Submitted To Course Instructor:-

Mr. Mani Pratap

Project-Topic
Agricultural-Income
 Contents
1. Introduction
2. What is Agricultural Income?
3. Non Agricultural Income from land
4. Agriculture not merely includes foods & grains
5. Some connection with land not sufficient
6. Income from nursery operations
7. Income derived from marketing process
8. Income from form building
9. Use of building for any other purposes other than agriculture
10. Case when income held to be agriculture income
11. Case when income held to be non-agriculture income
12. Conclusion
Introduction:-
Agriculture income is exempt under the Income Tax Act 1961. 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.
From the assessment year 1974-75, agricultural . Agriculture income is exempt under the
Indian Income Tax Act. 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 consideration.
Hence Agricultural income [2(1A)] has not been taxed right from the beginning under the
Income-tax Act. The justification for such exemption is that income from agriculture is
taxed in the form of land revenue
What is Agricultural Income?
As per Income Tax Act 1961, any income, which is derived from any of the
following sources, will be treated as agricultural income –
1. Any rent or revenue derived from land which is situated in India and is used for
agricultural purposes.
2. Any income derived from such land by agricultural operations including
processing of the agricultural produce, raised or received as rent in kind so as to
render it fit for the market or sale of such produce.
3. Income attributable to a farm house subject to certain conditions
4. Income earned from saplings or seedlings grown in a nursery.
So, agricultural income is neither taxable nor it is included in total income except
for determining the tax on non-agricultural income.
Non-Agricultural Incomes From Land:-
The following incomes, are not derived from land used for agricultural purposes hence
they are non-agricultural incomes:-
1) Incomes from markets
2) Income from stone quarries
3) Income from mining royalties
4) Income from self-grown grass, trees or bamboos
5) Income from fisheries
6) Income from the sale of earth for brick making
7) Remuneration received as manager of an agricultural farm
8) Dividend from a company engaged in agriculture
9) Income of the buyer of a ripe crop
10) Income from dairy farm, poultry farming, etc.
11) Income from interest on arrears of rent of agricultural land.
Agriculture Not Merely Includes Food & 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 may be grain or vegetable or fruits including
plantation and groves or grass or pasture for consumption of beasts or articles of
luxury such as betel, coffee, tea, spices, tobacco etc. or commercial crops like cotton,
flax, jute, hemp etc.
Some Connection With Land Not Sufficient:- The mere fact that an activity
has some connection with the land or in some way dependent on land is not
sufficient to bring it within the scope of the term agriculture. For example, breeding
and rearing of livestock, cheese and butter making and poultry farming would not
come under the agricultural purposes.
Income From Nursery Operations:-
Accordingly, irrespective of the basic operations have been carried out on land,
such income will be treated as agriculture income and thus qualify for the
exemption under section 10 (1).
Income Derived From Marketing Process:-
The following conditions must be satisfied:-
• The process must be one which is usually employed by a cultivator or receiver
of rent in kind.
• The process must be applied to render the produce fit to be taken to market.
Income From Farm Building:-
The following conditions must be satisfied:-
• The building should be occupied by the cultivator or receiver of rent in kind
who can be a landlord or a tenant.
• It should be on or in the immediate locality of land situated in India and used
for agricultural purposes.
• The cultivator or receiver in kind should by reason of his connection with the
agriculture land requires the building as a dwelling house or as a store house or
other out building.
• The land is assessed to land revenue or local rate or the land is situated outside
the urban area.
Use of Building For Any Other Purposes Other Than Agriculture:-
Income would be exempt from tax if land or building is used for agriculture
purposes. If the land or building is used for any other purpose then the exemption is
not available. For example, if a farmer gives his building on rent for residential
purposes then such income would be chargeable to tax.
Cases When Income Held To Be Agriculture Income:-
In the following cases, income is held as agriculture income –
1. If denuded parts of the forest are replanted and subsequent operations in forestry are
