UNIVERSITY INSTITUTE OF LEGAL STUDIES, PANJAB UNIVERSITY, CHANDIGARH

Income Tax Act, 1961

AGRICULTURAL
INCOME

SUBMITTED TO: SUBMITTED BY:

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ACKNOWLEDGEMENTS

It is with profound gratitude and deep reverence that I have completed this project
as it would not have been completed without the indispensable guidance of my
teacher, whose encouragement, support and suggestions have played a major role
in the completion of this project.

I am also grateful to my friends for helping me give shape to my ideas and

thoughts on the topic.

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TABLE OF CASES

Brihan Maharashtra Sugar Syndicate Ltd. v CIT

Camellia Tea Group Pvt. Ltd. V CIT

CIT v Gupta (Tea) Pvt. Ltd.

CIT v. Kamakhya Natyan Singh
CIT v P.Z. Estates (P) Ltd.
CIT v R. Venkataswamy Naidu

CIT v Raja Benoy Kumar Sahas Roy

CIT v Soundrya Nursery

CIT v Venkataswamy Naidu

Jhalak Prasad Singh v Province of Bihar

K. Lakshmann Co. v CIT

Kil Kotagiri Tea and Coffee Estate Co. Ltd. v State of Tamil Nadu

Mustafa Ali Khan v CIT

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TABLE OF CONTENTS

Introduction

Agricultural Income under Income Tax Act, 1961

Rent or Revenue from Land

Income Derived from Land by Agriculture

Income from Farm House

Cases

Tax Treatment of Income which is Partially Agricultural and Partially from Business

Scheme of Partial Integration

Computation of Tax under Scheme of Partial Integration

Bibliography

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INTRODUCTION

Agricultural income in India is categorized as a valid source and essentially incorporates

income from sources that include farming area, structures on or identified with a rural land and
business deliver from a horticultural land. This income is considered for rate purposes while
ascertaining the income tax liability of an individual.

AGRICULTURE INCOME – INCOME TAX ACT, 1961

Section 2 (1A) of the Income Tax Act, 1961 details out the conditions wherein sources can be
considered to be generating agricultural income. 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;

(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;

(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:

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Provided that:

(i) The building is on or in the immediate vicinity of the land and is a building which the
receiver of rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of the
connection with the land, required as a dwelling house, or as a store-house, or other out-
building; and

(ii) The land is either assessed to land revenue in India or is subjected 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:

(A) 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

(B) 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, urbanization of that area and other relevant
considerations, specify in this behalf by notification in Official Gazette.

The above three types of income shall be treated as Agricultural Income if the following
conditions are satisfied:

(1) Income must be derived from land: For income to be Agricultural Income, land must be
primary or immediate and effective source of income and should not be remote source i.e.,
there must be proximate and sufficient connections between income and land. And where there
is no proximate connection between income and land, income shall not be Agricultural
Income.1

(2) Land must be situated in India: Second condition for income from Agricultural Income
is that the land from which income is derived must be situated within the jurisdiction of India.

1
CIT v. Kamakhya Natyan Singh (1948) 16 ITR 325 (PC).

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It may be situated anywhere (urban area or rural area) in India and may or may not be subjected
to land revenue or local rate.

Where land is situated outside the jurisdiction of India then income from such land received by
a person residing in India shall not be Agricultural Income under Section 2(1A) and would be
taxable under the head ‘Income from other Sources’ under Section 56(1).

(3) Land must be used for Agricultural Purposes: It is most important to note that the term
“agricultural purpose” as such is not defined in this Act. However, the Supreme Court in CIT
v Raja Benoy Kumar Sahas Roy2 has laid down that agricultural purpose means that basic
operations3 and subsequent operations4 must be performed on such land.

