Section 10(1)

Section 10(1) — the law in short

What the courts have decided on section 10(1), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Union of India v Tata Tea Co Ltd Supreme CourtHelps department
  Sixty per cent of my tea company's income is agricultural and outside income tax. When I distribute dividend, is the distribution tax payable on the whole dividend or only on the taxable forty per cent?
  On the whole dividend. The Supreme Court upheld section 115-O as within Parliament's competence under Entry 82 of List I and set aside the Calcutta High Court's rider that additional tax could be charged only on 40 per cent of the dividend. Dividend declared and distributed is not impressed with the character of the profits out of which it is paid, so it does not become agricultural income in the shareholder's hands merely because the company's income was largely agricultural. Reading a 40 per cent limit into section 115-O would alter the provision, for which there is no warrant. The tea company's appeal was dismissed.
• CIT, Dibrugarh v Doom Dooma India Ltd Supreme CourtHelps taxpayer
  I grow and manufacture tea, so only part of my income is taxed under the Income-tax Act. When I carry the written down value forward, does the Assessing Officer deduct the whole year's depreciation or only the taxable proportion?
  Only the taxable proportion. Under s.10(1) read with rule 8 of the Income-tax Rules, 1962, 40 per cent of the income from the sale of tea grown and manufactured in India is the part liable to tax, and the Supreme Court held that in a rule 8 case the depreciation 'actually allowed' within s.43(6)(b) is the proportionate depreciation only. The Department's appeals, which sought to reduce the written down value by 100 per cent of the depreciation computed at the prescribed rate, were dismissed.
• CIT v. Willamson Financial Services (Supreme Court) — a Chapter VI-A deduction on a tea company's composite income is allowed AFTER the Rule 8(1) sixty-forty apportionment, not against the whole composite income Supreme CourtHelps department
  Our tea company exports. Should the section 80HHC deduction be worked out on the whole composite income before Rule 8 splits it sixty-forty, or only on the forty per cent that is taxable?
  Only on the forty per cent. The Supreme Court held that the deduction under section 80HHC is required to be allowed AFTER the apportionment of income under Rule 8(1), and answered the issue in favour of the Department. The legal fiction in Rule 8(1) is confined to that rule: it assigns chargeability and computability only to the non-agricultural forty per cent, and it cannot be extended into section 80HHC(3)(a), because deductions under Chapter VI-A are made from gross total income and are not part of the computation of income under the head "Profits and gains of business".
• K. Lakshmanan & Co v CIT Supreme CourtHelps department
  I grow mulberry, feed the leaves to silkworms and sell the cocoons. Is the whole income agricultural income and exempt?
  No. The Supreme Court held that income from rearing silkworms and selling cocoons is not agricultural income. The definition requires that what is taken to market and sold be the produce raised by the cultivator, processed only so far as to make it marketable. Mulberry leaves are the agricultural produce here; silkworms are not, and cocoons certainly are not. A process that alters the character of the produce into a different commodity takes the income outside the definition. That the leaves themselves had no market did not help the assessee. The appeals were dismissed.
• Thiru Arooran Sugars Ltd v CIT, Madras Supreme CourtHelps department
  I grow sugarcane and crush all of it in my own mill, so I never sell any cane. My cost of cultivation is higher than the market price. Can the Assessing Officer still deduct the market value of the cane under rule 7 instead of my actual costs?
  Yes. Rule 7(2)(a) applies wherever the agricultural produce is of a kind ordinarily sold in the market in its raw state, and sugarcane is such a produce, so the deduction from composite profits is the average price at which cane was sold during the previous year, not the assessee's cultivation expenses. The Supreme Court held that 'market' in rule 7 does not require an open market where buyers and sellers congregate, that the controlled price under the Sugarcane Control Order is the market price, and that it makes no difference that the assessee was the only buyer in its region.
• CIT v R.M. Chidambaram Pillai Supreme CourtHelps taxpayerSuperseded by amendment
  I draw a salary from my firm, which grows and manufactures tea. Only 40 per cent of the firm's income is taxable as business income - is my whole salary taxable, or only 40 per cent of it?
  Only the taxable proportion. The Supreme Court held that a firm is not a legal person, and since a contract of service needs two distinct persons there can be no contract of employment between a firm and its own partner. A salary agreed to a partner is therefore a special share of profits - profits under another name - and takes the character of the firm's income. Where the composite income from tea is apportioned so that 60 per cent is agricultural and beyond the Union's reach, 60 per cent of the partner's salary shares that character too. The position is different for a stranger who is not a partner.
• CIT v Raja Benoy Kumar Sahas Roy Supreme CourtHelps taxpayer
  I sell timber from forest land that we prune, weed and replant. Is that agricultural income?
