Chapter 2: Incomes Which Do Not Form Part of Total Income
Comprehensive CA Final Direct Tax notes covering Section 11, Schedules II to VII architecture, Agricultural Income under Section 2(5), Partial Integration mathematical steps, Composite Income apportionment (Rubber, Coffee, Tea, Sugarcane), Section 14 / Rule 14 expense disallowance, and all 5 ICAI Illustrations with full tabular calculations.
2.1 Introduction: Exemption under Section 11 vs Deduction under Chapter VIII
Statutory DistinctionA foundational distinction exists under income-tax law between incomes exempt under Section 11 and deductions allowable under Chapter VIII (formerly Chapter VI-A):
- Exemption under Section 11 (read with Schedules II to VII):
Incomes which are exempt under Section 11 do not enter the computation of Gross Total Income at all. They are excluded right at the inception (e.g. Agricultural Income under Schedule II, partner's share under Schedule III). - Deductions under Chapter VIII:
Incomes eligible for deduction under Chapter VIII (e.g. profits from infrastructure, employment generation u/s 146, royalty income) must first be included in Gross Total Income under their respective heads. Thereafter, deductions are subtracted to arrive at Total Income.
| Parameter | Exemptions under Section 11 | Deductions under Chapter VIII |
|---|---|---|
| Gross Total Income Impact | Completely excluded from Gross Total Income (GTI). | First included in GTI; then deducted to compute Total Income. |
| Applicability of Section 14 | Expenses incurred to earn exempt income are strictly disallowed under Section 14. | Section 14 disallowance does NOT apply to Chapter VIII deductions (CIT v. Kribhco). |
| Loss Impact | Loss from an exempt source cannot be set off against any taxable income. | Deduction cannot exceed Gross Total Income; cannot create a loss. |
The Two-Tier Statutory Framework of Section 11
Under the Income-tax Act, 2025, exemptions previously clustered under Section 10 are restructured into an organized statutory framework across Schedules II to VII:
Specifies categories and types of income that are not included in the total income of any assessee (e.g., agricultural income, partner's profit share, LTCG on listed equity up to statutory limit, specified allowances, international shipping lease rentals).
Specifies statutory institutions, entities, and funds whose total income itself is exempt from tax, subject to statutory conditions (e.g., local authorities, notified universities, charitable funds, registered trade unions, scientific research associations).
ICAI Master Directory: Exemptions Discussed in Respective Chapters
As detailed in the ICAI study module, the vast catalog of exemptions under Schedules II to VII is apportioned among specialized chapters for in-depth analysis:
| Subject Area / Head | Schedule & Statutory Entry | Nature of Exemption |
|---|---|---|
| Income from Salaries | Schedule III (Table: Various Sl. Nos.) | Gratuity, Commuted Pension, Leave Encashment, Retrenchment Compensation, House Rent Allowance (HRA). |
| Income from Other Sources | Schedule II, Table: Sl. No. 2, 9, 11–13, 17 | Receipts from LIC/ULIP, Educational Scholarships, Interest on Tax-free bonds, MACT motor accident compensation. |
| Clubbing Provisions | Schedule III, Table: Sl. No. 32 | Exemption of ₹1,500 per child in respect of minor's income clubbed in parent's hands. |
| Deductions from GTI | Schedule II, Table: Sl. No. 5, 6, 15, 16 | Payments from Sukanya Samriddhi Account, NPS Trust withdrawals, Agnipath Corpus Fund receipts. |
| Special Entities & Trusts | Schedule III (Sl. 26); Schedule V (Sl. 1–5) | Income of Securitisation Trusts, Investment Funds, Business Trusts (REITs & InvITs), Electoral Trusts. |
| Non-Resident Taxation | Schedule III (Sl. 8); Schedule IV (Sl. 1–18); Schedule VI (Sl. 8) | NRE account interest, Diplomatic allowances outside India, Offshore derivatives, Cruise ship lease rentals, IFSC units. |
Sec 2(5) Agricultural Income: Constitutional Basis & Statutory Scope
Schedule II, Table: Sl. No. 1Under Article 246 read with Entry 82 of List I of the Seventh Schedule, Parliament has the competence to tax "income other than agricultural income". Article 366(1) defines agricultural income by reference to the definition in the Income-tax Act. Therefore, Schedule II, Table: Sl. No. 1 provides that agricultural income is totally excluded from Total Income.
