Agricultural Income: Even Nursery at Home could result in Agricultural Income

Section 10(1) of the Income-tax Act, 1961 exempts agricultural income from income-tax. However, net agricultural income is added to the total non-agricultural income computed as per Income-tax Act, for the purpose of determining the income-tax on non-agricultural income of an individual, HUF, AOP/BOI or an artificial juridical person, although the agricultural income will remain fully exempt.

Tax is calculated on non agricultural income if following two conditions are satisfied:

1. Non-agricultural income of the assessee exceeds the maximum exemption limit which is 2,50,000 in the case of an individual (other than individual of the age of 60 years or above) and HUF,etc and
2. Net Agricultural Income exceeds 5,000.

 As per section 2(1A), 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 operations including processing of agricultural produce so as to render it fit for the market or sale of such produce.
• Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A). Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.

Following are few interesting observation as to the recognition of income as agricultural income:

1. Income from growing and manufacturing of any product other than tea [Rule 7] An assessee may have composite business income which is partially agricultural and partially non-agricultural, for example, where XYZ Ltd. grows potatoes and further processes its produce to sell them as wafers. In this case the company has composite income i.e. from agriculture and from business. The composite income has to be disintegrated and for computing business income the market value of any agricultural produce raised by the assessee or received by him as rent in kind and utilised as raw material in his business is deducted. No further deduction is permissible in respect of any expenditure incurred by the assessee as a cultivator or receiver of rent in kind. For computing agricultural income the market value of agricultural produce will be total agricultural receipt on account of potatoes. From such agricultural receipts, expenses such as cultivation expenses etc. incurred in connection with such receipt will be deducted and balance will be agricultural income which will be exempt.
2. The nature of agricultural income would not change merely because agricultural operation was carried out in a greenhouse under a controlled environment- held by ITAT, Pune Bench in the case of Asstt. CIT v. KF Bio Plants (P.) Ltd. ITA No. 1110/PN/2011 [(Pune-‘A’ Trib)] ITAT & also in the case of Asstt. CIT v. KF Bio Plants (P.) Ltd. ITA No. 1110/PN/2011 [(Pune-‘A’ Trib)].
3. The ITAT Ahmedabad Bench ‘A’ decision in the case of Dy. CIT v. Best Roses Biotech (P.) Ltd. (2012) 49 SOT 277 (Ahd-A’-Trib) : (2012) 144 TTJ (Ahd ‘A’-Trib) 645 has analyzed the advanced mechanism of growing rose plants in a controlled environment and held as under :
   “7.2 Considering the advancement of technology and *the use of the advanced equipment in cultivation coupled with the conventional cultivation method put together, it has to be held that the operation carried out by the assessee was agricultural operation in nature.* Therefore, the income in question was an agricultural income.*It cannot be included in total income being within the ambits of the provisions of section 10(1).”
4. In Shivlal Ganga Ram, In re AIR 1927 All 703, it has been held that income from stone quarries is not an agricultural income.
5. Preservation of potatoes by refrigeration as it is not a process ordinarily employed by a cultivator & so it is not an agricultural income.
6. Income from salt produced by flooding the land with sea water and then extracting salt therefrom is not an agricultural income as held in Linga Reddi v CIT 2 ITC 363 (Mad).
7. Interest on arrears of rent in respect of agricultural land is not an agricultural income and hence it will be taxable as regular income.
8. Income from sale of forests, trees, wild grass, fruit and flowers grown spontaneously and without human effort is not an agricultural income. This is so held in the case of ustafa Ali Khan v CIT (1948) 16 ITR 330 (PC) & also in Maharajadhiraj Sri Kameshwar Singh (1957) 32 ITR 587 (SC)
9. Registration fee collected from the contractor who is bidding at the auction conducted for sale of plantation is not an agricultural income as such registration fee had no nexus with land& so held to be not an agricultural income in CIT v Tamil Nadu Forest Plantation Corporation Ltd. (2000) 162 CTR 525 (Mad).
10. Income derived by the assessee, a State Government undertaking engaged in cultivation of sugarcane, from the sale of tender forms is held to be not an agricultural income in State Farming Corporation v CIT (1990) 181 ITR 271 (Ker).
11. Annuity payable to vendor of agriculture land or payable to a person giving up his claims to piece of agricultural land is held to be not an agricultural income – Maharaja Bikram Kishore of Tripurav Province of Assam (1949) 17 ITR 220
12. Trees which do not have a spontaneous growth and cannot be regenerated in near future to give some benefit to assessee and which are being cut in a prescribed manner and thereafter sold to particular person at a fixed price & involving no profit element in the transaction, such income earned shall be treated as capital receipt and not revenue receipt. Accordingly, it will not be chargeable to tax as held in CIT vMahendra Karma Pooranchand Soni (2014) 42 taxmann.com 380 (Chhattisgarh), (2014) 221 Taxman 172 (Chhattisgarh) (Mag).
13. Hire charges received for use of the garden for shooting films could not be treated as agricultural income, as it has no nexus with the land, except that it was carried out on the agricultural land. So, it is held to be not an agricultural income in B. Nagi Reddiv CIT (2002) 258 ITR 719 (Mad)
14. Income of nursery [Explanation 3 to section 2(1A)]:
    Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income. So, irrespective of the fact as to whether the basic operations have been carried out on land, such income will always be treated as agricultural income & so will be eligible for exemption under section 10(1) of the Act.
15. In CITv Maddi Venkatasubbaya (1951) 20 ITR 151 (Mad), it is held that profit on sale of standing crops/agricultural produce purchased by the assessee is not an agricultural income.
16. Mushrooms grown by the assessee in ‘growing rooms’ under ‘controlled conditions’ in racks placed on shelves above land and on Compost (manure) which was prepared with paddy straw, Horse manure, Chicken manure, Gypsum and Urea is an agricultural income.
    In Dy. CIT v. Inventaa Industries Private Limited [ITA Nos. 1015 to 1018/Hyd/15 (Hyd-Trib)(SB)], ITAT Special Bench has held as under:
    “soil”, even when separated from land and placed in trays, pots, containers, terraces, compound walls, etc., continues to be a specie of land and hence “land” for the sole purpose of determining whether activity performed on such land is for production of an agricultural product. The Bench finally held that as basic operations were performed by expenditure of human skill and labour on land by the assessee, which resulted in the raising of the ‘product’ called “Edible white button mushroom” on the land and as this product has utility for consumption, trade and commerce, the income arising from the sale of this product was agricultural income and hence exempt* under section 10(1) of the Income Tax Act