Section 10(1) of the Income Tax Act deals with Agricultural Income and its Taxability. All Agricultural Income is not exempt under 10(1) Income Tax Act. It is necessary to know the distinction between taxable Agricultural Income and Non-Taxable Agricultural Income. In this Article, we will cover multiple sides of Agricultural Income, like, Its Meaning, Scope etc. Section 10(1) is one of the most relevant section these days due to the advent of Real estate boom in India. More and more farmers are selling their agricultural lands. Indian Farmers are the pillars of society and it is government job not put put any more pressure on them. This is the reason for introducing Section 10(1) in to the Income Tax act, so that Agricultural Income need not be taxed.
Agricultural Income is exemption u/s 10(1)
Agricultural income as defined in Section 2(1A) is exempt from income-tax in the case of all assesses. This exemption has been granted on account of the constitutional provisions relating to the powers of the Central and the State Governments for levying tax on agricultural income.
Power to Levy of Tax – Section 10(1) Exemption
Under the Constitution only the State Governments are empowered to levy tax on agricultural income. Hence, the Central Government while imposing income-tax on incomes of various types has specifically excluded agricultural income from the purview of Central income-tax. This exemption would, however, be available only in cases where the income in question constitutes agricultural income within the meaning of Section 2(1A).
Definition of Agricultural Income – Section 10(1) Exemption
As per section 2(1A) of the Act, agricultural income is defined as follows:
Agricultural income means –
- Any rent or revenue derived from land which is situated in India and is used for agricultural purposes;
- Any income derived from such land by –
- agriculture; or
- 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
- 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 –
- 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
- 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 –
- 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 ; or
- in any area within the distance, measured aerially,—
- not being more than two kilometers, 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
- not being more than six kilometers, 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
- not being more than eight kilometers, 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.
Explanation 1. – 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.
Explanation 2. – For the removal of doubts, it is hereby declared that income derived from any building or land referred to in sub-clause (c) arising from the use of such building or land for any purpose (including letting for residential purpose or for the purpose of any business or profession) other than agriculture falling under subclause (a) or sub-clause (b) shall not be agricultural income.
Explanation 3. – Income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.
Explanation 4. – For the purposes of clause (ii) of the proviso to sub-clause (c), “population” means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year;
Conditions under Section 10(1)
According to the definition of Agricultural Income as per Section 2(1A) of the Act, the income which satisfies following conditions is treated as agricultural income.
Rent or revenue derived from land:
- The expression revenue is used in the broader sense of return, yield or income, and not in the sense of land revenue.
- The recipient of rent or revenue should be the owner of the land.
- The word rent denotes the payment of money either in cash or in kind by one person to another (owner of the land) in respect of grant of right to use land.
- Income is said to be derived from land only if the land is the immediate and effective source of the income and not the secondary and indirect source. Thus interest on arrears of rent payable in respect of agricultural land is not agricultural income because the source of income (interest) is not from land but it is from rent which is a secondary source of income and is taxable under the head Income from other sources. [CIT v. Kamakshya Narain Singh [(1948) 16 ITR 325].
b. Land must be situated in India: – Section 10(1) Exemption
Land must be situated in India but it is immaterial whether the agricultural land in question has been assessed to land revenue or local taxes assessed and collected by the Officers of the Government in India.
c. Land must be used for agricultural purpose: – Section 10(1) Exemption
The land must be used for agricultural purposes. There must be some measure of cultivation on the land, some expenditure of skill and labour upon it, to have been used for agricultural purposes within the meaning of the Act. [Mustafa Ali Khan v. CIT (16 ITR 330)]. Also, the land is said to be used for agricultural purposes where the following two types of operations are being carried on [CIT v. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466]
- Basic operation:These include tilling of the land, sowing of seeds, planting or an operation of a similar kind (digging pits in the soil to plant a sapling)
- Subsequent operations:These include weeding, digging the soil around the growth, nursing, pruning, cutting, Protection of Crops from insects and pets etc.
|If the person has performed the basic operations on the land whether he has performed the subsequent operations or not.||The income shall be agricultural income. For example: Seller of standing crops, who has put inlabour and skill to make the crop sprout out of theland, is agricultural income.|
|If the person has not performed the basic operations on the land but he has performed the only subsequent operations.||The income shall not be agricultural income for him and it will be taxable under the head Business/ Profession. For example: If a person purchases a standing crop, and makes a profit out of it, the income is not agricultural income.|
Note: Here agriculture connotes all the products of vegetable kingdom (food for human beings and animals, fruits, commercial crops, flowers, medicines, bamboo, timber, fuel material) but it does not include the products of animal kingdom (dairy farming, butter and cheese making, poultry farming, breeding of live stock etc.).
