AGRICULTURAL INCOME

AGRICULTURAL INCOME [SECTION ✓ Cultivation of rice, wheat, vegetables, fruits,

2(1A)] etc.
✓ Raising of crops or horticulture
➢ Agricultural income includes:
✓ Rent or revenue from land situated in India LAND USED FOR
used for agricultural purposes. AGRICULTURAL PROCESS
✓ Income from agricultural operations, like: ➢ The Supreme Court explained the meaning of
a) Cultivation of land. "agricultural "and "agricultural purposes " in
C.I.T. v. Raja Benoy Kumar Sahas Roy,
b) Sale of agricultural produce grown on (1957) 32 ITR 466 (SC). The relevant portions
that land. from judgement are reproduced below:
➢ Income from farm buildings required for ✓ "agricultural" in its primary sense denotes
agricultural operations (like a storehouse or the cultivation of the field and is restricted
farmer's residence on the field). to cultivation of the land in strict sense of
THREE BASIC CONDITIONS the term, meaning thereby tilling of land,
sowing of seeds, planting and similar
➢ To treat income as “agricultural income” under
operation on land. These are basic
Section 2(1A) of the Income Tax Act, 1961,
operations.
three basic conditions must be satisfied:
✓ Operations to be performed subsequently
The Income Must Be Linked to Agricultural
like "weeding" "digging" etc.
Produce: The income must be from:
✓ "Agriculture" comprises within its scope all
✓ Sale of produce grown on agricultural land, or
produce "regardless of the nature". This
✓ Rent or revenue from such land, or produce may be grain, vegetable or fruits
✓ Income from farm buildings used in including plantations and grass or
connection with agricultural operations. pastures or articles of luxury such as betel,
coffee, tea, spices, tobacco, or commercial
If the produce is processed, the processing must
crops like cotton, jute, etc.
be only to make it marketable in its natural form.
Further value-added processing may make it ➢ It was further observed that activities not
business income. involving any basic operations on land would
not constitute agriculture merely because they
The Income Must Be Derived from Land
have relation to or connected with the land
situated in India: The income must originate or
e.g., breeding and rearing of livestock, dairy-
arise from land situated in India. The land must be
farming, butter and cheese making and
used for agricultural purposes (e.g., growing
poultry farming, would not by themselves be
crops, fruits, vegetables, etc.).
agricultural processes.
The Land Must Be Used for Agricultural
➢ In C.I.T. v. P.Z. Estate (P) Ltd., (2005) 2 SOT
Operations: There must be agricultural activity on
563 Delhi High Court, it was held that income
the land — such as sowing, planting, cultivation,
is derived from by growing special quality of
and harvesting. This involves human skill and
grass required for creating golf course is
effort in the process of growing the produce.
agricultural income.
Examples of agricultural operations:
 WHAT IS NOT AGRICULTURAL INCOME? purposes, the rent compensation received by
➢ Income from sale of processed agricultural the owner from the Government is not
products (if substantial processing is agricultural income even through the land had
involved). always been used for agricultural purposes.

➢ Income from poultry farming, fisheries, or INCOME DERIVED FROM AGRICULTURE

dairy farming. [SECTION 2(1)(b)(i) 1]

➢ Rent from non-agricultural land or urban land. ➢ Any income from agriculture derived from
land, situated in India and used for agriculture
➢ Income from agri-businesses like tea blending
purposes, is agricultural income.
and packaging, without cultivation.
➢ For example, the income from the sale of
KINDS OF AGRICULTURAL INCOME standing crop or raw produce after harvest
➢ From the definition of agricultural income as (without performing marketing process) is
given in Section 2 the categories of income, income derived from agriculture.
which may be included for the purpose ➢ Temporary use of land for non-agricultural
exemption as agricultural income, are as purposes will not alter the character of land as
follows: agricultural land, but a permanent
RENT OR REVENUE DERIVED FROM abandonment will do so.
