Assessment of Agricultural Income

Agricultural Income
Section 10(1) of the Income-tax Act, 1961 exempts agricultural income from income-tax. However, K.N Raj
committee has recommended for integration of net agricultural income to the total non-agricultural income
computed as per Income-tax Act since AY 1973-74.
Definition of Agricultural Income

[Section 2(1A)]
“Agricultural income” means

I - RENT OR REVENUE
1. any rent or revenue
2. derived from land
3. which is situated in India (i.e the land should be situated in India)
II. INCOME FROM AGRICULTURE OR PROCESSING ACTIVITY OR SALE

any income derived from such land by—
(i) agriculture; or
(ii) the performance of any process ordinarily employed by a cultivator or receiver of rent-in-kind
to render the produce raised by the cultivator or received by receiver of rent in kind fit to be taken to
market by
1. a cultivator or
2. receiver of rent-in-kind
III – INCOME FROM FARM BUILDING

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 the previous paragraphs (i) and (ii) of sub-
clause (II) is carried on.
Use of building or land for purpose other than agriculture shall not constitute agricultural income: Income
derived from any building or land referred to in sub-clause (c) above 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 shall not be agricultural income.
Non- agricultural income

Following incomes have been held to be non-agricultural income, hence taxable:
(a) Income from sale of forests, trees, wild grass, fruit and flowers grown spontaneously and without
human effort.
(b) Income from salt produced by flooding the land with sea water and then extracting salt therefrom.
(c) Income from stone quarries.
(d) Income from breeding of livestock.
(e) Income from dairy farming, butter and cheese making.
(f) Income from poultry farming.
(g) Income from fisheries.
(h) Preservation of potatoes by refrigeration as it is not a process ordinarily employed by a cultivator.
(i) Income from brick making.
(j) Income from supplying surplus water to other agriculturists.
(k) Interest on arrears of rent in respect of agricultural land.
(l) Profit on sale of standing crops/agricultural produce purchased by the assessee.
(m) Income derived from letting out of land/godowns for storing crops.
(n) Royalty income of mines.
(o) Annuity payable to vendor of agriculture land or payable to a person giving up his claims to piece of
agricultural land.
(p) Harvest Crop on purchased land.
(q) Compensation/damages paid for loss of agricultural income due to late payment of instalments of the
consideration price of rubber plantation site.
(r) Registration fee collected from the contractor who is bidding at the auction conducted for sale of
plantation is not an agricultural income as such registration fee had no nexus with land.
Income which is partially agricultural and partially from business
(A) Income from growing and manufacturing of tea, rubber and coffee
Amount of Non-agricultural
Nature of Income Agricultural Income i.e.
Income business income
1. Income from sale of tea grown and manufactured by the 60% of such Income 40% of such Income
assessee in India
2. Income from rubber plants grown by the seller in India 65% of such Income 35% of such Income
3. Income derived from the sale of coffee grown and cured by 75% of such Income 25% of such Income
the seller in India
4. Income derived from the sale of coffee grown, cured, 60% of such Income 40% of such Income
roasted and grounded by the seller in India
(B) Income from growing and manufacturing of any product other than tea [Rule 7]
An assessee may have composite business income which is partially agricultural and partially non-
agricultural, for example, where XYZ Ltd. grows potatoes and further processes its produce to sell them as
wafers. In this case the company has composite income i.e. from agriculture and from business. The composite
income has to be disintegrated and for computing business income 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. For computing agricultural income the market value of agricultural produce will be total
agricultural receipt on account of potatoes. From such agricultural receipts, expenses such as cultivation
expenses etc. incurred in connection with such receipt will be deducted and balance will be agricultural income
which will be exempt.
For example, in the above case, if the market value of the potatoes grown by the company, which have been
used for the purpose of making its own wafers, is Rs. 5 lakhs and the cost of cultivation of such potatoes is Rs. 4
lakhs. From the business income of wafers Rs. 5 lakhs i.e. the market value, shall be deducted and no other
expense shall be allowed for such potatoes. On the other hand, the agricultural income shall be Rs. 1 lakh (5
lakhs - 4 lakhs). This agricultural income of Rs. 1 lakh shall be exempt.
. Tax on non-agricultural income if the assessee earns agricultural income also

There is no tax on agricultural income but if an assessee has non-agricultural income as well as agricultural
income, such agricultural income is included in his Total Income for the purpose of computation of Income -tax
on non-agricultural income.
This is done only in the case of:
(i) individual;
(ii) HUF;
(iii) AOP/BOI;
(iv) Artificial juridical person.
This addition is done to compute the tax on non-agricultural income only when the following two conditions are
satisfied:
(i) non-agricultural income of the assessee exceeds the maximum exemption limit.
(ii) the Net Agricultural Income exceeds Rs. 5,000.
Computation of tax where there is agricultural income also: The following steps should be followed to
calculate the tax:
Step 1: Add agricultural income and non-agricultural income and calculate tax on the aggregate as if such
aggregate income is the Total Income.
Step 2: Add agricultural income to the maximum exemption limit available in the case of the assessee and
compute tax on such amount as if it is the Total Income.
Step 3: Deduct the amount of income-tax as computed under Step 2 from the tax computed under Step 1.
The amount so arrived at shall be total Income-tax payable by the assessee.
Step 4: Add surcharge, if applicable.
Step 5: Add education cess @ 2% and SHEC @ 1%.

Assessment of Agricultural Income

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Agricultural Income

Definition of Agricultural Income

“Agricultural income” means

II. INCOME FROM AGRICULTURE OR PROCESSING ACTIVITY OR SALE

III – INCOME FROM FARM BUILDING

Non- agricultural income

Income which is partially agricultural and partially from business

. Tax on non-agricultural income if the assessee earns agricultural income also

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