UNIVERSITY INSTITUTE OF LEGAL

STUDIES,
PANJAB UNIVERSITY, CHANDIGARH

Project Work on Topic-

“AGRICULTURAL INCOME

SESSION: 2024-25

Submitted to- Submitted by-

Kriti Bhatia Mam Ayushi Sharma

B.Com LL.B (Hons.)

R.no-199/20

Semester-10

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 ACKNOWLEDGEMENT
I would like to express my special thanks of gratitude to Kriti Bhatia Mam for their able
guidance and support in completing my project.

I would also like to extend my gratitude to my parents and friends for providing me with all
the facility and support required for the completion of the project.

Ayushi Sharma

199/20

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 INDEX

S.no Content Pg.no.

1 GENERAL 4
2 MEANING OF AGRICULTURAL INCOME 4
3 SECTION-2(1A), INCOME TAX ACT, 1995 5
4 NECESSARY CONDITIONS FOR INCOME TO BE 6
AGRICULTURAL INCOME
5 8
RENT OR REVENUE FROM LAND{(S.2(1A)(a)}
6 INCOME FROM AGRICULTURAL PRODUCE AND 10
MARKETING PROCESSES {S2(1A)(b)(ii)}
7 INCOME FROM FARM BUILDING {S.2(1A)(c)} 10
8 CONCLUSION 12
9 REFERENCES 14

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 GENERAL
Agriculture, alongside its allied sectors, exists as one of the largest sources of livelihood in
India. Figures ascertained by the Food and Agriculture Organisation (FAO) indicate that
agriculture still serves as a primary source of income for about 70% of the Indian rural
households. The government, therefore, endeavours to boost this sector by means of schemes,
policies, and tax exemptions for agricultural income. It may seem like the fact of exemption
to income tax is all that we need to know when it comes to the taxation of agricultural income
but there is more to it.

MEANING OF AGRICULTURAL INCOME

In general sense any revenue derived from agricultural land is known as agricultural income
and has been exempted from taxation. Article 366(1) of the Constitution provides that the
expression ‘agricultural income’ in the Constitution means agricultural income as defined for
the purpose of enactments relating to Indian Income Tax. As per section 2(1A) of the Income
Tax Act, 1961 (the Act) ‘agricultural income’ means-

(a) Any rent or revenue derived from land which is situated in India and is used for
agricultural purposes;

(b) Any income derived from such land by agricultural operations including processing of
agricultural produce so as to render it fit for market or sale of such produce;

(c) Any income attributable to a farm house subject to fulfilment of conditions specified in
the Act; and

(d) Any income derived from saplings or seedlings grown in a nursery.

As per section 10(1) of the Income Tax Act, 1961, agricultural income is exempted from tax.
Taxes on agricultural income fall under Entry 46 in “State List” under the Constitution of
India. Thus, only the State Governments are competent to enact legislations for taxation of
agricultural income. The Central Government cannot levy income tax on agricultural income.
However, agricultural income is considered for rate purposes while determining the income
tax liability viz. the rate91 of tax applicable to other taxable income of Individuals, Hindu
Undivided Families (HUF), Association of Persons (AOP), Bodies of individuals (BOI) and
artificial juridical persons. Exemption under the Income Tax law may be claimed as
agricultural income, income from sale of agriculture land, income earned as compensation
received from government for acquiring the agriculture land etc.

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 SECTION-2(1A), INCOME TAX ACT, 1995
Section 2(1A), Income Tax Act provides meaning of Agricultural Income as-

(a) any rent or revenue derived from land which is situated in India and is used for
agricultural purposes;

(b) any income derived from such land by-

(i) agriculture; or

(ii) the performance by a cultivator or receiver of rent- in- kind of any process ordinarily
employed by a cultivator or receiver of rent- in- kind to render the produce raised or received
by him fit to be taken to market; or

(iii) 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 paragraph (ii) of this sub- clause;

(c) any income derived from any building owned and occupied by the receiver of the rent or
revenue of any such land, or occupied by the cultivator or the receiver of rent- in- kind, of
any land with respect to which, or the produce of which, any process mentioned in
paragraphs (ii) and (iii) of sub- clause (b) is carried on: 1 Provided that-

(i) the building is on or in the immediate vicinity of the land, and is a building which the
receiver of the rent or revenue or the cultivator, or the receiver of rent- in- kind, by reason of
his connection with the land, requires as a dwelling house, or as a store- house, or other out-
building, and

