The Assessing Officer says my client's receipt is not agricultural income even though it comes off farm land. What exactly does section 2(1A) require, limb by limb, and where do the farm building and nursery cases sit?
Section 2(1A) has three limbs and every one of them is anchored to land "situated in India and used for agricultural purposes". Limb (a) is rent or revenue derived from such land; limb (b) is income derived from such land by agriculture, or by a cultivator's or rent-in-kind receiver's performance of a process ordinarily employed to render the produce fit to be taken to market, or by his sale of that produce with no process beyond that one; limb (c) is income from a farm building, and it is allowed only if BOTH conditions in the proviso are met. Explanation 1 keeps capital gains on urban agricultural land out of "revenue derived from land", Explanation 2 keeps a farm building's non-agricultural use out, Explanation 3 deems nursery income in, and Explanation 4 defines "population" for the proviso.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text), reported as Income-tax Act, 1961, s.2(1A), as printed on the departmental Year 2025 page (incometaxindia.gov.in/w/section-2-66) and the Year 2024 (No. 1) page (/w/section-2-64); an earlier form of the clause is reproduced at para 13 of the Supreme Court's judgment in CIT v. Willamson Financial Services (12 December 2007). It bears on section 2(1A), section 10(1), section 2(14)(iii), section 45 of the Income Tax Act 1961, in Capital Gains Exemptions, How Tax Law Is Read and Capital Gains matters.
This is the clause the whole exemption in s.10(1) runs on, and most disputes are lost on a limb the assessee never read. Four points repay attention. First, limb (b)(ii) is narrow: the process must be one ORDINARILY EMPLOYED by a cultivator, and it must be to render the produce fit to be taken to market — a process that makes a new and different commodity is not within it, and the income from that step is business income. Second, limb (b)(iii) permits a sale only where "no process has been performed other than a process of the nature described in paragraph (ii)" — one extra manufacturing step takes the whole receipt out. Third, the farm building in limb (c) needs two things cumulatively: the building must be on or in the immediate vicinity of the land and required by the receiver or cultivator, by reason of his connection with the land, as a dwelling house, store-house or other out-building; AND the land must either be assessed to land revenue or subject to a local rate, or else lie outside the municipal and aerial-distance limits set out in item (ii)(A) and (B) of the proviso. Fourth, Explanation 2 is the trap in every "farmhouse let out" case: income from using that building or land for ANY purpose other than agriculture, expressly including letting for residence or for a business or profession, is not agricultural income at all. Explanation 3, which deems income from saplings or seedlings grown in a nursery to be agricultural income, is a deeming provision and does its work whether or not basic operations on land were carried out.
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The clause is structured as follows on both departmental editions read. Sub-clause (a): "any rent or revenue derived from land which is situated in India and is used for agricultural purposes". Sub-clause (b): "any income derived from such land by— (i) agriculture; or (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or (iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause". Sub-clause (c): "any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on", subject to a proviso in two items. Item (i) of the proviso requires that the building be on or in the immediate vicinity of the land and be required by the receiver of the rent or revenue, or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the land, as a dwelling house, store-house or other out-building. Item (ii) requires that the land be either assessed to land revenue in India or subject to a local rate assessed and collected by officers of the Government as such; or, where it is not, that it not be situated (A) in any area comprised within the jurisdiction of a municipality (however described) or a cantonment board having a population of not less than ten thousand, or (B) in any area within the distance, measured aerially, of not more than two kilometres from the local limits of such a municipality or cantonment board having a population of more than ten thousand but not exceeding one lakh, not more than six kilometres where the population is more than one lakh but not exceeding ten lakh, and not more than eight kilometres where the population is more than ten lakh. Four Explanations follow. Explanation 1 declares that revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of land referred to in item (a) or item (b) of sub-clause (iii) of clause (14). Explanation 2 declares that income derived from any building or land referred to in sub-clause (c) arising from the use of that building or land for any purpose (including letting for residential purpose or for the purpose of any business or profession) other than agriculture falling under sub-clause (a) or sub-clause (b) shall not be agricultural income. Explanation 3 deems income derived from saplings or seedlings grown in a nursery to be agricultural income. Explanation 4 defines "population" for the purposes of item (ii) of the proviso to sub-clause (c) as the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year.
