Agricultural income - Relevant Income Tax Issues

Agricultural
Income
(Relevant Provisions under
Income Tax law)
BY CA AMITOZ SINGH
Ex-Chairman – Chandigarh Branch of NIRC of ICAI

Taxation of Agricultural Income
Tax on Agriculture : Constitutional Provisions
´ Article 246 along with clause 82 of the Union List in Seventh Schedule
empowers the Parliament to legislate all taxes on Income ”other then
Agriculture Income”
´ Article 246(3) along with entry 46 in List II (State List) of the Seventh Schedule
vests powers on the States to levy tax on Agricultural Income.
Presented By CA AMITOZ SINGH

Meaning of Agricultural Income
Section 2(1A) defines agricultural income as:
1. Revenue generated through rent or lease of a land in India that is is used for
agricultural purposes;
2. Any income derived from commercial sale of produce gained from an
agricultural land
3. Any income from farm building.
Key points to validly classify an income as “agricultural income”
´ Income should be from an existent piece of land in India ;
´ Income should be from a piece of land that is used for agricultural operations
´ Income should stem from produce achieved after cultivation of the land.
Cultivation of land is a must ;
´ Income can be from a land that is not under the assessee’s ownership. i.e.
ownership of Land is not essential.

´ Usage: Agricultural operations means efforts induced for the crop to sprout out of
the land. The ambit of agricultural income covers income from agricultural
operations, which includes processes undertaken to make the produce fit for sale
in the market. Both, rent or revenue from the agricultural land and income earned
by the cultivator or receiver by way of sale of produce are exempt from tax only if
agricultural operations are performed on the land.
´ Cultivation: Some measure of cultivation is necessary for land to have been used
for agricultural purposes. The ambit of agriculture covers all land produce like
grain, fruits, tea, coffee, spices, commercial crops, plantations, groves, and
grasslands. However, the breeding of livestock, aqua culture, dairy farming, and
poultry farming on agricultural land cannot be construed as agricultural
operations.
´ Ownership: In the case of rent or revenue, it is essential that the assessee has an
interest in the land (as an owner or a mortgagee) to be eligible for tax-free
income. However, in the case of agricultural operations, it is not necessary that
the cultivator be the owner of the land. He could be a tenant or a sub-tenant. In
other words, all tillers of land are agriculturists and enjoy exemption from tax. In
certain cases, further processes may be necessary to make a commodity
marketable out of agricultural produce. The sales proceeds in such cases are
considered agricultural income because the producer’s final objective is to sell his
products.

(Supreme Court Decision in CIT vs Raja Benoy Kumar Sahas Rpy (1957) 32 ITR 466)
2 types of Operations should be carried out on Land:
´ Basic: Cultivation, Tilling, Sowing, Planting, etc. demanding labour & skill and further
they are directed to make the crop sprout from land
´ Subsequent: Weeding, Digging, Removal, Tending, Pruning, Cutting, Prevention from
Insects, Pests, cattle, etc. After the crop sprouts, for Efficient Production of crops
The cultivation of the land does not comprise merely of raising the products of the land in
the narrower sense of the term like tilling of the land, sowing of the seeds, planting, and
similar work done on the land but also includes the subsequent operations set out above
all of which operations, basic as well as subsequent, form one integrated activity of the
agriculturist and the term “agriculture” has got to be understood as connoting this
integrated activity of the agriculturist. One cannot dissociate the basic operations from
the subsequent operations, and say that the subsequent operations, even though they
are divorced from the basic operations can constitute agricultural operations by
themselves. If this integrated activity which constitutes agriculture 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.

Exceptions – Not Agricultural Income
´ sIf a person sells processed produce without carrying out any agricultural or
processing operations, the income would not be regarded as agricultural
income.
´ Likewise, in cases where the produce is subjected to substantial processing which
changes the very nature of the product (for instance, canning of fruits), the entire
operation is not considered as an agricultural operation. The profit from the
sale of such processed products will have to be apportioned between
agricultural income and business income.
´ Income from trees that have been cut and sold as timber is not considered as an
agricultural income since there is no active involvement in operations like
cultivation and soil treatment.
Income from sale of Forest Trees of spontaneous or natural growth where only forestry
operations in the nature of these subsequent operations are performed would,
therefore, not be agricultural income. (Maharjadhiraj Sir Kameshwar Singh vs. CIT
(1957) 32 ITR 587 (SC)). However, where fresh trees have been planted in old forests,
the income attributable to such plantation activity would be Agricultural Income.

