Section Section 2 (1A)

AGRICULTURL INCOME
CONCEPT OF INCOME
 In general terms, Income is a periodical
monetary return with some sort of regularity.
However, the Income Tax Act, even certain
income which does not arise regularly are
treated as income for tax purposes e.g.
Winnings from lotteries, crossword puzzles.
SECTION 2 (1A)  “AGRICULTURAL INCOME “MEANS
—

(a)  Any rent or revenue derived from land which is

situated in India and is used for agricultural purposes;
(b)  Any income derived from such land by—
 (i)  Agriculture; or
(ii)  the performance by a cultivator or receiver of rent-
in-kind of any process ordinarily employed by a
cultivator or receiver of rent-in-kind to render the
produce raised or received by him fit to be taken to
market ; or
(iii)  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 described in paragraph (ii) of this
sub-clause ;
SECTION 2 (1A)  “AGRICULTURAL INCOME “MEANS
—

(c)  any income derived from any building owned and

occupied by the receiver of the rent or revenue of any
such land, or occupied by the cultivator or the receiver
of rent-in-kind, of any land with respect to which, or
the produce of which, any process mentioned in
paragraphs (ii) and (iii) of sub-clause (b) is carried on :
 Provided that—
(i)  The building is on or in the immediate vicinity of the
land, and is a building which the receiver of the rent
or revenue or the cultivator, or the receiver of rent-in-
kind, by reason of his connection with the land,
requires as a dwelling house, or as a store-house, or
other out-building, and
SECTION 2 (1A)
    (ii)  The land is either assessed to land revenue in India or is subject
to a local rate assessed and collected by officers of the Government
as such or where the land is not so assessed to land revenue or
subject to a local rate, it is not situated—
in any area which is comprised within the jurisdiction of a municipality
(whether known as a municipality, municipal corporation, notified
area committee, town area committee, town committee or by any
other name) or a cantonment board and which has a population of
not less than ten thousand according to the last preceding census of
which the relevant figures have been published before the first day
of the previous year ; or
in any area within such distance, not being more than eight
kilometres, from the local limits of any municipality or cantonment
board referred to in item (A), as the Central Government may,
having regard to the extent of, and scope for, urbanisation of that
area and other relevant considerations, specify in this behalf by
notification in the Official Gazette.
SECTION 2 (1A)
Explanation 1.—For the removal of doubts, it is hereby
declared that revenue derived from land shall not include
and shall be deemed never to have included any income
arising from the transfer of any land referred to in item (a)
or item (b) of sub-clause (iii) of clause (14) of this section.
Explanation 2.—For the removal of doubts, it is hereby
declared that income derived from any building or land
referred to in sub-clause (c) arising from the use of such
building or land for any purpose (including letting for
residential purpose or for the purpose of any business or
profession) other than agriculture falling under sub-clause
(a) or sub-clause (b) shall not be agricultural income.
Explanation 3.—For the purposes of this clause, any income
derived from saplings or seedlings grown in a nursery shall
be deemed to be agricultural income
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.
AGRICULTURE INCOME
As per Income Tax Act income earned from any
of the under given three sources meant
Agricultural Income:
(i) Any rent received from land which is used
for agricultural purpose.
(ii) Any income derived from such land by
agricultural operations including processing
of agricultural produce, raised or received as
rent in kind so as to render it fit for the
market, or sale of such produce.
AGRICULTURE INCOME
 (iii) Income attributable to a farm house
subject to the condition that building is
situated on or in the immediate vicinity of
the land and is used as a dwelling house,
store house etc.
 Now income earned from carrying nursery
operations is also considered as agricultural
income and hence exempt from income tax.
IN ORDER TO CONSIDER AN INCOME AS
AGRICULTURAL INCOME CERTAIN POINTS HAVE TO
BE KEPT IN MIND:

(i) There must me a land.

(ii) The land is being used for agricultural operations.
(iii) Agricultural operation means that efforts have
been induced for the crop to sprout out of the land .
(iv) If any rent is being received from the land then in
order to assess that rental income as agricultural
income there must be agricultural activities on the
land.
(v) In order to assess income of farm house as
agricultural income the farm house building must be
situated on the land itself only and is used as a store
house/dwelling house.
CERTAIN INCOME WHICH IS TREATED
AS AGRICULTURE INCOME:
(a) Income from sale of replanted trees.
(b) Rent received for agricultural land.
(c) Income from growing flowers and creepers.
(d) Share of profit of a partner from a firm
engaged in agricultural operations.
(e) Interest on capital received by a partner
from a firm engaged in agricultural
operations.
(f) Income derived from sale of seeds.
CERTAIN INCOME WHICH IS NOT TREATED
AS AGRICULTURAL INCOME:

(a) Income from poultry farming.

(b) Income from bee hiving.
(c) Income from sale of spontaneously grown
trees.
(d) Income from dairy farming.
(e) Purchase of standing crop.
(f) Dividend paid by a company out of its
agriculture income.
CERTAIN INCOME WHICH IS NOT
TREATED AS AGRICULTURAL INCOME:

(g) Income of salt produced by flooding the

land with sea water.
(h) Royalty income from mines.
(i) Income from butter and cheese making.
(j) Receipts from TV serial shooting in farm
house is not agriculture income.
PARTLY AGRICULTURE INCOME
1. Profit of business other than Tea
 This rule applicable to agricultural produce
like cotton, tobacco, and sugarcane etc,
here the market value of the agricultural
produce raised by the Assessee for utilizing it
as raw material for his business will be
deducted out of the total profit of such
Assessee while calculating tax on his income.
PARTLY AGRICULTURE INCOME
2. Profit from Tea manufacturing
If a person using his own tealeaves grown by him for his
tea manufacturing business, then 60 % of his income
will be treated as agricultural income and the
remaining 40 % will be treated as business income. So
he has to pay tax on that remaining 40% of income.
3. Income from the manufacturing of centrifuged
latex or cenex
If a person manufacturing centrifuged latex by using his
own made raw then, 65 % of the income derived from
the sale of the same is treated as agricultural income
so he has to pay tax remaining part of the income.
PARTLY AGRICULTURE INCOME
4. Income from the coffee manufacturing
a) 75% of the income derived from the sale of
coffee grown and cured by the seller in India
is deemed to be agricultural income 25% is
taken as business income.
b) 65% the income derived from the sale of
coffee grown, cured, roasted and grounded
by the seller in India is deemed to be
agricultural income 40% is taken as business
income.
ILLUSTRATION:1
Mr. Ramnanth had estates in Rubber, tea and
coffee. He derives income from them.
He furnishes the following particulars of his
income for the year ending 31-3-2013.
Manufacture of rubber Rs: 5,00,000
Manufacture of coffee grown and cured Rs:
3,50,000
Manufacture of tea Rs: 7,00,000
Compute taxable income of Ramanth for the
A.Y. 2013-14.
COMPUTATION OF TAXABLE
INCOME FOR THE A.Y.2013-14:
 Manufacture of rubber ( 35% is non-
agricultural income) : 175,000
 Manufacturing of Coffee (25% is non-
agricultural income) : 87,500
 Manufacturing of tea ( 40% is non-agricultural
income) : 2,80,000
 Taxable Income : 5,42,500
DOOARS TEA CO. LTD. V CIT - 1962 AIR 186 1962 -
GAJENDRAGADKAR P.B.

 The appellant which carried on

business of growing, manufacturing and
selling tea held a large tract of land on
which bamboos, thatching grass, and fuel
timber were grown by it by agricultural.
 operations through its servants , and laborers
and the same were utilised for the purposes
of its tea business and were not sold in the
market or Otherwise.
FACTS
 In the relevant assessment year the
Agricultural Income-tax Officer increased the
appellant's return by a certain sum of money
as representing the market value of its
agricultural income from bamboos,
thatching grass and fuel timber,
 The appellant contended inter alia that
the agricultural produce in question did not
constitute agricultural income under the
Bengal Agricultural Income-tax Act because
the same had not been sold or converted into
money.
THE HIGH COURT AT
CALCUTTA
 under s. 63(1) of ,the,, Bengal Agricultural Income-Tax Act
IV of 1944 (hereafter called the Act). The,, appellant, the
Dooars Tea, Co. Ltd., is a public limited company and it
carries on- business of growing , manufacturing and selling
tea. For the accounting year 1948 which corresponds to the
assesments year 1949-50 a return was submitted by the,
appellant in respect of its agricultural' income showing the
said income at the Rs.3,45,702.
 The Agricultural Income-tax Officer, however, did not
accept the correctness of the said return and increased.
the amount to Rs 4,41,940 This increased amount included
a sum of Rs. 39,849 and it represented the market value
of:
 the appellants agricultural income from bamboos,
thatching grass and fuel timber.
USAGE OF BAMBOOS
 The bamboos, the thatching grass and fuel
timber were grown the, appellant on its land
by agricultural operations which were carried
on by the servants and labourers empoyed by
the appellant.
 After they were grown they were utilised by
the appellant for the purpose of its tea
business and were not sold either-in the
market or otherwise. It has been found that
the appellant has been utilising the bamboos
thatching grass and fuel timber grown by it on
its land in this way every year.
BEFORE THE TAX AUTHORITIES
 the appellant urged that the agricultural
produce in question did' not constitute
agricultural income within the meaning of
the Act because the same had not been sold.
 The appellant's case was that agricultural
produce grown by it on its own land could
not in law be treated as its income unless it
was converted into its money equivalent or
into something which was money's worth ; in
other words, unless the said produce was
sold.
TRIBUNALS RULING
 This dispute went up to the Tribunal ;
 but the Tribunal agreed with the conclusion
of the tax authorities and held that the
produce in question constituted agricultural
income of the appellant for the relevant
year, and
 so the addition of Rs. 39,849 made by the
Agricultural Income-tax Officer in
determining the total agricultural income of
the appellant for the relevant year was
affirmed.
ISSUES FRAMED
 Feeling aggrieved by the final order passed by the
Tribunal in this matter the appellant required the
Tribunal to refer two questions for' the opinion of the
High Court, and in due course the Tribunal made the
reference as required. The two questions referred for
the, opinion of' the High Court have been thus framed
by the Tribunal :
(1) Is bamboo, thatch, fuel, etc., grower by assessee
company and utilised for its own benefits in its tea
business, agricultural income within the meaning of
the Bengal Agricultural Income-tax Act? ; and
(2) If the answer to question (1) be in the affirmative,
can such income be computed under rule 4 of the rules
framed under the Act?
MEANING OF THE WORD INCOME
 It is not disputed by the appellant that in the context
income may mean either cash or income in kind.
 It is also conceded by the appellant that the
dictionary meaning of the word "income" includes
"Produce of a farm", and so if we were, to construe
the relevant clause in the light of the dictionary
meaning 'of the word come"';
 -it would take in agricultural produce with which we
are concerned in the present case.
 It is, however, urged that the" word "Income"
necessarily denotes, and Las reference to, profit or
gain, and profit or gain cannot be made unless the
produce is sold and realises its value.
CASES CITED
 No person can trade with himself and so if the
agricultural produce is used by the appellant for its
own purposes there is no element of sale involved in
the transaction and there can be no profit or gain
which would justify the imposition of tax on the said
produce.
 In Alexander Tennant v. Robert Sinclair Smith (1)
Lord Halsbury has cited with approval Lord
Wensleydale's observation in In re Micklethwait (2)
that "'it is a well- establisbed rule, that the subject is
not to be taxed without clear words for that purpose ;
and also that every Act of Parliament must be read
according to the natural construction of its words".
CASES CITED
 Sir Kikabhai Premchand
v. Commissioner of Income-tax (Central), Bombay In that
case Bose J., who spoke for the majority of the Court,
stated that it was well recognised that in revenue cases
regard must be had to the substance of the transaction
rather than its mere form, and he proceeded to observe
that in the case before the Court, disregarding
technicalities, it was impossible to get away from the fact
that the business was owned and run by the assessee
himself ;
 and if he was to be held liable for the tax "you reach the
position that a man is supposed to be selling to himself
and thereby making a profit out of himself which on the
face of it is not only absurd but against all canons of
mercantile and income-tax law".
CASES CITED
 Sir George Lowndes in 
Commissioner of Income-tax v. Shaw Wallace & Co ., (1)
the object of Indian Income-tax is to tax income a term
which it does not define. It is expanded, no doubt, into
income, profits and gains, but the expansion is more a
matter of words than of substance.
 Similar is the observation of Lord Russell in Captain
Maharaj Kumar Gopal Saran Narain Singh v.
Commissioner of Income-tax, Bihar and Orissa
(2)where it has been observed that "the word "income"
is not limited by the words ,profits" and gains".
Anything which can be properly described as income is
taxable under the Act unless expressly exempted".
ARGUMENTS OF RESPONDENT
 the respondent contends that r. 4(2) covers the
present case, and if that is so., according to the
respondent, that would incidentally support his
construction of s. 2(1)(b)(1). The argument urged by
the appellant assumes that the two rules are based on
a kind of basic dichotomy. Rule I deals with
agricultural produce sold in the market, and r. 2 with
the agricultural produce which has been sold but not
in the market.
 In other words, according to the appellant, both the
rules assume that the agricultural produce has in fact
been sold, r. (1) deals with cases where it has been
sold in the market and r. (2) with cases where it has
been sold but not in the market.
JUDGMENT
 Rule (2) is a residuary rule which applies to all cases
not falling under r. (1). Therefore, we must hold that
the answer given by the High Court to question 2 is
also right. It is obvious that the rules framed in
exercise of the power conferred by s. 57 of the Act
cannot legitimately be pressed into service for the
purpose of construing the relevant provisions of the
Act ; even so, incidentally it may be permissible to
observe that the construction of r. 4(2) which we are,
inclined to adopt is consistent with the respondent's
case that s.2 (1)(b)(i) includes agricultural produce
utilised b the appellant for its own business.
 In the result the appeal fails and is dismissed. With
costs. Appeal dismissed.
MRS. BACHA F. GUZDAR
V.
COMMISSIONER OF INCOME-TAX - MEHR CHAND MAHAJAN, CJ.
AND S.R. DAS, GHULAM HASAN, N.H. BHAGWATI AND T.L. VENKATARAMA AYYAR, JJ.
IT APPEAL NO. 5228 OF 1950-51 (

