7/29/2019 Treatment of Agricultural Income
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i,
CHAP.TE... .R....E'WElV ,.
What is agricultural income185. Section 10(1) exempts
agricultural income from income-tax. By virtue of section 2(lA)
theexpression "agriculturalfucome" means:1. Any rent or revenue
derived from land which is situated in lndia and is used for
agriculturalpurposes [sec. 2(lA)(a)-seeparas 185.1 and 185.1-1].2.
Any income derived from such land by agricultural operations
includ,ing p r o c e s ~ i n g of theagricultural produce, raised
or received asrent-in-kind,so as to re nder it fit for the market
or saleof such p r o d u ~ e [sec. 2(lA)(b)-seeparas 185.2 and
185.1-1).3.lncome attributable to a fann house subject to certain
conditions [sec. 2(1A)(c)-see paras 185.3and 185.1-1].185.1 Rent or
revenue derived from ia,.,d [Sec. 2(JA)(a)] - According to .section
2(lA)(a), if thefollowing three conditions are satisfied, income
derived from land be termed as "agriculturalincome":a. rent or
revenue should be derived from land (may be in cash or kind) ;b.
the land s one which is situated in lndia (if the land is situated
in a foreign country, this conditionis not satisfied) ; and 'c. the
land is used for agricultural purposes.185.1-1 LAND USED FOR
AGRICULTURAL PURPOSES - The primar y ,condition to claim exemption
as"agricultural income" is that the land in question should be u ~
e d fqr agricultural purpos es whetherexemption is sought under
sub-clause (a) or (b) or (c) of section2(1A).The terms
"agriculture" and "agricultural purpqses" have not been defined in
the Act; one has,therefore, to depend upon ordinary meaning and
decided cases.. In CITv. RajaBenoy Kumar Sahas Roy[1957] 32 ITR 466
(SC), Bhagwati, J.laid down the followingprinciples to serve as a
guide in the determination of the scope of the terms "agriculture"
and"agricultural purposes":
658
.659 Incomdrom agriCUlturalland by agricultural operations Para
185.2Basic,operatio;ns - PriOI1.togermination, some ,basic
operations are essential, to c onstituteagricultur.e.,The
basicoper.ations.would involve expenditure of human skill and
labour upon theland itself and.not metely on the growth from. the
land. Some illustrative instances of basicoperationsare ilIi:ngof
and, sowingoftheseeds,pianting, and similar kind of operationson he
and.Subsequent operations -Besides the basic operations, t here
arecertainsubsequentbpetationswhich are performed after the produce
sprouts from the land. illustrative instances of
ubsequentqperations areweeding;cUgging the soil around the growth,
l'Cmoval of undesirable undergrowthsand.alloperaJ:ionswbich foster
thegrowth and preserve the same, no tonly from insects and pestsbut
also 11;omdegradation from outside; tending, pruning, Clltting,
harvesting and rendering theprodl,1cefitforJbemiU"ket. MerepeIf
ormance of these subsequent operations on the prooucts ofthe land
(where such proollcts have not been raised on the landhy the
performanceof he basicoperationsd;escriQed'above) would no t be
enough to characterise them as agricultural operations.Where,
however, the subsequent operations are performed n conjunction with
and in continuation
o f t h ~ b ~ i c . o p ~ r a t i o n s , the subsequent
operations would also constitute part of the integratedactivity' o
f ~ g r i c U 1 t u r e . . .Agriculture no t merely includes
foodan dgrains -Agriculture does not merely imply raising of
foodand grains for the consumption of men and animals; it also
includes all products from theperformance of basic as well as
subsequent operations on land. These products, for instance, maybe
grain or vegetable or fruits including plantation and groves or
grass orpastureforconsumption
of beasts or articles of luxury such as betel, coffee, tea,
spices, tobacco, etc., or commetcial cropslike cotton, flax, jute,
hemp, indigo, etc. All these are products raised from the land and
the term"agriculture" cannot be confined merely to the production
of food and grains products for humanbeings but must be understood
as .comprising all the products of the land whichhave some
utilityeither for consumption or for trade a nd commercial asset
would also include forest products suc has timber, sal and
piyasaltrees, casuarina plantation, tendu leaves, horra nuts,
etc.Some connection with land no tsufficient The mere fact that an
activity has s ome connection withor is in sorpe way dependent o n
land is n ot sufficient to bring.it within the scope of the
term"agriculture". For instance, breecling ;and rear ing of
livestock, dairy farming, cheese and bu ttermaking and poultry
fanning would not by themselves be agricultural purposes.
