What is agriculture income ? Agricultural income Section 10(1)

Agricultural income [Section 10(1)]

Section 10(1) provides that agricultural income is not to be included in the total income of the assessee. The reason for the total exemption of agricultural income from the scope of central income - tax is that under the Constitution, the Central Government has no power to levy a tax on agricultural income.  

 Definition of agricultural income [Section 2(1A)]

This definition is very wide and covers the income of not only the cultivators but also the landholders

who might have rented out the lands. Agricultural income may be received in cash or in kind.

Agricultural income may arise in any one of the following three ways:-

1)    it may be rent, or revenue derived from land situated in India and used for agricultural purposes.

2)    It may be income derived from such land. 

1. Agriculture or 
2. the performance of a process ordinarily employed by a cultivator or receiver of rent in    kind to render the produce fit to be taken to the market or
3. the sale, by a cultivator or receiver of rent in kind, of such agricultural produce raised or received by him, in respect of which no process has been performed other than a            process of the nature mentioned in point (b) above.
4. Lastly, agricultural income may be derived from any farm building required for agricultural operations.

Now let us take a critical look at the following aspects:

1. Rent or revenue derived from land situated in India and used for agricultural purposes: The following three conditions have to be satisfied for income to be treated as agricultural income:

1. Rent or revenue should be derived from land.
2. Land must be situated in India (If agricultural land is situated in a foreign    country, the entire income would be taxable); and
3. land should be used for agricultural purposes.

The amount received in money or in kind, by one person from another for right to use land is termed as Rent. The rent can either be received by the owner of the land or by the original tenant from the sub-tenant. It implies that ownership of land is not necessary. Thus, the rent received by the original tenant from sub-tenant would also be agricultural income subject to the other conditions mentioned above. The scope of the term “Revenue” is much broader than rent. It includes income other than rent. For example, fees received for renewal for grant of land on lease would be revenue derived from land.

I.                   Income derived from such land by

1.  Agriculture: The term “Agriculture” has not been defined in the Act. However,            cultivation of a field involving human skill and labor on the land can be broadly  termed as agriculture.

 

“Agriculture” means tilling of the land, sowing of the seeds and similar operations. It involves basic operations and subsequent operations.

 “Agriculture” comprises within its scope the basic as well as the subsidiary operations regardless of the nature of the produce raised on the land. These produce may be grain, fruits or vegetables necessary for sustenance of human beings including plantation and groves or grass or pasture for consumption of beasts or

articles of luxury such as betel, coffee, tea, spices, tobacco or commercial crops like cotton flax, jute hemp and indigo. The term comprises of products of land having some utility either for consumption or for trade and commerce and would include forest products such as sal, tendu leaves etc.

Note:

The term ‘agriculture’ cannot be extended to all activities which have some distant relation to land like dairy farming, breeding and rearing of live stock, butter and cheese making and poultry farming. This aspect is discussed in detail later on in this chapter.

II.     Process ordinarily employed to render the produce fit         to be taken to the market:

Sometimes, to make the agricultural produce a saleable commodity, it becomes necessary to perform some kind of process on the produce. The income from the process employed to render the produce fit to be taken to the market would be agricultural income. However, it must be a process ordinarily employed by the cultivator or receiver of rent in kind and the process must be applied to make the produce fit to be taken to the market. The ordinary process employed to render the produce fit to be taken to the market includes thrashing, winnowing, cleaning, drying, crushing etc. For example, the process ordinarily employed by the cultivator to obtain the rice from paddy is to first remove the hay from the basic grain, and thereafter to remove the chaff from the grain. The grain has to be properly filtered to remove stones etc. and finally the rice has to be packed in gunny bags for sale in the market. After such process, the rice can be taken to the market for sale. This process of making the rice ready for the market may involve manual operations or mechanical operations. All these operations constitute the process ordinarily employed to make the product fit for the market. The produce must retain its original character in spite of the processing unless there is no market for selling it in that condition. However, if marketing process is performed on a produce which can be sold in its raw form, income derived therefrom is partly agricultural income and partly business income.

III.                 Sale of such agricultural produce in the market:

Any income from the sale of any produce to the cultivator or receiver of rent-in kind is agricultural income provided it is from the land situated in India and used for agricultural purposes. However, if the produce is subjected to any process other than the process ordinarily employed to make the produce fit for market, the income arising on sale of such produce would be partly agricultural income and partly non-agricultural income. Similarly, if other agricultural produce like tea, cotton, tobacco, sugarcane etc. are subjected to the manufacturing process and the manufactured product is sold, the profit on such sale will consist of agricultural income as well as business income. That portion of the profit representing agricultural income will be exempted.

Apportionment of Income between business income and agriculture income:

 

Rules 7, 7A, 7B & 8 of Income-tax Rules, 1962 provides the basis of apportionment of income between agricultural income and business income.

1.    Rule 7 - Income from growing and manufacturing of any product. 

Where income is partially agricultural income and partially income chargeable to in come-tax as business income, the market value of any agricultural produce which has been raised by

 

the assessee or received by him as rent in kind and which has been utilised as raw material in such business or the sale receipts of which are included in the accounts of the business shall be deducted. No further deduction shall be made in respect of any expenditure incurred by the assessee as a cultivator or receiver of rent in kind.

1.    Determination of market value - There are two possibilities here:

1. The agricultural produce is capable of being sold in the market either in its raw stage or after the application of any ordinary process to make it fit to be taken to the market. In such a case, the value calculated at the average price at which it has been sold during the relevant previous year will be the market value.
2. It is possible that the agricultural produce is not capable of being ordinarily sold in the market in its raw form or after the application of any ordinary process. In such case the market value will be the total of the following: -

       

• The expenses of cultivation.
• The land revenue or rent paid for the area in which it was grown; and
•  Such amount as the Assessing Officer finds having regard to the circumstances in each case to represent at reasonable profit.

ILLUSTRATION

 

Mr. Nilesh manufactures latex from the rubber plants grown by him in India. These are then sold in the market for 36 lakhs. The cost of growing rubber plants is & 16 lakhs and that of manufacturing latex is 12 lakhs. Compute his total income.

 

The total income of Mr. Nilesh comprises agricultural income and business income. Total profits from the sale of latex = 36 lakhs — 16 lakhs — 12 lakhs =X 8 lakhs.

Agricultural income = 65% of T 8 lakhs = 5.2 lakhs

Business income = 35% of T 8 lakhs = 2.8 lakhs