The Four Statutory Limbs of Section 2(5)
Under Section 2(5), agricultural income comprises four distinct categories of receipts:
| Statutory Category | Section Reference | Essential Legal Conditions & Scope |
|---|---|---|
| 1. Rent or Revenue from Land | Section 2(5)(a) |
Any rent or revenue derived from land which:
• Is situated in India; and • Is used for agricultural purposes. Can be received in cash or kind by the landowner or rent-receiver. |
| 2. Income Derived from Agricultural Operations | Section 2(5)(b) |
Income derived from such land by:
(i) Agriculture: Performance of basic operations (tilling, sowing, planting) and subsequent operations (weeding, harvesting). (ii) Ordinary Processing: Performance of any process ordinarily employed by a cultivator to make produce fit to be taken to market (e.g. threshing, winnowing, cleaning, drying paddy to make rice). (iii) Sale: Sale of such agricultural produce where no non-ordinary processing has occurred. |
| 3. Income from Farm Buildings | Section 2(5)(c) |
Income derived from a building owned and occupied by the cultivator or rent-receiver, provided:
• The building is on or in the immediate vicinity of agricultural land; • The building is required as a dwelling house, storehouse, or out-building by reason of his connection with the land; AND • The land is assessed to land revenue/local rate in India, OR is located in a rural area (outside urban limits specified in Section 2(22)(iii)). |
| 4. Nursery Income | Section 2(5)(d) | Any income derived from saplings or seedlings grown in a nursery is expressly deemed to be agricultural income, regardless of whether basic operations on the soil were carried out by the assessee. |
Negative Scope: What Does NOT Constitute Agricultural Income
- Transfer of Urban Agricultural Land: Surplus arising on transfer of urban agricultural land is a Capital Gain under Section 67 and NOT agricultural income (Bittoo's case: New Delhi farm land sale surplus is taxable).
- Distant / Allied Activities: Breeding and rearing of livestock, dairy farming, poultry farming, butter and cheese making separated from the farm, and fisheries.
- Managing Agency Commission: Commission received by a managing agent calculated as a percentage of company profits (even if the company's income is agricultural).
- Spontaneous Forest Trees: Sale of forest trees growing spontaneously without human skill, tilling, or cultivation.
- Commercial Exploitation: Rent received from letting out agricultural land/building for residential use of industrial workers, or for business purposes.
Urban Agricultural Land Definition & The 10 ICAI Aerial Distance Examples
Under Section 2(22)(iii), agricultural land is classified as urban if it satisfies either of the following criteria:
1. Located within municipal or cantonment limits having a population of $\ge 10,000$.
2. Located outside municipal limits within the prescribed aerially measured distance based on population:
| Population of Municipality / Cantonment | Urban Aerial Distance Radius |
|---|---|
| 10,001 to 1,00,000 | Within 2 km aerially |
| 1,00,001 to 10,00,000 | Within 6 km aerially |
| Exceeding 10,00,000 | Within 8 km aerially |
| Area | Aerial Distance | Municipal Population | Is Land Urban? | Is Farm Building Income Exempt? |
|---|---|---|---|---|
| (i) Area A | 1.0 km | 9,000 | No (Rural) | Yes (Exempt) |
| (ii) Area B | 1.5 km | 12,000 | Yes (Urban) | No (Taxable) |
| (iii) Area C | 2.0 km | 11,00,000 | Yes (Urban) | No (Taxable) |
| (iv) Area D | 3.0 km | 80,000 | No (Rural) | Yes (Exempt) |
| (v) Area E | 4.0 km | 3,00,000 | Yes (Urban) | No (Taxable) |
| (vi) Area F | 5.0 km | 12,00,000 | Yes (Urban) | No (Taxable) |
| (vii) Area G | 6.0 km | 8,000 | No (Rural) | Yes (Exempt) |
| (viii) Area H | 7.0 km | 4,00,000 | No (Rural) | Yes (Exempt) |
| (ix) Area I | 8.0 km | 10,50,000 | Yes (Urban) | No (Taxable) |
| (x) Area J | 9.0 km | 15,00,000 | No (Rural) | Yes (Exempt) |
Ruling: Compensation received by a landowner for permitting the shooting of a cinematograph film on agricultural land does not constitute agricultural income. The receipt has no direct nexus with agricultural operations or the produce of the soil; it arises merely from the commercial exploitation of the open physical space. Fully taxable under Income from Other Sources.
