AGRICULTURAL INCOME

TREATMENT OF AGRICULTURAL INCOME

* Agricultural Income Earned outside India: No exemption is available in respect of agricultural
income earned outside India. The taxability of agricultural income earned outside India depends
upon the residential status of the assessee:
In case of ROR, such income would always be taxable.
In case of NOR & NR, such income would be taxable only if it is received directly in india.

* Agricultural Income Earmed In India: Agricultural income earned in India is exempt in the
hands of the assessee as per section 10(1) of the Income Tax Act, 1961 irrespective of his
residential status. The provisions relating to partial integration of agricultural income may apply
in some cases.

PARTIAL INTEGRATION OF AGRICULTURAL INCOME

Applicability of The provisions relating to partial integration of agricultural income would

Partial apply if all the following conditions are satisfied:
Integration of
* The assessee is chargeable to income tax at the slab rates. In other
Agricultural
words, partial integration would be applicable only in case of individuals,
Income
HUF, AOP/BOI and AJP. (Partial integration is not applicable in case of
companies & partnership firm)

⋆ The amount of agricultural income should be more than ₹ 5,000.

⋆ The non-agricultural income of the assessee should exceed the maximum

amount not chargeable to tax. In other words, non-agricultural income
should be more than:

₹2,50,000 - In case of residents below the age of 60 years and in case of

non-residents irrespective of their age

₹3,00,000 - In case of a resident senior citizen (⩾ 60 years, < 80 years)

₹ 5,00,000 − In case of a resident very senior citizen (¥80 years)

Note: Non-agricultural income for the purposes of 'partial integration'

would mean income which is taxable at the normal slab rates. Therefore,
LTCG, STCG U/S 111A and causal income shall not be included in the
calculation of non-agricultural income.

Steps Involved in Where an assessee has agricultural income (exceeding ₹ 5,000) and non-
Partial integrat agricultural income (exceeding the basic exemption limits stated above),
ion of tax on normal income shall be calculated as follows:
Agricultural
Step 1: Calculate tax on the total of agricultural income and non-agricultural
Income
income at slab rates.
Step 2: Calculate tax on the total of agricultural income and the exemption
limit (2,50,000/3,00,000/5,00,000) at the slab rates.

Step 3: Calculate the difference between Step 1 - Step 2. The difference

so obtained is the tax on norm al income of the assessee.
 COMPUTATION OF TAX LIABILITY WHERE PARTIAL INTEGRATION APPLIES

* Tax On Special Income At The Applicable Rates After Adjusting Deficiency, If XXXX
Any

* Tax On Normal Income (ie, the difference obtained at Step 3 above) XXXX

Total Tax (Before Surcharge/Rebate/Cess) XXXX

Add: Surcharge (10%, 15%, 25% or 37%, as the case maybe) XXXX

Less: Marginal Relief (if any) (XXXX)

Less: Rebate u/s 87A (only for residents if total income does not exceed ₹ 5,00,000) (XXXX)

Tax Liability Before Cess XXXX

Add: Health 2 Education Cess @ 4% XXXX

Tax Liability XXXX

(To Be Rounded off in Nearest Multiple of ₹10 As Per Sec 288B)

Illustration on Meaning of Agricultural Income (Examination Question - 4 Marks)

Discuss with brief reasons, whether rent received for letting out agricultural land for a movie
shoo ting and amounts received from sale of seedlings in a nursery adjacent to the agricultural
lands owned by an assessee can be regarded as agricultural income, as per the provisions of the
Income Tax Act, 1961.

MEANING OF 'AGRICULTURE' AGRICULTURAL PURPOSES'

The terms 'agriculture' and 'agricultural purposes' have not been defined under the income Tax
Act. The Supreme Court of India in the case of Raja Benoy Kumar Sahas Roy vs CIT held that
carrying out an agricultural activity would involve combined performance of basic operations along
with subsequent operations. (Carrying out only subsequent operations does not amount to
agriculture. Basic operations must be performed before any income is called agricultural income.)

* Basic operations: Basic operations involve application of human labour and skill on the land to
make the crop sprout from the land. Examples of basic operations are ploughing of land, sowing
of seeds, planting and other similar operations on land.

⋆ Subsequent Operations: Subsequent operations are carried out by agriculturalists after the
crop sprouts from the land such as weeding, digging the soil around the growth, protections of
plants by using insecticides & pesticides, watering of the plant at regular intervals, pruning,
cutting, harvesting, etc.
 Meaning Of ‘Agricultural Income’
Section 2(1A)

Section 2(1A)(a) Section 2(1A) (b) Sectioη 2(1A)(c)

Income From Letting Out Of Income From Agricultural Income From Farm Building
Land For Agricultural Purposes Operations

Section 2(1A) - MEANING OF AGRICULTURAL INCOME

Income From * Rent received from letting out of land shall be considered to be
Letting-Out of agricultural income if the following two conditions are satisfied:
Land For
such land is situated in India; and
Agricultural
Purposes The land should be let out for being used for agricultural purposes (ie,
basic + subsequent operations).
{Section2(1A)(a)}
⋆ Rent can be received in cash or in kind or in money or in money's
worth. Where rent has been received in kind, its market value shall be
taken into consideration.

Example: Mr X has let out one land to Mr Y for agricultural purposes.

Mr Y has given 1000 kgs of wheat to Mr X as rent payment. The market
value of I kg of wheat is ₹ 50. In this case, rent income in the hands of
Mr X would amount to ₹ 50,000 and income would be treated as
agricultural income of Mr X.

* Interest on delayed payment of rent received from the tenant is not

an agricultural income in the hands of the owner. Rather such interest
would be taxable u/h 'income from other sources'.
Income From * Income earned by any person from sale of crops which have been
Agricultural grown as a result of agricultural operations is treated as agricultural
operations income in the hands of the cultivator. (Agricultural operations = Basic
Operations + Subsequent Operations)
{Section 2(1A)(b)}
Example: Mr X has grown 10,000 kg of potatoes on a piece of land owned
by him after carrying out basic & subsequent operations. The potatoes
have been sold in the market for ₹ 10/kg whereas the cost of
cultivation of such potatoes came out to ₹ 30,000. The net income of ₹
70,000 earned by Mr X from sale of potatoes qualifies as agricultural
income u/s 2(1A)(b).

⋆ Marketing Operations/Marketing Process: At times, a cultivator is

required to perform additional operations on a crop to make it fit for
sale in the market because such crop cannot be sold in the market in
the form in which it was grown. Such additional operations which make
the product fit for sale in the market are known as 'marketing
operations/marketing process'.
Example: Wheat needs to be threshed before being sold, tobacco
leaves need to be dried to make them fit for sale, etc. The activities
of threshing, drying, etc are referred to as marketing operations. The
gain in the value of agricultural produce by such marketing process is
also classified as agricultural income.

Income From * The following conditions need to be fulfilled cumulatively for the
Farm Building applicability of this provision:

(Farm House) There exists a building which has been constructed within the
agricultural field or in the vicinity of the agricultural field (ie, area very
{Section 2(1A)(C)}
near to the agricultural field).

Such building is used for the purposes of storing agricultural produce

or agricultural implements by the owner himself or the tenant.
Alternatively, the owner can occupy such building as a dwelling unit.

As per the government records, such land should be classified as an

'agricultural land'. However, if such land is not classified as an
'agricultural land', then it should not be situated in an urban area.
(Meaning of urban area given below)

* If all the above conditions are satisfied, such building would qualify as
'farm building' and income arising from such farm building would be
treated as agricultural income in the hands of the owner. (Income shall be
computed by applying the provisions given under the head 'house
property')
Meaning of 'Urban Area': The following two points define the scope of
'urban area':
* Any area situated within the local limits of a municipality/cantonment
board having a population of 10,000 or more; and
 * Any additional area beyond the local limits of the above mentioned
municipality/cantonment board to the extent provided in the table given
below:

Population of The Area As Shortest Aerial Distance From The

Per The Latest Census Local Limits of The
Published Before The Municipality/Cantonment Board
Commencement of The Mentioned Under First Point
Relevant Previous Year

> 10,000 and ⩽ 1,00,000 2 kilometers

> 1,00,000 and ⩽ 10,00,000 6 kilometers

> 10,00,000 8 kilometers

SCOPE OF 'AGRICULTURAL INCOME'

* Company Carrying On Agricultural Operations:

Income from agricultural operations would be treated as agricultural income in the hands of the
company and thus exempt u/s 10 (1).

Dividend distributed by a company carrying on agricultural operations shall be treated as normal

dividend on which the recipient shareholder is liable to pay income tax at the applicable rates.
* Partnership Firm Carrying on Agricultural Operations:

Income from agricultural operations would be treated as agricultural income in the hands of the
partnership firm and thus exempt u/s 10 (1).

Share of profit from a partnership firm is exempt in the hands of the partners u/s 10(2 A).
Generally, interest on capital and salary received by the partners from a partnership firm are
treated as income in the hands of the partners u/h 'income from business/profession'. However,
where such salary or interest on capital is paid by a partnership firm earning income through
agricultural operations, such salary/interest on capital would be treated as agricultural income in
the hands of the partners as per the decision of the supreme Court in the case of R.M.
Chidambaram Pillai vs CIT.

