Income Tax is charged on 5 different heads. Aggregate of taxable income under each head of income is known as Gross Total Income and so

Taxable Income = Gross Total Income - Allowance Deductions.

Deduction of Expenditure :

In computing income under various heads, deduction is allowed towards expenditure incurred in relation to earning the income. However, no deduction shall be allowed in respect of expenditure incurred in relation to incomes exempt from tax.

Computation of Gross Total Income :

It is the aggregate of incomes under various heads of income calculated after set-off of unabsorbed depreciation/loss, carried forward from earlier years.

Set-off and Carry Forward :

Set-off means adjustment of certain losses against the income under other sources / heads. Carry forward implies carrying forward of certain losses for set-off in subsequent years.

Total / Taxable Income :

Total / Taxable Income is computed after deducting permissible deductions under section 80A to 80U, from the Gross Total Income.

Where the Gross Total Income of the Assesses includes Short-Term Capital Gains from transfer of equity shares / units of an equity oriented mutual fund subject to Securities Transaction Tax or any Long-Term Capital Gains, then no deduction shall be allowed against such Capital Gains.

On this Taxable Income, Income Tax will be calculated as per the applicable rates.

Sec.10(1) exempts Agricultural Income from Income-Tax. Bu virtue of Sec.2(1)a the expression “Agricultural Income” means :

• Any Rent or Revenue derived from Land which is situated in India and is used for agricultural purposes. [Sec. 2(1A)(a)]
• Any income derived from such land :
• Use for Agricultural purposes ; or
• Used for agricultural operations means- irrigating and harvesting , sowing, weeding, digging, cutting etc. It involves employment of some human skill, labour and energy to get some income from land. ; or

According to Sec. 2(1)(a) , if the following 3 conditions are satisfied, income derived from Land can be termed as “Agricultural Income”.

Condition-1 : Income derived from Land

It is essential that for any income to be termed as agricultural Land must be effective and immediate source of Income and not indirect and secondary.

As a result, interest on arrears of land revenue, dividend paid by a company out of its profits which included agricultural income also and salary paid to a manager for managing agricultural farms are not agricultural incomes because in all these cases land is not the effective and immediate source of income.

Condition-2 : Land is used for Agricultural Purposes

To term any income as agricultural income, it is necessary that income must be the result of agricultural operations performed on agricultural land. Agriculture means performance of some basic operations— irrigating and harvesting , sowing, weeding, digging, cutting etc. it involves employment of some human skill, labour and energy to get some income form land.

Condition-3 : Land is situated in India

To qualify the exemption u/s 10(1) of the Act, it is necessary that agricultural income must be derived from land situated in India. In case income is derived from agricultural land situated outside India or is from any non-agricultural land, it will not be exempted u/s 10(1). It is taxable income under the head “Income from other Sources”.

What is the Tax Treatment of Income which is partially Agricultural and partially from Business [ Rules 7, 7A, 7B and 8]

For disintegrating a composite business income which is partly agriculture and partly non-agricultural, the following rules are applicable –

Types of Income	Business Income	Agricultural Income
Tea Business	40%	60%
Coffee Business	40%	60%
Rubber Business	35%	65%

Example :

Mr. X owns a Flour Mill and some agricultural Land. During the year 2007-2008 he has shown profit of Rs.25 lacs from the Business of Flour Mill. On scrutiny of accounts it was found that he has used 5,000 quintals of wheat produced in his own Farms and cost of this wheat has not been debited to P & L account. The market price of the wheat during the season was Rs.400 per quintal.. Find out his Agricultural and Business income.

[ Hints : Agricultural income Rs.20,00,000 and Business income Rs. 5,00,000 ]