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CHAP.TE .... .R ..... E'

TWElV , ..
What is agricultural income
185. Section 10(1) exempts agricultural income from income-tax. By virtue of section 2(lA) the
expression "agriculturalfucome" means:
1. Any rent or revenue derived from land which is situated in lndia and is used for agricultural
purposes [sec. 2(lA)(a)-seeparas 185.1 and 185.1-1].
2. Any income derived from such land by agricultural operations includ,ing of the
agricultural produce, raised or received asrent-in-kind,so as to render it fit for the market or sale
of such [sec. 2(lA)(b)-seeparas 185.2 and 185.1-1).
3.lncome attributable to a fann house subject to certain conditions [sec. 2( 1 A)( c)-see paras 185.3
and 185.1-1].
185.1 Rent or revenue derived from ia,.,d [Sec. 2( JA)(a)] - According to .section 2(lA)(a), if the
following three conditions are satisfied, income derived from land be termed as "agricultural
income":
a. rent or revenue should be derived from land (may be in cash or kind) ;
b. the land is one which is situated in lndia (if the land is situated in a foreign country, this condition
is not satisfied) ; and '
c. the land is used for agricultural purposes.
185.1-1 LAND USED FOR AGRICULTURAL PURPOSES - The primary ,condition to claim exemption as
"agricultural income" is that the land in question should be fqr 'agricultural purposes whether
exemption is sought under sub-clause (a) or (b) or (c) of section2(1A).
The terms "agriculture" and "agricultural purpqses" have not been defined in the Act; one has,
therefore, to depend upon ordinary meaning and decided cases.
. In CITv. Raja Benoy Kumar Sahas Roy[1957] 32 ITR 466 (SC), Bhagwati, J.laid down the following
principles to serve as a guide in the determination of the scope of the terms "agriculture" and
"agricultural purposes":
658
.659 Incomdrom agriCUltural land by agricultural operations Para 185.2
Basic,operatio;ns - PriOI1.togermination, some ,basic operations are essential, to constitute
agricultur.e.,The basicoper.ations.would involve expenditure of human skill and labour upon the
land itself and.not metely on the growth from. the land. Some illustrative instances of basic
operations are tilIi:ng of land, sowingoftheseeds,pianting,and similar kind of operations on the land.
Subsequent operations -Besides the basic operations, there arecertainsubsequentbpetations
which are performed after the produce sprouts from the land. illustrative instances of subsequent
qperations areweeding;cUgging the soil around the growth, l'Cmoval of undesirable undergrowths
and. all operaJ:ionswbich foster the growth and preserve the same, not only from insects and pests
but .also 11;omdegradation from outside; tending, pruning, Clltting, harvesting and rendering the
prodl,1cefitforJbemiU"ket. MerepeIformance of these subsequent operations on the prooucts of
the land (where such proollcts have not been raised on the landhy the performance of the basic
operationsd;escriQed'above) would not be enough to characterise them as agricultural operations.
Where, however, the subsequent operations are performed in conjunction with and in continuation
the subsequent operations would also constitute part of the integrated
activity' . .
Agriculture not merely includes food and 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, for instance, may
be grain or vegetable or fruits including plantation and groves or grass or pasture forconsumption
of beasts or articles of luxury such as betel, coffee, tea, spices, tobacco, etc., or commetcial crops
like cotton, flax, jute, hemp, indigo, etc. All these are products 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 and commercial asset would also include forest products such
as timber, sal and piyasaltrees, casuarina plantation, tendu leaves, horra nuts, etc.
Some connection with land not sufficient -The mere fact that an activity has some connection with
or is in sorpe way dependent on land is not sufficient to bring.it within the scope of the term
"agriculture". For instance, breecling ;and rearing of livestock, dairy farming, cheese and butter-
making and poultry fanning would not by themselves be agricultural purposes.
185.21ncome derived from agrlculturalland by agrlcultufai operations [Sec. 2( lA)(b)] - Section
2{ 1 A)( b) gives the folloWing three iristances of agricultural income:
a. any income derived by agriculture from land situated in India' and used for' agricultural
purposes; , .' .
b. any income derived by acultivator or receiver of rent-in-kind of any process ordinarily employed
tQ render the produce raised or received by him to make it fit to be taken to market; ot
c. anymcomederived bjrsuchland by the sale by a cultivator or receiver of of the
produce raised or received by him in respect of which no process has been performed other than
a process of thenaturedescnbed ih (b).
