1

PATNA

Project Topic:

AGRICULTURAL INCOME

Taxation Law

Project submitted to: Mr. G.P. Pandey [ Lecturer(law) ]

Project submitted by:

POORNIMA SINGH

Roll no:575

TABLE OF CONTENTS

2

1) ACKNOWLEDGEMEN T.................................................................3

2) RESEARCH METHODLOGY.........................................................4

3) INTRODUCTION..…………………………………………………5

4) MEANING OF AGRICULTURAL INCOME………………….6-8

5) ESSENTIALS OF AN AGRICULTURAL INCOME………….9-11

6) TAX ON SALE OF AGRICULTURAL LAND…....................12-13

7) PROVISIONS OF FINANCE ACT……………………………….14

8) SOME IMPORTANT CASE LAWS ……………………..…...15-21

9) CONCLUSION…………………………………………………….22

10) BIBLIOGRAPHY………………………………………………...23

ACKNOWLEDGEMENT

3

I feel highly delighted, as it gives me incredible pleasure to present a research work on

“Agricultural income”. I would like to enlighten my readers regarding this topic and I hope I

have tried my best to pave the way for bringing more luminosity to this topic.

I am grateful to my faculty “Mr.G.P. Pandey” who has given me an idea and encourage me

to venture this project. I would like to thank librarian of CNLU for their interest in providing

me a good back up material.

And finally yet importantly I would like to thank my parents for their support and

almighty god who helps me in all my endeavours.

POORNIMA SINGH

7th semester, 4th year

4

RESEARCH METHODOLOGY

Aims and Objectives :

The aim of the project is to present a detailed study of Agricultural income and to study the

various aspects of agricultural income and its taxability.

Scope and Limitations :

The four point on which special emphasis has been given in this research are:

Definition of agricultural income in the act

Limit of exemption

Essentials of agricultural income

Case laws on this matter

Sources of Data :

The following secondary sources of data have been used in the project-

1. Articles

2. Books

3. Websites

Method of Writing :

The method of writing followed in the course of this research paper is primarily analytical.

Mode of Citation :

The researcher has followed a uniform mode of citation throughout the course of this research

paper.

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CHAPTER 1-INTRODUCTION

Agriculture income is exempt under the Indian Income Tax Act. This means that income

earned from agricultural operations is not taxed. The reason for exemption of agriculture

income from Central Taxation is that the Constitution gives exclusive power to make laws

with respect to taxes on agricultural income to the State Legislature. However while

computing tax on non-agricultural income agricultural income is also taken into

consideration.

Agricultural income is exempt from tax by virtue of section 10(1). Section 2(1A) defines

agricultural income as  :-

Any rent or revenue derived from land, which is situated in India and is used for

agricultural purposes.

Any income derived from such land by agricultural operations including processing of

agricultural produce, raised or received as rent-in-kind so as to render it fit for the market

or sale of such produce.

Income attributable to a farm house (subject to some conditions).

Income derived from saplings or seedlings grown in a nursery.

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CHAPTER 2-

MEANING OF AGRICULTURAL INCOME

Section 2. (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

7

(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 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.

(B) 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

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;

As per Income Tax Act income earned from any of the under given three sources meant

Agricultural Income:

8

(i)     Any rent received from land which is used for agricultural purpose: Assessees do not

have to pay tax on rent or revenue from agricultural land. Such land should, of course, be

assessed to land revenue in the country or be subject to a local rate. Further, there must be a

direct link between the agricultural land and the receipt of income by way of rent or other

revenue (for instance, a landlord could receive revenue from a tenant).

(ii)   Any income derived from such land by agricultural operations including processing of

agricultural produce, raised or received as rent in kind so as to render it fit for the market, or

sale of such produce.

(iii)   Income attributable to a farm house subject to the condition that building is situated on

or in the immediate vicinity of the land and is used as a dwelling house, store house etc.

Income from such farm houses is considered agricultural income. The definition of `farm

houses’ covers buildings owned and occupied by both cultivators of agricultural land and

assessees who receive rent or revenue from agricultural land. The sole purpose of such

farmhouses should be for use as dwellings for the cultivators or use as store houses.

Normally, the annual value of a building is taxable as `income from house property’.

However, in the case of a farm house, the annual value would be deemed agricultural income

and would, thus, be exempt from tax.

(iv) Income earned from carrying nursery operations is also considered as agricultural

income and hence exempt from income tax.

