Agriculture, being the primary occupation and the only source of income for a large rural population in India, is one of the important subjects to be considered while levying tax under the taxation statutes. The entire country depends on agriculture for its basic food requirements and taking consideration of the same, the government has introduced several schemes, policies and other measures to promote growth in this sector, as well as exempting agricultural income from levying tax under the Central taxing statute.

This article is focusing on the subject of "agricultural income" under the Income Tax Act, 1961, its computation, exemption, and the conditions necessary for income to be considered as agricultural income. Section 10(1) of the Act, exempts agricultural income from tax liability. Further, this article is focusing on the question: Why does agricultural income need to be considered under the Act when it is exempted from tax liability? and what are the principles relating to 'Agriculture' and 'Agricultural Purposes' as laid down in the case of CIT v. Raja Benoy Kumar Suhas Roy[1]?

With the help of relevant case laws and regulations in India, this article has assessed the provisions relating to agricultural income under various statutes, as well as Section 10(1) of the Income Tax Act, 1961.

Background
Historically, taxing agricultural income goes back to the 1860s. The Indian Income Tax of 1860 was introduced to recover the losses incurred by the government on account of the military mutiny in 1857. It applied to all sources of income including agricultural income.[2] The Act of 1860 was only active for a period of 5 years and quashed accordingly.

A comprehensive Income Tax Act was introduced by Governor General Lord Dufferin in 1886 to meet the revenue for the Anglo-Russian war. This comprehensive Act was a combination of licence tax and income tax. It was through this Act for the first time agricultural income was excluded from tax liability in India.

This act defined agricultural income and exempted it from tax liability and the exclusion has stayed ever since.[3] After independence, the Constitution of India listed the subject matter of tax under the Seventh Schedule.[4] Under the seventh Schedule, Entry 82 of the Union List mentions taxes other than agricultural income and by virtue of this entry, the Constitution empowers the Union Parliament to legislate on "taxes on income other than agricultural income." Entry 46 of the State list mentions taxes on agricultural income. Complying with the constitutional provisions, section 10 (1) of the Income Tax Act, 1961 exempts the agricultural income from tax liability.

Meaning Of Agricultural Income

Agricultural income is defined under section 2(1A) of the Income-tax Act.

As per this section, agricultural income generally means:

1. Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.
2. Any income derived from such land by agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce.
3. Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A).[5]

Examples of Agricultural Income:
Rent received from subletting agricultural land. Income from growing flowers and creepers. Income from the sale of replanted trees. Share of profit of a partner from a firm engaged in agricultural operations (CIT v. R.M. Chindabaram Pillai[6]). Interest on capital received by a partner from a firm engaged in agricultural operations (CIT v. M.I. Mahindra,[7]).[8] Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.[9]

Examples of Non-Agricultural Income:
Income from poultry farming. Income from bee hiving. Income from the sale of spontaneously grown trees. Income from dairy farming. Purchase of standing crop. Dividend paid by a company out of its agriculture income. The income derived from salt produced by flooding any portion of the agricultural land with seawater. Royalty income from mines. Income from butter and cheese making. Receipts from a television serial shooting in a farmhouse.[10]

Need And Computation Of Agricultural Income Under The Act Of 1961

Section 10(1) of the Income Tax Act, 1961 exempts agricultural income from tax liability. The Central Government cannot levy tax on the agricultural income received. Although not being taxed under the Act, it is an important subject under the Act as it helps in imposing tax on non-agricultural income under the Act. The Finance Act, 1973, introduced a scheme whereby agricultural income is aggregated with non-agricultural income in the case of non-corporate (individual) assessees who are liable to pay tax at specified slab rates.

For computation of income tax, the agriculture income is included with non-agriculture income, only if the assessee is an individual or has non-agricultural income which exceeds the taxable limit or if it exceeds a limit of five thousand rupees. Agricultural income is considered with the slab rates while assessing the income tax liability in accordance with the provisions of the Finance Act of the relevant year.

Conditions when Agricultural Income will be considered for levying tax under the Act of 1960
The conditions mentioned under this section are as follows:

1. Net agricultural income is greater than Rs. 5,000/- for previous year.
2. Total income, excluding net agricultural income, surpasses the basic exemption limit (Rs. 2,50,000 for individuals below 60 years of age, Rs. 3,00,000 for individuals above 60 years of age and Rs. 5,00,000 for every individual who is of the age of 80 years or more.)[11]

Computation
The net agriculture income will be computed as follows:

1. Agricultural income of the nature referred in Section 2 (1A)(a) will be computed on the same basis as is adopted for the computation of income chargeable under the head 'Income from other sources' under Sections 56 to 59.
2. Agricultural income of the nature referred in Section 2 (1A)(b) will be computed as if it were income chargeable under the head "Profits and Gains of Business and Profession" and provisions of Sections 30, 31, 32, 36, 37, 40, 40A, 41, 43, 43A, 43B, and 43C will apply accordingly.
3. Agricultural income of the nature referred in Section 2 (1A)(c) will be computed as if it were income chargeable under the head "Income from House Property" under Sections 23 to 27.
4. Where an assessee derives income from the sale of tea grown and manufactured by him, 60 percent of the total income from such business, as computed in accordance with rule 8 of Income Tax Rules, will be regarded as agricultural income.
5. Loss incurred in agriculture will be allowed to set off against gains from other agricultural income sources.
6. Where the net result of computation of agriculture income from various sources is a loss, the loss will be regarded, and the net agricultural income of the assessee shall be taken as nil.
7. Any tax levied by a State Government on agricultural income will be allowed as a deduction.
8. The net agricultural income of the assessee will be rounded off to the nearest multiple of Rs. 10/-.

If the above mentioned conditions are fulfilled, in such a case, agricultural income shall be considered in calculating the tax liability of an individual by following the below-mentioned method:
Step 1: The total income and the net agricultural income shall be aggregated and the amount of income-tax shall be determined in accordance with rates specified under the Finance Act of the relevant year, as if such aggregate income were the total income.
Let us regard: Total income : A
Net Agricultural Income : B
Tax computed on A+B is Y1.

Step 2: The net agricultural income shall be increased by a sum of two lakh fifty thousand rupees (in case of individual below the age of 60 years), and the amount of income-tax shall be determined in respect of the net agricultural income as so increased at the rates specified under the Finance Act of the relevant year, as if the net agricultural income as so increased were the total income.
Let us regard: Basic exemption slab: C
Tax Computed on B+C is Y2.

Step 3: The actual income tax liability shall be Y1-Y2 and the sum so arrived at shall be the income-tax in respect of the total income.
Note: If the individual's aggregate agricultural income is up to Rs. 5,000, the individual will have to disclose the agricultural income in the income tax return (ITR). In case the agricultural income crosses Rs. 5,000, the individual will have to disclose the agricultural income in ITR 2.[13]

Conditions Necessary For Income To Be Agricultural Income

The Income Tax Act of 1961 does not impose tax on agricultural income.[14] So, the question arises here as to which income should be considered as an agricultural income. The Act under section 2 (1A) provides certain conditions for an income to be considered agriculture income.

These necessary conditions are as follows:

1. Income should be derived from land
   The very first requirement is that the income should be derived from land and not from any other assets. Land can be owned or occupied by a cultivator who produces on that land, or a rent receiver of that produce. The land can be farming land or a building that should be occupied or owned by a cultivator or a rent receiver. That building or farmhouse should be on the same land and used as a dwelling-house, store-house or other outbuildings. Income must be in the form of rent or revenue. The rent paid in lieu of using a land for the agricultural purpose, may be in cash or in-kind, by one person to another in respect of a grant of right to use that land.
   Illustrations: If person X owns a land and gives it to Mr.Y for rent for agricultural purposes. Mr.Y uses it for growing sugarcane. Is it taxable or not? No, it is not taxable because here income derived by a cultivator and a rent receiver is as per the condition.[15]
    
2. Land must be situated in India
   Another condition is the land must be situated in India, whether situated in urban areas or rural areas. The areas are also mentioned in Sec. 2(1A) of Act of 1961.
   
   1. 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.
   2. where the land is not so assessed to land revenue or subject to a local rate, it must not be situated:
      
      1. 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;
      2. in any area within the distance, measured aerially:
         
         1. not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than ten thousand but not exceeding one lakh; or
         2. not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than one lakh but not exceeding ten lakh; or
         3. not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than ten lakh.
      Agricultural income from foreign countries will be considered as income from other sources and it will not be exempted under Agricultural income.
      Illustrations: A person owns the land in America and give it to Mr. A on rent for the Agricultural purpose. Now, the income which is earned by that person will be treated as an income from other sources and as such will be included in the total income.[16]
   
    
3. Land must be used for Agriculture Purpose
   For exemption under agricultural income, the operation must be related to agricultural. That means land should be used for agricultural purpose. Now, the question arises as to what can be understood by the term 'Agricultural Purpose'? In the case of CIT v. Raja Benoy Kumar Suhas Roy[17] the Supreme Court laid down the principles in regard to the term 'Agriculture' and 'Agricultural Purposes'.[18]
   
   The Apex Court divided operations relating to agriculture into two types:
   
   • Basic operation. Basic operation includes the expenditure of human skill and labour upon the land itself, merely having an agricultural land will not constitute agricultural purposes. Some operations like tilling of land, sowing of the seeds, planting, etc.
      
