AGRICULTURAL INCOME, DIVERSION OF INCOME AND APPLICATION OF INCOME

AGRICULTURAL INCOME

INTRODUCTION

Agricultural Income is defined under section 21A) of the Income Tax Act, 1961. As per Article 246 & 265, agricultural income is exempted from tax.

In easy language, it simply means, the income derived from factors that include farming land, buildings on or identified with an agricultural land and commercial produce from a horticulture land.

ESSENTIALS

1. Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.

Rent or revenue may be included in agricultural income, if:

• It is derived from land
• Land is situated in India
• Land is used for agricultural purposes

RELEVANT CASES

CWT V. Officer-in-charge (courts of wards), Paigah¹

Supreme Court held that the land to be treated as an agricultural land must not only be capable of being used for agricultural purposes but it must have been actually used for such purposes at some point of time. Temporary use of agricultural land is not considered as agricultural land, permanent use of land must be there.

Union of India V. S. Muthyam Reddy²

Court held that income derived from sale of agricultural lands is not agricultural income.

2. Any income derived from such land by anyone of the following:

• Agriculture
• The performance by the cultivator to render the produce raised or received by him fit to be taken to the market.

Killing Valley Tea Company Ltd. V. Secretary of state³

Income derived from the sale of tobacco leaves after subjecting them a scientific process of drying will be an agricultural income because tobacco leaves are ordinarily dried to make them fit for sale.

But the green tea leaf is a marketable commodity and therefore, the process of manufacturing green tea leaf into tea fit for human consumption cannot be said to be a process ordinarily employed to render the tea leaves fit to be taken to the market and therefore, will not be considered as agricultural income.

• The sale by a cultivator or receiver of rent in kind of the produced raised or received by him in respect of which no process has been performed other than a process ordinarily employed to render the produce fit for market will be considered as agricultural income.

 

3. Income derived from building owned and occupied by any receiver of the rent and revenue of any such land or occupied by the cultivator, or the receiver of rent in kind or any land with respect to which or the produced of which any process mentioned as:

• The building is situated or in the immediate vicinity of the agricultural land.
• The cultivator or the receiver of rent in kind needs to occupy it on account of its connection with the agricultural land.
• Building is used as dwelling house, stone house or other out building.

FOLLOWING ARE NOT CONSIDERED AS AGRICULTURAL INCOME 

1. If the land is not situated in any area which is comprised within the jurisdiction of a municipality or a cantonment board having a population of 10,000 or more.
2. In any area 8 kms from the local limits of any municipality or cantonment board.
3. Income from supply of water for irrigation purposes.
4. Income from land used for storing agricultural produce.
5. Remuneration received by the manager of an agricultural farm.
6. Income from forest trees of spontaneous growth.
7. Income from dyeing.
8. Income from mining royalties.
9. Income from stone quarries.
10. Income from fisheries.
11. Income from TV serial shooting in farm house.
12. Income from land used for brick making.

PARTIALLY AGRICULTURAL INCOME {RULE 7}

In the case of income which is partially agricultural income and partially income chargeable to tax under the head of ‘Profits & Gains’ of the business in determining that part which is chargeable to income tax the market value of the agricultural produce which has been raised by the assessee and which has been civilized as a raw material is such business shall be made in respect of any expenditure, by the assessee, as a cultivator.

BURDEN OF PROOF

The assessee who claims the exemption has to prove that the income is agricultural income.

CASE LAWS

Bacha F. Guzdar V. C.I.T.⁴

Even if the entire profits of a company constitutes agricultural income, the dividend received by a share holder of that company form the company do not constitute agricultural income.

C.I.T. V. Raja Benoy Kumar Sahas Roy⁵

The expression land used for agricultural purpose in the income tax act does not extend to forest of spontaneous growth.

K.Lakshmann & Co. V. C.I.T.⁶

When the assessee is growing mulberry leaves and feeding such leaves to silk-worms and is obtaining silk cocoons, income from sale of silk cocoons is not agricultural income.

 

DIVERSION OF INCOME

Diversion of Income is the process of diverting income before it is earned by the assesee. Such amount shall be excluded from the total income of the assessee as the income is diverted to someone else before being earned by the assessee.

In case of diversion of income there is an over ridding title of any other person on such income. So the income before being earned by the assessee reaches such person and hence not chargeable to tax in the hands of the assessee.

REQUISITES

• The income has to be diverted as source.
• There is an overriding charge or title for such diversion.
• The charge or the obligation is on the source of income and not on the receiver.

CASE LAWS

Bejoy Singh Dudhuria V. C.I.T.⁷

The assessee succeeded to the family ancestral estate on the death of his father. Subsequently, a suit was brought by his stepmother for maintenance against the assessee in which a consent decree was made directing the assessee to pay a fixed monthly sum to his stepmother and the maintenance was declared as a charge on the ancestral estate in the hands of assessee.

Held: The sum paid by the assessee to his stepmother could not be treated as income of the assessee.

 

APPLICATION OF INCOME

The transfer of income by a person without transfer of source of income is merely application of income and remains the income of the person who has so transferred, even if the transfer has been made by him under a legal obligation to apply the income in that way.

ESSENTIALS

1. The voluntary foregoing by an employee of the salary due to him is application of money.
2. Salary due to an employee is treated as his income, although he may not have right to apply it as he likes.
3. Compulsory deductions from the remuneration or salary are also mere application of money and the amount of compulsory deduction will be treated as income of the employee.

CASE LAWS

Probhat Kumar Mitter V. C.I.T.⁸

Where a husband by trust-dead transfers the income from certain shares held by him in a company to his wife, the income so transferred will remain the income of the husband because he has transferred the income from the shares but not the shares themselves.

 

 

¹1977 SCR(1)146

²(1999) 156 CTR 0361

³(1921)I.L.R. 48 Cal. 161

⁴1955 AIR 740

⁵1957 AIR 768

⁶(1998) 9 SCC 537

⁷(1933) 35 BOMLR 811

⁸1961 AIR 1019

Author: AKANKSHA CHHABRA,
School of Law,IIMT