Agricultural Income
Section 10(1)
● 10. In computing the total income of a previous year of any person, any income falling
within any of the following clauses shall not be included—
○ (1) agricultural income ;
Constitution: Article 270. Taxes levied and collected by the Union and distributed between
the Union and the States
○ Taxes on income other than agricultural income shall be levied and collected by
the Government of India and distributed between the Union and the States in the
manner provided in clause (2).
1. Definition under the Income Tax Act
(1A) "agricultural income"1 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—
(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 :
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; or
(B) in any area within the distance, measured aerially,—
(I) not being more than two kilometres, from the local limits of any
municipality or cantonment board referred to in item (A) and which
has a population of more than ten thousand but not exceeding one
lakh; or
(II) not being more than six kilometres, from the local limits of any
municipality or cantonment board referred to in item (A) and which
has a population of more than one lakh but not exceeding ten lakh;
or
(III) not being more than eight kilometres, from the local limits of
any municipality or cantonment board referred to in item (A) and
which has a population of more than ten lakh.
Explanation 1.—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.
Explanation 2.—For the removal of doubts, it is hereby declared that income derived
from any building or land referred to in sub-clause (c) arising from the use of such
building or land for any purpose (including letting for residential purpose or for the
purpose of any business or profession) other than agriculture falling under sub-clause (a)
or sub-clause (b) shall not be agricultural income.
Explanation 3.—F or the purposes of this clause, any income derived from saplings or
seedlings grown in a nursery shall be deemed to be agricultural income.
Explanation 4.— For the purposes of clause (ii) of the proviso to sub-clause (c),
"population" means the population according to the last preceding census of which the
relevant figures have been published before the first day of the previous year;
Commissioner Of Income-Tax, ... vs The Panbari Tea Co. Ltd on 19 April, 1965
S.2(a)(i)— Agricultural Income - Salami paid by tenant to landlord is neither rent, nor
revenue but is capital payment. A.I.R. 1953 Assam 47, Reversed. Income-Tax Act (11 of
1922) , S.2(1)— Words and Phrases Salami. The payments by way of salami are made
by the prospective lessees anterior to the constitution of the relationship of landlord and
tenant as the price for the lessor agreeing to the parting of his rights in an agricultural
holding in favour of the proposed lessee. Thus, 'Salami' is a payment by the tenant as a
present or as price for parting by the landlord with his rights under the lease of a
holding. It is a lump sum payment as consideration for what the landlord transfers to the
tenant.
● From the definition,Income is Agricultural only if it is from the following 3 sources:
1. Any rent or revenue derived from land which is situated in India and is used for
agricultural purposes
2. Any income derived from such land by agricultural operations including processing of
agricultural produce,raised or received as rent in kind or any process ordinarily
employed by cultivator or receiver of rent-in-kind so as to render it fit for the market,or
sale of such produce.
3. Any income derived from any building owned and occupied by the assessee, receiving
rent or revenue from the land,by carrying out agricultural operations.
● The conditions for classifying income derived from farm building as agricultural
income are as follows:
a. The building should be on or in immediate vicinity of the agricultural land and is one which
the receiver of rent or revenue or the cultivator, by reason of his connection with the land,
requires the building as a house to stay or as a storehouse, or uses it for these kind of situations
b. Either of the two conditions should be satisfied:
The land is assessed by either land revenue or a local rate assessed and collected by government
officers;
OR
If the above condition is not satisfied, the land should not be located within the following region:
Aerial distance from Population as per last preceding census.
municipality*
Within 2 kms 10,000 to 1,00,000
Within 6 kms 1,00,000 to 10,00,000
Within 8 kms > Rs. 10,00,000
Municipality includes municipal corporation, notified area committee, town area committee,
town committee and cantonment board.
Note: Even where the local population is < 10,000, the land should also not be situated within
the jurisdiction of the local municipality or cantonment board.
In cases where the activities have only some distant relation to land like dairy farming, breeding,
rearing of livestock, poultry farming, etc. they do not form a part of agriculture income.
Important Cases
1. Bacha F. Guzdar v CIT Bombay (1955)
The income received by the assessee in the case was in the form of dividends which were paid
out by the companies as against the plaintiff holding shares in the respective companies. The
judgment was indeed correct, since the claim so maid by the assessee had no basis to stand on. In
the case of Caltex (India), Ltd. v. Comm. of I. T. 54 Bom. L. R. 222 the Court had held that if the
source from which the dividend is paid to an individual is the profit made by the company, then
the dividend which is received by the individual arises from the source of the profit of the
company. The same logic was used to arrive at a conclusion in the present case by the Court. The
Court considered the question whether the dividends which were received by the Assessee, in
this case, would themselves constitute as an income derived from the land for the plaintiff.