Taxability of Agricultural Income
By default, agricultural income is exempted from taxation and not included in
Total Income for tax purposes.
1. Exemption provision : Sec.10 (1) of the Income Tax Act, 1961.
2. However, Agricultural Income is included in the Taxable income for Rate
purposes if :
a) Net Agricultural Income exceeds Rs. 5,000/-
b) Total Income, excluding Net Agricultural Income, exceeds the Basic
exemption limit
c) Integration is done only in case of Individuals, HUF, AOP, BOI and Artificial
Judicial person

How to Integrate ?
´ If all the above mentioned conditions are satisfied, the agricultural income is
added with the Non Agricultural Income
Tax is calculated on the total Income at the current rates of Tax – A
´ Net Agricultural Income is added with the Basic Exemption Limit
Tax is calculated on this total at the current rates of Tax – B
´ Tax Calculated at Point B is deducted out of tax calculated at Point A
´ Add Education and Higher Education Cess on the Net amount of tax and
the said total is Tax payable

If Taxability arises – Certain information
to be furnished in ITR Forms
Furnish the following:
´ Name of District (with PIN Code) where the Agricultural
Land is located
´ Measurement of Agricultural Land is Acres
´ Whether the Agricultural land is Owned or held on Lease
´ Whether Agricultural Land is Irrigated or Rain-fed

Partly Agriculture Income and Partly Non
Agricultural Income
CROP RULE AGRI. INCOME NON AGRI. INCOME
Growing and manufacture of Tea 8 60% 40%
Rubber Manufacturing Business 7A 65% 35%
Coffee grown and cured by Seller 7B(I) 75% 25%
Coffee grown, cured, roasted and
grounded by the seller in India with
or without mixing any flavouring
ingredients
7B(IA) 60% 40%

Various Issues in Taxability of Agricultural Income
There are various activities/situation wherein it is frequently
discussion is taken place whether these activities will be considered
as agricultural income or not and consequent exemption from
income tax is available in these situation: A few of such activities
are discussed hereunder:

Various Issues in Taxability of Agricultural Income
Whether agriculture activity on urban land is exempt ?
Agriculture activity carried out on agriculture land whether it is rural or urban is
exempt from tax hence profit from agricultural operation carried out at urban land
is exempt from tax.
Whether agriculture activity carried out by company is exempt ?
Section 10(1) speaks about exemption of agricultural income irrespective to the
constituent of the person be it individual, HUF, Company, trust etc hence profit
from agricultural activity carried out by company is also exempt from tax.

TAXABILITY OF CONTRACT FARMING ?
In such a situation agricultural operations must be actually carried out by such entity other
than individual and mere supervision and guidance provided to agricultural operation by
outsourcing is not sufficient. As per decision of Ld. Delhi ITAT in the case of P.H.I. Seeds P
Ltd v/s DCIT
Facts and issues of the case:
´ The assessee-company, was engaged in business to procure various variety of seeds
from growers, processing and packing, and subsequent sale of same. The assessee
filed its return and claimed exemption under section 10(1).
´ The assessee submitted that the lease agreement and service provider agreement
was entered between the farmers and the assessee. As per said agreement the
farmers were provided seeds for planting by the assessee and on the directions and
guidance by the assessee the entire range of agricultural operations were carried out.

´ The Assessing Officer was of a view that the charges for supervision and guidance could
not be said to be agricultural activities within the meaning of the Act. It was further held
that the assessee did not indulge in agricultural operations in accordance with tests laid
in the judgment of the Supreme Court in the case of CIT v. Raja Benoy Kumar Sahas
Roy [1957] 32 ITR 466, accordingly the claim of exemption under section 10(1) was
denied by Assessing Officer.
On appeal, the Commissioner (Appeals) dismissed the appeal of the assessee on grounds
that the assessee-company was not engaged in the performance of agricultural operations
because the basic operations like tilling, sowing etc. were being performed by the farmer.
Result/Judgments: If agricultural activity is carried out by corporates than following points
should be kept in mind to get it eligible for exemption.
´ a) Agricultural activity should be carried out by employee of the company.
´ b) Risk of the agricultural produce should be bear by the company.
´ c) Mere supervision and guidance provided to the farmers cannot be termed as agricultural
activity.