185.21ncome derived from agrlculturallandby
agrlcultufaioperations[Sec. 2( A)(b)]-Section2{1A)(b) gives the
folloWing three iristances of agricultural income:a. any income
derived by agriculture from land situated in India' and used for'
agriculturalpurposes; , . 'b. any income derived by acultivator or
receiverof ent -in-kind of any process ordinarily employed
tQ render the produce raised or received by him to make it fit
to be taken to market; otc. anymcomederivedbjrsuchland by the sale
by a cultivator or receiver of r e n t ~ i n - k i n d of
theproduce raisedorreceived by him in respectofwhich no
processhasbeen performed other than
aprocess of thenaturedescnbed h (b).The aforesaid income' are
agricultural incol11e, if such income are d ~ r i v e d from land
which issituated in lndia and is used for agricultural purposes.Any
surplus arisingon sale or transfer of agriculturallandis not
treated as rent or revenue derivedfrom land.185.2-1INCOMEDER1VED
FROM MARKETlNGPROCESS-Sometimesit becomes difficult to find
readymarket of the crop as harvested. In order to make the produce
a commodity which is saleable, itbecomes necessary to perform. some
kind of process on the produce.: The income, ,arising by wayof
enhance ment of value.of such produce, hyperforming such process to
make the raw producefit for m arket, is also agricultural income.
However" .the following condjtions must be satisfied:a. the process
must be one which is ordinarily employed by a cultivatoror
receiverof rent-in-kind ;andb. the process must be applied to rende
r the produce fit to be taken to market.
7/29/2019 Treatment of Agricultural Income
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Para 187 MeauJngof agri!:JdturaI incom e ed i t s tax treaQnent
662What isthe.tax treatment of income which is partially.
agricultural and partially from business[Rules 7, 7A,7B;and til187.
Fo r disintegrating a composite busirless income which is partly
agricultural an d partly nonagricultUral, th e following rules ar e
applicable-
GrowipgSale ; f centrifuged latex or cenex or latex basedcrepes
(such as,pale latex crepe) or.brown crepes(such as estate broWn
crepe, remilled crepe, smokedblanket. crepe Or flat bark crepe) or
technicallyspecified block rubbers manufactured or processedfrom
field latex or coagulum obtained from rubber plants grown by the
seller in IndiaSale of coffee.grown and cured by sellerSale of
coffee grown, cured, roasted andgrounded by seller in India with or
withoutmixing chicory or other flavouring ingredients
35%25%
4096
65967596
6096.