 Section 2(1A), read with section 10(1) of

the Income-tax Act, 1961 [Corresponding
to section 2(1), read with section 4(3)(viii)
of the Indian Income-tax Act, 1922] -
Agricultural income - Assessment year
1949-50 - Assessee was a shareholder of a
company which carried on business of
growing and manufacturing tea - Whether
dividend income received by assessee
could not be treated as agricultural income
- Held, yes
FACTS

 The assessee was a shareholder in two tea companies, which

carried on business of growing and manufacturing tea. For the
relevant assessment year, the appellant claimed that the
dividend income received by her in respect of the shares held by
her in the said tea companies was to the extent of 60 per cent
agricultural income in her hands and, therefore, pro
tanto exempt from tax while the revenue contended that
dividend income was not agricultural income and, therefore, the
whole of the income was liable to tax.
 The ITO, and on appeal, the AAC both concurred in holding the
whole of the said income to be liable to tax. The Tribunal
confirmed the view that the dividend income could not be
treated as agricultural income in the hands of the shareholder
and decided in favour of the revenue.
 On reference the High Court confirmed the order of the Tribunal.
 On appeal to the Supreme Court :
SUBSTANTIVE QUESTION OF
LAW
 "Whether 60% of the dividend amounting to
Rs. 2,750 received by the assessee from the
two tea companies is agricultural income and
as such exempt under section 4(3) (viii) of
the Act."
RELEVANT STATUTORY
PROVISIONS
 Under section 2(1) "agricultural income" means:
 "(a) any rent or revenue derived from land which is used for
agricultural purposes, and is either assessed to land-
revenue in the taxable territories or subject to a local rate
assessed and collected by officers of the Government as
such;..."
 Sub-section (15) of section 2 defines "total income" as total
amount of income, profits and gains, referred to in sub-
section (1) of section 4 computed in the manner laid down
in this Act. Section 3 authorises income-tax to be charged
upon a person in respect of the total income of the previous
year. Section 4 lays down that the total income of any
previous year of any person to be charged must include all
income, profits and gains, from whatever source derived
and defines the scope of its application for purposes of tax.
ISSUES
 In order, however, that dividend may be held to be agricultural
income it will be incumbent upon the appellant to show that,
within the terms of the definition, it is rent or revenue derived
from land which is used for agricultural purposes