LAND [SECTION 2(1)(a)) ➢ In CWT v. Officer-in-charge (Court of
➢ Rent or revenue derived from land, situated in Wards) Parigah, (1976) 105 ITR 133 (SC) it
India and used for agricultural purposes is was held that the land must not only be
agricultural income. capable of being used for agricultural
purposes but it must have been actually used
➢ Rent is the money, share of crops, or service or for such purposes at some point of time.
any other thing of value to be rendered.
➢ Mere potential or possible use of the land for
➢ periodically or on the specified occasions by agricultural purposes is not sufficient to treat
the tenant in consideration for the use of land. it as an agricultural land.
Revenue is used in the wider sense as return,
yield or profit or income of any land or ➢ In C.I.T. v. Gemini Pictures Circuit Pvt. Ltd.,
property and not in the sense of land revenue, AIR 1996 SC 1522 it was held that the land
Salami or premium is an example of revenue. situated on the busiest road of the city within
limits of Municipal Corporation and
➢ The word 'derived' means arising or accruing. surrounded on all sides by industrial and
Revenue can be derived from land only if land commercial buildings was held to be not
is the immediate and effective source and not agricultural were being raised at the time of
secondary or indirect source. sale does not change the nature and character
➢ Interest on arrears of rent will not be derived of the land.
from land as land is not the immediate and INCOME DERIVED FROM LAND BY
effective source. PERFORMING ANY PROCESS TO RENDER THE
➢ Salami or premium received by land lord for PRODUCE FIT TO BE TAKEN TO MARKET
giving the land on lease constitutes [Section 2(1)(b)(ii)]
agricultural income. ➢ This clause covers income that results from
➢ If agricultural land is requisitioned by the performing post-harvest processes on
Government and issued for non-agricultural
 agricultural produce, only if such processes related to cultivation was exempt, and the
are: profit from manufacturing sugar was taxable.
✓ Ordinarily employed by farmers or ➢ In C.I.T. v. B. Gupta (Tea) Pvt. Ltd., (1969) 74
cultivators, and ITR 337 (Cnl.), It was held that claim received
✓ Necessary to make the produce market- from the insurance company on account of
ready (not value-added beyond that). damages caused by hailstorm to growing tea
is agricultural income.
➢ Examples of Allowable Processes under
Section 2(1)(b)(ii): ➢ In C.LT. v. M. Venkatasubbaya, (1967) 63 ITR
325 (PC), it was held that where the assessee
➢ These are considered ordinary agricultural purchases a standing crop and sells
processes: immediately or after performing subsequent
✓ Winnowing operations, the income derived from such sale
is not agricultural income as the assessee has
✓ Drying
not derived the income by cultivating the land.
✓ Cleaning
➢ In Bhikanpur Sugar Concern, AIR 1919, 260
✓ Grading it was held that income derived from sale of
✓ Sorting sugar manufactured from sugarcane grown by
the assessee on its land was not agricultural
✓ Removing husks or shells
income because the process employed by the
✓ Packing for transport assessee for manufacturing sugar was not a
➢ If the process adds value beyond making the process ordinarily employed by cultivator of
product market-ready, the income may not be sugarcane for rendering it fit for marketing
considered agricultural. Example (non- ➢ In Killing Valley Tea Co. Ltd v. Secretary of
agricultural): State, AIR 1921 Cal 40, it was held that
✓ Processing sugarcane into jaggery or manufacturing of the tea from green leaves
sugar. plucked from the garden was not agricultural
income. The Calcutta High Court held that
✓ Polishing rice or converting wheat into
though the green leaf from the tea plant was
flour.
