundational agricultural activ t es carried out on land involving human skill and labor, their busines; would simply not exist. 9. Learned counsel for the appellant further cont rnded that the tissue extracted from these mother plants was not t n independent creation but a direct derivative of the agricultural pr:1uce grown on the land. Therefore, he argued that the resultanr income from selling plants propagated from this agricultural ;,urce material

7 i'O Page 7 of 32 should be treated as agricultural income, as the entire chain of production origlnated from and depended upon basic agricultural operations performed on land. 1O. Learned counsel for the appellant relying upon the decision of the Gujarat High Court in Shri Puransingh M. Verma vs. CIT1 drew the attentions of this Bench in comparing with the nursery operations that were held to constitute agriculture income. He argued that just as nursery businesses involve basic agricultural operatrons like tilling, sowing, planting, watering, and manuring, which qualify the resulting income as agricultural despite involving pots and controlled environments, tissue culture operations similarly require fundamental agricultural activities after the laboratory phase. He further submitted that once the plantlets are micro-propagated through scientific methods under sterile conditions, they must still be hardened and grown in actual land where all the same basic agricultural operations become necessary to achieve better yields. This process involves human skill and labour on the land itself transforming the scientifically developed material into marketable produce through traditional cultivation ' 2014 sCC onLine Guj '13112

('r Page I of 32 methods. He therefore contended that since the ir r ome ultimately derives from plants that undergo complete agricu l ,.rral operations on land, just as nursery plants do, the income fror r tissue culture should logically be treated as agricultural inco I e rather than business income, especially given that the Gujir at High Court recognized nursery income as agricultural despite its commercial and scientific elements. 11, Similarly, the learned counsel for the appell; r t relied on the decision of the Madras High Court in the cas: of CIT vs. Soundarya Nursery2 wherein it was held that i,t:ome from the sale of plants grown in pots constituted agricultural ircome because the plants were the result of basic agricultural of ( rations carried out on land, even though they were ultimately solc in pots rather than directly from the ground. Similarly, they too tv rre engaged in growing mother plants through agricultural operat ( ns from which they derived tissue that was then used to propag r e more plants through scientific methods. Therefore, the interrr t diate steps of tissue extraction and laboratory propagation should rot change the essential agricultural character of the income, just ls transferring 2 2qt trn sso

7 ? Page 9 of 32 plants to pots did not change the agricultural nature of income in the Soundarya Nursery (supra). Therefore, he argued that the use of modern scientific techniques in their process was merely an enhancement of agricultural methodology rather than a fundamental departure from agriculture itself. ,-2. Learned counsel for the appellant further contended that modern agriculture is no longer limited to traditional methods of sowing seeds and harvesting crops, but now encompasses a wide range of scientific applications including hybrid seed development, genetic selection, controlled environment cultivation, precision farming, and biotechnology. Moreoveri he argued that tissue culture technology is fundamentally an agricultural technique which is more efficient, reliable, and productive method of plant propagation that serves the ultimate purpose as traditional agricultural methods, namely the production of plants for cultivation and consumption. Therefore, adopting a narrow or archaic definition of agriculture that excluded modern scientific methods would be contrary to the legislative intent behind Section 2(1A) of the Act. 13. Lastly, the learned counsel for the appellant contended that tissue culture technology provided substantial and critical support

c., Page 10 of 32 to Indian farmers and the agricultural sector . s a whole by enabling the production of high-quality, dis;r ase-free, and genetically uniform planting material for fruits, s I ces, plantation crops, and other agricultural products. This technrr )gy has helped farmers significantly increase their productivity, re J rce crop losses due to disease, ensure consistency in crop qualit), and ultimately improve their per capita income and standard c I living. Thus, treating their income other than agriculture incom: is illogical and unjust and that their activities had been officially ecognized and classified as agricultural by multiple authorities, including the Government of Andhra Pradesh and various bankir 7 and financial institutions. These governmental and financial it rdies provided them with agricultural incentives, subsidies, and lt rns specifically on the basis that their tissue culture operati lrs constituted agricultural activity. Therefore, the classification by competent authorities who had examined their operations in l:tail should be given substantial weight in determining the true ature of their business for income tax purposes. 14. The learned counsel for the appellant also pl;r, ed reliance on the following table which shows the difference betwr: :n nursery and