Concept of Agricultural Income – Section 10(1) Exemption
Rent received from the land used for agricultural purposes [section 2(1A)(a)]:
When a person (landlord or tenant) lets out a piece of land, which is situated in India, for agricultural purposes, the rent received either in cash or kind from the tenant is considered as agricultural income
Revenue income derived from agriculture – Section 10(1) Exemption
When the landlord or tenant cultivates the farm, raises the product and sells it or appropriates it for his individual needs, the difference between the cost and selling price (including the value of self consumption on the basis of average market rate for the year) is the income derived from agriculture.
Income from making the produce fit to be taken to market
The crop as harvested might not find a market. If, in order to make the product a saleable commodity, the cultivator or receiver of rent-in-kind performs some operation (manual or mechanical) and enhances the value of the produce, the enhancement of value of the produce is also agriculture income. Such income to be regarded as agricultural income, the following conditions must be satisfied:
- The operation must be one which is ordinarily employed by the cultivator to make the produce fit for market, i.e., threshing, winnowing, cleaning, drying, etc.
- There is no market (ready and willing and not a theoretical market) for the produce as received from the farm.
- The process to make it marketable has been performed either by the cultivator or receiver of rent-in-kind.
- The produce must not change its original character.
Example – Section 10(1) Exemption
There is no ready market for raw coffee in the green state. It has to be dried-up and cured before it can be sold. In the same way, the conversion of the green tobacco leaves into fluecured tobacco is a must before sale. On the other hand, there is a ready market of kapas or unginned cotton.
If the farmer sells the ginned cotton, the additional income (difference between the selling price of ginned cotton and unginned cotton) is not agricultural income and is therefore liable to tax.
Similarly, where a farmer grew mulberry leaves and fed the same to silk-worm, it was not a process employed by the cultivator of mulberry leaves to make them marketable by way of producing silk cocoons, and the income derived from rearing of silk-worms was not agricultural income because the silk cocoons produced by silk-worms did not bear any character of an agricultural produce or as a marketable form of mulberry leaves. [K. Lakshmansa & Co. v. CIT (1981) 128 ITR, p. 283 (Kar.)].
Income from sale of produce:
When the cultivator or receiver of rent-in-kind sells the produce either after performing certain activities to make it fit for market (discussed in III above) or without doing any such activity, the income is agricultural income. It is immaterial that he has sold the produce to the wholesaler in the market or through his own retail shop directly to the consumers.
Ownership of Land is not essential u/s 10(1):
In the case of rent or revenue, it is essential that the assessee has an interest in the land (as an owner or a mortgagee) to be eligible for tax-free income. However, in the case of agricultural operations, it is not necessary that the cultivator be the owner of the land. He could be a tenant or a sub-tenant.
In other words, all tillers of land are agriculturists and enjoy exemption from tax. In certain cases, further processes may be necessary to make a commodity marketable out of agricultural produce. The sales proceeds in such cases are considered agricultural income because the producer’s final objective is to sell his products.
Income Connected with Land but not Agricultural Income
There are certain incomes which are derived from land but that are not agricultural incomes because the requisite conditions – land must be used for agricultural purposes and it must be the primary source of income – are not satisfied in such cases. Some of the examples of such incomes are as follows
- Income from spontaneous growth of grass, trees or bamboos;
- Dividend from a company engaged in agriculture;
- Salary of a farm manager;
- Income from mines;
- Income from stone quarries;
- Income from fisheries;
- Income from brick making;
- Income from supply of water for irrigation purposes;
- Profit accruing from the purchase of a standing crop and resale thereof after harvest;
- Income from poultry, dairy farming, butter and cheese making;
- Income from production of salt from sea water;
- Income from preservation, storage and sale of potatoes and other vegetables.