Agricultural Income
Agricultural income is explained under section 2(1-A) and exempted from income-tax under S. 10(1) of the Income Tax Act 1961. The Parliament has no power under the Constitution of India to levy tax on agricultural income because entry 82 of the Union List empowers the Parliament to make law for levying tax on income other than agricultural income. However, it is to be noted that with effect from the assessment year 1974-75, the agricultural income has been taken into account in determining the rate of tax applicable to the non-agricultural income of the assessee.
“AGRICULTURAL INCOME” means-
(a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes
Thus, rent or revenue may be agricultural income if:
(i) it is derived from land,
(ii) the land is situated in India, and
(iii) the land is used for agricultural purposes.
Here rent may be understood as a payment in money or in kind by one person to another in respect of the grant of a right to use land for agricultural purposes. Revenue means return, yield or income derived from the land which is the immediate and effective source of the return, yield or income. It is to be noted that the term “revenue” is not used here in the sense of land revenue.
(i) Rent or Revenue must be derived from the land – It indicates that the land must be immediate and effective source of the rent or revenue and not merely secondary or indirect source. For example, where a land owner transfers to another person his agricultural land in consideration of a life annuity payable by that other person (i.e., the transferee) which is secured by a charge on that land, the life annuity cannot be treated as agricultural income because in this condition the source of the life annuity is not the land but covenant. Similarly, the interest on the arrears of rent payable in respect of land used for agricultural purposes is not agricultural income because in this condition the land is not the direct source of income (ie, the interest).
Income received by the assessee by leasing out his coffee estatesis agricultural income because here the land is the direct source of the income But income received from lease of coconut trees for enjoyment of their fruits was not treated as agricultural income, because land was not the diren source of this income. Dividend income received by the assessee-shareholder is not agricultural income even if the dividend has been paid out of the this that derived from the investment in the shares of the company, and, therefore
(ii) The land must be situated in India – For the application of this clause the land must be situated in India. Where the agricultural land is situated in a foreign country and the income from such land is received in India, the whole income received in India will be taxable.
{iii} The land must be used for agricultural purpose. – Income to be treated as agricultural income is required to be derived from agricultural land. Agricultural land may be understood as a land which has been used for agricultural purposes. Prima facie agricultural land may be said as a land which is either actually used or ordinarily used or meant to be used for agricultural purposes. A land cannot be treated to have been used for agricultural purpose unless there is some measure of cultivation of the land, some expenditure of skill and labour upon the land.” “Agriculture” involves two operations”:
(a) Basic operations prior to germination, like tilling of the land, sowing of the seeds and planting, etc. requiring expenditure of human labour and skill; and
(b) Subsequent operations (i.e., operations performed after the produce sprouts from the land, required for effective raising the produce from the land) as, for example, weeding, digging, the soil around the grounds, removal of undesirable undergrowths, cutting. preservation of the plants from insects, pests and other animals, harvesting and rendering the produce marketable.
(c) It includes the raising of the commercial crops like tobacco, tea, coffee, cotton etc. in addition to food grains.
(b) Agricultural Income and Income from Agricultural Produce, i.e., Any income derived from such land by any one of the following:
(i) Agriculture: See the last sub-section.
(ii) The performance by a cultivator (or receiver of rent in kind) to render the produce raised or received by him fit to be taken to market-It indicates that any income derived from a land situated in India and used for agricultural purposes by performance of agricultural process to render the produce raised fit to be taken to market will be considered as agricultural income. The agricultural process may be understood as some operations (either manual or mechanical) performed by a cultivator to render the produce fit to be taken to market.
Therefore we can say that an income will be agricultural income within the meaning of this clause if:
(a) the agricultural process performed on the produce is such as is ordinarily employed by cultivator of that locality to render the produce fit to be taken to market; and
(b) the agricultural process has been performed by the cultivator or receiver of rent in kind either by himself or under his authority.
It is to be noted the produce must retain its original character in spite of the process unless it is not marketable in that state. Thus, income derived from the sale of tobacco leaves after subjecting them to a scientific process of drying will be an agricultural income because tobacco leaves are ordinarily dried to make them fit for sale. But the green tea leaf is a marketable commodity and, therefore, the process of manufacturing green tea leaf into tea fit for human consumption cannot be said to be a process ordinarily employed to render the tea leaves fit to be taken to the market and consequently the income derived from the tea manufactured cannot be treated as agricultural income. Similarly, sugarcane is marketable in its original state and, therefore, no agricultural process is required to be employed to render it fit to be taken to market. Consequently, if any agricultural process is employed to convert sugarcane into Gur or sugar, the income derived from the sale of such Gur or sugar cannot be treated as agricultural income.”
(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 ordinarily employed to render the produce fit for market. In other words, the income derived by the cultivator by selling the produce which he has raised or received and in respect of which he has not performed any process other than a process ordinarily to render the produce fit for market will also be treated as agricultural income.
The above income will be agricultural income only if they are derived from the land situated in India and used for agricultural purposes.
(c) Income derived from building
Income from any building will be treated as agricultural income if-
(i) the building is situated on or in the immediate vicinity of the agricultural land;
(ii) the building is owned and occupied by the cultivator or by the receiver for rent-in-kind;
(iii) the cultivator or the receiver of rent-in-kind needs to occupy it on account of his connection with the agricultural land;
(iv) the building is used as dwelling house or as store-house or other outbuilding.
For the purpose of this clause, the building must be situated in the immediate vicinity of the agricultural land. Where a building was situated at a distance of 16 miles from agricultural land, the Court held that the building could not be taken to have been situated in the immediate vicinity of the agricultural land.”
There is also a strict requirement under this clause that the said land-
(a) is assessed to land revenue in India; or
(b) is subject to a local rate assessed and collected by government officers; or
(c) if not assessed or subjected as mentioned in (a) and (b) above, is situated beyond certain areas or local limits of certain population limits as prescribed within the section.
What is not Agricultural Income?
Thus from the above discussion we can say, the following are not agricultural income:
(i) Income from the sale of forest trees, fruits and flowers growing on land naturally, spontaneously and without the intervention of human agency cannot be treated as agricultural income because the basic operations have not been performed.”
(ii) Income from dairy farming is not agricultural income.’
(iii) Income from fisheries is not agricultural income.”
(iv) Income from the harvested crop on purchased land is not agricultural income. For example, where the assessee purchases an agricultural land along with crops which has been harvested prior to the date of purchase, the income derived from the sale of the crops cannot be treated as an agricultural income. Similarly, where the assessee purchases a standing crop and sells it immediately after its harvest , the income derived from such sale cannot be treated as an agricultural income because the assessee has not derived the income by cultivating the land.