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.

• 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 departmentValidity unconfirmed
  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 departmentValidity unconfirmed
  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.
• M/s. Jayanti Botanical Gardens v ITO, Bangalore ITATHelps departmentValidity unconfirmed
  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.

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.