Thus, agriculture produce means any produce formed after performing basic and subsequent
operations on agricultural land. It may be:

 Food, grain, vegetables or fruit for human consumption;

 Plantation and groves, grass, fodder for animal consumption
 Article of luxury such as betel, tea, coffee, spices, tobacco;
 Commercial crops such as cotton, flex, jute, hemp, indigo;
 Article having artistic and decorative value such as flowers, creepers;
 Articles having housing value like bamboo, timber;
 Articles having fuel value;
 Articles having medicinal and health value.

However, every activity on land is not agriculture. The term agriculture is used in the sense
that basic and subsequent operations are performed on land to grow agricultural produce (crop).
Simply because some activity is done on land or the activity in some way is dependant on land
does not mean that the activity comes within the purview of agriculture. For example, breeding
and rearing of livestock, dairy farming, cheese and butter making and poultry farming are non-
agriculture activities.

2
(1957) 32 ITR 466 (SC).
3
The operations which are performed on land before germination. These operations involve expenditure of
human skill and labour upon land, and held the seed to sprout from the land.
4
These operations are performed after the produce (crop) sprouts from the land till harvesting.

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RENT OR REVENUE FROM LAND

[SECTION 2(1A)(a)]

Rent from land means payment in cash or kind by one person (tenant) to another person
(landlord) om respect of right to use land. Therefore, relationship of a landlord and tenant or
lessor or lessee must be there between parties. For example, half of agricultural produce given
by the tenant to landlord is rent in kind and hence agricultural income in the hands of the
landlord.

Revenue

Revenue from land means any income derived from agricultural land, but other than:

(i) Rent; or

(ii) Income under Section 2(1A)(b)(c)

The expression ‘rent’ or ‘revenue’ is employed so as to obviate any discussion as to whether

what the landlord realized should be something in the nature of rent or whether it would include
all other types of receipts that the landlord may realize from the land. It has been held that the
word ‘revenue’ is used to denote an income receipt as opposed to a capital receipt and would
cover all income from agricultural land other than rent, and that no real distinction could be
drawn between the expressions ‘rent’ and ‘revenue’ in the Indian Income Tax Act.5 Thus, the
compensation received by an agricultural company from an insurance company for the loss of
crops due to hail storm would be agricultural income.6

INCOME DERIVED FROM LAND BY AGRICULTURE

[SECTION 2(1A)(b)]

5
Jhalak Prasad Singh v Province of Bihar (1941) 9 ITR 386, 396 (Pat). See also Kil Kotagiri Tea and Coffee Estate
Co. Ltd. v State of Tamil Nadu (1998) 234 ITR 252 (Mad).
6
CIT v Gupta (Tea) Pvt. Ltd. (B) (1969) 74 ITR 337 (Cal); Camellia Tea Group Pvt. Ltd. V CIT (1993) 203 ITR 80
(Cal).

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It includes income derived from land situated in India used for agricultural purpose.

Any income derived by a cultivator or receiver or rent in kind from any process ordinarily
employed to render the produce, raised or received by him, marketable is Agricultural Income.

Sometimes, raw produce may not be saleable. To make it marketable or saleable, it becomes
necessary to perform a process on such produce which is generally called “Marketing process”
or “Agricultural process”. Such “Marketing process” or “Agricultural Process” increases the
market value of produce, therefore, such increased value of such produce is also agricultural
income. However, the following conditions must be satisfied:

(i) process must be such which is ordinarily employed by the cultivator or receiver or rent-in-
kind. Such processes which are ordinarily employed include thrashing, winnowing, cleaning,
drying, boiling, crushing, decanting etc. However, nature of process depends upon the quality
of produce and varies from time to time and place to place. Further, such processes may be
performed manually or mechanically.

(ii) The process must be performed to make the product marketable.

Therefore, where the produce is already saleable in the market and some process is performed
on the procedure to earn extra profit then income derived will be partly agricultural and partly
non-agricultural and such process shall not be called “marketing process” or “agricultural
process”. Such income is called composite income and is to be disintegrated into agricultural
and business incomes according to the rules laid down under this Act.

