Sanchayita Lahkar

The High Court of Telangana Division Bench of Justice P. Sam Koshy and Justice Narsing Rao Nandikonda has held that income earned from the sale of tissue-cultured plants is agricultural income and, as such, is exempt from income tax, even though advanced scientific techniques are used in their cultivation. The Bench set aside the tax treatment that had characterised the receipts as taxable business income, accepting the assessee’s position that the activity remains rooted in cultivation of mother plants on agricultural land, with tissue-culture methods operating as a propagation stage of that agricultural source.

The dispute arose from income tax assessments relating to income earned from the sale of tissue-cultured plants by an assessee engaged in micro-propagation of plants through tissue culture technology. The assessee claimed that such income constituted agricultural income exempt from tax, as it originated from mother plants grown on agricultural land through basic agricultural operations. The revenue authorities rejected this claim and treated the income as business income, primarily on the ground that the major activities involved laboratory-based scientific processes rather than cultivation on land.

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The matter reached the High Court following dismissal of the assessee’s claim by the Income Tax Appellate Tribunal, which had held that the plants sold were not a direct result of agricultural operations but of advanced scientific methods. The assessee contended that cultivation of mother plants involved all essential agricultural operations and that tissue culture was only an advanced method of propagation. The revenue argued that laboratory activities were dominant and severed the nexus with agriculture.

The Court examined the nature of tissue culture operations, the statutory definition of agricultural income under the Income Tax Act, and prior judicial precedents relating to nursery operations, seeds, and modern agricultural techniques.

The Division Bench observed that “the primary dispute in the instant case is classification of income earned by the assessee from the sale of tissue-cultured plants.” The Court noted that the tissue culture process involved extraction of tissue from mother plants grown on land, followed by laboratory-based multiplication, and that the core issue was whether such income retained its agricultural character.

Referring to established precedent, the Court recorded that “agriculture in its primary sense denotes the cultivation of the field… meaning thereby tilling of the land, sowing of the seeds, planting and similar operations on the land.” It further stated that subsequent operations fostering growth and rendering produce fit for market would also qualify as agricultural when taken in conjunction with basic operations.

The Bench rejected the narrow interpretation advanced by the revenue and observed that “the essence of the assessee’s activity remains rooted in agriculture, the cultivation of mother plants on land through basic agricultural operations.” It stated that the use of advanced scientific methods did not alter the essential character of agriculture, noting that “the legislature did not intend to freeze the concept of agriculture in a time warp.”

The Court further recorded that “the application of tissue culture technology is merely an advanced form of plant propagation and cannot be said to denature the agricultural foundation of the enterprise.” It also noted consistency with earlier decisions where income derived from seeds and nursery activities was treated as agricultural income, provided there was a foundational link to cultivation on land.

Addressing the argument relating to laboratory environments, the Bench observed that “the fact that multiplication occurs in a controlled laboratory environment rather than in open fields does not sever the essential connection to agriculture.” The Court thus found that the income in question satisfied the statutory definition of agricultural income.

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The Court held 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.” It further directed that “the instant appeal stands allowed and the question of law stands decided in favour of the assessee and against the Revenue.”

“Income Tax Tribunal Appeal No.92 of 2008 also stands allowed. Miscellaneous petitions pending, if any, shall stand closed,” and “there shall be no order as to costs.”

Advocates Representing the Parties

For the Appellant: Mr. A.V.A. Siva Kartikeya, learned counsel appearing on behalf of Mr. A.V. Krishna Koundinya

For the Respondent: Ms. Bokaro Sapna Reddy, learned Senior Standing Counsel for the Income Tax Department, appearing on behalf of Mr. J.V. Prasad, learned Senior Standing Counsel

Case Title: M/s. A.G. Biotech Laboratories (India) Ltd. v. Income Tax Officer
Case Number: Income Tax Tribunal Appeal Nos. 91 and 92 of 2008
Bench: Justice P. Sam Koshy, Justice Narsing Rao Nandikonda