Topic 2

Agricultural Income - Meaning of Agricultural Income

[ (S2(1A), 10(1)]

S2 (1A) "Agricultural income" means -

(a) any rent or revenue derived from land which is situated in India and is used

for agricultural purposes;

(b) Any income derived from such land by -

(i) Agriculture; or

(ii) The performance by a cultivator or receiver of rent-in-kind of any

process ordinarily employed by a cultivator or receiver of rent-in-kind to render
the produce raised or received by him fit to be taken to market; or

(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 of the nature described in paragraph (ii) of this sub-clause;
(c) Any income derived from any building owned and occupied by the receiver of the
rent or revenue of any such land, or occupied by the cultivator or the receiver of
rent-in-kind, of any land with respect to which, or the produce of which, any
process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on :

Provided that - (i) The building is on or in the immediate vicinity of the land, and is
a building which the receiver of the rent or revenue or the cultivator, or the receiver
of rent-in-kind, by reason of his connection with the land, requires as
a dwelling house, or as a store-house, or other out-building, and

(ii) 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 or where the land is
not so assessed to land revenue or subject to a local rate, it is not situated - (A) 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 according to the last
preceding census of which the relevant figures have been published before the first
day of the previous year; or

(B) In any area within such distance, not being more than eight kilometres, from
the local limits of any municipality or cantonment board referred to in item (A), as
the Central Government may, having regard to the extent of, and scope for,
urbanization of that area and other relevant considerations, specify in this behalf
by notification in the Official Gazette.

Explanation : For the removal of doubts, it is hereby declared that revenue derived

from land shall not include and shall be deemed never to have included any income
arising from the transfer of any land referred to in item (a) or item (b) of sub-clause
(iii) of clause (14) of this section;
Section 10 is a exclusionary section. It is provided to exempt certain
incomes from being laible for tax calculation. Agriculture income is one
such income.

S10(1) INCOMES NOT INCLUDED IN TOTAL INCOME.

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 - (1) Agricultural income;
(5) Bacha F Guzdar v. CIT Bombay, AIR 1955 SC 74 – this case explains what
is agriculture income, the nexus of income with agriculture was discussed.

The Dividend received by the shareholder is not exempt u/s 10(1).

This case was decided when there was no Dividend Distribution Tax on companies.
Dividend received from a company having agricultural income does not have the
character of agricultural income in the hands of the shareholders. This is because
of the separate legal entity concept. Hence such income was taxable as dividend
income. Now, with the introduction of Section 10(34), dividend received from a
company is exempt as dividend income because tax for the same is paid by the
company as DDT/CDT u/s 115 O

Citations:-

Commissioners of Inland Revenue v Forrest – shareholder does not hold rights

in assets of firm

Sholapur Mills Case -***

Buckley's Company's Act - Defn of Dividend - etymological meaning of dividend is

given as dividendum, the total divisible sum but in its ordinary sense it means the
sum paid and received as the quotient forming the share of the divisible sum
payable to the recipient. This statement does not justify the contention that
shareholders are owners of a divisible sum or that they are owners of the
property of the company.

CIT v Raja Bahadur Kamakshya Narayan Singh

Interest on arrears of rent payable in respect of land used for agricultural

purposes was not agricultural income within Section 2 (1) of the Income-tax
Act. It was held that the interest was neither rent nor revenue derived from the
land. The relationship between the tenant who executed the bond for arrears of
rent with interest and the landlord was held to be that of a debtor and creditor.
There is however one observation of the Judicial Committee which might be helpful
in connection with the present case. Their Lordships while holding that interest on
rent was revenue derived by the land-holder, went on to hold that it was not
revenue "derived" from land. They observed:

"The word 'derived' is not a term of art. Its use in the definition indeed demands an
enquiry into the genealogy of the product. But the enquiry should stop as soon as
the effective source is discovered. In the genealogical tree of the interest, land
indeed appears in the second degree, but the immediate and effective source is
rent, which has suffered the accident of non-payment."

