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TAXATION LAWS

TOPIC: AGRICULTURAL INCOME

SUBMITTED TO:- SUBMITTED BY:-

Miss. Kriti Shourya Mehra

B.A.LLB.

Roll No:-19/18

UNIVERSITY INSTITUTE OF LEGAL STUDIES (UILS)

PANJAB UNIVERSITY,
CHANDIGARH
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Acknowledgement

Success is a blend of multiple efforts. The final import of this project is also a result of the

sheer hard work and constant support of many people. I would like to take this opportunity

to thank all of them.

To begin with, I would like to express my humble gratitude to my teacher, Miss. Kriti,

for her able guidance and mentoring. The meticulous manner in which she teaches has

paid significantly in the completion of this project.

Secondly, I would like to thank my department, University Institute of Legal Studies,

PanjabUniversity, Chandigarh, for providing such an expansive library which provided

meall the relevant material required for this project.

Last but not the least, I would like to express my profound gratitude to my parents and my

friends who have constantly supported and motivated me throughout this project.

Shourya Mehra
B.A.LLB
19/18
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Table of Contents:

Sr. Page No.

No.
1. Table of Contents 3

2. Table of Cases 4

3. Agricultural Income exempted under Income Tax Act, 1961 5

4. Meaning of Agricultural Income 5

5. Essential conditions to be satisfied for Income to be treated as 10

Agricultural Income
6. Examples of Agricultural Income 13

7. Examples of Non – Agricultural Income 13

8. Scheme of Partial Integration of Non - Agricultural Income 14

with Agricultural Income

9. Bibliography 15
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TABLE OF CASES

1. Brihan Maharashtra Sugar Syndicate Ltd. v. CIT, (1946) 14 ITR 611 (Bom)

2. CIT v. Kamakhya Naryan Singh, (1948) 16 ITR 325 (PC)

3. CIT v. R. Venkataswamy Naidu, (1956) 29 ITR 529 (SC);

4. CIT v. Raja Benoy Kumar Sahas Roy, (1957) 32 ITR 466 (SC)

5. CIT v. B. Gupta Tea Pvt. Ltd., (1969) 74 ITR 337 (Cal)

6. CIT v. Gupta (Tea) Pvt. Ltd. (B), (1969) 74 ITR 337 (Cal)

7. CIT v. Soundrya Nursery (2000), 241 ITR 530 (Mad)

8. CIT v. Venkataswamy Naidu (R), (1956) 29 ITR 529 (SC)

9. Member for the Board of Agricultural Income Tax v. Sindhurani Chaudhurani, (1957)
32 ITR 163
10. Mustafa Ali Khan v. CIT, (1948) 16 ITR 330 (PC)

11. Probyanand Stud Farm v. CIT, (1936) 4 ITR 114(Lah.)

12. Sri Ranganatha Enterprises v .CIT, (1998) 232 ITR 568 (Ker)
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Agricultural Income exempted under Income Tax Act, 1961

Agricultural Income is exempted under Section 10(1) of Income Tax Act. As under the
Constitution of India tax on Agricultural Income is a state matter therefore only the state
government is empowered to impose a tax on Agricultural Income. Hence, the Central
Government is not empowered to impose a tax on Agricultural Income and it is
exempted under this Act.

Meaning of Agricultural Income

Agricultural Income is defined under Section 2(1A) of Income Tax Act, 1961(hereinafter
referred to as ‘the Act’). As per Section 2(1A) of the Act, agricultural income means the
following:

As per the definition, the agricultural income can be divided into five parts:

a. Rent or Revenue from Land

b. Income derived from land by agriculture
c. Income derived from agricultural operations
d. Income derived from Sale of Crop
e. Income from Building

1. Rent or Revenue from Land [Section 2(1A)(a)]:

As per Section 2(1A)(a) of the Act, agricultural income means –

“Any rent or revenue derived from land which is situated in India and is used for agricultural
purposes”

Rent from land means payment in cash or kind (for example - agricultural produce) by one
person to another person in respect of the right to use land. Therefore, there must be a
relationship of landlord and tenant or lessor and lessee between the parties.

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

a. Rent; or
b. Income mentioned under Section 2(1A)(b); or
c. Income mentioned under Section 2(1A)(c).

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

what the landlord realizes should be something in the nature of rent or whether it would include
all other types of receipts (including receipts in the nature of tax) that the landlord may
realize from the land.
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Thus, 'dharat' or weighing charges recovered by the landlord from tenants in addition to rent
have been held to be Agricultural Income1. It has, likewise, been held that the compensation
received by an agricultural company from an insurance company for the loss of the crops due
to a hail storm would be Agricultural Income2.

