Meaning & Determination of Agriculture Income under Income Tax Act, 1961

Meaning & Determination of Agriculture Income under Income Tax Act, 1961

Basic Condition for Considering Income as Agriculture Income

1. The land must be used for growing all or any of the commercial crops
2. That the income should be derived from such land by agricultural
3. Land Must in India
4. sale by a cultivator of the produce raised or received

Section 2(1) defines “agricultural income”, inter alia, to mean any rent or revenue derived from land which is situated in India and is used for agricultural purposes. Further any income derived from such land by the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by him to render the produce raised or received by him fit to be taken to market is also agricultural income.

Agricultural income” means—

(a)  any rent or revenue derived from land which is situated in India and is used for agricultural purposes;

(b)  any income derived from such land by—

(i)  agriculture; or

(ii)  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

(iii)  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 ;

(c)  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 :

What is Considered as Agriculture Land in India

Important Points related to Taxation of Agriculture Income 

• Seeds are clearly a product of agriculture and income derived from sale of seeds can be agricultural income
• The sale of jaggery falls beyond the ken of agricultural income
• Income earned from floriculture activity of growing rose plants on leasehold agriculture land falls within the definition of agricultural income
• Activity of extraction of oil from fruit/from Kernel is an industrial activity
• Process of developing certain types of hybrid seeds desired traits or enhancing various traits and concentrating them in a few germ plasms by harvesting certain number of crops year after year using the grains obtained in one crop as seed for next crop until the desired result is obtained cannot be said to be in the nature of “agricultural operations”

Reference Case Laws related to Building Attached to Agriculture Land

Section 2(1A) of IT Act, 1961, Rule 7 of IT Rules, 1962—Agricultural income—For the purpose of satisfying the conditions specified in paras (ii) of s. 2(1A)(b), the process performed by cultivator must be one which is ordinarily and usually employed by a cultivator to render the produce raised by him fit to be taken to the market and nothing else. Sec. 2(1A) does not contemplate sale of any item or commodity which is different from what is raised or cultivated. Apart from the basic operations i.e., tilling of land, sowing of seeds, planting and similar operations, etc., the later operations i.e., weeding, digging of soil around the growth, removal of undesirable under growths and all operations which foster the growth and preserve the same, etc., constitute agricultural operations and when taken in conjunction with the aforesaid basic operations. However, mere performance of subsequent operations where the products have not been raised on the land by performance of said basic operations would not be enough characterize them agricultural operations. Conducting agri-genetic research for development of new products and making available parent seeds to joint venture company is one composite activity. Therefore, process of developing certain types of hybrid seeds desired traits or enhancing various traits and concentrating them in a few germplasms by harvesting certain number of crops year after year using the grains obtained in one crop as seed for next crop unitll the desired result is obtained cannot be said to be in the nature of “agricultural operations” as contemplated under various clauses of section 2(1A) cannot be treated as agricultural income and should be held as business income. Although income attributable to the grains originally produced would constitute agricultural income under section 2(1A)(b)(i) of the Act. In view of the provisions of rule 7(2)(a), only 10 per cent of the total income of the assessee from the sale of parent seeds can be attributed to the price of grains or seeds ordinarily produced in the first crop and, thus, only the same is to be regarded as agricultural income within the meaning of s. 2(1A), r/w s. 10(1) of the Act—Pioneer Overseas Corporation vs. Dy. Dir. of IT (2010) 127 TTJ 640 (ITAT-Delhi)

S. 2(1A)(a)(b), 147 of IT Act, 1961—Reassessment—On account of furnishing incorrect particulars while filing return of income, reopening of assessment is justified—Papaya Farms Pvt. Ltd. vs. Dy. CIT (2010) 325 ITR 60 (Mad)

