CONTENTS

No. Heading Pg no.

1 Acknowledgment 3

2 Research Methodology 4

3 Introduction 5

4 What Is Agricultural Income? 6

5 Rent or Revenue derived from Land 6

6 Income derived from agricultural land by agricultural operations 8

7 Income derived from Marketing Process 8

8 Income from Farm Building 9

9 Cases when Income held to be Agriculture Income 10

10 Cases when Income held to be Non-Agriculture Income 10

11 Treatment of Partly Agriculture Income 11

12 Computation Of Agriculture Income 11

13 Case Laws 12

14 Conclusion 15

15 Bibliography 18

1|Page
 ACKNOWLEDGEMENT

Any project completed or done in isolation is unthinkable. This project, although prepared by
me, is a culmination of efforts of a lot of people. Firstly, I would like to thank our Professor
for Taxation law, Dr. Sree Sudha for his valuable suggestions towards the making of this
project.

Further to that, I would also like to express my gratitude towards our seniors who were a lot
of help for the completion of this project. The contributions made by my classmates and
friends are, definitely, worth mentioning.

I would like to express my gratitude towards the library staff for their help also. I would also
like to thank the persons interviewed by me without whose support this project would not
have been completed.

Last, but far from the least, I would express my gratitude towards the Almighty for obvious
reasons.
AttiIi. Leela Naga Janaki Rajitha

2|Page
 RESEARCH METHODOLOGY

Method of Research

The researcher has adopted a purely doctrinal method of research. The researcher has made
extensive use of the available resources at library of the Chanakya National Law University
and also the internet sources.

Scope and Limitations

Though the study of the this topic is an immense project and pages can be written over the
topic but due to certain restrictions and limitations the researcher has not been able to deal
with the topic in great detail.

Sources of Data:

The following secondary sources of data have been used in the project-

1. Cases

2. Books

3. Journals

Method of Writing:

The method of writing followed in the course of this research paper is primarily analytical.

Mode of Citation

The researcher has followed the bluebook method of citation throughout the course of this
research paper.

3|Page
 INTRODUCTION

As per Income Tax Act income earned from any of the under given three sources meant
Agricultural Income. Agriculture income is exempt under the Indian Income Tax Act. This
means that income earned from agricultural operations is not taxed. The reason for exemption
of agriculture income from Central Taxation is that the Constitution gives exclusive power to
make laws with respect to taxes on agricultural income to the State Legislature. However
while computing tax on non-agricultural income agricultural income is also taken into
consideration.

Hence Agricultural income [2(1A)] has not been taxed right from the beginning under the
Income-tax Act. The justification for such exemption is that income from agriculture is taxed
in the form of land revenue. Another reason for its being kept outside the purview of the
Income-tax Act, 1961, is that agriculture being a State subject, the Central Government is not
entitled to tax this source of income. The State Governments are of course, free to tax this
source. A few of them are, in fact, doing so. The position under the Income-tax Act is that
section 10(1) exempts agricultural income from income-tax. Because of the exemption it
enjoys, it is necessary to clearly understand the definition of the term ‘Agricultural Income’.
In the exact sense, ‘Agricultural Income’ as defined u/s 2(1A) includes the various types of
incomes.
Definition Sec .2(1A)1.By virtue of this section 2(1A), “agricultural income” means –

i. Any rent or revenue derived from land which is situated in India and is used for agricultural
purposes.

ii. Any income derived from such land by agricultural operations including processing of the
agricultural produce, raised or received as rent-in-kind so as to render it fit for the market, or
sale of such produce; and

iii. Any income derived from any building, farmhouse or land utilized in connection with
cultivation of agricultural produce provided that-

a) The land concerned is either assessed to land revenue or local rates and is not situated
within 8 km of such municipal limits, and

1
http://www.lawnotes.in/Section_2_of_Income-Tax_Act,_1961 as accessed on 5th Nov, 16.

4|Page
b) The building or land concerned is situated in the immediate vicinity of the agricultural
land and is utilized as a dwelling house, store house or as other out building.