2. Income derived from land by Agriculture [Section 2(1A)(b)(i)]:

As per Section 2(1A)(b)(i) of the Act, agricultural income means –

“Any income derived from land situated in India by agriculture”

This includes the income derived from land situated in India used for agricultural purposes.

For Example –

a. Income from the sale of standing crops or raw produce after harvest by
theagriculturist.
b. Income or value of crop used by the agriculturist in his business as raw material.
c. Income or value of crop used for self-consumption by the agriculturalist.

3. Income derived from Agricultural Operations [Section 2(1A)(b)(ii)]:

As per Section 2(1A)(b)(ii) of the Act, agricultural income means –

“Any income derived from land situated in India by 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”

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

Sometimes raw produce (crop) may not be saleable. To make it marketable or saleable, it
becomes necessary to perform a process on such produce which is generally called the
"Marketing process" or "Agricultural process" or "agricultural Operation". Such operation
increases the market value of produce (crop), therefore, such increased value of such produce
is also Agricultural Income.

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

1 Probyanand Stud Farm v. CIT (1936) 4 ITR 114(Lah.)

2 CIT v. Gupta (Tea) Pvt. Ltd. (B) (1969) 74 ITR 337 (Cal)
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The process must be performed to make the produce marketable.

For Example - Tobacco leaves are saleable in the market in dried form. Therefore, the
income from the ordinary process employed to dry the tobacco leaves to make them
marketable is Agricultural Income.

Therefore, where produce is already saleable in the market and some process is performed on
the produce 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". However, such income is called composite income and is to be disintegrated into
Agricultural Income and business (non-agricultural) income according to the rules laid down
under this Act.

For Example - Sugarcane is generally saleable in the market. Where any process (non-
agricultural process) is performed to convert sugarcane into sugar or gur will be a non-
agricultural process and proportionate income from the process of converting sugarcane into
sugar or gur will be non-Agricultural Income3.

4. Income from Sale of Crop [Section 2(1A)(b)(iii)]:

As per Section 2(1A)(b)(iii) of the Act, agricultural income means –

“Any income derived from land situated in India 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 a process of the nature described in paragraph (ii) of this sub-clause i.e.
Agricultural Process”

This include any income from the sale, by a cultivator or receiver of rent-in-kind, of produce
raised or received by him in respect of which agricultural process has been performed.

5. Income from Building [Section 2(1A)(c)]:

As per Section 2(1A)(c) of the Act, agricultural income means –

“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

3 Brihan Maharashtra Sugar Syndicate Ltd. v CIT (1946) 14 ITR 611 (Bom)
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his connection with the land, requires 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 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—

(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; or

(B) In any area within the 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
tenthousand 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.”

As per this sub-clause,

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

i. Building must be owned by the landlord and occupied by the cultivator (landlord
ortenant) or receiver of rent-in-kind (landlord);
ii. Building should be on or in the immediate vicinity of land situated in India used
foragricultural purposes;
iii. Building must be used by the cultivator or receiver of rent-in-kind as:
a. Dwelling house; or
b. A store house; or
c. Other out-building.
iv. The land where the building is situated must be assessed to land revenue or local rate.
However, where it is not assessed to land revenue or local rate then it must be
situatedoutside the urban area i.e., it must be the rural area.

Urban area means 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:

i. In any area which is comprised within the jurisdiction of such municipality

(whetherknown as a municipality, municipal corporation, notified area committee,
town area
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committee, town committee, or by any other name) or a cantonment board and

which has a population of not less than ten thousand; or
ii. in any area within the distance, measured aerially:
a. not being more than two kilometers, from the local limits of any municipality
as mentioned above and which has a population of more than ten thousand but
not exceeding one lakh; or
b. not being more than six kilometers, from the local limits of any municipality
as mentioned above and which has a population of more than one lakh but not
exceeding ten lakh; or
c. not being more than eight kilometers, from the local limits of any
municipality as mentioned above and which has a population of more than ten
lakh.
"Population" means the population according to the last preceding census of which the
relevantfigures have been published before the first day of the previous year. [Explanation 4 of
Section2(1A)]

However 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 2 of Section 2(1A)]
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Essential Conditions to be satisfied for Income to be treated as

Agricultural Income:
The above mentioned types of income are to be treated as Agricultural Income if the
followingconditions are satisfied:

1. Income must be derived from land:

For income to be Agricultural Income, the land must be a primary or immediate and effective
source of income and should not be a 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 Income4. Therefore, the following
are non-Agricultural Income as there is no proximate connection between income and land:

a. Dividend received by a shareholder from a company carrying on the agricultural

operation is not Agricultural Income in his hands. The shareholder receives the
dividendnot by virtue of any activity of agriculture carried on by him, but by virtue of
the investment of his funds in the company in buying up its shares.
b. Loan obtained by a shareholder out of accumulated profits of a company having only
Agricultural Income, which is liable to be treated as 'deemed dividend', is not
Agricultural Income in the hands of the recipient.
c. Interest on arrears of rent payable by a tenant to his landlord is no doubt revenue but
itis not revenue derived from land and hence it is not Agricultural Income.
d. Commission earned by a broker for selling agricultural produce of an agriculturist is
not Agricultural Income.
e. Salami or Nazarana paid shall not be Agricultural Income in the hands of the recipient
unless it is a payment of rent in advance. Basically 'Salami' is not rent. The word 'rent'
means a payment made after the relationship of landlord and tenant has come into
existence and for its continuance. Whereas, 'Salami' is a payment made by
prospective lessees antecedent to the constitution of the landlord and tenant
relationship. It is a payment made as the price for the landlord agreeing to part with
his rights in the agricultural holding in favour of the proposed lessee. It is generally a
lump sum payment and it is a capital receipt in the hands of the lessor and is not
Agricultural Income5.

2. Land must be situated in India:

The second condition for income from Agricultural Income is that the land from which
income is derived must be situated within the jurisdiction of India. 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.

4 CIT v Kamakhya Naryan Singh (1948) 16 ITR 325 (PC)

5 Member for the Board of Agricultural Income Tax v Sindhurani Chaudhurani (1957) 32 ITR 163
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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 important to note that the term "agricultural purpose" as such is not defined in this Act.
However, the Supreme Court of India in CIT v Raja Benoy Kumar Sahas Roy6 has laid down
that agricultural Purpose means that basic operations and subsequent operations must be
performed on such land.

Basic Operations are those operations that are performed on land before germination. These
operations involve the expenditure of human skill and labour upon the land, and help the
seed to sprout from the land. These operations involve the cultivation of the land and some h
examples are tilling of land, sowing of seeds, planting, and similar operations on the land.
Suchoperations may be performed mechanically or manually.
Subsequent Operations are those which are performed after the produce (crop) sprouts
from the land till harvesting. Some examples of subsequent operations are weeding, digging
the soilaround the produce, removal of undesirable growths, prevention of the produce (Crop)
from insects, pests, or from degradation by cattle and other factors. Basically it involves all
operations which foster growth and preserve the produce (crop) and make it fit for the
market.Further, it also includes tending, pruning, cutting, and harvesting, etc.
Subsequent operations alone are not sufficient for income to be Agricultural Income. These
operations must be performed in conjunction with, and in connection with basic operations.
Therefore, both basic and agricultural operations must constitute the integrated activity of
agriculture. Where subsequent operations are performed on the produce (crop) of
spontaneous growth (where no basic operations were performed by the agriculturist income
will not be Agricultural Income.
Agriculture produce means any produce formed after performing basic and subsequent
operations on agricultural land. It may be:
i. Food, grain, vegetables, or fruit for human consumption;
ii. Plantation and groves, grass, fodder for animal
consumption;iii Article of luxury such as betel, tea, coffee,
spices, tobacco;
iv. Commercial crops such as cotton, flex, jute, hemp, and indigo;
v. Article having an artistic and decorative value such as flowers,
creepers;vi Articles having housing value like bamboo, timber;
vii Articles having fuel value;
The term agriculture is used in a wider sense and it also includes horticulture (cultivation
ofevery type of plant), Floriculture (cultivation of flowers), arboriculture (cultivation and
management of trees within the landscape which includes the study of how trees grow and
respond to cultural practices and the environment, as well as application of cultural
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techniques such as selection, planting, care, surgery, and removal) and sylviculture
(cultivation of forest).

However, every activity on land is not agriculture. The term agriculture is used in the
sensethat basic and subsequent operations are performed on land to grow agricultural produce
(crop). Simply because some activity is done on land or activity in some way is dependent on
land does not mean that, the activity comes within purview of agriculture.

For Example - Breeding and rearing of livestock, dairy farming, cheese and butter making,
and poultry farming are non-agricultural activities.