Not a judgment. The statutory position, transcribed from two departmental editions of section 2, is as set out above: three limbs, a two-part cumulative proviso for the farm building, and four Explanations of which Explanation 1 excludes capital gains on urban agricultural land, Explanation 2 excludes non-agricultural use of a farm building or the land under it, Explanation 3 deems nursery income to be agricultural income, and Explanation 4 fixes the census by reference to which "population" is measured.
Not a judgment; no judicial reasoning is stated. The structural points recorded above are taken from the words of the clause itself: the governing phrase "situated in India and is used for agricultural purposes" appears in sub-clause (a) and is carried into sub-clause (b) by the words "such land" and into sub-clause (c) by the words "any such land"; the proviso to sub-clause (c) is expressed as two items joined by "and", so both must be satisfied; and Explanations 1 and 2 are each cast as declaratory ("For the removal of doubts, it is hereby declared") while Explanation 3 is cast as a deeming provision ("shall be deemed to be agricultural income").
Explanation 2.—For the removal of doubts, it is hereby declared that income derived from any building or land referred to in sub-clause (c) arising from the use of such building or land for any purpose (including letting for residential purpose or for the purpose of any business or profession) other than agriculture falling under sub-clause (a) or sub-clause (b) shall not be agricultural income.
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Handle my notice → Ask a CA on WhatsAppSection 2(1A) has three limbs and every one of them is anchored to land "situated in India and used for agricultural purposes". Limb (a) is rent or revenue derived from such land; limb (b) is income derived from such land by agriculture, or by a cultivator's or rent-in-kind receiver's performance of a process ordinarily employed to render the produce fit to be taken to market, or by his sale of that produce with no process beyond that one; limb (c) is income from a farm building, and it is allowed only if BOTH conditions in the proviso are met. Explanation 1 keeps capital gains on urban agricultural land out of "revenue derived from land", Explanation 2 keeps a farm building's non-agricultural use out, Explanation 3 deems nursery income in, and Explanation 4 defines "population" for the proviso. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 2(1A), section 10(1), section 2(14)(iii), section 45 of the Income Tax Act 1961. It is reported as Income-tax Act, 1961, s.2(1A), as printed on the departmental Year 2025 page (incometaxindia.gov.in/w/section-2-66) and the Year 2024 (No. 1) page (/w/section-2-64); an earlier form of the clause is reproduced at para 13 of the Supreme Court's judgment in CIT v. Willamson Financial Services (12 December 2007). This is the clause the whole exemption in s.10(1) runs on, and most disputes are lost on a limb the assessee never read. Four points repay attention. First, limb (b)(ii) is narrow: the process must be one ORDINARILY EMPLOYED by a cultivator, and it must be to render the produce fit to be taken to market — a process that makes a new and different commodity is not within it, and the income from that step is business income. Second, limb (b)(iii) permits a sale only where "no process has been performed other than a process of the nature described in paragraph (ii)" — one extra manufacturing step takes the whole receipt out. Third, the farm building in limb (c) needs two things cumulatively: the building must be on or in the immediate vicinity of the land and required by the receiver or cultivator, by reason of his connection with the land, as a dwelling house, store-house or other out-building; AND the land must either be assessed to land revenue or subject to a local rate, or else lie outside the municipal and aerial-distance limits set out in item (ii)(A) and (B) of the proviso. Fourth, Explanation 2 is the trap in every "farmhouse let out" case: income from using that building or land for ANY purpose other than agriculture, expressly including letting for residence or for a business or profession, is not agricultural income at all. Explanation 3, which deems income from saplings or seedlings grown in a nursery to be agricultural income, is a deeming provision and does its work whether or not basic operations on land were carried out. If it applies to you, the first step is this: Identify which limb you are on before you argue anything. Rent or revenue is limb (a); produce and process are limb (b); a building is limb (c). The three do not overlap and the conditions differ.