AGRICULTURAL INCOME

Agriculture income is exempt under the Income Tax Act 1961. The reason for exemption of
agriculture income from Central Taxation is that the Constitution gives exclusive power to
make laws with respect to taxes on agricultural income to the State Legislature. From the
assessment year 1974-75, agricultural income is taken into consideration to determine tax on
non-agricultural income in certain cases.

WHAT IS AGRICULTURAL INCOME?

As per Income Tax Act 1961, any income, which is derived from any of the following
sources, will be treated as agricultural income2 –
1. Any rent or revenue derived from land which is situated in India and is used for
agricultural purposes.
2. Any income derived from such land by agricultural operations including processing of the
agricultural produce, raised or received as rent in kind so as to render it fit for the market or
sale of such produce.
3. Income attributable to a farm house subject to certain conditions
4. Income earned from saplings or seedlings grown in a nursery

RENT OR REVENUE DERIVED FROM LAND

According to section 2 (1A), if the following three conditions are satisfied, then the income
derived from land can be termed as agricultural income3 –
 Rent or revenue should be derived from land and it may be in cash or in kind
 The land is one which is situated in India. If the land is situated in a foreign country,
then the income derived from it will not be considered as agricultural income.
 The land should be used for agricultural purposes.
The term ‘agricultural purposes’ has not been defined under the Income Tax Act 1961.
Therefore we should have a look upon the following important points –
2
ibid
3
http://finotax.com/income-tax/info/exempt-income as accessed on5th Nov, 16.

5|Page
Basic operations: -
Prior to germination, some basic operations are essential to constitute agriculture. The basic
operations would involve expenditure on human skill and labour upon the land itself and not
merely on the growth from the land. The examples of basic operations are – tilling of land,
sowing of seeds, planting and similar kind of operations on the land.

Subsequent operations:-
Besides the basic operations, there are some subsequent operations which are performed after
the produce sprouts from the land. The examples of subsequent operations are weeding
digging the soil around the growth, removal of undesirable under growths and all operations
which foster the growth and the preserve the same, not only from insects and pests but also
from degradation, tending pruning, cutting, harvesting and rendering the produce fit for the
market.
The subsequent operations are performed in conjunction with and in continuation of the basic
operations which constitute part of the integrated activity of agriculture.

Agriculture not merely includes food & grains:-

Agriculture does not merely imply raising of food and grains for the consumption of men and
animals. It also includes all products from the performance of basic as well as subsequent
operations on land. These products may be grain or vegetable or fruits including plantation
and groves or grass or pasture for consumption of beasts or articles of luxury such as betel,
coffee, tea, spices, tobacco etc. or commercial crops like cotton, flax, jute, hemp etc 4. All
these products are raised from the land and the term agriculture cannot be confined merely to
the production of food and grains products for human beings but must be understood as
comprising all the products of the land which have some utility either for consumption or for
trade.

Some connection with land not sufficient:-

The mere fact that an activity has some connection with the land or in some way dependent
on land is not sufficient to bring it within the scope of the term agriculture. For example,
breeding and rearing of livestock, cheese and butter making and poultry farming would not
come under the agricultural purposes.
4
http://yourfinancebook.com/definition-of-agricultural-income/as accessed on 5th Nov, 16.

6|Page
Income from nursery operations:-
There was a judicial controversy whether income from nursery operations would qualify as
agriculture income within the definition given under section 2(1A). With a view to give
finality to the issue, section 2(1A) has been amended with affect from the assessment year
2009-10 so as to provide that any income derived from saplings or seedlings grown in a
nursery shall be deemed to be agriculture income. Accordingly, irrespective of the basic
operations have been carried out on land, such income will be treated as agriculture income
and thus qualify for the exemption under section 10(1).

