Advocate Akhilesh Kumar Sah

Akhilesh Kumar SahRecently, in CIT, Gauhati vs. Sati Oil Udyog Ltd. [ 2015 (3) TMI 854 SC], the Supreme Court has held that the word “income” would include within it both profits as well as losses.

The word “income” has a special significance in Income-tax machinery as the income-tax is a tax upon the ‘income’.  Section 2 (24) of the Indian Income-tax Act, 1961 [which corresponds to section 2 (6C) of the Income-tax Act, 1922] contains the inclusive definition of “income”. The abovementioned section includes in its ambit the clauses (i) to (xiv) as the income. The clauses enumerated in section 2(24) are not exhaustive in the sense any receipt which may be termed as income shall be brought to income-tax unless specifically exempted from tax. The Calcutta High Court, while deciding the case Hope (India) Ltd. Vs. CIT as reported in (1999) 12 SITC 406 (Cal) has taken into observation (at page 414) the decision of Hon’ble Supreme Court in E.D. Sasson & Co. Ltd. Vs. CIT (1954) 26 ITR 27 (SC), The relevant portion of which is as follows:

“Now what is income” The term is nowhere defined in the Act……..In    the absence of a statutory definition we must take its ordinary meaning ‘that which comes in as the periodical produce of one’s work’, business lands or investments (considered in reference to its amount and commonly expressed in terms of money); annual or periodical receipts accruing to a person or corporation (Oxford Dictionary)…………..”

The Karnataka High Court in CIT Vs. Motor Industries Co. Ltd. (1988) 173 ITR 374 (Kar) has observed that an inclusive definition enlarges the ordinary meaning and brings into its fold what may not normally fall within its ordinary meaning and brings into its fold what may not normally fall within its ordinary meaning. Also, the Punjab & Haryana High Court, in Raja Ragavendra Singh Vs. State of Punjab (1976) 102 ITR 40 (P&H) has observed that whenever a term is given such a definition in a statute, it means not only the things mentioned therein but also includes in its ambit the meaning of the term as generally understood. The word “income” has thus to be given a very wide meaning. Anything which can properly be described as income is taxable under the Act, unless expressly exempted. In order to escape liability of payment of tax, the assessee must show that his case falls squarely within the four corners of a statutory exemption. The Supreme Court in Dooars Tea Co. Ltd. Vs. CAIT (1962) 44 ITR 6 (SC) that the word “income” as it is used in the Indian Income-tax Act, 1922 (which corresponds to Income-tax Act, 1961) is formidably wide and vague in its scope. It is a word of elastic import. It is expanded, no doubt, into income, profits and gains but the expansion is more a matter of words than of substance. The word “income”, in entry 82 of list I of Sch. VII of the Constitution of India and Parliament, is capable of a wider meaning than what was given to it in the Indian Income-tax Act, 1922, or the English Income-tax Act of 1918. The expression “income” according to the dictionary means “a thing that comes in”. Income may also be defined as a gain derived from land, capital or labour or any two or more of them. Even in its ordinary economic sense, the expression “income” includes not merely what is received or what comes in by exploiting the use of a property but also what one saves by using it one-self. That which can be converted into income can be reasonably regarded as giving rise to income ( Dass Jain Vs. Union of India (1981) 128 ITR 315 (SC)). The Supreme Court in Raja Bahadur Kamakshya Narain Singh of Ramgarh Vs. CIT (1943) 11 ITR 513 (PC) at page 521 has observed that income, it is true, is a word difficult and perhaps impossible to define in any precise formula. It is a word of the broadest connotation. No attempt has been made in the Act to define “income” except to say in section 2(6C) of the Income-tax Act, 1922 (which corresponds to section 2(24) of Income-tax Act, 1961) that it includes certain things which would possibly not have been regarded as income but for the special definition. That, however, does not limit the generality of its natural meaning except as qualified in the section itself. [Raghuvanshi Mills Ltd. Vs. CIT (1952) 22 ITR 484 (SC) (at page 488)].

Then, what is ‘income’ for the purposes in income-tax?

