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

Section 10(1) of the Income-tax Act, 1961 exempts agricultural income from income-tax. However, net agricultural income is added to the total non-agricultural income computed as per income-tax Act, for the purpose of determining the income-tax on non-agricultural income of an individual, HUE, AOP/BOI or an artificial juridical person, although the agricultural income will remain fully exempt.

Agricultural income including the following:

(1)        any rent or revenue derived from land;

(2)        any income derived from such land by agriculture or from processing of agricultural produce;

(3)        any income from farm building.

The above three types of income shall be treated as ‘agricultural income’ on! when the following conditions are satisfied:

(i) Income should be derived from land.

(ii) Land should be situated in India.

(iii) Land should be used for agricultural purposes.

Income of Nursery [Explanation 3 to section 2(1A)]:

Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income. Accordingly, irrespective of whether the basic operations have been earned out on land, such income will be treated as agricultural income, thus qualifying for exemption under section 10(1) of the Act.

This exemption applies to all types of nurseries, including those that grow fruit trees, ornamental plants, and flowers. It also applies to nurseries that process their produce to make it fit for market, such as by grafting, budding, or pruning.

The above Three types of agricultural incomes have been defined under Section 2(1A)(a), 2(1A)(b) and 2(1A)(c) respectively. The definition is being discussed in detail as under:

1.  Rent or Revenue derived from Land [Sec. 2(1A) (a)] –

According to section 2(1A)(a), if the following three  conditions are satisfied, income derived from land can be termed as “agricultural income”: 

1.         Rent or revenue should be derived from land (may be in cash or kind); 

2.         The land is one which is situated in India (if the land is situated in a foreign country, this condition is not  satisfied); and 

3.         The land is used for agricultural purposes. 

Land Used for Agricultural Purposes –

The primary condition to claim exemption as “agricultural  income” is that the land in question should be used for agricultural purposes whether exemption is sought under  sub-clause (a) or (b) or (c) of section 2(1A). 

The terms “agriculture” and “agricultural purposes” have not been defined in the Act; one has, therefore, to  depend upon ordinary meaning and decided cases. 

The following principles serve as a guide in the determination of the scope of the terms “agriculture” and “agricultural purposes”: 

(1)  Basic Operations –

Prior to germination, some basic operations are essential to constitute agriculture. The basic  operations would involve expenditure of human skill and labour upon the land itself and not merely on the  growth from the land. Some illustrative instances of basic operations are tilling of land, sowing of the seeds,  planting, and similar kind of operations on the land. 

(2)  Subsequent Operations –

Besides the basic operations, there are certain subsequent operations which are  performed after the produce sprouts from the land. Illustrative instances of subsequent operations are weeding, digging the soil around the growth, removal of undesirable undergrowths and all operations which foster the  growth and preserve the same, not only from insects and pests but also from degradation from outside, tending,  pruning, cutting, harvesting and rendering the produce fit for the market. Mere performance of these subsequent  operations on the products of the land (where such products have not been raised on the land by the performance  of the basic operations described above) would not be enough to characterise them as agricultural operations.  Where, however, the subsequent operations are performed in conjunction with and in continuation of the basic  operations, the subsequent operations would also constitute part of the integrated activity of agriculture. 

(3)  Agriculture Not merely includes Food and Grains –

Agriculture does not merely imply raising of food and grains for  the consumption of men and animals; it also includes all products from the performance of basic as well as  subsequent operations on land. These products, for instance, may be grain or vegetable or fruits including  plantation and groves or grass or pasture for consumption of beasts or articles of luxury such as betel, coffee, tea,  spices, tobacco, etc., or commercial crops like cotton, flax, jute, hemp, indigo, etc. All these are products raised  from the land and the term “agriculture” cannot be confined merely to the production of food and grains  products for human beings but must be understood as comprising all the products of the land which have some  utility either for consumption or for trade and commercial asset would also include forest products such as  timber, sal and piyasal trees, casuarina plantation, tendu leaves, horra nuts, etc. 

(4)  Some Connection with Land Not Sufficient –

The mere fact that an activity has some connection with or is in some  way dependent on land is not sufficient to bring it within the scope of the term “agriculture”. For instance,  breeding and rearing of livestock, dairy farming, cheese and butter-making and poultry farming would not by  themselves be agricultural purposes. 

