Assessments relating to Agricultural income

Article 366(1) of the Constitution provides that the expression ‘agricultural income’ in the Constitution means agricultural income as defined for the purpose of enactments relating to Indian Income Tax. As per section 2(1A) of the Act, ‘agricultural income’ means (a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes; (b) Any income derived from such land by agricultural operations including processing of agricultural produce so as to render it fit for market or sale of such produce; (c) Any income attributable to a farm house subject to fulfillment of conditions specified in the Act; and (d) Any income derived from saplings or seedlings grown in a nursery.

As per section 10(1) of the Income Tax Act, 1961, agricultural income is exempted from tax. Taxes on agricultural income falls under Entry 46 in “State List” under the Constitution of India. Thus, only the State Governments are competent to enact legislations for taxation of agricultural income. The Central Government cannot levy income tax on agricultural income. However, agricultural income is considered for rate purposes while determining the income tax liability viz. the rate of tax applicable to other taxable income of Individuals, Hindu Undivided Families (HUF), Association of Persons (AOP), Bodies of individuals (BOI) and artificial juridical persons. Exemption under the Income Tax law may be claimed as agricultural income, income from sale of agriculture land, income earned as compensation received from government for acquiring the agriculture land etc.

Legal framework

Section 2(1A) of the Act defines agricultural income. Part IV of the First Schedule to the Finance Act deal with computation of net agricultural income for the purposes of determining the rate of Income Tax applicable to certain non-corporate assessees. Section 10(1) provides for the exemption of agricultural income in the computation of the total income of any person. Rules 7, 7A, 7B and 8 of Income Tax Rules, 1962 deal with Income which is partly agricultural and partly from business.

As agricultural income is exempt under the provisions of the Income Tax Act, giving credit to agricultural income for income tax purposes without adequate verification of claim may involve risk of allowance of exemption on ineligible incomes resulting in loss of revenue to the Government. To ensure allowance of exemption on eligible incomes only, it is imperative for the Income Tax Department to institute a robust mechanism for verification of claims for exemption on account of agricultural income.

Objective of the Department

The objective of the Department is to ascertain that the Department, through its Assessing Officers, satisfied itself concerning the genuineness and correctness of the exemptions claimed in respect of agricultural income in cases selected for scrutiny assessments.

Verification of claims relating to agricultural income

The Assessing Officers are required to satisfy themselves that the assessees were eligible for allowance of the exemption claimed under section 10(1) read with section 2(1A) of the Act. Section 2(1A)(b) provides that the agricultural income includes, inter alia, any income derived from land in India by agricultural operations including processing of agricultural produce, raised or received as rent in kind or any process ordinarily employed by cultivator or receiver of rent in kind so as to render it fit for the market, or sale of such produce. Agricultural income of this nature will broadly be computed as if it were chargeable to tax under the head “Profit and gains of business or profession”. This exemption claimed is indicated under Schedule EI of the ITR filed by the assessees.

Section 143(3) of the Act dealing with detailed scrutiny envisages that after hearing the evidence produced by the assessee and such other evidence as the Assessing Officer may require and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income of the assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such assessment. Thus, Assessing Officers are mandated by law to assess the income of the assessee and determine the tax payable by/refundable on the basis of such assessment. Different types of claims together with accounts, records and documents enclosed with the return are required to be examined in detail in scrutiny assessments.

Verification of claims relating to agricultural income - Assessing Officer shall have the same powers as he has under the Income Tax Act

For the purposes of computing the net agricultural income of the assessee, the Assessing Officer shall have the same powers as he has under the Income Tax Act for the purposes of assessment of the total income.

Onus lies on the assessee who claims exemption to establish it

It has been held by the Apex Court in CIT v. R. Venkataswamy Naidu (1956) 29 ITR 529 (SC)  that the onus lies on the assessee who claims exemption to establish it. While determining the taxable income and tax payable, the Assessing Officer shall have the same powers as he has under the Income Tax Act should insist upon production of material evidence for the exemption claimed on account of Agricultural income. Failure to adopt a system of establishing the veracity of the claim would result in excess allowance of exemptions and under-assessment of taxable income.

Exemption allowable only after verification of supporting documents

The claim of exemption on account of agricultural income is allowed only after verification of supporting documents such as the land records, income and expenditure statements, crop information, proof of agricultural income and expenditure such as ledger account, bills, invoices etc. These documentary proof in support of agricultural income claimed by the assessee should be available in the assessment records to establish the veracity of the claim.

Verify the documents and details for correctness of allowance of exemption

Before allowing exemption for agricultural income, the Assessing Officer should obtain and verify

the following details for correctness of allowance of exemption:

(i)              Land records - Ownership/rights over the agricultural land,

(ii)            Land usage,

(iii)          Cost of cultivation,

(iv)          Purchase of seeds, fertilizers,

(v)            Labour/machinery use in agricultural activity.

