‘DEFINITION’ Of Agricultural Income [ Section 2(1A)]

Agricultural income including the following:

  1. any rent or revenue derived from land which is situated in India and is used for agricultural purposes [sec. 2(1A)(a)];
  2. any income derived from such land by agricultural operations including processing of the agricultural produce, raised or received as rent-in-kind so as to render it fit for the market, or sale of such produce [sec. 2(1A)(b)]; and
  3. income attributable to a farm house subject to the condition that the building is situated on or in the immediate vicinity of the land and is used as a dwelling house, storehouse, or other out-building and the land is assessed to land revenue or a local rate or, alternatively, the building is situated on or in the immediate vicinity of land which (though not assessed to land revenue or local rate) is situated in a rural area [sec. 2(1A)(c)].

The above three types of income shall be treated as ‘agricultural income’ only when the prescribed conditions are satisfied

Assessment of Agricultural Income
  • Section 10(1) exempts agricultural income from tax. The reason for exemption for agricultural 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. However, in some cases agricultural income is taken into consideration to determine tax on non-agricultural income. 
  • From the assessment year 2009-10, any income derived from saplings or seedings grown in a nursery shall be deemed to be agricultural income. 
  • Rural area – Rural area for the above purpose is as follows –

From the assessment year 2014-15 – Any area which is outside the jurisdiction of a municipality or cantonment board having a population of 10,000 or more and also which does not fall within distance (to be measured aerially) given below –

2 kilometres from the local limits of municipality / cantonment board.If the population of the municipality/cantonment board is more than 10,000 but not more than 1 lakh
6 kilometres from the local limits of municipality / cantonment board.If the population of the municipality/cantonment board is more than 1 lakh but not more than 10 lakh
8 kilometres from the local limits of municipality / cantonment board.If the population of the municipality/cantonment board is more than 10 lakh

Need for Assessment of Agricultural Income :

Agriculture is the main part of the Indian economy. 70% of Indian population is based upon agriculture and derives its income from agricultural operations. But u/s 10(1) of the Act agricultural income is fully exempted from tax. As a result agricultural income does not form part of total income. The agricultural income is exempted from tax as under Article 270 of Indian Constitution. Central Government cannot levy any tax on such income because agriculture is a State subject. In a case J. Ragho Rama Reddy v. I.T.O. (1988) 169 I.T.R. 174 (A.P.) it has been held that Parliament is not competent to tax agricultural income. The State governments are free to levy any tax on agricultural income.

Due to green revolution, the agricultural incomes increased and a demand was raised to levy tax on agricultural incomes. A committee on taxation of agricultural income and wealth was set up under the chairmanship of Dr. K.N. Raj. This committee also recommended that agricultural income must remain exempted from tax. On the other hand, it suggested a system of integration of agricultural income with non-agricultural income in certain cases. From assessment year 1974-75, this scheme of assessment of agricultural income was introduced and which is known as present treatment or its assessment.