Section 2(1A)

Section 2(1A) — the law in short

What the courts have decided on section 2(1A), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• 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".
• Malabar Industrial Co Ltd v CIT Supreme CourtHelps department
  The Commissioner wants to revise my assessment. What does he actually have to establish?
  Both things, not one. The order must be erroneous AND prejudicial to the revenue. If the officer took one of two possible views, that is not an error.
• 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.
• 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.
• 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.
• 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 — s.2(14)(iii): when agricultural land is NOT a capital asset, and the aerially measured distance test substituted by the Finance Act, 2013 with effect from 1 April 2014 CBDT Circulars & InstructionsCuts both ways
  My client sold ancestral farm land near a town and the Assessing Officer has charged capital gains. What are the exact population and distance limits in section 2(14)(iii), and from when is the distance measured aerially rather than by road?
  Agricultural land in India is not a "capital asset" at all unless it falls inside one of the two areas described in s.2(14)(iii), so a sale of land outside them produces no capital gain to charge. Item (a) catches land within the jurisdiction of a municipality (however described) or a cantonment board having a population of not less than ten thousand. Item (b) catches land within an aerially measured distance of the local limits of such a municipality or cantonment board: not more than two kilometres where its population is more than ten thousand but not exceeding one lakh; not more than six kilometres where it is more than one lakh but not exceeding ten lakh; and not more than eight kilometres where it is more than ten lakh. Item (b) in that aerially measured form was substituted for the earlier item (b) by the Finance Act, 2013, with effect from 1 April 2014.
• 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.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 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.