(vi)          Cash book and/or Bank statements of the assessee

(vii)        Transaction details of agricultural produce

(viii)      Details of receipts and expenditure claimed by assessee (i.e. proof of agricultural receipts and expenses)

(ix)          Proof of having sold the agricultural produce in the open market or in one's own retail shop.

(x)  Proof of having grown the agricultural produce directly from any land used for agricultural purposes.

(xi)     Proof of having derived the agricultural income from direct connection with the agricultural land showing cultivation of the ground, tilling of the land, sowing of the seeds, planting and similar operations on the land, expenditure on human labour and skill, weeding, digging the soil around the growth, removal of undesirable growth, preservation of the crops from insects and pests, protection from depredations by cattle, tending pruning, cutting etc.

(xii)        Proof of performance of any process ordinarily employed by a cultivator or receiver of rent in kind.

(xiii)   Proof of having rendered the produce raised or received by him in a fit condition for being taken to the market without applying any process other than ordinarily employed by a cultivator or receiver of rent in kind.

(xiv)   Proof/evidence of the market value of the agricultural produce sold, evidence of the rate, quality and kind of the produce sold.

(xv)        Proof of having granted rights to the user of the land where it was given to some share cropper of cultivation.

(xvi)      Proof of having derived the agricultural income (claimed by Assessee) from direct connection with the agricultural land showing cultivation of the ground, tilling of the land, sowing of the seeds, planting and similar operations on the land, expenditure on human labour and skill, weeding, digging the soil around the growth, removal of undesirable growth, preservation of the crops from insects and pests, protection from depredations by cattle, tending, pruning, cutting etc., & market where the agricultural produce sold.

Omission to verify the above documents, assessee’s submission, agricultural income and expenditure statement may be resulted not only in inaccurate allowance of exemption but also underassessment of ‘income from other sources’. Where exemption on account of agricultural income was allowed without taking into account/verifying the expenditure incurred to earn the agricultural income, which could also be a potential undesirable avenue for bringing unaccounted income/black money into the financial

Verification of Genuineness of Agricultural Income shown in the Income Tax Return filed by   the assesses for Assessment year 2007-08 to 2015-16 

Although there are no instructions from CBDT specific to scrutiny of agricultural income exemption claims. Assessing Officers should ensuring that the exemption was provided only to eligible assessees, and that the claims of assessees are genuine. The CBDT had issued letter (F. No. DGIT(S)/DIT(S)-3/AST/PIL Matter/Agricultural Income/97/2015-16, dated 10.03.2016) in which it had pointed out that several assesses have declared income from agriculture of more than Rs. 1 Crore in the income tax return filed for earlier years especially from Assessment years 2011-12 to 2013-14.

The CBDT had also stated that a Public Interest Litigation (PIL) is pending before Hon’ble Patna High Court wherein concerns have been raised that a few assesses may be engaged in routing their unaccounted or illegal money in the garb of agricultural income thereby not only claiming exemptions on such income but also engaged in the money laundering activities.

Since agricultural income is only used for rate purposes, it was further stated that in a few such high value cases, taxpayers may have inadvertently made data entry errors while filling up the fields for agricultural income.

Accordingly, CBDT had directed Assessing Officers as under:

(i)   Verify whether the taxpayer may have made a data entry error while filling up the return.

(ii) Wherever scrutiny assessment is completed, Assessing Officer may provide feedback based on assessment records.

(iii) In cases where proceedings under section 143(3) are pending, assessing officers may be informed to thoroughly verify the claims.

Assessing Officers had also been requested to send a status report in this regard after verification on urgent basis to this Directorate General Systems before 20th March 2016 so that correct figures can be reported for the claims of agricultural income to the Hon’ble Patna High Court.

Letter F. No. DGIT(S)/DIT(S)-3/AST/PIL Matter/Agricultural Income/97/2015-16, dated 10.03.2016

Subject : Section 2(1A) - Agricultural Income - Genuineness of Agricultural Income Shown in       Income Tax Return - Verification thereof

Kindly refer to subject matter.

2. It has been noticed that several assesses have declared income from agriculture of more than Rs. 1 Crore in the income tax return filed for earlier years especially from AYs. 2011-12 to 2013-14. 

3. In this regard, there is a PIL matter pending before Hon'ble Patna High Court wherein concerns have been raised that a few assesses may be engaged in routing their unaccounted/illegal money in the garb of agricultural income thereby not only claiming exemptions on such income but also engaged in the money laundering activities.