carried out, the income arising from the sale of replanted trees.
2. Profit on sale of standing crop or the produce after harvest by a cultivating owner or
tenant of land.
3. Rent for agriculture land received from sub tenants by mortgagee in possession.
4. Compensation received from an insurance company for damage caused by hail
storm to the green leaf forming part of assessee’s tea garden.
5. Income from growing flowers and creepers.
6. Salary received by a partner for rendering services to a firm which is engaged in
agricultural operations, is agriculture income.
7. Interest on capital received by a partner from the firm engaged in agricultural
operations.
8. If nursery is maintained by carrying out basic as well as subsequent operations then
the income from such nursery would be agriculture income.
Cases When Income Held To Be Non-Agriculture Income:-
In the following cases, income is held as non-agriculture income –
1. Annual annuity received by a person in consideration of transfer of agricultural land.
2. Interest on arrears of rent in respect of agricultural land as it is neither rent nor revenue
derived from land.
3. Interest accrued on promissory notes obtained by a Zamindar from defaulting tenants.
4. Income from sale of wild grass and reeds of spontaneous growth.
5. Remuneration received by a managing agent at a fixed percentage of net profit from a
company having agriculture income.
6. Interest received by a money lender in the form of agriculture produce.
7. Income from sale of agricultural produce received by way of price for water supplied to
land.
8. Commission received by the landlord for selling agriculture produce of his tenant.
9. Royalty income of mines
10. Income from poultry farming
Case Laws Related to Agricultural Income:-
1. Bacha F. Guzdar v. C.I.T., Bombay
AIR 1955 SC 740
The Supreme Court held that, Agricultural income as defined in the Act 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.
2. CIT v. Raja Bahadur Kamakshya Narayan Singh
AIR 1971 SC 794
It dealt with the question whether interest on arrears of rent payable in respect of land used
for agricultural purposes is agricultural income and therefore exempt from Income Tax. It
was held that it was neither rent nor revenue derived from land within the meaning of
Section 2(1A) of the Income Tax Act.
3. Maharaj kumar Gopal Saran Narain Singh v. CIT,
3. I.T.R. 237
An annual payment for life to the assessee was not held to be agricultural income and
therefore not exempt from tax where the annuity arose out of a transfer made by the
assessee of a portion of his estate for discharging his debts and for obtaining an adequate
income for his life. It was held that it was not rent or revenue derived from land but money
paid under a contract imposing personal liability on the covenator the discharge of which
was secured by a charge on land.
4. C.I.T. v. Benoy Kumar Sahas Roy,
(1957) 32 ITR 466 (SC)
In this case the court emphasized that certain basic operations should be carried out
alongwith subsequent operations. The Supreme Court observed that if the integrated
activity of the agriculturist, viz., agriculture, which includes the basic operations and the
subsequent operations, 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.
Conclusion:-
Agriculture income is defined under sec 2 (1A) and is exempt under the Indian Income
Tax Act. 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. While computing tax on non-agricultural income, agricultural income is
also taken into consideration.
Clearly, despite agricultural income being tax-exempt, assessees have to be extra careful
while dealing with such income. They must make sure that they aggregate agricultural
income with their total income to avoid interest payments and possible penalties for
concealment of income. Assessees must also maintain credible records to provide the tax
authorities with proof of ownership of agricultural land and evidence of having earned
agricultural income. The benefit of Tax Exemption on Agricultural Income has not only
been continued but extended to urban land used for agricultural purposes. Capital Gain on
Agricultural Land is now liable to Income Tax subject to benefit of Roll-over of
Investment in Agricultural Land. Agricultural Income will continue to be taken into
consideration for Rate purposes in the like manner as under the present Income Tax Law.
Sources:-
Books-Referred:-
1. Income Tax - Dr. V. K. Singhania
2. Income Tax- Dr. Monika Singhania
Websites:-
1. http://blog.lotuseduservices.com/wp-content/uploads/2014/12/CA-Final-DIRECT-
TAX-notes-on-AGRICULTURAL-INCOME.pdf
2. http://cms.gcg11.ac.in/attachments/article/101/assessment%20of%20agricultural%20i
ncome.pdf
3. http://commercehub.webs.com/documents/AGRICULTURAL%20INCOME-3.pdf

**************************