There is no precise definition of ‘income’ under the Act. Also it was not possible for the legislative authority to define it in precise terms due to its (incomes’) wide scope. Therefore, Section 2(24) of the Act, the word ‘income’ shall be construed as comprehending, not only those which section 2(24) declares that they shall include but also such a thing as it signifies according to its natural import (Lachit Films Vs. CIT (1992) 106 CTR (Gau) 98. The Parliament has been adding to the definition ‘income’ under section 2(24) by adding sub-clause (s) from time to time. Even if a receipt does not fall within the ambit of any of the sub-clauses in section 2(24) it may still be income if it partakes of the nature of the income. The idea behind providing inclusive definition in section 2(24) is not to limit its meaning but to widen its net. Supreme Court has repeatedly said that the word “income” is of widest amplitude, and that it must be given its natural and grammatical meaning. What, then , is the ordinary, natural and grammatical meaning of the word “income”? According to the dictionary, natural and grammatical meaning of the word “income”? According to the dictionary it means “a thing that comes in”. (See Oxford Dictionary, Vol. V. p. 162; Stroud, Vol. II, pp. 14-16). In the United States of America and in Australia both of which also are English speaking countries the word “income” is understood in a wide sense so as to include a capital gain. Since the definition of income in section 2(24) is an inclusive one, its ambit, should be the same as that of the word income occurring in Entry 82 of List I of the Seventh Schedule to the Constitution (corresponding to Entry 54 of List I of the Seventh Schedule of the Government of India Act (CIT Vs. G.R. Karthikeyan (1993) 112 CTR (SC) 302). In the abovementioned case (G.R. Karthikeyan’s) although the inclusive character of the definition has been emphasised, this inclusive factor of the term ‘income’ will have to be understood and appreciated with regard to the facets of its inclusiveness which are definitely to be understood in the context of having some semblance of relationship with various clauses of section 2(24) of the Act (CIT Vs. M. Shajahan) (1997) 139 Taxation 315 (Ker)). Income may be received in kind as well as in cash and the receipt of an equivalent cash may be a receipt in kind as well as in cash and the receipt of an equivalent cash may be a receipt of income. But the sense of the matter is that there must be an actually realised or realiseable profit (Raja Raghunandan Prasad Singh Vs. CIT (1933) 1 ITR 113 (PC). Also, profit motive is not decisive of the question whether a particular receipt is capital or income (A.K.T.K.M. Vishnudatta Antharjanam Vs. CAIT (1970) 78 ITR 58 (SC). “Income’ does not include fixed capital or the realising of fixed capital by turning it into some other form of capital or money (Karanpura Development Co. Ltd. Vs. CIT (1962) 44 ITR 362 (SC)). The Madras High Court has observed in CIT Vs. M. Ramalakshmi Reddy (1981) 131 ITR 415 that a receipt cannot be treated as income where no characteristics of income can be deducted in it. Where a person gets some receipt of money where he does not angle for it, or where it is not the product of an organised seeking after emoluments, or where it is merely a chance encounter with a venture, which while enriching him does not form part of any scheme of profit making, the idea of income is absent. Further, from the charging provisions of the Act, it is discernible that the words ‘income’ or ‘profit & gains’ should be understood as including losses also, so that, in one sense ‘profit& gains’ represent ‘plus income’ whereas losses represent ‘minus income’. In other words, loss is a negative profit. Both positive & negative profits are of a revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee. [(CIT Vs. Har Prasad & Co. Ltd. (1975) 99 ITR 118 (SC) (at page 124, 125; IPCA Laboratory Ltd. vs DCIT (2004) 275 ITR 1 (SC): (2004) 181 Taxation 2 (SC) ; CIT vs. Gold Coin Health Food Pvt. Ltd. (2009) 208 Taxation 123 (SC)].

            Section 14 of the Income-tax Act, 1961 incorporates that save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income :-

A. Salaries.

[“B.   Interest on securities” (omitted by Finance Act, 1988 w.e.f. 1-4-1989.]

C-            Income from house property.

D-         Profits and gains of business or profession.

E-          Capital gains.

F-           Income from other sources.

Bottom-line :

