By CA Surekha
Agriculture has always been the backbone of India’s economy, and in recent years, even formal business entities such as One Person Companies (OPCs), Private Limited Companies, and LLPs have entered this space — from organic cultivation to agri-processing and exports. However, questions frequently arise on whether such entities are subject to tax audit under Section 44AB of the Income-tax Act, 1961, particularly when their turnover from sale of agricultural produce exceeds ₹1 crore.
This analysis examines the statutory framework, judicial interpretations, and professional guidance to clarify when agricultural entities are exempt from or liable for tax audit.
Definition of Agricultural Income – Section 2(1A)
“Agricultural income” includes:
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Rent or revenue derived from land used for agricultural purposes in India.
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Income from cultivation—tilling, sowing, harvesting, and similar operations.
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Income from sale of agricultural produce grown on such land.
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Income from processing of produce, if the processing is incidental to cultivation (e.g., drying, cleaning, or grading at the farm level).
Such income is exempt under Section 10(1), subject to the conditions that the land is situated in India and the activities are genuinely agricultural.
Tax Audit Framework – Section 44AB
A tax audit under Section 44AB is required if:
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Business turnover or gross receipts exceed ₹1 crore;
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Professional receipts exceed ₹50 lakh;
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Aggregate cash receipts or payments exceed 5% and turnover exceeds ₹10 crore; or
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The taxpayer opts out of presumptive taxation and turnover exceeds ₹2 crore.
The audit report must be issued by a Chartered Accountant and furnished with the income tax return.
However, the first proviso to Section 44AB provides a specific carve-out:
“This section shall not apply to a person who derives income solely from agriculture.”
Conditions for Agricultural Income Exemption – Section 10(1)
To qualify for exemption:
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The income must originate from agricultural land in India.
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The assessee must be a cultivator, landlord, or entity engaged in cultivation.
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Sale proceeds of produce grown by the assessee are treated as agricultural income.
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Processing is exempt only if it is incidental to cultivation and necessary to make the produce marketable.
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Leasing agricultural land for cultivation also yields exempt income.
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Activities such as trading, factory-level processing, or commercial warehousing of produce are non-agricultural and thus taxable.
When Tax Audit Is Not Applicable
If an OPC, Private Limited Company, or any other entity:
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Is exclusively engaged in cultivation and sale of its own agricultural produce, and
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Has no other source of taxable income,
then, even if the turnover exceeds ₹1 crore, the entity is not required to get its accounts audited under Section 44AB.
This flows directly from the first proviso to Section 44AB, as the income is entirely agricultural and exempt under Section 10(1).
When Tax Audit Becomes Applicable
Tax audit becomes mandatory where:
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The entity has mixed income, i.e., both agricultural and business income; or
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It is engaged in trading of purchased agricultural produce without undertaking cultivation; or
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It undertakes non-incidental processing or value addition that goes beyond basic agricultural operations.
In such cases, the entire turnover (including from agricultural produce trading) is considered for audit threshold computation under Section 44AB.
Judicial and Professional Interpretations
Key rulings and professional guidance have clarified this position:
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Supreme Court in CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 (SC) held that agricultural income covers both basic and subsequent operations integral to cultivation but excludes industrial or commercial activity.
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ITAT in P.H.I. Seeds Pvt. Ltd. v. ACIT emphasized that exemption applies only when agricultural operations are genuine and substantial.
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ICAI’s Guidance Note on Tax Audit affirms that if an assessee’s entire income is agricultural, the provisions of Section 44AB do not apply, as the income itself is exempt from tax.
Comparative Summary Table
| Aspect | Agricultural Farming & Sale (Own Produce) | Trading of Purchased Produce | Mixed Income (Agricultural + Other Business) |
|---|---|---|---|
| Nature of Income | Exempt under Section 10(1) | Taxable as business income | Agricultural income exempt; business income taxable |
| Turnover Considered for Audit | Not considered | Considered | Combined turnover considered |
| Tax Audit Requirement (Section 44AB) | Not applicable even if turnover > ₹1 crore | Applicable if turnover > ₹1 crore | Applicable if combined turnover > ₹1 crore |
Practical Compliance Guidance for OPCs and Pvt Ltd Companies
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Maintain distinct books of account segregating agricultural and non-agricultural income.
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Ensure documentary evidence of cultivation — land records, crop sale invoices, and proof of agricultural operations.
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For entities with only agricultural income, no audit is required under Section 44AB regardless of turnover.
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For entities involved in agri-trading or processing, apply standard audit thresholds.
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Presumptive taxation under Section 44AD may be explored where eligible to ease compliance.
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Obtain professional validation to avoid disputes during scrutiny or audit verification.
Key Legal References
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Section 10(1) – Exemption for agricultural income
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Section 2(1A) – Definition of agricultural income
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Section 44AB – Tax audit provisions and exemption proviso
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ICAI Guidance Note on Tax Audit
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Judicial rulings:
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CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 (SC)
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P.H.I. Seeds Pvt. Ltd. v. ACIT (ITAT)
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Conclusion
For OPCs, Private Limited Companies, and similar entities, the determinant factor is not turnover but the nature of income.
If income arises solely from genuine agricultural activity, the entity stands exempt from tax audit under the proviso to Section 44AB, irrespective of turnover size.
However, trading or processing activities that are not incidental to cultivation transform the character of income into business income, thereby triggering audit requirements once the prescribed thresholds are crossed.
In essence, the exemption under Section 10(1) and the audit exemption under Section 44AB are two sides of the same coin—both rooted in the principle that genuine agricultural activity is not subject to income tax or its procedural extensions.