not a marketable commodity for immediate
➢ In such cases, only a portion of the income use as an article of food, it was certainly "a
may be treated as agricultural, depending on marketable commodity to be manufactured
how much of it is from basic vs. value-added by people who possess the requisite
processing. machinery to make tea fit for human
➢ In Sakarlal Balabhai v. CIT (1968), the consumption" and the manufacturing process
assessee grew sugarcane on his agricultural could not therefore, properly be said to be
land and used it to manufacture sugar and employed to render tea leaves fit to be taken
sold the sugar commercially. He claimed the to market as required by the section.
entire income as agricultural income, exempt ➢ In J.M. Casev v. Comm. of Income tax, AIR
from tax. The Supreme Court held that only 1930 Pat 44, it was held that the process
the income from growing sugarcane was performed on aloe leaves for preparing sisal
agricultural, but the income from processing it fiber was a process ordinarily employed to
into sugar was a business activity and not render aloe leaves fit to be taken to market,
agricultural income. Therefore, only the part this decision laid down two propositions:
 1) that in order to attract applicability of necessary for rendering the process as
Section 2 (1) (b) (ii) the produce in its raw produce fit to be taken to the market.
state must not have a ready and available ➢ In C.P.A. Yoosuf v. ITO, Kottayam, (1970) 77
market where goods of that kind are ITR 237, it was held that all income from land
bought and sold, and is not agricultural income. Only income
2) even if the assessee is the only cultivator a derived from such lands and buildings as one
generalisation can be made from the mentioned in the definition of agricultural
single instance of the assessee and the income, alone would be agricultural income.
process employed by the cultivator can be The income derived by a person of rubber
regarded as a process ordinarily employed obtained by slaughter-tapping trees, which
by the cultivator to render the produce the assessee has purchased for being cut and
marketable. removed is not income derived in such
➢ In Sheolal v. C.I.T. AIR 1932 Nag 61, it was manner, and it does not, therefore, fall within
held that the process of ginning of cotton the definition of income."
could not be said to be a process necessary to INCOME DERIVED FROM THE SALE OF
render the produce fit to be taken to market. PRODUCE [SECTION 2(1)(b)(iii)]
➢ In a decision of the Bombay High Court in AIR ➢ Any income from the sale of produce of any
Bom. 166 it was held that income realised land, situated in India and used for agricultural
from sale of gur manufactured by the assessee purposes, to the cultivator or receiver of rent-
out of sugarcane grown by it was not in-kind is agricultural income provided the
agricultural income. It established that if there produce is not subjected to any process
is a market for the produce and no process except marketing process ordinarily employed
performed on it them it can be said to be a to render the produce fit for sale.
process necessary for rendering it fit to be
INCOME FROM FARM BUILDING
taken to market.
[Section 2(1)(c)]
➢ In Boggavarapu Peda Ammaiah v. C.I.T.
➢ The income from farm building will be exempt
(1964) 1. ITR, 197 (A.P) it was held that in
from tax as agricultural income if the following
respect of tobacco income derived from
conditions are satisfied:
operations up to the stage of a flue-curing as
agricultural income but regarded the ✓ that the building is on or in the immediate
subsequent activities which involved the vicinity of the land;
performance of the process of redrying, ✓ that the building is, occupied and
stripping and grading and sale of tobacco required, by the receiver of the rent or
subjected to such process as non-agricultural revenue or the cultivator or the receiver of
operations and treated the income rent-in-kind, as a dwelling house or a store
attributable to those operations as an income house or other outbuildings on account of
from business subject to tax. his connections with the land; and
➢ In A.T. Parathsarthiah & Bros. v. C.LT. (1963) ✓ that the land is either assessed to land
48 ITR 830, it was held that covering of revenue in India or is subject to a local rate
termind into flower termind and in C.L.T. v. assessed and collected by the officers of
Woodland States Ltd. (1965) 48 ITR 612, the Government; or the land is not situated
conversion of latex into sole crepe or smoked in any area which is comprised within the
sheets, are to be regarded as agricultural it is jurisdiction of a municipality or a
cantonment board having a population of
 10,000 or more inhabitants according to AGRICULTURAL LOSSES & THEIR TAX
the last preceding census; or the land is TREATMENT UNDER THE INCOME TAX
not situated in any area within such ACT, 1961
distance not being more than 8 kms, or
➢ Agricultural income in India is exempt from
such shorter distance, if any, notified by
tax under Section 10(1).
the Central Government in respect of any
urban area, from the local limits of any ➢ Because it's not included in total income,
municipality or cantonment board having agricultural losses are also not allowed to be
a population of 10,000 or more set off against taxable income (like business
inhabitants. income).
