Agriculture Income
Introduction
The agricultural income has been specifically defined in the Income-tax Act. It includes rent or revenue derived from agriculture land, any income derived by agriculture from land, from marketing process, from sale of produce, from farm building or income derived from saplings or seedlings grown in a nursery.
1. Meaning of Agriculture
The term ‘Agriculture’ has not been defined in the Income-tax Act. In general parlance, agriculture means the science or practice of farming, including the cultivation of soil for the growing of crops and the rearing of animals to provide food, wool, and other products. In the absence of any specific definition of ‘agriculture’ in the Income-tax Act, its meaning has to be derived in accordance with the judicial pronouncements.
Agriculture in its primary sense denotes the cultivation of the field, meaning thereby tilling of the land, sowing of seeds, planting and similar operations on the land. The cultivation of land involves two important agricultural operations - basic and subsequent.
Basic operations require the application of human skill and labour upon the land itself. The kind of basic operation required depends upon the nature of the crop intended to be raised. The subsequent operations are absolutely necessary for the purpose of effectively raising the produce and are to be performed after the produce sprouts from the land
Mere performance of subsequent operations on the products of the land, where such products have not been raised on the land by the performance of the basic operations, would not be enough to characterise them as agricultural operations. The subsequent operations must necessarily be in conjunction with, and in continuation of, the basic operations, which are the effective cause of the products being raised from the land. The subsequent operations divorced from the basic operations cannot constitute by themselves agricultural operations
1.2. Growing commercial crops
Agriculture connotes not only the production of food grains and other primary produce for human consumption and animals, but also raising of commercial crops, that is, cotton, rubber, jute, tea, coffee, sugarcane, etc., things of artistic and decorative value, such as flowers, and creepers, materials of housing value, such as bamboo and timber, herbs of medicinal or health value and commodities of fuel value
However, if the plants reared in a nursery are the result of basic operations on the land expending human skill and labour thereon, and if after performance of the basic operations on land the resultant product grown on such part thereof is suitable for being nurtured in a pot with water or by placing them in the green house or in shade or after performing several operations such as weeding, watering, manuring, etc., and are made ready for sale, all these operations are agricultural operations and the plants are thus products of agriculture. So far as the seeds are concerned, it is not possible for the seeds to exist without the mother plants, and if the mother plant is grown on land, the seeds will be clearly a product of agriculture
1.4. Income from sapling or seedling
Any income derived from saplings or seedlings grown in a nursery is deemed to be agricultural income. Accordingly, irrespective of whether the basic operations have been carried out on land or not, such income is treated as agricultural income, qualifying for exemption under Schedule II [Table S. No. 1].
1.5. Activities having remote connection with the land
The term ‘agriculture’ does not extend to those activities which have some remote relation to the land, or are in some remote way connected with land. “Agriculture” in its primary sense denotes the cultivation of the field and is restricted to cultivation of the land in the strict sense of the term. There is no warrant at all for extending the term ‘agriculture’ to all activities which have some relation to the land or are in any way connected with the land, the term agriculture cannot be dissociated from its primary significance, which is that of cultivation of the land.
The extension of the term ‘agriculture’ to denote such activities as breeding and rearing livestock, dairy farming, butter and cheese-making, and poultry farming, fisheries, use of land for potteries or brick-kiln, stone quarries or for storing agriculture produce is not agricultural income
2. Meaning of Agriculture Income
The agricultural income has been specifically defined in the Income-tax Act. The following incomes are considered as agricultural income.
2.1. Rent or revenue derived from a land [Section 2(5)(a)]
Rent or revenue derived from land, situated in India and used for agricultural purposes is agricultural income. In other words, income derived from a land can be termed as agricultural income if following conditions are satisfied:
(a) Rent or revenue should be derived from a land;
(b) Land should be situated in India;
(c) Land should be used for agricultural purposes; and
(d) Assessee must have interest in the agricultural land.
2.1-1. Meaning of Rent
Rent is a payment by one person to another for the grant of right to use land
2.1-2. Meaning of Revenue
The ‘revenue’ is used in the broad sense of return, yield or income and not in the sense of land revenue. It covers income other than rent. However, surplus arising on transfer of agricultural land is not deemed as revenue derived from land.
Revenue can be said to be derived from land only if land is effective and immediate source of income and not the indirect and secondary source of income. Where income is derived indirectly from land, it cannot be said to be rent or revenue derived from land.
