Agricultural Income

Meaning of Agricultural Income (Section 2(1 A), 10()]

India's first Income-tax Act was introduced in the vear 1860 to overcome financial stress due
to 1857's Sipay Mutiny, but that law was in force just for a period of five years. In 1867, the
said Act was revived as License Tax' to levy tax on the trade and professions. Again, in
1868, the then Legislature replaced the 1867 Act with 'Certificate Tax.' Under both the
statutes, Agricultural Income was (even under the current Incomc-tax Act, 1961, also
hereinafter 1961 Act')excluded with certain modifications. In 1877, Licence Tax with Cess
on land' was introduced. The Income-tax Act of 1886, for the very first time, defined the term
'agricultural income' and also exempted it from tax liability duc to the cxistence of the then
land revenue. Fast forward to post-independence, where agriculture is listed under Entry 82
of List - Il or State's List, ie., State Subject rather than Central Government's, except while
levying tax on capital gains arising from the transfer of agricultural land. Since then, the State
Governments have been entitled to levy taxes on agricultural incomes, which are specifically
from the purview of the 1961l Act.
GENERAL EXEMPTION
Under Section 10 of the Income-tax Act, various items of income are totally exempted from
income tax. Therefore, these incomes are not included in the total income of an assessce.
CHAPTER III

INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME

Incomes not included in total income.

10. In computing the total income of a previous year of any person, any income falling within
any of the following clauses shall not be included

()agricultural income;

Section 10 provides that in computing the total income of a prevIOUS year of any person, any
income that falls in its ambit shall not be included in the total income, provided thc assesscc
proves that aparticular item of income is exempt and falls within a particular clause.
The onus is on the assessee, i.e., the assessee has to prove that his income falls under Section
10.
 Agricultural income, as defined in Section 2(1A), is exempt from income tax in the case of all
assessments. This exemption has been granted on account of the constitutional provisions
relating to the powers of the Central and the State Governments for levying tax on
agricultural income. Under the Constitution, only the State Governments are empowered to
levy tax on agricultural income. Hence, the Central Government, while imposing income tax
on incomes of various types, has specificallyexcluded agricultural income from the purview
of Central income tax. This exemption would, however, be available only in cases where the
income in question constitutes agricultural income within the meaning of Section 2(1A).

Constitution of India: Article 366 is Definitions.

Article 366(1) vaguely defines the term 'agriculture' as:

In this Constitution, unless the context otherwise requires, the following

expressions have,
the meanings hereby respectively assigned to them, that is to say--(1y"agricultural income"
means agricultural income as defined for the purposes of the enactments relating to Indian
income-tax;
Section 2(1A) of the Income-tax Act, 1961 defines the term which is in a summarized form,
any rent or revenue derived from aland situated in India used for agricultural
purposes, rent
received by a tenant from a sub-tenant, by agriculture or cultivation to render the produce fit
for sale. The burden of proof lies on the assessee to prove that the income derived by
him is
agricultural income.
Therefore, section 10(1) says, agriculture income is fully exempted. But to get the exemption,
three conditions should be fulfilled:

1) Income directly derived from the land: ex: rent received from the tenant or
through
lease or sub-lease. Gave the land for lease, and B has given that lease on sublease to

C. Then both the income.

Sale of agricultural products.
2) That agricultural land should be in India:

3) Land must have been used for agricultural purposes only.

Ploughing-sowing
harvesting-irrigating-weeding-seeding-watering, etc.
Typesof agricultural income:
sublease.
1) Rent from agricultural income or lease,
of process like turmeric.
2) Income from agricultural processes, some kind

3) Income from cultivation.

nursery.
4) Income derived from saplings or seedlings grown in a

5) Sale of produce. Like rice, wheat, etc.

purposes. Like storage, seeds
6) Income from houses used for agricultural
municipality areas, but in
kept. This house should not be in urban area,

agricultural area. Conditions are mentioned.

Agricultural operation meaning:

operations on the land then it
If any person has performed basic and subsequent
will be called as an agricultural income.

Basic operations: like ploughing of land, sowing of seeds, planting and similar
kinds of operations on the land.
Subsequent: after carrying out the basic operations, there must be subsequent

operations like weeding, digging the soil around the growth, watering the plant

at regular intervals, using pesticides, etc.

If only basic operations: Al
Both: AI

Only subsequent operations:Non-agricultural income.

 taxed, the definition thereof has
Fundamentals under Section 10(1) of the Act. Since, it is not
interested in classifying
assumed significance. The assessee would naturally be
distantly it might have been related
his income as agricultural incomes; however,
authorities would like to interpret the
to agriculture. On the other hand, the tax
dispute between
term conservatively and, thus, there is apossibility of some
Income Tax Act, 1961. has
the parties as regards the meaning of the term. The
defined the term agricultural income' under Section 2 (1A) exhaustively.