The aforesaid income' are agricultural incol11e, if such income are from land which is
situated in lndia and is used for agricultural purposes.
Any surplus arising on sale or transfer of agricultural landis not treated as rent or revenue derived
from land.
185.2-1 INCOMEDER1VED FROM MARKETlNGPROCESS-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, hyperforming such process to make the raw produce
fit for market, is also .agricultural income. However" .the following condjtions must be satisfied:
a. the process must be one which is ordinarily employed by a cultivator or receiver of rent-in-kind ;
and
b. the process must be applied to render the produce fit to be taken to market.
668 .
For instance; tobacco leavesareordiIiarily<lried to make them Juitable fOr sale.'1:'herefore;,illie
ineomefromthe 0l"dirtary process tohetalam
tommet;is ,agricUlt1.U'8l,income, The Ordihar;}r procesS 'emplpyt'id to}renderithe prOduce fMC, be
taken.tO' market.inclt.t4eslhnishing, Winnowing, de8ning,dtjing; crusHing. boUing and decanting,
etc.,1ltough fromtim,etotime
and placeJoP}ace,c ,..' . '
Moreover if marketing 'process is performed on a' produce wbich'canbesoldin lits vawform
to ,make it
For ven;area
,.'.. clnot be
.. .. .
not Mahaffi8htta'SugiLr Syndic4te Ltd. Vi 'VlT 'f'l946t,t4'rrR 611
(Bom,). . .' .' . . '. . .' ...... '.' "'I ,
Section 2(1A)(b) does notconremplate sate 'of CotnmoditY different and
processed and where the assessee was growing mulberry leaves, feeding them 10 Silkwornisand
obtaining silk cocOons, income from sale-of'silk cocoons would not beagncultural incolne-K
LakshmananCo. v.CIT{1999}239ITR'59f(SC}. " . ,'" ,.
18U from farm bul.lt!:t"g [$ep.2( lA)(c)J.-l1ona fide annuai is
section 22. H;o\yeyer,jncqme frolfiJi,hQl,Ule which satisfies the following
cumulative conditions ,would be treated as agricultural income and .(:<;>nsequently, it would be
exemptfrom tax by virtue of section 10(1);
a. the building shoUld be occupied by the cUltivator (as a landlord or asa tenant) or receiver of rent-
a landlord);
b. it shoUld be on or in the immediate vicinity of land, situated in India and used for agricultural
purposes,;
c. the cultivator Of reeelveT'Of by reason Ofhis connection With the agricultural
land requires thebtiilding as a'dwelling house or as a storeh,ouse of 'Other out-building; and
d. the land is asseSS'ed to land reverfueor local rateot,altetnatively; the land (though not aSsessed
toland or local rate), i,s situated outside "urban any area which,is co,mprised
within the jurisdiction of any .boardha;ving ap,opplat.ion Qf not less
,than 1 O,QOOpersons or witJ.lin to amaximumot 8 kiI()lfietres) fromthe limits
of any'such municipality or cantonment board.
If all the aforesaid conditions are satisfied, iric()me from a farm building is exeIDpt from tax under
c). :." '.'. ". ,: '. . .,' . '. .
Usf! of or:Z4ndfor any purpose otlter. than agr:icl14ur.c incomefrQm such building
or land is!llg fr()mtheqse of the. building or for shall. not
be irichided in the definition of "agricultural income". For exrunp\e,if a pt;rson ,h<,\sinCOIPe from
using farm building or land for purposes such as letting it oi!t for of any
business or profession, then, such irlcome shay not be treatelI: irlsome.
What are 'instances of income ,held .to be agricuJ.blral/non-agricultul'aJ income'
186. In the following cases, income is held as agricultural income:
I.If parts of the forest subsequent operations iri forestry are carried out,
the incomearising.fr'Om the sal.e of replanted. ..
2. The fees ,collected from oWners ,of cattle (norlnally used for agricUltural purposes), for allowing
them to graze on forest lands cover.ed byjimgle and grass grown spontaneously.
3. PtJfit on sale'of standing crop 'Or the pr6duce after harvest bya cUltivating ownetor tenant of
land;, .