Composite Composite Income: Business vs Agricultural Apportionment
Rules 14, 15, 16, 17
Where an assessee uses agricultural produce raised by him as raw material in his manufacturing business (e.g. growing sugarcane and manufacturing sugar), the income is composite.
Apportionment Principle:
• Business Deduction: The Market Value of such agricultural produce is allowed as a deduction against business sales receipts.
• Agricultural Income: Market Value of the produce minus the cost of cultivating that produce is treated as exempt agricultural income.
- Produce Ordinarily Sold in Market: Market value is calculated at the average price at which the raw produce was sold in the market during the relevant tax year.
- Produce NOT Ordinarily Sold in Market: Market value is computed as:
$$ ext{Market Value} = ext{Expenses of Cultivation} + ext{Land Revenue / Rent Paid} + ext{Reasonable Profit fixed by AO}$$
Problem: Mr. Amar grows sugarcane and uses it for manufacturing sugar in his factory.
• 40% of sugarcane produce is sold raw for ₹12,00,000 (cost of cultivation = ₹6,00,000).
• Balance sugarcane (60%) has a cultivation cost of ₹15,00,000 and a market value of ₹25,00,000.
• After incurring manufacturing expenses of ₹1,50,000 on the balance sugarcane, the sugar was sold for ₹30,00,000.
Compute Amar’s Business Income and Agricultural Income.
| Particulars | Business Income (₹) | Agricultural Income (₹) | Statutory Explanation |
|---|---|---|---|
| A. Manufacturing & Sale of Sugar (60% Sugarcane) | |||
| Sale proceeds of manufactured sugar | 30,00,000 | - | Gross business turnover |
| Less: Market value of sugarcane used as raw material | (25,00,000) | - | Deduction under Rule 14 |
| Less: Factory manufacturing expenses | (1,50,000) | - | Allowable business expenditure |
| Net Business Income from Sugar | 3,50,000 | - | ₹30L − ₹25L − ₹1.5L |
| B. Agricultural Incomes | |||
| Agricultural income on sugarcane used in factory | - | 10,00,000 | Market value (₹25L) − Cost (₹15L) |
| Sale of raw sugarcane in market (40% produce) | - | 6,00,000 | Sale proceeds (₹12L) − Cost (₹6L) |
| Final Computed Totals | ₹3,50,000 | ₹16,00,000 | Taxable business vs Exempt agricultural |
Statutory Apportionment Ratios: Rubber, Coffee & Tea
For plantation commodities, the entire composite income is computed under the rules of business computation, and then apportioned as per statutory percentages:
| Rule | Agricultural Commodity & Operations | Agricultural Income (Exempt) | Business Income (Taxable) |
|---|---|---|---|
| Rule 15 (Old 7A) | Rubber Products: Manufactured from field latex or coagulum obtained from rubber plants grown by seller in India (latex, cenex, crepes, block rubber). | 65% | 35% |
| Rule 16(1) (Old 7B) | Coffee (Cured Only): Grown and cured by the seller in India. | 75% | 25% |
| Rule 16(2) (Old 7B) | Coffee (Roasted & Grounded): Grown, cured, roasted, and grounded by seller in India (with or without chicory/flavouring). | 60% | 40% |
| Rule 17 (Old 8) | Tea: Grown and manufactured by the seller in India. | 60% | 40% |
Problem: Mr. Nilesh manufactures latex from rubber plants grown by him in India. These are sold in the market for ₹36,00,000. The cost of growing rubber plants is ₹16,00,000 and the cost of manufacturing latex is ₹12,00,000. Compute his total income.