The structure of the Income-tax Act lies on/by taxing the ‘income’. Legislative authorities are including in the definition of ‘income’ under section 2(24) of the Act the clauses from time to time. The Supreme Court in Raja Bahadur Kamakshaya Narain Singh of Ramgarh Vs. CIT (supra) has observed that the word ‘income’ in not limited by the words ‘profits’ and ‘gains’. Anything which can properly be described as income, is taxable under the act unless expressly exempted. Income is not necessarily the recurrent return from a definite source, though it is generally of the character. Income again may consist of a series of separate receipts, as it generally does in the case of professional earnings. The multiplicity of form which ‘income’ may assume is beyond enumeration. The definition of income provided under section 2(24) of the Act is an inclusive definition and it covers even such items which are not income in the natural sense of the word (CIT Vs. Jora Oil Mills (1981) 129 ITR 423 (MP)). If a particular income is not taxable under the Income-tax Act, it can not be taxed on the basis of estoppel or any other equitable doctrine. Equity is out of place in tax law; a particular income is either exigible to tax under the taxing statute or it is not. If it is not the Income-tax Officer has no power to impose tax on the said income (CIT Vs. V.M.R.P. Firm (1965) 56 ITR 67 (SC). Also the Supreme Court has held in CIT Vs. Central India Industries Ltd. (1971) 82 ITR 555 (at page 559) that an income does not cease to be income merely because the person who receives it retains it in his hands. The fact that he receives it in kind makes no difference in principles. The income earned by an assessee has to be determined by the authorities under the Act and not by a third person. Also, the Madhya Pradesh High Court has observed, in Kaluram Ganeshram (HUF) Vs. CIT (1988) 172 ITR 154 (MP), that when section 2(24) of the Act defines the term “income”, it does not make any distinction between the gross income and the taxable income for purposes of taxation.

The Determination Of Agricultural Income For The Purposes Of Income Tax

The ITAT Pune has held in ITO vs. Gajanan Agro Farms [2013] 33 149/142 ITD 571, that ownership of land is not a prerequisite for having agricultural income; it would suffice if revenue is derived from agricultural activities carried out on an agricultural land situated in India.

 The term “agriculture” has not been defined under the Income Tax Act. Question whether particular income is to be treated as agricultural income or not arises in many cases dealt in the framework of Income Tax Act. In the Advanced Learners’ Dictionary of Current English (Second Edition) printed in Great Britain at the Oxford University Press, the term “agriculture” has been given the meaning as “science or practice of farming; cultivation of the soil”. Various meanings have been given to the world “agriculture” in different dictionaries. “Agricultural Income” has been defined in the Constitution of India in article 366(1) to mean agricultural income as defined for the purposes of enactments relating to Indian income-tax. Subject to its proviso & Explanations, section 2(1A) defines the agricultural income.

Test for determination of agricultural income:

The above definition is the general definition in the sense that it does not provide the single formula or the decisive test for treating the particular income as the agricultural income. Hon’ble Supreme Court in CIT v. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC) has analysed the terms “agriculture”, “agricultural purposes operations” and “agricultural income” for the purposes of Indian Income Tax Act. In other words, it has fixed the criterion for taking particular income as the agriculture income. The Supreme Court has observed at page 508 and 509 (in the above case): “the primary sense in which the term agriculture is understood is agar-field and cultra-cultivation, i.e., the cultivation of the field and if the term is understood only in that sense agriculture would be restricted only to cultivation of the land in the strict sense of the term meaning thereby, tilling of the land sowing of the seeds, planting and similar operations on the land. They would be the basic operations and would require the expenditure of human skill and labour upon the land itself. There are however other operations which have got to be resorted to by the agriculturist and which are absolutely necessary for the purpose of effectively raising the produce from the land. They are operations to be performed after the produce sprouts from the land, e.g., weeding, digging the soil around the growth, removal of undesirable undergrowths and all operations which foster the growth and preserve the same not only from insects and pests but also from depredation from outside, tending, pruning, cutting, harvesting and rendering the produce fit for the market. The latter would all be agricultural operations when taken in conjunction with the basic operations above described, and it would be futile to urge that they are not agricultural operations at all. But even though these subsequent operations may be assimilated to agricultural operations, when they are in conjunction with these basic operations could it be said that even though they are divorced from these basic operations they would nevertheless enjoy the characteristic of agricultural operations. Can one eliminate these basic operations altogether and say that even if these basic operations are not performed in a given case the mere performance of these subsequent operations would  tantamount to the performance of agricultural operations on the land so as to constitute the income derived by the assessee therefrom agricultural income within the definition of that term? We are of opinion that the mere performance of these subsequent operations on the products of the land, where such products have not been raised on the land by the performance of these basic operations that the subsequent operations attach themselves to the products of the land and acquire the characteristic or agricultural operations. The cultivation of the land does not comprise merely of raising the products of the land in the narrower sense of the term like tilling of the land, sowing of the seeds, planting, and similar work done on the land but also includes the subsequent operation set out above all of which operations, basic operations from the subsequent operations and say that the subsequent operations, even though they are divorced from the basic operations can constitute agricultural operations by themselves. If this integrated activity which constitutes agriculture is undertaken and performed in regard to any land that land can be said to have been used for “agricultural purposes” and the income derived therefrom can be said to be “agricultural income” derived from the land by agriculture”.