PARTIAL INTEGRATION OF CAN AGRICULTURAL LOSS BE SET OFF
AGRICULTURAL INCOME AGAINST BUSINESS INCOME?

➢ Even though agricultural income is tax- ➢ No, agricultural loss cannot be set off against
exempt, it is used to compute the tax rate on Non-agricultural income (e.g., business
non-agricultural income, in certain cases. This income, salary, house property, etc.) nor can it
is called partial integration and applies if: be carried forward for set-off against future
non-agricultural income.
✓ Agricultural income exceeds ₹5,000, and
➢ This is because agricultural income is outside
✓ Non-agricultural income exceeds the basic
the scope of the Income Tax Act, except for
exemption limit:
rate purposes (partial integration).
a) ₹2.5 lakh (for individuals below 60
➢ Only the business income portion is taxable;
years),
the agricultural portion remains exempt.
b) ₹3 lakh (for individuals between 60-80
CAN BUSINESS LOSS BE SET OFF
years),
AGAINST AGRICULTURAL INCOME?
c) ₹5 lakh (for individuals above 80
years). ➢ No, the reverse is also true and business loss
cannot be set off against agricultural income
➢ In such cases, agricultural income is added to since: Agricultural income is exempt and not
total income for rate calculation only, but tax part of the total income.
is levied only on the non-agricultural portion.
WHY AGRICULTURAL LOSS CANNOT
SECTION 10 BE SET OFF AGAINST BUSINESS
➢ Section 10 of the Income Tax Act lists specific INCOME UNDER INDIAN TAX LAW?
types of income that are exempt from tax. ➢ The reason is rooted in the basic structure of
➢ These incomes are not included in the total the Income Tax Act, 1961, and the special
income when calculating tax liability. status given to agricultural income.
SECTION 10(1) – AGRICULTURAL ➢ Section 10(1) of the Income Tax Act states that
INCOME agricultural income is exempt from tax. Since
it's not part of “total income”, it lies outside the
➢ Exempts agricultural income from land
taxable scope of the Act.
situated in India.
➢ Therefore, losses from agricultural operations
➢ Subject to partial integration with non-
are also outside the scope, and cannot affect
agricultural income for tax rate calculation (as
taxable income like business income. Business
explained earlier).
income is part of the taxable base.
➢ Agricultural income is not taxed, so allowing a ➢ One such exclusion is: Section 2(14)(iii) which
loss from exempt income to reduce taxable deals with Agricultural Land in India
income would lead to: ➢ "Agricultural land in India" is not a capital
✓ Tax arbitrage (legal loopholes), asset if it is:
✓ Revenue loss for the government, ✓ The land must be located in an area that is
✓ And violation of tax neutrality. not inside a town or city (municipality or
cantonment board) has less than 10,000
➢ For example, a farmer-businessman could people, then it's considered rural and
show a large agricultural loss (from exempt
income) and set it off against profit from a ✓ Situated beyond certain distances from
business (taxable), thereby reducing overall municipalities, depending on population.
tax liability, even though he’s only incurring EXEMPT (NOT A CAPITAL ASSET):
losses in a non-taxable area. RURAL AGRICULTURAL LAND
IS INCOME FROM SALE OF AGRICULTURAL ➢ If land is:
LAND CONSIDERED AGRICULTURAL ✓ Used for agriculture, and
INCOME?