| Step / Particulars | Amount (₹) | Working & Statutory Basis |
|---|---|---|
| Market sale proceeds of latex | 36,00,000 | Gross turnover from latex |
| Less: Cost of growing rubber plants | (16,00,000) | Agricultural cultivation cost |
| Less: Cost of manufacturing latex | (12,00,000) | Industrial processing cost |
| Total Composite Profit | 8,00,000 | ₹36L − ₹16L − ₹12L |
| Agricultural Income (65% of ₹8,00,000) | 5,20,000 | Exempt under Schedule II, Table Sl. No. 1 |
| Taxable Business Income (35% of ₹8,00,000) | ₹2,80,000 | Included in Total Income |
Integration Partial Integration: Indirect Aggregation Mechanism
Formula: Zn = Xn − Yn
Although the Central Government cannot levy income-tax on agricultural income directly by virtue of the Constitutional division of powers, a statutory method is enacted to tax agricultural income in an indirect manner.
The Objective: To aggregate net agricultural income with non-agricultural income so that non-agricultural taxable income is pushed into higher progressive tax slabs.
Applicability & Qualifying Conditions
Applies ONLY to:
• Individuals
• Hindu Undivided Families (HUF)
• Association of Persons (AOP) / Body of Individuals (BOI)
• Artificial Juridical Persons (AJP)
Note: Does NOT apply to Companies, LLPs, Partnership Firms, Co-operative Societies, or Local Authorities.
- Net Agricultural Income must exceed ₹5,000 p.a.; AND
- Non-Agricultural Total Income must exceed the applicable Basic Exemption Limit:
• Default Regime (Sec 202): ₹4,00,000
• Normal Regime (< 60 Yrs): ₹2,50,000
• Normal Regime (60–79 Yrs): ₹3,00,000
• Normal Regime (80+ Yrs): ₹5,00,000
Step-by-Step Mathematical Calculation Formula
Where:
• Xn = Income-tax computed on Aggregate Income (AIn = Total Income + Net Agricultural Income)
• Yn = Income-tax computed on (Net Agricultural Income + Applicable Basic Exemption Limit)
• Zn = Base Income-tax payable before Surcharge / Rebate / Cess
1. Add Surcharge, if applicable (based on Total Income level).
2. Less Rebate under Section 156, if applicable.
3. Add Health & Education Cess @ 4% to arrive at final tax liability.
Problem: Ankur, owner of agricultural land in Kerala used for growing fruits, paddy, and vegetables, received ₹5,00,000 from Yahoo Movies Ltd., Chennai, as rent for allowing the use of this land for shooting a film. Ankur accounted for this as revenue derived from land and claimed it as exempt agricultural income under Schedule II, Table Sl. No. 1. Confirm whether his claim is correct.
To qualify for exemption under Section 2(5) read with Schedule II, the receipt must be derived from the performance of agricultural operations or sale of produce.
The amount received from Yahoo Movies Ltd. was paid solely for permitting the shooting of a cinematograph film. It has no direct or immediate nexus with the soil or agricultural produce, except the incidental circumstance that it occurred on open farm ground.
Conclusion: The claim of Mr. Ankur is incorrect in law. The sum of ₹5,00,000 is non-agricultural income, fully chargeable to tax under Income from Other Sources.
Problem: Mr. X, a resident, provides the following particulars of income for T.Y. 2026-27:
• Income from salary (computed): ₹11,50,000
• Income from house property (computed): ₹3,80,000
• Agricultural income from land in Assam: ₹4,50,000 (Expenses incurred: ₹1,60,000)
Compute his tax liability for T.Y. 2026-27 assuming his age is: (a) 40 years, and (b) 75 years, under both Default Regime and Optional Normal Regime.