7 I Page 11 of 32 tissue culture activities, which for ready reference IS reproduced hereu nd e r: Nursery / traditional production plants 1. Traditional production of Plants through grafting, budding, layering, cutting and seedltngs and which requires large land area and will take longer period for propagation. 2 The primary source of the Plants in the nursery production was the large number of mother plants which are growing ln blockson the land and requires human labour and manures and fertilizers. The mother Plants also growing on land in raised beds under Green House or shade house. Nursery activity req uires, mother plants, nursery green houses, shade and houses skilled manpower and regular sl. No. Tissue culture / micro- propagation plants production Tissue culture ts the cultivation of plant tissue or organs on specially formulated soil nutrient media. In this way, thousands of coPles of a plant can be produced in a short time. The primary source of the Plants in the trssue culture activities was the mother plant, which is reaTed on earth / land and for which certainly contribution of human labour and energy was essential, The no. of mother plants are less comPared to nursery production Requires small tissues or organs of the mother plant for ProPagation Rapid propagation of superior plant while maintaining its genetic make up. Requires large parts of the mother plant and sometimes whole plant used for propagatron Propagation oF plants slow and genetic variation may occuT during propagation. 3 4 Tissue culture aPPlication onlY requires a sterile workPlace /containers based on land, mother plants growing farm, nursery and 5

Page t2 of 32 manures and fertilisers, pestrcides and watering. Production of the plants in containers/pots/poly bags rn open area in polybags and containers with more soll, sometimes carry the pest and diseases. In the nursery production also, the mother plants are the result of the basic operations on the land on expendrng human skill and labour thereon and it is only after the performance the basic operations on the land, the resultant product qrown or such part thereof as was suitable for being nurtured rn a pots/poly bags for propagation, was separated and placed in a pots/poly bags 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 pla nts, all these agricultural operations Involves human skill and effort. Thus, the plants sold by through nursery propagation qreen house/shade rouse and skilled manpower and re(ll lar nanures and fertilisers and watt r ng The Production ,r the plants in sterile contarners t'- rt allows them to be moved with lreatly reduced chances of transr rittinq diseases, pests and pathoge r ln the trssue cult re, the mother plants are the r.s.rt of the basic operations on the . rd on expending human skill and l.l our ihereon and itis only after the t ( {ormance of the basic operations r r the land, the resultant product ( r :wn or such part thereof as was st table for being nurtured rn a stei i 3 containers for mass propagation, was separated and placed in a p) s/poly bags and nurtured with wat l and by placing them in the green I ruse or in shade and after peri rming several operations, sucl- as weeding, watering, manurlnq et.., they are made ready for sa e as plants, all these agricultLr rl operations involves humarr s <lll and effort. Thus, the plants : old by through tissue culture ropagation in pots/poly bags we 3 the result of primary as well as subsequent t i I 6 7

7 0 8 Page 13 of 32 in pots/poly bags were the result of prrmary as well as subsequent operations comprehended within the terms "agriculture and theY are clearly the Products of ag n cu ltu re. Basic operations oF agriculture were carried out on land in greenhouse / shade house which require human skill and labour, and subsequent oPerations, no matter how sophisticated, were only to foster the growth and to protect the produce, therefore, Income from these oPerations can only be said to be agricultural Income. Therefore, merely because a greenhouse was Involved, the nature of operations would not change. To maintain mother stock under openly condition and sometimes diseases escaped and transmitted through nursery propagation. operations comprehended within the terms "agriculture" and theY are clearly the products of agriculture. Basic operations of agriculture akin to nursery production were carried out on land in greenhouse which require human skrll and labour, and subsequent operations, no matteT how sophisticated, were onlY to foster the growth and to protect the produce, therefore, Income from these operations can only be said to be agricu ltural Income. Therefore, merely because a .greenhouse was Involved, the nature of operations would not change. To maintain mother stock Plants under controlled condition, elimination of diseases escaped from plant propagative material. 9 Tissue culture activities are to prepare seedlings on scientific lines: that the mother plants are grown onprepared beds on lands owned by It and the plants are then micro- propagated that the resulting seedlings are transplanted in 1 Nursery activities are to Prepare seedlings on scientific Iines: that the mother plants are grown onprepared beds on lands and the plants are then grafted or budded; that the resulting grafts are transplanted in suitable