✓ Located:
➢ The sale of agricultural land can sometimes be
• More than 2 km away from a town with
considered tax-free agricultural income — but
population more than 10,000 and up
not always.
to 1 lakh.
➢ The tax treatment depends on where the land
• More than 6 km away from a town with
is located, how it is used, and other conditions
population more than 1 lakh and up to
laid out in the Income Tax Act, 1961.
10 lakhs.
➢ It is tax-free agricultural income IF the land is
• More than 8 km away from a town with
a "rural agricultural land" in India.
population more than 10 lakhs.
➢ It is taxable as capital gains IF the land is an
TAXABLE (CAPITAL ASSET): URBAN
"urban agricultural land" (i.e., within or near
AGRICULTURAL LAND
city limits).
➢ Conditions for Sale to Be Considered Exempt ➢ If the land:
Agricultural Income: ✓ Falls within the above limits from a
✓ Land must be used for agricultural municipality or is within city limits,
purposes (actual cultivation, not just ✓ Even if used for agriculture,
declared as agricultural). ➢ Then it is a capital asset → Taxable under
✓ Located in rural area as defined above. capital gains.
✓ No development or plotting (e.g. if land is ➢ Just because land is called "agricultural"
sold as a part of real estate project, doesn’t mean it qualifies for tax exemption.
exemption may not apply). The location and actual use of the land are
✓ No business activity involved (like frequent critical.
buying/selling of land). ➢ In M.S. Srinivasa Naicker v. ITO (2007) an
agricultural land was converted into plots
DEFINITION OF AGRICULTURAL LAND
before sale. The Madras High Court treated
➢ Any property held by a person, but excludes
certain types of assets.
 it as business income, not agricultural income. ✓ Income from supply of water from a tank
Fully taxable. situated in the agricultural land, (1982) 133
➢ In CIT v. Raja Benoy Kumar Sahas Roy, the ITR 85.
apex court defined agricultural income strictly ✓ Income from shooting hire charges by
as income from land by agricultural permitting the film producers to shoot
operations, not from sale of land itself. their films in farm of the assessee.
EXAMPLES ✓ Income from TV serial shooting in form
house.
Exempt (Rural Land): A farmer owns 5 acres of
land 9 km from a municipality with a population ✓ Interest on arrears of rent payable in
of 3 lakhs. The land is used to grow paddy. Not a respect of agricultural land.
capital asset → No capital gains tax. ✓ Interest received by a moneylender in the
Taxable (Urban Land): Land located 3 km from a form of agricultural produce.
city with a population of 2 million. Used for
farming. It is a capital asset → Capital gains tax Case laws
applies on sale. BACHA F. GUZDAR V.
Converted Land: A person converts agricultural COMMISSIONER OF INCOME TAX,
land into residential plots for sale. Treated as BOMBAY, AIR 1955 SC 74
business income, not agricultural → Fully taxable.
➢ Assessee (Bacha F. Guzdar) was a shareholder
NON-AGRICULTURAL INCOME in several Indian companies engaged in
➢ The following are not agricultural income: agriculture-based activities, such as tea
growing.
✓ Income from supply of water for irrigation
purposes; ➢ These companies earned agricultural income,
a portion of which was exempt from tax under
✓ Income from land used for storing
Section 10(1) of the Income Tax Act, 1922.
agricultural produce;
➢ The companies declared dividends to
✓ Remuneration received by the manager of
shareholders, and Bacha F. Guzdar received
an agriculture farm (iv) Income from forest
dividends on her shares.
trees of spontaneous growth;
➢ She claimed that the dividend income she
✓ Income from dairying;
received should be treated as agricultural
✓ Income from poultry farming, butter and income (to the extent that the company's
cheese making, income was agricultural) and thus should be
✓ Income from mining royalties; exempt from tax.