Here also the land appears in the history of the trading operations of the assessee
but it can not be said to be the immediate or the effective source of the income
made by the assessee firm. The immediate and effective source was the trading
operation of purchase of the standing crop and its resale in the market after
harvesting the produce at an advantageous price.

For these reasons we hold that the sum of Rs. 7500 was not exempt from liability
to assessment to income-tax and that the answer to the question referred to must
be in the negative and against the assessee. The assessee shall pay Rs. 250, the
costs of the Commissioner of Income-tax on this reference.

CIT v Sir Kameshwar Singh

That was a case of a usufructuary mortgagee the profits received by whom were

exempt from income-tax on the ground that they were agricultural income in his
hands. Lord Macmillan, after referring           to certain sections of the Act,
observed that "the result of those sections is to exclude agricultural income
altogether from the scope of the Act howsoever or by whomsoever it may be
received." These observations must be held to be confined to the facts of that
particular case which was a case of usufructuary mortgagee who had received
profits directly from the land. The obvious implication of the words used by Lord
Macmillan was that whosoever receives profit from the land directly is entitled to
the exemption.

(6) Premier Construction Co. Ltd. v. CIT., Bombay CIty (1948) XVI ITR 380

(PC)

Dealt, with the nature of the commission of a managing agent of the company

a part of whose income was agricultural income. The assessee claimed
exemption from tax on the ground that his remuneration at 10 per cent of the
profits was calculated with reference to the income of the company part of which
was agricultural income. It was held that the assessee received no agricultural
income as defined by the Act but that he received a remuneration under a
contract for personal service calculated on the amount of profits earned by the
employer, payable not in specie out of any item of such profits, but out of any
moneys of the employer available for the purpose, and that the remuneration
therefore was not agricultural income and was not exempt from tax. Sir John
Beaumont in the above case observed: " In their Lordships' view the principle to be
derived from a consideration of the terms of the Income-tax Act and  the authorities
referred to is that where an assessee receives income, not itself of a character to fall
within the definition of agricultural income contained in the, Act, such income does
not assume the character of agricultural income by reason of the source from
which it is derived, or the method by which it is

Citations:-

Gopal Saran Narain Singh v. CIT Bihar & Orissa

Assessee was entitled to an annuity under a contract, the annuity being made
a charge upon agricultural land. The Board held that the annuity was not rent
or revenue derived from land : it was money payable under a contract
imposing personal liability on the covenantor, the discharge of which was
secured by a charge on land.

CIT Bihar & Orissa v Maharajadhiraj of Darbhanga

the assessee carried on business as a money-lender. As security for a debt due to

him in respect of his business he was put into possession of agricultural land as a
mortgagee. It was held that the rents received by the assessee from the
agricultural land were agricultural income and exempt from Income-tax and
that the exemption was not affected by the circumstance that the rents were
received as part of the money-lending business of the assessee, the exemption
depending on the kind of income received and not on the character of the
recipient

Nawab Habibulla v CIT Bengal

the assessee as the Mutawalli of a Wakf received as remuneration for his services a

monthly salary. It was held by the Board that the fact that the income of the
Wakf was derived from agricultural land did not make the remuneration paid
to the Mutawalli "agricultural income" since the remuneration did not depend
either on the nature of the properties which constituted the wakf Estate, or on the
amount of income derived there from by the Estate.

Muhammad Isa v CIT, Central & United Provinces

where the High Court of Allahabad held that the assessee as Mutawalli of a

wakf was entitled, by way of remuneration for his services, to retain as a
beneficiary the agricultural income of the wakf estate and that such
remuneration was therefore free from Income-tax.