9

CHAPTER 3-

ESSENTIALS OF AN AGRICULTURAL INCOME

(i)  There must be a land.

(ii)  The land is being used for agricultural operations:- Agricultural operation means that

efforts have been induced for the crop to sprout out of the land. The ambit of agricultural

income also covers income from agricultural operations, which includes processing of

agricultural produce to make it fit for sale. Like the people who receive passive agricultural

income in the form of rent or revenue, the people who actually carry out agricultural

operations are also eligible for tax-free agricultural income.

(iii) Land cultivation is must:- Some measure of cultivation is necessary for land to have

been used for agricultural purposes. The ambit of agriculture covers all land produce like

grain, fruits, tea, coffee, spices, commercial crops, plantations, groves, and grasslands.

However, the breeding of livestock, aqua culture, dairy farming, and poultry farming on

agricultural land cannot be construed as agricultural operations.1

(iv)  If any rent is being received from the land then in order to assess that rental income as

agricultural income there must be agricultural activities on the land.

(v)   In order to assess income of farm house as agricultural income the farm house building

must be situated on the land itself only and is used as a store house/dwelling house.

(vi) Ownership is not essential. In the case of rent or revenue, it is essential that the

Assessee have an interest in the land (as an owner or mortgagee) to be eligible for tax-free

income. However, in the case of agricultural operations it isn’t necessary that the person

conducting the operations be the owner of the land.2 He could be just a tenant or a sub-tenant.

In other words, all tillers of land are agriculturists and enjoy exemption from tax. In some

cases, further processes may be necessary to make a marketable commodity out of

.................................................................................................................................................

1. Institute of Chartered Accountants of India (2011).Taxation. ISBN 978-81-8441-290-1.

2. "Growth of Income Tax revenue in India". Retrieved 16 November 2012.

10

agricultural produce.3 The sales proceeds in such cases are considered agricultural income

even though the producer’s final objective is to sell his products.

Certain income which is treated as Agriculture Income;

(a)    Income from sale of replanted trees.

(b)   Rent received for agricultural land.

(c)    Income from growing flowers and creepers.

(d)   Share of profit of a partner from a firm engaged in agricultural operations.

(e)    Interest on capital received by a partner from a firm engaged in agricultural operations.

(f)    Income derived from sale of seeds.

Certain income which is not treated as Agricultural Income;

(a)    Income from poultry farming.

(b)   Income from bee hiving.

(c)    Income from sale of spontaneously grown trees.

(d)   Income from dairy farming.

(e)    Purchase of standing crop.

(f)    Dividend paid by a company out of its agriculture income.

(g)   Income of salt produced by flooding the land with sea water.

(h)   Royalty income from mines.

(i)     Income from butter and cheese making.

(j)     Receipts from TV serial shooting in farm house is not agriculture income.

(k) Income from Plantation companies:- Many plantation companies have launched

schemes that offer tax-free agricultural income.4These schemes are of various types: while

some give investors leasehold rights to the land,some give rights to trees a certain level above

the ground, even as others offer rent.5If the scheme gives rise to ownership or leasehold

interest in the land, then the income is considered to be rent or revenue in the hands of the

..................................................................................................................................................

3.  50-year trend of Indian personal tax rates - Business Today - Business News4. Income Tax India5.  http://www.thetaxinfo.com/2013/12/income-tax-rebate-of-2000-calculation-sec-87a/6.  The Indian upper class grew rapidly during the Noughts

11

investor. In the absence of ownership or leasehold rights, income from plantation

companies is either considered interest or non-agricultural income chargeable to tax.

Certain points to be remembered;

(a)    Agricultural income is considered for rate purpose while computing tax of

Individual/HUF/AOP/BOI/Artificial Judicial Person.7

(b)   Losses from agricultural operations could be carried forward and set off with agricultural

income of next eight assessment years.

(c)    Agriculture income is computed same as business income.

Exceptions: – If a person just sells processed produce without actually carrying out any

agricultural or processing operations, the income would not be regarded as agricultural

income.8 Likewise, in cases where the produce is subjected to substantial processing that

changes the very character of the product (for instance, canning of fruits), the entire

operations cannot be regarded as agricultural operations. The profit from the sale of such

processed products would have to be apportioned between agricultural income and business

income.9 Further, the income from trees that have been cut and sold as timber is not

considered agricultural income since there is no active involvement in operations like

cultivation and soil treatment.