It was held in Brihan Maharashtra Sugar Syndicate Ltd. v CIT 7 that where any process is
performed to convert sugarcane into sugar or gur, it will be non agricultural process and
proportionate income from the process of converting sugarcane into sugar or gur will be non
Agricultural Income.

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(1946) 14 ITR 611 (Bom).

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It was held in K. Lakshmann Co. v CIT8 that where mulberry leaves are grown by the assessee,
which are fed to silkworms and silk cocoons are obtained from those silkworms, then income
from sale of silk cocoons would be non-Agricultural Income.

INCOME FROM FARM HOUSE

[SECTION 2(1A)(c)

Any income from building is Agricultural Income if the following conditions are satisfied:

(i) Building must be owned by the landlord and occupied by the cultivator (landlord or tenant)
or receiver of rent-in-kind (landlord);

(ii) Building should be on or in the immediate vicinity of land situated in India used for
agriculture purpose;

(iii) Building must be used by the cultivator or the receiver of rent-in-kind as:

(a) Dwelling house; or

(b) A store house; or

(c) Other out-building.

(iv) The land where building is situated must be assessed to land revenue or local rate.
However, where it is not assessed to land revenue or local rate, it must be situated outside urban
area, i.e., it must be situated in rural area.

Urban area means: The land is either assessed to land revenue in India or is subjected 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:

(A) 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

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(1999) 239 ITR 597 (SC).

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committee or by any other name) or a cantonment board and which has a population of not less
than ten thousand; or

(B) In any area within such distance, measured aerially –

(I) not being more than two kilometres, from the local limits of any municipality or cantonment
board referred to in item (A) and which has a population of more than ten thousand but not
exceeding one lakh; or

(II) not being more than six kilometres, from the local limits of any municipality or cantonment
board referred to in item (A) and which has a population of more than one lakh but not
exceeding ten lakh; or

(III) not being more than eight kilometres, from the local limits of any municipality or
cantonment board referred to in item (A) and which has a population of more than ten lakh.

“Population” means the populations according to the last preceding census of which the
relevant figures have been published before the first day of the previous year.9

It was held in CIT v R. Venkataswamy Naidu 10 that onus of proving that an income is
Agricultural Income is on the assessee.11

CASES

CIT v Soundrya Nursery12

It was held that where basic operations are carried out in nursery and subsequent operations
are carried out in pots in continuation of basic operations then income from such nursery is
Agricultural Income.

9
Explanation 4.
10
(1956) 29 ITR 529 (SC).
11
See also Sri Ranganatha Enterprises v CIT (1998) 232 ITR 568 (Ker).
12
(2000) 241 ITR 530 (Mad).

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CIT v P.Z. Estates (P) Ltd.13

It was held that income derived by growing special quality of grass required for creating golf
course is Agricultural Income.

Mustafa Ali Khan v CIT14

It was held that income from sale of forests, wild grass, fruits and flowers grown spontaneously
and without human effort is non-Agricultural Income.

CIT v Venkataswamy Naidu15

It was held that income from dairy farming, butter and cheese making etc is non-Agricultural
Income.

TAX TREATMENT OF INCOME WHICH IS PARTIALLY

AGRICULTURAL AND PARTIALLY FROM BUSINESS

[RULES 7, 7A, 7B, 8]

Sometimes, assessee who is carrying on business, grows agricultural produce and uses that
crop as raw material in his business. However, if such produce is saleable in the market and
assessee performs any “non-agricultural process” to earn extra profit then such composite
income shall be partially agricultural and partially non-agricultural. This composite income is
to be disintegrated into Agricultural Income and business(non-agricultural) income according
to the following rules:

1. Income from growing and manufacturing of tea [Rule 8]: Where assessee is carrying on
business of growing tea leaves and then manufacturing tea, then income from sale of tea will
be computed under head “profits and gains of business and profession”. After giving
permissible deduction, 60% income shall be treated as agricultural and 40% be business
income.

13
(2005) 2 SOT 563 (Del).
14
(1948) 16 ITR 330 (PC).
15
(1956) 29 ITR 529 (SC).

