DR.

RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY,
LUCKNOW

PROJECT
LAW OF

TAXATION-I
Topic: Income Exempted from Income Tax-Agriculture
Income

Submitted by:

Under the guidance of:

Nilesh Yadav

Mr. Anil Sain

Semester -7th
Section-A

(Asst Prof.)
Dr. Ram Manohar Lohiya

Roll no. 80
Lucknow

National Law University,

ACKNOWLEDGEMENT

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On the completion of this project, I would like to place on record my sincere gratitude
towards all those people who have been important in its making. Firstly I would like to thank,
Prof. Anil Sain for giving me such an interesting topic to research and for helping me with
the research process and for always attending all my queries and doubts on the same. I thank
him for all the support and encouragement without which the completion of this project
would not have been possible.
And last but not the least; I thank my family and friends for supporting me throughout in all
my endeavours.

TABLE OF CONTENTS
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1) Introduction................................................................................................... 4
2) Meaning of Income........................................................................................5-6
3) Meaning of Agriculture Income.....................................................................6-8
4) Exemption of Agriculture Income from Income Tax.....................................8-9
5) Relevant Case Laws.......................................................................................9-11
6) Conclusion......................................................................................................12
7) Bibliography...................................................................................................13

INTRODUCTION

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Income tax is the tax given by every responsible citizen of this country whose income falls
within the taxable limit. Although none like to pay tax especially when it is your hard earned
money but in a way its for our own good as the amount collected by way of tax is used by
the government for the development of the country. But keeping the development factor aside
we all do try to save as much tax as we can. This is for those who do pay tax and not for those
who opt not to pay tax at all. The government has now come with such rules that do not allow
one to escape his tax liability very easily. With such strict rules which are being enforced so
that the people do pay their income tax there is also a category of people whose income is
exempted from tax. Surprised ? Yes there are several categories of income under the Income
Tax act which are exempted from giving tax. This study would however focus only on one of
such categories that is Agriculture income.
Even today 60% of the Indias population reside in villages with agriculture as their main
source of income. It is not only a source of income for them but also a source of food for the
rest of the population. So in order to boost the agriculture practice the Central government
might have decided not put it under the list of taxable income. Although there are state laws
for the same but state laws are not a relevant consideration in this study. This study only deals
with the issue of agriculture income being exempted from tax under the Income tax act 1961.
When the government itself provides for exemption who wouldnt like to take advantage of
such exemption. There have been cases where people have tried to establish even the
remotest link of their income with agriculture so that they could claim exemption. In such a
case we look into the judgments of the apex court i.e. the Supreme Court which through
judicial pronouncements has fixed the scope of agriculture income as to what would form
part of agriculture, what would be agriculture income etc. This is important because we do
not want people who are actually engaged in industrial work or some other business to be
able to show their income as agriculture income by establishing a distant and indirect link and
take advantage for the same.

MEANING OF INCOME
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This head would not be dealt in detail in this project and has been only included in the study
for the objective purpose of understanding income. It is important to understand what is
income as we would be dealing with exemption of a particular type of income in this project.
So before we could know whether a particular type of income is exempted from tax or not we
have to know whether it actually qualifies to be income at the first place. It may happen that a
particular in flow of money may not be considered as income so then there would be no issue
as to whether it could be exempted or not. The dictionary meaning of income is money that
an individual or business receives in exchange for providing a good or service or through
investing capital. Investments, pensions and Social Security are primary sources of income
for retirees. In businesses, income can refer to a company's remaining revenues after all
expenses and taxes have been paid.1
The Income tax act 1961 also provides for the definition of the income in sec 2 (24) of the
act. According to this section apart from the items listed in the section any receipt which
satisfies the basic condition of being income is also to be treated as income and charged to
income tax accordingly. The list of items include2:
(i) Profits or gains from business or profession including any benefit, amenity, perquisite
obtained in the course of such business or profession.
(ii) Salary income including benefit, allowance, amenity, perquisite obtained in lieu or in
addition to such salary.
(iii) Dividend income.
(iv) Capital gains from sale of capital assets.
(v) Winnings from lotteries, crosswords puzzles, races etc.
(vi) Amounts received under a keyman insurance policy.
(vii) Voluntary contributions received by a religious or charitable trust or scientific research
association or a sports promotion association.