..................................................................................................................................................

7. The Indian upper class grew rapidly during the Noughts8.  Business Income9. The institute of Cost accountants of India (Jan 2012).Applied direct taxation. Directorate of

Studies,The Institute of Cost accountants of India. p. 238.

12

CHAPTER 4-

TAX ON SALE OF AGRICULTURAL LAND

 Before 1970, profit on the sale or transfer of all agricultural land was considered rent or

revenue derived from the land. Such profit was, therefore, tax-exempt as agricultural income.

There were several favorable judgments of various High Courts on the issue. However, via a

retrospective amendment that took effect from April 1, 1970 LAND qualifies to be

agricultural land if it is not situated 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 does not have a population of 10,000 or more according to the last

preceding census which has been published before the 1st day of the previous year in which

the sale of land takes place, and it is not situated less than eight kilometers from the local

limits of any municipality or a cantonment board.

If, by the test above, the land is agricultural land, it will not form part of the definition of a

capital asset and so there will be no capital gains on the sale of such land.

Agricultural land not forming part of the above will be a capital asset and sale of which will

attract capital gains tax subject to Section 54B, which is explained below.

Section 54B – Capital gain on transfer of land used for agricultural purposes not to be

charged in certain cases.

The agricultural land should have been used for agricultural purposes.

It must have been used either by the assessee or his parents in the two years immediately

preceding the date on which the transfer of land took place.

The assessee should have purchased another land, which is being used for agricultural

purposes, within a period of two years from the date of sale.

The whole amount of capital gain must be utilised in the purchase of the new agricultural

land. If not, the difference between the amount of capital gain and the new asset will be

chargeable as capital gains and the tax will be computed accordingly.

The new asset purchased should not be sold within a period of three years.

If sold, the cost of the new asset will be reduced by the amount of capital gain for the purpose

of computing capital gains tax.

13

Where the amount of capital gain is not utilised by the assessee for the purchase of the new

asset before the due date of furnishing his return of income, he may deposit it in the Capital

Gains Account Scheme (CGAS) of any specified bank.10

The return of income of the assessee should be accompanied by the proof of such deposit.

In such a case, the cost of the new asset shall be deemed to be the amount already utilised by

the assessee for the purchase of the new asset together with the amount deposited in the

CGAS.11

If the deposited amount is not utilised for the purchase of the new asset within the specified

period, then the unutilised amount shall be charged in the year in which the period of two

years from the date of sale of the original asset expires.12

.....................................................................................................................................................

10. The institute of Cost accountants of India (Jan 2012).Applied direct taxation. Directorate of

Studies,The Institute of Cost accountants of India. p. 238.

11. http://www.tax.fintotal.com/Sections/80E-Tax-Rebate/5913/68

12. http://www.tax.fintotal.com/Sections/80TTA-Tax-Rebate/6212/68

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CHAPTER 5-PROVISIONS OF FINANCE ACT,1973

Tax after including agricultural income in total income

 Although agricultural income is fully exempt from tax, the Finance Act, 1973, introduced a

scheme whereby agricultural income is included with non-agricultural income in the case of

non-corporate assessees who are liable to pay tax at specified slab rates.13 The process of

computation is as follows:

(a) Income tax is first calculated on the net agricultural income plus the assessee’s total

income from non-agricultural sources.

(b) Income tax is then calculated on the basic exemption slab increased by the assessee’s net

agricultural income.

(c) The difference between (a) and (b) is the amount of tax payable by the assessee.

This process of computation is, however, followed only if the assessee’s non-agricultural

income is in excess of the basic exemption slab.

Clearly, despite agricultural income being tax-exempt, assessees have to be extra careful

while dealing with such income.14 They must make sure that they aggregate agricultural

income with their total income to avoid interest payments and possible penalties for

concealment of income.15 Assessees must also maintain credible records to provide the tax

authorities with proof of ownership of agricultural land and evidence of having earned

agricultural income.16

...............................................................................................................................................