(ii) the land is either assessed to land revenue in India or is subject to a local rate assessed
and collected by officers of the Government as such or where the land is not so assessed to
land revenue or subject to a local rate, it is not situated-

(A) in any area which is comprised within the jurisdiction of a municipality (whether
known as a municipality, municipal corporation, notified area committee, town area
committee, town committee or by any other name) or a cantonment board and which has a
population of not less than ten thousand according to the last preceding census of which the
relevant figures have been published before the first day of the previous year; or

(B) in any area within such distance, not being more than eight kilometres, from the local
limits of any municipality or cantonment board referred to in item (A), as the Central
Government may, having regard to the extent of, and scope for, urbanisation of that area and
other relevant considerations, specify in this behalf by notification 2 in the Official Gazette.]
3 Explanation.- For the removal of doubts, it is hereby declared that revenue derived from
land shall not include and shall be deemed never to have included any income arising from
the transfer of any land referred to in item (a) or item (b) of sub- clause (iii) of clause (14) of
this section;]

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 NECESSARY CONDITIONS FOR INCOME TO BE
AGRICULTURAL INCOME
The above three types of incomes shall be treated as agricultural income if following
conditions are satisfied:

I. Income should be derived from land

The very first requirement is the income should be derived from land not from any other
assets. Land can be owned or occupied by a cultivator who produces on that land, or a rent
receiver of that produce. Land can be farming land or a building that should be occupied or
owned by a cultivator or a rent receiver. The building or farmhouse should be on the same
land and used as a dwelling-house, store-house or other outbuildings.

Income should be in the form of rent or revenue,

Rent is payment, it can be in cash or in-kind, by one person to another in respect of a grant of
right to use that land.

Revenue is used in a broader sense, In the case of Durga Narain Singh v. CIT 1[(1947) 15
ITR 235]-

“Revenue” covers income other than rent. Mutation fees extracted from tenants upon their
succeeding to occupancy holding are revenue derived from land.

Revenue can be derived from land only if lands are an effective and immediate source of
income and not the indirect and secondary source of income. Where income derived from
indirect source then it will not be considered income derived from land.

We can understand this with the help of the case Bacha F. Guzdar v. CIT2, In this case, a
dividend paid by a company out of its agricultural income is not revenue derived from land,
as an effective and immediate source of income is shareholding and not the land.

Let’s discuss this situation with some illustrations-

1. If a person X owns the land and give it to Mr.Y for rent for agricultural purpose. Mr.Y
uses that land for growing wheat. Is it taxable or not?

Sol: No, it is not taxable because here income derived by a cultivator and a rent receiver is as
per the condition.

2. If a person X owns a building and give it to Mr.Y on rent for Agricultural Purpose.
But Mr.Y uses that building for the non-agricultural purpose. What will be the result?

Sol: This will be taxable because the income derived here is other than the agricultural
purpose.

1
[(1947) 15 ITR 235] 2 1955 AIR 740, 1955 SCR (1) 876

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 II. Land must be situated in India

Another condition is the land must be situated in India, whether situated in urban areas or
rural areas. The areas are also mentioned in Sec. 2(1A) of the Income Tax Act. The area
where land revenue can be collected by officers of the government:

1. If it is situated in an area which comes within the jurisdiction of the municipality or

cantonment board where the population is not less than ten thousand.

2. Any area within the distance,

3. Not being more than two kilometres from the local limits of any municipality or
cantonment board and which has a population of more than ten thousand but not
exceeding one lakh.

4. Not being more than six kilometres from the local limits of any municipality or
cantonment board and which has a population of more than one lakh but not
exceeding ten lakh.

5. Not being more than eight kilometres from the local limits of any municipality or
cantonment board and which has a population of more than ten lakh.

Agricultural income from foreign countries will be considered as income from other sources
and it will not be exempted under Agricultural income.

E.g.- A person owns the land in Africa and give it to Mr A on rent for the Agricultural
purpose. Now, the income which is earned by that person will consider being an income from
other sources and will include in the total income.

III. Land must be used for basic operations of Agriculture

For exemption under agricultural income, the operation must be related to agricultural. That
means land should be used for the agricultural purpose.