INCOME DERIVED FROM AGRICULTURAL LAND BY AGRICULTURAL

OPERATIONS

Section 2(1A) gives the following three instances of agriculture income –

 Any income derived by agriculture from land situated in India and used for
agricultural purposes.
 Any income derived by a cultivator or receiver of rent in kind of any process
employed to render the produce raised or received by him to make it fit to be taken to market.
 Any income derived by such land by the sale by a cultivator or receiver of rent in kind
of the produce raised or received by him in respect of which no process has been performed
other than a process of the nature.
These incomes are agriculture income if such incomes are derived from land which is situated
in India and is used for agricultural purposes.
Any surplus arising on sale or transfer of agricultural land is not treated as rent or revenue
derived from the land.

INCOME DERIVED FROM MARKETING PROCESS

Sometimes it becomes difficult to find ready market of the crop as harvested. In order to
make the produce a commodity which is saleable, it becomes necessary to perform some kind
of process on the produce. The income arising by way of enhancement of value of such
produce, by performing such process to make the raw produce fit for market, is also
agriculture income. However, the following conditions must be satisfied –

7|Page
 The process must be one which is usually employed by a cultivator or receiver of rent
in kind.
 The process must be applied to render the produce fit to be taken to market.
For example, tobacco leaves are ordinarily dried to make them suitable for sale. Therefore,
the income from the ordinary process employed to dry the tobacco leaves to make them fit to
be taken to market, is agriculture income. The ordinary process employed to render the
produce fit to be taken to market includes thrashing, winnowing, drying, crushing, boiling
etc.
Moreover, if marketing process is performed on a produce which can be sold in its raw form
without requiring any process to make it fit for marketing, then the income derived from it is
partly agricultural and partly non agriculture. For example, if sugarcane is generally sold in a
given area without being subject to any process, the process of converting sugarcane into
sugar would not be agriculture process and income attributable to the process of converting
sugarcane into sugar would not be agriculture income.
Section 2(1A)(b) does not contemplate sale of commodity different from what is cultivated
and processed and where the assess was growing mulberry leaves, feeding them to silkworms
and obtaining silk cocoons, income from sale of silk cocoons would not be agriculture
income.

INCOME FROM FARM BUILDING

Income from a house property which satisfies the following cumulative conditions, would be
treated as agriculture income and would be exempt from tax by virtue of section 10(1) –
 The building should be occupied by the cultivator or receiver of rent in kind who can
be a landlord or a tenant.
 It should be on or in the immediate locality of land situated in India and used for
agricultural purposes.
 The cultivator or receiver in kind should by reason of his connection with the
agriculture land requires the building as a dwelling house or as a store house or other out
building
 The land is assessed to land revenue or local rate or the land is situated outside the
urban area.
Here urban area means any area which is comprised within the control of any municipality or
cantonment board having a population of not less than 10000 persons upto a maximum of 8

8|Page
kilometers or within notified distance from the limits of any such municipality or cantonment
board.
If all these above conditions are satisfied, the income from a farm building is exempt from
tax.
Use of building for any other purposes other than agriculture:-
Income would be exempt from tax if land or building is used for agriculture purposes. If the
land or building is used for any other purpose then the exemption is not available.5
For example, if a farmer gives his building on rent for residential purposes then such income
would be chargeable to tax.6

CASES WHEN INCOME HELD TO BE AGRICULTURE INCOME

In the following cases, income is held as agriculture income –

1. If denuded parts of the forest are replanted and subsequent operations in forestry are
carried out, the income arising from the sale of replanted trees.
2. Profit on sale of standing crop or the produce after harvest by a cultivating owner or tenant
of land.
3. Rent for agriculture land received from sub tenants by mortgagee in possession.
4. Compensation received from an insurance company for damage caused by hail storm to the
green leaf forming part of assessee’s tea garden.
5. Income from growing flowers and creepers.
6. Salary received by a partner for rendering services to a firm which is engaged in
agricultural operations, is agriculture income.
7. Interest on capital received by a partner from the firm engaged in agricultural operations.
8. If nursery is maintained by carrying out basic as well as subsequent operations then the
income from such nursery would be agriculture income.7

CASES WHEN INCOME HELD TO BE NON-AGRICULTURE INCOME

In the following cases, income is held as non-agriculture income –

1. Annual annuity received by a person in consideration of transfer of agricultural land.
5
Dr. Raj, Kailash, ‘Taxation Laws”, Allahabad Law Agency, 9th edition, Faridabad (Haryana), 2007.Pg. no. 3
6
http://taxguru.in/income-tax/income-tax-treatment-taxability-of-agricultural-income.htmlas accessed on 5th
Nov, 16.
7
http://indiantaxguide.wordpress.com/2009/05/08/agricultural-income/as accessed on 5th Nov, 16.