4. Rent for agricultural land received from sub-tenants by mortgagee-in-possession.
\
i
j
.
"I
5. Colnpensation received from an insurance company for damage caused by hailstonn to the green
leaf forming part of assessee's tea garden (moreover, no part of such compensation cohsists of
manufacturing income, as, cannot be apportioned under rule,S between
manufacturing income and agricultural income). . ,
6. Income flowers . . .
7. Salary. received bya partner forreric:lering services to a firm which is engaged in agricUltural
operations is agricUltural income as payment of salary is only a mode of adjustment of the firm's
income [it may be noted that share of profit from such. firm is not taken as "agricultural income" as
such share is exempt under section 10(2A)]. ' i . '"
8. Intereston5apiWr,eceivd by a partner fropt
9. If nursery-iS maintained by carrying out basic operatiOns and subsequent .operations are' carried
out in pots in continuation of basic operations;then'income from such nursery would be
agricUltural income.
17lf..tance of non-agricultural income :
1. Annual annuity received by a person in consideration of transfer of agricUltUral land even if it is
charged on land, as source of annuity is covenant and not larid. ,,'
2. Interest on arrears of rent in respect of agricUltural. land as it rent nor revenue derived
from land.
3. Interest accrued On promissory notes <>btained by a zamind.ar from defaulting tenants.
4. Inc:omefrom sale of{onist trees, fruits imd flowers growing:on land naturally; sPontaneously and
Without the intervention of human, agency. " , ,
5. Income from .sale of wild grass and reeds 'of spontaneous .growth.
6. Income of salt produced by flooding the land with sea water as it is not .derived from land used,
, for agricUltural income.
Z Profitaccruing.from the purchase ofa standing crop and resale of it after harvestby a merchant,
having no interest in land a mere Ucence to enter upon the landandgather,upon the produce,
as land is not the direct, immediate or effective source of incOme. '
8. Remuneration received by managing agent at a fixed percentage of net profit from a company
having agricultural income.
9. Interest received by a money-lender in the form of agricultural produce.
10. Income of sale of agricUltural produce received by way of price for water supplied to land.
11. Commission earned by the landlord forselling'agricUltUral produteof his tenant.
12. Dividend paid by a company out of its agricUltural income.
13. Income derived from land let out for storing crops.
14. hlcome froIllfisheries, '.
15. Maintenance allowance charged on agricUltural land.
16. If the assessee iaXes loans on hypothecation of agricUltural produce cUltivated by him and
'advancest'hesame t<)'its sister concerns, interest earned thereupon (is not agricultural income).
17. Royalty income of mines. ' .',
18. Income from butter and cheese making.
19. Income from poUltry farming ..
20. Income from sale of trees of forest which are of spontaneous growth and inrelation to which
forestry operations alone are performed.
21. Where the assessee-company is grQWing various ,kinds, of hyb,rid/germ,plasm seed.safter
conducting agrigenetic agricUltural research costIng crores of eamed on s* 9f
such seeds cannot be treated as 'agricUltural income'.
22. Receipts from TV serial shooting in farm house.
Para 187 MeauJngof agri!:JdturaI income edits tax treaQnent 662
What isthe.tax treatment of income which is partially. agricultural and partially from business
[Rules 7, 7A,7B;and til
187. For disintegrating a composite busirless income which is partly agricultural and partly non-
agricultUral, the following rules are applicable-
Growipg
Sale ;f centrifuged latex or cenex or latex based
crepes (such as,pale latex crepe) or.brown crepes
(such as estate broWn crepe, remilled crepe, smoked
blanket. crepe Or flat bark crepe) or technically
specified block rubbers manufactured or processed
from field latex or coagulum obtained from rub-
ber plants grown by the seller in India
Sale of coffee.grown and cured by seller
Sale of coffee grown, cured, roasted and
grounded by seller in India with or without
mixing chicory or other flavouring ingredients
35%
25%
4096
6596
7596
6096.
Rule 7A
Rule 7B(1)
Rule 7B(lA)
'Income in respect of the business given above is, in the first instance, computed under .the Act as if were
derived frolTI business after making permissible deduction. 40 or 35 or 25 per cent of the mcome so aITlved at
istreated as business income and the balance is treated as agricultural income. Salary and interest received
by a partner from a firm (growing leaves and manufacturing tea orany other activity mentioned in the table)
is taxable only to the extent of 40 or 35 or 25 per cent and the balance is treated as agricultural income.