(5)  Income from Nursery Operations –

Any income derived from saplings or seedlings grown in a nursery shall be  deemed to be agricultural income. Accordingly, irrespective of whether the basic operations have been carried  out on land, such income is treated as agricultural income and, consequently, it is under section 10(1).

2.  Income derived from Agricultural Land by Agricultural Operations [Sec. 2(1A) (b)] –

Under the Income Tax Act, 1961, income derived from agricultural land by agricultural operations is subject to certain tax treatments. Section 2(1A)(b) of the Income Tax Act defines agricultural income as income derived from any land which is used for agricultural purposes. This includes income from the sale of agricultural produce, rent or revenue derived from agricultural land, and income derived from the farmhouse.

It is important to understand the tax implications of income derived from agricultural land to ensure compliance with the Income Tax Act. Here are some key points to consider:

i. Exemption of Agricultural Income

Agricultural income is exempt from tax under the Income Tax Act. This means that income derived from agricultural land by agricultural operations is not included in the total income of the taxpayer for the purpose of calculating income tax liability.

ii. Conditions for Exemption

While agricultural income is generally exempt from tax, there are certain conditions that need to be fulfilled:

• The land should be used for agricultural purposes
• The income should be derived from agricultural operations
• The income should be directly related to agricultural land

If these conditions are not met, the income may not be considered as agricultural income and may be subject to tax.

iii. Income from Farmhouse

Income derived from a farmhouse is also considered as agricultural income if the farmhouse is situated on or in the immediate vicinity of the agricultural land and is used for agricultural purposes. However, if the farmhouse is used for non-agricultural purposes, the income derived from it may not be considered as agricultural income.

iv. Clubbing of Income

In certain cases, income derived from agricultural land may be clubbed with the income of the taxpayer or any other person. This can happen if the agricultural land is transferred by an individual to a firm or association of persons in which the individual has a substantial interest. In such cases, the income derived from the agricultural land will be included in the total income of the individual or the person to whom the land is transferred.

v. Tax Planning

Proper tax planning can help in optimizing the tax treatment of income derived from agricultural land. This can include structuring the ownership of the land, documenting the agricultural operations, and maintaining proper records of income and expenses related to agricultural activities.

3.  Income from Farm Building [Sec. 2(1A) (c)] –

Bona fide annual value of house property is taxable under  section 22. However, income from a house property which satisfies the following cumulative conditions would  be treated as agricultural income and, consequently, it would be exempt from tax by virtue of section 10(1): 

(1).       The building should be occupied by the cultivator (as a landlord or as a tenant) or receiver of rent-in-kind (as  a landlord); 

(2).       It should be on or in the immediate vicinity of land, situated in India and used for agricultural purposes; 

(3).       The cultivator or receiver of rent-in-kind should by reason of his connection with the agricultural land requires  the building as a dwelling house or as a store house or other out-building; and 

(4).       The land is assessed to land revenue or local rate or, alternatively, the land (though not assessed to land  revenue or local rate), is situated in a rural area†. 

If all the aforesaid conditions are satisfied, income from a farm building is exempt from tax under section  2(1A)(c). 

Use of building or land for any purpose other than agriculture –

Income would be exempt from tax only if land or  building is used for agricultural purposes. In other words, if land or building is used for any other purposes,  exemption is not available. For instance, if a farmer gives his building on rent for residential purposes, income  is chargeable to tax.

Examples of farm buildings

Some examples of farm buildings that are exempt from income tax include:

• Barns
• Silos
• Stables
• Poultry sheds
• Greenhouses
• Irrigation facilities
• Storage facilities for agricultural produce

Important points

• The taxpayer must maintain proper records of the income and expenses incurred in relation to the farm building.
• The taxpayer must also maintain proper records of the use of the farm building.
• If the farm building is used for non-agricultural purposes, such as for residential or commercial purposes, then the income from the farm building will be taxable.

4. Instance of Income held to be Agricultural / Non-Agricultural Income

In the following Cases, Instances of Agricultural and Non-Agricultural Incomes are described in details with examples.

Instances of Agricultural Income:

In the following cases, income is held as agricultural income: 

1.         If denuded parts of the forest are replanted and subsequent operations in forestry are carried out, the income  arising from the sale of replanted trees. 

2.         Profit on sale of standing crop or the produce after harvest by a cultivating owner or tenant of land. 

3.         Rent for agricultural land received from sub-tenants by mortgagee-in-possession. 

4.         Compensation received from an insurance company for damage caused by hail storm to the green leaf forming  part of assessee’s tea garden (moreover, no part of such compensation consists of manufacturing income, as such  compensation cannot be apportioned under rule 8 between manufacturing income and agricultural income). 