Now, what can be understood by the term ‘Agricultural Purpose’. In the case of CIT v. Raja
Benoy Kumar Suhas Roy1 [1957] 32 ITR 466, the Supreme Court laid down the principles in
regard to the term ‘Agriculture’ and ‘Agricultural Purposes’.

SC divided operations into two types-

• Basic operation.- Basic operation includes the expenditure of human skill and labour
upon the land itself, merely having an agricultural land will not constitute agricultural
purposes. Some operations like tilling of land, sowing of the seeds, planting, etc.

• Subsequent operation.- Subsequent operations are performed after the produce

sprouts from the land. Like weeding (removal of wild plants), digging the soil around
the growth, removal of undesirable undergrowth, removal of the crop from insects

1
[1957] 32 ITR 466

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 and pests, cutting, harvesting, rendering the produce fit for the market etc..
Subsequent operation must be in continuation of basic operations, mere performance
of these activities on the land will not constitute agricultural operation.
If this integrated activity is done on the land then it can be said to be “Agricultural purposes”
and the income derived from these activities said to be “Agricultural income”.

Agricultural Activity does not merely include the production of foods and grains. It includes
all products from the performance of basic and subsequent operations on land. We cannot
confine it to the production of food and grains for human consumption, it can also include
products for trade and commercial assets like cotton, flax, jute, indigo, etc. and it would also
include forest products like timber, sal, tendu leaves, and all those forest products which are
used for commercial purpose.

In support of the Agricultural operation, there is another case K. Lakshmanan Co. v. CIT2
[1999] 239 ITR 597 (SC),

In this case, SC held that Sec. 2(1A)(b) of the Act does not contemplate the sale of
commodity different from what is cultivated and processed and where the assessee is growing
mulberry leaves, feeding them to silkworms and obtaining silk cocoons, income from the sale
of silk cocoons is not an agricultural income.

IV. Income from a Nursery

Income from a nursery is always exempted from total income.

In case of- H.H. Maharaja Vibhuti Narain Singh v. State of Uttar Pradesh3 [1967] 65 ITR
364 (All.), the Hon’ble Allahabad High Court held that income from a nursery is not an
agricultural income unless maintained by a farmer as an aid or necessary adjunct to the
primary process of agriculture, for example, paddy nursery, nursery of tomato plants. Here
assessee used the nursery for ornamental plants which cannot be considered an adjunct to the
primary agricultural process.

In the case of CIT v. Saundarya Nursery4 [2000] 241 ITR 530 (Mad.), the Madras High
Court held that nursing activities involve carrying out of several operations on land before the
sapling were transplanted in a particular pot and then put them in shades for further operation
and growth. Therefore, the income from the nursery will consider being an agricultural
income.

2
[1999] 239 ITR 597 (SC)
3
[1967] 65 ITR 364 (All.)
4
[2000] 241 ITR 530 (Mad.)

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 RENT OR REVENUE FROM LAND{(S.2(1A)(a)}
Rent or Revenue is a kind of income derived from agricultural income by the landlord or the
owner of the land.

Rent can be in cash or in-kind. E.g.- if a person owns the land and gives it to another person
on rent for agricultural purposes @ Rs. 5,000, then this amount of income considered to be
rent from land in cash which is a part of agricultural income.

Another example of rent from land is, A person owns the land and gives it to Mr.B on rent for
agriculture, a tenant will give 1/3rd part of the whole wheat grown to the landlord, this is rent
from land in-kind.

Revenue is a kind of profit received from the land. Let’s say a landowner asks a farmer to
grow wheat and 50% of its profit will be credited to the landlord. This profit is revenue from
land. Rent or revenue derived from land should fulfil three essential conditions:

1. Rent or revenue should be earned from land- To receive rent or revenue, the most
important point is that it should be earned from land. Rent or revenue received from
assets other than land will not be considered as income derived from land. Revenue
which is received by the landlord should be from the direct and immediate source. If
the land is an indirect and secondary source then revenue will not be considered to be
agricultural income.

In the support of the statement, Patna High Court provided in case of-Pratap Singh v.
Province of Bihar7 [1949] 17 ITR 202 (pat.) that the Malikana allowance paid by the
government under a legal obligation to an owner, dispossessed of his land, is not revenue
derived from land, as the immediate source of income is the government’s legal obligation to
pay compensation and not the land.