h Page 14 of 32 containers and are reared in green houses or rn shade and after they take root, they are tra nsmitted to large contarners filed with top sorl and manure, etc, t ill they establish themselves; and there after suita ble conta ine.s green houses or r they take root, th,l to large container-. and manure, dtc, I themselves; and t plants are sold. rnd are reared in :;hade and after are tra nsm itted iled with top soil ll they esta blish €rre after those plants are sold 15. Per contra, the learned Senior Standing (l )unsel for the Income Tax Department contended that the incorr: derived from the sale of tissue culture plants constitutes as b-;iness income. The statutory definition of the agricultural incomr: under Section 2(1A) of the Act requires that income must be de -ived from the land through the basic agricultural operations invol r ng human skill and labour and that the appellant's activities faile: to satisfy this fundamental requirement. Further; she argued I rat while the appellant did maintain some mother plants on le:: ed agricultural land, this represented only an incidental and pre ininary step in their overall business process, rather than the subs :antive activity from which income was generated. However, the si'l rificant portion of the appellant's operations took place not on agri(r rltural land but rather in sophisticated clinical laboratories under st rrile conditions where tissues extracted from mother plants werr subjected to

7 0 Page 15 of 32 complex scientrfic processes of micro-propagation, multiplication, and hardening. These laboratory operations were fundamentally scientific, technological and industrial in character rather than agricultural, involving specialized technical knowledge, expensive equipment, controlled environmental conditions and scientific research rather than the traditional agricultural activities of tilling, sowing, watenng and harvesting that the legislature contemplated when defining agricultural income for tax exemption purposes.' 16. Furthermore, the learned Senior Standing Counsel argued that judicial precedents cited by the learned counsel for the appellant were factually distinguishable and legally inapplicable to the present case, and that the appellant had m ischa racterized the true nature of the holdings in those cases to support their position. With respect to the Madras High Court's decision in Soundarya Nursery (supra) and the Gujarat High Court's decision in Shri Puransingh M. Verma (supra), she contended that the case involved a fundamentally different fact pattern where plants were actually grown on land through traditional agricultural operations and were merely transferred to pots for convenience of sale and transportation. Whereas in the appellant's case, the plants sold

Page 16 of 32 were not the direct product of agricultural operatrc ns on land but rather were created through laboratory multipli: ttion of tissue samples in a scientific process that bore little resemblance to conventional farming. Moreover, in the nursery :ase the basic agricultural operations performed on land were tt e primary and essential activities that produced the plants tl at were sold, whereas in the appellant's tissue culture business, ,he agricultural operations on land were merely preliminary steps t ) obtain source material, and the actual commercial product, arr thousands of micro- propagated plantlets. was manufactured ir the laboratory through scientif ic technology. 1"7, Learned Senior Standing Counsel rejectecl he appellant's reliance on classifications made by the State C ( vernment and various banking institutions that had treated l1e appellant's activities as agricultural for purposes of provirl ng incentives, subsidies. and financial assistance. Therefore, the: : classification by other governmental departments and financial ir ;titutions while perhaps appropriate for the limited purposes for v/ lich they were made, such as determining eligibility for agricultur'; I development schemes or agricultural credit facilities, had no bea r ng whatsoever

7 0 Paqe 11 of 32 on the proper classification of income under the Act which is governed by specific statutory definitions and judicial interpretations that must be applied uniformly across all taxpayers. 18. Thereafter, the learned Senior Standing Counsel argued that the definition of agricultural income in Section 2( 1A) of the Act is a matter of central legislation that cannot be varied or modified by state government policies or banking practices and that permitting such external classifications to influence income tax assessments would create uncertainty, inconsistency, and opportunities for manipulation in tax administration. Therefore, different statutes and different administrative schemes may legitimately adopt different definitions and classifications appropriate to their respective purposes, but for income tax purposes, only the statutory definition in the Act is interpreted. Furthermore, she argued that the motivations behind the state government cla ssifications, such as promoting biotechnology industries, encouraging rural employment, or supporting agricultural development, while laudable from a policy perspective, could not override or supplant the clear legal requirements established by the parliament in the tax legislation.