4. Since agricultural income is only used for rate purposes, it was noticed that in a few such high value cases, taxpayers may have inadvertently made data entry errors while filling up the fields for agricultural income.

5. Therefore, it is requested that the assessing officers may be directed to

(i)    Verify whether the taxpayer may have made a data entry error while filling up the return.

(ii)  Wherever scrutiny assessment is completed, Assessing Officer may provide feedback based on assessment records.

(iii)  In cases where proceedings under section 143(3) are pending, assessing officers may be informed to thoroughly verify the claims.

6. The list of cases having agriculture income more than Rs. 1 Crore alongwith jurisdictional details is placed at itaxnet at the following path : Resources Downloads Systems Verification of Agriculture-Income You are requested to kindly send a status report in this regard after verification as mentioned above. This feedback may be urgently provided to this Directorate before March 20th, 2016 so that we can report the correct figures of claims of agricultural income to the Hon'ble Patna High Court.

7. This issues with the approval of Pr. DGIT(S)

RCC wise list of cases

RCC Code	RCC Name	AY 2007-08	AY 2008-09	AY 2009-10	AY 2010-11	AY 2011-12	AY 2012-13	AY 2013-14	AY 2014-15	AY 2015-16	Grand Total
AGR	Agra					1	2	2	3	2	10
AHM	Ahmedabad	1	2	2	2	2	4	7	4	5	29
ALD	Allahabad		4		3			2	1	2	12
AMR	Amritsar		4	3	2	2	3	8	1	3	26
BBN	Bhubaneshwar	1	4	5	1	1	4	1			17
BLR	Bengaluru	17	26	26	16	31	51	48	59	47	321
BOM	Mumbai	19	18	21	17	22	35	29	32	19	212
BPL	Bhopal	6	7	5	8	2	5	9	6	6	54
BRD	Baroda	1		2	1	3	3	2	1	2	15
CAL	Kolkata	20	25	24	24	32	30	38	32	14	239
CHN	Kochi	7	12	10	6	7	10	17	22	18	109
CMB	Coimbatore	7	14	16	11	13	11	15	13	6	106
DEL	Delhi	28	34	24	32	32	31	35	33	26	275
HYD	Hyderabad	19	21	20	11	17	18	21	17	18	162
JBP	Jabalpur	1	3	3	2	3	4	6	7	5	34
JDH	Jodhpur	1	2	3	3	5	4	1	1	1	21
JLD	Jalandhar	9	13	6	16	5	5	9	13	12	88
JPR	Jaipur	1	3	6	1	1	3	6	7	1	29
KLP	Kolhapur	2	1	3	6	11	7	7	5	3	45
KNP	Kanpur					1			1	2	4
LKN	Lucknow			2	1	4	5	2	4	1	19
MDS	Chennai	13	22	17	16	11	25	26	34	17	181
MRI	Madurai	1	3	5	4	6	5	4	4	6	38
MRT	Merrut	1	3	3	1	4	5	8	6	8	39
NGP	Nagpur	1		3	1		1	1	1	2	10
NSK	Nasik		4	4	2	5	6	9	7	2	39
PNE	Pune	5	8	16	15	33	27	30	28	30	192
PTL	Patiala		4	12	9	12	9	10	8	10	74
PTN	Patna		4	3	10	7	2	5	4		35
RKT	Rajkot		3	2	3	2	2	2		2	16
RTK	Rohtak	6	5	5	8	11	5	18	16	9	83
SHL	Shillong	5		2	4	3	3	2	1	2	22
SRT	Surat	1	1	4	2	2	2	1	1	4	18
TVD	Thiruvanantapuram	6	10	11	14	24	29	23	20	20	157
VPN	Vishakhapatnam	1	2	2	1	3	2		2	2	15
Grand Total		180	262	270	253	318	358	404	394	307	2746

Applicability of Section 14A Read with Rule 8D to Agricultural Income

The exemption from income tax can be granted under section 10(1) of the Income-tax Act, 1961 to the agricultural income earned, if the agricultural activities are actually carried out on said land during the financial year as stipulated under section 2(1A) of the Act to enable earning to fall within exemption provided under section 10(1)) of the Act. One of the purposes for exemption from income tax is to encourage cultivation or actual utilisation of land for agricultural purposes and hence if there is neither in its condition nor anything in the evidence to indicate the intention of its owners or possessors so as to connect with an agricultural purpose, the land could not be “agriculture land”. Hence even if record for ownership and cultivation of agricultural land is maintained, but if no record for proof of agricultural income is maintained, such income is taxable under the head “income from other sources.” Moreover if any person has different source of income including agricultural income, Section 14A is also applicable. Section 14A of Income-tax Act directs to disallow expenditure in relation to earning exempt income and Rule 8D prescribes the method of disallowance of such expenditure. Hence if gross agricultural income is shown in financial statement, disallowance under section 14A will be made for expenses incurred. But if agricultural income returned is net of agricultural expenditure, no disallowance will be made under section 14A. But if such expenditure claimed is inadequate, addition will be made to total income.