• Net Agricultural Income = ₹4,50,000 − ₹1,60,000 = ₹2,90,000 (> ₹5,000).
• Total Income (Non-agricultural) = ₹11,50,000 + ₹3,80,000 = ₹15,30,000 (> Basic Exemption Limit).
• Aggregate Income (AIn) = ₹15,30,000 + ₹2,90,000 = ₹18,20,000.
(a) Tax Liability for Mr. X (Age 40 Years)
| Particulars / Steps | Default Regime (Sec 202) | Optional Normal Regime |
|---|---|---|
| Gross Total Income (Salary + HP) | 15,30,000 | 15,30,000 |
| Net Agricultural Income (Exempt) | (Exempt: ₹2.90L) | (Exempt: ₹2.90L) |
| Total Income (TI) | 15,30,000 | 15,30,000 |
| Partial Integration Formula Steps: Zn = Xn − Yn | ||
|
Step 1: Compute Xn
Tax on Aggregate Income (AIn = ₹18,20,000) |
1,64,000
(20k+40k+60k+20% of 2.2L) |
3,58,500
(12.5k+100k+30% of 8.2L) |
|
Step 2: Compute Yn
Tax on (Net Ag Income + Basic Exemption) |
14,500
Tax on (2.9L + 4.0L = 6.90L) @ 5% of 2.9L |
20,500
Tax on (2.9L + 2.5L = 5.40L) (12.5k + 20% of 40k) |
| Step 3: Base Tax Zn = Xn − Yn | 1,49,500 | 3,38,000 |
| Add: Health & Education Cess @ 4% | 5,980 | 13,520 |
| Total Tax Liability (Age 40) | ₹1,55,480 | ₹3,51,520 |
(b) Tax Liability for Mr. X (Age 75 Years - Senior Citizen)
| Particulars / Steps | Default Regime (Sec 202) | Optional Normal Regime (Age 75) |
|---|---|---|
| Total Income (TI) | 15,30,000 | 15,30,000 |
|
Step 1: Compute Xn
Tax on Aggregate Income (₹18,20,000) |
1,64,000
(Default slabs unchanged) |
3,56,000
(10k + 100k + 30% of 8.2L) |
|
Step 2: Compute Yn
Tax on (Net Ag Income + ₹3,00,000 Basic Exemption) |
14,500
Tax on ₹6,90,000 |
28,000
Tax on (2.9L + 3.0L = 5.90L) (10k + 20% of 90k) |
| Step 3: Base Tax Zn = Xn − Yn | 1,49,500 | 3,28,000 |
| Add: Health & Education Cess @ 4% | 5,980 | 13,120 |
| Total Tax Liability (Age 75) | ₹1,55,480 | ₹3,41,120 |
Schedules Specific Exemptions: HUF, Firms, Disaster & Sovereign Relief
Schedules II, III & VIIHUF is assessed as a separate taxable person. To prevent double taxation, any sum received by an individual member from the family (out of family income or impartible estate) is wholly exempt in the hands of the member.
Partner's share in the total income of a firm/LLP is exempt from tax in the partner's hands.
CBDT Circular No. 8/2014: The partner's share remains 100% exempt even if the firm's taxable income becomes NIL due to Chapter III exemptions or Chapter VIII deductions!
Any compensation received by an individual or legal heir on account of any disaster from the Central Government, State Government, or local authority is exempt.
• Meaning of "Disaster" derives from the Disaster Management Act, 2005 (catastrophe, mishap, calamity causing substantial loss of life or human suffering beyond coping capacity).
• Exception: Exemption is NOT available for compensation compensating loss/damage already claimed and allowed as a deduction under the Act.
Problem: An amount of ₹5,00,000 was paid on 17.3.2027 to the parents of Amit by the Government of Chhattisgarh as compensation to the aggrieved family, whose only son Amit lost his life in a Maoist local bus bomb blast in Dantewada. Examine with reasons whether the compensation received is chargeable to tax in T.Y. 2026-27.
