Income-tax Act, 2025: basis of charge, basic concepts and agricultural income
Law of Taxation · Unit II · Topic 5 of 20 · 8 min read
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Cases checked to exist. Read the judgment before quoting a holding.
Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.
1. The new Act and the transition
The 2025 Act consolidates the law in 536 sections and 16 Schedules, against roughly 800 sections in the 1961 Act after decades of insertions. Much of the substance is carried over, but the numbering is entirely new, many exemptions have moved into Schedules, and tables replace long provisos. Two changes affect every answer:
- “Tax year” replaces “previous year” and “assessment year”. Under section 3, the tax year is the twelve months of the financial year beginning on 1 April. Income of the tax year 2026–27 is taxed as income of that tax year; there is no separate assessment year. For a business or source newly set up, the tax year begins on the date of setting up and ends with that financial year (section 3(2)).
- Savings. Under section 536(2), proceedings for any tax year beginning before 1 April 2026 (that is, the old “previous year” 2025–26 and earlier) continue under the 1961 Act and its procedure, including assessments, reassessments, penalties and appeals. Options and elections made under the old Act carry over.
2. Charge of income-tax: section 4 [section 4]
Where a Central Act (the annual Finance Act) prescribes rates for a tax year, income-tax is charged at those rates on the total income of the tax year of every person (section 4(1) and (2)). Tax is deducted or collected at source or paid in advance as the Act provides (section 4(5)). The charge therefore has four elements: the rate fixed by the Finance Act, the person, the tax year, and the total income computed under the Act.
3. Basic definitions
- Person, section 2(77) [section 2(31)]: an individual, a Hindu undivided family, a company, a firm, an association of persons or body of individuals (whether incorporated or not), a local authority, and every artificial juridical person not falling in the earlier categories. An AOP, BOI, local authority or artificial juridical person is a person whether or not formed to earn income.
- Assessee, section 2(11) [section 2(7)]: a person by whom tax or any other sum is payable under the Act, and includes (a) every person in respect of whom a proceeding has been taken for assessment of his income, or of the income of another person for which he is assessable, or of loss or refund; (b) every person deemed to be an assessee; and (c) every person deemed to be an assessee in default.
- Income, section 2(49) [section 2(24)]: an inclusive definition covering profits and gains, dividend, voluntary contributions received by charitable and similar bodies, perquisites and profits in lieu of salary, special allowances, capital gains, winnings from lotteries and races, gifts taxable under section 92(2)(m), and other items. Because it is inclusive, the ordinary meaning also applies: a receipt is income if it is a revenue receipt arising from a source, periodical or not, and not a capital receipt unless the Act specifically says so.
- Total income, section 2(108) [section 2(45)]: the income referred to in section 5 computed in the manner laid down in the Act, that is, gross total income under the five heads less deductions under Chapter VIII [Chapter VI-A].
4. Deemed assessee and assessee in default
Some persons are assessed not for their own income but for someone else’s, or for a failure to pay over tax. These are the “deemed assessees”.
- Legal representative of a deceased person, liable to the extent of the estate: section 302 [section 159].
- Representative assessee: the guardian of a minor or lunatic, a court of wards, an administrator-general, a trustee, and the agent of a non-resident: sections 303 and 304 [sections 160 and 161]. Who is an agent of a non-resident (an employee, a person with a business connection, a person from or through whom income is received) is in section 306 [section 163].
- Assessee in default: a person who fails to deduct or collect tax at source, or having deducted fails to pay it to the Government, is deemed an assessee in default under section 398 [section 201]; a person who fails to pay advance tax as directed is deemed in default under section 409 [section 218]; any person who does not pay a notice of demand in time is in default under section 411 [section 220].
5. Heads of income: section 13 [section 14]
All income is classified under five heads: (a) Salaries; (b) Income from house property; (c) Profits and gains of business or profession; (d) Capital gains; (e) Income from other sources. The heads are mutually exclusive: an item that falls under a specific head cannot be taxed under another, and “other sources” under section 92 [section 56] is residuary. Expenditure in relation to exempt income is not deductible (section 14 [section 14A]).
6. Agricultural income
Constitutional basis. Entry 82 of List I lets Parliament tax income other than agricultural income; Entry 46 of List II gives taxes on agricultural income to the States. Article 366(1) defines agricultural income as agricultural income as defined for the purposes of the enactments relating to Indian income-tax. Parliament therefore cannot tax it, and the Act exempts it.
Definition, section 2(5) [section 2(1A)]. Agricultural income means:
- (a) any rent or revenue derived from land situated in India and used for agricultural purposes;
- (b) income derived from such land by agriculture, by a process ordinarily employed by a cultivator to make the produce fit for market, or by sale of the produce without further process;
- (c) income from a farm building on or near the land, required by the cultivator or receiver of rent as a dwelling house, store-house or out-building because of his connection with the land, subject to the location conditions;
- (d) income from saplings or seedlings grown in a nursery.
It excludes income from using such building or land for any non-agricultural purpose, and income from transfer of urban agricultural land (that is a capital gain).
Exemption. Agricultural income is not included in total income: section 11(1) read with Schedule II (Table: Sl. No. 1) [section 10(1)]. It is nevertheless taken into account for rate purposes in the case of individuals and HUFs having non-agricultural income above the basic exemption (the “partial integration” method laid down in the annual Finance Act), so that the non-agricultural income is taxed at the higher slab rate.
Basic operations test. In Commissioner of Income-tax, West Bengal v. Raja Benoy Kumar Sahas Roy, 1957 INSC 55, (1957) 32 ITR 466, the assessee earned income from trees in a forest that had grown spontaneously, on which he carried out only subsequent operations such as weeding and tending. The Court held that “agriculture” requires basic operations on the land itself, tilling, sowing, planting, and human skill and labour applied to the land. Subsequent operations alone, on products of spontaneous growth, are not agriculture. Income from a spontaneously grown forest was therefore not agricultural income.
7. Problem (January 2026, Q. 9(b))
Mr. Mahantesh, a resident of India, receives Rs. 6 lakhs from agricultural land situated outside India. How is this income treated under the Income-tax Act?
Issue. Whether income from farming land abroad is exempt agricultural income, and if not, whether it is taxable in India.
Law. Section 2(5)(a) and (b) define agricultural income by reference to land situated in India. Only such income is exempt under section 11(1) and Schedule II (Sl. No. 1). Under section 5(1) a resident (other than not ordinarily resident) is taxed on income from whatever source, including income that accrues or arises outside India.
Application. The land is outside India, so the income is not “agricultural income” within section 2(5), however agricultural the activity may be. Mahantesh is a resident. If he is resident and ordinarily resident, his foreign income is included under section 5(1)(c). If he were not ordinarily resident, foreign income would be included only if derived from a business controlled in or a profession set up in India. The income will be computed under “Profits and gains of business or profession” if he carries on farming as a business, or under “Income from other sources” if he only receives rent. Relief may be available under a tax treaty with that country (section 159) or unilaterally (section 160) [sections 90 and 91] for foreign tax paid.
Conclusion. The Rs. 6 lakhs is not exempt. It is taxable in India as part of Mahantesh’s total income, subject to double taxation relief.
How this is examined
January 2026 (100-mark paper) Q. 3: explain the meaning of agricultural income and how it is treated for tax purposes, and Q. 9(b), the problem above. Older papers ask for definitions of person, assessee and deemed assessee as short notes.
For the essay on agricultural income, give the constitutional basis, the four limbs of the definition, the exemption and partial integration, and Raja Benoy Kumar. Always mention that the land must be in India; that single point decides the usual problem.
Now try the real questions: Law of Taxation past question papers.