Expenses relating to agricultural operations could not be allowed as expenditures in computing the business incomes
Agricultural income is not only exempt from tax, but under the scheme of the Income Tax Act, 1961 is also to be excluded in computing the total income. In the present  case, the assessee has earned some agricultural income by way of sale of white chillies cultivated by it. But the expenses for farming the white chillies were more than such income.

Therefore, the assessee had to debit the net expenses in its P&L a/c. If, on the other hand, there was a surplus on sale of white chillies, the surplus income being in the nature of agricultural income could not be brought to tax under the Income Tax Act, 1961. If there was a surplus of agricultural income in the hands of the assessee for these impugned assessment years, there would have been no question of claiming expenses by way of deduction or question of allowing the same as deduction in computing the business income of the assessee company.

The expenses relating to agricultural operations cannot be allowed as expenditure in computing the business income for the simple reason that agricultural income does not form part of the total income under the Income Tax Act. (Related Assessment years : 1994-95 & 1996-97) – [Kancor Flavours & Extracts Ltd. v. DCIT (2010) 123 ITD 97 (ITAT Cochin)]

Estimation of income without considering the land holding by the assesse was deleted

Allowing the appeal of the assesse , the Tribunal held that , the Assessee had land holding of 75 acres therefore estimation of income was not justified. (Related Assessment year : 2008-09) – [Amarjit Singh v. ITO (2016) 48 ITR 622 (ITAT Amritsar)]

Assessee failed to explain source of agricultural income – Exemption denied

Assessee was required to prove the agricultural income by documentary evidence and to produce the concerned owner of the land. Being not satisfied with the explanation provided by the assessee, Assessing Officer made addition by denying the exemption claimed by the assessee on agricultural income. CIT (Appeals) and Tribunal upheld the order passed by Assessing Officer. On appeal by the assessee to the High Court, held dismissing the appeal, that the Assessee failed to provide adequate material on the points raised by the Assessing Officer as well as the Commissioner (Appeals) and even before the Tribunal no material was placed except reiterating the facts pleaded before. When the assessee was not owner of the land and the agreements were full of discrepancies pointed out by the Assessing Officer, it was for the assessee to produce the owner to the satisfaction of the Assessing Officer for examining or by acceptable evidences or otherwise as also in meeting with the various defects/discrepancies pointed, which the assessee failed to do. (Related Assessment year : 1994 - 95) - [Bhairavnath Agrofin (P) Ltd. v. CIT (2013) 354 ITR 276 : 259 CTR 51(Raj)]

Entry in revenue records is not conclusive proof of the fact that the land is agricultural in the absence of evidence that the land is put to agricultural use. - [D.S. Karunakar Reddy (2011) ITA Nos. 752 to 757/ Hyd/2011 dated 30.11.2011]

No additions can be made where assessee has only agricultural income

The assessee filed return of income declaring agricultural income. The Assessing Officer assessed that income as income from other sources disbelieving the quantum of agricultural income claimed/admitted by the assessee. The Commissioner (Appeals) also confirmed the order of the Assessing Officer. It was factually found that the assessee owned agricultural land and did not have any other source of income other than agriculture. Further, the assessee furnished receipts by local market committee evidencing the sale of agricultural produce in the earlier years. The Tribunal accordingly held that in the absence of any other source of income available to the assessee, no addition could be made by converting the agricultural income into income from other sources. Thus the decision was rendered in favour of the assessee. -  [Pennalal Holani v. ITO (2009) 34 SOT 20 (ITAT Jodhpur) (URO)]

Onus lies on the assessee who claims exemption to establish it

In respect of exemption of any income from income-tax, the cardinal principle is that the burden of proof is on the person who claims such exemption. It is the bounden duty of such person to place all relevant material and evidence before the income-tax authorities. In CIT v. R. Venkataswamy Naidu (1956) 29 ITR 529 (SC), this principle was laid down with the observation that it is not for the income-tax authorities to prove that it is not agricultural income. 

It has been held by the Apex Court in CIT v. R. Venkataswamy Naidu that the onus lies on the assessee who claims exemption to establish it. While determining the taxable income and tax payable, the Assessing Officer should insist upon production of material evidence for the exemption claimed on account of Agricultural income. Failure to adopt a system of establishing the veracity of the claim would result in excess allowance of exemptions and under-assessment of taxable income. – [CIT v. R. Venkataswamy Naidu (1956) 29 ITR 529 (SC)]