 Mr. Kolah, for the appellant, contends that it is revenue derived

from land because 60% of the profits of the company out of which
dividends are payable are referable to the pursuit of agricultural
operations on the part of the company.
 It is true that the agricultural process renders 60% of the profits
from land which is used for agricultural purposes exempt from tax
in the hands of the company but can it be said that when such
company decides to distribute its profits to the shareholders and
declares the dividends to be allocated to them, such dividends in
the hands of the shareholders also partake of the character of
revenue derived from land which is used for agricultural purposes?
ISSUES
 There can be no doubt that the initial source which
has produced the revenue is land used for
agricultural purposes but to give to the words
"revenue derived from land" the unrestricted
meaning apart from its direct association or relation
with the land, would be quite unwarranted.
 For example, the proposition that a creditor
advancing money on interest to an agriculturist and
receiving interest out of the produce of the lands in
the hands of the agriculturist can claim exemption
of tax upon the ground that it is agricultural income
within the meaning of section 4, sub-section (3)
(viii), is hardly statable.
LEGISLATIVE INTENTION
 The object appears to be not to subject to
tax either the actual tiller of the soil or any
other person getting land cultivated by
others for deriving benefit there from, but to
say that the benefit intended to be conferred
upon this class of persons should extend to
those into whosoever hands that revenue
falls, however remote the receiver of such
revenue may be, is hardly warranted.
MEANING OF TERM DIVIDEND
 Buckley's Companies Act (12th Ed., page 894) where the
etymological meaning of dividend is given as dividendum,
the total divisible sum, but in its ordinary sense it means
the sum paid and received as the quotient forming the
share of the divisible sum payable to the recipient.
 In Halsbury's Laws of England, Vol. 6 (3rd Ed.), page 234,
the law regarding the attributes of shares is thus stated:
 "A share is a right to a specified amount of the share
capital of a company carrying with it certain rights and
liabilities while the company is a going concern and in its
winding up. The shares or other interest of any member in
a company are personal estate transferable in the manner
provided by its articles, and are not of the nature of real
estate."
CASES CITED
 In Borland's Trustee v. Steel Brothers & Co.
Ltd. [1901] 1 Ch. 279Farwell, J., held that "a
share in a company cannot properly be
likened to a sum of money settled upon and
subject to executory limitations to arise in
the future; it is rather to be regarded as the
interest of the shareholder in the company,
measured, for the purposes of liability and
dividend, by a sum of money……….."
THE FIRST CASE
  viz., Commissioner of Income-tax v. Raja
Bahadur Kamakshya Narayan Singh 
[1948] 16 ITR 325 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(1) of the Income-tax Act.
Lord Uthwatt who delivered the judgment of
the Privy Council used the following piquant
language in coming to that conclusion;
 Premier Construction Co., Ltd. v. Commissioner of Income-
tax [1948] 16 ITR 380 (Bom.), 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% 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 specie 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. Sir John Beaumont in the
above case observed :
 "In their Lordships' view the principle to be
derived from a consideration of the terms of
the Income-tax Act and the authorities
referred to 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."
CASES CITED
 Maharajkumar Gopal Saran Narain
Singh v. Commissioner of Income-tax 
[1935] 3 ITR 237, 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 being held that it
was not rent or revenue derived from land but
money paid under a contract imposing personal
liability on the covenantor the discharge of which
was secured by a charge on land.
CASES CITED
 in Commissioner of Income-tax v. Sir
Kameshwar Singh [1935] 3 ITR 305. That was
a case of a usufructuary mortgagee the
profits received by whom were exempt from
income-tax on the ground that they were
agricultural income in his hands. Lord
Macmillan, after referring to certain sections
of the Act, observed that " the result of
those sections is to exclude agricultural
income altogether from the scope of the Act
howsoever or by whomsoever it may be
received."
DECISION
 The learned Attorney-General also contended that
the conclusion that dividend is not agricultural
income also follows from the provisions of section
16, sub-section (2), and the proviso to the Act.
According to him, this section compels the
assessee to show in his return the whole dividend
including the portion which is excluded on the
ground of agricultural income. We do not consider
it necessary to express any opinion upon this
contention as our conclusion reached as a result of
the foregoing discussion is sufficient to dispose of
the appeal. We accordingly dismiss the appeal
with costs. Ruled in favour of department
K. LAKSHMANAN & CO.
V.
COMMISSIONER OF INCOME-TAX
 B.N. KIRPAL AND S.P. KURDUKAR, JJ. – 1998
 Section 2(1A) of the Income-tax Act, 1961 -
Agricultural income - Whether section 2(1)
(b) contemplates sale of an item or
commodity different from what is
cultivated and processed - Held, no -
Whether income derived by assessee from
sale of cocoons raised by it by growing and
feeding mulberry leaves to silkworms could
be said to be agricultural income
FACTS
 The assessee was engaged in the activity of growing mulberry
leaves and rearing silkworms. It purchased silkworm eggs and when
they were hatched, the worms were principally fed on mulberry
leaves. The mulberry leaves were plucked from the trees grown by
the appellant and these leaves were cut into strips which were fed
to the silkworms. The worms wind around themselves the saliva
which oozes from their mouth and the hardened saliva forms the
protective cocoons. These cocoons were then sold in the market by
the assessee.
 The appellant claimed that the entire income which it derived from
the growing of the mulberry leaves and the sale of the cocoons was
exempt from levy of income-tax as it was 'agricultural income'. The
ITO, however, concluded that part of the income which was
attributable to growing of mulberry leaves alone constituted
agricultural income and was exempt from levy of income-tax but
the income derived from the rearing of silkworms on the leaves and
selling of the cocoons was not agricultural income.
CASE REVIEW

 The decision of the Karnataka High Court

in K. Lakshmansa & Co. v. CIT 
[1981] 128 ITR 283 affirmed.
 Dooars Tea Co. Ltd. v. CAIT [1962] 44 ITR 6
(SC) followed & relied upon
FOLLOWING QUESTION OF LAW TO THE HIGH
COURT :

 "Whether, on the facts and in the

circumstances of the case, the Tribunal is
justified in holding that the income derived
by the assessee from the process, i.e., the
rearing of silkworms, is not entitled to
exemption under section 2(1)(b)(ii ) of the
Income-tax Act, 1961 ?"
THE HIGH COURT
 in the impugned judgment has answered the
question of law in favour of the revenue as it
came to the conclusion that feeding of
mulberry leaves to silkworms was not a
process employed by the cultivator of
mulberry leaves to make them marketable by
way of producing silk cocoons.
THE AFORESAID VIEW FINDS SUPPORT FROM THE
FOLLOWING OBSERVATIONS OF THIS COURT
IN DOOARS TEA CO. LTD. V. CAIT [1962] 44 ITR 6 (SC) :