187.1 Any other case [Rule 7J - For:disintegrating a composite business income which is partly
agricultural and partly non-agricultural, the market value of any agricultural produce, raised by the
assessee or received by him as rent-in.kind and utilised as raw material in his business, is deducted.
No further deduction is permissible in respect of any expenditure incurred by the assessee as a
cultivator or receiver of rent-in-kind.
illustrated - The following examples are given to. illustrate the aforesaid provisions
1. X Ltd. grows sugarcane to manufacture sugar. Data of 2004-05 is as follows
Cost of cultivatioll of sugarcane
Market value of sugarcane when sugarcane is transferred to factory
Other manufacturing cost
Sales turnover of sugar
Income in this case will be determined as follows -
Sales turnover/market value of sugarcane
Less: Expenses
Manufacturing expenses
Market value of raw material (ie., sugarcane)
Cultivation .expenses
Income
(Rs. in Jakh)
4
9
6
22
2. y Ltd. is in the business of growing and manufacturing tea in 'India. The following data is available
for the previous year 2004-05-
668
Sales turnover of tea
Less:
Computation of tlXin::cases covered by scheme
- , "" $-" '"
Expenses on growing tea leaves
Manufacturing expenses
mcolTIe [60 per cent 'of Rs.HJlakh will be income and 40 per cent of
Rs. 10lakh (ie., Rs. 4Iakh), takenllS non-agncultureincome]
Para
(Rs.in lakh)
45
20
15
10
3. Assume in the above case, Y Ltd. is engaged in the cultivation, manufacture and sale of coffee. As per rule
7l3, 40 per cent of the income from growing and manufacturing coffee in India with or without mbting of chicory
or other flavouring i[}gredients is taken as non-agricultural income.
What is the scheme of partial integration of non-agricultural income with agricultural income
188. The scheme of partial integration of non-agricultural income with. agricultUral income is
applicable if a few conditions are
It is applicable, if the follbwing conditions are satisfied -
The taxpayer is an individual, a Hindu undivided family, a body of individual, an association
of persons or an f\rtificial juridical person.
The taxpayer has non-agricultural income exceeding the amount of exemption limit (i.e.,
Rs.50,000 for the assessment year 2005-06t)
If the three conditions are satisfied, then the of partial integration of tax on non-agricultural
income with income derived from agriculture is applicable. .
It may be noted that, the aforesaid scheme is not applicable in the case of a firni, company,
co-operative society, etc.
. ' ' ,
188.1 Computation of tax in cases covered by the scheme -In cases covered by the scheme, income-
tax will be computed for the assessment year 2005-06 in the following manner: ,
Step one -Net agricultural income is to be computed as if it were income chargeable to income-
tax.
.. Step two -Agricultural and non-agricultural income of the assessee will then be aggregated and
income-tax is calculated on the aggregate income as if such aggregate income were thetotalincome.
.. Step three, The net agricultural income will then be increased by an amount of Rs. 50;000 (ie., the
first shib of income on which tax is charged at nil ratet) and income-tax is calculated on net
agricultural income, so increased, as if such income was the total income of the assessee.
Steplour -The amount of income-tax determined at Step two will be reduced by the amount of
income-tax determined under Step three. -
.. Step five - Rebate under sections 88:j:, 88B:j:, 88C:j:, 88D:j: and 88E shall be deducted;
Step six - Find out the balance. Add surcharge and education cess.
.. Step seven - The amount so arrived will be the total income-tax payable by the assessee.
ISS-PI For the previous year ending March 31, 2005, non-agricultural income of X is Rs .. 50,000, whereas
agricultural income is Rs. 6.80,000. Is he liable to pay income-tax? .

As non-agricultural income of X does not exceed Rs. 50,000, he is not liable to pay any tax, irrespective of
quantum of agricultural income.
tFor the assessment year 2006-07, the exemption limit is Rs. 1,35,000 (in the case a resident woman below 65
years), Rs. 1,85,000 (in the case of a resident senior citizen 6S years or more) and Rs, 1,00,000 (in case of any
other individual or every HUF).
tFrom the assessment year 2006-07 onwards, rebate under sections 88, 88B, 88C and 880 will not be available.