1 http://www.investopedia.com/terms/i/income.asp
2 http://www.caclubindia.com/experts/definition-of-income-as-per-income-tax-act--27796.asp
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For our the purpose of the Income tax act we have to consider the definition of income as
given in sec 2 (24) of the act. Now that we have understood income we need to understand
what constitutes agriculture and agriculture income.

MEANING OF AGRICULTURE INCOME

"Agriculture would include horticulture, floriculture, arboriculture and sylviculture. It would
include the raising of grooves, plantations, raising of grass or pastures. It would extend to
cultivation of all commodities of food value like sugarcane, coffee, mangoes, etc, artistic and
decorative value like flowers and creepers, housing value like bamboo, timber, fuel value and
medicinal and health value"3.
"Agriculture income would however include only those incomes which are derived by human
effort".4
As per Income Tax Act income earned from any of the under given three sources meant
Agricultural Income5;
(i) "Any rent received from land which is used for agricultural purpose: Assessees do not
have to pay tax on rent or revenue from agricultural land. Such land should, of course, be
assessed to land revenue in the country or be subject to a local rate. Further, there must be a
direct link between the agricultural land and the receipt of income by way of rent or other
revenue (for instance, a landlord could receive rent from a tenant who is involved in
agriculture practice)".
(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".
(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.
Income from such farm houses is considered agricultural income. The definition of `farm
houses covers buildings owned and occupied by both cultivators of agricultural land and
3 Dr. Girish Ahuja, Compendium Issues in Income Tax, New Delhi: Bharat Publications,2011 Pg 385
4 Dr. Girish Ahuja, Compendium Issues in Income Tax, New Delhi: Bharat Publications,2011 Pg 385
5 http://taxguru.in/income-tax/income-tax-treatment-taxability-of-agricultural-income.html
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assessees who receive rent or revenue from agricultural land. The sole purpose of such
farmhouses should be for use as dwellings for the cultivators or use as store houses".
Normally, the annual value of a building is taxable as `income from house property.
However, in the case of a farm house, the annual value would be deemed agricultural income
and would, thus, be exempt from tax.
(iv) "Income earned from carrying nursery operations is also considered as agricultural
income and hence exempt from income tax."
Hence in order to consider an income as agricultural income certain points have to be kept in
mind6:
(i) There must me a land which is situated in India.
(ii) "The land is being used for agricultural operations:- Agricultural operation means that
efforts have been induced for the crop to sprout out of the land. The ambit of agricultural
income also covers income from agricultural operations, which includes processing of
agricultural produce to make it fit for sale. Like the people who receive passive agricultural
income in the form of rent or revenue, the people who actually carry out agricultural
operations are also eligible for tax-free agricultural income."
(iii) "Land cultivation is must:- Some measure of cultivation is necessary for land to have
been used for agricultural purposes. The ambit of agriculture covers all land produce like
grain, fruits, tea, coffee, spices, commercial crops, plantations, groves, and grasslands.
However, the breeding of livestock, aqua culture, dairy farming, and poultry farming on
agricultural land cannot be construed as agricultural operations."
(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".

