Agricultural income excludes plantation service receipts after transplantation; only land-linked cultivation income retained exempt character.

Turnkey plantation receipts were held to qualify as agricultural income only to the extent they arose from cultivation and nursery development on the assessee's own land. The post-transplantation stage, carried out on the customer's land, was treated as a separate contractual service because its immediate source was the service arrangement, not land owned or used by the assessee. The Court further held that the post-transplantation receipts did not fall within clause (b)(ii) or clause (b)(iii) of the statutory definition, as there was no proof of an ordinary cultivator's market-making process and no sale of agricultural produce from the customer's land. The remaining receipts were taxable business income.

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Issues: (i) Whether income from turnkey plantation contracts could be treated as agricultural income by treating the activity as an integrated agricultural operation rather than splitting it into stages; (ii) Whether the receipts from the post-transplantation stage fell within agricultural income under clause (b)(ii) or clause (b)(iii) of the statutory definition.

Issue (i): Whether income from turnkey plantation contracts could be treated as agricultural income by treating the activity as an integrated agricultural operation rather than splitting it into stages.

Analysis: The statutory scheme excludes agricultural income from total income, but only income that satisfies the restrictive definition of agricultural income qualifies. The source must be land situated in India and the income must be directly derived from that land. The plantation arrangement contained two distinct components: cultivation and nursery development on the assessee's own land, followed by transplantation and maintenance on the customer's land. The first component produced income derived from the assessee's own land, but the second component was consideration for services rendered after transplantation on land in which the assessee had no interest. The later stage was not a seamless continuation of the first and could be bifurcated on the facts. The immediate source of the second-stage receipts was the contract for services, not land.

Conclusion: The second-stage receipts were not agricultural income, and the bifurcation adopted by the Tribunal was upheld. The issue was decided against the assessee and in favour of the Revenue.

Issue (ii): Whether the receipts from the post-transplantation stage fell within agricultural income under clause (b)(ii) or clause (b)(iii) of the statutory definition.

Analysis: Clause (b)(ii) applies only where the income is derived from land and the process is ordinarily employed by a cultivator or receiver of rent in kind to render produce fit for market. No evidence showed that the post-transplantation care undertaken on the customer's land was such an ordinary cultivator's process. Clause (b)(iii) applies where the income is derived from land by the sale of produce in respect of which only the permitted process has been performed. The assessee did not sell agricultural produce from the customer's land, and the receipts were not referable to a sale of produce. The payments were contractual consideration for maintaining plants after transplantation.

Conclusion: The receipts did not fall within clause (b)(ii) or clause (b)(iii) of the definition of agricultural income. The issue was decided against the assessee and in favour of the Revenue.

Final Conclusion: The Court held that only the first stage of the plantation activity was agricultural in character, while the post-transplantation receipts were taxable business receipts. The appeal failed.

Ratio Decidendi: For income to qualify as agricultural income, the direct and immediate source must be land used for agricultural purposes; receipts arising from services rendered under a contract, even if connected with agricultural operations, are not exempt merely because they relate to cultivation or plant maintenance.

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