Income from Sale of Tissue-Cultured Plants Constitutes Agricultural Income, Exempt from Tax: Telangana HC [Read Order]

Telangana: The Telangana High Court has ruled that income earned from the sale of tissue-cultured plants constitutes agricultural income and is therefore exempt from tax under Section 10(1) of the Income Tax Act, 1961, holding that modern scientific methods of plant propagation do not alter the agricultural character of such operations.

A Division Bench comprising Justice P. Sam Koshy and Justice Narsing Rao Nandikonda delivered the judgment while allowing two income tax appeals filed by M/s A.G. Biotech Laboratories (India) Ltd. for the assessment years 2002–03 and 2003–04.

The appellant company is engaged in the business of micro-propagation of plants through tissue culture technology. The primary dispute centred on whether income from the sale of tissue-cultured plants should be treated as agricultural income exempt from tax under Section 10(1) of the Act, or as taxable business income. The Income Tax Officer had rejected the company’s claim and treated the income as business income subject to taxation.

The tissue culture process involves taking tissue samples from mother plants grown on land, culturing these tissues in a clinical 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 normal atmospheric conditions before sale. The Income Tax Appellate Tribunal (ITAT) had held that the plants were not a direct result of basic agricultural operations on land, but rather the outcome of advanced scientific methods, since the major activities were performed in laboratories under sterile conditions.

The company contended that its operations were rooted in agricultural activities, as it cultivated mother plants on leased agricultural land requiring all basic agricultural operations such as soil preparation, tilling, planting, watering, application of manures and fertilisers, weeding, and ongoing maintenance. The tissue extracted from these mother plants, it argued, was a direct derivative of agricultural produce grown on land. Drawing parallels with nursery operations recognised as agriculture, the company submitted that tissue culture similarly requires fundamental agricultural activities after the laboratory phase, including hardening and growing plants on actual land, where traditional cultivation methods transform scientifically developed material into marketable produce.

The company further argued that modern agriculture encompasses scientific applications such as hybrid seed development, genetic selection, controlled-environment cultivation, and biotechnology. Tissue culture technology, it submitted, is fundamentally an agricultural technique—merely a more efficient method of plant propagation serving the same ultimate purpose as traditional agricultural methods. The company also highlighted that its activities had been officially recognised and classified as agricultural by the Government of Andhra Pradesh and various banking institutions, which provided agricultural incentives, subsidies, and loans on that basis.

The Income Tax Department countered that the statutory definition of agricultural income under Section 2(1A) requires income to be derived from land through basic agricultural operations involving human skill and labour, which the company had failed to satisfy. While the company maintained some mother plants on leased land, the Department argued that this was merely an incidental preliminary step, with the substantial portion of operations taking place in sophisticated clinical laboratories. These laboratory operations, it contended, were scientific, technological, and industrial in character rather than agricultural.

The Department further argued that the judicial precedents relied upon by the company were factually distinguishable, as those cases involved plants actually grown on land through traditional operations and merely transferred to pots for sale, whereas the company’s plants were created through laboratory multiplication. It also rejected reliance on classifications by the State Government and banking institutions, arguing that such classifications had no bearing on interpretation under the Income Tax Act, which is governed by specific statutory definitions.

The High Court, however, sided with the company and held that the essence of the activity remained rooted in agriculture—the cultivation of mother plants on land through basic agricultural operations—followed by multiplication and propagation through tissue culture technology. The use of sophisticated scientific methods to enhance efficiency and productivity, the Court held, does not alter the agricultural character of the underlying activity.

The Court observed that just as the use of modern machinery, hybrid seeds, or advanced irrigation systems does not convert traditional farming into a non-agricultural activity, the application of tissue culture technology—being merely an advanced form of plant propagation—cannot be said to denature the agricultural foundation of the enterprise. The legislature, the Court emphasised, did not intend to freeze the concept of agriculture in time or restrict it to primitive methods of cultivation.

The Court found merit in the contention that tissue culture operations represent a natural evolution and modernisation of traditional agricultural practices. The cultivation of mother plants on land involves all basic agricultural operations contemplated under Section 2(1A)—tilling, planting, nurturing, and harvesting. The subsequent laboratory-based multiplication process, the Court held, is essentially an extension of propagation that would otherwise occur naturally or through conventional vegetative methods such as grafting, layering, or cutting.

The Court also relied on its earlier decision in The Principal Commissioner of Income Tax v. M/s Nuziveedu Seeds Ltd., wherein income was recognised as agricultural despite the use of scientific research and hybridisation techniques. It held that where agricultural operations form the foundational basis of an enterprise, the use of advanced scientific technology does not strip the income of its agricultural character.

Allowing both appeals, the High Court held that income earned from the sale of tissue-cultured plants constitutes agricultural income within the meaning of Section 2(1A) of the Income Tax Act and is therefore exempt from tax under Section 10(1) of the Act.

Case Title: M/s A.G. Biotech Laboratories (India) Ltd. v. Income Tax Officer

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