6 http://taxguru.in/income-tax/income-tax-treatment-taxability-of-agricultural-income.html
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(vi) "Ownership is not essential. In the case of rent or revenue, it is essential that the Assessee
have an interest in the land to be eligible for tax-free income. However, in the case of
agricultural operations it isnt necessary that the person conducting the operations be the
owner of the land. He could be just a tenant or a sub-tenant. In other words, all tillers of land
are agriculturists and enjoy exemption from tax. "
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 process to make the raw produce fit for market, is also agricultural
income. However the following condition must be satisfied.7:
(i) "the process must be one which is ordinarily employed by a cultivator or receiver of rentin kind; and
(ii) the process must be applied to render the produce fit to be taken to market.
The sales proceeds in such cases are considered agricultural income even though the
producers final objective is to sell his products.
If marketing process is applied on a produce which can be sold in its raw form income
derived there from is partly agricultural and partly non-agricultural."
EXEMPTION OF AGRICULTURE INCOME FROM INCOME TAX
Agriculture income is exempt under the Indian Income Tax Act. Section 10(1) exempts
Agricultural Income from tax and also provides for its exclusion in computing the total
income of the assessee. 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 consideration8.
In practice if we see almost all states have state laws relating to taxes on agriculture income.
There is also a proper office of an Agriculture Tax officer. So one might say that exempting
7 Taxmann's Direct Taxes: Law and Practice. Vinod Kumar Singhania, Kapil Singhania, Taxmann Publications,
2004. Pg 646
8 Taxmann's Direct Taxes: Law and Practice. Vinod Kumar Singhania, Kapil Singhania, Taxmann
Publications, 2004. Pg 644

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agricultural income from the central statute is of not mush benefit as tax is being collected by
the states by means of the state acts. But this is not the case as the scope and way of taxation
in these statutes is different from the central act of 1961. This means that paying agriculture
tax under the state statutes would be less burdensome for the assesse instead of paying tax
under the central act of 1961.
RELEVANT CASE LAWS
In Singhai Rakesh Kumar v. Union of India 9 it was held that Under the terms of the
Constitution, Parliament is empowered to legislate to say what agricultural income means.
What Parliament says in this regard in the statute then current relating to income tax is the
definition of agricultural income for the purposes of the Constitution. In regard to such
agricultural income the States may legislate. In regard to all other income it is for Parliament
to legislate.
In CIT v Raja BenoyKumar Sahas Roy10 it was held that the land is said to used for
agricultural purposes where the following two types of operations are carried out on such
land :
Basic Operations : These involve cultivation of the ground, in the sense of tilling of the land,
sowing of the seeds, planting and similar operations on the land. Such basic operations
demand the expenditure of human labour and skill upon the land itself and further they are
directed to make the crop sprout from the land.
Subsequent Operations : After the crop sprouts from the land, there are subsequent operations
which have to be resorted to by the agriculturists for the efficient production of the crop such
as, weeding (removal of wild plants), digging the soil around the growth, removal of
undesirable growths, prevention of the crop from insects and pests, cutting etc.
Basic operations must be performed before any income is called agricultural income.
Subsequent operations should be in continuation. However, the mere performance of these
subsequent operations on the products of the land, where such products have not been raised
on the land by the performance of the basic operations which have been described above
9 (2001) 1 SCC 364
10 (1957) 32 ITR 466
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would not be enough to characterize them as agricultural operations. In order to invest them
with the character of agricultural operations, these subsequent operations must necessarily be
in conjunction with and a continuation of the basic operations which are the effective cause of
the products being raised from the land. It is only if the products are raised from the land by
the performance of these basic operations that the subsequent operations attach themselves to
the products of the land and acquire the characteristic of agricultural operations. The
cultivation of the land does not comprise merely of raising the products of the land in the
narrower sense of the term like tilling of the land, sowing of the seeds, planting, and similar
work done on the land but also includes the subsequent operations set out above all of which
operations, basic as well as subsequent, form one integrated activity of the agriculturist and
the term agriculture has got to be understood as connoting this integrated activity of the
agriculturist. One cannot dissociate the basic operations from the subsequent operations and
say that the subsequent operations, even though they are divorced from the basic operations
can constitute agricultural operations by themselves. If this integrated activity which
constitutes agriculture 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.

In CIT v Kamakhya Narayan Singh (Raja Bahadur)11 it was held that the expression derived
from land would mean springing from land. It points to a source from out of which comes out
springs. But such source should be immediate and effective source and not any secondary or
remote source. The proximate source and not the source to which it may be ultimately be
referable has to be considered.

In Brihan Maharashtra Sugar Syndicate ltd v CIT12 it was held that if sugarcane is generally
sold in a given area without being subjected to any process, the process of converting
sugarcane into gur would not be agriculture income.

