CA Shelly Maheshwari
Agricultural Income Taxation in India: Constitutional Framework, Judicial Tests and Practical Realities
Under the Constitution of India, levy of any tax on agricultural income is within the exclusive legislative competence of the States, since the relevant entry falls in List II (State List) in the Seventh Schedule. The Parliament has no powers to legislate on this subject, with the result that agricultural income is outside the purview of the levy of tax under the Income-tax Act, 1961. In fact, section 10 of this Act specifically provides that agricultural income of an assessee will not form part of the total income chargeable to tax, while section 2 gives a fairly elaborate and specific definition of ‘agricultural income’ for this purpose.
It is significant to point out at this juncture that though the term ‘Taxes on agricultural income’ figures in the State List, the term ‘Agricultural income’ has not been separately defined in the Constitution of India. On the contrary, the Constitution merely refers to the definition in the Income-tax Act and provides that the same definition will apply for interpreting the term mentioned in the State List. However, not all the States have taken advantage of the powers vested in them for enacting any legislation whereby agricultural income can be subjected to tax. Only very few States like Karnataka, Tamil Nadu, Kerala, Andhra Pradesh have enacted the necessary legislation for this purpose.
When discussing agricultural income in India, two predominant perceptions often emerge. As professionals, we recognize this area as a potential tool for tax planning or evasion. Conversely, the general populace views India as an agrarian economy, envisioning a “krishi-pradhan desh” where the majority are engaged in farming, typically picturing a poor farmer toiling in the fields. This article aims to clarify these perceptions by examining the ground realities and tax implications associated with agricultural income in India.
What is agriculture?
The concept of agriculture was discussed in detail in the benchmark judgement of CIT Vs Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC) and Kameshwar Singh (Sir) 32 ITR 587 (SC) and CIT vs Jyotikana Chaowdhurani 32 ITR 705 (SC) wherein it was stated that, the primary sense in which the term “agriculture” should be understood, is its root meaning “ager” = field + “cultura” = cultivation; that is to say, field cultivation or cultivation of the ground, in the sense of tilling of the land, sowing of the seeds, planting and similar operations on the land. As per the above judgement’s following criteria’s should be meet to treat income as agricultural income –
1. Land-Based Operations: Agricultural operations should be carried out on land.
2. Cultivation and Tilling: There must be cultivation of soil involving human effort.
3. Connection with Land: The income must be directly derived from such land-based agricultural operations.
When a land can be said to be used for agricultural purposes?
Any type of agricultural income is exempt only in case where the land has been used for agricultural purposes. As per Supreme Court in aforesaid cases and subsequent cases, agriculture operations would be performed on land only when both primary and secondary operations are performed on land. Secondary operations are performed subsequent to when the crop sprouts from land.
(a) Primary/basic operations includes tilling of land, sowing of seeds, planting etc.
(b) Secondary operations includes weeding, digging the soil around the growth, removal of undesired growths, preservation of the crop from insects and pests and from depredation by cattle, tending, pruning, cutting etc.
There shall be direct association with the land. Without the operation on the land by way of interfering with the ground or the soil, there would be no agricultural operation within the meaning of the definition.
Whether the agriculture can be said to exist only if the produce is fit for human consumption?
The nature of produce obtained from agricultural operations is irrelevant. What is to be seen that the primary and secondary operations were performed on land.
Whether the produce was for human consumption or for animal or for any industry or for any other purpose would not make any difference.
Illustrative cases where agriculture operations were said to have been performed: –
1. Horticulture
2. Floriculture
3. Arboriculture
4. Sylviculture
5. Agriculture operations would not be dependent upon whether
a. food values are grown or
b. artistic or decorative produce is obtained or
c. trade or commercial value such as cotton, indigo, jute, rubber etc is grown
d. housing value such as bamboo, timber and Palmyra is grown
e. fuel value such as casuarinas is grown
f. Medicinal and health value such as cardamoms, areca nuts, betels etc are grown.
g. Trees are grown.
Thing which may be for human consumption do not be themselves become agricultural income.
Eg : –
1. Poultry farming
2. Dairy farming
3. Fishing
In such activities no direct operations are conducted on land.