  Only so far as basic operations were performed. Income is agricultural where operations on the land itself prior to germination — tilling, sowing, planting — have been carried out; subsequent operations such as weeding, pruning, tending and harvesting qualify only when performed as part of an integrated activity with those basic operations. Produce of spontaneous growth is not agricultural income, so a part-replanted forest has to be apportioned.
• Bacha F Guzdar v CIT Supreme CourtHelps department
  I hold shares in a tea company and 60 per cent of its income is exempt as agricultural income. Is 60 per cent of my dividend exempt too?
  No. The Supreme Court held that dividend from a tea company is not agricultural income in the shareholder's hands. Agricultural income means revenue received by direct association with land used for agricultural purposes; it does not extend to revenue that changes hands by way of distribution of dividends. In fact and truth the dividend is derived from the investment in shares and rests on the contractual relation between the company and the shareholder. The shareholder has no interest in the property of the company, which is a juristic person distinct from him, only a right to participate in profits.
• PCIT-1, Chennai v M/s. British Agro Products (India) Pvt. Ltd. High CourtHelps departmentNo later treatment found
  I grow button mushrooms in trays under controlled temperature in a shed and claim the income as agricultural income under s.10(1). The Assessing Officer says it is business income. Where does that stand?
  Against you, in the Madras High Court. The Court held that income from the sale of white button mushrooms grown in a factory under controlled conditions does not fall within any of the three limbs of s.2(1A) and so is not exempt under s.10(1), allowed the Revenue's appeals and answered both substantial questions against the assessee. That result is squarely opposed to the Hyderabad Special Bench in DCIT v. Inventaa Industries Pvt. Ltd., which the Tribunal below had followed, and appeals against Inventaa were recorded as still pending before the Telangana High Court.
• Namdhari Seeds Pvt Ltd v CIT High CourtHelps department
  I give farmers my foundation seed, supervise their fields and buy back the hybrid seed at a fixed rate per quintal. Is what I earn agricultural income exempt under section 10(1)?
  No. The Karnataka High Court held the whole of the income was business income. Under the contract farming arrangement the farmer used his own land and his own labour and carried out the basic operations - preparing the bed, sowing, cultivating and harvesting. The company only supplied foundation seed, gave technical advice and supervision, and paid a fixed rate per quintal for seed meeting its specification. Because the assessee did not itself carry out the basic agricultural operations, cleaning, grading and converting foundation seed into certified seed could not be treated as part of an integrated agricultural activity. The Commissioner (Appeals) was wrong to exempt all of it and the Tribunal wrong to split it 90:10.
• Bennur Siddegowda Santhosh v. ITO, Ward-1, Chikmagalur (ITAT Bangalore) — Rule 7B, not the general Rule 7, governs coffee, and coffee bought from other planters and processed carries no agricultural element at all ITATCuts both waysNo later treatment found
  We grow coffee, cure it in our own concern and also buy coffee from other planters. The Assessing Officer has applied Rule 7B and taxed forty per cent. We say Rule 7 applies. Who is right?
  The Assessing Officer and the Commissioner (Appeals) were right that Rule 7B applies and the general Rule 7 does not. The Tribunal held that Rule 7 of the Income-tax Rules, 1962 provides for general agricultural income other than coffee and rubber, that Rule 7B is the specific provision for income from the manufacture of coffee, and that the assessee's case fell under Rule 7B(1A), so that forty per cent of the income is business income and sixty per cent is exempt as agricultural income. But it also held that coffee PURCHASED from other planters and processed and sold by the assessee's proprietary concern has no element of agricultural income at all and could not get the benefit of exemption, and it restored the whole issue to the Assessing Officer for the assessee to segregate the two streams.
• Mrs. Sisily Jose v. ITO, NCW-19(4), Chennai (ITAT Chennai) — converting field latex into ribbed smoked sheets is not "manufacture or processing" within Rule 7A, so the whole income remains agricultural ITATHelps taxpayerNo later treatment found
  My client taps rubber and makes ribbed smoked sheets to keep the latex from spoiling before sale. The Commissioner (Appeals) has applied Rule 7A and taxed thirty-five per cent as business income. Is that right?
  No. The Tribunal held that ribbed smoked sheets are merely dried and smoked latex, intended to prevent deterioration and make the product marketable, and that the process involves no chemical or mechanical treatment or transformation resulting in a new product — so it is not "manufacture" or "processing" in the sense contemplated by Rule 7A. Rule 7A applies to income from the manufacture or processing of centrifuged latex and the other products it names, not to the simple smoking or drying of latex sheets. The Tribunal set aside the Commissioner (Appeals)'s order to the extent it treated thirty-five per cent of the income as business income and directed the Assessing Officer to treat the entire income from the sale of ribbed smoked rubber sheets as agricultural income.