11 (1948) 16 ITR 325 (PC)

12 [1946] 4 ITR 611 (Bom)
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In Land Acquisition Officer v. Karigowda13 it was held that While agricultural activity is the
growing of mulberry crop and disbursing it, manufacture of silk thread from silkworms who
are fed with mulberry leaves, and then converted through the specified process into cocoons
and ultimately silk thread and its sale is an activity of sericulture which primarily falls in the
domain of manufacturing and commercial activity. This activity of producing silk from
silkworms for which mulberry crop is used as food, therefore, cannot be an activity directly
covered under the provisions of Section 23 of the Act. Even by the process of judicial
interpretation, it will amount to drawing an impermissible inference that sericulture is a part
of agricultural activity, that too to the extent to make it a permissible consideration under the
relevant provisions of the Act.
In Travancore Tea Estates Co. Ltd. v. State of Kerala 14 it was held that The fact that the
timelag between the plucking of tea leaves and their being subjected to manufacturing
process in the factories is very little would not detract from the conclusion that the cultivation
and growth of tea plants and leaves is something distinct and separate from the manufacturing
process to which those leaves are subjected in the factories for turning them into tea meant
for sale. Income which is realised by sale of tea by a tea company which grows tea on its land
and thereafter subjects it to manufacturing process in its factory is an integrated income. Such
income consists of two elements or components. One element or component consists of the
agricultural income which is yielded in the form of green leaves purely by the land over
which tea plants are grown. The second element or component consists of non-agricultural
income which is the result of subjecting green leaves which are plucked from the tea plants
grown on the land to a particular manufacturing process in the factory of the tea company.
In Mrs. Bacha F. Guzdar v. Commissioner of Income-tax15 it was held that In order,
however, that dividend might be held to be agricultural income it would be incumbent upon
the appellant to show that, within the terms of the definition, it was rent or revenue derived
from land which was used for agricultural purposes. Agricultural income as defined in the Act
13 (2010) 5 SCC 708
14 (1976) 4 SCC 470
15 [1955] 27 ITR 1 (SC)

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is obviously intended to refer to the revenue received by direct association with the land
which is used for 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 in 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. 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.

CONCLUSION
After analysing the above mentioned provisions and case laws of the Supreme Court as well
as the High Court the following conclusions could be derived:
(i) For any rent or revenue from the land to qualify as agriculture income there should be
agriculture activity on the land.
(ii) Any activity would only be considered as agriculture activity when there there is a
combination of both-Basic operations and Subsequent operations. Mere performance of
subsequent operations would not make the activity agricultural.
(iii) In order to establish the income as agricultural the source should be directly related to the
land i.e. income should be derived from the produce of the land (immediate and effective
factor).
(iv) If the produce is not directly marketable then ordinary process could be applied to make
it marketable. However if the produce is directly marketable and then too a process is applied
then the income would be partly agricultural and partly non- agricultural.
(v) For income from building to qualify as agriculture income the building should be located
near the land where the agriculture activity is being carried on and should be used by the
cultivator for some purpose such as store house, dwelling etc. If it has been given on rent then
the rent would also qualify as agriculture income.
(vi) The parliament has the power to include anything within the ambit of agriculture.

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(vii) There are state laws to tax agricultural income so this income cannot be in actual
practice called tax free.

BIBLIOGRAPGHY
Primary sources

Income tax act, 1961

Taxmann's Direct Taxes: Law and Practice. Vinod Kumar Singhania, Kapil Singhania,

Taxmann Publications, 2004.

Income Tax and Central sales tax: Law and practise. B B Lal, N Vashist, dorling

Kindersley, 2008.
Chaturvedi and Pithisaria's Income Tax Law. K Chaturvedi, S M Pithisaria, M K

Chaturvedi, Eastern Law House, 1988

Dr.Vinod K. Singhania , Student Guide to Income Tax, New Delhi:Taxmann

Publications Pvt.Ltd., 2010

Dr. Girish Ahuja, Compendium Issues in Income Tax, New Delhi: Bharat

Publications,2011
S Iyengar, Law of Income Tax (New Delhi: Bharat Law House, 1996).

Secondary sources

Relevant articles or reports available online.

Scconline.com
Taxmann

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