✓ Income from stone quarries; ISSUES RAISED

✓ Income from fisheries; ➢ Can a shareholder claim exemption on

dividend income on the ground that the
✓ income from land used for brick-making: company’s income is agricultural?
✓ Income from the sale of silk cocoons ➢ Is dividend income of a shareholder derived
produced by silk worms fed by mulberry from agricultural income if the source
leaves, (1981) 5 Taxman 272; company earns such income?
 JUDGMENT JUDGMENT
➢ The Supreme Court held against the assessee. ➢ Agricultural income means income derived
It ruled that the shareholder and the company from land by agricultural operations, which
are distinct legal entities. "A shareholder does involve:
not own the company’s assets or income; he ✓ Basic operations like ploughing, sowing,
owns only a right to receive dividends." planting, etc.
➢ The income that a shareholder receives in the ✓ Subsequent operations like weeding,
form of dividends is not agricultural income, watering, harvesting, etc.
even if the company’s income (out of which
the dividends are paid) includes agricultural ✓ If only natural growth (like wild grass) is
income. sold without active cultivation, it is not
agricultural income.
➢ Therefore, the dividend is taxable in the hands
of the shareholder. Agricultural income ➢ However, if there is active effort to grow, tend,
exemption applies to income earned directly and manage the crop, then income from such
by the assessee through agricultural activities does qualify as agricultural income.
operations, not through indirect means like ➢ The Court found that Benoy Kumar Sahas Roy
dividends. did carry out some agricultural operations
(though limited).
C.I.T. V. RAJA BENOY KUMAR
SAHAS ROY, AIR 1957 SC 768 ➢ Hence, some part of the income may be
considered agricultural, depending on further
➢ Benoy Kumar Sahas Roy, the assessee, owned factual determination.
agricultural land in Bengal.
CIT V. RAJA BAHADUR
➢ He engaged in growing grass on the land,
which was later sold as fodder. KAMAKSHYA NARAYAN SINGH
[AIR 1949 PC 1]
➢ The revenue authorities taxed the income
from these activities. ➢ It dealt with the question whether interest on
arrears of rent payable in respect of land used
➢ The assessee claimed that the income was
for agricultural purposes is agricultural
agricultural and therefore exempt under
income and therefore exempt from Income
Section 2(1A) of the Income Tax Act, 1922
Tax.
(equivalent to Section 10(1) in later Acts).
➢ It was held that it was neither rent nor revenue
ISSUES RAISED
derived from land within the meaning of
➢ What is the true meaning of “agricultural Section 2(1) of the Income Tax Act.
income” under the Income Tax Act?
➢ Therefore, arrears of rent in this case were held
➢ Does growing and selling grass (without neither to be rent or revenue derived from
ploughing, sowing, or irrigation) qualify as land within the meaning of agricultural
agricultural operations? income.
➢ Can income from spontaneous growth (not
actively cultivated) be considered agricultural
income?
 C.I.T. V. MADDI exempt from tax under Section 4(3)(viii) of the
VENKATASUBBAYYA (1951) XX ITR 1922 Act.
151 (MAD.) ➢ Income derived from land used for agriculture
remains agricultural income even if the owner
➢ Maddi Venkatasubbaiah, the assessee, was a
does not personally cultivate the land,
landowner who granted a lease of land for
provided the income is directly attributable to
agricultural purposes.
agricultural use.
➢ Under the lease, the lessee was permitted to
KILLING VALLEY TEA COMPANY
cultivate sugarcane and was also allowed to
sell the sugarcane to a sugar factory. LTD. V. SECRETARY OF STATE AIR
1921 CAL 40 (CALCUTTA HIGH
➢ The assessee received payments based on the
quantity of sugarcane supplied to the factory COURT)
— this was termed “commission” or royalty. ➢ Killing Valley Tea Company Ltd., the appellant,
➢ The Income Tax Department argued that this was a company engaged in the business of
income was not agricultural income, and growing and manufacturing tea.
hence taxable. ➢ Under the Finance Act and Income Tax Act of
➢ The assessee claimed that the income was British India (pre-independent era), a question
derived from agricultural land, and hence arose about the taxability of income from tea
exempt under Section 4(3)(viii) of the Income production.