• Shri Samadhan Rambhau Patil v ITO, Ward-1, Malegaon ITATHelps departmentNo later treatment found
  I explained my cash deposits as loans taken in cash from local farmers and filed their Aadhaar cards and 7/12 extracts. The Assessing Officer added the amount under s.69A because the farmers did not turn up. What happens on appeal?
  Identity documents and land records of the lenders are not enough by themselves. The Pune Tribunal held that Aadhaar cards and 7/12 extracts failed to serve any purpose once the lenders, when summoned, did not confirm the loans, and that the absence of the one-time settlement papers the loans were said to have funded left the explanation unverified at every stage. But because the assessee had in fact produced the farmer-lenders before the Assessing Officer on 20 October 2019 and they could not be examined owing to the officer's own unavailability, and because the Departmental Representative did not controvert that, the Tribunal remanded the issue for de novo verification and allowed the appeal for statistical purposes.
• Shri Madhusudan Dhakad v ITO-1, Harda ITATHelps taxpayer
  I am a farmer. Cash deposits in my bank account during demonetisation have been added under s.69A because I could produce bills and vouchers for only part of my crop sales. How much proof of cultivation is enough?
  Enough to show that you had sufficient sources for the deposits, not vouchers for every rupee. The Indore Tribunal deleted an addition of Rs 9,42,063 where the assessee produced vouchers covering about 72 per cent of the year's total deposits, held 99.195 acres in the family with 40.90 acres in his own name, was a full-time agriculturist with government awards for yield, had made cash withdrawals of Rs 33,86,980 from the same accounts during the year, and had no other source of income. The Tribunal held the explanation that part of the crop was sold direct to consumers without bills deserved credence.
• M/s. Jayanti Botanical Gardens v ITO, Bangalore ITATHelps departmentNo later treatment found
  I run a nursery. Explanation 3 to s.2(1A) says income from saplings or seedlings grown in a nursery is agricultural income. The Assessing Officer has treated half my receipts as business income because my contracts also cover planting and landscaping at the customer's site. Can he?
  Yes. The Bangalore Tribunal held that by virtue of Explanation 3 to s.2(1A) only income derived from the sale of saplings and seedlings grown in the assessee's OWN nursery is deemed to be agricultural income, and that receipts under a composite contract that also covers preparing the client's site, supplying soil and fertiliser, making pits, planting, engaging horticulturists and insuring the plants are not. The ad hoc split of 50 per cent made by the Assessing Officer and confirmed by the Commissioner (Appeals) was upheld and the appeal was dismissed.
• Statutory position — section 115TD: the exit tax on accreted income, and the Finance Act 2022 extension to a mere failure to re-apply in time CBDT Circulars & InstructionsCuts both waysNo later treatment found
  We simply missed the deadline for the fresh application under s.12A(1)(ac). We have not been cancelled and nobody has rejected anything. Can the exit tax under s.115TD really apply to us?
  Yes. Since the Finance Act 2022, s.115TD(3)(iii) deems a specified person to have been converted into a form not eligible for registration where it simply fails to make the application required by s.12A(1)(ac)(i), (ii) or (iii), or by the corresponding clauses of the first proviso to s.10(23C), within the period specified, where that period expires in the previous year. The consequence is tax on accreted income at the maximum marginal rate, payable within fourteen days of the end of that previous year, in addition to any income tax otherwise chargeable, with no credit and no deduction against it.
• Statutory position — partial integration: agricultural income is exempt under the Income-tax Act but is aggregated for RATE purposes, and that aggregation is enacted by the annual Finance Act, not by the Income-tax Act CBDT Circulars & InstructionsCuts both waysNo later treatment found
  My client's agricultural income is exempt, so why has the system charged tax at a higher rate on his non-agricultural income, and where in the Act is that written?
  It is not written in the Income-tax Act at all, and that is the point. Section 10(1) excludes agricultural income from total income and the Income-tax Act contains no provision aggregating it; the aggregation is enacted afresh every year by section 2 of the annual Finance Act, which is the Central Act contemplated by section 4(1) of the Income-tax Act as fixing the rate. Sub-section (2) of that section applies where Paragraph A of Part I of the First Schedule applies and the assessee has, in the previous year, net agricultural income exceeding FIVE THOUSAND RUPEES in addition to total income, and the total income exceeds the basic exemption amount named in that sub-section. Where it applies, the net agricultural income is taken into account only for the purpose of charging income-tax on the total income, and the computation is: aggregate the total income and the net agricultural income and work out the tax on the aggregate at the Paragraph A rates; then increase the net agricultural income by the basic exemption sum and work out the tax on that figure at the same rates; the second amount is deducted from the first, and what is left is the tax on the total income.