Example, interest on delayed payment of rent of agricultural land is not agricultural income
2.1-3. Land should be situated in India
Income should be derived from land which is situated in India. If land is situated outside India, income derived from such land cannot be termed as agricultural income
2.1-4. Land should be used for agricultural purposes
The primary condition to claim exemption for the agricultural income is that the land should be used for agricultural purposes.
2.1-5. Assessee must have interest in the agricultural land
Agricultural income cannot be said to accrue to every person in whose hands the produce of the land passes. It is only the owner, landlord or persons having a derivative interest in the land can be said to ‘derive’ income from the land by the performance of agricultural operations. In other words, agriculture income shall not be deemed to accrue to a merchant who purchases a standing crop and resell it after harvesting as he is not having any interest in the land except a mere licence to enter upon the land and gather the produce. The profit in such a case is derived by purchasing a commodity and reselling it at a higher price and it is not an agricultural income. The land is not the direct or immediate or effective source of his income. The immediate and effective source is the trading operation of purchase of the standing crop and its resale in the market after harvesting the produce at an advantageous price
2.2. Any income derived by agriculture from land [Section 2(5)(b)(i)]
Any income derived by agriculture from land situated in India and used for agricultural purposes is an agricultural income. Thus, any proceed received from sale of crops harvested prior to the date of purchase of agricultural land is not an agricultural income in the hands of assessee as such proceeds has not been derived from any agricultural operations or by performance of any process ordinarily employed by a cultivator to render the produce fit for the market
2.3. Any income derived from marketing process [Section 2(5)(b)(ii)]
Where cultivator does not find a market for the crop harvested, and in order to make it saleable, it may be necessary to perform some kind of process on the produce. Any income earned by performing such process to make the crop fit for marketing is also agricultural income. However, if crop can be sold in its raw form (without any process) but it goes through the marketing process, the income derived by performing such process is partly agricultural income and partly business income.
Example, sugarcane can be sold without any further processing, thus, the process of converting sugarcane into Jaggery would not be agricultural process and income attributable to the process of converting sugarcane into Jaggery would not be agricultural income.
Any income derived by performing marketing process by the cultivator is an agriculture income if following conditions are fulfilled.
2.3-1. Process is ordinarily employed by cultivator
The process to which the agricultural produce is subjected, whether manual or mechanical, should be one which is ordinarily employed by a cultivator. The ordinary process employed to make the produce fit for marketing includes threshing, winnowing, cleaning, drying, crushing, boiling, decanting, etc. The nature of the process depends on the prevailing practice in the particular locality where the crop is grown and the assessee resides.
2.3-2. Process should be to make the produce marketable
The process should be employed to render the produce fit to be taken to market and not for any other purpose. The produce must retain its original character in spite of the process, unless there is no market for selling it in that condition. If there is no market to sell the produce, then any process which is ordinarily employed to render it fit to reach the market where it can be sold would be covered by the definition
Example, tobacco leaves are ordinarily dried to make them suitable for sale. Hence, income from the sale of dried tobacco leaves is agricultural income. Similarly, there is no ready market for raw coffee. It has to be dried and cured before it can be sold. Hence, this process has to be performed to make the produce fit for marketing and any income from this process is agricultural income.
2.3-3. Produce must retain its original character
The produce must retain its original character in spite of the process unless there is no ready market for its raw form and the process is necessary to make it marketable. The assessee must establish that the agricultural produce itself has got no market and only by converting the same into some other product, there can be a market.
Example, that in the present case, the oil extracted from the eucalyptus leaves lose its original identity and if it cannot be proved that the eucalyptus leaves had no market, the oil extracted from eucalyptus leaves could not be considered to be an agricultural produce within the meaning of Section 2(5)(b)(ii)
2.4. Any income derived from sale of produce [Section 2(5)(b)(iii)]
Any income arising to the cultivator or receiver of rent-in-kind from sale of produce of any land (situated in India and used for agricultural purposes) is agricultural income, provided the produce should not be subjected to any process except marketing process ordinarily employed to render the produce fit for sale. However, if produce is subject to other process, income arising from sale of such produce is partly agricultural income and partly non-agricultural income.
