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Agricultural income under the Income Tax Act, 1961

Before we discuss what is agricultural income under the Income Tax Act, 1961 (the Act), let us understand some related issues, information of which are essential for proper understanding of the subject.

Clause (1) of Article 366 of the Constitution of India defines agricultural income as - "agricultural income" means agricultural income as defined for the purposes of the enactments relating to Indian income tax;" Therefore, the definition of agricultural income in clause (1A) of section 2 of the Act can never be ultra vires as this definition of the Act is a definition of the Constitution of India. [“Ultra vires” means where an act requires legal authority and it is passed without such authority, it is ultra vires]

India is a federal country as there exists two kinds of Government, namely Central Government and State Governments. Legislative powers of these two types of governments are demarcated by the Seventh Schedule to the Constitution of India. This Schedule has three lists namely Union List, State List and Concurrent List. Whereas the Central Government may make law relating to any matter enumerated in Union List, the State Governments may make law relating to any matter enumerated in State List. For any matter enumerated in Concurrent List both the Central Government and State Governments may make laws and if there is any conflict between laws made by the Central Government and laws made by State Governments, the law made by the Central Government shall prevail over the law made by the State Governments. Whereas Taxes on income other than agricultural income fall under Union List, Taxes on agricultural income fall under State List. Therefore the Act, which is made by the Central Government, cannot tax agricultural income and any remote attempt to tax agricultural income through the Act shall make such provision as ultra vires.

In view of the above, section 10 of the Act states in computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included – and clause (1) of section 10 of the Act states agricultural income.

CBDT is empowered to make rules for carrying out the purposes of the Act. CBDT may prescribe the manner and the procedure by which the income shall be arrived at in the case of income derived in part from agriculture and in part from business. It may specify the proportion of the income which shall be deemed to be income liable to tax and an assessment based on such proportion shall be deemed to be duly made in accordance with the provisions of the Act. [Refer Section 295(2)(b)(i) and section 295(3)(b)]

Rules 7, 7A, 7B and 8 of the Income tax Rules, 1962 respectively deal with Income which is partially agricultural and partially from business; Income from manufacture of rubber; Income from manufacture of coffee and Income from manufacture of tea.

Partial integration of agricultural income with non-agricultural income is made only if the assessee is an Individual/HUF/AOP/BOI/AJP and has net agricultural income above rupees five thousand in addition to total income, and the total income exceeds to exemption limit [Refer Section 2(2) of the Finance Act]

Part IV of the First Schedule to the Finance Act deals with Rules for computation of Net Agricultural Income. Detailed procedure for computation of Net Agricultural Income are given in Part IV of said First Schedule and it has 11 Rules [Refer Section 2(13) (c) of the Finance Act]

Now coming to the issue, section 2 of the Act starts with “In this Act, unless the context otherwise requires –“. Clause (1A) of section 2 defines “agricultural income” and it has three sub-clauses.
Sub-clause (a) states any rent/revenue derived from land situated in India [see NOTE below] and used for agricultural purposes. Sub-clause (b) and sub-clause (c) of clause (1A) also state about “such land”. Therefore if the land is either situated outside India or used for purposes other than agricultural, then any rent/revenue there from shall not be determined as agricultural income. Rent is a tenant’s payment, either in cash or in kind, to a landlord (or to a person from whom the right to use of land was obtained) for the use of land. Revenue is any income other than rent generated from use of land.

Sub-clause (b) states any income derived from “such land” by –, thereafter it has three paragraphs.
Paragraph (i) of sub-clause (b) of clause (1A) states ‘agriculture’. The term ‘agriculture’ is not defined in the Act. The Hon’ble Supreme Court in 1957 AIR 768, 1958 SCR 101, [1957] 32 ITR 466 has laid down four basic principles to determine the scope of ‘agriculture’ and “agricultural purpose” These are 1.Basic operation like tilling of land, sowing of the seeds, planting and similar operations. 2 Subsequent operations like weeding, digging the soil around the growth, removal of undesirable undergrowths and all operations which foster the growth and preserve the same not only from insects and pests but also from depreciation from outside, tending, pruning, cutting, harvesting and rendering the product for the market. Mere subsequent operations alone shall not constitute agricultural operations, for the activity to constitute agricultural operations both the basic and subsequent operations must be performed in conjunction/continuation with the basic operations. 3 The term ‘agriculture’ does not merely imply food or grains for men and animals but also includes vegetables, fruits, grass, tea, coffee, cotton, jute, indigo, timber tendu leaves. It comprises all products from the land which have some utility. And 4 Mere connection to land is not sufficient. Activities like breeding and rearing a livestock, dairy farming, cheese and butter making, poultry farming though connected to land but these activities by themselves are not agricultural.