Page 18 of 32 19. Lastly, the learned Senior Standing Counsel rontended that the social utility and beneficial impact of tissue cul ure technology on Indian agriculture and farmers' welfare are of ( conomic policy and social benefit which could not justify treat ng income as agricultural when it did not meet the statutory defi rition and legal requirements established by the Act. Furthel the learned Senior Standing Counsel argued that the tax system must le administered according to law rather than according to symp athy or policy preferences, and that while tissue culture technolr 7y may indeed provide valuable support to farmers and contribute to agricultural productivity, this fact alone cannot transform wh:: is essentially business income from a scientific and technological enterprise into a tax-exempt agricultural income. Moreoveq if .he legislature wished to provide tax incentives or exemptions fo - bio-technology businesses that support agriculture, it could do so e> plicitly through appropriate amendments to the tax law, bu1 such specific legislative provisions are absent. Therefore, th() Revenue was bound to apply the existing statutory definitions and could not create de-facto exemptaons based on the perceiveil social utility of particular businesses. Thus, the income from thr: sale of tissue

7 I Page 19 of 32 cultured plants must properly be assessed as business income subject to tax, and accordingly conFirm the assessment orders treating the appellant's income as taxable business income for the assessment year 20O2-03. 2fJ. Having heard the contentions put forth on either side and on perusal of records. it would be relevant at this juncture to take note of the definition of agriculture as per the Provisions of the Finance Act, 2008, which reads thus: "4. Widening the scope of "agrtcultural income" 4.1 "Agricultural tncone" is defined in sub-section (1A) of section 2 of the Act to mean, inter-alia, income derived from land which is. situated in India and is used for agricultural purposes. Such agricultural income is exempt from tax under sub-section (1) of section 10 of the Income-tax Act, 1961. It has been held by iudicial authorities that whether income from nursery operations constitutes agricultural income or not. will depend on the facts of each case. If the nursery is maintained by carrying out basic operations on land and subsequent operations are carried out in continuation of the basic operations, then income from such nursery would be agricultural income not liable to tax under section 70. However, if the nursery is maintained independently without resorting to basic operations on land, then income from such nursery would not be agricultural income and would be liable to be included in the total income. 4-2 With a view to giving finalitY to the issue, an Explanation in section 2 of the Income-tax Act, has been inserted providing that any income derived from saplings or seedlings grown in a nursery

(. Page 20 of 32 shall be deemed to be agricultural income. Accordingl / trrespective of whether the basc operatrcns have been carried oL,t (,1 land, such income will be treated as agricultural income, thus c Lalifyinq for exemption under sub-section (1) of section 10 of the t('. 4.3 Applrcability: This amendment has been made a) tlicable with effect from 1" Aprtl, 2009 and shall according t apply for assessment year 2009- 1O and subsequent assessment ears." 2L. It would also be relevant to take note of a fe\, judgments on the subject matter. Firstly, the Madras High CoLrrt in the case of Soundarya Nursery (supra) held in paragraph Nos 6,8,9 and 10 as u nder: "6. The Tribunal, after considering all the relevant facts as also the applicable law, concluded that the assesseeb actt)\es are to prepare seedlings on scientific lines) that the oth plants are grown on prepared beds on lands owned by it and t1 | plants are then grafted or budded; that the resulting grafts are tre Eplanted in suitable containers and are reared in green houses or it shade and after they take root, they are transmitted to large coi ainers filled with top soil and manure/ etc., till they establish ther selves; and thereafter those plants are sold and that the primary s ,urce of the plant is the mother plant, whtch is reared on earth zr 7 for which activities, certainly contribution of human labour anLl energy are essential. 8. Our attention was then invited by learned counsel t( he decisiotl of the Supreme Court in the case of CIT v. Raja E< 1oy Kumar Sahas Roy, [1957] 32 ITR 466, which is the lead, tg case of "agriculture". It was held therein that agriculture ir its primary sense denotes the cultivation of the field and is .stricted to