• Statutory position — s.10(37): the four cumulative conditions for exempting capital gain on the compulsory acquisition of urban agricultural land CBDT Circulars & InstructionsCuts both waysNo later treatment found
  My client's agricultural land inside the municipal limits has been compulsorily acquired. Section 2(14)(iii) does not help because the land is urban. What exactly must he prove under section 10(37)?
  Section 10(37) exempts capital gain on the transfer of agricultural land where four conditions are ALL satisfied. The assessee must be an individual or a Hindu undivided family. The land must be situated in an area referred to in item (a) or item (b) of s.2(14)(iii) — that is, it must be the urban agricultural land which IS a capital asset. The land must, during the period of TWO YEARS immediately preceding the date of transfer, have been used for agricultural purposes by that Hindu undivided family or individual, or by a parent of his. The transfer must be by way of compulsory acquisition under any law, or a transfer the consideration for which is determined or approved by the Central Government or the Reserve Bank of India. And the income must have arisen from compensation or consideration received on or after 1 April 2004. An Explanation provides that "compensation or consideration" includes compensation or consideration enhanced or further enhanced by any court, Tribunal or other authority.
• Statutory position — s.2(1A): the three limbs of "agricultural income", the two conditions a farm building must satisfy, and Explanations 1 to 4 CBDT Circulars & InstructionsCuts both ways
  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.
• Statutory position — Rule 7: where income is partly agricultural and partly business, the market value of the assessee's own produce comes out and nothing else does CBDT Circulars & InstructionsCuts both waysNo later treatment found
  We grow our own raw material and process it in our own factory. How is the business profit computed, and can we also claim the cultivation expenses?
  Rule 7 of the Income-tax Rules, 1962 governs income that is partly agricultural income as defined in section 2 and partly income chargeable under "Profits and gains of business". In determining the part chargeable to income-tax you DEDUCT the market value of the agricultural produce the assessee has raised, or received as rent-in-kind, which has been used as raw material in the business or whose sale receipts are included in the business accounts — and no further deduction is made for any expenditure incurred by the assessee as a cultivator or receiver of rent-in-kind. Sub-rule (2) then fixes "market value": where the produce is ordinarily sold in the market in its raw state, or after a process ordinarily employed to render it fit for market, it is the average price at which it was so sold during the relevant previous year; where it is not ordinarily so sold, it is the aggregate of the expenses of cultivation, the land revenue or rent paid for the area in which it was grown, and such amount as the Assessing Officer finds to represent a reasonable profit.
• Statutory position — Rule 8: tea grown and manufactured by the seller, forty per cent taxable and sixty per cent agricultural, and the sub-rule (2) replanting allowance CBDT Circulars & InstructionsCuts both waysNo later treatment found
  Our client grows tea and manufactures it in its own factory. What proportion of the composite income is taxable under the Income-tax Act, and what does sub-rule (2) allow for replanting?
  Rule 8(1) of the Income-tax Rules, 1962 provides that income derived from the sale of tea GROWN AND MANUFACTURED BY THE SELLER IN INDIA shall be computed as if it were income derived from business, and forty per cent of such income shall be deemed to be income liable to tax. The balance sixty per cent is agricultural income, exempt under s.10(1) and within the States' taxing power. Sub-rule (2) directs that in computing such income an allowance shall be made in respect of the cost of planting bushes in replacement of bushes that have died or become permanently useless in an area already planted, if such area has not previously been abandoned, and that in determining that cost no deduction shall be made in respect of any subsidy which, under clause (30) of section 10, is not includible in total income.
• Statutory position — Rule 7A (rubber) and Rule 7B (coffee): the fixed apportionment percentages, both coffee cases, and the replanting allowance CBDT Circulars & InstructionsCuts both ways
  My client grows rubber and my other client grows and cures coffee. What percentage of the income is business income in each case, and does it change if the coffee is also roasted and ground?
  Rule 7A: income from the sale of centrifuged latex or cenex, or latex based crepes (such as pale latex crepe), or brown crepes (such as estate brown crepe, remilled crepe, smoked blanket crepe or flat bark crepe), or technically specified block rubbers, manufactured or processed from field latex or coagulum obtained from rubber plants GROWN BY THE SELLER IN INDIA, is computed as if it were business income and THIRTY-FIVE PER CENT of it is deemed to be income liable to tax — the balance sixty-five per cent being agricultural. Rule 7B has two cases: coffee GROWN AND CURED by the seller in India — TWENTY-FIVE PER CENT taxable, seventy-five per cent agricultural (sub-rule (1)); and coffee GROWN, CURED, ROASTED AND GROUNDED by the seller in India, with or without mixing chicory or other flavouring ingredients — FORTY PER CENT taxable, sixty per cent agricultural (sub-rule (1A)). Both rules carry a replanting allowance in their sub-rule (2), and the cost is not to be reduced by any subsidy that clause (31) of section 10 keeps out of total income.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.