Paragraph (ii) of sub-clause (b) of clause (1A) states any income derived from such land by a cultivator/ receiver of rent-in-kind of any process ordinarily employed by him to render the produce raised/received by him fit to be taken to market. Any income from the process that are ordinarily employed to the product to render the product raised/received fit to be taken for market is agricultural income. Say green tea leaves has a market and any income derived from sale of green tea leaves is wholly agricultural income but if the green tea leaves are grown and tea is manufactured from green tea leaves so grown then it is partly agricultural income and partly not. Depending upon the nature of the produce the process that is ordinarily employed varies. Some of the ordinarily employed process may be boiling, cleaning, crushing, decanting, drying, thrashing, and winnowing.

Paragraph (iii) of sub-clause (b) of clause (1A) states any income derived from such land by sale by a cultivator/receiver of rent-in-kind in respect of which no process has been performed other than any process ordinarily employed by him to render the produce raised/received by him fit to be taken to market.

Sub-clause (c) states that any income derived from any building owned and occupied the receiver of the rent/revenue or occupied by the cultivator/receiver of the rent-in-kind of any land for which or produce of which any process mentioned in Paragraphs (ii) and (iii) of the sub-clause (b) is carried on. Clause (i) of the Proviso to sub-clause (c) states that the building shall be on / in the immediate vicinity of such land. The building is required as a dwelling house/store house/other out-building by the cultivator, receiver of rent/revenue/rent-in-kind and clause (ii)of the Proviso to sub-clause(c) states the land is assessed to land revenue/local rate, if not, then the land is not situated in specified area.

Specified area is mentioned in item (A) as in any area which is comprised within the jurisdiction of a municipality/cantonment board having a population of 10,000 or above or in item (B) in any area within aerial distance sub-item (I) not being more than 2 KM from the local limits of any municipality/ cantonment board having a population more than 10,000 but not more than 1,00,000, or sub-item (II) not being more than 6 KM from the local limits of any municipality/cantonment board having a population more than 1,00,000 but not more than 10,00,000, or sub-item (III) not being more than 8 KM from the local limits of any municipality/ cantonment board having a population more than 10,00,000

Clause (1A) has four Explanations. These are Explanation 1. Any income arising from the transfer of any land referred to in item (a)/ (b) of section 2(14)(iii) relating to “capital asset” shall not be agricultural income. This land is same as referred to in item (A)/(B) of the above para. Explanation 2. Income derived from any building/land referred to in sub-clause (c) from the use of building/land for purpose other than agricultural as stated in sub-clause (a)/(b, shall not be agricultural income. Explanation 3. Any income derived from saplings/seedlings grown in a nursery is agricultural income. Explanation 4 “population” means population according to the last preceding census of which the relevant figures have been published before the first day of the previous year.

NOTE: [Please read the definition of “India” in section 2(25A) of the Act. The substitution made by the Finance Act, 2007 to the definition with retrospective effect from 25/08/1976 is interesting.]

NOTE 1: [Clause (1A) of section 2 of the Act has three sub-clauses namely (a), (b) and (c), sub-clause (b) has three Paragraphs namely (i), (ii) and (iii), sub-clause (c) has a proviso and the proviso has two clauses namely (i) and (ii), clause (ii) of the proviso has two items namely (A) and (B) and item (B) has three sub-items namely (I), (II) and (III). For the benefit of beginners detailed reference of clause, sub-clause, paragraph, proviso, clause of proviso, items and sub-items are given]

33
vvgovil on May 07 2015 17:14:30

it was the crux on the matter sir. superb..
Thanks

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