S. 2(1A) of IT Act, 1961—Assessment—The assessee-a doctor, who run a clinic, and his wife, each held 5 acres of coffee estate. Since the Assessing Officer himself had characterised, without any contradiction of facts that the additional amount received by the assessee on sale of coffee estates over and above the registered sale deed, are “on money” and the property sold by the assessee is agriculture property situated far from any municipality and further the property is not notified either. Therefore, in such circumstances any surplus of money arising to an assessee on sale of agriculture land would always partake of the character of agricultural income itself. Hence, consideration mentioned in sale deed is an agricultural income and the “on money” also should be treated as agricultural income—ITO vs. Dr. Koshy Geoge (2009) 317 ITR 116 (ITAT-Cochin)

Section 2(1A) of IT Act, 1961—Exemption—The assessee is engaged in the business of production and sale of hybrid seeds. It carried out research to find out the suitable genetic composition of seeds in the respective local environment and all the primary operations are carried on by the assessee in its own lands or lands leased by it and under its own direct supervision and guidance engaging casual labour and hybrid seed were grown by the farmers in their own lands but leased out to the assessee-company. Merely because, the basic seeds are sown in leasehold land and the manpower required is arranged through contract farming, the operations carried out by the assessee cannot be held as non-agricultural operations and, therefore, entire income of the assessee is agricultural in nature and which has to be excluded form the total income—Advanta India Ltd. vs. Dy. CIT (2010) 5 ITR (Trib) 57 (ITAT-Banglore)

Section 2(1A) of IT Act, 1961, r. 7 of IT Rules 1962—Agricultural income—Natural rubber is obtained by tapping matured rubber trees and when it is extracted from rubber trees by tapping it, it is liquid form, like milk and depending upon the variety, and health of the tree, rubber content in the liquid rubber may vary. Rubber latex has short life and rubber in all forms is an industrial raw material used in the manufacture of various products like tyre, tube, flap, glouse, bush, etc. Central Income tax cannot be brought on sale of scrap rubber which is generated in course of extraction of rubber latex from trees by applying rule 7A of Rules 1962 because such scrap is generated in course of taking yield which is purely an agricultural operation—CIT vs. State Farming Corporation of Kerala Ltd.

Section 2(1A) of IT Act, 1961—Agricultural income—Agricultural income is not only exempted from taxable income but also from the total income of the assessee. The term agriculture has to be understood as comprising all products of the land which have some utility either for consumption or for trade and commerce. Therefore, unless the immediate and effective source is land, such income cannot be termed as agricultural income—CIT vs. Namdhari Seeds P. Ltd. (2012) 341 ITR 342 (Karn.)

Section 2(1A) of the IT Act, 1961—Agricultural income—Conversion of surgercane into jaggery is not a necessary process performed by the cultivator to render sugarcane fit for being taken into maket, thus, profit from the sale of jaggery falls beyond the ken of agricultural income—E. Palanippan vs. ITO (2009) 121 TTJ 541 (ITAT-Cochin)

Section 2(1A),r/w s. 263 of IT Act, 1961—Agricultural income—To exercise the power under section 263, two ingredients are essential; erroneous and prejudicial order which must go hand in hand. In the assessment order in question, there was no discussion as to how the Assessing Officer arrived at the conclusion that the assessees income was to be treated as agricultural income and there was no consideration of the facts as pleaded by the assessee itself for the previous assessment year or the assessment years in question. Thus, there was an incorrect assumption of facts or incorrect application of law in assessment order which would satisfy the requirement of order being erroneous and prejudicial  to the revenue and therefore, jurisdiction under s. 263 of the Act can be invoked by the Commissioner—CIT vs. Namdari Seeds

Section 2(1A) of IT Act, 1961—Agricultural Income—Seeds are clearly a product of agriculture and income derived from sale of seeds can be agricultural income—CIT vs. Nambhari Seeds (P.) Ltd.

Section 2(1A)(b)(ii),(iii) of IT Act, 1961—Agricultural income—The conversion of raw seeds into pea seeds cannot be held as non-agricultural as the raw seeds are a highly perishable item that might result in prospective loss in the absence of marketability thereof. Thus, income derived from pea seeds constitutes agricultural income—CIT vs. Rana Gurjit Singh (2012) 340 ITR 108 (P&H)

Section 2(1A) & 10(1) of IT Act, 1961—Agricultural income—Basic/primary agriculture activity and subsequent/secondary agriculture operations thus constitute an integrated agriculture activity. Primary as well as secondary agriculture activities both carried out conjointly thus comprehend agriculture operation. So a nexus is needed between agriculture land with agriculture operation to treat an income as agriculture income. The fundamental requirement is that it should remain connected with the basic agriculture operation. Hence, as per s. 2(1A), income earned from floriculture activity of growing rose plants on leasehold agriculture land falls within the definition of agricultural income and same is eligible for exclusion from total income under s. 10(1) of the Act—Dy. CIT vs. Best Roses Biotech (P) Ltd. (2012) 144 TTJ 645 (ITAT-Ahd.)

Section 2(1A), r/w s. 28(i), of IT Act, 1961, r. 7 of IT Rules, 1962—Income—Activity of extraction of oil from fruit/from Kernel is an industrial activity and, therefore, income from such activity is assessable under s. 28(i) as its profits and gains of business—Oil Palm India Ltd. vs. ACIT

S. 2(1A)and 56 of IT Act, 1961—Agricultural income—Since the assessee has no other source of income other than agricultural income and the receipt of the Krishi Upaj Mandi Samiti is very much there, therefore, the income returned by assessee as agricultural income cannot be assessed as income from other sources merely on the basis of record of Patwari —Pannalal Holani vs. ITO (2009) 123 TTJ 142 (ITAT-Jd)

S. 2(1A), 10(1) of IT Act, 1961—Agricultural income—In order to constitute agricultural income, under s. 2(1A)(b) of the Act, two conditions have to be satisfied, viz., (i) the land must be used for growing all or any of the commercial crops, (ii) that the income should be derived from such land by agricultural. The assessee who involves in basic agricultural operations and growing basic seeds. Basic seeds produced and sold by the assessee are the result of primary as well as subsequent operations involing huge skill and efforts as defined under section 2(1A) of the Act and same is agricultural income as provided under s. 2(1A) of the Act and entitled to exemption under s. 10(1) of the Act—Vibha Agrotech Ltd. vs. ITO (2009) 314 ITR 231 (ITAT-Hyderabad)

Reference Section 2(1A) Meaning of Agriculture Income

1A)  “agricultural income” means—

(a)  any rent or revenue derived from land which is situated in India and is used for agricultural purposes;

 (b)  any income derived from such land by—

  (i)  agriculture; or

(ii)  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

(iii)  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 ;

(c)  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—

(i)  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

(ii)  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—

(A)  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

(B)  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.

The following item (B) shall be substituted for the existing item (B) of clause (ii) of the proviso to sub-clause (c) of clause (1A) of section 2 by the Finance Act, 2013, w.e.f. 1-4-2014 :

(B)  in any area within the distance, measured aerially,—

 (I)  not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than ten thousand but not exceeding one lakh; or

(II)  not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than one lakh but not exceeding ten lakh; or

(III)  not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than ten lakh.

Explanation 1.—For the removal of doubts, it is hereby declared that revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of this section.

Explanation 2.—For the removal of doubts, it is hereby declared that income derived from any building or land referred to in sub-clause (c) arising from the use of such building or land for any purpose (including letting for residential purpose or for the purpose of any business or profession) other than agriculture falling under sub-clause (a) or sub-clause (b) shall not be agricultural income.

Explanation 3.—For the purposes of this clause, any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income;

The following Explanation 4 shall be inserted after Explanation 3 in clause (1A) of section 2 by the Finance Act, 2013, w.e.f. 1-4-2014 :

Explanation 4.—For the purposes of clause (ii) of the proviso to sub-clause (c), “population” means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year;