The clause is structured as follows on both departmental editions read. Sub-clause (a): "any rent or revenue derived from land which is situated in India and is used for agricultural purposes". Sub-clause (b): "any income derived from such land by— (i) agriculture; or (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or (iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause". Sub-clause (c): "any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on", subject to a proviso in two items. Item (i) of the proviso requires that the building be on or in the immediate vicinity of the land and be required by the receiver of the rent or revenue, or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the land, as a dwelling house, store-house or other out-building. Item (ii) requires that the land be either assessed to land revenue in India or subject to a local rate assessed and collected by officers of the Government as such; or, where it is not, that it not be situated (A) in any area comprised within the jurisdiction of a municipality (however described) or a cantonment board having a population of not less than ten thousand, or (B) in any area within the distance, measured aerially, of not more than two kilometres from the local limits of such a municipality or cantonment board having a population of more than ten thousand but not exceeding one lakh, not more than six kilometres where the population is more than one lakh but not exceeding ten lakh, and not more than eight kilometres where the population is more than ten lakh. Four Explanations follow. Explanation 1 declares that revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of land referred to in item (a) or item (b) of sub-clause (iii) of clause (14). Explanation 2 declares that income derived from any building or land referred to in sub-clause (c) arising from the use of that building or land for any purpose (including letting for residential purpose or for the purpose of any business or profession) other than agriculture falling under sub-clause (a) or sub-clause (b) shall not be agricultural income. Explanation 3 deems income derived from saplings or seedlings grown in a nursery to be agricultural income. Explanation 4 defines "population" for the purposes of item (ii) of the proviso to sub-clause (c) as the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year. It was decided by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Not a judgment. The statutory position, transcribed from two departmental editions of section 2, is as set out above: three limbs, a two-part cumulative proviso for the farm building, and four Explanations of which Explanation 1 excludes capital gains on urban agricultural land, Explanation 2 excludes non-agricultural use of a farm building or the land under it, Explanation 3 deems nursery income to be agricultural income, and Explanation 4 fixes the census by reference to which "population" is measured.
Not a judgment; no judicial reasoning is stated. The structural points recorded above are taken from the words of the clause itself: the governing phrase "situated in India and is used for agricultural purposes" appears in sub-clause (a) and is carried into sub-clause (b) by the words "such land" and into sub-clause (c) by the words "any such land"; the proviso to sub-clause (c) is expressed as two items joined by "and", so both must be satisfied; and Explanations 1 and 2 are each cast as declaratory ("For the removal of doubts, it is hereby declared") while Explanation 3 is cast as a deeming provision ("shall be deemed to be agricultural income"). In the words reproduced by the source cited on this page: "Explanation 2.—For the removal of doubts, it is hereby declared that income derived from any building or land referred to in sub-clause (c) arising from the use of such building or land for any purpose (including letting for residential purpose or for the purpose of any business or profession) other than agriculture falling under sub-clause (a) or sub-clause (b) shall not be agricultural income."