As per Note 1 to Schedule III, the term "disaster" follows the Disaster Management Act, 2005. A terrorist/Maoist bus bomb blast constitutes a grave catastrophe causing loss of life and human suffering beyond normal coping capacity.
Compensation paid by the State Government for such disaster is wholly exempt from tax under Schedule III, Table: Sl. No. 3.
Conclusion: The compensation of ₹5,00,000 is not taxable in the hands of the parents.
Parliamentary Allowances & Gallantry Award Pensions
- Daily Allowance: Daily allowance received by MPs, MLAs, or members of committees [Sl. 5].
- MP Constituency Allowance: Allowance received under Members of Parliament Rules, 1986 [Sl. 6].
- MLA Constituency Allowance: Any constituency allowance received by MLAs [Sl. 7].
- Gallantry Award Pension [Sl. 14]: Pension received by recipients of Param Vir Chakra, Maha Vir Chakra, or Vir Chakra.
- Family Pension [Sl. 15]: Family pension paid to family members upon death of gallantry award winners.
- Disability Pension [Sl. 38A]: Armed forces disability pension for personnel invalided out due to service disability.
Regional Exemptions: Scheduled Tribes & Sikkimese Individuals
| Statutory Category | Statutory Entry | Scope & Conditions for Exemption |
|---|---|---|
| Members of Scheduled Tribes | Schedule III, Table: Sl. No. 19 | Income accruing from any source in specified areas (Sixth Schedule autonomous districts, Arunachal Pradesh, Manipur, Mizoram, Nagaland, Tripura, or Ladakh) OR by way of dividend/interest on securities, in the hands of a member of a Scheduled Tribe residing in these areas. |
| Sikkimese Individuals | Schedule III, Table: Sl. No. 20 |
Income accruing from any source in the State of Sikkim, or income by way of dividend or interest on securities.
Proviso: Exemption does NOT apply to a Sikkimese woman who marries a non-Sikkimese individual on or after 1st April, 2008. |
| Tea, Rubber, Coffee Subsidies | Schedule III, Table: Sl. No. 21 | Subsidy received from Tea Board, Coffee Board, or Rubber Board for replantation or replacement of bushes/plants under schemes notified by the Central Government. Assessee must furnish a certificate from the concerned Board. |
Local Authorities & Educational / Medical Institutions
Exempts income from House Property, Capital Gains, Other Sources, and business of supplying commodities/services within jurisdiction, or water/electricity inside or outside jurisdiction. Covers Panchayats, Municipalities, and Cantonment Boards.
• Wholly/Substantially Govt Financed: 100% exempt (Sl. 17 & 18).
• Receipts ≤ ₹5 Crores: Exempt if solely for educational/philanthropic purposes and not for profit (Sl. 19).
• Special Treatment of Anonymous Donations [Section 355(a) & Section 337]: Where any university, educational institution, hospital or medical institution receives any anonymous donation defined under section 355(a) [formerly Sec 115BBC], the provisions of Section 337 (Table: Sl. No. 1) in respect of specified income shall apply mutatis mutandis as they apply to a registered non-profit organisation, and such anonymous donations are strictly excluded from the exemption under Section 11.
Sec 14 Section 14: Restriction on Allowability of Expenditure
Read with Rule 14 (Old Rule 8D)Under Section 14(1), irrespective of anything to the contrary contained in the Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act.
Overrides all deduction sections in Chapter IV. Expenses attributable to exempt income cannot reduce taxable profits.
AO can determine disallowance per Rule 14 if dissatisfied with correctness of assessee's accounts or claim of zero expenditure.
Disallowance applies even if exempt income has not accrued, arisen, or been received during the tax year!
Rule 14 of Income-tax Rules, 2026: Mathematical Disallowance Formula
Where:
• [A] Direct Expenditure: Amount of expenditure directly relating to income not forming part of total income.
• [B] Indirect Expenditure: 1% of the annual average of monthly averages of opening and closing balances of investments yielding exempt income.
