Agricultural income test: compensation for being kept out of land may be exempt, but interest on deposits is not derived from land.

Amounts received to compensate an assessee for being kept out of possession of agricultural land can qualify as agricultural income if they are effectively in lieu of the income that would have been derived from the land. The test is whether the receipt has its effective source in the land and is directly associated with it, rather than being only remotely connected. Applying that principle, the principal amount received under the stay order was treated as exempt agricultural income, but interest earned on the deposited amount was not, because its effective source was the deposit itself and not the land.

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Issues: Whether the amount received by the assessee under the stay order, together with the question of interest on the deposited amount, was exempt as agricultural income under section 2(1) of the Income-tax Act, 1961.

Analysis: Agricultural income under section 2(1) includes rent or revenue derived from land used for agricultural purposes and income derived from such land by agriculture. The governing enquiry is whether the receipt has its effective source in the land and is directly associated with it, or whether it is merely connected with the land in a remote sense. On the facts, the deposits were made to compensate the assessee for being kept out of possession of agricultural land and were treated as standing in lieu of the agricultural income that would have been earned from the land. That receipt was therefore inseparably connected with the agricultural land. However, the interest earned on the deposits had the deposits themselves as its effective source and was not directly derived from the land.

Conclusion: The principal amount received was exempt as agricultural income, but the interest on the deposits was not. As the interest question was not canvassed, the reference was answered in favour of the assessee.

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