It was decided by the CBDT Circulars & Instructions and is reported as Income-tax Act, 1961, s.2(1A), as printed on the departmental Year 2025 page (incometaxindia.gov.in/w/section-2-66) and the Year 2024 (No. 1) page (/w/section-2-64); an earlier form of the clause is reproduced at para 13 of the Supreme Court's judgment in CIT v. Willamson Financial Services (12 December 2007). Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 2(1A), section 10(1), section 2(14)(iii), section 45, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Not a judgment. The statutory position, transcribed from two departmental editions of section 2, is as set out above: three limbs, a two-part cumulative proviso for the farm building, and four Explanations of which Explanation 1 excludes capital gains on urban agricultural land, Explanation 2 excludes non-agricultural use of a farm building or the land under it, Explanation 3 deems nursery income to be agricultural income, and Explanation 4 fixes the census by reference to which "population" is measured. It arises in Capital Gains Exemptions, How Tax Law Is Read and Capital Gains matters, on section 2(1A), section 10(1), section 2(14)(iii), section 45 of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. For a process claim under limb (b)(ii), collect evidence that the process is one ORDINARILY employed by cultivators of that produce in that region, and that it goes no further than making the produce marketable. Get a statutory or expert body's opinion in writing if one exists for your crop. For a farm building, prove both proviso conditions separately: the building's connection with and vicinity to the land, and the land's land-revenue or local-rate assessment — or, failing that, its position outside the municipal and aerial-distance limits. If the building or the land is being used for anything other than agriculture, including letting, stop: Explanation 2 puts that income outside the clause however agricultural the surrounding operation is. For a nursery, plead Explanation 3 in terms as a deeming provision, and keep the saplings-and-seedlings description accurate in the books and the return. Check the land is situated IN INDIA. Foreign agricultural income is not within s.2(1A) at all and is not exempt under s.10(1).
Still good law. Two departmental editions of section 2, Year 2025 and Year 2024 (No. 1), print clause (1A) identically, which is the best evidence obtainable on this pass that the clause is unchanged as between those editions. That is not the same as reading the current Finance Act: no Finance Act text was retrieved on this pass and no amendment footnote for clause (1A) could be read, because the fetch of the section 2 page ended before the footnote block. I did not carry out any check of judicial treatment of clause (1A) beyond noting the earlier form of the clause reproduced by the Supreme Court in 2007. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Clause (1A) was transcribed in full from the departmental Year 2025 page at /w/section-2-66 and the proviso to sub-clause (c) with Explanations 1 to 4 was transcribed again, independently, from the Year 2024 (No. 1) page at /w/section-2-64. The two editions print the clause identically. I could NOT read any amendment footnote for clause (1A): the section 2 page is long and the fetch of the footnote block ended before reaching it (it stopped at the definition of "company" in clause (17)(iii)), so no amending Act or commencement date for any part of clause (1A) is stated here. Separately, the Supreme Court in CIT v. Willamson Financial Services (12 December 2007) reproduces clause (1A) at its paragraph 13 in an EARLIER form: item (B) of proviso (ii) then read "in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (A), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette", there was a single unnumbered Explanation, and there was no Explanation 2, 3 or 4. That establishes that the aerially measured distance test and Explanations 2 to 4 in clause (1A) were introduced after December 2007, but I did not find a footnote naming the amending Act for CLAUSE (1A) itself. The Finance Act, 2013, w.e.f. 1-4-2014 is documented on this pass only for item (b) of sub-clause (iii) of clause (14) — see the separate s.2(14)(iii) entry — and I do not extend that attribution to clause (1A) without a source. The "decided_on" value of 1 April 2025 is NOT a decision date and NOT a commencement date: no commencement date for any part of clause (1A) could be established on this pass. It is carried only as the 1 April anchor of the departmental edition read ("Year: 2025"), and a later pass that establishes the amending instrument for the proviso to sub-clause (c) and for Explanations 2 to 4 should replace it with the true commencement date. This page carries no date. That is deliberate: no commencement date for this provision was established on this pass, and every other date available — the date of a judgment that reproduces the text, or the vintage of the departmental page it was read from — would be read as the day the position took effect, which it is not. The percentages and text above are verified; only the date they took effect from is not. A later pass will supply it. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Not a judgment. The statutory position, transcribed from two departmental editions of section 2, is as set out above: three limbs, a two-part cumulative proviso for the farm building, and four Explanations of which Explanation 1 excludes capital gains on urban agricultural land, Explanation 2 excludes non-agricultural use of a farm building or the land under it, Explanation 3 deems nursery income to be agricultural income, and Explanation 4 fixes the census by reference to which "population" is measured.
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