Tax Act, 1922. ➢ The issue was whether the income derived
ISSUES RAISED from the manufacture and sale of tea (grown
on the company's own plantations) should be
➢ Is the commission or royalty received by the
considered wholly agricultural (and thus
landowner from the cultivation and sale of
exempt), or if any portion of it was taxable as
sugarcane by a lessee agricultural income?
business income.
➢ Can such income be exempt from tax, even
➢ The tax authorities had taxed a part of the tea
when the landowner himself does not
income, and the company contested this,
cultivate the land?
arguing that the entire income was
JUDGMENT agricultural and therefore exempt.
➢ The court held that the income received by the ISSUES RAISED
assessee was agricultural income under the
➢ Is the income derived from the business of
meaning of the Act.
growing and manufacturing tea in India fully
➢ The sugarcane was grown on agricultural land, agricultural income and exempt from tax?
and the income was directly derived from land
➢ If not, what portion of that income is subject
used for agricultural purposes.
to tax?
➢ Even though the assessee did not cultivate the
JUDGMENT
land personally, the income arose as
consideration for allowing agricultural use of ➢ The Court held that tea income is only partly
his land. agricultural.

➢ Therefore, the income received (even though ➢ The Calcutta High Court, however, held that
calculated based on quantity of produce) was though the green leaf from the tea plant was
not a marketable commodity for immediate
use as an article of food, it was certainly "a
 marketable commodity to be manufactured SAKARLAL NARANLAL V. C.I.T.,
by people who possess the requisite AIR 1965 GUJ. 165
machinery into tea fit for human
consumption" and the manufacturing process ➢ Sakarlal Naranlal, the assessee, owned land on
could not, therefore, properly be said to be which he grew agricultural produce.
employed to render the tea leaves fit to be ➢ He sold a part of that agricultural produce
taken to market as required by the section. after applying some processing (e.g.,
➢ The process of growing tea leaves is converting cotton to ginned cotton).
agricultural, but the processing (manufacture) ➢ The assessee claimed that the entire income
of tea is a commercial activity. from the sale of the processed produce was
➢ Therefore, only the portion of income agricultural income, and hence exempt from
attributable to cultivation (agricultural income tax under Section 2(1A) of the Income
operations) is exempt, while the rest is taxable. Tax Act (previously Section 4(3)(viii) of the
1922 Act).
➢ The Court accepted the principle that a
composite activity involving both agriculture ➢ The Income Tax Department argued that the
and business must be apportioned. processing altered the nature of the income
and made it partly business income, which
➢ The judgment led to the "60:40 Rule" should be taxable.
(Apportionment Rule), later formalized under
Rule 8 of the Income Tax Rules: ISSUES RAISED

✓ 60% of income from tea business is treated ➢ Whether the income derived from the sale of
as agricultural income (exempt). processed agricultural produce (processed
beyond what is necessary to make it
✓ 40% is treated as business income
marketable) is agricultural income.
(taxable).
➢ If processing changes the character of the
➢ This decision, therefore proceeded on the
income, does it become taxable business
basis that if there is a market for the produce
income?
grown by the assessee and despite that, some
process is performed on it, such process JUDGMENT
cannot be said to be a process to render the ➢ The Court distinguished between two types of
produce fit to be taken to market so as to processing:
attract the applicability of section 2(1)(b)(ii).
✓ Necessary processing to make the product
BHIKANPUR SUGAR CONCERN, marketable (e.g., drying tobacco leaves,
AIR 1919 SC 260 ginning cotton) does not destroy the
agricultural character of the income.
