agricultural income tax
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This article has been edited by Mansi Bathija and written by Ayushi Yadav, a fourth-year law student from Banasthali Vidhyapith, Rajasthan. In this article, she has discussed the agricultural and non-agricultural income.

INTRODUCTION

Agricultural income is any income that is earned from any rent or revenue from a land or a building, which is used for an agricultural purpose. Agricultural income is exempt from income tax as per section 10(1) of the Income Tax Act, 1961. The Central Government has not any power in relation to this, but the State Government can collect agricultural income from other sources. But when agricultural income can be non-agricultural income, we will discuss it here.

Meaning of Agricultural Income

Agricultural income is defined under Sec. 2(1A) of the Income Tax Act, 1961.

Agricultural income is any rent or revenue by means of cash or in-kind, derived from a land, which is used for an agricultural purpose and land should be situated in India.

Income from agricultural should be produced by a cultivator or a rent receiver of that produce in-kind, which can be fit to take that into the market. 

The income should be derived from the sale by a cultivator or a rent receiver of that product which is produced or received by him, no process can be performed other than the process to render it fit for the market. 

Income which is derived from the building should follow some conditions:

  1. The building should be situated in India;
  2. It should be occupied by a cultivator or a receiver of rent-in-kind.
  3. In the connection of the land of a cultivator or a rent receiver, the building required to be as a dwelling-house, store-house or other outbuildings. 

Agricultural Income has been exempted from Income Tax under Sec. 10(1) of the Income Tax Act, where it has been given that, in computing, the total income of a previous year of a person whose source of income is agriculture will not fall under the category of total income. The burden of proof that an income fall under this category is on the assessee.

Sri Ranganatha Enterprises v. CIT [1998] 232 ITR 568 (kar.)

In this case, the Court held that the burden lies on the assessee to prove that the income derived by him is the agricultural income for which he is claiming an exemption under Sec. 10(1) of the Income Tax Act. 

Necessary conditions for income to be Agricultural income

There are some necessary conditions which are required for income to be  Agricultural income –

  • Income should be derived from land 

The very first requirement is the income should be derived from land not from any other assets. Land can be owned or occupied by a cultivator who produces on that land, or a rent receiver of that produce. Land can be farming land or a building that should be occupied or owned by a cultivator or a rent receiver. That building or farmhouse should be on the same land and used as a dwelling-house, store-house or other outbuildings.

Income should be in the form of rent or revenue, 

Rent is payment, it can be in cash or in-kind, by one person to another in respect of a grant of right to use that land. 

Revenue is used in a broader sense, In the case of Durga Narain Singh v. CIT [ (1947) 15 ITR 235] 

“Revenue” covers income other than rent. Mutation fees extracted from tenants upon their succeeding to occupancy holding are revenue derived from land.

Revenue can be derived from land only if lands are an effective and immediate source of income and not the indirect and secondary source of income. Where income derived from indirect source then it will not be considered income derived from land. 

We can understand this with the help of the case Bacha F. Guzdar v. CIT,

In this case, a dividend paid by a company out of its agricultural income is not revenue derived from land, as an effective and immediate source of income is shareholding and not the land.

Let’s discuss this situation with some illustrations-

  1. If a person X owns the land and give it to Mr.Y for rent for agricultural purpose. Mr.Y uses that land for growing wheat. Is it taxable or not?

No, it is not taxable because here income derived by a cultivator and a rent receiver is as per the condition.

  • If a person X owns a building and give it to Mr.Y on rent for Agricultural Purpose. But Mr.Y uses that building for the non-agricultural purpose. What will be the result?

This will be taxable because the income derived here is other than the agricultural purpose.

  • Land must be situated in India

Another condition is the land must be situated in India, whether situated in urban areas or rural areas. The areas are also mentioned in Sec. 2(1A)  of the Income Tax Act. The area where land revenue can be collected by officers of the government: 

  1. If it is situated in an area which comes within the jurisdiction of the municipality or cantonment board where the population is not less than ten thousand.
  2. Any area within the distance,
  3. Not being more than two kilometers from the local limits of any municipality or cantonment board and which has a population of more than ten thousand but not exceeding one lakh.
  4. Not being more than six kilometers from the local limits of any municipality or cantonment board and which has a population of more than one lakh but not exceeding ten lakh.
  5. Not being more than eight kilometers from the local limits of any municipality or cantonment board and which has a population of more than ten lakh.