 " . . .Section 2(1)(b ) consists of three clauses. Let us first construe clauses
(ii) and (iii ). Clause (ii) includes cases of income derived from the
performance of any process therein specified. The process must be one
which is usually employed by the cultivator or receiver of rent-in-kind; it
may be simple manual process or it may involve the use and assistance of
machinery. That is the first requirement of this proviso. The second
requirement is that the said process must have been employed with the
object of making the produce marketable. It is, however, clear that the
employment of the process contemplated by the second clause must not
alter the character of the produce. The produce must retain its original
character and the only change that may have been brought about in the
produce is to make it marketable. The said change in the condition of the
produce is only intended to make the produce a saleable commodity in the
market. Thus, clause (ii) includes within the categories of income, income
derived from the employment of the process falling under that clause. As
we have just observed, the object of employing the requisite process is to
make the produce marketable but in terms the clause does not refer to
sale and does not require that the income should be obtained from sale as
such though in a sense it contemplates the sale of the produce." (p. 12)
DECISION
 We are in respectful agreement with the
aforesaid observations. The High Court, as
we have already observed, has rightly come
to the conclusion that the income derived by
the appellant from the sale of the cocoons
could not in law be regarded as agricultural
income. The question of law was, therefore,
rightly answered in the affirmative and
against the appellant.
ANIL PLANTATIONS (P.) LTD.
V.
PRINCIPAL COMMISSIONER OF INCOME TAX-2, KOLKATA 2017

 Income accrued by way of compensation

for compulsory acquisition of agricultural
land by State Government was to be
regarded as agricultural income and not
chargeable to tax as capital gain
CASES REFERRED TO
 

 CIT v. All India Tea & Trading Co. Ltd. 
[1979] 117 ITR 525 (Cal.) (para 5), 
 CIT v. All India Tea & Trading Co. Ltd. 
[1996] 219 ITR 544/85 Taxman 391 (SC)
 (para 5), 
 Pydah Suryanarayan Murthy v. CIT 
[1961] 42 ITR 83 (AP) (para 8) and 
 D.L.F Housing & Construction (P.)
Ltd. v. CIT 
[1983] 141 ITR 806/9 Taxman 207 (Delhi)
 (para 9).
FACTS
 The Assessee is a company. It is engaged in the business of
growing and manufacturing and selling of tea. The
assessee's tea estate is located at Harishnagar Tea Estate,
P.O. Harishnagar via Bhishalgarh Vill. Gokul Nagar District
Sepahijala, Tripura West - 799102.
 During the previous year a portion of the
assessee's tea plantation comprising of land together
with tea gardens thereon was acquired by the Government
under the Land Acquisition Act, 1894 for a public purpose
viz., extension of North East Railway line from Agartala to
Sabroom.
 An extent of about 3.63 acres of tea garden was
compulsorily acquired for the aforesaid public purpose. The
assessee received a compensation of Rs.1,32,74,986/- on
compulsory acquisition of the land.
ASSESSEES SUBMISSION
 The assessee filed its return of income for A.Y.2012-13 in
which he did not compute and offer to tax the capital gain
on compulsory acquisition of its agricultural land. In the
course of assessment proceedings, the AO specifically
called upon the assessee to explain as to why capital gain
on compulsory acquisition of a portion of the tea estate
was not offered to tax. The assessee vide its letter dated
17.12.2014 explained that the land in question was an
agricultural land which was used for agricultural purpose
and therefore not a capital asset within the meaning of
section 2(14) of the Act. The assessee further submitted
that the compensation received on compulsory acquisition
will be in the nature of agricultural income within the
meaning of section 10(1) of the Act and was therefore not
liable to tax.
ASSESSEES SUBMISSION
 During the year under assessment, Government
of Tripura has acquired the land used by us for
agricultural purposes. At the time of requisition
by Tripura Government and also earlier to that,
the land was used by us for agricultural
purposes. Hence the compensation received
amounting to Rs.1,36t47,685/- by Government
of Tripura is purely agricultural income in the
meaning of Section 10( 1) and therefore, not
liable to tax. Your honour will appreciate that
the undernoted legal Judgements are squarely
applicable in our present case :
CASES CITED
 In CIT vs. All India Tea and Trading Co. Ltd. 
(1979) 117 ITR 525 (Cal),
 It was held that as the land in question was
agricultural land which was being used for
agricultural purposes, the amount or
compensation paid on its acquisition was not
taxable under the head "Capital gains" as the
said land was not a capital asset.
CASES CITED
 In CIT v. All India Tea & Trading Co. Ltd. 
(1996) 85 Taxman 391/219 ITR 544, Hon'ble Supreme
Court has held "Where land of assessee - tea company
was requisitioned by state Government and same was
given to refugees and at the time of requisition
assessee was carrying on agricultural operation of
land, compensation received by assessee was to be
treated as agricultural income since such
compensation clearly had the character of rent or, in
any case, had to be regarded as revenue derived from
the land. Therefore compensation paid for acquisition
of land by State Government can only be regarded as
agricultural income which admittedly is not taxable."
THE CIT IN EXERCISE OF HIS POWERS U/S 263 OF
THE ACT WAS OF THE VIEW THAT
 order of the AO accepting the claim of the Assessee as
stated in para-4 above was erroneous and prejudicial to
the interest of the revenue. The crux of the order of CIT is
that the assessee in the course of assessment proceedings
before the AO took a stand that the amount received by it
on compulsory acquisition of land was not liable to tax
under the head 'Capital gain' on the ground that the
Hon'ble Calcutta High Court in the case
of CIT v. All India Tea & Trading Co. Ltd. 
[1979] 117 ITR 525 held that agricultural land which was
used for agricultural purpose and which are acquired and
for which compensation is paid cannot be brought to tax
under the head 'capital gain' as agricultural land cannot be
regarded as capital asset and the sum received was in the
nature of Agricultural income not chargeable to tax.
CASES CITED
 The Hon'ble Supreme Court also confirmed the view of the
Hon'ble Calcutta High Court in the case
of CIT v. All India Tea & Trading Co. Ltd. 
[1996] 219 ITR 544/85 Taxman 391 (SC). According to the
CIT in the decision rendered by the Hon'ble Supreme Court
it was noticed by the Hon'ble Supreme Court that refugees
from Bangladesh had occupied agricultural land on which
agricultural operations were carried on. The Government
acquired these lands and gave the lands so acquired to the
refugees who occupied those lands. The refugees also
continued to carry on agricultural operations over the land
on which they encroached. Thus in this circumstances the
Hon'ble Supreme Court held that compensation received
on compulsory acquisition is not chargeable to tax under
the head 'capital gain'.
HAVING DISCUSSED ALL THE CASES CITED AT THE
BAR, WE WILL NOW SUMMARISE OUR OPINIONS IN
THE FOLLOWING TERMS:
 (i) The words "held by-an assessee" in Section
2(4A)of the 1922 Act include physical,
actual, constructive and also symbolic
possession of a property of any kind;
 (ii) A land is an agricultural land if it is used
for agricultural purposes and, briefly
speaking, an income derived from such land
by agriculture. is an agricultural income ;
 (iii) Though ownership is a property, any land
from which the income derived is an
Agricultural income is not a capital asset;
IMPORTANT TERMS
 (iv) If no agricultural income. can be derived by an assessee
from an agricultural land in the accounting year or for some
time for any reason beyond his control, such land does not
automatically cease to be an agricultural land;
 (v) Where the assessee is the owner of an agricultural land and
he uses it for agricultural purposes and derives agricultural
income from it, any profits or gains arising from the sale,
transfer, acquisition, etc., of such land is not taxable under the
head "Capital gains". for such land is not a capital asset;
 (vi) Even where any person other than the assessee uses an
agricultural land belonging to the assessee for agricultural
purposes with or without the consent of the assessee and such
person derives agricultural income from it, any profits or gains
arising from the sale, transfer, acquisition, etc., of such land is
not taxable under the head "Capital gains" in the hands of the
assessee; and
IMPORTANT TERMS
 (vii) The land is a capital asset where it is
not used for agricultural purposes, for there
cannot be any question of deriving any
agricultural income from it, and any surplus
arising from its sale, transfer or acquisition,
etc., is taxable under the head "Capital
gains",
JUDGMENT
 The Hon'ble Delhi High Court in the case of D.L.F
Housing & Construction (P.) Ltd. v. CIT 
[1983] 141 ITR 806/9 Taxman 207 has held that
there exists distinction between the expression
"compensation given under an award for requisition
of the property" and "compensation payable under
Land Acquisition Act". The former is as case of
payment for use and occupation whereas the latter
is for compulsory transfer of the property. From
the aforesaid observations it is clear that there is a
distinction between requisitioning of properties
and compensation payable for acquisition of a
property under the Land Acquisition Act.
JUDGMENT
 The payment for use of an occupation of a property
cannot be equated with the payments made for
acquisition of the property. In the former case only
right to use and enjoy is transferred whereas in the
later case there is a complete transfer of the whole
interest over or complete ownership over the property.
 We are therefore of the view that the approach
adopted by CIT in the present case was not proper in
law.
 Since the order of the AO is not erroneous the CIT was
not justified in invoking the jurisdiction u/s 263 of the
Act.
 We therefore quash the order u/s 263 of the Act and
allow the appeal of the assessee. - In favour of revenue
CASE - LAW
 Bacha F. Guzdar v. C.I.T., Bombay AIR
1955 SC 74
 Whether 60% of the dividend amounting to Rs
2750 received by the assessee from the two
Tea companies is agricultural income and as
such exempt under Section 4(3)(viii) of the
Act.
 Appeal was dismissed with costs.
C.I.T. V. BENOY KUMAR SAHAS
ROY AIR 1957 SC 768
 The respondent owns an area of 6,000 acres of forest land
assessed to land revenue and grown with Sal and Piyasal
trees.
 The forest was originally of spontaneous growth, ―not
grown by the aid of human skill and labour and it has been
in existence for about 150 years.
 A considerable income is derived by the assessee from
sales of trees from this forest.
 The assessment year in which this forest income was last
taxed under the Indian Income-tax Act was 1923-24 but
thereafter and till 1944-45 which is the assessment year in
question, it was always left out of account. The assessment
for 1944-45 also was first made without including therein
any forest income, but the assessment was subsequently
re-opened under s. 34.
C.I.T. V. BENOY KUMAR SAHAS
ROY AIR 1957 SC 768
 In response to a notice under s. 22(2) read with s. 34 of the
Act, the respondent submitted a return showing the gross
receipt of Rs. 51,798 from the said forest. A claim was,
however, made that the said income was not assessable under
the Act as it was agricultural income and was exempt under s.
4(3)(viii) of the Act.
 The Income Tax Officer rejected this claim and added a sum of
Rs. 34,430 to the assessable income as income derived from
the forest after allowing a sum of Rs. 17,548 as expenditure.
 The Appellate Assistant Commissioner confirmed the
assessment and the Income Tax Appellate Tribunal also was of
opinion that the said income was not agricultural income but
was income derived from the sale of jungle produce of
spontaneous growth and as such was not covered by s. 2(1) of
the Act.
 demarcation between agriculture and forests
in the Constitution, taxes on agricultural
income are a separate head under entry 46
of List II of the Seventh Schedule and would
comprise within their scope even income
from forestry operations provided it falls
within the definition of agricultural income
which according to the definition given under
Art. 366(1) means agricultural income as
defined for the purposes of the enactments
relating to Indian Income Tax.
AGRICULTURE -
INTERPRETATION
 The terms ―agriculture and ―agricultural
purpose not having been defined in the Indian
Income-tax Act, we must necessarily fall back
upon the general sense in which they have
been understood in common parlance.
 ―Agriculture in its root sense means ager, a
field and culture, cultivation, cultivation of
field which of course implies expenditure of
human skill and labour upon land. The term
has, however, acquired a wider significance
and that is to be found in the various
dictionary meanings ascribed to it.
WEBSTER’S NEW INTERNATIONAL
DICTIONARY DESCRIBING IT AS
 ―the art or science of cultivating the
ground, including rearing and management
of livestock, husbandry, farming, etc. and
also including in its broad sense farming,
horticulture, forestry, butter and cheese-
making etc.
 Murray‘s Oxford Dictionary describes it as
―the science and art of cultivating the soil,
including the allied pursuits of gathering in
the crop and rearing livestock, tillage,
husbandry, farming (in the widest sense).
IN CORPUS JURIS
 the term ―agriculture has been understood
to mean: ―art or science of cultivating the
ground, especially in fields or large
quantities, including the preparation of the
soil, the planting of seeds, the raising and
harvesting of crops, and the rearing, feeding
and management of livestock;
 tillage, husbandry and farming.
 In its general sense the word also includes
gardening or horticulture.
INTERPRETATION OF HC
 the Court should accept the wider
significance of the term and include forestry
operations also within its connotation even
though they did not involve tilling of the
land, sowing of seeds, planting, or similar
work on the land.
 If breeding and rearing of livestock, dairying,
butter and cheese-making etc., could be
comprised within the term ―agriculture, it
was asked, why should these also be not
classed as agricultural operations.
VISHWANATHA SASTRI J., IN COMMISSIONER OF
INCOME-TAX, MADRAS V. K.E. SUNDARA
MUDALIAR [1950-18 ITR 259, 271]
 Exemption from tax granted by a Statute should be
given full scope and amplitude and should not be
whittled down by importing limitations not inserted by
the Legislature.
 Mookerjee J. in Commissioner of Agricultural Income-
tax, West Bengal v. Raja Jagadish Chandra Deo Dhabal
Deb [1949-17 ITR 426, 438 (Cal)] also expressed
himself similarly: (A)nd the present day view seems to
be that where an exemption is conferred by statute,
that clause has to be interpreted liberally and in favour
of the assessee but must always be without any
violence to the language used.
 The rule must be construed together with the exempting
provisions, which must be regarded as paramount.
TERMS ― AGRICULTURE‖ AND
―AGRICULTURAL PURPOSE:
 The Shorter Oxford Dictionary, Vol. I,
page 735, gives the meaning of ― forestry as
the ―science and art of forming and
cultivating forests, management of growing
timber.
 Webster’s New International Dictionary,
Vol. I, page 990, gives the following
meaning of forestry: Science and art of
farming, caring for, or cultivating forests;
the management of growing timber.
EMPEROR V. PROBHAT
CHANDRA [ILR 51 CAL. 504]
 was a case under the Indian Income-tax Act and
the classes of income derived from permanently
settled estates were ―(1) Income from fisheries,
 (2) Income from land used for stacking timber, (3)
Income from pasturage.
 The income from the first two heads was
certainly not agricultural income or income
derived from ―land which is used for agricultural
purposes within the meaning of Ss. 2 and 4 of the
Act. But income derived from pasturage was held
to be agricultural income which could not
lawfully be charged with income-tax.
COMMISSIONER OF INCOME-TAX, MADRAS V.
MANAVEDAN TIRUMALAPAD [AIR 1930 MAD. 764
(F.B.)]
 was also a decision under the Indian Income-tax Act
and the assessee there was assessed by the Income-tax
Officer for the year 1928-29 on the amount received
by the sale of timber trees cut and removed from the
forests.
 (W)e are unable to distinguish between the income
derived from the sale of paddy which is grown on land
and the income derived from the sale of timber cut in
a forest; but the profits earned from the sale of paddy
would be assessable to income-tax but for the special
exemption given to that income in the Income-tax Act,
by reason of its being agricultural income. There is no
such exemption in the case of income derived from the
sale of timber.
MADRAS HIGH COURT IN CHANDRASEKHARA
BHARATHI SWAMIGAL V. DURAISAMI NAIDU [ILR
54 MAD. 900]
 however, contains an elaborate discussion as to the
connotation of the term ―agriculture. The case
arose under the Madras Estates Land Act, 1908 and
the question which the Court had to consider was
whether growing casuarina trees, i.e. trees for fuel,
was an agricultural purpose so as to make the
person who held the land for that purpose a ―ryot
within the meaning of the Madras Estate Act
 While delivering the judgment of the Court Reilly J.,
embarked upon a consideration of what the term
―agriculture meant and came to the conclusion that
agriculture could not be defined by the nature of the
product cultivated but should be defined rather by the
circumstances in which the cultivation was carried on.
DEEN MOHAMMAD MIAN V. HULAS NARAIN SINGH
[23 PAT LT 143, 152],
 where it was held that an orchard is an agricultural
land.
 It was observed: The case of an orchard is quite
different. Orchard trees ordinarily are, and can be
presumed to have been, planted by men after
preparation of the ground which is cultivation and
seasonal crops are gathered. Fruit trees also require
seasonal attention such as pruning and digging of the
soil around the roots and it cannot be said that this
ceases to be cultivation merely because the whole tree
is not replanted every year .... In my opinion the land
in suit is agricultural land; it is land from which by
preparing the soil and planting and cultivating trees
the raiyat expects to enjoy periodical returns in the
way of produce for food.
COMMISSIONER OF INCOME-TAX, BURMA V.
KOKINE DAIRY, RANGOON [1938-6 ITR 502, 509],
 the question was whether income from a dairy farm and
the milk derived from the farm is agricultural income and
exempt as such from income-tax.
 Roberts C.J., who delivered the opinion of the Court
observed:
 Where cattle are wholly stall-fed and not pastured upon the
land at all, doubtless it is trade and no agricultural operation
is being carried on: where cattle are being exclusively or
mainly pastured and are nonetheless fed with small amounts
of oil-cake or the like, it may well be that the income derived
from the sale of their milk is agricultural income. But between
the two extremes there must be a number of varying degrees,
and the task of the Income-tax Officer is to apply his mind to
the two distinctions and to decide in any particular case on
which side of the fence, if I may use the term, the matter
falls.
IN MOOLJI SICKA & CO., IN RE
[1939-7 ITR 493 (CAL.)]
 Derbyshire C.J., understood the term
―agriculture in a wider sense as including
operations not only on the land itself but on
the shrubs which grew on the soil and were
according to him a part of the soil. The
assessees were manufacturers of bidi, a kind
of cigarette consisting of tobacco wrapped in
tendu leaves.
 Pruning of shrubs is an agricultural activity
 The Court held that the profits accruing to the
assessees by the sale of tendu leaves was not
exempt as agricultural income
MUSTAFA ALI KHAN V. COMMISSIONER OF
INCOME-TAX, U.P. & C.P. [1945-13 ITR 98
(OUDH)],
 which went up to the Privy Council, the
Oudh Chief Court held that income from
the sale of forest trees growing on land
naturally and without the intervention of
human agency, even if the land was
assessed to land revenue,
 was not agricultural income within the
meaning of S. 2(1)(a) of the Income-tax
Act.
BENOY RATAN BANERJI V. COMMISSIONER OF
INCOME-TAX, U.P., C.P. & BERAR, [1947– 15 ITR
98 (ALL)],
 was another case in which the assessee derived income
from the sale of timber from his Zamindari on which
there had been for many years, a number of forest
trees, khar and wild plants. There was no evidence on
the record to show that the growth of the trees in
question was the result of any actual cultivation by
the assessee at all.
 The various trees which he sold were of spontaneous
growth, not having grown as a result of actual
cultivation. The Court held that in order to come
within the definition of ―agricultural income, the
income had not only to be derived from land which
was used for ―agricultural purposes but such income
had also to be derived by the process of ―agriculture.
JUDGMENT:
 It is quite clear that their Lordships were of
the view that, for income to be agricultural
income, the essential element that must
exist is that there should be ―some measure
of cultivation of the land, or ―some
expenditure of skill and labour upon it. The
language used by their Lordships of the Privy
Council shows that the expenditure of skill
and labour must be upon the land and not
merely on the trees which are already
growing on it as a result of spontaneous
growth.
 In view of the fact that the forest is more
than 150 years old, the areas which had thus
become denuded and re-planted cannot be
considered to be negligible.
 The position therefore is that the whole of
the income derived from the forest cannot
be treated as non-agricultural income.
 The appeal is accordingly dismissed with
costs.
C.I.T. V. MADDI VENKATASUBBAYYA
(1951) XX ITR 151 (MAD.)
 Pruning of tobacco
 Here also the land indeed appears in the history of the
trading operations of the assessee but it cannot be said to
be the immediate or the effective source of the income
made by the assessee firm.
 The immediate and effective source was the trading
operation of purchase of the standing crop and its resale in
the market after harvesting the produce at an
advantageous price. For these reasons we hold that the
sum of Rs. 7,500 was not exempt from liability to
assessment to income-tax and that the answer to the
question referred to must be in the negative and against
the assessee.
 The assessee shall pay Rs. 250, the costs of the
Commissioner of Income-tax on this reference.
C.I.T. V. H.G. DATE (1971) 82
ITR 71 (BOM.)
 the respondent-assessee, being the owner of
about 93 acres of land situated at Phaltan on the
southern and/or right bank of river Nira,
cultivated sugarcane on his lands. He owned
three heavy horse power engines for crushing
sugarcane and converted sugarcane into jaggery
for sale in the market. He was assessed to
income-tax in respect of the income from the
sales of jaggery under the Income-tax Act, and
had not claimed exemption in respect of this
income on the footing that it was agricultural
income. Sugarcane – jaggery sale - is exempted ?
BRIHAN MAHARASHTRA SUGAR SYNDICATE
V. COMMISSIONER OF INCOME-TAX [(1946)
14 ITR 611, 616 (BOM)]
 on a true construction of the provisions in
section 2(1)(b)(iii), it was held that in
connection with the claim for exemption
made by an assessee under the above
section, the first condition required to be
satisfied was that the process employed
by the assessee must be one which is
ordinarily employed by a cultivator for
making his agricultural produce
marketable. The second condition
required to be satisfied was:
 [T]he produce must retain its original
character in spite of the process unless there
is no market for selling it in that condition.
The further observation was: If there is no
market to sell the produce then any process
which is ordinarily employed to render it fit
to reach the market, where it can be sold,
would be covered by the definition.
 Under the circumstances, the answer to
Question Nos. 1 and 2 was answered in
affirmative
K. LAKSHMANAN & CO. V. C.I.T.
(1998) 9 SCC 537
 the entire income which it derived from the
growing of the mulberry leaves to the sale of
the cocoons, was exempt from levy of income
tax as it was ―agricultural income‖ within the
meaning of that expression used in Section
2(1) of the Act.
 The Income Tax Officer accepted the
contention of the appellant only insofar as it
related to the growing of the mulberry leaves
but did not accept the appellant‘s contention
that the rearing of the worms and the selling
of the cocoons resulted in agricultural income.
DECISION OF THE COURT
 The High Court, as we have already
observed, has rightly come to the conclusion
that the income derived by the appellant
from the sale of the cocoons could not in law
be regarded as agricultural income. The
question of law was, therefore, rightly
answered in the affirmative and against the
appellant.
NAGIREDDI V CIT (1984) 147 ITR 337 (MAD)

 In this case, the assessee had shown certain income

from film-shooting in his premises, which was known
as Vijaya Gardens, and he used to recover charges for
the same.
 that income earned by the assessee by way of
shooting-hire charges by permitting film producers to
shoot their films in his garden was not agricultural
income. The shooting of films is an activity which has
no nexus whatsoever with agricultural operations, or
with the land, except that the shooting is done on land
which may be or has been agricultural land yielding
some agricultural income.
 The nexus, as claimed by the assessee, was non-
existent, far-fetched and illusory.