Determination of whether certain income constitutes agricultural income:

The immediate and effective source of the income must be found out. If the immediate and effective source is not land, the income cannot be considered to be agricultural income [CAIT v. Narayanan Tratan Namboodiripad (1967) 64 ITR 57 (Ker)]. The character of the land will have to be determined in the light of the facts and circumstances of the case that prevailed in the year of account or at or about that period [M. Ranghanatha Sastri vs. CIT/CWT (1979) 119 ITR 488 (Mad)].The agricultural income which is derived by a person should be from land which is situated in India (not outside India). In order to decide the question whether land is “used for agricultural purposes” no assistance is to be got from the meaning ascribed to the word “agriculture” in other statutes [Raja Mustafa Ali Khan v. CIT (1948) 16 ITR 330 (PC). Once an assessee establishes that the land in question was continuously used for agricultural purposes, then the prima facie presumption arising from such user is that the land in question continues to be agricultural land. The burden of proving that it is not agricultural land is on the revenue [Gemini Pictures Circuit (P) Ltd. v. CIT (1981) 130 ITR 686 (Mad)]. But in order to claim an exemption from payment of income-tax in respect of what the assessee considered agricultural income, it is the assessee who has to place before the income-tax in respect of what the assessee considered agricultural income, it is the assessee who has to place before the income-tax authorities proper material which would enable them to come to conclusion, that the income sought to assessed was agricultural income. [CIT v. R. Venkataswamy Naidu (1956) 29 ITR 529 (SC)]. The hire-charges for allowing film-shooting on agricultural land cannot be treated as an agricultural income [B. Nagi Redi v. CIT (2002) 258 ITR 719 (Mad)].

In a case before Madras High Court CIT vs. Soundarya Nursery (2000) 157 Taxation 492, question before the court was whether the income from sale of plants grown directly in the pots and the sale of seeds can be treated as agricultural income within the meaning of section 2(1) of the Income tax Act, 1961? The Madras High Court held that sale of both the plants & seeds was agricultural income since both the products were as a result of basic operation expanding human skill and operation on land through in pots. See also, ITAT, Ahmedabad decision in Best Roses Biotech Pvt. Ltd. vs. Department Of Income Tax [ITA No.1975/Ahd/2008, date of pronouncement 30/11/2011]. The Finance Act, 2008 w.e.f. 1-4-2009 has added Explanation 3 in section 2(1A) which explains that for the purposes of this clause, any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.

Rule 7 of  IT Rules, 1962 gives the basis of determination of income which is partially agricultural and partially from business and Rule 7A, 7B & 8 of IT Rules provide the Rules for computation of income which is partially agricultural and partially from business, of income from the manufacture of rubber, coffee, tea, respectively. The Finance Act contains the rules for the computation of net agricultural income.

Significance of word ‘revenue’:

The word ‘revenue’ in section 2(1) of the Income Tax Act, 1922 [corresponding to section 2(1A) of the IT Act, 1961] is used to denote income or a revenue receipt as opposed to a capital receipt and covers all income from agricultural land other than rent. No real distinction can be drawn between the expressions ‘rent’ or ‘revenue’ in section 2(1) of Income Tax Act, 1922 [Jhalak Prasad Singh v. Province of Bihar (1941) 9 ITR 386 (Pat). What the framers of the Act meant by the distinction between “rent” and “revenue” is not quite clear. Rent is defined in section 105 of the Transfer of Property Act as “money, share of the crops, service, or any adding of value to be rendered periodically or on the specified occasions by the tenant to the landlord in consideration of the enjoyment of immovable property”. In other words, “rent” implies the idea of lesser and lessee or landlord and tenant. The term “revenue” also has not been defined anywhere in the Act. In the absence of a statutory definition, the courts must take its ordinary dictionary meaning so long as it does not militate against any express provisions of the statute. In Wharton’s Law Lexicon the meaning assigned to the word “revenue” has a wider connotation than “rent” [DLF Housing & Construction (P) Ltd. v. CIT (1983) 141 ITR 806 (Del)]. The sub-clause (a) of section 2(1A) of the Act states “any rent or revenue derived from land…….” The word “any” qualifies not merely the word “rent” but also the word “revenue”. The word “revenue” is not used as a synonymous for the word “rent” but in contradiction to it [Manubhai A. Sheth v. N.D. Nirgudkar. ITO (1981) 128 ITR 87 (Bom)].

Income, in order that it may fall within the definition of “agricultural income” in section 2(1) (a) of the Income Tax Act, 1922 [which corresponds to section 2(1) of the Income tax Act, 1961) whether one calls it rent or revenue, must be derived as a result of and in consequence of agricultural operations. The fact that the income is indirectly referable to the land will not invest it with the character of agricultural income [Pydah Suryanarayana Murty v. CIT (1961) 42 ITR 83 (AP)]. Again, it is essential that the income should be derived from some activity which necessitates the employment of human skill and labour and which is not merely a product of man’s neglect or inaction except for the gathering in of the spoils. Not only must the assessee labour to reap the harvest, but must also labour to produce it [Beohar Singh Raghubir Singh v. CIT (1948) 16 ITR 433 (Nag)]. Also, for the purposes of rule 7 of the Income Tax Rule, 1962, it is not necessary that the agricultural produce raised by the assessee should be sold. On the contrary rule 7 applies only to cases where such agricultural produce is utilised by the assessee as raw material for the business carried on by him and not when such produce is sold. When the assessee raised agricultural produce and used it as raw material that cannot be a sale by the assessee to the assessee himself, but yet the agricultural produce raised by the assessee would constitute agricultural income within the meaning of section 2(1) of the Act and this income is not liable to tax. [Nizam Sugar Factory Ltd. v. AAC (1971) 80 ITR 547 (AP), See also Thiru Arooran Sugars Ltd. v. CIT (1997) 140 Taxation 564 (SC)].


There is no warrant at all for extending the term “agriculture” to all activities which have some relation to the land or are in any way connected with the land, the for the term agriculture cannot be dissociated from the primary significance thereof, which is that of cultivation of the land. The extension of the term “agriculture” to denote such activities as breeding and rearing live-stock, dairy farming, butter and cheese-making, and poultry farming, is an unwarranted distortion of the term. That products which grow wild on the land or area of spontaneous growth not involving any human labour or skill upon the land are not products of agriculture and the income derived therefrom is not agricultural income. The term “agriculture” cannot be confined merely to the production of grain and food products for human beings and bests but must be understood as comprising all 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 [CIT V. Raja Benoy Kumar Sahas Roy (supra)]. The word “agriculture” and “agricultural purposes” with reference to land clearly imply that some operation must be carried on the soil of the land itself; human skill and labour should be used for the purpose of ploughing the soil, of the land itself; human skill and labour should be used for the purpose of ploughing the soil, manuring it, planting the trees or some similar process [Pratap Singh Balbeer Singh v. CIT (1952) 22 ITR 1 (All)]. The general principles applicable in determining whether a particular income is agricultural income, are : (i) Rent or revenue which is directly derived from any land which is used for agricultural purposes will be agricultural income for purposes of income-tax (ii) Revenue which is derived must also be directly and not indirectly associated with the land which is used for agricultural purposes before it can be said to be agricultural income, and (iii) The effective source is the decisive factor [CIT v. All India Tea & Trading Co. Ltd. (1998) 113 ITR 545 (Cal)]. Also, it has been observed by the Madhya Pradesh High Court In CIT v. Laxmi Development Co. (1988) 171 ITR 125 (MP) that when exemption as agricultural income is sought under sub-clause (a) or (b) or (c) of section 2(1). The primary condition that must be satisfied is that the land in question must be actually used for agricultural purposes in the accounting year. CBDT Circular No. 310, dt. 29-7-1981 has clarified that the legislative competence of the State Legislature is restricted by the definition of “agricultural income” and it is not open to the State Legislature to enlarge the definition of agricultural income so as to bring within its scope what would not be agricultural income for the purposes of the Income Tax Act. This position has been recognised all along and is supported by the Supreme Court’s ruling in Karimtharuvi Tea Estates Ltd. v. State of Kerala (1963) 48 ITR 83 (SC) and Anglo American Direct Tea Trading Co, Ltd. v. CAIT (1968) 69 ITR 667 (SC). Both these decisions are authority for the proposition that what is “agricultural income” insofar as tea estates are concerned, has to be computed strictly in accordance with the scheme of the Income Tax Act.

Bottom Line:

 The case laws, as above, are also, useful in deciding whether particular income falls under “agricultural income.”

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