Definitive list of non-agricultural Incomes which are taxable
Income from –
1. Sale of forests, trees, wild grasses, fruits and flowers grown spontaneously and without human effort.
2. Salt produced by flooding of the land with sea water and then extracting salt therefrom.
3. Stone quarries.
4. Breeding of livestock.
5. Dairy farming, butter and cheese making.
6. Poultry farming and fisheries.
7. Preservation of potatoes by refrigeration.
8. Brick making.
9. Supplying surplus water to other agriculturists.
10. Selling of standing crops, agricultural produce purchased by the assessee.
11. Letting out of land and Godowns for storing crops.
12. Royalty of mines.
Whether ownership of land is a prerequisite criterion for having agricultural income ? Ownership of land is not a prerequisite for having agricultural income and it would suffice if revenue is derived from agricultural activities carried out on an agricultural land situated in India
1. Under section 2(1A) only agricultural income is defined and is required to be a source of income. It is not necessary that in order to come within the ambit of the Act, the person has to be an agriculturist. It is sufficient if revenue is derived from agricultural activities conducted on a land situated in India which is used for agricultural purposes. Therefore, a person can be an agriculturist which derives revenue from agricultural activity.
2. A plain reading of section 2(1A) makes it clear that all that is necessary that revenue should be derived from a land situated in India and which is used for agricultural purposes. This section does not specify that revenue has to be derived by the owner of the agricultural land only. The term ‘revenue’, therefore, implies some yield or some income from agricultural operations. Sub-clause (ii) and (iii) also use the terms ‘cultivator’ and ‘receiver of rent-in-kind’. These terms also appear in clause (c) of section 2(1A). Thus, it can be inferred that agricultural income can also be derived by person who is a cultivator or who is the owner of land. It is only the receiver of rent-in-kind who can directly be held to be the owner of land as referred to in this section.
3. A cultivator may be the owner but it is not necessary that he has to be the owner. In clause (a), there can be a recipient of rent from land which implies ownership and also a recipient of revenue derived from land, which implies that the person can be the owner or may not be the owner of land. Similarly, sub-clause (i) of clause (b) speaks of income derived from an agricultural land by agricultural. This makes it clear that revenue derived from land or from agriculture implies a periodic return of income from agricultural operations only.
4. If Income is derived from an agricultural land situated in a foreign land, then whole such income though purely from agricultural activities, will be taxed under Section 28 of the Act as income from Business or Profession.
Whether due to non-agricultural income’s indirect connection with agricultural income it is entitled to become as agricultural income?
No, the Privy Council held that where an assessee receives income not itself of having agricultural character, does not assume the character of agricultural income by mere reason of the source it is derived. Premier Construction Co. Ltd. v. CIT [1948] 16 ITR 380 (PC) For instance, Interest received by a lender in the form of agricultural produce Cassin v. CIT 6 ITC 41, interest or salary received by a partner from his partnership firm out of its agricultural income Bhagavandas v. Agricultural ITO 70 ITR 128, interest on compensation for compulsory acquisition of land Tuhi Ram v. Land Acquisition Officer [1993] 66 Taxman 127/199 ITR 490 (Punj. & Har.), a share of agricultural produce shared by way of price for water supplied to the land Umar Hayat Khan v. CIT [1925] 2 ITC 52 (Lah), Remuneration for managing an agricultural estate Major Conville v. CIT [1935] 3 ITR 404 (Lah)cannot be held as agricultural income.
Whether primary and secondary operations are required to be performed by the same person?
Generally land shall be the direct or immediate or effective source of income. Where a person performs activity whereby land is not a direct or immediate or effective source of income, the income is not agricultural income in his hands. It is not every person in whose hands the produce of the land passes earns agricultural income.
(a) In case assessee takes coconut plants on lease to extract coconut from them and sell them, same was not agricultural income.
(b) Similarly where the assessee purchased rubber plantation, just to extract latex and thereby returned the trees, agricultural income was not earned by him.
(c) Where assessee purchased standing crop and re-sold it subsequently after harvesting, which was also undertaking by the taxpayer as incidental to purchase of standing crops, when he had no interest in the land except mere licence to enter upon the land to gather produce, same was held to be non-agricultural.
Therefore, by above, it may be seen that generally primary and secondary activities should be performed by the same person.
However, where basic operations were performed by lessee and the lease expired in midst of accounting year and the lessee handed over the possession of the land and the lessor-performed subsequent operations, it was held to be agricultural income in hands of latter. A.S. Karachi 115 ITR 629 (Karn.)
Agricultural income exemption, though constitutionally protected, has evolved into one of the most complex and litigated areas of direct taxation due to its frequent misuse and blurred boundaries with commercial activities. Understanding this nuance is essential for both professionals and common individuals to navigate the complexities of agricultural income taxation. Judicial precedents have consistently emphasized that mere association with land is insufficient and that real, substantive agricultural operations must exist. As India’s economy modernizes and agricultural practices increasingly overlap with business activities, there is a pressing need for rationalisation, clearer legislative guidance, and stronger scrutiny mechanisms. The objective should not be to burden genuine cultivators but to ensure that the exemption serves its intended purpose and does not undermine the principles of fairness and revenue justice.
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