2. Land should be situated in India - The Second essential condition is to be land

should be situated in India, otherwise, it will be considered to be income from other
sources and will not include in agricultural income. Land can either be in a rural or
urban area. Some conditions are given under Sec. 2(1A)(c) of the Income Tax Act in
regards to the Area which is considered to be land.
3. Land should be used for agricultural purposes.- The land should be used for
Agricultural purposes. We have discussed earlier the meaning of the term
“Agricultural Purpose” with the help of case: CIT v. Raja Benoy Kumar Suhas Roy
8
[1957] 32 ITR 466, where SC laid down the principles of basic operation and
subsequent operation.

Mere connection with land will not be sufficient for Agricultural Purpose. There should be
activities in connection with agriculture. Activities like dairy farming, poultry farming,
cheese and butter making, etc. are not considered to be agricultural activities.

7
[1949] 17 ITR 202 (pat.)

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Illustrations –

• A landowner receives rent in-kind from a tenant who grows wheat on that land, now
the landowner sells it in the market @ Rs. 20000. This income is derived from
agricultural operation.
• A landowner receives the rent of 1/3rd of whole wheat grown in his land. And he uses
that wheat in making biscuits and sells it in the market. Here, this activity is not
considered to be an agricultural operation because that income is business income.

INCOME FROM AGRICULTURAL PRODUCE AND

MARKETING PROCESSES {S2(1A)(b)(ii)}

Any income derived by a cultivator or receiver of rent-in-kind from agriculture by the sale of
agricultural produce on which necessary operations( maybe or may not be needed)are carried
on to render the produce fit for consumption and taking it to market is called as agricultural
income. Such income is exempt from taxation. However in case of operations performed are
not in nature as mentioned above, income has to be separated so as to compute tax on
nonagricultural income. The operations mentioned above are called as agricultural or
marketing operations.

There are two conditions which must be satisfied for marketing operation;

1. The agricultural process must be performed by a person employed by a cultivator or a

receiver of rent-in-kind.
2. That product should be fit to be taken to market.

There is some ordinary process employed to render the produce fit to be taken to market like-
thrashing, winnowing, cleaning, drying, crushing, boiling and decanting, etc. if the income
derived from these marketing process will be considered as agricultural income. If the
marketing process is performed on products that can be sold in the market in its raw form
without performing any operation which makes it fit for marketing, then that income will be
considered as partly agricultural and partly from a business.

In Brihan Maharashtra Sugar Syndicate Ltd. v. CIT5 [1946] 14 ITR 611 (Bom.) the assesse
carries the business in the manufacture and sale of sugar, and then he owns a sugarcane farm
and utilized this in the production of sugar. The court, in this case, held that the process of
converting sugarcane into sugar would not be agricultural process and the income derived
from this would not be agricultural income.

5
[1946] 14 ITR 611 (Bom.)

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 INCOME FROM FARM BUILDING {S.2(1A)(c)}
Income from farm building which is derived from Agricultural operation is exempted from
tax. But to satisfy that property is used for agricultural purposes there are some essential
requirements that need to be fulfilled. Those conditions are:

1. The building must be occupied by the cultivator or the receiver of rent-in-kind;

2. The land must be situated in India and used for agricultural purposes;

3. The building which is used for agricultural operations by the cultivator or the rent
receiver must be as a dwelling house, storehouse.

4. The land is assessed to land revenue or local rates or land is situated in rural areas.

Rural Areas for the above purpose are given under Sec.2(1A)(c)(ii) of the Act, any area not
situated:

1. within the jurisdiction of municipality or cantonment board and where the population
is not more than ten thousand.

2. within 2km from the local limits of municipality or cantonment board, where the
population is more than 10000 but less than 1 lakh.

3. Within 6km from the local limits of municipality or cantonment board, where the
population is more than 1 lakh but less than 10 lakh.

4. Within 8km from the local limits of municipality or cantonment board, where the
population is more than 10 lakh.

The use of the building other than farming activity will not be exempted under Income Tax.
E.g.- If an owner gives that building on rent for residential purpose then income derived
from that building will not be exempted.

Illustrations

1. Mr. W owns farmland and there is a building attached to that land. Mr. W gives it on
rent to Mr. H @ rs.4000(rs. 3500 for land and rs. 500 for a house). Income received
by Mr.W will be exempted here because the land is used for an agricultural purpose
and the building is attached to the land and used by cultivator as a dwelling house.

