K.C. Singhal, J.M. - (1.) VARIOUS grounds have been raised but in reality there is only one issue as to whether the income from the sale of plants grown by the assessee can be said to be agricultural income exempt under Section 10.
(2.) Briefly stated, the facts are these : The assessee, a partnership firm, was engaged in running a nursery w.e.f. 1st April, 1992. It had been declaring its income from agriculture since asst, yr. 1993-94 and claiming the same as exempt under Section 10 of IT Act, 1961 (in short Act). For asst, yr. 1998-99, if filed its return on 30th Oct., 1998, declaring income of Rs. 2,460 as interest income in addition to agricultural income of Rs. 5,61,826. The agricultural income was claimed as exempt from taxation under Section 10 of the Act. The case for this year was selected for scrutiny and consequently, the notices under Section 143(2) was issued. The assessee was asked to substantiate its claim of agricultural income. The assessee vide letter dt. 29th March, 2001, explained in detail the various activities carried on by it i.e., preparation of the soil beds and propagation of the plaints. The details of such activities will be referred to by us at the appropriate place in our order later on. However, not satisfied with the explanation of the assessee, the AO rejected the claim of the assessee by observing as under : "Now the question comes what the agriculture is - the primary meaning of word is Agar field and cultra - cultivation i.e., cultivation of field, which means tilling of land, sowing the seeds, etc. The subsequent observation are weeding, digging of soil around the growth, removal of undesirable undergrowth etc. [CIT v. Raja Benoy Kumar Suhas Roy (1957) 32 ITR 466 (SC)]. The next point is there must be nexus between income, land and agriculture operation. As per Section 2(1A) an income to be "agriculture income" should be derived from land and the land should be used for agricultural purposes. Then there should be something done to land by human and technical agency to produce out of land any crop, tree plantation or other product, In order to determine whether a certain income is agricultural income, the immediate and effective source of income must be land if it is not land the income cannot be considered an agricultural income [CIT v. Raja Bahadur Kamakhya Narain Singh (1948) 16 ITR 325 (PC)]. But in this case (Sudisha Farms and Nursery) the land at the best is used for germinating and growing of small plants to certain maturity afterwards the plants are shifted in pots and matured in controlled environment, hence the immediate and effective source of income is not land. The development of land is possible in multistoried complex with controlled environment. Development of Bonsai plant, Centctus etc. does not require the use of land at all and are developed in pots. Certain other methods employed by firm for developing plants are not required the use of land at all. For example, in the process "Gootying" a branch of mother plant is slit and that to that portion harmones are applied and covered with manure and soil and wrapped with jute/polythene. Roots emerged from that point and when sufficient roots come out these are planted on pots and kept at controlled environment. In this process land is seldomly used, hence, income from sale of plant developed by this process cannot be considered as agricultural income. In the case of CIT v. Raja Benoy Kumar Suhas Roy (supra), it has been held that it is essential to carry some basic primary operations prior to germination of produce involving expenditure of human skill and labour on the land itself and not on the growth. Subsequent post germination operation would not constitute agricultural operation. Hence, for argument sake it is accepted that land is used by assessee for transplanting roots/stems developed by gootying, grafts etc. the same is post germination process and cannot be considered as agriculture operation. In an another case H.H. Maharaja Vibhuti Narain Singh v. State of U.P. (1967) 65 ITR 364 (All) the Hon'ble Allahabad High Court held that income from nursery is not an agricultural income unless maintained by farmer as an aid or necessary adjunct to the primary process of agriculture for example peddy nursery, nursery of tomato plants. But the assessee is using the nursery for production of ornamental plants which cannot be considered adjunct to primary agriculture process. Moreover, the plants are developed further in pots by taking them out from land. Hence, income from the sale of such plants cannot be considered as agricultural income, therefore, the income of the assessee at Rs. 5,61,826 which is claimed exempt under Section 10(1) is treated as non-agricultural income and benefit of exemption under Section 10(1) is not allowable and income is added into taxation income of the assessee." The matter was carried in appeal before the CIT(A), who also confirmed the order of AO by holding that running of nursery by the assessee was a commercial activity which could not be treated as agricultural activity in view of the Hon'ble Allahabad High Court judgment in the case of H.H. Maharaja Vibhuti Narain Singh v. State of U.P. (1967) 65 ITR 364 (All) wherein it has been held that nursery income is not necessarily agricultural income unless is maintained by the farmers as an aid or necessary adjunct to the primary process of agriculture. Further, reliance was placed on another judgment of Allahabad High Court in the case of Smt. Anand Bala Bhushan v. CIT (1996) 217 ITR 144 (All) wherein it was held that sale proceed to leechi fruit was not an agricultural income. He also relied on the judgment of Hon'ble Madras High Court in the case of CIT v. Stanes Amalgamated Estate Ltd. (1998) 232 ITR 443 (Mad) wherein it was held that sale proceeds of eucalyptus oil extracted by the assessee from the leaves of the tree grown by it was not agricultural income. Aggrieved by the same, the assessee is in appeal before the Tribunal.
(3.) BOTH the parties have been heard at length. At the outset, the learned counsel for the assessee drew our attention to pp. 38 to 65 of the paper book containing the computation of income, statement of accounts and acknowledgement of income-tax returns pertaining to asst. yrs. 1993-94 to 1998-99 to point out that the claim of the assessee regarding agricultural income has always been accepted by the AO and, therefore, considering the rule of consistency, the claim of the assessee could not be rejected. He relied on the decision of Supreme Court in the case of Radha Saomi Satsang v. CIT (1992) 193 ITR 321 (SC). When assessee's counsel was asked to file the copies of the assessment order, it was stated by him that all assessments were completed under Section 143(1), A query was raised from the Bench as to whether rule of consistency could be applied where assessments are not completed under Section 143(3). In response to the same, it was submitted that intimation under Section 143(1) amounts to assessment order as held by the Punjab & Haryana High Court in the case of Vipin Khanna v. CIT (2002) 255 ITR 220 (P&H). He has also relied on two decisions of the Tribunal reported as Fisons Ispat Ltd. v. Asstt. CIT (1992) 42 ITD 365 (Del) and Puranmall Narayan Prasad Kedia (HUF) v. Asstt. CIT (1994) 48 ITD 439 (Cal). It was also submitted that Department has not resorted to any action either under Section 143(2) or under Section 147 or under Section 263. Hence, all such assessments have become final. In view of the same, it was contended that it would make no difference if the assessment is made either under Section 143(1) or under Section 143(3). He also drew our attention to the recent unreported judgment of the Hon'ble Delhi High Court in the case of Rajiv Grinding Mills copy of which is placed on record wherein according to him, the rule of consistency has been followed despite assessments under Section 143(1). On the other hand, the learned Departmental Representative opposed the contentions of the learned counsel for the assessee by contending that principle of res judicata do not apply to the income-tax proceedings since each year is an independent year and, therefore, finding, if any, recorded in one year would not be binding in the subsequent year. Reliance we also placed on the decision of Punjab High Court in the case of Jamna Das Rameshwar Das v. CIT (1952) 21 ITR 109 (Punj). It was also submitted by her that rule of consistency would not apply where returns are processed under Section 143(1) since such process has to be carried out without application of mind in view of Board circular wherein the AOs have been advised to dispose of the returns under Section 143(1).;