7 Page 21 of 32 cultivation of the land in the strict sense of the term, meantng thereby tilling of the land, sowing of the seeds, planting and simtlar operations on the land and these are basic operations, which requre the expenditure of 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 undegrable undergrowth and all operations which foster the growth and preservation of the same not onlY from insects and pests, but also from depradation, from outside, tending, pruning, cutting, harlesting and rendering the produce fit for the market, which would atl be agricultural operations, when taken in coniunction with the basic operations. 9. Atl 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. Here, 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 sold by the assessee in pots were the result of the basic operations on the land on expending 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 tn 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 questions would be agricultural operations all this involves human skill and effort. Thus, the plants sold bY the assessee in pots were the result of primary as well as subsequent operations

CJ 22. The Hon'ble Supreme Court in CIT v. Benol' Kumar Sahas Roy3 held in paragraph Nos.89 and 91 as under: Page 22 of 32 comprehended within the term "aqriculture" and the / the products of agriculture. 70. So far as the seeds are concerned, we are surprise question should have been raised at all bY the Revenu. possible for the seeds to exist without the mother pl.t mother plant, it is nobodY's caset was not grown on ler not the case of the Revenue that the seeds were lhe t wtld growth and not on account of cultivation by the .s seeds were clearly a product of agriculture and the in'\ from the sale of seeds, was agncultural income." "89. We have, therefore, to consider when it can be s land is used for agricultural purposes or agricultural o, performed on it. Agriculture is the basic idea ttr t expressions "agricultural purposes" and "agriculturat and it is per nent therefore to enquire what is the c) the term "agriculture". As we have noted above, the tI in which the term agnculture is understood is agar cultra - cultivation i.e. the cultivation of the field and i understood only in that sense, agriculture would be r) to cultivation of the land in the strict sense of the t? thereby, titling of the land, sowing of the seeds, plantir'! operations on the land. TheY would be the basic opt would require the expenditure of human skill and labc land itself. There are however other operations whiclt be resorted to bY the agriculturist and which a't necessary for the purpose of effectively raising the ) are clearly I that, that as it is not ts, and the 1. It is also )sult of the ;essee. Ihe me derived tid that the :rations are erlying the operations" notation of mary Sense field and the term is tricted only m meaning and stmilar rations and tr upon the \ave qot to absolutely 'oduce from t ltosz; sz tTR 466 1957 scc onLine sc 34

Page 23 of 32 the land. They are operations to be performed after the produce sprouts from the land e.g. weeding, digging the soil around the growth, removal of undesirable under-growths and all operations which foster the growth and preserve the same not only from insects and pests but also from depradation ffom outside, tending, pruning, cutting, harvesting, and rendering the produce fit for the market. The latter would all be agricultural operations when taken in conjunction with the basic operations above described, and it would be futile to urge that they are not agricultural operations at all, But even though these subsequent operations may be assimilated to agricultural operations, when they are in conjunction with these basic operations, could it be said that even though they are divorced from these basic operations they would nevertheless enloy the characteristic of agricultural operations? Can one eliminate these basic operations altogether and say that even if these basic operations are not performed in a given case the mere performance of these subsequent operations would be.tantamount to the performance of agncultural operations on the land so as to constitute the income derived by the assessee therefrom agricultural income within the definition of that term? 97, In considerinq the connotation of the .term "agriculture" we have so far thought of cultivation of land in the wider sense as comprising within its scope the basic as well as the subsequent operations described above, regardless of the nature of the products raised on the land. These products may be grain or vegetables or fruits which are necessary for the sustenance of human beings including plantations and groves, or grass or pasture for consumption of beasts or articles of luxury such as, betel, coffee, tea, spices, tobacco etc., or commercial crops like, cotton, flax, jute, hemp, indigo etc. All these are products raised from the land and the term "agriculture" cannot be confined merely to the production of grain and food products for human beings and beasts

