Is it agricultural income? Six items (as set, 1961 Act, AY 2017-18)

The meaning of agricultural income

Agricultural income is exempt (section 10(1)). Section 2(1A) defines it, in substance, as:

• 1. rent or revenue derived from land in India that is used for agricultural purposes;
• 2. income derived from such land by agriculture, by a process a cultivator or receiver of rent-in-kind ordinarily applies to make the produce fit for the market, or by the sale of that produce by the cultivator or receiver of rent-in-kind with no other process applied; and
• 3. income from certain farm buildings used by the cultivator or receiver of the rent.

The common thread is that the income must come from land and from agriculture, which means cultivating the soil with human effort and skill (tilling, sowing, watering, weeding and the like). What grows without such work, or what comes from animals rather than from the land, is not agricultural income.

(i) Tenant's profit from standing crop or harvested produce

Agricultural income. A tenant who cultivates the land is a cultivator. His profit from selling the produce he has raised, whether as a standing crop or after harvest, is income derived from the land by agriculture or by the sale of its produce (section 2(1A)(b)(i) and (iii)). That he is a tenant and not the owner does not matter.

(ii) Wild grass that grows on its own

Not agricultural income. Grass that grows spontaneously is not the result of any basic operation on the land; no one has tilled or sown it. Its sale is therefore not income from agriculture, and it is taxed as income from other sources (or business income if it is a trade).

(iii) Interest on capital from a firm engaged in agriculture

Not agricultural income. The firm's own income from agricultural operations on land in India is agricultural. The interest on capital that the firm pays a partner is a different receipt: the partner earns it on the money he has lent to the firm as capital, not from land and not by agriculture, so it does not meet section 2(1A). The Act charges it in the partner's hands as business income: section 28(v) brings in any interest due to, or received by, a partner from his firm. Where the firm was refused a deduction for part of that interest under section 40(b), the partner's income under the clause is reduced by the part refused (proviso to section 28(v)). (The partner's share of the firm's profit is a separate item: where the firm is separately assessed as such, his share in its total income is exempt under section 10(2A), the share being the part of the firm's total income in the proportion his profit share under the partnership deed bears to the firm's profits, by the Explanation to that clause.)

The other reading. Some texts treat this interest as agricultural income, on the view that it is paid out of the firm's agricultural income and keeps that character. That view rests on authority not held here; on the wording of section 2(1A) the interest is not derived from land, and the answer follows that wording.

(iv) Poultry farming

Not agricultural income. Rearing birds is not cultivation of land, even when it is done on a farm; the income comes from the birds, not from the soil. It is business income.

(v) Flowers and creepers

Agricultural income. Flowers and creepers are grown by cultivating the land, with the usual operations of preparing the soil, planting and tending. Their sale by the grower is income derived from land by agriculture (section 2(1A)(b)(i)).

(vi) Dairy farming, butter and cheese

Not agricultural income. Dairy farming depends on animals, not on cultivation of land, and making butter and cheese is a manufacturing process, not a process that a cultivator applies to make produce fit for the market. The income is business income.

Summary