• Statutory Cap: Total disallowance ([A] + [B]) CANNOT exceed the total expenditure claimed by the assessee!
Issue: Does Section 14 apply to disallow expenses relating to incomes eligible for deduction under Chapter VIII (e.g., Section 80P, Section 80JJAA)?
Ruling: NO. Deductions under Chapter VIII are deductions from Gross Total Income, not exclusions/exemptions under Chapter III (Section 11). Section 14 is applicable ONLY where income is excluded from total income under Chapter III. Hence, no disallowance under Section 14 can be made in respect of deductions allowable under Chapter VIII.
TYK ICAI Test Your Knowledge: Practical Exam Problems & Solutions
Practical Application
Question: Examine with reasons, based on the provisions of the Act, the chargeability of the following receipts to tax in T.Y. 2026-27:
(i) Rent of ₹60,000 charged from tenants occupying houses constructed on agricultural land situated in India. The tenants work in a nearby industrial area and occupy these houses for residential purposes.
(ii) Income of ₹75,000 derived by Anand Nursery from the sale of seedlings grown without carrying out all the basic operations on land.
(iii) Mr. Gaitonde, born and brought up in the State of Sikkim, had a net profit of ₹2,25,000 from a business located in Sikkim and interest of ₹55,000 on bonds issued by the Government of Rajasthan.
(i) Rent of ₹60,000 from Residential Tenants:
Under Section 2(5), any income derived from any building from the use of such building for any purpose (including letting for residential purposes or business/profession) other than agriculture shall NOT be agricultural income.
Conclusion: The rent of ₹60,000 from letting out houses to industrial workers is not agricultural income; it is fully chargeable to tax under Income from House Property / Other Sources.
(ii) Income of ₹75,000 from Anand Nursery:
Under Section 2(5)(d), any income derived from saplings or seedlings grown in a nursery is expressly deemed to be agricultural income. Performance of basic agricultural operations on soil is not mandatory.
Conclusion: The income of ₹75,000 is agricultural income and is wholly exempt from tax under Schedule II, Table Sl. No. 1.
(iii) Mr. Gaitonde (Sikkimese Individual):
Under Schedule III, Table Sl. No. 20, income accruing or arising to a Sikkimese individual from any source in the State of Sikkim, and income by way of dividend or interest on securities is exempt.
Conclusion: Both the business income of ₹2,25,000 in Sikkim and interest income of ₹55,000 on Rajasthan Government securities are fully exempt from tax.
Question: Mr. Akash, a resident Indian, earns income of ₹22,00,000 from sale of rubber manufactured from latex obtained from rubber plants grown by him in India, and ₹30,00,000 from sale of rubber manufactured from latex obtained from rubber plants grown by him in Malaysia during T.Y. 2026-27. What would be his business income?
| Source of Rubber | Composite Profit (₹) | Business Ratio | Taxable Business Income (₹) |
|---|---|---|---|
| Rubber plants grown in India | 22,00,000 | 35% (Rule 15) | 7,70,000 |
| Rubber plants grown in Malaysia | 30,00,000 | 100% (Foreign land) | 30,00,000 |
| Total Taxable Business Income | - | - | ₹37,70,000 |
Question: Mr. Ram, a resident Indian, earns income of ₹15,00,000 from sale of coffee grown and cured in India during T.Y. 2026-27. His friend Mr. Shyam, a resident Indian, earns income of ₹25,00,000 from sale of coffee grown, cured, roasted, and grounded by him in India during T.Y. 2026-27. What would be the business income chargeable to tax in India of Mr. Ram and Mr. Shyam?
| Assessee | Coffee Processing Activity | Total Income (₹) | Statutory Ratio | Taxable Business Income (₹) |
|---|---|---|---|---|
| Mr. Ram | Grown and cured in India | 15,00,000 | 25% Business / 75% Ag | ₹3,75,000 |
| Mr. Shyam | Grown, cured, roasted, and grounded in India | 25,00,000 | 40% Business / 60% Ag | ₹10,00,000 |