Section 106 of the Income Tax Act is a special provision that deals with income that is partly agricultural and partly non-agricultural. This section applies when a business earns income from activities where a part of the process is agricultural and another part is commercial or manufacturing in nature. Instead of treating the full income as taxable or fully exempt, the law divides the income into two parts.
One part is treated as agricultural income, which is generally exempt from income tax in India. The other part is treated as non-agricultural business income, which is taxable. Section 106 gives the legal base for splitting such combined income into taxable and non-taxable portions.
This section is important for businesses connected with land-based production where further processing is done before sale.
Why Section 106 of Income Tax Act is Important
Section 106 is important because not all income connected with agriculture is fully exempt. Many businesses grow products using agricultural methods but also process them through factories or commercial systems. If the entire income were treated as agricultural, it would escape tax completely. If treated fully as business income, it would become fully taxable. Both situations would be unfair.
To solve this issue, Section 106 allows income to be apportioned, which means divided properly based on rules. This ensures that only the correct portion is taxed.
It creates balance between tax exemption for agriculture and taxation of commercial activities.
Meaning of Partly Agricultural and Partly Business Income
Partly agricultural and partly business income means that the earning process has two stages.
The first stage is agricultural. This includes growing crops, planting, nurturing, harvesting, and other land-based activities. Income from this part is agricultural income.
The second stage is non-agricultural. This includes processing, manufacturing, refining, packaging, or commercial conversion that changes the nature of the product. Income from this part is business income.
Section 106 covers cases where both stages are involved in generating final revenue.
How Section 106 Works
Section 106 does not itself give fixed percentages. Instead, it allows the government to prescribe rules for dividing such income. These rules are given separately under Income Tax Rules for different industries.
The process works like this:
First, the total income from the combined activity is calculated.
Second, based on prescribed rules, a certain percentage is treated as agricultural income.
Third, the remaining percentage is treated as business income and becomes taxable.
This method is called apportionment of income.
Common Examples Covered Under Section 106
There are some industries where income is commonly considered partly agricultural and partly business. These are classic examples used under Section 106 principles.
Tea Growing and Manufacturing
Tea is grown on plantations, which is agricultural work. But tea leaves are then processed in factories to make drinkable tea. Because of this, income is divided between agricultural and business parts.
Coffee Growing and Processing
Coffee is grown on land but also goes through curing, roasting, and processing. Some portion of income is agricultural, and some is business.
Rubber Growing and Manufacturing
Rubber trees are grown agriculturally, but latex is processed into rubber products. Again, income is split.
Income Apportionment Table (General Understanding)
The exact percentages are given in tax rules, but for understanding purposes, the division is generally done like this:
| Activity | Agricultural Income | Business Income |
|---|---|---|
| Tea grown and manufactured | 60% | 40% |
| Coffee grown and cured | 75% | 25% |
| Coffee grown, cured, roasted and grounded | 60% | 40% |
| Rubber grown and manufactured | 65% | 35% |
These ratios are applied to total profit to calculate taxable income.
Agricultural Income Under Section 106 Concept
Agricultural income means income earned from land through agricultural operations. This includes cultivation, growing crops, and basic processing that makes the product fit for market without changing its nature.
Such income is normally exempt from income tax under Section 10(1). But when additional commercial processing is done, exemption does not apply to the entire income. Only the agricultural portion remains exempt.
Section 106 supports this separation approach.
Business Income Portion Under Section 106
The business portion includes income from processing or manufacturing beyond basic agricultural preparation. When the product undergoes transformation through machinery or factory processes, value is added through business activity.
This portion is treated as business income under “Profits and Gains of Business or Profession” and is taxable according to normal income tax rates.
Expenses related to the business portion can be claimed as deductions while calculating taxable profit.
Who Should Understand Section 106
Section 106 is especially useful for:
Plantation owners
Tea estate operators
Coffee producers
Rubber plantation businesses
Agro-processing companies
Tax professionals
Chartered accountants
Agricultural business investors
Any person earning income from land-based production plus processing should understand this rule.
