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Modern agriculture rooted in traditional Income-tax law

23 七月 2025

by Harshit Khurana Sonali Bansal

Introduction

India is often referred to as country of farmers. Agriculture activity forms a vital part of Indian economy. For decades, while the Governments may have changed but the focus on benefitting this sector has remained steadfast.

One such form of unwavering support has been in the form of income-tax exemption[1] granted to this sector which has been there for decades.

Over a period of time, the way of undertaking agricultural activities has transitioned significantly. Modern techniques such as vertical farming have been introduced wherein agricultural produce is grown indoors in vertically stacked layers. Also, it is quite common for the landowners and farmers to have a collaborative arrangement for undertaking farming.

While agricultural operations have been modernised, the law for claiming income-tax exemption for agricultural operations has remained constant. The key question which arises in such a situation is how the age-old income-tax exemption apply to modern agriculture.

This article focuses on the various aspects of the textbook provisions and their implications on the modern agriculture and the take of Indian judiciary on the same.

What constitutes ‘land’ for agriculture: A fixed place with soil or any place with soil?

Under the Income-tax law, any income derived from ‘land’ by agriculture has been exempted. Also, any income derived from saplings or seedlings grown in a nursery has been deemed to be agricultural income.

In the traditional sense, land is construed as an immovable property where activities in the nature of tilling of soil, sowing of seeds and plantation activity can be undertaken. However, agriculture has moved far beyond its traditionally understood scope. Now, agriculture activities are being undertaken in factories, greenhouses and nurseries. The scope has expanded to customised produce with increased nutritional value.

The ITAT Hyderabad (Special Bench) in the case of Inventaa[2] gave a wider interpretation to the exemption provided under the law. The Tribunal observed that soil is part of land and when such soil is placed in trays, it does not cease to be land and when operations are carried out on this ‘soil’, it will qualify as agricultural activity carried upon the land itself. The Special Bench also held that the nature of produce cannot be restricted to exclude white button mushrooms. Any product raised on land/ soil by performing basic functions will qualify for exemption. Lastly, the Special Bench also affirmed the position that advancement of technology which allows taxpayers to grow produce in controlled environment will not negate their claim of exemption.

However, in a recent judgement, the Madras High Court in the case of British Agro Products India (Private) Limited[3] dealt with the question of what constitutes ‘land’ for the purpose of taxation of agricultural income under the Income-tax law. The High Court held that that white button mushrooms harvested in the controlled environment in a factory will not be eligible to tax exemptions. The Court held that the button mushrooms were not cultured in the land used for agriculture purposes and therefore, it is taxable under the IT Act.

The Court distinguished from the judgement of Special Bench on facts. The High Court stated the Special Bench of the Tribunal did not examine the issue from the point of view of definition of ‘agricultural income’ under Section 2(1A) of the Income-tax Act, 1961.

It is worthwhile to note that the ITAT (Special Bench) in its judgment had undertaken detailed analysis of the judicial precedents and by applying the principle of purposive interpretation it had concluded upon the matter. The Madras High Court has not provided adequate reasoning for diverting from the view expressed by the ITAT. Also, the High Court did not deal with the intent of introducing the exemption as reflected in the Finance Minister’s speech and the memorandum while extending the benefit of agricultural exemption to saplings or seedlings grown in a nursery.

Considering the advancement in agricultural operations, the judgment is likely to have mass effect. One will have to wait and watch if the matter is challenged before the Supreme Court. In Author’s view, in cases where it can be explained that all basic operations such as tilling of land, sowing of the seeds, planting and similar operations, as laid by Hon’ble Supreme Court in the case of Raja Benoy Kumar Sahas Roy[4] are carried out from the factory, it can be good case to argue that agriculture exemption should be available to the taxpayers.

Contract farming vs. hiring of farmers on contract basis

Unlike a decade ago, there are many companies which undertake agricultural activities by engaging contract farmers or agents. The question which stems in these cases is whether the income from sale of agricultural produce will qualify for income-tax exemption.

The Courts/ Tribunals in India have adjudicated these fact situations on numerous occasions. The key judgments have been discussed in the form of case studies to understand the legal position emanating on the issue.