Since Agriculture is not defines in this act, How to Determine whether

an Income was Agro income or not. The test to determine agriculture
was discussed in this land mark judgement

(7) CIT v. Benoy Kumar Sahas Roy, AIR 1957 SC 768 ( Forest Income

not agriculture income)

S2(1A) IT Act Basic operation like tilling of the land, sowing of the seeds, planting,

etc. is necessary to establish an activity as an agricultural operation. Mere
subsequent activity like tending, pruning, and cutting does not constitute
agricultural operation. Further, all these are products like jute, tobbaco, cotton,
timber etc. raised from the land and the term ‘agriculture’ cannot be confined
merely to the production of grain and food products for human beings and beasts
but must be understood as comprising all the products of the land which have
some utility either for consumption or for trade and commerce and would also
include forest product such as timber, sal and piyasal trees, etc.

Facts: The respondent owns an area of 6,000 acres of forest land assessed to land
revenue and grown with sal and piyasal trees.The forest was originally of
spontaneous growth, "not grown by the aid of human skill and labour" and it has
been in existence for about 150 years. A considerable income is derived by the
assessee from sales of trees from this forest. The assessment year in which this
forest income was last taxed under the Indian Income-tax Act was 1923-24,
but, thereafter and till 1944-45, which is the assessment year in question, it was
always left out of account. The assessment for 1944-45 also was first made without
including therein any forest income, but the assessment was subsequently re-
opened under section 34. In response to a notice under section 22(2) r/w S34 of
the Act, the respondent submitted a return showing the gross receipt of Rs. 51,798
from the said forest. A claim was, however, made that the said income was not
assess able under the Act as it was agricultural income and was exempt under
section 4(3)(viii)of the Act. The Income-tax Officer rejected this claim and added a
sum of Rs.34,430 to the assessable income as income derived from the forest after
allowing a sum of Rs. 17,548 as expenditure.

6000 acres – sal & piyasal - The forest is occasionally parceled out for the purposes
of sale and the space from which trees sold are cut away is guarded by forest
guards to protect off shoots - It has been satisfactorily proved that considerable
amount of human labour and care is being applied year after year for keeping the
forest alive as also for reviving the portions that get denuded as a result of
destruction by cattle and other causes – staff employed for following
operations à pruning, weeding, felling, clearing, cutting of channel to help the flow
of rain water, guarding the trees against pests and other destructive
elements, Sowing the seeds after digging of the soil in the denuded areas.

Citations:- Court looked into  

Defn of Agriculture - Webster's New Intl Dictionary "the art or science of cultivating

the ground, including rearing and management of live-stock, husbandry, farming,
etc. and also including in its broad sense farming, horticulture, forestry, butter and
cheese-making etc", Murray's Oxford Dictionary "the science and art of cultivating
the soil; including the allied pursuits of gathering in the crop and rearing live-
stock; tillage, husbandry, farming (in the widest sense)"
Corpus Juris the term"agriculture" has been understood to mean: "art or science of
cultivating the ground, especially in fields or large quantities, including the
preparation of the soil, the planting of seeds, the raising and harvesting of crops,
and the rearing, feeding and management of live-stock; tillage, husbandry and
farming. In its general sense the word also includes gardening of horticulture"

Raja Mustafa Ali Khan v CIT – income from sale of forest trees growing on
land naturally without human intervention is not agricultural income within
the meaning of S2(1)(a) of the IT Act

Court held that cannot construe the meaning of agriculture with respect to

dictionary meaning.

Held only income from basic operations of cultivating land and require the
expenditure of human skill and labour on land is agricultural income. Present
case the income is not agricultural income to the extent where the above operations
have not been carried out.

(8) CIT v. Maddi Venkatasubbayya (1951) XX ITR 151 (Mad.) – It is an

extension of the definition or meaning of the term agriculture for the taxation
purpose.

Assessee purchased standing crop of tobacco from person who had raised the
tobacco on the land. Tobacco harvested, cured and sold in the marker by the
assessee. Plucking of the ripe leaves the pruning and flue curing of the harvested
tobacco leaves were all done by the assessee firm. Firm also did some sort of
ploughing on the land. The assessee firm was not a landholder or a ryot or a lessee
of the land on which the tobacco crop stood. Tobacco plants had been raised on the
land by its owner or lessee and they had reached such a degree of maturity as to
render them saleable as standing crops to tobacco merchants in the locality.