13.  http://www.tax.fintotal.com/Sections/80U-Tax-Rebate/5916/68

14.  http://www.thetaxinfo.com/2014/01/additional-deduction-on-interest-on-housing-loan/

15. http://www.incometaxindia.gov.in/publications/1_Compute_Your_Salary_Income/

2_Income_from_house_property.asp

16. http://www.caclubindia.com/articles/e-filing-is-mandatory-income-is-more-than-5-lacs-17646.asp

15

CHAPTER 6-SOME IMPORTANT CASE LAWS

Bacha F. Guzdar v. C.I.T., Bombay [AIR 1955 SC 74]

Agricultural income as defined in the Act is obviously intended to refer to the revenue

received by direct association with the land which is used for agricultural purposes and not by

indirectly extending it to cases where that revenue or part thereof changes hands either by

way of distribution of dividends or otherwise.17

In fact and truth dividend is derived from the investment made in the shares of the company

and the foundation of it rests on the contractual relations between the company and the

shareholder.

Dividend is not derived by a shareholder by his direct relationship with the land.

There can be no doubt that the initial source which has produced the revenue is land used for

agricultural purposes but to give to the words “revenue derived from land” the unrestricted

meaning, apart from its direct association or relation with the land, would be quite

unwarranted.

For example, the proposition that a creditor advancing money on interest to an agriculturist

and receiving interest out of the produce of the lands in the hands of the agriculturist can

claim exemption of tax upon the ground that it is agricultural income within the meaning of

Income Tax Act Section is not tenable.

The policy of the Act appears to be to exempt agricultural income from the purview of

Income Tax Act. The object appears to be not to subject to tax either the actual tiller of the

soil or any other person getting land cultivated by others for deriving benefit therefrom.18 But

to say that the benefit intended to be conferred upon this class of persons should extend to

those into whosoever hands that revenue falls, however remote the receiver of such revenue

may be is hardly warranted.

..............................................................................................................................................

17.  Income Tax Act, tax rates for foreign companies.

18.  Finance Act 2010

16

A shareholder acquires a right to participate in the profits of the company may be readily

conceded but it is not possible to accept the contention that the shareholder acquires any

interest in the assets of the company.

It cannot be said that a shareholder, on investing money in the purchase of shares, becomes

entitled to the assets of the company and has any share in the property of the company.

A shareholder has got no interest in the property of the company though he has undoubtedly a

right to participate in the profits if and when the company decides to divide them.

C.I.T. v. MaddiVenkatasubbayya (1951) 20 ITR 151 (Mad.)

It was held that the interest was neither rent nor revenue derived from the land.

The relationship between the tenant who executed the bond for arrears of rent with interest

and the landlord was held to be that of a debtor and creditor. In the present case the land

appears in the history of the trading operations of the assessee but it cannot be said to be the

immediate or the effective source of the income made by the assessee firm.The immediate

and effective source was the trading operation of purchase of the standing crop and its resale

in the market after harvesting the produce at an advantageous price.

Therefore the sum realized from sale of tobacco in the present case , being income not

derived directly from the land is not exempt from liability to assessment to income-tax .

The assessee is required to pay the income tax on proceeds from the sale of tobacco , for the

reason that such income is trade profit and not agricultural income.

Premier Construction Co. Ltd. v. C.I.T., Bombay City (1948) 16 ITR 380 (PC)

Where an assessee receives income, not itself of a character to fall within the definition of

agricultural income contained in the Act, such income does not assume the character of

17

agricultural income by reason of the source from which it is derived, or the method by which

it is calculated.

But if the income received falls within the definition of agricultural income it earns

exemption, in whatever character the assessee receives it.19

In the present case the assessee received no agricultural income as defined by the Act, it

received remuneration under a contract for personal service calculated on the amount of

profits earned by the employer.20 Such remuneration was payable, not specifically out of any

item of such profits, but out of any moneys of the employer available for the purpose.

In such circumstances , remuneration therefore is not agricultural income and is not exempt

from tax.21

C.I.T. v. Benoy Kumar Sahas Roy

AIR 1957 SC 768

It is agreed on all hands that products which grow wild on the land or are of spontaneous

growth not involving any human labour or skill upon the land are not products of agriculture

and the income derived therefrom is not agricultural income. 22

There is no process of agriculture involved in the raising of these products from the land.

There are no agricultural operations performed by the assessee in respect of the same, and the

only work which the assessee performs here is that of collecting the produce and consuming

and marketing the same.No agricultural operations have been performed and there is no

question at all of the income derived therefrom being agricultural income within the

definition given in S. 2(1A) of the Indian Income-tax Act.Where, however, the assessee

performs subsequent operations on these products of land

......................................................................................................................................................

