LL.B. (Three Years) Sem 3 Law of Taxation 2015 Dec Question Paper with Solutions

For full marks, cover: why agricultural income is outside Union income tax (List I entry 82, List II entry 46); the definition in section 2(1A) of the Income-tax Act, 1961 and its limbs; the meaning of "agriculture" (Raja Benoy Kumar Sahas Roy); what is and is not agricultural income (Bacha F. Guzdar); exemption under section 10(1); composite income of tea, coffee and rubber; partial integration with a worked example; the Income-tax Act, 2025 (section 2(5), Schedule II).

Why agricultural income is special

Parliament's power to tax income comes from entry 82 of List I: "Taxes on income other than agricultural income". Taxes on agricultural income belong to the States under entry 46 of List II. So the Union's income tax cannot touch agricultural income. The Income-tax Act therefore defines it carefully and exempts it.

Meaning: section 2(1A)

Agricultural income has four limbs under section 2(1A) of the 1961 Act:

1. The building is on or near the land. The cultivator needs it, because of his link with the land, as a dwelling house, store-house or out-building.
2. The land is assessed to land revenue or a local rate. If it is not so assessed, it must lie outside urban limits.

"Outside urban limits" means outside any municipality or cantonment with a population of ten thousand or more. It also means beyond an aerial distance set by the town's population. The distance is 2 kilometres from a town of up to one lakh, and 6 kilometres from a town of up to ten lakh. It is 8 kilometres from a larger town. Population is taken from the last census published before the year begins (Explanation 4).

The essentials

1. Land. The income must come from land, directly or through its produce.
2. In India. Land outside India gives taxable foreign income, not agricultural income.
3. Used for agricultural purposes. The land must actually be cultivated.
4. Agriculture. There must be agricultural operations on the land.

Income in other hands

Bacha F. Guzdar v. Commissioner of Income-Tax, Bombay, AIR 1955 SC 74. Mrs. Guzdar held shares in tea companies whose income was 60 per cent agricultural. She claimed that 60 per cent of her dividends was exempt agricultural income. The Supreme Court disagreed. A shareholder gets no interest in the company's land; she only shares profits when they are distributed. So a dividend is not agricultural income, however the company earned it.

Examples

These came from rules 8, 7B and 7A of the Income-tax Rules, 1962, and are now in rule 271 of the 2026 Rules.

3. Partial integration. The annual Finance Act uses agricultural income to fix the rate on other income. It applies to individuals, Hindu undivided families and similar persons where net agricultural income exceeds Rs 5,000 and other income exceeds the basic exemption limit.

1. X = tax on (non-agricultural income + net agricultural income).
2. Y = tax on (net agricultural income + the basic exemption limit).
3. Tax payable = X minus Y.

Worked example

Sachin, aged 45, has a salary income of Rs 7,00,000 and net agricultural income of Rs 2,00,000. He is in the old regime, with a basic exemption limit of Rs 2,50,000.

Conclusion. Agricultural income is rent or revenue from land in India used for agriculture, and income from cultivating it and selling or processing its produce. Farm building income and nursery income are included. Under Benoy Kumar it needs basic operations on the land. Under Bacha F. Guzdar it keeps its character only in the hands of the person who derives it from the land. It is exempt under section 10(1), now Schedule II of the 2025 Act, because only the States may tax it. Through partial integration it still raises the rate of tax on the person's other income.