Whether Profit on sale of fruits from the trees planted around the house/Bunglow is
exempt being agricultural activity ?
As per section 2(1A) any income derived from agriculture on the land which is used for
agricultural purpose will be considered as agricultural income for the purpose of
Income tax Act. Since fruits is extracted from trees which are planted on the land
which is for residential purpose hence profit on sale of such fruits will be taxable under
the Income tax Act and cannot be considered as agricultural income.
Whether Income from export of agriculture produce is exempt ?
If the agriculturist had directly export the agriculture produce than profit on export shall
be exempt from tax provided other condition as mentioned in section 2(1A) is also
satisfied but if any middlemen has undertaken export of agriculture produce than the
same shall not be exempt under section 10(1) being agricultural income.

Profit on sale of mangoes/Chikoo/Jamun etc. from a farm taken on lease basis for
short term period eg. One Year ?
Since all such type of fruits is extracted from trees which have long gestation
period means trees were planted on the land before it is taken on lease but it
requires various subsequent operations which tantamount to agriculture
operation hence if the land is agricultural land than profit on sale of fruits can be
claimed as exempt even though land is taken on short term lease.
Answer of this question would be in negative if the tress were standing trees and
no subsequent activity had been carried out, In such a situation profit on sale of
standing trees will be taxable under the Income Tax Act.

Whether profit from agriculture produce is exempt in a case where the
subsequent process is undertaken on non-agriculture land/premises to make it
marketable ?
Subsequent process on Agricultural produce to make it marketable is a part of
agricultural operations and profit on sale of such produce shall be treated as
agricultural income only. Say for example trashing of Rice, wheat, mustard, etc is
part of agricultural operations only even though these activities are carried out
on non-agricultural land or building.
But in the case of tea, coffee, sugarcane where a major processing (change of
very nature of the product) is being done, than income shall be bifurcate as
agricultural and non-agricultural as per rule 7, 7A, 7B and 8 of the Income tax rule.

Whether growing of grass of specific texture/quality/process is agricultural
income when such grass was grown under a tendered contract in a time definite
manner for CWG (Common Wealth Games) 2010:
The same situation was happened in the case of Hortus Consultants P Ltd wherein
the company was granted a contract to grow grass in soil or in peat moss with
mesh to a certain height with three mowing and then lifted / rolled with the roots
intact to a specific thickness and planted in a time definite seamless manner at
the Jawaharlal Nehru Stadium which required foreign technology, implements,
consultancy and collaboration. The company claimed the whole income as
agricultural income but ITAT held that the concept of income splitting will need to
be done in this case. Income up to growing of the grass was held to be
agricultural income and thereafter the job of lifting/rolling/relaying will not be
agricultural income.

Whether converting of jiggery(Gur) from sugarcane by the farmer himself is
agricultural activity and thus exempt from tax ?
Generally both the commodity is separately marketable and conversion of Gur
from sugarcane is not a necessary process performed by the cultivator to render
the sugarcane fit for being taken to the market hence profit from sale of
Jaggery will be bifurcated as agricultural and non-agricultural income if the
farmer himself is involved but if someone else is involved than profit from sale of
jaggery is taxable as business income.
But When there was no market for the sugarcane produced by the assessee in
its natural condition, income received by the assessee from sale of jaggery was
exempt from tax as agricultural income. CIT v H.G. Date [1971] 82 ITR 71 (Bom.)

Whether Income from sale of flowers or nursery products are exempt from tax ?
There are two type of operations that are generally carried out in nursery or
greenhouse operations. In the case where soil is removed from the land and kept in
various pots etc and subsequent operations are carried out in pots. In such a scenario
income from sale of flowers or nursery products will be considered as agriculture
income because basic operation had been done on the soil and there is no
relevance of subsequent operation hence sapling or seeding grown is considered as
deemed agricultural income but if flower plants are sold after purchased it from farm
house then it will be business income.
Whether claim received from Insurance company for damage of crop is agricultural
income ?
Insurance claim received from insurance company for loss of crop is agricultural
income because such claim is received against basic agricultural operations.