9|Page
2. Interest on arrears of rent in respect of agricultural land as it is neither rent nor revenue
derived from land.
3. Interest accrued on promissory notes obtained by a Zamindar from defaulting tenants.
4. Income from sale of wild grass and reeds of spontaneous growth.
5. Remuneration received by a managing agent at a fixed percentage of net profit from a
company having agriculture income.
6. Interest received by a money lender in the form of agriculture produce.
7. Income from sale of agricultural produce received by way of price for water supplied to
land.
8. Commission received by the landlord for selling agriculture produce of his tenant.
9. Royalty income of mines
10. Income from poultry farming
11. Receipts from TV serial shooting in farm house
12. Maintenance allowance charged on agriculture land8

TREATMENT OF PARTLY AGRICULTURE INCOME

For decomposing a composite business income, which is partly agricultural and partly non
agricultural, the following rules are applicable –

Income Non-Agricultural Agricultural

Income Income
Growing and Manufacturing Tea in India 40% 60%

Rubber Plants grown by the seller in India 35% 65%

Sale of coffee grown & cured by seller 25% 75%

(normal)
Sale of coffee grown, cured, roasted and 40% 60%
grounded by the seller in India
COMPUTATION OF AGRICULTURE INCOME

For computation of agriculture income, the agriculture income is aggregated with non
agriculture income if following three conditions are satisfied9–
8
http://indiantaxguide.wordpress.com/2009/05/08/agricultural-income/as accessed on 5th Nov, 16.
9
T. Padma, Dr., “Principle of Law of Taxation”, ALT Publication, 10th Edition. Pg. no. 20

10 | P a g e
 Assessee is an individual, HUF, AOP/BOI etc.
 Assessee has non agriculture income which exceeds the minimum taxable limit
 Agricultural income exceeds Rs. 5000

The aggregation of agriculture income with non agriculture income and computation of
income tax for the Assessment year 2011-12 shall be done in the following manner –

Step 1 : Net agriculture income is to be computed if it would be chargeable to income tax. In

case of an assessee engaged in business of growing and manufacturing tea, 60% of income
computed is agriculture income.

Step 2 : Agricultural and non agricultural income of the assessee will be aggregated and
income tax is calculated on the aggregate income.

Step 3 : Then the net agricultural income is increased by the first slab of income which tax is
charged at nil rate i.e. Rs. 190000 in case of resident woman below 60 years, Rs. 250000 in
case of resident senior citizen(between 60-80 years), Rs. 500000 in case of super senior
resident individual(80 years or more), Rs. 180000 in case of another individual or every
HUF.

Step 4 : The amount of income tax determined at step 2 will be reduced by the amount of
income tax determined under step 3.

Step 5 : Find out the balance. Add education cess and secondary & higher secondary
education cess.

Step 6 : The amount so arrived at is the income tax payable by the assessee.

CASE LAWS

Bacha F. Guzdar v. C.I.T., Bombay 10, The appellant, MrsBacha F. Guzdar, was, in
accounting year 1949-50, a shareholder in two Tea companies, Patrakola Tea Company Ltd.,
and Bishnauth Tea Company Ltd., and received from the aforesaid companies dividends
aggregating to Rs 2750.The two companies carried on business of growing and
manufacturing tea.By Rule 24 of the Indian Income Tax Rules, 1922, it is provided that
10
1955 AIR 740

11 | P a g e
Income derived from the sale of tea grown and manufactured by the seller in the taxable
territories shall be computed as if it were income derived from business and 40% of such
income shall be deemed to be income, profits and gains, liable to tax.

Therefore  40% of the income of the Tea companies was taxed as income from the
manufacture and sale of tea and 60% of such income was exempt from tax as agricultural
income.