Issue: whether sale of tobacco by assessee firm constitutes agricultural income.

Raja Mustafa Ali Khan v CIT – income from sale of forest trees growing on
land naturally without human intervention is not agricultural income within
the meaning of S2(1)(a) of the IT Act

Yagappa Nadar v CIT - held that income earned by a person who had a licence to
tap toddy from trees belonging to licensors and who sold the toddy extracted by
him at a profit was non-agricultural income, though if the same income was earned
by the owner or the lessee of the land on which the trees grew, it would be
agricultural income.

(9) Sakarlal Naranlal v. CIT. AIR 1965 Guj 165 – Galka the meaning of Sec
2(1)A(b)ii, iii that is “The performance by a cultivator or receiver of rent-in-
kind of any process ordinarily employed…” was explained Case – this case

Facts: In or about 1952, a friend of the assessee suggested to him the idea of
growing a vegetable product commonly called galka, the botanical name being luffa
pentendra and the assessee accordingly obtained galka seeds from
abroad and, after preparing the lands for cultivation, raised galka on the lands in
1952. Now the kind of galka grown by the assessee was not an indigenous kind but
was a kind grown fairly widely in Formosa, Japan and other places. After the
gulkas were fully grown, they were removed from the plants and the assessee then
subjected them to a process for preparing what are called loofahs. The process
consisted of various steps taken in the following order : (1) tapping dry galkas for
taking out the seeds; (2) deskinning them; (3) giving them an acetic acid bath;
(4) holding them in salicylic acid; (5) drying them in the sun ; (6) drying them in
sun; (6) putting them in cold water for two days ; and (7) lastly, pressing them for
the purpose of packing. The final product which emerges as a result of subjecting
galkas to this process is known as loofah. It is a fibrous product in the nature of a
pad and we area told that it is commonly used in the manufacture of shoes.

The foreign loofahs are about 16" in length and 4" in width. The loofahs prepared
by the assessee were, however, only 5" in length and 2-1/2" in width. The assessee
tried to market these loofahs abroad and sent them to England on consignment
basis the sale, but it was found that it was not possible to sell them. The position
was that even if they were sold at the lowest possible rate, the assessee would have
been liable to pay purchase tax and that would have caused considerable loss to
the assessee. The loofahs were, therefore, reshipped to India. The result was that
loss was suffered by the assessee in this transaction. The assessee claimed a loss of
Rs. 1,85,932-8-0 in the assessment for the assessment year 1954-55 and similar
losses were also claimed in the assessment for the subsequent assessment years
1955-56 and 1956-57.

Tribunal came to the conclusion that the process employed by the assessee
was a process within the purview of Sec 2(1A) (b)(ii) and the losses suffered by
the assessee were therefore agricultural losses which were not liable to be
deducted in computing the income of the assessee.

HC held that it was not enough for the Tribunal to find that there was no market
for Galkas in India. The tribunal should have also considered whether there was no
market for Galkas outside India and it was only if the Tribunal found that there
was no market for Galkas outside India, the tribunal could come to the conclusion
that the process employed for the purpose of converting Galkas into Loofahs was a
process covered by S2(1A)(b)(ii). HC held that Galkas as such being marketable
outside India, the process employed on it for preparation of Loofah is not an
agricultural process.

