Agricultural income classification for parent seeds turns on whether hybridisation went beyond ordinary cultivation; only the initial crop qualified.

Income from production and sale of parent seeds was not entirely agricultural income, because the activity went beyond ordinary cultivation and market preparation. The assessee first developed breeder or germplasm seed through research and hybridisation, then re-cultivated successive generations to fix desired traits, which transformed the original produce into a specialised commercial product rather than a crop merely rendered fit for sale. However, the first crop raised from agricultural land, before further hybridisation and re-generation, retained an identifiable agricultural character. Accordingly, only the limited portion attributable to that initial agricultural production qualified as agricultural income, while the balance was assessable as business income.

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Issues: Whether income derived from production and sale of parent seeds was agricultural income eligible for exemption, and if not, whether the entire receipt or only a part thereof could be treated as non-agricultural income.

Analysis: The definition of agricultural income under section 2(1A) requires income derived from land used for agricultural purposes, and where the claim rests on clause (b)(ii) or (iii), the process must be one ordinarily employed by a cultivator to render the produce fit to be taken to market. Applying the settled principles governing basic and subsequent agricultural operations, the Court found that the assessee's activity was not a simple cultivation of an existing crop for sale. The assessee first developed breeder or germplasm seed through a prolonged research and hybridization programme, then re-cultivated and re-generated the produce across successive generations to fix desired traits, which went beyond ordinary agricultural operations. The original produce was transformed into a different hybrid parent seed and the process was aimed at developing a specialised commercial product rather than merely rendering the crop marketable in its original character. At the same time, the first crop raised from agricultural land, before further hybridization and re-generation, retained an agricultural character capable of being separately identified.

Conclusion: The income from sale of parent seeds was not wholly agricultural income; only a limited portion attributable to the initial agricultural production could be treated as agricultural income, and the balance was assessable as business income. The assessee succeeded only to that limited extent.

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