19. http://www.tax.fintotal.com/Sections/80U-Tax-Rebate/5916/68

20.  http://www.thetaxinfo.com/2014/01/additional-deduction-on-interest-on-housing-loan/

21. http://www.incometaxindia.gov.in/publications/1_Compute_Your_Salary_Income/

2_Income_from_house_property.asp

22. http://www.caclubindia.com/articles/e-filing-is-mandatory-income-is-more-than-5-lacs-17646.asp

18

which are of wild or spontaneous growth, the nature of those operations would have to be

determined in the light of the principles enumerated above.

Applying these principles to the facts of the present case, we no doubt start with the finding

that the forest in question was of spontaneous growth. If there were no other facts found, that

would entail the conclusion that the income is not agricultural income. But, then, it has also

been found by the Tribunal that the forest is more than 150 years old, though portions of the

forest have from time to time been denuded, that is to say, trees have completely fallen and

the proprietors have planted fresh trees in those areas and they have performed operations for

the purpose of nursing the trees planted by them.It cannot be denied that so far as those trees

are concerned, the income derived therefrom would be agricultural income.

In view of the fact that the forest is more than 150 years old, the areas which had thus become

denuded and re-planted cannot be considered to be negligible.

The position therefore is that the whole of the income derived from the forest cannot be

treated as non-agricultural income.

If the enquiry had been directed on proper lines, it would have been possible for the Income-

tax authorities to ascertain how much of the income is attributable to forest of spontaneous

growth and how much to trees planted by the proprietors.But no such enquiry had been

directed.

The expenditure shown by the assessee for the maintenance of the forest is about Rs. 17,000

as against a total income of about Rs. 51,000.Having regard to the magnitude of this figure, it

can be assumed that a substantial portion of the income must have been derived from trees

planted by the proprietors themselves.

As no attempt has been made by the Department to establish which portion of the income is

attributable to forest of spontaneous growth, hence it is nothing but agricultural income.

B. Nagi Reddi v CIT ((2002) 125 Taxman 20).

19

Income from Film Shooting on Agricultural land is not Agricultural Income:- Supreme Court

of India in the case of CIT v Raja Benoy Kumar Sahas Roy (32 ITR 466) laid down the

following three propositions to decide as to what constitutes agricultural income –

(a) some basic operation, prior to germination, involving expenditure of human skill and

labour on the land itself and not merely on the growths from the land, is essential to constitute

agriculture. Illustrative instances of such basic operations are tilling of the land, sowing or

disseminating of seeds, and planting;23

(b) subsequent operations, i.e., operations performed after the produce sprouts from the land,

e.g. weeding, digging the soil around the growth, removal of undesirable undergrowths,

tending, pruning, cutting, felling and preservation of the plants from insects, pests and other

animals by themselves would not constitute agriculture24. However, in cases where the

subsequent operations are combined with basic operations, the subsequent operations would

also constitute part of the integrated activity of agriculture;

(c) activities not involving any basic operation on the land would not constitute agriculture

merely because they have relation to or connection with the land. This point was considered

by the Madras High Court in B. Nagi Reddi v CIT ((2002) 125 Taxman 20). In this case, the

assessee had shown certain income from film-shooting in his premises, which was known as

Vijaya Gardens, and he used to recover charges for the same.25 The assessee claimed that

those charges amounted to agricultural income as the said premises were used for agricultural

activities also. The assessing authority, however, treated it as business income. The assessee,

therefore, filed three separate appeals before the Tribunal.

The Tribunal held against the assessee on the basis of the earlier orders passed that the

income earned by the assessee by way of film-shooting charges did not amount to agricultural

income. On a reference, the High Court observed that the assessee used to grow agricultural

produces like paddy and derived income from fruit-yielding trees,etc.He earned income from

rice, vegetables, fruits, etc., and, incidentally, he had also permitted film-producers to shoot

their films in the said garden on payment of hire charges26.It was the case of the

assessee ........................................................................................................................................

....

23.  Business Income

24. The institute of Cost accountants of India (Jan 2012).Applied direct taxation. Directorate of

Studies,The Institute of Cost accountants of India. p. 238.

25. http://www.tax.fintotal.com/Sections/80E-Tax-Rebate/5913/68

20

26. http://www.tax.fintotal.com/Sections/80TTA-Tax-Rebate/6212/68

that had it not been for the vegetation, there would not have been any occasion for the

producers to shoot films in the garden and, it was because of that, that the income earned

from those shooting charges amounted to agricultural income. The High Court considered

whether the income earned by the assessee by permitting film producers to shoot their flms in

his garden could amount to agricultural income within the meaning of section 2(1-A) of the

Income-tax Act, 1961.