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2. Income from growing and manufacturing coffee [Rule 7B]: Where assessee is carrying
on business of growing coffee beans then there are two possibilities:

a) Where assessee is carrying on business of growing coffee beans and then curing them in
India then income will be computed under the head “profits and gains of business or
profession”. After giving permissible deduction, 75% of such income shall be treated as
Agricultural Income and remaining 25% be business income.

b) Where assessee is carrying on business of growing coffee beans and then curing, roasting
grounding in India with or without mixing chicory or other flavouring ingredients then income
will be computed under the head “profits or gains of business or profession”. After giving
permissible deduction, 60% of such income shall be treated as Agricultural Income and
remaining 40% be business income.

3. Income from growing and manufacturing of Rubber [Rule 7A]: Where assessee is
carrying on business of growing, manufacturing and processing rubber from field later on
coagulum obtained from rubber plants then income will be computed under the head “profits
and gains of business or profession”. After giving permissible deduction, 65% of such income
shall be treated as Agricultural Income and remaining 35% be business income.

4. Income from growing and manufacturing of any product other than Tea, Coffee and
Rubber [Rule 7]: Where assessee (cultivator or receiver of rent in kind) carrying on business
of growing and manufacturing any product other than tea, coffee and rubber, then income will
be computed under the head “profits and gains of business or profession”. However, no
deduction is permissible regarding expenditure incurred by the assessee as a cultivator or
receiver of rent in kind. However, the composite income shall be disintegrated by deducting
the Market values of agricultural produce raised by the assessee and utilized as raw material in
his business which shall be treated as Agricultural Income and balance shall be treated as
business income.

For example, Assessee is carrying on business of manufacturing chips. He is also growing

potatoes to be used for manufacturing chips. In the Assessment Year, composite Income from
sale of chips is Rs. 9lacs and market value of raw produce (potatoes) is 6 lacs. Therefore,

Agricultural Income = 6 lacs, and

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Business Income = 3 lacs [i.e., 9 lacs - 6 lacs]

SCHEME OF PARTIAL INTEGRATION

Agricultural income is exempted under Section 10(1) of Income Tax Act, 1961. Moreover, if
assessee has agricultural as well non-Agricultural Income then Agricultural Income shall be
included into his Total Income for computation of Income-tax on non-Agricultural Income.
This is known as Scheme of partial integration of non-Agricultural Income with Agricultural
Income or taxing Agricultural Income. However, for applying this scheme, following
conditions must be satisfied:

(1) Assessee must be:

a) An individual;

b) A Hindu Undivided Family;

c) AOPs/BOIs

d) Artificial juridical person

And it should not be a

a) Firm,

b) Company

c) Co-operative Society

d) Local Authority

(2) The assessee’s non-Agricultural Income must exceed Basic Exemption Limit for that
Assessment Year.

(3) The Agricultural Income must exceed Rs. 5,000.

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COMPUTATION OF TAX UNDER SCHEME OF PARTIAL

INTEGRATION

Step I: Compute Net Agricultural Income as if it is chargeable to tax.

Step II: Compute Non-Agricultural Income and add net Agricultural Income.

Step III: Calculate tax on aggregated income

Step IV: Add Agricultural Income to Basic Exemption Limit for assesee and compute tax as if
it is Total income of assesee.

Step V: Reduce amount of tax determined under Step III from tax determined under Step IV.

Step VI: Add surcharge (if applicable) education cess 2% and secondary and higher education
cess @ 1%, if any, to balance.

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BIBLIOGRAPHY

Dr. Jyoti Rattan, Taxation Laws, 9th Edition, Bharat Law House Pvt. Ltd.

Kailash Rai: Taxation Laws, 9th Edition, Allahabad Law Agency, 2007

Kanga and Palkhiwals: The Law and Practice of Income Tax, 7th Edition.

Vinod K. Singhania: Direct Taxation: Law and Practice of Income Tax, Taxman
36th Edition (2007).

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