Whether compensation received for loss of trees with roots is agricultural income: ?
Where the assessee receive compensation for loss of trees from a company which was laying
gas pipeline crossing his farm. The Ld. Hyderabad bench had treated such compensation as
agricultural income being equal to sale of crop or claim from insurance company. (Sri meela
Satynarayan HUF v/s ITO, Suryapet in ITA no 1047/Hyd/2016.
Whether Mashroom Farming is an agricultural activity even though vertical space is used
instead of horizontal space on soil: ?
The Hyderabad ITAT in the case of DCIT v. Inventaa Industries (P.) Ltd. [2018] 95 taxmann.com
162 had dealt this issue and explained that why mashroom farming is to be considered as
agricultural activity. The Ld. Tribunal had held that “ Soil’ is a part of the land. Land is also part
of earth. The upper strata of the land is soil and this is cultured and made fit for production of
crops, vegetables and fruits, etc., by enriching the soil. When such soil is placed on trays, it
does not cease to be land and when operations are carried out on this ‘soil’, it would be
agricultural activity carried upon land itself.

Whether Income from Fish Farming(Jhinga) is agricultural Income: ?
Fish farming is not an agricultural activity as no basic agricultural operation is carried
out on land hence income from fish farming is taxable as business income. However
income of fish farming to a co-operative society is exempt u/s 80P of the Act.
Whether dividend declared by a tea manufacturing company can be claimed as
exempt to the extent of 60%:?
Suppose an assessee is a shareholder of a tea company which is engaged in the
growing and marketing of tea. The assessee received handsome amount of dividend
from the company and wanted to claim exemption to the extent of 60% being sole
source of dividend is agriculture income. Reliance can be made from the following
case law:

Case Name: Union of India v/s Tata Tea Co Ltd 251 taxmann 0010(SC)
Facts: The assessee was a tea company which cultivated tea in gardens and processed it in its
own factory/plants for marketing the same. The cultivation of tea was an agricultural process
although, the processing of tea in the factory was an industrial process.
The agricultural income was within the legislative competence of the State and not in the
legislative competence of the Parliament. Section 115-O imposed tax on the dividend
distributed by the company which was nothing but imposing the tax on agricultural income of
the assessee. The assessee thus filed a writ petition challenging the vires of section 115-O. The writ
petition was dismissed by the Single Judge. The Division Bench set aside the judgment of the
Single Judge.
Judgment: The Ld. Supreme court has held that meaning of income derived from land should be
give in case of direct association with the land and an unrestricted meaning to this term shall be
unwarranted meaning thereby that agricultural income shall be construed only when captioned
income have direct connection with the land.

Taxability of income not derived from agricultural land: ?
In our daily life, we used to come across various incomes which seems to be agricultural income
but minute study suggests that unless until income is have direct linkage from agricultural land, such
income can-not be treated as agricultural income. Example of such incomes which does not have
direct linkage with agricultural land are as under (Such income is taxable under the Income Tax
Act)
´ Income from Bee Hiving
´ Income from making of salt from sea water.
´ Interest income on crop loan
´ Income from dairy farming
´ Rent received from farm house given for residential purpose or shooting of film
´ Commission received by broker on sale of crop
´ Income from poultry farm
´ Income from selling of milk, ghee etc
´ Interest on belated receipt of rent of land, building.
´ Income from Sale of spontaneously grown trees. Presented By CA AMITOZ SINGH

´ Does interest on arrears of rent qualify as agricultural income and will this be
exempt from tax?
Sometimes, a tenant could slip up on rent or revenue payments (either in cash
or kind) and have to pay arrears. If the landlord charges interest on such
arrears, the income would not be considered as an agricultural income, but
would be deemed income by way of interest and would, hence, be
chargeable to tax. While ‘rent’ presupposes periodical and pre-determined
payment (either in cash or kind), ‘revenue’ implies a sharing arrangement that
depends on the actual agricultural produce. In either case, ownership of
agricultural land or interest in such land is essential, which means, the owners of
agricultural land, tenants who are given a sub-lease, and people who are
mortgagees of agricultural land, all enjoy tax-free agricultural income.