(: Page 24 of 32 as was saught to be done by Bhashya mAYyanqar, 1.. t lvlurugessa Chetti v. Chinnathambi Goundun [(1901) ILR 24 MaIl '>-1, 123] or Sadashiva Ayyar, 1., in Ralah of Venkattq r v. Ayyappa Reddi [(1913) ILR 38 Mad 738] but must be ,i ) erstood as comprising all the products of the land which havt ;ome utiltty either for consumption or for trade and commerce ar t would also include forest products such as timber, sal and t i 'asal trees, casuarina plantations, tendu leaves, horranuts etc." 23. The Gujarat Hrgh Court in the case of Shri I uransingh M Verma (supra) held as under "lf the term "aqriculturc "is thus understood as cttr-t,t its scope the basic as utell as subsequent operations tt of agriculture and the raising on the land of produ(t; some utility either for consumption or for trade anrl c will be seen that the term "agriculture "rerei'.'r interpretation both in regard to its operations as welt I of the same'. Neveftheless there is present all throu(tl ( idea that there must be at the bottom of it cultivatiott . sense of tilling of the land, sowing of the seeds, ,) similar work done on the land itself This basic con( t essential sine qua non of any opeiation pertormed constituting agricultural operation. If the basic operatit't the rest of the operations found themselves upon the these basic operations are wanting the subsequent rt1 not acquire the characteristic of agricultural operati(r operations no doubt require the expenditure of hum.r skill but the human labour and skill spent in the per-for r basic operations only can be said to have been spent LE The human labour and skill spent in the performance d operations cannot be said to have been spent on tl ( ising within the process which have tmmerce, it ; a wider the results )t the basic ' land in the lnting, and )tion is the 'n the land s are there, ame. But if erations do ;. All these labour and 'ance of the >n the land. subsequent la nd itself,

7 Page 25 of 32 though it may have the effect of preserving, fostering and regenerating the products of the land. This distinction is not so important in cases where the agriculturist performs these operations as a part of his integrated activity in cultivation of the land. Where, however, the products of the land are of spontaneous growth, unasststed by human skill and labour, and human skill and labour are spent merelY in fostering the growth, preservation and regeneration of such products of land, the question falls to be considered whether these subsequent operations performed by the agriculturist are agricultural operations and enjoy the characteristic of agricultural operations. " IEmphasis Supplied] 6.2 In the case of Green Gold Tree Farmers P. Ltd. (supra), similar case wherein the assessee also used to carry on nursery business came up for consideration before the Uttarakhand High Court. The Uttarakhand High Court relying upon the decision of the Apex Court in the case of Raja Benoy Kumar Sahas Roy (supra) held that sale proceeds of the land belonging to the assessee constituted income from agriculture and hence should be exempted from tax under the Act. The relevant paragraphs are quoted as Linder: The terms "agriculture" and "agricultural purposes" not having been defined in the Indian Income-tax Act, but necessarily fall back upon the general sense in which they have been understood in common parlance. "Agriculture" in its root sense. means a geaL a field and cultivate, cultivation of field which of course implies expenditure of human skill and labour upon land. Turning to the dictionary meaning of "agriculture", Webster's New International Dictionary describing it as the art or science of cultivating the ground, including rearing and management of livestock husbandry farming, etc., and also including in its good sense farming, horticulture, forestry, butter and cheese making, etc. Murray's Oxforffifrfrionary

t;,o Page 26 of 32 describes it as the science and art of cultivating the ;t the allied pursuits of gathering in the crop and rearir tillaqe, husbandly, Farming in the widest sense. In llt Dictionary quoting the Standard Dictionary agriculture, the cultivation ot soil tor food producls ot any oL l valuable growths of the field of garden, tillage, husbar extension, farming, inctuding any industry practised b:, the soil tn connection with such cultivation as breedinl of stock, dairying, etc. The science that treats of thp- ( the soil. In Corpus juris Secundum the term "agricultLtt understood to mean, art or science of cultiva nq especially in fields of large quantities, including the {.t soil, the planting of seeds, the raising and harvestinq c the rearing, feedtng and management of live: t husbandry and farming. In its general sense, the worc , gardening or horticulture. Century Dictionary and Dictionary of Law: The primary meaninq of 'agricut cultivation of the ground, and in its general sen.;' cultivation of the ground for the purpose of procurir( and fruits for the use of man and beast tncluding a horticulture and the raising or feeding of cattle and Wharton's Law Lexicon adopts the definition of agr ( Edn. VII, C.36. As including hofticulture, forestry arrt land for any purpose of husbandry, etc. In 10 Edn. VI., 41, it was defined so as to include the use of land as pasture land or orchard or osier or woodland or for mar nursery grounds/ or allotments, etc. In 57 and 58 Vict t 22, the term "agricultural property" was" defined so z agricultural land, pasture, and woodland, etc." il, including g livestock, uviers'Law ; defined as r useful ar lry, also by -ultivator of and rearing tltivation of )" has been he ground, tparation of ' crops, and 'ck tillage, lso includes Anderson's ure' is the , it is the vegetables trdening or ,ther stock. tlture, in I the use of C8, Section meadow or 'et gardens, ' 30 Section ; to include

