Hyderabad : In a significant ruling with wide implications for modern agri-biotechnology, the Telangana High Court has held that income earned from the sale of tissue-cultured plants qualifies as agricultural income and is therefore exempt from income tax under Section 10(1) of the Income Tax Act, 1961.
A Division Bench comprising Justice P. Sam Koshy and Justice Narsing Rao Nandikonda ruled that the adoption of advanced scientific or technological processes does not strip an activity of its agricultural character. The Court underlined that agriculture cannot be frozen in time and must be understood as an evolving field that naturally absorbs technological advancements.
The appeals arose from Income Tax Tribunal Appeal Nos. 91 and 92 of 2008 filed by M/s. A.G. Biotech Laboratories (India) Ltd., which is engaged in the micro-propagation of plants through tissue culture technology. The core issue before the Court was whether income derived from tissue culture and micro-propagation could be treated as agricultural income, or whether it constituted taxable business income because of the extensive use of laboratory-based scientific processes.
The revenue authorities had classified the income as business income, reasoning that the principal activity involved sophisticated laboratory techniques conducted under sterile conditions, with agricultural land being used only incidentally for growing mother plants. This view was earlier accepted by the Income Tax Appellate Tribunal, which held that the final commercial product was primarily the outcome of scientific intervention rather than direct agricultural operations on land.
The taxpayer, however, maintained that its operations were fundamentally agricultural in nature. It was argued that mother plants were cultivated on agricultural land through basic operations such as tilling, planting, irrigation, manuring, and sustained human labour. Tissue samples taken from these plants were then multiplied using tissue culture technology, after which the plantlets underwent hardening and nurturing in greenhouses and soil before being sold.
Accepting this contention, the High Court observed that tissue culture is a modern method of plant propagation comparable to grafting, budding, or nursery cultivation. The Court held that such scientific techniques do not sever the essential agricultural character of the activity. Reliance was placed on earlier judicial precedents, including decisions of the Madras and Gujarat High Courts, which recognised income from nursery operations as agricultural income.
The Bench also referred to the landmark Supreme Court judgment in Raja Benoy Kumar Sahas Roy, reiterating that agriculture includes both basic operations on land and subsequent operations that foster and preserve growth. It emphasised that as long as the foundation of the activity lies in basic agricultural operations, the use of laboratories and biotechnology does not change the nature of the income.
Strengthening its reasoning, the Court relied on its own recent ruling in PCIT v. Nuziveedu Seeds Ltd., where income from hybrid seed production involving scientific research and farmer supervision was held to be agricultural in nature.
Concluding that the cultivation of mother plants formed the agricultural base of the taxpayer’s activity, the Court held that income generated through tissue culture operations qualifies as agricultural income under Section 2(1A) of the Act and is exempt under Section 10(1). The questions of law were answered in favour of the taxpayer and against the revenue, and the orders of the ITAT were set aside.
Case Title: M/s. A.G. Biotech Laboratories (India) Ltd. vs. Income Tax Officer
Case No.: Income Tax Tribunal Appeal Nos. 91 and 92 of 2008
Bench: Justice P. Sam Koshy and Justice Narsing Rao Nandikonda
For the Appellant: Mr. A.V.A. Siva Kartikeya, Mr. A.V. Krishna Koundinya
For the Respondent: Ms. Bokaro Sapna Reddy, Mr. J.V. Prasad