Agricultural income from foreign countries will be considered as income from other sources and it will not be exempted under Agricultural income. 

E.g.- A person owns the land in Africa and give it to Mr. A on rent for the Agricultural purpose. Now, the income which is earned by that person will consider being an income from other sources and will include in the total income.

  • Land must be used for basic operations of Agriculture 

For exemption under agricultural income, the operation must be related to agricultural. That means land should be used for the agricultural purpose.

Now, what can be understood by the term ‘Agricultural Purpose’. In the case of CIT v. Raja Benoy Kumar Suhas Roy [1957] 32 ITR 466, the Supreme Court laid down the principles in regard to the term ‘Agriculture’ and ‘Agricultural Purposes’.

SC divided operations into two types-

  • Basic operation.- Basic operation includes the expenditure of human skill and labor upon the land itself, merely having an agricultural land will not constitute agricultural purposes. Some operations like tilling of land, sowing of the seeds, planting, etc.   
  • Subsequent operation.- Subsequent operations are performed after the produce sprouts from the land. Like weeding (removal of wild plants), digging the soil around the growth, removal of undesirable undergrowths, removal of the crop from insects and pests, cutting, harvesting, rendering the produce fit for the market etc.. Subsequent operation must be in continuation of basic operations, mere performance of these activities on the land will not constitute agricultural operation.

If this integrated activity is done on the land then it can be said to be “Agricultural purposes” and the income derived from these activities said to be “Agricultural income”.

Agricultural Activity does not merely include the production of foods and grains. It includes all products from the performance of basic and subsequent operations on land. We can not confine it to the production of food and grains for human consumption, it can also include products for trade and commercial assets like cotton, flax, jute, indigo, etc. and it would also include forest products like timber, sal, tendu leaves, and all those forest products which are used for commercial purpose.

In support of the Agricultural operation, there is another case K. Lakshmanan Co. v. CIT [1999] 239 ITR 597 (SC),

In this case, SC held that Sec. 2(1A)(b) of the Act does not contemplate the sale of commodity different from what is cultivated and processed and where the assessee is growing mulberry leaves, feeding them to silkworms and obtaining silk cocoons, income from the sale of silk cocoons is not an agricultural income.

  • Income from a Nursery

Income from a nursery is always exempted from total income.

H.H. Maharaja Vibhuti Narain Singh v. State of Uttar Pradesh [1967] 65 ITR 364 (All.)

In this case, the Hon’ble Allahabad High Court held that income from a nursery is not an agricultural income unless maintained by a farmer as an aid or necessary adjunct to the primary process of agriculture, for example, paddy nursery, nursery of tomato plants. Here assessee used the nursery for ornamental plants which can not be considered an adjunct to the primary agricultural process.

In the case of CIT v. Saundarya Nursery [2000] 241 ITR 530 (Mad.), the Madras High Court held that nursing activities involve carrying out of several operations on land before the sapling were transplanted in a particular pot and then put them in shades for further operation and growth. Therefore, the income from the nursery will consider being an agricultural income. 

Rent or Revenue from Land

Rent or Revenue is a kind of income derived from agricultural income by the landlord or the owner of the land. 

Rent can be in cash or in-kind. E.g.- if a person owns the land and gives it to another person on rent for agricultural purposes @ Rs. 5,000, then this amount of income considered to be rent from land in cash which is a part of agricultural income.

 Another example of rent from land is, 

A person owns the land and gives it to Mr.B on rent for agriculture, a tenant will give 1/3rd part of the whole wheat grown to the landlord, this is rent from land in-kind. 

Revenue is a kind of profit received from the land. Let’s say, a landowner asks a farmer to grow wheat and 50% of its profit will be credited to the landlord. This profit is revenue from land.

Rent or revenue derived from land should fulfill three essential conditions 

  1. Rent or revenue should be earned from land.- To receive rent or revenue, the most important point is that it should be earned from land. Rent or revenue received from assets other than land will not be considered as income derived from land. 

Revenue which is received by the landlord should be from the direct and immediate source. If the land is an indirect and secondary source then revenue will not be considered to be agricultural income. In the support of the statement, there is a case- 

Pratap Singh v. Province of Bihar [1949] 17 ITR 202 (pat.) 

In this case, the Malikana allowance paid by the government under a legal obligation to an owner, dispossessed of his land, is not revenue derived from land, as the immediate source of income is the government’s legal obligation to pay compensation and not the land.