5.         Income from growing flowers and creepers. 

6.         Salary received by a partner for rendering services to a firm which is engaged in agricultural operations is  agricultural income as payment of salary is only a mode of adjustment of the firm’s income [it may be noted that  share of profit from such firm is not taken as “agricultural income” as such share is exempt under section 10(2A)]. 

7.         Interest on capital received by a partner from the firm engaged in agricultural operations. 

8.         If nursery is maintained by carrying out basic operations and subsequent operations are carried out in pots  in continuation of basic operations, then income from such nursery would be agricultural income. 

Instances of Non-Agricultural Income: 

1.         Annual annuity received by a person in consideration of transfer of agricultural land even if it is charged on  land, as source of annuity is covenant and not land.

 2.        Interest on arrears of rent in respect of agricultural land as it is neither rent nor revenue derived from land. 

3.         Interest accrued on promissory notes obtained by a zamindar from defaulting tenants. 

4.         Income from sale of forest trees, fruits and flowers growing on land naturally, spontaneously and without the  intervention of human agency. 

5.         Income from sale of wild grass and reeds of spontaneous growth. 

6.         Income of salt produced by flooding the land with sea water as it is not derived from land used for agricultural  income. 

7.         Profit accruing from the purchase of a standing crop and resale of it after harvest by a merchant, having no  interest in land except a mere license to enter upon the land and gather upon the produce, as land is not the direct,  immediate or effective source of income. 

8.         Remuneration received by managing agent at a fixed percentage of net profit from a company having  agricultural income. 

9.         Interest received by a money-lender in the form of agricultural produce. 

10.       Income of sale of agricultural produce received by way of price for water supplied to land. 

11.       Commission earned by the landlord for selling agricultural produce of his tenant. 

12.       Income derived from land let out for storing crops. 

13.       Income from fisheries. 

14.       Maintenance allowance charged on agricultural land. 

15.       If the Assessee takes loans on hypothecation of agricultural produce cultivated by him and advances the same  to its sister concerns, interest earned thereupon (is not agricultural income). 

16.       Royalty income of mines. 

17.       Income from butter and cheese making. 

18.       Income from poultry farming. 

19.       Income from sale of trees of forest which are of spontaneous growth and in relation to which forestry  operations alone are performed. 

20.       Where the Assessee-company is growing various kinds of hybrid/germ plasm seeds after conducting  Agri genetic agricultural research costing crores of rupees, income earned on sale of such seeds cannot be treated  as ‘agricultural income’. 

21.       Receipts from TV serial shooting in farm house.

5. Tax Treatment of Income which is Partly Agricultural and Partly from Business [Rules 7,7A,7B,8]

Tax Treatment of Partly Agricultural and Partly Non-Agricultural Income

Tax Treatment of on Composite Business Income i.e. Partly Agricultural and Partly Non-Agricultural Income as per Rules 7, 7A, 7B, 8.

For disintegrating a composite business income which is partly agricultural and partly non-agricultural, the  following rules are applicable— 

(A) Income from Growing and Manufacturing of any Product other than Tea [Rule 7]

The tax treatment of income from growing and manufacturing of any product other than tea is governed by Rule 7 of the Income Tax Rules, 1962.

Rule 7 provides that where income is partially agricultural in nature and partially from business, the market value of the agricultural produce which has been raised by the assessee or received by him as rent in kind and which has been utilised as a raw material in his business shall be deducted from the sale receipts and will be treated as agriculture income. The remaining will be considered as non agricultural income.

An assessee may have composite business income which is partially agricultural and partially non-agricultural, for example, where XYZ Ltd. grows potatoes and further processes its produce to sell them as wafers. In this case the company has composite income. i.e., from agriculture and from business. The composite income has to be disintegrated and for computing business income the market value of any agricultural produce raised by the assessee or received by him as rent in kind and utilised as raw material in his business is deducted. No further deduction is permissible in respect of any expenditure incurred by the assessee as a cultivator or receiver of rent in kind. For computing agricultural income the market value of agricultural produce will be total agricultural receipt on account of potatoes.

From such agricultural receipts, expenses such as cultivation expenses etc. incurred in connection with such receipt will be deducted and balance will be agricultural income which will be exempt.