Further, any income arising from the transfer of agricultural land shall not be treated as revenue
arising from such land and therefore, not Agricultural Income. [Explanation 1 of Section 2(1A)]

Any income derived from saplings or seedlings grown in a nursery shall be deemed to be
Agricultural Income. [Explanation 3 of Section 2(1A)]

The onus of proving that an income is Agricultural Income is on the assesse7.

7CIT v R. Venkataswamy Naidu (1956) 29 ITR 529 (SC); Sri Ranganatha Enterprises v CIT (1998) 232 ITR
568 (Ker)
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Examples of Agricultural Income:

a. Where Basic Operations are carried out in a nursery and Subsequent Operations are
carried on in pots in continuation of basic operations then income from such nursery
isAgricultural Income8.
b. Seeds are agricultural produce that is obtained on the account of Cultivati0n by the
assessee. Therefore, income from seeds is Agricultural Income9.
c. Rent from agricultural land received by Mortgagee in possession from sub-tenant. For
Example - Mr. A (mortgagor) mortgaged his agricultural land to Mr. B (mortgagee in
possession). Mr. B gives that agricultural land on rent to Mr C (sub-tenant) therefore
rent received by Mr. B (mortgagee in possession) shall be Agricultural Income.
d. Salary received by a partner, for rendering service to a firm, which is engaged in
agricultural operations and has Agricultural Income.
e. Interest on capital received by a partner from the firm engaged in agricultural
operations is Agricultural Income. However, the share of profit received by a partner
from the firmis exempted under section 10(2A) and it is not Agricultural Income.
f. The compensation received from an insurance company for damage caused to the
crop is an Agricultural Income. Such compensation cannot be distributed between
Agricultural Income and business income under rules10.
g. Profit on sale of standing crop or produce after harvest by a cultivator or receiver of
rent-in-kind.
h. Income from the sale of grass where the grass was grown by making human efforts
i.e.basic and subsequent operation.
i. Income from the sale of replanted trees where denuded parts of the forest were
replantedand subsequent operations were performed.

Examples of Non – Agricultural Income:

a. Interest on arrears of rent regarding agricultural land as it is not revenue derived
fromland.
b. Interest on promissory notes received by the landlord from defaulting tenants.
c. Income from the sale of forests, wild grass, fruits, and flowers is grown
spontaneouslyand without human effort11.
d. Income from the sale of wild grass and reed of spontaneous growth.
e. Income from dairy farming, butter, and cheese making12.
f. Income from fisheries.
g. Income from poultry farming.
h. Income from the sale of preserved potatoes as preservation of potatoes by
refrigerationis not a process ordinarily employed by a cultivator.
i. Agricultural produce is received by a moneylender as interest.

8 CIT v. Soundrya Nursery (2000) 241 ITR 530 (Mad)

9 Ibid
10 CIT v. B. Gupta Tea Pvt. Ltd. (1969) 74 ITR 337 (Cal)
11 Mustafa Ali Khan v CIT (1948) 16 ITR 330 (PC)
12 CIT v. Venkataswamy Naidu (R), (1956) 29 ITR 529 (SC)
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Scheme of Partial Integration of Non –Agricultural Income with

Agricultural Income:
Agricultural Income is exempted under section 10(1) of the Income-tax Act, 1961. Moreover,
if the assessee has agricultural as well as non-agricultural income then Agricultural Income
shall be included in his Total income for computation of Income-tax on non-Agricultural
Income. This is known as a 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; or
b. A Hindu Undivided Family; or
c. Association of Person/ Body of Individuals; or
d. Artificial Judicial

PersonAnd it should not be:

a. Firm; or
b. Company; or
c. Co – operative society
d. Local Authority

2. The assessee's non-Agricultural Income must exceed the Basic Exemption limit for
thatAssessment Year.
3. The Agricultural Income must exceed 5,000.

Computation of tax under Scheme of Partial Integration:

Step 1: Compute Net Agricultural Income as if it is chargeable to tax.

Step 2: Compute Non-Agricultural Income and add net Agricultural Income.

Step 3: Calculate tax on aggregated income [Agricultural + Non-Agricultural] as if such

aggregated income is Total income.

Step 4: Add Agricultural Income to the Basic Exemption limit for the assessee and compute
tax as if it is the Total Income of the assessee.

Step 5: Reduce the amount of tax determined under Step 3 from tax determined under step 4.

Step 6: Add surcharge (if applicable) education cess 2% and secondary and higher education
cess @ 1%, if any, to balance.
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Bibliography:

1. Dr. Jyoti Rattan, Taxation Laws, (Bharat, 14th Edition, 2022).

2. https://www.scconline.com/

3. https://cleartax.in/s/agricultural-income