CENTRAL UNIVERSITY OF SOUTH BIHAR

Project-Topic
“Agricultural-Income”

Submitted To Course Instructor Submitted By Student

Mr. Mani Pratap Amitesh-Tejaswi

Assistant Professor, Law CUSB1613125060
School Of Law And Vivek-Raj
Governance CUSB1613125053
Subject- Taxation Law-I BA.LLB.(Hons)
Course Code -Law 451 VIIIth Semester
Continuous Assessment-II

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 CONTENTS

 Acknowledgement

 Research Methodology

 Introduction

 Agricultural Income

 What is Agricultural Income?

 Rent or Revenue derived from land

 Agricultural not merely includes food & grains

 Some connection with land not sufficient

 Income from nursery operations

 Income derived from agricultural land by agricultural operations

 Income derived from marketing process

 Income from farm building

 Use of building for any other purposes other than agriculture

 Case when income held to be agriculture income

 Case when income held to be not agriculture income

 Computation of agriculture income

 Case Laws

 Conclusion

 Bibliography

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 TABLE OF CASES

 Bacha F. Guzdar v. C.I.T., Bombay………………………….…P-15-16

 CIT v. Raja Bahadur Kamakshya Narayan Singh………….……P-16

 Premier Construction Co. Ltd. v. CIT……………………………P-16-17

 Maharaj kumar Gopal Saran Narain Singh v. CIT……………….P-18

 CIT v. Sir Kameshwar Singh……………………………………..P-18

 C.I.T. v. Benoy Kumar Sahas Roy………………………………..P-18

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 ACKNOWLEDGEMENT
At this point of time I would like to express my gratitude to all those who gave me their
support to complete this project.

I am grateful to my Taxation Law teacher, who is Mr. Mani Pratap Das for giving me
permission to commence this project in the first instance and to do necessary study and
research. I want to thank law faculty members and other faculty members for all their
professional advice, value added time, effort and enterprise help, support, interest and
valuable hints that encouraged me to go ahead with my project.

I am deeply indebted to my colleagues for their meticulous planning, layout, presentation

and above all for their consideration and time.

My heartfelt appreciation also goes to seniors and my classmate for their stimulating
suggestions and encouragement which helped me at each level of my research and in
writing of this project.

Especially, I would like to give my special thanks to my parents, family members and god
whose patient love enabled me to complete this project.

I have tried my best to enclose practical approach of agricultural income and also
theoretical approach to my project.

(Signature of the Student)

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 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 Central University of South Bihar
and also the internet sources.

Scope and Limitations

Though the study of 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 Indian Law Institute of citation throughout the course of
this research paper.

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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) By virtue of this section 2(1A), “agricultural income” means 1–

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-

1
http://www.lawnotes.in/Section_2_of_Income-Tax_Act,_1961 as accessed on 29th March,2020.

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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

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.2

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 income –

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.3

2
http://www.lawnotes.in/Section_2_of_Income-Tax_Act,_1961 as accessed on 29th March, 2020.
3
https://www.coverfox.com/personal-finance/tax/agricultural-income/ as accessed on 29th March, 2020.

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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 income4 –

 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 –

 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.5

4
https://www.bankbazaar.com/tax/tax-on-agricultural-income.html as accessed on 29th March,2020
5
https://tax2win.in/guide/income-tax-agricultural-income as accessed on 29th March, 2020.

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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. 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.6

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.

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).7

6
Dr. H.C. Mehrotra, Income Tax & Law Accounts, 12 (Sahitya Bhawan Publications, Agra, 42nd edn., 2004)
7
https://blog.ipleaders.in/agriculture-income-types-taxability/ as accessed on 29th March, 2020.

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Income Derived From Agricultural Land By Agricultural Operations

Section 2(1A) gives the following three instances of agriculture income8 –

 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:-

 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.

8
Dr. H.C. Mehrotra, Income Tax & Law Accounts, 11 (Sahitya Bhawan Publications, Agra, 42nd edn., 2004)

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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.9

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.

9
https://www.nber.org/chapters/c0564.pdf as accessed on 29th March 29, 2020.

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  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 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. For
example, if a farmer gives his building on rent for residential purposes then such income
would be chargeable to tax.10

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.

10
4 http://yourfinancebook.com/definition-of-agricultural-income/as accessed on 29th March, 2020.

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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.11

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.

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

11
http://indiantaxguide.wordpress.com/2009/05/08/agricultural-income/as accessed on 29th March, 2020.

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12. Maintenance allowance charged on agriculture land12

Computation Of Agriculture Income:-

For computation of agriculture income, the agriculture income is aggregated with non
agriculture income if following three conditions are satisfied13 –

 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.

12
http://indiantaxguide.wordpress.com/2009/05/08/agricultural-income/as accessed on 29th March, 2020.
13
T. Padma, Dr., “Principle of Law of Taxation”, ALT Publication, 10th Edition. Pg. no. 20

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

Case Laws:-

Bacha F. Guzdar v. C.I.T., Bombay14, 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
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.

Decision:-

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

14
1955 AIR 740

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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 Bahadur Kamakshya Narayan Singh15, 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.

Premier Construction Co. Ltd. v. CIT16, 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

15
1971 AIR 794
16
[1948] 16 ITR 380 (PC)

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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.

In Maharaj kumar Gopal Saran Narain Singh v. CIT17, 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 Singh18, 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 .

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 Roy19, 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.

17
3 I.T.R. 237
18
[1935] 2011 TPI 646
19
(1957) 32 ITR 466 (SC)

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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.

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.

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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 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.

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Bibliography:-

Books referred:

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

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%20i
ncome.pdf

3. http://commercehub.webs.com/documents/AGRICULTURAL%20INCOME-3.pdf

4. http://www.incometaxindia.gov.in/Tutorials/11.Tax%20free%20incomes%20final.pdf

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