Court explained the reason behind S2(1A)(b)(ii) A cultivator raises produce from the
land with a view to selling it. If there is a market for the produce as grown, there is
no difficulty; the cultivator can in such a case sell the produce without anything
more and he need not perform any process on the produce. But if there is no
market for the produce as grown and it can be sold only by performing some
process on it., the cultivator would have to perform such process in order to be able
to sell the produce; otherwise the produce would not be marketable and the raising
of it would be futile. Where such is the case, the legislature says that, though
strictly the agricultural operations ceases when the produce is raised and removed
from the soil, the performance of the process should be regarded as a continuation
of the agricultural operations since the process has to be performed by the
cultivator for the purpose of enabling him to sell the produce which the otherwise
cannot. It is because the performance of the process is essential in order to render
the produce marketable, which it is otherwise not, that the law regards it as part of
the agricultural operations carried on by the cultivator. This reason also explains
the other requirement of the section, namely, that the process must be such as
is ordinarily employed by cultivators to make the produce
saleable. The performance of the process is assimilated to agricultural
operations and must, therefore, like agricultural operations stricto sense, be an
operation which is ordinarily done by cultivators. If some special or unusual
process is employed by a cultivator, which is not ordinarily employed by cultivators
to render the produce marketable, it cannot be regarded as part of the agricultural
operations and the benefit of the income being treated as agricultural income would
not be available to the cultivator. It will be clear from this discussion that there
are two conditions which are required to be fulfilled before a process performed by
the assessee can be said to be a process within the meaning of section 2(1)(b)(ii).
The first condition is that the process must be necessary to render the produce
fit to be taken to market and that involves the proposition that there must be
no market for the produce in its raw state. If there is already a market for the
produce in its raw state, then the process cannot be said to be a process employed
to render the produce fit to be taken to market or, in other words, to make it
marketable. That which is already marketable does not need any process to render
it marketable. The second condition is that the process must be one which
is ordinarily employed by a cultivator of the produce to render it marketable.
But even if these two conditions are satisfied, it is not sufficient to attract
the applicability of section 2(1)(b)(ii). There is an additional requirement which
must be satisfied and that requirement springs directly from the language and the
reason of the enactment. It follows as a necessary corollary from what is stated
above that, even where the produce is subjected to a process ordinarily employed
by cultivators to render it fit to be taken to market, the produce must not change
its original character. The cultivator is permitted to subject the produce to a
process in order to make it marketable and what is ultimately marketed must,
therefore, be that produce. The character of the produce must not be altered
as a result of the process. Of course when we say this we must make it clear that
there may be changes brought about in the produce for the purpose of making the
produce marketable but those changes must not amount to altering the original
character of the produce. (vide Dooars Tea Co Ltd v CIT )

Brihan Maharashtra Sugar Syndicate Ltd v CIT

The question which arose in this case was whether income realised as a sale of
gur manufactured by the assessee out of sugarcane grown by it, was
agricultural income within the meaning of section 2(1)(b)(ii). The Tribunal
found that the requirements of the section were satisfied, but on a reference to the
High Court a Division Bench of the High Court held that though there was evidence
to support the finding of the Tribunal that the process employed by the assesse in
the manufacture of gur was a process ordinarily employed by a cultivator, the
finding that the process was one ordinarily employed by a cultivator to render the
produce fit to be taken to market was erroneous in as much as there was a market
for the sale of sugarcane before it was turned into gul. Kania J., as he then was,
after referring to section 2(1)(b)(ii), said "Reading the words used in the definition
section with their mutual meaning they must mean that 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..."

In re Bhikanpur Sugar Concern -  process employed by the assessee for

manufacturing sugar was not a process ordinarily employed by cultivators of
sugarcane for rendering it fit for marketing.

Killing Valley Tea Compnay Ltd v Secretary of State

The assessee in this case grew green leaf tea in a tea garden owned by it

and manufactured tea by performing a process on green leaves plucked from the
tea garden. In its assessment to income-tax, the assessee contended that the
entire income from the sale of manufactured tea was agricultural income
within the meaning of section 2(1)(b)(ii) of the Income-tax Tax Act, 1918. The
Calcutta High Court, however, held that though the green leaf from the tea plant
was not a marketable commodity for immediate use as an article of food, it
was certainly "a marketable commodity to be manufactured by people who
possess the requisite machinery into tea fit for human consumption" and the
manufacturing process could not, therefore, properly be said to be employed to
render the tea leaves fit to be taken to market as required by the section. This
decision, therefore, proceeded on the basis that if there is a market for the produce
grown by the assessee and despite that, some process is performed on it, such
process cannot be said to be a process to render the produce fit to be taken to
market so as to attract the applicability of section 2(1)(b)(ii).