  • Land should be situated in India .- The Second essential condition is to be land should be situated in India, otherwise, it will be considered to be income from other sources and will not include in agricultural income. Land can either be in a rural or urban area. Some conditions are given under Sec. 2(1A)(c) of the Income Tax Act in regards to the Area which is considered to be land.
  • Land should be used for agricultural purposes.- The land should be used for Agricultural purposes. We have discussed earlier the meaning of the term “Agricultural Purpose” with the help of case: 

CIT v. Raja Benoy Kumar Suhas Roy [1957] 32 ITR 466, where SC laid down the principles of basic operation and subsequent operation.

Mere connection with land will not be sufficient for Agricultural Purpose. There should be activities in connection with agriculture. Activities like dairy farming, poultry farming, cheese and butter making, etc. are not considered to be agricultural activities. 

Illustrations –

  1. A landowner receives rent in-kind from a tenant who grows wheat on that land, now the landowner sells it in the market @ Rs. 20000. This income is derived from agricultural operation.
  2. A landowner receives the rent of 1/3rd of whole wheat grown in his land. And he uses that wheat in making biscuits and sells it in the market. Here, this activity is not considered to be an agricultural operation because that income is business income.

Income derived from Agricultural produce and marketing processes

Any income derived by a cultivator or receiver of rent-in-kind from agriculture by the sale of agricultural produce on which necessary operations( maybe or may not be needed)are carried on to render the produce fit for consumption and taking it to market is called as agricultural income. Such income is exempt from taxation. However in case of operations performed are not in nature as mentioned above, income has to be separated so as to compute tax on non-agricultural income. The operations mentioned above are called as agricultural or marketing operations.

There are two conditions which must be satisfied for marketing operation;

  1. The agricultural process must be performed by a person employed by a cultivator or a receiver of rent-in-kind.
  2. That product should be fit to be taken to market.

There are some ordinary process employed to render the produce fit to be taken to market like- thrashing, winnowing, cleaning, drying, crushing, boiling and decanting, etc. if the income derived from these marketing process will be considered as agricultural income.

If the marketing process is performed on products that can be sold in the market in its raw form without performing any operation which makes it fit for marketing, then that income will be considered as partly agricultural and partly from a business.

Brihan Maharashtra Sugar Syndicate Ltd. v. CIT [1946] 14 ITR 611 (Bom.) 

In this case, assessee carries the business in the manufacture and sale of sugar, and then he owns a sugarcane farm and utilized this in the production of sugar. The court, in this case, held that the process of converting sugarcane into sugar would not be agricultural process and the income derived from this would not be agricultural income. 

Income from Farm building

Income from farm building which is derived from Agricultural operation is exempted from tax. But to satisfy that property is used for agricultural purposes there are some essential requirements that need to be fulfilled. Those conditions are:

  1. The building must be occupied by the cultivator or the receiver of rent-in-kind;
  2. The land must be situated in India and used for agricultural purposes;
  3. The building which is used for agricultural operations by the cultivator or the rent receiver must be as a dwelling house, storehouse.
  4. The land is assessed to land revenue or local rates or land is situated in rural areas.

Rural Areas for the above purpose are given under Sec.2(1A)(c)(ii) of the Act, any area not situated:

  1. within the jurisdiction of municipality or cantonment board and where the population is not more than ten thousand.
  2. within 2km from the local limits of municipality or cantonment board, where the population is more than 10000 but less than 1 lakh.
  3. Within 6km from the local limits of municipality or cantonment board, where the population is more than 1 lakh but less than 10 lakh.
  4. Within 8km from the local limits of municipality or cantonment board, where the population is more than 10 lakh.

The use of the building other than farming activity will not be exempted under Income Tax. E.g.- If an owner gives that building on rent for residential purpose then income derived from that building will not be exempted.

Illustrations 

  1. Mr. W owns farmland and there is a building attached to that land. Mr. W gives it on rent to Mr. H @ rs.4000(rs. 3500 for land and rs. 500 for a house). Income received by Mr.W will be exempted here because the land is used for an agricultural purpose and the building is attached to the land and used by cultivator as a dwelling house.
  2. A person owns a building in a particular city and gives it on rent to Mr. X who is a farmer. Mr. X uses it as a dwelling house. Is it taxable or not? In this case, income is taxable because the building is not attached to any land, so it is not an agricultural income and taxable.
  3. