AGRICULTURAL INCOME AND ITS COMPUTATION WITH NON-AGRICULTURAL INCOME

• Section 10(1) exempts agricultural income from the Central taxation as the exclusive power to
make laws on agricultural income lies with the State Legislature.
• Agricultural income is taken into considerationto determine the tax on non-agricultural
income in certain cases.
AGRICULTURAL INCOME
• Any rent or revenue derived from the land which is situated in Inida and is used for
agricultural purposes.
• 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.
• Income attributable to farm house subject to certain conditions.
• Any income derived from saplings or seedlings grown in a nursery shall be deemed to be
agricultural income.
1. Rent or revenue derived from land:
Section 2(1A)(a), following three conditions to be satisfied for an income derived
from land is termed to be the “agricultural income”.
• Rent or revenue should be derived from land(in cash or in kind)
• The land is one situated in India(if situated in foreign country, the condition is not
applicable)
• The land is used for agricultural purpose.
Exemption for agricultural income shall be claimed only if the land is used for
agricultural purpose.
Principles to serve as guidelines in determining the scope of the terms ‘agriculture”
and “agricultural purposes”.(no definitions under the act but depend upon the
ordinary meaning and decided cases.)
BASIC OPERATIONS:
• Basic operations prior to germination are essential to constitute agriculture.
Basic operation would involve expenditure on human skill and labor upon land itself
and not merely on the growth of the land.
• Basic operations are tilling of land, sowing of the seeds, planting and similar kind of
operations of the land.
• Besides the basic operations, there are certain subsequent operations which are
performed after the produce sprouts from the land.
• SOps are weeding, digging the soil around the growth, removal of undesirable
undergrowths and all operations which foster the growth and preserve them, not
only from insects bust also from degradation from outside, tending, pruning, cutting,
harvesting and rendering the produce fit for the market.
• Mere performance of the subsequent operations-not enough to characterize as
agricultural operations.
• Sub. Ops in conjunction with and in continuation of the basic operations, the sub.
Ops would constitute part of the integrated activity of agriculture.
AGRICULTURE NOT MERELY INCLUDES FOOD AND GRAINS:
• Does not merely imply raising of food and grains for consumption of men and
animals.
• Includes all products from the performance of basic as well as subsequent
operations of the land.
• Products can be of grain, vegetables or fruits including-
Plantation and groves or grass or pasture for consumption of beasts or
Articles of luxury such as betel, tea, coffee, spices, tobacco, etc., or
Commercial crops like cotton, jute, flax, hemp, indigo, etc.
-all these are products raised from land and the term agriculture cannot be
confined only to the food and grains products for human beings.
-the term comprises all the products of the land that includes forest products such
as timber, sal, and piyasal trees, tendu leaves, casuarina plantations, hora nuts, etc.
SOME CONNECTION WITH LAND NOT SUFFICIENT
• Mere fact that an activity has some connection with land or in some way
dependent on land is nit sufficient to bring within the term “ agriculture”.
Ex: breeding and rearing of livestock, dairy farming, cheese anf butter-making and
poultry farming - not by themselves an agricultural purposes.
INCOME FROM NURSERY OPERATION:
• Any income derived from saplings or seedlings grown in a nursery shall be
deemed to be an agricultural income, irrespective of the basic operations been
carried out on land. Consequently exempted under Section 10(1).
2.INCOME DERIVED FROM AGRICULTURAL LAND BY AGRICULTURAL OPERATIONS:
• 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
ordinarily employed to render the produce raised or received by him to make it fit
to be taken to the market or
• 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 the process of the nature described in (b)
• Aforesaid income are agricultural income if such income derived from land
situated in India.
• Any surplus arising from the sale or transfer of agricultural land in urban area is
not treated as rent or revenue derived from land.
INCOME DERIVED FROM MARKETING PROCESS:
• Difficult to find ready made market of the crop as harvested.
• Necessary to perform some kind of process to make produce as a commodity
which is saleable.
• The income arising by way of enhancement of value of such produce by
performing such process to make raw materials fit for market, is agricultural
income on the following conditions:
- Process must be one of which is ordinarily 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.
- Ex: tobacco leaves are ordinarily dried to make them suitable for sale. The
ordinary process employed to render the produce fit to be taken to market is
agricultural income.
- Includes thrashing winnowing, cleaning, drying, crushing, boiling, and decanting
though the nature of process depends upon the quality of the produce and
varies from time to time and from place to place.
- If marketing process is performed on products which can be sold in raw form,
then the income derived is partly agricultural and partly non agricultural.
- Sugarcane to gur.
- 2(1A)(b) does not contemplate sale of commodity different from what is
cultivated by the assesse- growing mulberry leaves and feeding to silworms and
then obtaining silk cocoons and selling is not an agricultural income
3.INCOME FROM FARM BUILDING –SEC 2(1A)(C)
• Bonafide annual value of house property is taxable under Sect 22.
• But income from a house property which satisfies the following conditions
would be treated as agricultural income and it would be exempt from tax by
virtue of Section 10(1)
• The building should be occupied by the cultivator (as a landlord or as a tenant) or as a
receiver of rent-in-kind (as a landlord).
• It should be on or in the immediate vicinity of land, situated in India and used for
agricultural purpose
• The cultivator or receiver of rent-in-kind should by reason of his connection with the
agricultural land requires the building as a dwelling house or as a store house or other
out-building ; and
• The land is assessed to land revenue or local rate or; alternatively the land is situated in
the rural area.
• use of land or building for any other purpose other than the agricultural
purpose.
INSTANCES OF INCOME HELD TO BE AGRICULTURAL INCOME
• 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.
• Profit on sale of standing crop or the produce after harvest by a cultivating owner or tenant of
land.
• Rent for agricultural land received from sub-tenants by mortgagee-in-possession.
• Compensation received from an insurance company for damage caused by the hail storm to
the green leaf forming part of assesse’s tea garden.(compensation cannot be apportioned
between the manufacturing and agricultural income).
• Income from growing flowers or creepers.
• Salary received by a partner fro rendering services to a firm which is engaged in agricultural
operations is agricultural income. Payment of salary is only a mode of adjustment.
• Interest on capital received by a partner from the firm engaged in agricultural operations.
• If nursery is maintained by carrying out basic operations and subsequent operations are
carried out in pots in continuation of the basic operations, then income from such nursery is
agricultural income.
INSTANCES OF NON AGRICULTURAL INCOME
• Annual annuity received by a person in consideration of transfer of agricultural
land even if it is charged on land, as the source of annuity is covenant and not
land.
• Interest on arrears of rent in respect of agricultural land as it is neither rent nor
revenue derived from land.
• Interest accrued on the promissory notes obtained by a Zamindar from defaulting
tenants.
• from sale of forest trees, fruits and flowers growing on land naturally,
spontaneously and without the intervention of the human agency
• from sale of wild grass and reeds of spontaneous growth.
• Of Salt produced by flooding the land with sea water as it is not derived from land
used for agricultural income.
• Remuneration received by a managing agent at a fixed percentage of net profit
from a company having agricultural income.
• Interest received by the money lender in the form of agricultural produce.
• Income of sale of agricultural produce received by way of price for providing
water supply to the land.
• Commission earned by the landlord for selling agricultural produce of his tenants.
• Income derived form land let out for storing crops.
• Income from fisheries.
• Maintenance allowance charged on agricultural land.
• Royalty income from mines.
• Income from butter and cheese making.
• Income from poultry farming.
• Income from sale of trees of forest which are of spontaneous growth an din
relation to which forestry operations alone were performed.
• Receipt from TV serial shooting in the farm house.
• Profit accruing from the purchase of the standing crop and resale of it after
harvest by a merchant, having no interest in land except a mere license to enter
upon the land and gather upon the produce, as land is not the direct, immediate
and effective source of income.
• If the assesse takes loans on the hypothecation of agricultural produce
cultivated by him and advances the same to its sister concerns, interest earned
thereupon is not agricultural income.
• Assesee company conducting agrigenetic agricultural research costing crores of
rupees, growing hybrid/ germ plasm seeds and earning income on sale of such
seeds cannot be treated as agricultural income.
TAX TREATMENT OF INCOME WHICH IS PARTLY AGRICULTURE AND PARTLY FROM
BUSINESS
• Growing and manufacturing tea in India 40% (non agri.)+ 60%(Agri.) (Rule 8)
• Sale of coffee grown and cured by seller 25% + 75% (Rule 7B(1))
• Sale of centrifuged latex or cenex or latex based crepes or bloc rubbers
manufactured or processed from field latex or coagulum obtained from rubber
plants grown by the seller in India. 35% + 65% (Rule 7A)
• Sale or coffee grown, cured, roasted and grounded by seller in India with or
without mixing chicory or other flavouring ingredients 40% + 60% (Rule 7B (1A)
• In any other case, for disintegrating income which is partly agricultural and partly
non- agricultural, the market value of any agricultural produce, raised by the
assesse or received by him as rent-in-kind and utilized as raw material in his
business, is deducted.
• No further deduction is permissible in respect of any expenditure incurred by the assesse
as a cultivator or rent in kind.
SCHEME OF PARTIAL INTEGRATION OF NON-AGRICULTURAL INCOME WITH
AGRICULTURAL INCOME

partial integration to derive the agricultural income is applicable only when the
following conditions are satisfied.
1.The taxpayer is an individual, a hindu undivided family, an association of
persons or an artificial juridical person.
2.The tax payer has non agricultural income exceeding the amount of the
exemption limit.
3. The agricultural income of the taxpayer exceeds Rs.5000.
Above scheme not applicable to firm, company, co-operative society, etc.
COMPUTATION OF TAX IN CASE OF TAXES COVERED BY THE SCHEME
For the Assessment Year 2017-2018, the computation of agri. Income:
Step 1: Net agricultural income is to be computed as if it were income chargeable to
income-tax.
Step 2: Agricultural and non-agricultural income of the assesse with then be
aggregated and income-tax is calculated on the aggregate income as if such income
were the total income.
Step 3: The net agricultural income will then be increased by the amount of
exemption limit (first slab of nil rate) and income-tax is calculated on net agricultural
income, so increased, as if such income was the total income of the assesse.
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 surcharge and Cess.
Step 6 : the amount so arrived will be the total income-tax payable by the assesse.
ILLUSTRATIONS
• For the previous year 2017- 2018, non-agricultural income of Mr. X, aged 63 years
is Rs.2,88,000, whereas agricultural income is Rs. 7,12,000. find out the income
tax liability of Mr.X.
• For the previous year 2017- 2018, non-agricultural income of Mr. X, aged 45 years
is Rs.13,00,000, whereas agricultural income is Rs.7,12,000. expenses on
agricultural produce is Rs.2000. Mr. X pays Rs.30,000 as life insurance premium.
Determine the tax liability.

Find the non agricultural income – gross income less deduction

Step 1: net agricultural income
Step 2: non agricultural + agricultural=find income tax on the amount with rebate
Step 3: net agricultural income + exemption limit= find the income tax amount
with rebate.
Step 4: Step 2- step 3; then find income tax after applying surcharge and cess