Agricultural Income [Section 2(1A)]

Section 10(1) of the Income-tax Act, 1961 exempts agricultural income from income-tax. However, net agricultural income is added to the total non-agricultural income computed as per income-tax Act, for the purpose of determining the income-tax on non-agricultural income of an individual, HUE, AOP/BOI or an artificial juridical person, although the agricultural income will remain fully exempt.

Agricultural income including the following:

(1)        any rent or revenue derived from land;

(2)        any income derived from such land by agriculture or from processing of agricultural produce;

(3)        any income from farm building.

The above three types of income shall be treated as ‘agricultural income’ on! when the following conditions are satisfied:

(i) Income should be derived from land.

(ii) Land should be situated in India.

(iii) Land should be used for agricultural purposes.

Income of Nursery [Explanation 3 to section 2(1A)]:

Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income. Accordingly, irrespective of whether the basic operations have been earned out on land, such income will be treated as agricultural income, thus qualifying for exemption under section 10(1) of the Act.

The above Three types of agricultural incomes have been defined under Section 2(1A)(a), 2(1A)(b) and 2(1A)(c) respectively. The definition is being discussed in detail as under:

1.  Rent or Revenue derived from Land [Sec. 2(1A) (a)] –

According to section 2(1A)(a), if the following three  conditions are satisfied, income derived from land can be termed as “agricultural income”:

1. Rent or revenue should be derived from land (may be in cash or kind);
2. The land is one which is situated in India (if the land is situated in a foreign country, this condition is not satisfied); and
3. The land is used for agricultural purposes.

Land Used for Agricultural Purposes –

The primary condition to claim exemption as “agricultural  income” is that the land in question should be used for agricultural purposes whether exemption is sought under  sub-clause (a) or (b) or (c) of section 2(1A).

The terms “agriculture” and “agricultural purposes” have not been defined in the Act; one has, therefore, to  depend upon ordinary meaning and decided cases.

The following principles serve as a guide in the determination of the scope of the terms “agriculture” and “agricultural purposes”:

(1)  Basic Operations –

Prior to germination, some basic operations are essential to constitute agriculture. The basic  operations would involve expenditure of human skill and labour upon the land itself and not merely on the  growth from the land. Some illustrative instances of basic operations are tilling of land, sowing of the seeds,  planting, and similar kind of operations on the land.

(2)  Subsequent Operations –

Besides the basic operations, there are certain subsequent operations which are  performed after the produce sprouts from the land. Illustrative instances of subsequent operations are weeding, digging the soil around the growth, removal of undesirable undergrowths and all operations which foster the  growth and preserve the same, not only from insects and pests but also from degradation from outside, tending,  pruning, cutting, harvesting and rendering the produce fit for the market. Mere performance of these subsequent  operations on the products of the land (where such products have not been raised on the land by the performance  of the basic operations described above) would not be enough to characterise them as agricultural operations.  Where, however, the subsequent operations are performed in conjunction with and in continuation of the basic  operations, the subsequent operations would also constitute part of the integrated activity of agriculture.

(3)  Agriculture Not merely includes Food and 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, for instance, 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, 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 human beings but must be understood as comprising all the products of the land which have some  utility either for consumption or for trade and commercial asset would also include forest products such as  timber, sal and piyasal trees, casuarina plantation, tendu leaves, horra nuts, etc.

(4)  Some Connection with Land Not Sufficient –

The mere fact that an activity has some connection with or is in some  way dependent on land is not sufficient to bring it within the scope of the term “agriculture”. For instance,  breeding and rearing of livestock, dairy farming, cheese and butter-making and poultry farming would not by  themselves be agricultural purposes.

(5)  Income from Nursery Operations –

Any income derived from saplings or seedlings grown in a nursery shall be  deemed to be agricultural income. Accordingly, irrespective of whether the basic operations have been carried  out on land, such income is treated as agricultural income and, consequently, it is under section 10(1).

2.  Income derived from Agricultural Land by Agricultural Operations [Sec. 2(1A) (b)] –

Section 2(1A)(b)  gives the following three instances of agricultural income:

(1).       Any income derived by agriculture from land situated in India and used for agricultural purposes;

(2).       Any income derived by a cultivator or receiver of rent-in-kind of any process ordinarily employed to render  the produce raised or received by him to make it fit to be taken to market; or

(3).       Any income derived by such land by the sale by a cultivator or receiver of rent-in-kind of the produce raised  or received by him in respect of which no process has been performed other than a process of the nature  described in (b).

The aforesaid income are agricultural income, if such income are derived from land which is situated in India  and is used for agricultural purposes.

Any surplus arising on sale or transfer of agricultural land (in urban area) is not treated as rent or revenue derived  from land.

Income Derived from Marketing Process –

Sometimes it becomes difficult to find ready market of the crop  as harvested. In order to make the produce a commodity which is saleable, it becomes necessary to perform some  kind of process on the produce. The income, arising by way of enhancement of value of such produce, by  performing such process to make the raw produce fit for market, is also agricultural income. However, the  following conditions must be satisfied:

(i).        the process must be one which is ordinarily employed by a cultivator or receiver of rent-in-kind; and

(ii).       the process must be applied to render the produce fit to be taken to market.

For instance, tobacco leaves are ordinarily dried to make them suitable for sale. Therefore, the income from the  ordinary process employed to dry the tobacco leaves to make them fit to be taken to market, is agricultural  income. The ordinary process employed to render the produce fit to be taken to market includes thrashing,  winnowing, cleaning, drying, crushing, boiling and decanting, etc., though the nature of process depends upon  quality of the produce and varies from time to time and place to place.

Moreover, if marketing process is performed on a produce which can be sold in its raw form (without requiring  any process to make it fit for marketing), income derived therefrom is partly agricultural and partly nonagricultural. For instance, if sugarcane is generally sold in a given area without being subjected to any process,  the process of converting sugarcane into gur would not be agricultural process and income attributable to the  process of converting sugarcane into gur would not be agricultural income.

Section 2(1A)(b) does not contemplate sale of commodity different from what is cultivated and processed and  where the assessee was growing mulberry leaves, feeding them to silkworms and obtaining silk cocoons, income  from sale of silk cocoons would not be agricultural income.

3.  Income from Farm Building [Sec. 2(1A) (c)] –

Bona fide annual value of house property is taxable under  section 22. However, income from a house property which satisfies the following cumulative conditions would  be treated as agricultural income and, consequently, it would be exempt from tax by virtue of section 10(1):

(1).       The building should be occupied by the cultivator (as a landlord or as a tenant) or receiver of rent-in-kind (as  a landlord);

(2).       It should be on or in the immediate vicinity of land, situated in India and used for agricultural purposes;

(3).       The cultivator or receiver of rent-in-kind should by reason of his connection with the agricultural land requires  the building as a dwelling house or as a store house or other out-building; and

(4).       The land is assessed to land revenue or local rate or, alternatively, the land (though not assessed to land  revenue or local rate), is situated in a rural area†.

If all the aforesaid conditions are satisfied, income from a farm building is exempt from tax under section  2(1A)(c).

Use of building or land for any purpose other than agriculture –

Income would be exempt from tax only if land or  building is used for agricultural purposes. In other words, if land or building is used for any other purposes,  exemption is not available. For instance, if a farmer gives his building on rent for residential purposes, income  is chargeable to tax.