Agricultural Income

Q: Define Agricultural Income. What is the tax treatment of Agricultural Income?
Ans: Agriculture is the main part of Indian economy. 70% of the Indian population is
based upon agriculture and derives its income from agriculture operations. But u/s
10(1) of income tax act, agriculture income is fully exempt from tax. The agriculture
income is exempt from tax under article 270 of Indian constitution. But in order to be
exempt from tax the agriculture income should be as defined u/s 2(1A) of income tax
act.
Agriculture Income
Section 2(1A) of Income tax act defines agriculture income as follows:
a. “Any rent or revenue derived from land which is situated in India and
used for agricultural purpose.”
According to this part of the definition the income will be agriculture income
if the following conditions are satisfied:
(i) Income must be derived from land.
It is essential for agriculture income that the immediate source of income
should be land. The income can be in the form of rent or revenue. Rent or
revenue is received by a person who grants the right to use his land for
agriculture purpose to other person. The rent or revenue can be in the form of
cash or in kind.
(ii) The land must be situated in India.

In order to qualify for exemption u/s 10(1) it is necessary that
agriculture income must be derived from land situated in India. In case
the land is not situated in India, the income will not be exempt. So the
agriculture income from a foreign country is taxable under income from
other sources.
(iii) The land must be used for agriculture purpose.

It is necessary that the land must be used for agriculture purpose.
Generally two types of operations are employed on land i.e. basic
operations and subsequent operations. Basic operations include tilling of
land, sowing of seeds and planting etc. Such basic operations demand
the expenditure of human labour and skill upon the land.
After the crop sprouts from the land there are subsequent operations.
Subsequent operations include weeding, digging, removal of undesired
growth, prevention of crop from insects etc.
Supreme Court of India in the case of CIT v/s Raja Benoy Kumar Sahas
Roy observed that agriculture purpose means that at least basic
operations have been employed on land.
b. “Any income derived from agricultural land by agriculture operations
or by performance of any process employed to make the produce fit to
be taken to the market or by sale of such produce.”
As per this part of the definition agriculture income also includes the following:
1. Any income derived by agriculture from land situated in India and used
for agriculture purpose. The following will be treated as income derived
from agriculture land:
(i) Standing crop or the raw produce sold in the market.
(ii) Crop used by the cultivator for his own consumption.
(iii) Crop used as raw material by the cultivator in his business.
2. Any income derived from an extra operation to make the produce fit to be
taken to the market. The produce raised from the land may not have a
market in its native form. It may become necessary to perform a process
on the produce to make it marketable. Any extra income from that
process also qualifies as agricultural income.
c. “Any income derived from any building (Farm House) situated in

agricultural land.”
The income from building is treated as agricultural income provided the following
conditions are satisfied:
1. Building should be owned and occupied by the land holder if he receives
rent or revenue from the land.
2. Building should be in the immediate vicinity of land situated in India
which is used for agricultural purposes.
3. Building should be used as dwelling house or store house or as out
house.
4. The land should be assessed to land revenue or a local rate. However if it
is not subject to land revenue or local rate, such land should be situated
in rural area.
Partly Agriculture and Partly Non Agriculture Income

Sometimes income comprises of both agriculture and non agriculture income. Such a
situation arises in case of agro-based industries. In such a situation it becomes
necessary to bifurcate the two incomes because agriculture income is exempt and non
agriculture income is taxable. Rules 7, 7A, 7B and 8 of income tax rules provide
method of segregating the two incomes.
1. Rule 7
As per rule 7, while calculating non agriculture income the market value
of the agriculture produce raised by the cultivator and utilized as raw
material will be deducted out of the total profits of such assessee.
2. Rule 7A
Income derived from sale of growing and manufacturing of rubber in
India, 65% of the income is treated as agricultural income and 35% is
treated as non agricultural income.
3. Rule 7B
Income derived from sale of growing and manufacturing coffee in India,
75% of the income is treated as agricultural and 25% is treated as non
agricultural income.
4. Rule 8
Income derived from sale of growing and manufacturing tea in India,
60% of the income is treated as agricultural income and 40% is treated
as non agricultural income.
Tax treatment of Agricultural Income

With effect from 1974-75 the agricultural income is integrated with the non
agricultural income in certain cases. The integration is done only in those cases where
the assessee has both agricultural and non agricultural income.
1. When to integrate
a. Integration is done only in case of (i) individual (ii) HUF (iii) AOP/BOI
(iv) artificial Juridical Person
b. Integration is done only if the agricultural income exceed Rs 5000
c. Integration is done only if the non agricultural income exceed NIL
Slab.
2. How to integrate
a. Calculate tax (incl. Edu Cess) on agricultural income + non
agricultural income
b. Calculate tax (incl. Edu Cess) on agricultural income + NIL Slab.
c. Tax payable = Tax in Pt (a) – Tax in Pt (b)

Agricultural Income

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Q: Define Agricultural Income. What is the tax treatment of Agricultural Income?

(ii) The land must be situated in India.

(iii) The land must be used for agriculture purpose.

c. “Any income derived from any building (Farm House) situated in

Partly Agriculture and Partly Non Agriculture Income

Tax treatment of Agricultural Income

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