AGRICULTURAL INCOME

Section 2(1A) | Section 10 of the Income Tax Act, 1961

Article 366(1) of the Constitution of India, 1950

 INTRODUCTION

Agricultural Income is defined under Section 2(1A) of the Income Tax Act,
1961.

It is exempted from tax liability under Section 10 of the Act.

Section 2(1A) of the Act defines agricultural income as an income/revenue

under three sources/kinds.

Power to levy taxes on agricultural income is vested only with the State
legislatures.

Net income is aggregated with agricultural income for the computation of

tax in order to tax only the net income.
 Agricultural income defined in three heads under Section 2(1A) of the
Income Tax Act 1961:
(a) Any rent or revenue/profits derived from land which is located in
India and is used for agricultural purposes [I].
(b) Any income/profit derived from such land by agriculture workings
including handing out of agricultural produce so as to provide it fit for the
market or sale of such generate [II].
(c) Any income/revenue attributable to a farm-house which is subject to
satisfaction of certain criteria prcised in Section 2(1A) [III].
 [I] Section 2(1A) (a) of the Act
Any rent or revenue derived from land which is situated in India and is used
for agricultural purposes.
Three elements:

{a} Rent or revenue derived from land: The grant of use of land as a right for
which payment is made to the owner in cash or kind. The source of yielding
income has to be direct and proximate, not indirect.

{b} Land should be situated in India: Irrespective of subjection to local

revenue or land rate. Indian resident deriving income from land outside India
not exempted from tax.
 {c} Land should be used for agricultural purposes:

In CIT v. Raja Benoy Kumar Sahas Roy, the Court defined agricultural
purposes to include the following operations, which must be in
conjugation and continuation:
[i] Basic operations: activities essential to constitute agriculture prior to
germination, involving expenditure of human skill and labour on the land
itself e.g. tilling of land, sowing seeds and planting.
[ii] Subsequent Operations: activities performed after the production of
sprouts from the land which by themselves alwould not constitute
agriculture e.g. weeding, tending, pruning, cutting, felling.
CASE: Bacha F Guzdar v. Commissioner of Income Tax
Agricultural income as defined in Section 2(1A)(a) of the Indian Income tax
Act signifies income proximately derived from direct association with land by a
person who actually tills the land or gets it cultivated by others. Agricultural
income does not mean income which can be ultimately or indirectly traced to
have connection with agricultural operations.

Held: Dividend of a shareholder of the tea company would not be the part of
agricultural income.
 [II] Section 2(1A) (b) of the Act
Agricultural income is the income derived from any land by agricultural
processing of the production, raised or received as rent in kind, in order to
make it fit for the market, or sale of such produce.

Three sub-sections:

(i) Agriculture: standing crop after harvest sold by agriculturist, or use for his
own consumption, or crop used as raw material for business.
(ii) Performing marketing process or agricultural process: Includes
increase in the value of produce for saleability (marketing process). Does
not include industrial processes (PGBP income) e.g. extraction of oil,
conversion of sugarcane into jaggery.

(iii) Performing other natural processes: Agricultural produce should be

done by the assessee, the process employed is used by cultivator and the
receiver of rent in kind, and the process makes the product fit for the
market. There should be no change in character and nature of produce.
 [II] Section 2(1A) (c) of the Act
Any income that is gained from the building would constitute an agricultural income if these essentials
are satisfied:

I. The owner of building should be the land-holder and the building should be occupied by him.

II. Where there is a cultivator or land holder receiving rent in kind, the only necessity is that the
building is occupied by him and ownership is not necessary.

III. Building should be within the vicinity of the land that is used for agricultural purposes.

IV. Building should be in the use as dwelling house, store house or other out-building.

V. Land should be assessed to land revenue or a local rate. If it is not assessed, then it
should be situated outside the urban area.
 CONDITIONS
In the following circumstances income can be considered as agricultural income:

Existence of an area/land.

Usage of area/land must be for farming (agricultural) operations.

Both rent and income from the horticultural area and pay earned by the cultivator
or recipient by method for offer of produce are exempted from taxation only if
agricultural operations are performed on the land/area.

Cultivation of Land.

Ownership of Land is not key: He could also be an inhabitant or a sub-occupant.

POWER OF STATE GOVTS TO TAX AGRICULTURAL INCOME

Article 246 (1) read with Article 270 of the Constitution gives the Centre authority
to legislate with regard to taxes on income other than agricultural income and the
States to legislate with regard to taxes on agricultural income.

Since, by virtue of Article 366 (1) of the Constitution, agricultural income is as

defined for Indian income tax, the States are competent to tax agricultural income
and also prescribe its method of computation.