Rule 7ARule 7B(1)
Rule 7B(lA)'Income in respect of the business given above is, in
the first instance, computed under the Act as if werederived frolTI
business after making permissible deduction. 40 or 35 or 25 per
cent of the mcome so aITlved atistreated as business income and the
balance is treated as agricultural income. Salary and interest
receivedby a partner from a firm (growing leaves and manufacturing
tea orany other activitymentioned in the table)is taxable only to
the extent of 40 or 35 or 25 per cent an d the balance is treated
as agricultural income.187.1 Any other case [Rule 7J -
For:disintegrating a composite business income which is
partlyagriculturalan d partly non-agricultural, th e market
valueofany agricultural produce, raised by heassesseeor received by
him as rent-in.kindan d utilised as raw material in his business,
is deducted.No further deduction is permissible in respect of any
expenditure incurred by the assessee as acultivator or receiver of
rent-in-kind.~ P r o v i s i a n s illustrated - The following
examples are given to. illustrate th e aforesaid provisions1. X
Ltd. grows sugarcane to manufacture sugar. Data of 2004-05 is as
followsCost of cultivatioll of sugarcaneMarket value of sugarcane
when sugarcane is transferred to factoryOther manufacturing
costSales turnover of sugarIncome in this case will be determined
as follows -
Sales turnover/market value of sugarcaneLess:
ExpensesManufacturing expensesMarket value of raw material (ie.,
sugarcane)Cultivation .expensesIncome
(Rs. in Jakh)496
22
2. y Ltd. is e n g ~ e d in the business of growingand
manufacturing tea in India. The following data is availablefor th e
previous year 2004-05-
668
Sales turnover of teaLess:
Computation of tlXin::cases covered by scheme- , "" $- " '"
Expenses on growing tea leavesManufacturing expensesmcolTIe [60
per cent of Rs.HJlakh will be a g r i c u l t u r ~ income and 40
per cent ofRs. 10lakh (ie., Rs. 4Iakh), ~ b e takenllS
non-agncultureincome]
Para 1 8 8 ~ 1 (Rs.in lakh)
45201510
3. Assume in the above case, Y Ltd. is engaged in the
cultivation, manufacture and sale of coffee. As per rule7l3, 40 per
cent of he income from growingand manufacturing coffee n India with
or without mbtingof chicoryor other flavouring i[}gredients is
taken as non-agricultural income.What is the scheme of partial
integration of non-agricultural income with agricultural income188.
The scheme of partial integration of non-agricultural income with.
agricultUral inco me isapplicable if a few conditions ar e s a t i
s f j . ~ d . It is applicable, if he follbwing conditi ons ar e
satisfied -
The taxpayer is an individual, a Hindu undivided family, a body
of individual, an associationof persons or an f\rtificial juridical
person.The taxpayer has non-agricultural income exceeding the
amount of exemption limit (i.e.,Rs.50,000 for the assessment year
2005-06t)
If he three conditions are satisfied, then the s c h ~ m e of
partial integration of ax on non-agriculturalincome with income
derived from agriculture is applicable. .It may be noted that, the
aforesaid scheme is not applicable in the case of a firni,
company,co-operative society, etc.. ' ' ,188.1 Computa tion of ax
in cases coveredby he scheme-In cases covered by the scheme,
ncome-tax will be computed for the assessment year 2005-06 in the
following manner: ,
Step one -Net agricultural income is to be computed as if t were
income chargeable to incometax... Step two -Agricultural an d
non-agricultural income of th e assessee will then be aggregated
andincome-tax is calculated on he aggregate ncomeas fsuch
aggregateincome were hetotalincome... Step three,The net
agriculturalincome will then be increased by an amount of Rs.50;000
(ie., thefirst shib of income on which tax is charged at nil ratet)
and income-tax is calculated on ne tagricultural income, so
increased, as if such income was the total income of the
assessee.
Steplour -The amount of income-tax determined at Step two will
be reduced by the amount ofincome-taxdetermined under Step three.
-.. Step five - Rebate under sections 88:j:, 88B:j:, 88C:j:, 88D:j:
and 88E shall be deducted;Step six - Find out the balance. Add
surcharge and education cess... Step seven -The amount so arrived
will be the total income-tax payable by the assessee.ISS-PI For the
previous year ending March 31, 2005, non-agricultural income of X
is Rs .50,000, whereasagricultural income is Rs. 6.80,000. Is he
liable to pay income-tax? .As non-agricultural income of X does no
t exceed Rs. 50,000, he is not liable to pay any tax, irrespective
ofquantum of agricultural income.tFor the assessment year 2006-07,
the exemption limit is Rs. 1,35,000 (in the case a resident woman
below 65years), Rs. 1,85,000 (in the case of a resident senior
citizen 6S years or more) an d Rs, 1,00,000 (in case of anyother
individual or every HUF).tFrom the assessment year 2006-07 onwards
, rebate under sections 88, 88B, 88C and 880 will not be
available.