Case Study 1: XYZ Pvt. Ltd. entered into an agreement with the farmers for cultivation of hybrid seeds on the lands owned by the farmers only. XYZ Pvt. Ltd. supplied the foundation seeds, and the farmers performed all activities under the guidance, specifications and supervision of the company on the land earmarked as per the agreement. The farmers were responsible to observe all the conditions regarding cultivation and other incidental matters. The farmers received compensation at a fixed price per quintal for the approved quality of seeds.

The Karnataka Hight Court held that the income arising from sale of hybrid seeds would not be agriculture income in the hands of assessee-company. The High Court noted that the Company neither had any interest in the land nor actually cultivated the land. Also, all the necessary activities of agriculture were carried out by the farmers. Mere supervision of those activities by the assessee-company will not qualify as carrying out of agricultural operations. Further, the Court also noted that the consideration which was paid to the farmers was fixed and depended upon the quality of the seeds. This demonstrated that the Company was interested only in healthy seeds grown by the farmers and not entire produce.

[refer CIT v. Namdhari Seeds (P.) Ltd. – [2011] 16 taxmann.com 83 (Kar), SLP admitted]

Case Study 2: XYZ Pvt. Ltd. entered into lease and service agreement with the farmers for leasing of land owned by farmers and cultivation of seeds on said land by obtaining the services of farmers. XYZ Pvt. Ltd supplied parent seeds to the farmers free of cost for cultivation under the supervision of the company. The farmers received compensation at a fixed rate based on the procurement of seeds by the company which was then bifurcated into land lease rent, fertilizers & chemicals and labour & service charges. The responsibility to carry out basic operations was that of the farmers.

The Tribunal, in this case, placed reliance on the judgement given by the Karnataka High Court in the case of CIT v. Namdhari Seeds (P.) Ltd. (supra) and held that the income arising from such arrangement will qualify business income and is not eligible for exemption. This decision was based on the fact that farmers were not employees of the assessee and the assessee’s role was limited to supervision without directly carrying out any basic operation for cultivation of land. 

[refer P.H.I. Seeds (P.) Ltd v. DCIT – [2018] 96 taxmann.com 493 (Delhi - Trib.)]

 

Case study 3: XYZ Pvt. Ltd. was engaged in the development and production of basic and hybrid seeds. The Company undertook the primary operations on its own or leased land, under its own direct supervision and guidance with the help of casual labour. The company thereupon cleaned the hybrid seeds i.e removed the mud, stones and non-standard sized seeds and then treated the seeds with chemicals to prevent infestation, packed the seeds into cloth bags to suit market requirements and dispatched the seeds to consignee’s agents located all over the country for sale to the distributors.

The Tribunal distinguished from the case of Namdhari Seeds (P.) Ltd. (supra) on facts and ruled in favour of the assessee-company. The Tribunal took of the facts that (i) the company undertook the activity of producing the basic seeds on its own lands and hybrid seeds on the leased lands, (ii) the company engaged the services of the farmers for production of hybrid seeds, and (iii) the company took the entire produce from the farmers and reimbursed entire expenditure to them. The entire control over the production rested with the company.

[Advanta India Ltd. v. ACIT – [2013] 34 taxmann.com 188 (Bangalore-Trib.)]

The principles emanating from the above judgments have been applied in other cases by the Courts/ Tribunals.

Final thoughts

From the above discussion, it is to be noted that all agricultural activities as understood in normal parlance may not be eligible for the benefit of the exemption. It needs to be substantiated that the taxpayer has certain interest in the land on which the activities are undertaken. Also, basic agricultural operations must be carried out under the control of the taxpayer. Merely supervising the activities may not be sufficient. Active participation and decision-making in the core farming processes are crucial.

Also, while innovative farming methods are transforming industry, their eligibility for tax exemption remains a contentious point. There exist arguments to support the claim of the taxpayers, however, the strength of the same may vary depending on the factual matrix of each case.

In essence, navigating agricultural tax exemptions requires a deep understanding of these nuances. It's not just about the crops you grow, but how you grow them and your connection to the land.

[The authors are Associate Partner, Principal Associate and Senior Associate, respectively, in Direct Tax practice at Lakshmikumaran & Sridharan Attorneys]

 

[1] Sectio 10(1) read with section 2(1A)

[2] [2018] 95 taxmann.com 162 (Hyderabad-Trib.); Appeal pending before Telangana High Court I.T.A. Nos. 58, 70, 74 and 100 of 2019

[3] [TS-641-HC-2025(MAD)]

[4] [1957] 32 ITR 466 (SC)

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