   • Subsequent operation. Subsequent operations are performed after the produce sprouts from the land. Like weeding (removal of wild plants), digging the soil around the growth, removal of undesirable undergrowth, removal of the crop from insects and pests, cutting, harvesting, rendering the produce fit for the market etc.. Subsequent operation must be in continuation of basic operations, mere performance of these activities on the land will not constitute agricultural operation.
   In support of the Agricultural operation, there is another case K. Lakshmanan Co. v. CIT[19], In this case, SC held that Sec. 2(1A) (b)[20] does not contemplate the sale of commodity different from what is cultivated and processed and where the assessee is growing mulberry leaves, feeding them to silkworms and obtaining silk cocoons, income from the sale of silk cocoons is not an agricultural income.
    
4. Direct Nexus
   The principle of direct nexus will be followed in determination of whether an income is agriculture income or not. Under this principle, the assessee must have direct connection with the earnings. If the source of income is something else, then it will render the same as indirect and as such, the income will not be an agriicultural income.
   
   In the case of Bacha F. Guzdar v. CIT,[21] the question was before the court that whether dividends received by a shareholder from a company which derived its income partly from agricultural operations and partly from other operations would be agricultural income in the hands of shareholder. The company carried on the business of growing and manufacturing tea, thus the income was partly from agricultural operations and partly from other operations.
   
   Revenue which is received by the landlord should be from the direct and immediate source. If the land is an indirect and secondary source then revenue will not be considered to be agricultural income. In the support of the statement, there is a case- Pratap Singh v. Province of Bihar[22].In this case, the Malikana allowance paid by the government under a legal obligation to an owner, dispossessed of his land, is not revenue derived from land, as the immediate source of income is the government's legal obligation to pay compensation and not the land.

Income must be derived only from Agricultural process and not from other processes
There are two conditions which must be satisfied for agriculture process:

• The agricultural operation must be performed by a person employed by a cultivator or a receiver of rent-in-kind.
• That product should be fit to be taken to market.

If the marketing process is performed on products that can be sold in the market in its raw form without performing any operation which makes it fit for marketing, then that income will be considered as partly agricultural and partly from a business.

In the case of Brihan Maharashtra Sugar Syndicate Ltd. v. CIT,[23] assessee carries the business in the manufacture and sale of sugar, and then he owns a sugarcane farm and utilized this in the production of sugar. The court, in this case, held that the process of converting sugarcane into sugar would not be agricultural process and the income derived from this would not be agricultural income.

Similarly, in the case of CIT v. H.C. Date,[24] the fact was same and the court laid down three conditions which are to be fulfilled before a process performed can be said to be an 'agriculture process'.

These Conditions are as:
Firstly, the process must be such as to render the produce fit to be taken to the market;

Secondly, the process must be such as is ordinarly empoyed by the cultivator. Thus, the process must be regarded as a part of 'agricultural operations', and not to be a special or unusual process; and

Thirdly, the produce must not change its original character though there may be changes brought in produce by such process.

Held: In the present case, the Court held that the sugarcane, by conversion, no doubt changed its character or condition into jaggery but there was no market for the sae of sugarcane in its original condition. So, it was necessary to convert the sugarcane into jaggery in order to make it fit to be taken into market. So, the Court held that in such a case, the agriculturist can claim the exemption.

Income from a Nursery
Income from a nursery is exempted from total income only when it is used as primary agriculture purpose. In the case of H.H. Maharaja Vibhuti Narain Singh v. State of Uttar Pradesh[25] the Hon'ble Allahabad High Court held that income from a nursery is not an agricultural income unless maintained by a farmer as an aid or necessary adjunct to the primary process of agriculture, for example, paddy nursery, nursery of tomato plants. Here assessee used the nursery for ornamental plants which cannot be considered an adjunct to the primary agricultural process.

Assessment Of Section 10(1) Of The Income Tax Act, 1961

Agricultural income is exempted from Income Tax under Sec. 10(1) of the Income Tax Act, where it has been given that, in computing the total income of previous year of a person whose source of income is agriculture will not fall under the category of total income.[26] The Section is compliance of the constitutional provisions.

Under Seventh Schedule of the Constitution, agriculture income is exempted from the central taxing statutes in levying taxes on it.[27] Entry 82 of the Union List under Seventh Schedule can be read as: "By virtue of this entry, the Constitution empowers the Union Parliament to legislate on "taxes on income other than agricultural income."