The court, however, also considered the fact that until and unless the profits are earned by the
company, the dividends cannot be declared by the company to the shareholders. This implied
that the income which is earned by the assessee was only possible once the company declared the
payment of dividends from the profits they had earned. This in turn implied that the source of
income would then be the profits and not the agricultural land itself. These reasons cumulatively
allowed the court to conclude that the income earned by the assessee in the form of the dividends
would not be receiving any exemption from Income Tax Rules on account of being agricultural
income.
2. CIT v. Benoy Kumar Sahas Roy (1957)
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:
● If 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.
3. Premier Construction Co. Ltd. v CIT Bombay City (1948)
In their Lordships' view the principle to be derived from a consideration of the terms of
the Income-tax Act and the authorities referred to is that where an assessee receives
income, not itself of a character to fall within the definition of agricultural income
contained in the Act, such income does not assume the character of agricultural income
by reason of the source from which it is derived, or the method by which it is calculated.
But if the income received falls within the definition of agricultural income, it earns
exemption, in whatever character the assessee receives it. In the present case the assessee
received no agricultural income as denned by the Act; it received remuneration under a
contract for personal service calculated on the amount of profits earned by the employer,
payable, not in specie out of any item of such profits, but out of any moneys of the
employer available for the purpose. The remuneration, therefore, is not agricultural
income and is not exempt from tax.
4. CIT v. Maddi Venkatasubbayya (1951)
Assessee purchased standing crops of tobacco from the person who had raised the
tobacco on the land. Tobacco harvested, cured and sold in the marker by the assessee.
Plucking of the ripe leaves the pruning and flue curing of the harvested tobacco leaves
were all done by the assessee firm. Firm also did some sort of ploughing on the land. The
assessee firm was not a landholder or a ryot or a lessee of the land on which the tobacco
crop stood. Tobacco plants had been raised on the land by its owner or lessee and they
had reached such a degree of maturity as to render them saleable as standing crops to
tobacco merchants in the locality. Firm does not hold a direct interest in the land.
5. Sakarla Naranlal v CIT (1965)
■ The first condition is that the process must be necessary to render the
produce fit to be taken to market and that involves the proposition that
there must be no market for the produce in its raw state. If there is already
a market for the produce in its raw state, then the process cannot be said to
be a process employed to render the produce fit to be taken to market or,
in other words, to make it marketable.
■ That which is already marketable does not need any process to render it
marketable.
■ The second condition is that the process must be one which is ordinarily
employed by a cultivator of the produce to render it marketable. But even
if these two conditions are satisfied, it is not sufficient to attract the
applicability of section 2(1)(b)(ii).
■ There is an additional requirement which must be satisfied and that
requirement springs directly from the language and the reason of the
enactment. It follows as a necessary corollary from what is stated above
that, even where the produce is subjected to a process ordinarily employed
by cultivators to render it fit to be taken to market, the produce must not
change its original character. The cultivator is permitted to subject the
produce to a process in order to make it marketable and what is ultimately
marketed must, therefore, be that produce. The character of the produce
must not be altered as a result of the process.
6. CIT v. H.G Date (1971)
Assessee converted Sugarcane to Jaggery – was held to be ‘process ordinariy employed
to render produce fit to be taken into market. – observed mills buy sugarcane near the
mills as far as possible – but if no mills nearby then no other option for cultivator but to
convert it into Gur – also mills buy at prices fixed by Gov – If no market as such where
sugarcane of his quality can be sold – Existence of a single mill would not constitute a
market for the assessee’s sugarcane. In case the mill refuses to buy his sugarcane the
agriculturalist has no other option available. In such cases agriculturalists can claim
exemption.
7. K. Lakshmanan & Co. v. CIT (1999)
According to section 2(1) b: what is taken to the market and sold must be raised by the
cultivator.
Some additional cases:
● Raja Mustafa Ali Khan v CIT – income from sale of forest trees growing on land
naturally without human intervention is not agricultural income within the meaning of
S2(1)(a) of the IT Act
● Yagappa Nadar v CIT - held that income earned by a person who had a licence to tap
toddy from trees belonging to licensors and who sold the toddy extracted by him at a
profit was non-agricultural income, though if the same income was earned by the owner
or the lessee of the land on which the trees grew, it would be agricultural income.
● CIT v Kamakhya Narain Singh-- Interest on arrears of rent payable in respect of land
used for agricultural purposes was not agricultural income within Section 2 (1) of the
Income-tax Act. It was held that the interest was neither rent nor revenue derived from
the land. The relationship between the tenant who executed the bond for arrears of rent
with interest and the landlord was held to be that of a debtor and creditor. There is
however one observation of the Judicial Committee which might be helpful in connection
with the present case. Their Lordships while holding that interest on rent was revenue
derived by the land-holder, went on to hold that it was not revenue "derived" from land.
They observed:
"The word 'derived' is not a term of art. Its use in the definition indeed demands an
enquiry into the genealogy of the product. But the enquiry should stop as soon as the
effective source is discovered. In the genealogical tree of the interest, land indeed
appears in the second degree, but the immediate and effective source is rent, which has
suffered the accident of non-payment."