Page 27 of 32 24. This High Court also in the case of The Commissioner of Income Tax, Hyderabad vs. M/s. Prabhat Agri-Biotech Ltd.a had an occasion of dealing with a similar issue which arose for consideration and while considering the said issue, it was held as u nd er: "In this case, we find that rhe assessee claimed for exemption under Section 10 (1) of the Income Tax Act, 1961 treating the income generated from the sale of basic/fou ndation seeds as agricultural income. Therefore, the question is whether the income arising from out of the sale of seeds can be treated to be income otherwise than the agricultural income. No one can dispute that the seed is the product of agricultural activity and the seeds cannot be sold commercially, unless it is produced by agricultural activity. We are unable to accept this far-fetched idea that artificial production of seeds can be sold or used for conrmercial purpose. May be a few hybrid seeds could be produced bY artificial method in a laboratory. The seeds so produced with non agricultural activity again will have to be sown in the agriculture field to have a larger quantity for sale in the market. Accordingly, we hold that the seed is a product of agricultural activity. Therefore, the sale of the same cannot be brought under the provisions of the Income Tax Act. We, therefore, upheld the decision of the learned Tribunal in this matter." 25. The fundamental question before us is whether the employment of advanced scientific techniques and laboratory- o ITTA No.88 0f 2014, decided on 21.02.2014

Page 28 of 32 based processes necessarily transforms what is agricultural activity into a commercial or business oc view, the essence of the assessee's activity renl agriculture, the cultivation of ntother plants on lan J agricultural operations, followed by the mu t propagation of plant material through tissue cultrl The fact that sophisticated scientific methods are enhance efficiency and productivity does not alter t character of the underlying operation. Just as the machinery, hybrid seeds, or advanced rrrigation sy; convert traditional farming into a non-agricultural ,r application of tissue culture technology which advanced form of plant propagation cannot be sarci : agricultural foundation of the enterprise. :ssentia lly an lration. In our rins rooted in through basic :lication and e technology. employed to re ag ricu ltu ral se of modern ems does not rtivity and the s merely an ,denature the 26. This Bench finds considerable merit in the learr:d counsel for the appellant's contention that tissue culture operati( ns represents a natural evolution and modernization of traditio-r rl agricultural practices. The cultivation of mother plants on land i volves all the basic agricultural operations contemplated under S3 ttion 2(1A) of the Act i.e. tilling, planting, nurturing, and h r -vesting. The

( Page 29 of 32 subsequent laboratory based multiplication process is essentially an extension and intensification of the propagation that would otherwise occur naturally or through conventional vegetative methods such as grafting, layering, or cutting. The legislature, in defining agricultural income did not intend to freeze the concept oF agriculture in a time warp or restrict it to primitive methods of cultivation. Agriculture, like all human endeavors, evolves with technological advancement and the introduction of tissue culture technology serves the same purpose as traditional agricultural methods, the production of plant material for cultivation, but achieves this objective with greater effieiency, uniformity, and disease-free quality. To deny the agricultural character of such operations merely because they employ modern scientific techniques would be ignoring the reality of contemporary agricultural practices and would create an arbitrary distinction that finds no support in the statutory language or legislative intent. 27. Interestingly, this very Bench recently in The Principal Commissioner of Income Tax vs. M/s. Nuzaveedu Seeds t