The burden of proof that an income fall under this category is on the assessee. In the case of Sri Ranganatha Enterprises v. CIT,[28] the Court held that the burden lies on the assessee to prove that the income derived by him is the agricultural income for which he is claiming an exemption under Sec. 10(1) of the Income Tax Act.

Conclusion
From the above, it is clear that though not being levied tax on agricultural income under the Act of 1961 it is an important subject to be dealt with under the Act. Agricultural income is taken into consideration while calculating the taxation of non-agricultural income. The reason for exempting agricultural income from the central tax is that the constitution gives the state legislature the exclusive right to make laws related to agricultural income tax. Through a series of cases by the higher courts, the concept of taxability of the agricultural income is now well settled in India.

S.No	Case Name	Citation
1	Durga Narain Singh v. CIT	(1947) 15 ITR 235
2	Pratap Singh v. Province of Bihar	[1949] 17 ITR 202 (pat.)
3	CIT v. Raja Benoy Kumar Suhas Roy	[1957] 32 ITR 466
4	K. Lakshmanan Co. v. CIT	[1999] 239 ITR 597 (SC)
5	H.H. Maharaja Vibhuti Narain Singh v. State of Uttar Pradesh	[1967] 65 ITR 364 (All.)
6	CIT v. Saundarya Nursery	[2000] 241 ITR 530 (Mad.)
7	Brihan Maharashtra Sugar Syndicate Ltd. v. CIT	[1946] 14 ITR 611 (Bom.)
8	Sri Ranganatha Enterprises v. CIT	[1998] 232 ITR 568 (kar.)
9	B. Nagi Reddy v. CIT	1993 199 ITR 451 Mad
10	Commissioner of Agriculture Income Tax v. Jagdish Chandra Deo Dhabal Deb, 1949	1962 44 ITR 842 Cal
11	CIT v. Raja Benoy Kumar Sahas Roy	(1957) 32 ITR 466 (SC)
12	CIT v. R.M. Chindabaram Pillai	(1970) 771 TR 494 (Mad.)
13	CIT v. M.I. Mahindra	(1978) 112 ITR 323(Gauhati)
14	CIT v. H.C. Date	(1971) 82 ITR 71 (Bom.)

End-Notes:

1. CIT v. Raja Benoy Kumar Suhas Roy, (1957) 32 ITR 466
2. History and Evolution of Income Tax in India, Available at: https://taxguru.in/income-tax/history-evolution-income-tax-act-india.html (Last visited on 05-04-2023)
3. Dr.S.M.ALAGAPPAN, "Overview of Income Tax Act- From 1860 Onwards" (2018) Volume 6, Alagappan / Star International Journal, Issue 10(6)
4. Constitution of India,1950
5. Income Tax Act, 1960, S. 2(1A)
6. CIT v. R.M. Chindabaram Pillai, (1970) 771 TR 494 (Mad.)
7. CIT v. M.I. Mahindra, (1978) 112 ITR 323(Gauhati)
8. Dr. S.R. Myneni, Law of Taxation (Allahabad Law Agency, Faridabad, Fourth Edition, 2018) 49
9. TAX-FREE INCOMES, Available at: https://incometaxindia.gov.in/Tutorials/11.Tax%20free%20incomes%20final.pdf (last visited on 05-04-2023)
10. Supra at 9
11. Finance Act, 2022, S. 2(2)
12. Supra at 9
13. "TYPES OF INCOME TAX RETURN", Types-of-Income-Tax-Return-Assessment-Year-2021-22.pdf (incometaxindia.gov.in) (Last visited on 05-04-2023)
14. Income Tax Act, 1961, S. 10 (1)
15. Dr. Askok K. Jain, Law of Income Tax (Taxation-I) (Ascent Publication, Delhi-110007, Fourth Edition, 2021) 30
16. Ibid
17. CIT v. Raja Benoy Kumar Suhas Roy, [1957] 32 ITR 466
18. Supra at 16
19. K. Lakshmanan Co. v. CIT, [1999] 239 ITR 597 (SC)
20. Income  Tax Act, 1961
21. Bacha F. Guzdar v. CIT, AIR 1955 SC 74
22. Pratap Singh v. Province of Bihar, [1949] 17 ITR 202 (pat.)
23. Brihan Maharashtra Sugar Syndicate Ltd. v. CIT, [1946] 14 ITR 611 (Bom.)
24. CIT v. H.C. Date, (1971) 82 ITR 71 (Bom.)
25. H.H. Maharaja Vibhuti Narain Singh v. State of Uttar Pradesh, [1967] 65 ITR 364 (All.)
26. Supra at 9.
27. Entry 82 of Union List of Seventh Schedule of the Constitution.
28. Sri Ranganatha Enterprises v. CIT, [1998] 232 ITR 568 (kar.)