What is the test that determines land is agricultural land?
The Gujarat HC in CIT v Siddhartha J. Desai 139 ITR 628 (Guj)(1983) has laid down the
following tests for determining whether the land is agricultural or not:
a) Whether, the land was classified in the revenue records as agricultural and whether it
was subjected to payment of land revenue? [CIT vs. Smt. Debbie Alemao 331 ITR
0059 (Bom) [2011]]
b) Whether, the land was actually or ordinarily used for agricultural purposes at or about
the relevant time?
c) Whether, such user of the land was for a long period or whether it was of temporary
character or by way of stop gap arrangement?
d) Whether the income derived from the agricultural operations carried on in the land
bore any rational proportion to the investment made in purchasing land?
e) Whether the land, on the relevant date, had ceased to be put to use? If so, whether
it was put to an alternative use? Whether such lessor and/ or alternative user was of
permanent or temporary nature?
f) Whether the land, though entered in revenue record, had never been actually used
for agriculture, i.e., it had never been ploughed or tilled?
g) Whether the owners meant or intended to use it for agricultural purposes?

Some Practical Issues
Issues related to Agricultural Land
´ The use to which the transferee put the land is immaterial and not relevant.
´ What is relevant is that, in the hands of transferor, the land must be agricultural in nature at
the time of transfer.
´ If the transferee converts the agricultural land into non agricultural land or divides it into
two plots and sells the same as house sites, the transfer of the land would not give rise to
capital gains tax in the hands of transferor. [Motibhai Patel v CIT 131 ITR 120 (Guj)(1981)].
´ It was held that the purchaser who had no intention of carrying on agricultural operations,
the seller assessee should not loose the benefit as long as he had been using the land for
agricultural purposes. [M.S. Srinivasa Naicker V ITO 292 ITR 0481 (Mad)[2007]].
´ If the land was put to agricultural use for a long period and the agricultural operations
were temporarily suspended, the land does not cease to be agricultural. [Ranganatha
Sastri (M) V CIT 119 ITR 488 (Mad) (1979)].

´ Where agricultural land which is outside the scope as per section 2(14) (iii) is sold
along with standing trees, there will be no liability to capital gains tax even in respect
of the standing trees. On the other hand, if the standing trees are sold separately
after they are cut and removed, they do not partake of the nature of the land and
there will be liability to tax on capital gains arising from the sale. [Gokul Rubber and
Tea Plantations Ltd. V CIT 172 ITR 197 (Ker)(1988)].
´ Where land was shown as agricultural land in the revenue records and was never
sought to be used for non-agricultural purposes by the assessee till it was sold, it was
held that such land has to be treated as agricultural land even though no agricultural
income is shown by the assessee as the assessee stated that the agricultural income
derived by sale of coconut grown on the land was just enough to maintain the land
and there was no surplus. [CIT v Debbie Alemao 46 DTR 341 (Bom.)(2010)]
´ Agricultural land not covered under specified urban areas and therefore not a
capital asset. [Ramjibhai P. Chaudhry v DCIT 314 ITR (AT) 0259 ITAT – Ahm.] [2009]

THANK YOU
CA Amitoz Singh Kamboj
Partner
APT & Co LLP , Chartered Accountants
Plot no. 1632, Sector 82 – JLPL Industrial Area, Mohali
Plot No. 181/33, Indl Area 1, Chandigarh
Ex-Chairman (2020-21)
Chandigarh Branch (NIRC) of The Institute of Chartered Accountants of India
|M| +91 987 202 7526, +91 936 900 0007
|E| ca.amitozsingh@gmail.com |W| www.aptllp.com

Agricultural income - Relevant Income Tax Issues

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Agricultural income - Relevant Income Tax Issues

Similar to Agricultural income - Relevant Income Tax Issues (20)

Recently uploaded

Recently uploaded (20)

Agricultural income - Relevant Income Tax Issues