Difference Between Pure Agricultural Income and Section 106 Cases
Pure agricultural income comes only from cultivation and basic preparation. It is fully exempt from tax.
But Section 106 applies when income is not purely agricultural. If commercial processing is added, then income becomes mixed in nature.
Here is a simple comparison:
| Basis | Pure Agricultural Income | Section 106 Type Income |
|---|---|---|
| Source | Only agriculture | Agriculture + processing |
| Tax treatment | Fully exempt | Partly exempt |
| Division needed | No | Yes |
| Rules applied | Section 10(1) | Section 106 + Rules |
How Tax Calculation is Done Under Section 106
Tax calculation follows a step-by-step approach.
First, calculate total income from the combined activity.
Second, apply the prescribed percentage split.
Third, separate agricultural part and business part.
Fourth, treat agricultural part as exempt.
Fifth, include business part in taxable income.
Sixth, apply deductions and expenses related to business portion.
Finally, compute tax normally on the business portion.
Key Point About Rules and Not Fixed Law Percentages
One important point is that Section 106 itself does not mention fixed ratios. It gives authority for rule-based division. The actual percentages come from Income Tax Rules.
This means the government can update rules if needed for specific industries. Taxpayers must follow current prescribed ratios.
Practical Understanding of Section 106
In practical terms, Section 106 prevents misuse of agricultural exemption. Without this section, businesses could claim full exemption even when major profit comes from processing or manufacturing.
At the same time, it protects genuine farmers and plantation owners by ensuring that real agricultural work still enjoys exemption.
It creates a fair and structured method of taxation.
Compliance Requirement Under Section 106
Businesses covered under this concept should maintain proper records. They should keep:
Production records
Processing records
Expense details
Sales details
Segregated cost data
Proper accounting helps in correct apportionment and avoids disputes during tax assessment.
Conclusion
Section 106 of the Income Tax Act deals with income that comes from activities that are partly agricultural and partly business in nature. Instead of treating the entire income as exempt or taxable, it allows the income to be divided into two parts. The agricultural portion remains tax free, while the business portion is taxed.
This section mainly applies to industries like tea, coffee, and rubber where crops are grown and then processed. The law ensures fair taxation by using rule-based percentage division.
Understanding Section 106 is important for agro-based businesses and tax planners because it directly affects how much income becomes taxable. Proper calculation and record keeping help in correct compliance and prevent tax errors.
Also Read:
- Section 102 of the Income Tax Act
- Section 101 of the Income Tax Act
- Section 100 of the Income Tax Act
- Section 10 of the Income Tax Act
- Section 1 of the Income Tax Act
Frequently Asked Questions
What is Section 106 of Income Tax Act?
Section 106 explains how to treat income that is partly agricultural and partly business in nature. It allows total income to be divided into two parts. The agricultural part is exempt, while the business portion becomes taxable under normal income tax rules.
When does Section 106 apply to income?
Section 106 applies when income comes from activities that include both farming and commercial processing. This usually happens in tea, coffee, and rubber industries where crops are grown and then processed before sale, creating mixed income that must be divided for tax purposes.
Is all agricultural income tax free?
Not always. Only pure agricultural income is fully tax free. If the product is processed through factory or commercial methods, then only the agricultural portion stays exempt. The remaining portion is treated as business income and is taxed according to income tax rules.
How is mixed agricultural income calculated?
Mixed income is calculated by first finding total profit from the activity. Then prescribed percentage rules are applied to split it into agricultural and business parts. The agricultural share is exempt, and the business share is added to taxable income for tax calculation.
Which businesses are covered under Section 106?
Businesses involved in tea growing and manufacturing, coffee growing and processing, and rubber production are commonly covered. These activities include both land cultivation and commercial processing. Because of this mixed nature, their income is divided into exempt and taxable portions.