The Court referred to the aforesaid decision of the Supreme Court in the case of Raja Benoy

Kumar Sahas Roy in which it was emphasized that certain basic operations should be carried

out alongwith subsequent operations. The Supreme Court observed that if the integrated

activity of the agriculturist, viz., agriculture, which includes the basic operations and the

subsequent operations, is undertaken and performed in regard to any land, that land can be

said to have been used for agricultural purposes and the income derived therefrom can be said

to be agricultural income derived from the land by agriculture. In the very same judgment,

the Supreme Court also considered the other activities in relation to the land or having

connection with the land including breeding and rearing of live-stock, dairy-farming, butter

and cheese-making, poultry-farming, etc.

The Supreme Court observed and considered that this extension was based on the dictionary

meanings of the term and the definitions of “agriculture” in Whartons Law Lexicon. The

Supreme Court then went on to hold that 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”.

Applying the aforesaid principles, the Madras High Court held in Nagi Reddi’s case that

income earned by the assessee by way of shooting-hire charges by permitting film producers

to shoot their films in his garden was not agricultural income. The shooting of films is an

activity which has no nexus whatsoever with agricultural operations, or with the land, except

that the shooting is done on land which may be or has been agricultural land yielding some

agricultural income. The nexus, as claimed by the assessee, was non-existent, far-fetched and

illusory. To conclude, there is enough scope for taxing income from activities which are non-

agricultural in nature. In fact, it is well known that agriculturists themselves do not have

taxable income, taking into account the fact that when it is divided amongst family members

who are involved in agricultural operations, each one of them would have income within the

exemption limit. However, there are hundreds of thousands of middlemen like wholesalers,

21

retailers, distributors, etc. who earn substantial income from trading in agricultural produce as

well as fruits, flowers, etc. Such income or profits are fully taxable under the present law and,

therefore, if concerted efforts are made by the Tax Department to recover tax from them, the

need for widening the tax base to rope in agriculturists and farmers, would be eliminated.

22

CHAPTER 7-CONCLUSION

Agricultural income is exempt from income tax. no matter agricultural operations are done by

an industrial organisation or an individual. If any industrial organisation grow crops and sale

half of the goods as raw material in market and remaining further processed and sold as finish

goods the income earned on first half of produce which is sold in market as raw material is

totally exempt from tax.The second half of the produce which is further processed in this case

scheme of presumptive taxation is applicable. Rule 7,7A,7B & 8 of Income tax rules deals

with such type of income. Rule 7A deals with Income from manufacture of rubber, 7B deals

with Income from manufacture of coffee and Rule 8 deals with Income from manufacture of

tea. . Rule 7 deals generally wich says that in cases in which income is partially agriculture

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 shall be deducted from the sale receipts and will be treated as agriculture income.

Remaining will be treated as non agricultural income.

Any processing done on Agricultural produce to make it marketable is a part of agricultural

operations and such amount recoved will be treated as agricultural income only. Say for

example trashing of wheat, mustard, etc is part of agricultural operations only and the

amount recoved will be treated as agricultural income only no matter processing takes place

on on the land itself or some other place.

But in certain cases like in the case of tea, coffee, sugarcane where a major processing is

being done then some part of the processed produce (tea, coffee & sugar) is taxed as non-

agricultural income and rest is exempt as agricultural income.

As per the Income Tax Act Agriculture Income means income derived from land which is

used for agricultural purpose. If no land is being used for agriculture purpose in hydroponic

system. Therefore prima facie income derived from hydroponic system is not an agriculture

income. But as per the latest amendment in Income Tax Act in 2008 “…any income derived

from saplings or seedlings grown in a nursery shall be deemed to be agriculturral income”.

No Matter whether the land is urban or rural agricultural land. If agricultural operations are

carried out on land the income derived from sale of such agricultural produce shall be treated

as agricultural income and will be exempt from tax.

23

CHAPTER 8-BIBLIOGRAPHY

WEBSITES

en.wikipedia.org

indiantaxguide.wordpress.com

taxguru.in

www.moneycontrol.com

incometaxmanagement.com

BOOKS

TAXMANN’S DIRECT TAXES LAW & PRACTICE-by  Dr. Vinod K Singhania  Dr. Kapil Singhania

TAXATION LAWS- by Professor Kailash Rai