2.2.1 Definition of Agricultural Income

Agricultural income as defined under Section 2(1A) means any rent or revenue
derived from land which is situated in India and is used for agricultural purposes.
The definition mnakes it very clear that any rent or revenue (in cash or kind) will
be agricultural in nature only if the following conditions are fully satisfied:
a Rent or revenue is derived from land.

b The land is situated in India, and

The land is used for agricultural purposes.
Since the term agriculture' will determinc the naturc of incomc, it is nccessary
for us to understand what agriculture is. Income is said to have been derived
from land when that land is subjected to the labour and skill of man, whether in
the form of cultivation or otherwisc. Though tilling is not a necessary part of
agriculture, human labour and skill are suppOsed to be expended on the land
itsclf and not merely on the growth from land.
The Supreme Court has in CIT v. Raja Benoy Kumar Sahas Roy expounded on
the terms' Agriculture' and' Agricultural Purposes". The relevant portion ot the
judgment is given below:

Agriculture in its most primary sense denotes the culivation of the field
and is restricted to the cultivation of the land in the strict sense of the term,
meaning thereby tilling of land, sowing of seeds, planting, and similar
opcrations on the land. It also includes in its scopc all the operations which
foster the growth and preservationof the produce along wih the operations
requircd to make the produce 'marketable'. The term comprises within its
scope alltypes of produce regardless of its nature.
To decide whether a particular piece of land has been used for
agricultural
purpose, there has to be some measure of cultivation of land and some
expenditure of skill and labour upon it. Consequently, income from the
sale of forest trees growing naturally and without any human
intervention
cannot be treated as agricultural income.
2.2.2 Kinds of AgriculturalInconme
Agricultural Income is of five kinds:
i) Any rent or revenue derived tromn land
ii) Income derived from
Agriculture
ii) Any income derived from
20
receiver of rent in kind
marketing process performed by cultivator or
 Bask Concept-1I
iv) Any income derived from the sale of product
v) Income rom farm building

(ii). (iii) and (iv) can be combincdunder onc hcading and explaincd. Let us now
discuss the different kinds of income in detail.

Any rent or revenue derived from land (Section 2(1A) (a))

Rentor revenue derived from land situated in India and used for agricultural
purposes is agricultural income. Rent is received by one personfrom another
for thegrant of right to the other person to use land. Itmay be in cash orin
kind and the recipient of rent may or may not bethe ownerof the land.
Ifthe land has been let out by the person on rent and therent is in the nature
of produce, he is termed as 'receiver of rent in kind', Where the land is uscd
by the receiver of rent in kind for carrying out any process to make the
produce marketable or where hc derives any income on the sale of such
produce, this will be treated as agricultural income in his hands too. It is, of
course, agricultural income in the hands of the cultivator.
1) Income derived from such land by agriculture or from manufacturing
process (Section 2(1A)(b)|
The words 'such land' arc ofsignificance herc. Thesc words limit agricultural
income to the land situated in India which is used for agricultural
purposes; the income generated by thc following activities is considered
agricultural income:

a) Agriculture
b) Processordinarily cmployed by a cultivator to render the produce
marketable

c) Sale by cultivator of theproduce withoutany furtlher processing except

the one mentioncd in (b) above.

Itis, thus, clear that the cultivator may necd to make the produce marketable
as the produce as such may not be sold. He is allowed thc use of aprocess
which is generally employed by all the cultivators to make the produce
marketable. Tobacco leaves are generally dried before being sold, and
therefore, the income from the sale of driedtobacco leaves will beagricultural
in nature. However, the income from thesale of beedies made out of the
same tobacco will not be treated as agricultural income, because marketable
produce has been further processed and made more valuable.
ii) Income from agricultural house property or farm buildings
|Section (2 (1A) (c|
Income derived from any building in the following cases will be agricultural
income:

a) The building is owned and occupied by the receiver of rent or revenue

of any such land.
b) The building is onor in the immediate vicinity of the agricultural land
in India.
21
 Fundamentals c) The agriculturist needs it by virtue of his connection with the land and
uses it as a dwelling house, store house or as an outhouse.
The land on which such building is situated must be subject to land
revenue in India or subject to a local rate assessed and collected by the
officers of the said Government.

If the land is not subject to land revenue, it must be outside the urban
notified
area, i.e., area comprising acantonment board. municipal board,
which it
area, town area, municipal corporation or any other name by
is known and which has a population of 10,000or more:
Gazette, it
f) If it is notified by the Central Government in the Official
of such
must not be situated within 8 kilometre or within the arca
lower limits from the jurisdiction of such municipal board etc. as the
Central Government may notify in this regard.

2.2.3 Instances of Non-agricultural Income

The following incomes though connected wvith land are not agricultural in nature:

1) Annuity payable to vendor of agricultural land or to a person giving up his

claim toa picce of agricultural land.
2) Comnmission for sclling agricultural produce.
3) Income from Dairy Farm.
4) Forest produce resulting from wildgrowth.
5) Fisheries
6) Ginning of cotton.
7) Harvesting of crop on purchased land.
8) Letting out of land for stocking timber or erops.
9) Dividend paid out of agricultural income.
10) Commission carned by the landlord for selling agricultural produce.
||) Profit carnedon purchase of standing crop.
12) Rcaring of silkworms.
13) Income from stone quarries.
14) Royalty income of mines.
15) Income from poultry farming.
16) Income from land used for brick making.
17) Income from producing water fruits in a tank.
18) Compensation for requisition of land for military use.
19) Remuneration of mutawalli or trustee out of agricultural income of Wakf.
20) Incomefrom saleoftender forms by the
of sugarcane.
assessee engaged in the cultivation
21) Income from
maintaining or running nurseries.
22
 Basic Concepts-II
2.2.4 Partly Agricultural Income
There are certain instances where it becomes extremely difficult to classify an
said income
income as agriculturalor non-agricultural. These are cases where the
and a few characteristics of
satisfies some characteristics of agricultural income
Profit
business income. Such incomes are said to be partlyagricultural in nature.
of asugar mill which grows its own sugarcane is cited as one of the examples of
partly agricultural income. In thiscase, incomeearned till harvestingof sugarcane
sugar
is agricultural in nature whereas income accruing trom the manufacture of
and remaining
is taxable income. Hence, 60% income is agricultural income
40% is commercial income. Similarly, income from growing and selling of tea
under rules 7 and
is partly agricultural income. These cases have becn dealt with
8 of the Income Tax Rules, 1962.
Example of Partly Agricultural Income
Income from growing and manufacturing of any product other than
ghee,
tea (Rule 7): This rule is applicable in factories of oil, vegetable
manufacturers who manufacturc
flour, sugar ctc. It is applicable on thosc
materials. It
and sell goods by using their agricultural products as raw
salc
includes both agricultural and non-agricultural incomc. In this casc.
market value
of agriculturalproduce would be partly agricultural income and
would be taken as agricultural income. For computing business income,
and
market valuc of agricultural producc raiscd or rcccivcd as rent in kind
used as raw material shall be deducted. For computing agricultural income,
of
market value of the produce will be considercd as rcccipts and cost
cultivationetc. shall be deducted from it.
manufacture and
2) Income of Tea Gardens (Rule 8): Total Income from
Howvever, 60°% of the total
sale of tea is not trcated as agricultural income.
non
income is treated as agricultural income and the rest is treated as
agricultural or business income.
7A): 65% of the
3 Income from the manufacture of latex or canex (Rule
rubber manufactured
total income derived from sale of latex or canex or block
agricultural income and the
andprocessed by the assessee will be treated s
in
balance 35% as non-agricultural incomc. Expenses rclated to new plant
received from
place of dead plant shall be included in cost. Any subsidy
rubber board shall be subtracted from the cost of production.
Ifcoffee is sold iust after
4) Income from manufacture of Coffee (Rule 7B):
agricultural income and
curing 75% of income from sale will be treated as
after curing
25% as non-agricultural income. However, if coffee is sold
such income
roasting and grounding and after adding some flavor etc, 60% of
willbe treated as agricultural incomeand remaining 40% as business income
or non-agricultural income. For computing total regarding it, expenses
related to these plants shall be included in cost of production, which are
replaced in place of dead plants, but any subsidy which was reccived by
coffee boards, will not be subtracted from the cost.

2.2.5 Integration of Agricultural income with the

Non- Agricultural income
As discussed, that there is no tax on agricultural income, but if an assessee
23
earns both agricultural as well as non-agricultural income, then such
entals
agricultural income is added in his total income for computation of income tax
on non-agricultural income. This concept is called as 'partial integration of
agricultural income with non-agricultural income'

The partialintegration is done only when the following two conditions are
satisfied:

1) The Net agricultural income exceeds Rs. 5,000, and

2) Non- agriculturalincome of the assessee exceeds the exemption limits of
Rs. 2.50,000 in case of an individual (other than individual of the age of 60
years or above) HUF, AOP/BOI. etc.
The partial integration is applicable only in caseof
i) Individual
ii) HUF

iii) AOP/BOI
iv) Artificial juridical person
It is not applicable in case of a) firn b) company c) cooperative society
d) local authority
3) Individual (whether malc or femalc). who is a resident in India and is of
the age of 60 years or more but less than 80 years at any time during the
previous ycar, the maximum cxemption limit shall be Rs 3.00,000 instcad
of Rs 2,50,000, but if the individual is of age of 80 vears or more, the
maximum excmption limit shall be Rs 5,00,000 instead of Rs 2.50.000. Ifan
individual opts for tax under section ||5 BAC. this exemption limit is Rs.
2.50,000 for all age groups of assesses.
Steps of computation of tax when there is agricultural income along with
non-aricultural income
The given below arc the steps to calculate tlhe tax:
Add agricultural income and non-agricultural income and
calculate taX On
the aggcgate as if such aggregate is the total income.
2) Add agricultural income to the maximumexemption limit
available and
compute tax on such amnount as if it in the total income.
3) Deduct the amount of income tax computed under step 2
from the tax
computed under step I.
The amount so calculated shall be total income tax
payable by the assesse
4) Claim rebate u/s 87A, if applicable.
5) Add surcharge, if applicable and health and
education cess (@ 4%
Illustration 1

Compute agricultural income from cultivation of land: Rs.

I) Sale proceedsof agricultural produce 1,70,000
ii) Depreciation of
iii) Labour charges
equipments 7,000
iv) Cost of seeds 25,000
v) Costof fertilizers 5,000
3,000