Agricultural income [Section 2(1A)]

 Agricultural income

Sec 10(1) Provides that Agricultural Income is Exempt

• Agricultural income definition is very wide and covers the income of not only the
  • cultivators; but also
  • the land holders who might have rented out the lands.
• Agricultural income may be received in cash or in kind

Sec 2(1A) - Agricultural income may arise in any one of the following three ways:-

• It may be rent or revenue derived from land situated in India and used for agricultural purposes
• It may be income derived from such land by
  • agriculture or
  • the performance of a process ordinarily employed by a cultivator or receiver of rent in kind to render the produce fit to be taken to the market or
  • the sale, by a cultivator or receiver of rent in kind, of such agricultural produce raised or received by him, in respect of which no process has been performed other than a process of the nature mentioned in point (b) above.
• Lastly, agricultural income may be derived from any farm building required for agricultural operations
• rent or revenue should be derived from land
• land situated in India
• used for agricultural purposes
• RENT: can either be in CASH or In-KIND
  • received by the owner of the land or
  • by the tenant from sub-tenant.
  • (It implies that ownership of land is not necessary)
• REVENUE: is much broader than rent. It includes income other than rent.
  • For example, fees received for renewal for grant of land on lease would be revenue derived from land
• Rent received from agricultural land provided for movie shooting / marriage purpose.
• Rent received from agricultural land provided for grazing of cattle.
• Y owned 100 acres of agricultural land, a part of which was used as pasture for cows. The lands were purely maintained for manuring and other purposes connected with agriculture and only the surplus milk after satisfying the assessee’s needs was sold. The question arose whether income from such sale of milk was agricultural income.
  • The regularity with which the sales of milk were effected and quantity of milk sold showed that the assessee carried on regular business of producing milk and selling it as a commercial proposition. Hence, it was not agricultural income.

The term “Agriculture” has not been defined in the Act.

CIT -vs.- Raja Benoy Kumar Sahas Roy

Any spontaneous growth from land itself (i.e. without any human effort) cannot be termed as agricultural operation

• Basic Operation: It means application of human skill & labour upon the land, prior to germination.

E.g. Tilling of land, sowing of seeds, planting, irrigation, etc.

• Subsequent Operation: It means operations -
  • which fosters the growth and preserves the produce
  • for rendering the produce fit for sale in market; and
  • which are performed after the produce sprouts from the land

E.g. Digging the soil around the growths, removal of undesirable undergrowths, weeding, tending, pruning, cutting, harvesting, etc.

Mere Basic Operation

Mere Subsequent Operation

Subsequent operation together with basic operation

Agriculture means growing food gains only ?

No. Flower, Jute, cash crops also agriculture income

Any connection with land ?

The term ‘agriculture’ cannot be extended to all activities which have some distant relation to land like dairy farming, breeding and rearing of live stock, butter and cheese making , poultry farming , salary or commission income from a company doing agriculture activity

Income derived from saplings or seedlings grown in a nursery ?

Yes, as per Explanation 3 to section 2(1A), income derived from saplings or seedlings grown in a nursery would be deemed to be agricultural income, whether or not the basic operations were carried out on land.

The income from Process ordinarily employed to render the produce fit to be taken to the market

can it be sold in its raw form?

ordinarily employed by the cultivator or receiver of rent in kind

+ Should be necessary to render it fit for market

+ After process the character should not be changed, unless it cant be sold in that character.

Examples : thrashing, winnowing, cleaning, drying, crushing etc

The income from the sale, by a cultivator or receiver of rent in kind, of such agricultural produce raised or received by him, in respect of which no process has been performed other than a process of the nature mentioned in point (b) above.

BUT WHAT IF .... the produce is subjected to any process other than process ordinarily employed to make the produce fit for market

the income arising on sale of such produce would be partly agricultural income and partly non-agricultural income

Rule 7A -

Rubber plants - latex - Latex & Rubber based products.

35% of profits = Business Income | 65% of profits = Agri Income

Rule 7B -

In case of income derived from the sale of coffee grown and cured by the seller in India 25% of profits = Business Income | 75% of profits = Agri Income

In case of income derived from the sale of coffee grown, cured, roasted and grounded by the seller in India 40% of profits = Business Income | 60% of profits = Agri Income

Rule 7 -

Income from growing and manufacturing of any product

Business Income = Sale proceeds of Final product XXXXX

Less Market value of Agri Produce (dddd)

Less Manufacturing Expense (aaaa)

Total Business Income (inc B)

The income from the farm building would be agricultural income

• building should be on or in the immediate vicinity of the land +

• reason of his connection with such land require it as a dwelling house or as a store house

Also any 1 of these 2 conditions should be satisfied

• Land should either be assessed to land revenue in India or be subject to a local rate assessed and collected
• Where the land is not so assessed it should be situated in Rural Area