The Meaning and Concept of Agricultural Income Finance Essay

Agricultural income is exempt under the Income Tax Act, which means that income earned from agricultural operations is not taxed. Agricultural income has been defined under section 2 clause 1A of the Income Tax Act. As per Section 2 (1A), ‘Agricultural Income’ means 

[1] : Any rent or revenue derived from land which is situated in India and is used for agricultural purposes. Any income derived from such land by agricultural or 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 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 ; 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 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 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 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 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 in the Official Gazette This paper will be structured so as to understand the meaning behind the above mentioned provisions. It shall broadly be divided into rent on revenue derived from land income derived from agricultural land for agricultural operations income from farm building once this understanding is gained, the researcher would dwell upon what would amount to agricultural income and what would not amount to agricultural income as well as income that would amount to part agricultural and part business and would end by discussing the understanding that the researcher has gained with regard to the ‘meaning and concept of agricultural income’ through the course of this assignment.

Agricultural Income Rent on Revenue Derived from Land: As per Section 2 (1A)(a) there seem to be three criteria laid down (i) rent or revenue should be derived from land (ii) land situated in India (iii) the land should be used for agricultural purposes. Revenue is said to be derived from the land if it is effective and immediate source of income and not if it is indirect or secondary. Rent received in cash or kind amounts to agricultural income as long as the remaining criteria are satisfied. Rent from sub-lease would also be considered as agricultural income. In Durga Narain Singh v. CIT 

[2] – “revenue the term is used in a broader sense of return, yield or income, and not in the sense of land revenue” 

[3] indirect revenue such as income derived from dividend paid by a company from agricultural income would not be agricultural income as the direct source of income would be through the shareholding. 

[4] But the surplus income received from the sale of agricultural land would not amount to agricultural income; this is so because it does not meet the criteria as laid down in Section 2(1A) of the Act. The second criteria situated in India. From the simple reading of the section it can be understood that this criteria not only applies in sub-clause (a) but also in (b) and (c). this would mean that any income earned from agricultural land outside of India would be taxed and not exempt under Section 10(1) it would be taxable depending upon the residential status of the recipient.

The primary condition for exemption remains that the land in question is to be used for “agricultural purposes” keeping this in mind it is essential to understand what would come under “agriculture” or rather the meaning of “agriculture”. The terms “agriculture” and “agricultural purposes” have not been defined under the Act. Under the circumstances it is necessary to understand their meaning in common parlance. It is to be noted that the term agricultural has varied definitions and it has a narrow sense as well as a broad meaning. Wider sense comprising of all activities related to land such as horticulture, livestock, husbandry, etc.

Bhagawati, J had put an end to the above disparity in definition by laying down the following principles in CIT v. Raja Benoy Kumar Sahas Roy 

[5] he stated that there would be basic operations (expenditure of human skills, labour upon land itself, tilling of land, sowing of seeds, etc.) and subsidiary operations (weeding, removal of undesired undergrowth, pruning, etc.) which would form one integrated activity. Basic operations or subsidiary operations alone cannot constitute a land being used for ‘agricultural purposes’ and hence income from it would not be ‘agricultural income’. He also went on to say that agriculture does not merely include food and grain. It is to be construed as all products of land that could be used for consumption, trade and commercial assets. He also stated that breeding, dairy farming, etc might have an association with land but by themselves keeping in mind the above mention basic and subsidiary operations they would not constitute as ‘agriculture’. Income derived from agricultural land for Agricultural Purposes: under Section 2(1A)(b) there are three instances of agricultural income: income derived by agriculture: income derived from agriculture (to determine if income derived is agricultural income one has to apply the principles as seen in the case CIT v. Raja Benoy Kumar Sahas Roy 

[6] ) from land which is situated in India and is used for agricultural purposes. income derived from market process: sometimes a produce needs to be altered to make it a marketable commodity. The income received from this would also be agricultural income subject to the following conditions the process must be one which is ordinarily employed the process must be applied to make the product fit to be taken to market E.g.: tobacco leaves need to be dried before they are fit for market consumption. Other instances of ordinary process would be cleaning, drying, boiling, etc. if process is performed on a product that can be sold in market in its raw from then it would be part agricultural and part non-agricultural income. 

[7] income from sale of agricultural produce: income from sale of agricultural produce would be agricultural income and if any process is employed which would not be necessary for the produce to be made saleable (the produce has market value in its original form) then it would be part agricultural and part non agricultural income. 