For example, in the above case, if the market value of the potatoes grown by the company, which have been used for the purpose of making its own wafers, is Rs.5 lakhs and the cost of cultivation of such potatoes is Rs.4 lakhs, the agricultural income shall be Rs.1 lakh (Rs.5 lakhs – Rs.4 lakhs). This agricultural income of Rs.1 lakh shall be exempt.

(B) Income from Growing and Manufacturing of Rubber [Rule 7A]

The tax treatment of income from growing and manufacturing of rubber in India is governed by Rule 7A of the Income Tax Rules, 1962.

Income from Growing Rubber

Income from growing rubber is considered agricultural income and is exempt from income tax in India, subject to certain conditions. However, 35% of the income from growing rubber is treated as business income and is taxable.

Income from Manufacturing Rubber

Income from manufacturing rubber is considered business income and is fully taxable.

Rule 7A

Rule 7A provides for the following tax treatment of income from growing and manufacturing of rubber:

Income derived from the sale of centrifuged latex or cenex or latex based crepes (such as pale latex crepe) or brown crepes (such as estate brown crepe, re-milled crepe, smoked blanket crepe or flat bark crepe) or technically specified block rubbers manufactured or processed from field latex or coagulum obtained from rubber plants grown by the seller in India      :          

35% of such income shall be deemed to be income liable to tax.

Example

Suppose a taxpayer grows and manufactures rubber in India. In the financial year 2023-24, the taxpayer's income from the sale of rubber is Rs. 100 crore. The taxpayer's income from growing rubber will be Rs. 65 crore (65% of Rs. 100 crore) and the taxpayer's income from manufacturing rubber will be Rs. 35 crore (35% of Rs. 100 crore).

The taxpayer's income from growing rubber will be exempt from income tax, but 35% of the taxpayer's income from growing rubber will be treated as business income and will be taxable. The taxpayer will also have to pay income tax on the taxpayer's income from manufacturing rubber.

Important Points

• The taxpayer can claim deduction for expenses incurred in growing and manufacturing rubber, such as the cost of seeds, fertilizers, pesticides, labor, and machinery.
• The taxpayer can also claim deduction for the cost of planting new bushes in replacement of bushes that have died or become permanently useless.

The taxpayer will have to maintain proper records of income and expenses incurred in growing and manufacturing rubber.

(C)      Income from Growing and Manufacturing of Coffee [Rule 7B]

The tax treatment of income from growing and manufacturing of coffee in India is governed by Rule 7B of the Income Tax Rules, 1962.

Income from Growing Coffee

Income from growing coffee is considered agricultural income and is exempt from income tax in India, subject to certain conditions. However, 25% of the income from growing coffee is treated as business income and is taxable.

Income from Manufacturing Coffee

Income from manufacturing coffee is considered business income and is fully taxable.

Rule 7B

Rule 7B provides for the following tax treatment of income from growing and manufacturing of coffee:

Income from the sale of coffee grown and cured by the seller in India:

25% of such income shall be deemed to be income liable to tax.

Income from the sale of coffee grown, cured, roasted and grounded by the seller in India:

40% of such income shall be deemed to be income liable to tax.

Example

Suppose a taxpayer grows and manufactures coffee in India. In the financial year 2023-24, the taxpayer's income from the sale of coffee is Rs. 100 crore. The taxpayer's income from growing coffee will be Rs. 60 crore (60% of Rs. 100 crore) and the taxpayer's income from manufacturing coffee will be Rs. 40 crore (40% of Rs. 100 crore).

The taxpayer's income from growing coffee will be exempt from income tax, but 25% of the taxpayer's income from growing coffee will be treated as business income and will be taxable. The taxpayer will also have to pay income tax on the taxpayer's income from manufacturing coffee.

Important Points

• The taxpayer can claim deduction for expenses incurred in growing and manufacturing coffee, such as the cost of seeds, fertilizers, pesticides, labour, and machinery.
• The taxpayer can also claim deduction for the cost of planting new bushes in replacement of bushes that have died or become permanently useless.
• The taxpayer will have to maintain proper records of income and expenses incurred in growing and manufacturing coffee.

(D) Income from Growing and Manufacturing of Tea [Rule 8]

Income from Growing Tea

Income from growing tea is considered agricultural income and is exempt from income tax in India, subject to certain conditions. However, 40% of the income from growing tea is treated as business income and is taxable.

Income from Manufacturing Tea

Income from manufacturing tea is considered business income and is fully taxable.