2. A person owns a building in a particular city and gives it on rent to Mr. X who is a
farmer. Mr. X uses it as a dwelling house. Is it taxable or not? In this case, income is
taxable because the building is not attached to any land, so it is not an agricultural
income and taxable.

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 CONCLUSION
Agriculture income is defined under Section 2 (1A) and is exempt under the Indian Income
Tax Act. This means that income earned from agricultural operations is not taxed. The reason
for the exemption of agriculture income from Central Taxation is that the Constitution gives
exclusive power to make laws with respect to taxes on agricultural income to the State
Legislature. While computing tax on non-agricultural income, agricultural income is also
taken into consideration. Although agricultural income is fully exempt from tax, the Finance
Act, 1973, introduced a scheme whereby agricultural income is included with nonagricultural
income in the case of non-corporate assessees who are liable to pay tax at specified slab rates.
The process of computation is as follows:

(a) Income tax is first calculated on the net agricultural income plus the assessee’s total
income from non-agricultural sources.

(b) Income tax is then calculated on the basic exemption slab increased by the assessee’s
net agricultural income.

(c) The difference between (a) and (b) is the amount of tax payable by the assessee.

This process of computation is, however, followed only if the assessee’s non-agricultural
income is in excess of the basic exemption slab. A method has been laid down to levy tax on
agricultural income in an indirect way. This concept is known as partial integration of taxes.
It is applicable to individuals, HUF, unregistered firms, AOP, BOI and artificial persons. Two
conditions which need to satisfy for partial integration are:

1. The net agricultural income should exceed Rs. 5,000 p.a., and
2. Non-agricultural income should exceed the maximum amount not chargeable to tax.

Yes, it is true that it is tax-free but the freedom arises neither by virtue of an increase in the
tax threshold, which remains put at Rs 50,000, nor by exemptions offered by Sec. 10. It
attracts rebate under the newly inserted Sec. 88D.

Accordingly, “An assessee, being an individual resident in India:

• whose total income does not exceed one hundred thousand rupees, shall be entitled to
a deduction from the amount of income-tax (as computed before allowing the
deductions under this chapter) on his total income with which he is chargeable for any
assessment year, of an amount equal to hundred per cent of such income-tax;
• whose total income exceeds one hundred thousand rupees and the income-tax payable
on such total income (as computed before allowing the deductions under this Chapter)
exceeds the amount by which such total income is in excess of one hundred thousand
rupees, shall be entitled to a deduction from the amount of income-tax on his total
income, of an amount equal to the amount by which the income-tax payable on such
total income is in excess of the amount by which the total income exceeds one
hundred thousand rupees.” The sub clause ‘b’ offers marginal relief.

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Clearly, despite agricultural income being tax-exempt, assessees have to be extra careful
while dealing with such income. They must make sure that they aggregate agricultural
income with their total income to avoid interest payments and possible penalties for
concealment of income. Assessees must also maintain credible records to provide the tax
authorities with proof of ownership of agricultural land and evidence of having earned
agricultural income.

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 REFERENCES
Books-

 Dr. Jyoti Rattan, Taxation laws (Bharat Law House, New Delhi, 11th Ed./ 2019-20).
 V.P. Gaur, Rajiv Puri and Pooja Gaur, Income Tax Law (Kalyani Publishers, New
Delhi, 3rd Ed., 2019)

Websites-

 https://www.lawctopus.com/academike/agricultural-income/, accessed on 12 March,

2023 at 5:12 p.m.
 https://incometaxindia.gov.in/Tutorials/11.Tax%20free%20incomes%20final.pdf,
accessed on 12 March, 2023 at 5: 15 p.m.
 https://indiankanoon.org/doc/545792/, accessed on 13 March, 2023 at 2: 15 p.m.
 https://cag.gov.in/cag_old/sites/default/files/audit_report_files/Chapter_5_Assessment
s_relating_to_Agricultural_Income_of_Report_No_9_of_2019_Compliance_Audit_o
f_Union_Government_Department_of_Revenue_Direct_Taxes.pdf, accessed on 13
March, 2023, at 4:55 p.m
 https://groww.in/p/tax/agricultural-income, accessed on 13 March, 2023, at 5:03 p.m

Bare Acts-

 Income Tax Act, 1961

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