* Salary Received By A Person Employed in Agricultural University:

Where any person is employed in any agricultural university, the salary income received by him
shall be taxable u/h 'income from salary'. Such salary shall not be considered as agricultural
income in the hands of such person.
 Incomes Treated/Deemed As Agricultural Incomes Not Treated As Agricultural Income
Income

* Income from sale of all types of crops & * Income from sale of forests, trees, wild
spices grown through basic & subsequent grass, flowers, etc grown spontaneously without
operations any human effort
* Income from sale of flowers, trees, bamboo, * Income from breeding of livestock (ie, animal
timber, grass, etc grown through basic & husbandry)
subsequent operations
* Income from dairy forming, butter & cheese
* Income of a nursery derived from saplings or making, poultry farming, fisheries, etc
seedlings grown in nursery irrespective of the
* Income from sale of agricultural land (such
fact whether basic operations are carried out or
Income is taxable u/h capital gains)
not {Explanation 3 to Section 2(1A)}

* Compensation received from an insurance

company on account of damage caused to the
crop

TREATMENT OF COMPOSITE INCOME

(Income Which Is Partially Agricultural & Partially From Business)

General Rule (For This rule applies where an assessee is carrying out both growing as
Products other Than well as manufacturing activities. Income from growing of crops is
Tea, Coffee & Rubber) considered as agricultural income and income from manufacturing
{Rule 7} activities is considered as business income.

Example: An assessee grows tomatoes and manufactures tomato

ketchup from such tomatoes which is then sold in the market. in this
case, income from growing of tomatoes would be treated as
agricultural income and income from manufacturing of tomato
ketchup would be treated as business income.

Manner of Computation of Agricultural Income & Business

Income

Agricultural sale proceeds of agricultural produce sold XXXX

Income as it is (+) Market value of agricultural
produce transferred to manufacturing
operations

Less: Cultivation expenses (XXXX)

Agricultural Income XXXX

Business Income from sale of final product XXXX

Income
Less: Market value of agricultural produce (XXXX)
transferred to manufacturing operations
 Less: Other manufacturing expenses (XXXX)

Business Income XXXX

Example: An assessee grows tomatoes after incurring an expenditure

of ₹5 lakhs on their cultivation. The market value of such tomatoes
is ₹8lakhs. However, the assessee decides to use such tomatoes for
the manufacture of tomato ketchup. Assessee incurs an expenditure
of ₹ 6 lakhs on manufacturing of tomato ketchup which is then sold
by the assessee for ₹ 25 lakhs.

* The amount of agricultural income would be ₹3 lakhs {ie, the

difference between the market value of tomatoes and the expenses
on cultivation of tomatoes?.

⋆ The business income would come out to ₹ Il lakhs {ie, income from
sale of tomato ketchup (-) market value of tomatoes (-) other
manufacturing expenses}.

Income from Growing & * Where an assessee is engaged in growing & manufacturing of
Manufacturing of rubber, firstly a single income is to be calculated combinedily for the
Rubber {Rule 7A} entire operations by deducting all the expenses from the total
revenue earned.

* 35% portion of the income so derived shall be treated as business

income and the balance 65% shall be treated as agricultural income.
Example: The total income from growing & manufacturing of rubber
has been computed as ₹100 lakhs. As per Rule 7A, ₹35 lakhs shall be
treated as business income whereas the balance ₹65 lakhs shall be
treated as agricultural income of the assessee.

Income From Growing & Firstly, a single income is to be calculated combinedly for the entire
Manufacturing of operations by deducting all the expenses from the total revenue
Coffee {Rule 7B} earned.

sale of Coffee Grown & Sale of Coffee Grown, Cured,

Cured Roasted & Grinded

25% portion of the income so 40% portion of the income so derived

derived shall be treated as shall be treated as business income
business income and the and the balance 60% shall be treoted
balance 7.5% shall be treated as agricultural income.
as agricultural income.

Income From Growing & * Where an assessee is engaged in growing & manufacturing of tea,
Manufacturing of Tea firstly a single income is to be calculated combinedly for the entire
[Rea operations by deducting all the expenses from the total revenue
earned.
* 40% portion of the income so derived shall be treated as business
income and the balance 60% shall be treated as agricultural income.
 Example: The total income from growing & manufacturing of tea has
been computed as ₹20 lakhs. As per Rule 8, ₹8 lakhs shall be treated
as business income whereas the balance ₹12 lakhs shall be treated as
agricultural income of the assessee.

Treatment of Salary/ Nature of Activity Percentage of Percentage of

interest On Capital Salary Interest On Salary/interest On
Received By A Partner Capital Considered Capital Considered
From A Partnership As Agricultural As Business Income
Firm Earning Composite income in The in The Hands of
Income Hands of The The Partner
Partner

Growing & 65% 35%

Manufacturing of
Rubber

Growing & Curing of 75% 25%

Coffee

Growing, Curing, 60% 40%

Roasting & Grounding
of Coffee

Growing & 60% 40%

Manufacturing of
Tea