Contention of  the Appellant

 The dividend income received by her in respect of the shares held by her in the said Tea
companies is to the extent of 60% agricultural income in her hands and therefore exempt
from tax

Contention  of  the Revenue

The dividend income is not agricultural income and therefore the whole of the income is
liable to tax.

Supreme Court held that,Agricultural income as defined in the Act is obviously intended to
refer to the revenue received by direct association with the land which is used for agricultural
purposes and not by indirectly extending it to cases where that revenue or part thereof
changes hands either by way of distribution of dividends or otherwise.

In fact and truth dividend is derived from the investment made in the shares of the company
and the foundation of it rests on the contractual relations between the company and the
shareholder.

Dividend is not derived by a shareholder by his direct relationship with the land. Therefore  
whosoever receives profit from the land directly is entitled to the exemption .

A shareholder does not receives profit directly from land , though the company may be
involved in agricultural activities and is not entitled for exemption.

CIT v. Raja BahadurKamakshya Narayan Singh11,dealt with the question whether interest
on arrears of rent payable in respect of land used for agricultural purposes is agricultural
income and therefore exempt from Income Tax. It was held that it was neither rent nor
revenue derived from land within the meaning of Section 2(1A ) of the Income Tax Act.
11
1971 AIR 794

12 | P a g e
Premier Construction Co. Ltd. v. CIT12,dealt, with the nature of the commission of a
managing agent of the company , a part of whose income was agricultural income.

The assessee claimed exemption from tax on the ground that his remuneration at 10 per cent
of the profits was calculated with reference to the income of the company part of which was
agricultural income. It was held that the assessee received no agricultural income as defined
by the Act but that he received a remuneration under a contract for personal service
calculated on the amount of profits earned by the employer, payable not in specific, out of
any item of such profits, but out of any moneys of the employer available for the purpose,
and that the remuneration therefore was not agricultural income and was not exempt from
tax.

“The principle to be derived from a consideration of the terms of the Income Tax Act is that
where an assessee receives income, not itself of a character to fall within the definition of
agricultural income contained in the Act, such income does not assume the character of
agricultural income, by reason of the source from which it is derived, or the method by which
it is calculated.13

In MaharajkumarGopal Saran Narain Singh v. CIT 14, An annual payment for life to the
assessee was not held to be agricultural income and therefore not exempt from tax where the
annuity arose out of a transfer made by the assessee of a portion of his estate for discharging
his debts and for obtaining an adequate income for his life. It was  held that it was not rent or
revenue derived from land but money paid under a contract imposing personal liability on the
covenator the discharge of which was secured by a charge on land.

In CIT v. Sir Kameshwar Singh15, Profits received by  usufructuary mortgagee  were exempt
from Income Tax on the ground that they were agricultural income in the hands of the
mortgagee .

It was held that such income in the hands of mortgagee  amounts to “agricultural income” as
the  usufructuary mortgagee  had received profits directly from the land.

Therefore   whosoever receives profit from the land directly is entitled to the exemption .

12
[1948] 16 ITR 380 (PC)
13
http://taxadviceindiacom.blogspot.in/2012/10/case-laws-on-sec-2ia-agricultural-income.html as accessed on
5th Nov, 16.
14
3 I.T.R. 237
15
1935] 2011 TPI 646

13 | P a g e
A shareholder does not receives profit directly from land, though the company may be
involved in agricultural activities and is not entitled for exemption.

C.I.T. v. Benoy Kumar Sahas Roy16, In this case the court emphasized that certain basic
operations should be carried out alongwith subsequent operations. The Supreme Court
observed that if the integrated activity of the agriculturist, viz., agriculture, which includes
the basic operations and the subsequent operations, is undertaken and performed in regard to
any land, that land can be said to have been used for agricultural purposes and the income
derived therefrom can be said to be agricultural income derived from the land by agriculture.
In the very same judgment, the Supreme Court also considered the other activities in relation
to the land or having connection with the land including breeding and rearing of live-stock,
dairy-farming, butter and cheese-making, poultry-farming, etc.

