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Why frown upon farm income from firm

T. N. Pandey

SECTION 10(l) of the Income-Tax act 1961 exempts income from agriculture if it comes within the definition of `agricultural income' as given in Section 2(1A) of the Act.

However, the I-T Act provides for partial integration of tax on non-agricultural income with income derived from agriculture if certain conditions are satisfied.The issue is: When a partner in a firm receives his share from the agricultural income earned by the firm, is such share to be included in the assessment of the partner for rate purposes? This issue came up for the consideration of the Nagpur Bench in Assistant Commissioner of Income-tax vs Smt Chandri N. Shah (1999 71 ITR 231 Nagpur). The issues before the Tribunal were whether the assessee's share in agricultural income, of Rs 2,16,838 and Rs 1,33,740, from the firm (in the case of Chandri N. Shah) and the Rs 96,815 and Rs 1,46,186 from the firm (in the case of Smt. Amrit Arvind Shah) are to be taken for rate purposes as per Section 10(2A) of the I-T Act.

The CIT(A) ruled in favour of the assessee saying: "The submissions are acceptable. The assessee had no agricultural income of her own. The share in agricultural income from the firm was not to be aggregated for rate purpose, in view of Section 10(2A), w.e.f. April 1, 1993, and omission of Section 67 and Rule 5 of Part IV of the First Schedule of the Finance Act, 1992, with effect from the same date. Accordingly, the assessing officer was not justified in considering the assessee's share in agricultural income from the firm, in which she was a partner, for rate purpose, in both the years."

The Single Member Bench of the Tribunal confirmed the CIT(A)'s view on the basis of legal provisions then in the statute book. Section 2(9)(d) of the Finance Act, 1992 provides that net agricultural income in relation to a person meant the total agricultural income, from whatever sources derived, of that person computed in accordance with the rules contained in Part IV of the First Schedule. The Tribunal held that the assessees' income was not the type referred to in Section 2(IA).

The assessees were partners of the firms. As per rule 5, the assessees' share in the agricultural income of the firm should only be computed in the manner laid down in sub-section (1), sub-section and sub-section (3) of Section 67 and the shares so computed should be regarded as the agricultural income or loss of the assesses.

The proviso to this section further states that nothing contained in this rule shall apply for computing the agricultural income of the assessees in relation to the assessment year commencing on or after April 1, 1993. Therefore, in the case of the assessees, rule 5 should not be applicable.

It is clear from Section 10(2A) that on or after April 1, 1993, the agricultural income of the firm is not to be regarded as such income for its partners. Finance Act, 1994 amended rule 5 of Part IV of the First Schedule which says that in the case of an HUF, a company or a firm, the agricultural income earned by these three entities shall not be considered in the hands of its members, its shareholders or its partners as share of agricultural income.

Therefore, it leads to the conclusion that this income shall not form part of the agricultural income of the partner of a firm for rate purpose in the partner's hands. Hence, the CIT(A) was well justified in directing the assessing officer not to include the assessees' share of agricultural income from the firm's for rate purpose while computing their other income.

The aforesaid view of the single member has been confirmed by a two-member Bench of the Hyderabad Tribunal in Harish Kumar vs Deputy CIT (2003 85 ITD 366 Hyderabad). The Bench has said that the share of the assessee in the agricultural income from the firm, Basant Farms, cannot be aggregated for rate purposes with other incomes of the assessee in view of the Tribunal decision in the Chandri case.

Thus, the current legal position regarding share from agricultural income of a firm received by the partner is that it would be totally exempt and not clubbed with other incomes for rate purposes.

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