2.5. Income from farm building [Section 2(5)(c)]
Though annual value of a house property is taxable under the head ‘Income from house property’, however, income from a farm building may be treated as agriculture income if the following conditions are satisfied:
2.5-1. Occupancy and ownership of farm building
Subject to fulfilment of other conditions, the income derived from farm building shall be considered as agricultural income if such building is:
(a) Owned and occupied by the receiver of revenue or rent; or
(b) Occupied by the cultivator or receiver of rent-in-kind
If a farm building is occupied by the cultivator or receiver of rent-in-kind as a tenant, the rent received by the owner of the building is chargeable to tax as income from house property. If the cultivator owns the farm building but does not occupy it, the income from the building (computed on the basis of annual value) is not agricultural income but taxable as income from house property. Therefore, in the case of the receiver of rent or revenue (in cash), the income from the farm building is agricultural income, provided it is owned and occupied by him.
2.5-2. Location of farm building
Subject to the fulfilment of other conditions, the income derived from farm building shall be considered as agricultural income if such building is on or in the immediate vicinity of the land, situated in India and used for agricultural purposes.
2.5-3. Use of the farm building
Subject to fulfilment of other conditions, the income derived from farm building shall be considered as agriculture income if such building is used as a dwelling-house, or as a store-house, or as an out-building (out-house). It must be used for the aforesaid purposes by the receiver of the rent or revenue (in cash) or the cultivator or the receiver of rent-in-kind because of his connection with the land.
It is not enough to use the building for the aforesaid purpose. There should also be justification in every case that the building is required for the aforesaid purposes. Thus, if the building is required as a dwelling-house by the cultivator, it has to be shown that a dwelling-house is necessary on the land or in its immediate vicinity for the efficient supervision and proper growth of the crop. There must be a bona fide use of the farm building either as a dwelling-house, or as a store-house or as an out-building. The burden of proof lies on the assessee that the building was used for the aforesaid purposes.
If a farm building is used for non-agricultural purposes, any income accruing/arising from non-agricultural use will not be treated as agricultural income. Thus, where farm houses are let out for residential purposes, marriage functions or other business purposes, income from such letting cannot be treated as agricultural income.
2.5-4. Land assessed to land revenue or assessed to a local rate
Subject to fulfilment of other conditions, the income derived from farm building shall be considered as agricultural income if the land is assessed to land revenue in India or is subject to a local rate. Where it is not assessed to land revenue or local rate, it should be situated in a rural area.
An agricultural land is considered as situated in a rural area if it is situated beyond the jurisdiction of a municipality or cantonment board having a population of 10,000 or more, and it does not fall within the following distances (to be measured aerially):
(a) Up to 2 kms from local limits of the municipality or cantonment board, if the population of such municipality or cantonment board exceeds 10,000 but does not exceed 1,00,000;
(b) Up to 6 kms from local limits of the municipality or cantonment board, if the population of such municipality or cantonment board exceeds 1,00,000 but does not exceed 10,00,000;
(c) Up to 8 kms from local limits of the municipality or cantonment board, if the population of such municipality or cantonment board exceeds 10,00,000.
For the above purpose, ‘population’ means the population according to the last preceding census
2.6. Income from nursery operations [Section 2(5)(d)]
Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.
References
CIT v. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC)
Maharajadhiraj Sri Kameshwar Singh v. CIT (1957) 32 ITR 705 (SC)
Maharaja Vibhuti Narain Singh (H.H.) v. State of Uttar Pradesh (1967) 65 ITR 364 (All.)
CIT v. Soundarya Nursery (2000) 241 ITR 530 (Mad.)
CIT v. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC)
Raza Buland Sugar Co. Ltd. v. CIT [1980] 123 ITR 24 (All.)
CIT v. Raja Bahadur Kamakshya Narain Singh (1948) 16 ITR 325
Bacha F. Guzdar v. CIT [1955] 27 ITR 1 (SC)
Sri Ranga Vilas Ginning and Oil Mills v. CIT (1982) 133 ITR 185 (Mad.)
CIT v. Carew & Co. Ltd. [1979] 120 ITR 540 (SC)
CIT v. Maddi Venkatasubbayya (1951) 20 ITR 151 (Mad.)
CIT v. New Ambadi Estates Ltd.(1967) 63 ITR 325 (SC)
CIT v. Woodland Estates Ltd. (1965) 58 ITR 612 (Ker.)
CIT v. Stanes Amalgamated Estates Ltd. (1998) 232 ITR 443 (Mad.)
The last census was taken in the Year 2011.
This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.