CONCLUSION

Agriculture income is defined under sec 2 (1A) and is exempt under the Indian Income Tax
Act. This means that income earned from agricultural operations is not taxed. The reason for
exemption of agriculture income from Central Taxation is that the Constitution gives
exclusive power to make laws with respect to taxes on agricultural income to the State
Legislature. While computing tax on non-agricultural income, agricultural income is also
taken into consideration.

Although agricultural income is fully exempt from tax, the Finance Act, 1973, introduced a
scheme whereby agricultural income is included with non-agricultural income in the case of
non-corporate assessees who are liable to pay tax at specified slab rates. The process of
computation is as follows:

(a) Income tax is first calculated on the net agricultural income plus the assessee’s total
income from non-agricultural sources.

(b) Income tax is then calculated on the basic exemption slab increased by the assessee’s net
agricultural income.

(c) The difference between (a) and (b) is the amount of tax payable by the assessee.

16
1957) 32 ITR 466 (SC)

14 | P a g e
This process of computation is, however, followed only if the assessee’s non-agricultural
income is in excess of the basic exemption slab. A method has been laid down to levy tax on
agricultural income in an indirect way. This concept is known as partial integration of taxes.
It is applicable to individuals, HUF, unregistered firms, AOP, BOI and artificial persons. Two
conditions which need to satisfied for partial integration are:

1. The net agricultural income should exceed Rs. 5,000 p.a., and
2. Non-agricultural income should exceed the maximum amount not chargeable to tax.

Yes, it is true that it is tax-free but the freedom arises neither by virtue of increase in the tax
threshold, which remains put at Rs 50,000, nor by exemptions offered by Sec. 10. It attracts
rebate under the newly inserted Sec. 88D.

Accordingly, “An assessee, being an individual resident in India:

1. a) whose total income does not exceed one hundred thousand rupees, shall be entitled
to a deduction from the amount of income-tax (as computed before allowing the
deductions under this chapter) on his total income with which he is chargeable for any
assessment year, of an amount equal to hundred per cent of such income-tax;
2. b) whose total income exceeds one hundred thousand rupees and the income-tax
payable on such total income (as computed before allowing the deductions under this
Chapter) exceeds the amount by which such total income is in excess of one hundred
thousand rupees, shall be entitled to a deduction from the amount of income-tax on
his total income, of an amount equal to the amount by which the income-tax payable
on such total income is in excess of the amount by which the total income exceeds
one hundred thousand rupees.” The sub clause ‘b’ offers marginal relief.

Clearly, despite agricultural income being tax-exempt, assessees have to be extra careful
while dealing with such income. They must make sure that they aggregate agricultural
income with their total income to avoid interest payments and possible penalties for
concealment of income. Assessees must also maintain credible records to provide the tax
authorities with proof of ownership of agricultural land and evidence of having earned
agricultural income. The benefit of Tax Exemption on Agricultural Income has not only been

15 | P a g e
continued but extended to Urban Land used for agricultural purposes.
Capital Gain on Agricultural Land is now liable to Income Tax subject to benefit of Roll-over
of Investment in Agricultural Land. Agricultural Income will continue to be taken into
consideration for Rate purposes in the like manner as under the present Income Tax Law

BIBLIOGRAPHY

Books referred:

1. Income Tax - Dr. V. K. Singhania

16 | P a g e
 2. Income Tax- Dr. Monika Singhania

3. Income Tax-Law & Accounts - Dr. R. K. Jain

.

Website referred:

1. http://blog.lotuseduservices.com/wp-content/uploads/2014/12/CA-Final-DIRECT-
TAX-notes-on-AGRICULTURAL-INCOME.pdf
2. http://cms.gcg11.ac.in/attachments/article/101/assessment%20of%20agricultural
%20income.pdf
3. http://commercehub.webs.com/documents/AGRICULTURAL%20INCOME-3.pdf
4. http://www.incometaxindia.gov.in/Tutorials/11.Tax%20free%20incomes%20final.pdf

17 | P a g e