➢ In this case it was held that income derived
from sale of sugar manufactured from ✓ But if processing is done beyond what is
sugarcane grown by the assessee on its land necessary and is undertaken to enhance
was not agricultural income because the value or create a new product, the income
process employed by the assessee for becomes partly or fully non-agricultural.
manufacturing sugar was not a process ➢ In this case, the court found that:
ordinarily employed by a cult it of sugarcane
✓ The processing done by Sakarlal was
for rendering it fit for the marketing.
essential to make the agricultural produce
marketable.
 ✓ Therefore, the income retained its jam, jelly, and squash was not agricultural
agricultural character and was exempt income.
from tax. ➢ The fruits grown on agricultural land ceased to
➢ Income remains agricultural as long as the be agricultural produce once they were
processing done is limited to what is subjected to extensive processing to create
necessary to render the produce marketable entirely new products.
in its primary form. ➢ The court emphasized that:
C.I.T. V. H.G. DATE (1971) 82 ITR 71 ✓ Processing must be confined to what is
(BOM.) necessary to make the produce
➢ H.G. Date, the assessee, owned agricultural marketable in its basic form.
land where he grew fruits like mangoes and ✓ In this case, the processing created
oranges. commercial products with a new identity,
which involved skill, labor, and enterprise
➢ Instead of selling the fruits in their raw form,
beyond agriculture.
he used them to manufacture processed
products like jam, jelly, and squashes. ➢ Therefore, the income was classified as
➢ He sold these processed products in the business income, taxable under the Income
market and claimed the income as agricultural Tax Act.
income, which is exempt under Section 2(1A) ➢ Agricultural income loses its exempt status if
of the Income Tax Act, 1961. the produce is processed beyond the stage
necessary to make it marketable and
➢ The Income Tax Officer (ITO) assessed this
income as business income, on the grounds converted into a new product through
manufacturing or commercial activity.
that the processing went beyond what is
required to make the produce marketable. K. LAKSHMANAN & CO. V. C.I.T.
➢ The case reached the Bombay High Court to (1999) 239 ITR 597
determine the correct nature of the income. ➢ K. Lakshmanan & Co., the assessee, was a
ISSUES RAISED partnership firm that carried on the business
of organizing horse races and operating a
➢ Whether the income derived from
totalizator (a betting system) under a license
manufacturing and selling products like jam,
issued by the Bangalore Turf Club.
jelly, and squash using homegrown fruits
qualifies as “agricultural income”? ➢ The firm collected commission and income
from running the totalizator on behalf of the
➢ Does such processing fall within the
club.
permissible agricultural operations, or does it
constitute a separate ➢ It claimed that the income earned from this
commercial/manufacturing activity? activity was not taxable under “business
income”, contending it was merely acting as
➢ Is the extent of processing the determining
an agent or facilitator.
factor in whether income retains its
agricultural character? ➢ The Income Tax Department assessed the
income as taxable business income under
JUDGMENT
Section 28 of the Income Tax Act.
➢ The court ruled against the assessee (H.G.
Date). It held that the income from making
➢ The matter reached the Supreme Court after
being decided against the assessee in lower
forums.
ISSUES RAISED
➢ Whether the income received by the assessee
from operating a totalizator at a racecourse is
business income?
➢ Does organizing horse races and running
betting operations constitute a “business”
under the Income Tax Act, 1961?
JUDGMENT
➢ The Supreme Court upheld the Income Tax
Department’s view and ruled against the
assessee.
➢ It held that the activities carried out by K.
Lakshmanan & Co. — operating the
totalizator and organizing betting activities —
were conducted in an organized, systematic,
and continuous manner for profit.
➢ This clearly amounted to “business” under
Section 2(13) of the Income Tax Act.
➢ Therefore, the income was taxable as “profits
and gains of business or profession” under
Section 28 of the Act.
➢ Any activity that is carried out systematically
and regularly with a profit motive constitutes
a business, even if it involves betting or
gambling (which may be frowned upon
morally or socially).