Contract Farming: Whether eligible for exemption under Income Tax Act?


Contract Farming: Whether eligible for exemption under Income Tax Act?



  1. Agriculture income earned by individuals and HUF is exempt under the Sec 10(1) of the Income Tax Act. This means that income earned from agricultural operations is not taxed.
  1. The reason for exemption of agriculture income from Central Taxation is that the Constitution gives exclusive power to make laws with respect to taxes on agricultural income to the State Legislature.
  1. However while computing tax on non-agricultural income agricultural income is also taken into consideration.

Issue: The issue is whether agriculture income earned by farming on leased land is entitled to exemption under the Income Tax Act or is it in the nature of contract farming?

Reply: This issue was before the ITAT Hyderabad, which held that:

  1. There was no dispute that the assessee took the agricultural lands on lease and conducted normal agricultural operations to produce the hybrid variety of foundation seeds in order to sell them in the open market to the seed industries, and in that pursuit, they engaged the labour, supervisors, etc.
  1. The assessee produced voluminous record to show the engagement of labour and the payment of salaries to the supervisors apart from producing the agreements with the landowners.
  1. Merely because the assessee took the land on lease for conducting their research operations to produce the foundation seeds of the hybrid varieties, such a lease cannot ipso facto make the operations of the assessee as contract farming. Further, the fact that foundation seeds of hybrid varieties are produced as per customer requirements will also not make it a case of contract farming.
  1. Contract farming case would be that if the assessee outsources the agricultural operations which they are doing for themselves now, to some other third party.

Conclusion: Agricultural operations, whether in leased land or own land will be eligible for exemption under Income Tax.