[8] Income From Farm Building: annual value of house property would be taxable under Section 22. The exception is when house property satisfies conditions as given under Section 2(1A)(c), it would be treated as agricultural income and would be exempt from tax virtue of Section 10(1). The building is occupied by the cultivator or receiver of rent-in-kind. It is on or in the vicinity of land situated in India and used for agricultural purposes.

Cultivator or receiver of rent-in-kind, due to his connection with the agricultural land requires the building as a dwelling house, store house or other out-building. Land needs to be asses to local revenue or rate. If this is not done, then it is alternatively to be situated outside of an urban area It is to be noted that the building is to be used only for agricultural purposes and if used for any other purpose such as renting it out as a residence, etc. then it would become taxable. Income – Agricultural or Non-Agricultural The terms ‘agriculture’ and ‘agricultural income’ have not been defined within the Income Tax Act, 1961. But these terms find their definition within the judicial decision given by Bhagawati, J. in CIT v. Raja Benoy Kumar Sahas Roy 

[9] where in four principles (Basic operations, Subsequent operations, agriculture not merely includes food and grains and mere connection with land not sufficient) were laid down to better understand the terms. In this case, denuded parts of the forest were replanted and subsequent operations in forestry were carried out. The income which was received from the replanted trees was determined to be agricultural income. There are various other examples through judicial decisions with regard to what would amount to agricultural income.

Some instances would be as follows. In CIT v. Rai Shamsherjang Bahadur 

[10] the matter before the court was if the fees collected from the owners of cattle normally used for agricultural purposes was permitted to graze upon forest land grass that grows spontaneously would amount to agricultural income. The court had decided that the same would amount to agricultural income. Share of Profits from a firm, the interest on capital from a firm are also considered to be agricultural income. The share of profit of a partner from a firm engaged in agricultural operations similar to salary received by him for rendering services is agricultural income. 

[11] This is so because payment of salary to a partner represents the special share of profits a firm has.

The salary which is paid retains the same character as the income of the firm and hence remains agricultural income. The same would be the case with regard to interest on capital received by a partner from the firm engaged in agricultural operations. 

[12] There has been judicial controversy as to if income from nursery’s would amount to agricultural income within the definition given under Section 2 (1A). this was settled with the amendment brought about to Section 2 (1A) with effect from assessment year 2009-10 which provided that any income derived from sapling or seedlings grown in a nursery shall be deemed to be agricultural income. 

[13] As per the amendment whether basic operations are carried out or not, the income received would be treated as agricultural income and would qualify for the exemption under Section 10(1). On the other hand dividends paid by a company are considered to be non-agricultural income as they do not meet the criteria and have no direct relation with the agricultural land. 

[14] There are various other instances of non-agricultural income such as interest arrears 

[15] (interest on arrears is neither rent nor revenue derived from land), Purchase of standing crop 

[16] (purchase of standing crop and its sale later show no interest in land except a mere license to enter upon it and gather the produce), fisheries 

[17] , poultry farming, toddy tapping 

[18] , etc. Income which is partially agricultural and partially from business: if the income receipts comprise of both agricultural and non agricultural elements, then it has to be looked at separately and the agricultural income part of it must not be taxed. 

[19] Similarly when a man subjects agricultural produce to a manufacturing process before selling it, then the profits on sale would have to be disintegrated and the portion attributing manufacturing process would have to be taxed and the remainder would have to be exempt as it would pertain to agricultural income. In the instances where a company produces tea leaves and manufactures tea, the income received would have to be divided and 40% of it would be considered to be income from the manufacturing process and the remainder would be looked upon as income from agriculture. 

[20] Growing and manufacturing tea is covered under Rule 8 of the Income Tax Rules, 1962. Rule 7A provides for the manufacture of rubber. Of the income computed, 35% would be taken as taxable income and the remainder would be part of agricultural income. Rule 7B deals with growing coffee in India. The income derived from growing and curing coffee of which 25% of the total income derived would be deemed to be income liable to tax and the remainder is deemed to be agricultural income.

Income from coffee grown, cured, roasted and ground in India whether it is mixed with chicory or other flavoring or not would be treated as business and 40% of the income would be taxable and the remainder would be agricultural income. Rule 7 provides for any other cases.

For disintegrating a composite business income which is partially agricultural and partially non-agricultural, the market value of any agricultural produce, raised by the assesses or received by him as rent-in-kind and utilized as raw material in his business, is deducted. No further deductions is permissible with regard to any other expenditure incurred by the assesses as cultivator or receiver of rent-in-kind. Conclusion

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