s Page 30 of 32 Ltd.s regarding hybrid seeds has taken a remark. I view on agricultural income classification and tf holds significant relevance for tissue culture operatic case, this Bench recognized that even though company was not directly involved in agricultural worked through farmers using scientific researclr techniques, and extensive supervision and the incorr as agricultural income. The Bench specifically noterl production involved scientific study, research and j parent seeds, and elaborate technical processes, tl( was that the cultivation occurred under the comparl and control on agricultural land. This reasoning where agricultural operations forms the foundatior i enterprise even when sophisticated scientific employed to enhance or multiply plant material, tlt still retain its agricultural character. The Bench also t the indirect involvement through contracted performed agricultural operations under the comp; guidance which mirrors the situation in tissue ly progressive s perspective rs. In the said the assessee rpe rations but hybridization r still qua Iified that while the :velopment of crucial factor 's su pervision juggests that I basis of the echnology is ) income may mphasized on a rmers who ry's tech nical ulture where t 120251 taxmann com 486 (Telangana)

V Page 31 of 32 mother plants are grown on leased land and laboratory processes serve to multiply and enhance the basic agricultural output. Thus, the same logic also apply to tissue culture ope.rations that begin with basic agricultural operations and use laboratory techniques merely as an advanced method of plant propagation rather than a complete departure from ag ricu ltu re. 28. In light of the foregoing analysis and following the precedent established by various Courts earlier in similar cases involving the production of agricultural products through modern scientific methods, we hold that the income earned by the assessee from the sale of tissue cultured plants constitutes agricultural income within the meaning of Section 2(1A) of the Act and is therefore exempted from tax under Section 10(1) of the Act holding that mother plants are grown on land owned or leased by the assessee through basic agricultural operations and the tissue culture process that follows is merely an advanced method of propagating and multiplying the plant material derived from those mother plants. The fact that the multiplication occurs in a controlled laboratory environment rather than in open fields does not sever the essential connection to agriculture or transForm the character of the income.

T Page 32 of 32 29. Taking into consideration the definition precedents cited above, this Bench is of the cons that the income derived from tissue culture opr: assessee qualifies as agricultural income which is e ; Section 10(1) of the Act. Accordingly, the instar Income Tax Tribunal Appeal No.91 of 2008 filed L1 stands allowed and the question of law stands decirl the assessee and against the Revenue. //TRUE COPY// rnd also the dered opinion a tions by the empted u nder : Appeal viz., the assessee :d in favour of Sd/. A.' .S.S.C.S.M. SARMA JOINT REGISTRAR a SECTION OFFICER 30. Consequently, Income Tax Tribunal Appeal \:.92 of 2O0B also stands allowed. 31. As a sequel, miscellaneous petitions pendir ( if any, shall stand closed. However, there shall be no order as to ( csts. One Fair Copy__to the Hon,ble Sri Justice P.SAM KOSHY (For His Lordship,s kind perusal) One Fair Copy__to the Hon,bte Sri Justice NARSING RAO N,l ,tDIKONDA (For His Lordship's kind perusal) To 1 2 3 4 5 The lncome Tax Appellate Tribunal, Hyderabad Bench ,ll Hyderabad. The Commissioner of Income tax (Appeals _ll), Hyderat; j llg !"^o.g tax Officer, ward t(t) Hyderabad ' - 1 1 LR Copies I[: y.:fl,T*aB"Jetary, Union of tndia Ministry of Law Jus t ;e and Company

7 6 The Secretary, Telangana Advocates Association Library' High Court for the " siale oifetaiqan", [igh Court Buildings at Hyderabad z 6ii6-ct io Sri A V Kriihna Koundinva' Advocate [oPUC] ;. il; cc io sCi. -r v Prasad 1Sr. Sc For lncome Tai), Advocate [oPUCl 9. Two CD CoPies / PR AL

\ HIGH COURT PSK,J & NNR, J DATED: 2111112025 COMMON JUDGMENT lTTA.No.91 AND 92 OF 2008 ALLOWING THE ITTA'S i\ lii-- a4r o ( ?- ,l: '.)i) 22 ;'- ' 71,,,6 .,/ 7 f a1 r1,- Yt