In Karimtharuvi Tea Estates Ltd. v. State of Kerala, the Supreme Court upheld such
power and freedom vested in the State Legislatures.
 RELEVANCE IN INCOME TAX CALCULATION
Scheme of partially integrated taxation on non- agricultural income with income derived
from agriculture was:

Implemented from Finance Act, 1973

Based on recommendation of the Committee on Taxation of Agricultural Wealth and

Income (Raj Committee)

Purpose: agricultural income of a person should be taken into account for the
purpose of determining the rates of income-tax chargeable to his non- agricultural
income.
 COMPUTATION OF NET AGRICULTURAL INCOME

Rules set out in Part IV of Schedule to the relevant Finance Act.

Provision for set-off of agricultural losses against agricultural income. Any

agricultural income-tax levied by a State Government would be deductible
here.

If the result of the computation is a loss, it will be ignored and the

agricultural income for the purposes of the rate schedule will be taken as
nil.

The net agricultural income thus computed is aggregated with the total
 COMPUTING THE TAX BASED ON PARTIAL INTEGRATION
Agricultural income alone is not taxable.

But when assessee earns both non-agricultural income and agricultural income, then
the latter is included in total income for purposes of income tax computation
(indirectly taxing agricultural income).

Only done when assessee is an Individual, HUF, Association of person/ Body of

individual, Artificial juridical person, Firm, Company, Co-operative society or Local
authority.
Two conditions must be fulfilled:
(i) Non-agricultural income of the assessee exceeds the maximum exemption limit, &
 STEPS TO COMPUTATION OF INCOME TAX

Step 1: Addition of agricultural income and non-agricultural income and calculate

tax on aggregate as if such aggregate income is the total income. [A]

Step 2: Add agricultural income to the maximum exemption limit available in the
case of assessee and compute tax on such amount as if it is the total income. [B]

Step 3: Deduct the amount of income tax as computed in Step 2 from the tax
computed in Step 1. The amount so arrived shall be total income- tax payable by
the assessee. [A - B]

Step 4: Add education cess @ 2% and SHEC cess @ 1%.

 CASES WHERE INCOME IS NOT TREATED AS
AGRICULTURAL
Use of garden for film shooting- Charges received for film shooting in the garden is not agricultural income.
[Nagi Reddy (B) v. CIT]

Sale of cocoons- The silk cocoon cannot be regarded as the agricultural produce of the cultivator of mulberry
leaves and hence the income derived from the sale of cocoons is not agricultural income. [Lakshmanan & Co
(K) v. CIT]

Sale of eucalyptus oil

Interest on compensation- Interest on additional compensation awarded by the Government is not

agricultural income. [Peninsular Capital Market Limited v. Asstt. CIT]

Sale of water- Income from sale of water situated in a pond amidst agricultural land cannot be treated as
agricultural income. It is also otherwise not exempt as a capital receipt.
CASES WHERE INCOME WAS INFERRED AS AGRICULTURAL
Income from nurseries or pot cultivation- Income from sale of plant grown directly in the pots and the sale of
seeds will be agricultural income. Income from nurseries was not treated as agricultural income.

Miscellaneous income from plantation- Miscellaneous income should also be agricultural income except in
respect of sale of trees of spontaneous growth.

Proceeds of crop insurance- The compensation received for loss of agricultural produce in pursuance of an
insurance policy can be treated as agricultural income liable to tax. [Midland Rubber and Produce Company
Ltd. v. State of Kerala]

Sale of seeds procured by research- Sale of hybrid/ germ plasm seeds after heavy outlay on research
produced by unconventional methods would not constitute agricultural income.

Hybrid seeds- Production and sale of hybrid seeds was eligible for exemption on its entire income as
 SHOULD AGRICULTURAL INCOME BE TAXED?
Majority of Indias population (70%) is dependent on agriculture as their means of earning.
Reasons for exempting agricultural income from income tax were:
(a) India was a poor, developing country.
(b) primary agricultural sector was in a bad shape.
(c) A lot of farmers were leaving the sector.
(d) Farmers committing suicide for heavy debts due to crop failures owing to unreliable
weather and low prices offered by traders and middlemen.
The intention of the government was thus, to not add to the plight of the poor farmers by
levying taxes on them.
Fact is, many farmers in the northern states are very rich.
Being a developing country India incurs a large amount of expenditure on the development of
infrastructure which is met by the taxpayers money. Exempting 70% of the population is a
huge loss.
 Being exempted of tax,there are recurring cases of tax evasion.
According to statics agricultural income is around 2000 lakhs Crores, i.e. 20
times of the nations GDP.
Tax evaders represent their black money as agricultural income.
Taxation Enquiry Commission set up in 1953-54 recommended that the
agricultural income should be (directly) taxed.
Levying of income tax will not affect the poor farmers because income less
than Rs. 2,50,000 is exempted from income tax anyway.
For the initial years of taxing agricultural income, such revenue should be put
to expenditure on the development of equipment, machinery, policies of the
agricultural sector.
Both the farmers and the government will be at a win-win situation.
Thank You.