J M Casey v CIT - assessee cultivated aloe plants and from them by means of

machinery prepared sisal fibre which he sold in the market. The question arose
whether the whole of the income derived by the assessee was exempt from tax as
being agricultural income. The Patna High Court held that it was so exempt and
the ground on which the Patna High Court based its decision was that aloe leaves
had no market and that the process performed on aloe leaves for preparing sisal
fibre was a process ordinarily employed to render aloe leaves fit to be taken to
market. Courtney-Terrell C.J. who delivered the main judgment, observed that no
cultivation of aloe plant appeared to have been practiced save in connection with
the process of manufacture of sisal fibre and, moreover, there was no market for
aloe leaves. Of course aloe leaves could be supplied to jails but the learned Chief
Justice observed that that did not make any difference since the leaves so bought
by the jail authorities were treated by the prisoners by means of the same laborious
and uneconomic process which was employed by some villagers in treating the
leaves of the wild and uncultivated plant and that the object of the manufacture in
jails was not the conducting of an economic process which rendered profitable the
cultivation of the aloe plant but merely to keep the prisoners employed on
sufficiently laborious and punitive work. It was thus definitely found that the aloe
leaves were not ordinarily marketable and they could normally be sold only by
converting them into sisal fibre. The learned Chief Justice made it clear that the
decision of the court was based on these conditions which existed at the time and
observed :

"It may be that in the future the economic conditions may change. If the growth of
the aloe leaf should become established as an agricultural industry by itself and if
the manufacturers of sisal fibre should cease to cultivate the plant themselves and
should purchase the leaves in an open market then and such circumstances may
possibly require reconsideration in the light of the income-tax law..."

Sheolal v CIT - whether the process of ginning applied by the assesse could be

said to be a process within the meaning of section 2(1)(b)(ii). The court held that
the process of ginning was not a process ordinarily employed by cultivators to
render cotton grown by them fit to be taken to market since unginned cotton
was sold by the cultivators and ginning was not essential in order to render
the cotton fit to be taken to market.
Boggavarapu Peda Ammaih v CIT

The assessee in this case carried on the business of export of tobacco grown on his

lands and he claimed exemption in respect of income arising on the sale of tobacco
as agricultural income. The revenue authorities treated the income derived from
operations up to the stage of "flue-curing" as agricultural income but regarded the
subsequent activities which involved the performance of the process of re-drying,
stripping and grading and sale of tobacco subjected to such process as non-
agricultural operations and treated the income attributable to those operations as
income from business subject to tax. The Andhra Pradesh High Court before whom
the question came on a reference took the view that the tobacco after flue-curing
had a large market in the country and the operations of re-drying, stripping and
grading were, therefore, not quite essential to make the tobacco marketable. The
High Court also took the view that these operations could not be regarded as a
process ordinarily employed by cultivators in order to make the tobacco
marketable. Since in the opinion of the High Court both the conditions of section
2(1)(b)(ii) were not satisfied, the High Court held that the income attributable to
the operations of re-drying, stripping, and grading could not be described as
agricultural income but should be treated as income liable to tax.

(10) CIT v. HG Date (1971) 82 ITR 71 (Bom) this is an extension of galka case

but the judgement is opposite to it.

Assessee converted Sugarcane to Jaggery – was held to be ‘process ordinariy

employed to render produce fit to be taken into market. – observed mills buy
sugarcane near the mills as far as possible – but if no mills nearby then no other
option for cultivator but to convert it into Gur – also mills buy at prices fixed by
Gov – If no market as such where sugarcane of his quality can be sold – Existence
of a single mill would not constitute a market for the assessee’s 
sugarcane. Incase the mill refuses to buy his sugarcane the agriculturalist has no
other option available. In such case agriculturalist can claim exemption.

(11) K Lakshmanan & Co v. CIT (1999) 239 ITR 597 (SC)Assesse grew mulberry
plant and reared coccons who fed on the leaves of mulberry plant. He sold
these cocoon .

Held: Sale of cocoons – Not agricultural income