Rule 8

Rule 8 of the Income Tax Rules, 1962 provides for the computation of income from the manufacture of tea. According to Rule 8, income from the manufacture of tea is computed as if it were income derived from business, and 40% of such income shall be deemed to be income liable to tax.

Example

Suppose a taxpayer grows and manufactures tea in India. In the financial year 2023-24, the taxpayer's income from the sale of tea is Rs. 100 crore. The taxpayer's income from growing tea will be Rs. 60 crore (60% of Rs. 100 crore) and the taxpayer's income from manufacturing tea will be Rs. 40 crore (40% of Rs. 100 crore).

The taxpayer's income from growing tea will be exempt from income tax, but the taxpayer's income from manufacturing tea will be taxable. The taxpayer will have to pay income tax on Rs. 16 crore (40% of Rs. 40 crore).

Important Points

• The taxpayer can claim deduction for expenses incurred in growing and manufacturing tea, such as the cost of seeds, fertilizers, pesticides, labor, and machinery.
• The taxpayer can also claim deduction for the cost of planting new bushes in replacement of bushes that have died or become permanently useless.

6. Tax on Non-Agricultural Income if the Assessee earns Agricultural Income also

Tax on Non-Agricultural Income with partial Agricultural Income

As already discussed, there is no tax on agricultural income but if an Assessee has non-agricultural income as well as agricultural income, such agricultural income is included in his Total Income for the purpose of computation of income-tax on non-agricultural income. This is also known as partial integration of agricultural income with non-agricultural income or indirect way of taxing agricultural income.

Such partial integration is done only in the case of:

(i) individual;

(ii) HUF;

(iii) AOP/BOI;

(iv) Artificial juridical person.

It is not done in the case of:

(i) Firm;

(ii) Company;

(iii) Co-Operative Society;

(iv) Local Authority.

The partial integration is done to compute the tax on non-agricultural income only when the following two conditions are satisfied:

(i)         Non-agricultural income of the Assessee exceeds the maximum exemption limit which is Rs.2,50,000 in the case of an individual (other than individual of the age of 60 years or above) and HUF, etc.; and

(ii)        The Net Agricultural Income exceeds Rs.5,000.

Computation of Tax where there is Agricultural Income also:

The following steps should be followed to calculate the tax:

Step 1:            Add agricultural income and non-agricultural income and calculate tax on the aggregate as if such aggregate income is the Total income.

Step 2:             Add agricultural income to the maximum exemption limit available in the case of the Assessee and compute tax on such amount as if it were the Total Income.

Step 3:             Deduct the amount of income-tax as computed under Step 2 from the tax computed under Step 1.

The amount so arrived at shall be total Income-tax payable by the Assessee.

Step 4:             Claim rebate under section 87A if applicable.

Step 5:             Add surcharge if applicable + health and education cess @ 4%.

EXAMPLE :

Gross Total Income of S aged 50 years as computed under Income-tax Act, for the assessment year 2022-23 is Rs.5,20,000. He deposits Rs.20,000 in a PPF account.

(i)         Compute the tax payable by S assuming that he has agricultural income of(a) Nil; (b) Rs.5,000; and (c) Rs.3,50,000.

(ii)        What will be the tax payable by S in the above case, if he opts to be taxed under section 115BAC.

Solution (i):

(a) and (b) Since the agricultural income is either Nil or does not exceed Rs.5,0000. there will be no partial integration and the Income-tax will be calculated on Rs.5,00,000 (Rs.5,20,000 — Rs.20,000 deduction under section 80C) as usual. Tax on Rs.5,00,000 will be Rs.12,500 — Rs.12,500 (Rebate under section 87A) = Nil.

Solution (ii):

In this case also, there will be no partial integration and the Income-tax will be calculated on Rs.5,20,000 as deduction under section 80C (Chapter VIA) shall not be allowed. Tax on Rs.5,20,000 will be Rs.15,500. Further, rebate under section 87A shall not be allowed as his total income exceeds Rs.5,00,000.

More topics on Agricultural Income :

1. ‘DEFINITION’ Of Agricultural Income
2. Tests To Determine Agricultural Income
3. Types Of Agricultural Income
4. Partly Agricultural and Partly Non-agricultural Income
5. Illustrations Of Agricultural and Non-Agricultural Incomes
6. Tax on Non-Agricultural Income if the Assessee has both Agricultural & Non-Agricultural Income
7. Computation of Net Agricultural Income