STUDY NOTE - 14

AGRICULTURAL INCOME
AND
AGGREGATION OF INCOMES

This Study Note includes

• Various Provisions under the Income Tax Act relating to Agricultural Income

14.1 AGRICULTURAL INCOME AND TAX LIABILITY

Article 270 of the Constitution of India empowers Government of India to collect tax on income
other than agricultural income. Agricultural income has been placed in the State list and as
such the Central Government cannot levy tax on agricultural income.

Sec. 2(1A)provides definition of the term. ‘Agricultural income’ means –

(a) any rent or revenue derived from land which is situated in India and is used for agricul-
tural 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 raised or received by him, in respect of
which no process has been performed other than a process of the nature described in
para (ii) of the sub-clause:
(c) any income derived from any building owned and occupied by the receiver of rent or
revenue of any such land provided the following conditions are satisfied-
(i) the building should be on or in the immediate vicinity of land and is used for agricul-
tural purposes;
(ii) the cultivator or receiver of rent-in-kind uses the building as a dwelling house or a
store house; and
(iii) the land is assessed to land revenue or local rate or the land is situated within the
jurisdiction of municipality/cantonment having a population of not less than 10,000
persons or within distance of not more than 8 k.m.

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 Agricultural Income and Aggregation of Incomes

It may be pointed out that sec. 10(1) exempts from income-tax ‘agricultural income’ covered by
the aforesaid definition.

However, in case of certain category of assessees e.g. individuals. HUFs having income more
than maximum amount not liable for tax, ‘agricultural income’ is taken into consideration to
determine tax on non-agricultural income.

Case Laws:

Essential Conditions :
Agriculture not involving any basic operation like tilling, sowing or dissemination of seeds
and planting on land would not constitute agriculture merely because they have relation or
connection with land. Term agriculture does not include breeding and rearing of live stock,
dairy faming, butter, cheese making, poultry, etc.- CIT v/s Raja Benoy Kumar Sahas Roy 32
ITR 466 (SC).

Agricultural Income:
Where the owner himself performs slaughter tapping and then sells the rubber, the income is
agricultural income.-Jacob(K.C.) v Ag. ITO 110 ITR 402.

Lease rent received for leasing out land for grazing of cattle required for agricultural pursuits,
is agricultural income.- CIT v Rai Shamsherjang Bahadur 24 ITR 1.

Compensation received from an insurance company on account of damaged caused to the crop
is an agricultural income.- CIT v B. Gupta Tea Pvt. Ltd. 74 ITR 337.

Seeds are clearly a product of agriculture and the income derived from the sale of seeds de-
rived on account of cultivation by the assessee is an agricultural income.- CIT v Soundharya
Nursury 241 ITR 530.

Miscellaneous income from plantation: Miscellaneous income from plantation should also be
agricultural income except in respect of sale of trees of spontaneous growth. Thus, where a
state undertaking owing a forest, had received income by sale of firewood, grazing permits
and compounding fee for trespasses into the plantation, the same shall be treated as agricul-
tural income.-CIT v Tamil Nadu Forest Plantation Corporation 248 ITR 331.

Non Agricultural Income:

Dividend received from company having only agricultural income is not agricultural income
for a shareholder-CIT v/s Mrs. Bacha F. Guzdar 27 ITR 1 (SC).
Conversion of sugarcane into Gur- No Agriculture income - Seth Banarasi Dass Gupta v/s CIT.
106 ITR 804 .
Income from agricultural lands situated outside India is not agricultural income within the
meaning of the Indian income-tax. Similarly if there is a figure of loss from agricultural lands,

242 Applied Direct taxation

situated outside India, it has got to be deducted while computing the total income of the resi-
dent assessee in India - CIT v. Carew & Co. Ltd. 120 ITR 540.

Compensation for acquisition of land - Where land of assessee-tea company was requisitioned by
State Government and same was given to refugees who carried on cultivation thereon and at
time of requisition assessee too was carrying on agricultural operations on land, compensation
received by assessee was to be treated as agricultural income - CIT v. All India Tea & Trading Co.
Ltd. 85 Taxman 391/219 ITR 544.

Following are certain instances defining the scope of agricultural income.

Rent or revenue should be derived from land:

— Any loan obtained by a shareholder out of accumulated profits of the company having
only agricultural income, which is liable to be treated as ‘deemed dividend’, is not agricul-
tural income in the hands of recipient.
— Interest on arrears of cess or rent payable by a tenant to his landlord is no doubt revenue
but it is not revenue derived from land and hence it is not agricultural income.
— Commission earned by a broker for selling agricultural produce of an agriculturist is not
agricultural income.
— Any capital gain arising from the transfer of agricultural land is not treated as revenue
derived from land and hence it is not agricultural income.

Income held as not derived from land:

— Mutation fees paid by tenant on succession to a holding by inheritance.
— Fees paid by tenants for renewal of leases and fees paid for recognising the distribution of
holding on partition would not be income derived from land, since they are payments
made for administrative services rendered by the landlord, akin to registration fees.
— Receipts from the supply of water tank in an agricultural land

Use of building or land for agricultural purpose:

— Any income arising from the use of land or building for any purpose (including letting for
residential purpose or for the purpose of any business or profession) other than agricul-
ture shall not be agricultural income.
— Any income attributable to farm house situated in urban areas will not be treated as agri-
cultural income unless the land on which the farm house is situated is assessed to land
revenue or any local rate. On the other hand, in case of farm house situated in rural areas,
the income will be treated as agricultural income even where the land on which farm
house is situated is not assessed to land revenue or any local rate.

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 Agricultural Income and Aggregation of Incomes

Agriculture Income and Income-tax:

Agricultural income [Section 10(1)] –
(i) Section 10(1) provides that agricultural income is not to be included in the total income of
the assessee. The reason for totally exempting agricultural income from the scope of cen-
tral income tax is that under the Constitution, the Parliament has no power to levy a tax on
agricultural income.
(ii) Indirect way of taxing agricultural income - However, since 1973, a method has been found
out 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 satisfied for partial integration are:
1. The net agricultural income should exceed Rs.5,000 for the year and
2. Non-agricultural income should exceed the maximum amount not chargeable to tax. (e. g.
Rs.1,95,000 for senior citizens, Rs.1,45,000 for women assessees below 65 years of age,
Rs.1,10,000 for all other individuals and HUFs.)

It may be noted that aggregation provisions do not apply to company, firm assessed as such
(FAS), co-operative society and local authority. The object of aggregating the net agricultural
income with non-agricultural income is to tax the non-agricultural income at higher rates.

Tax calculation in such cases is as follows:

Step 1: Add non-agricultural income with net agricultural income. Compute tax on the
aggregate amount.
Step 2: Add net agricultural income and the maximum exemption limit available to the as-
sessee (e.g. Rs.1,10,000 / Rs.1,45,000 / Rs.1,95,000, etc. as applicable). Compute tax on
the aggregate amount.
Step 3: Deduct the amount of income tax calculated in step 2 from the income tax calculated
in step 1 i.e. Step 1 – Step 2.
Step 4: Deduct any applicable rebate from the amount of tax obtained in step 3.
Step 5: Add surcharge, if applicable, to the amount obtained in step 4 above.
Step 6: The sum so arrived at shall be increased by education and higher secondary cess.

These steps are applicable whenever tax liability is to be worked out e.g. self-assessment tax,
advance tax, tax on regular assessment)

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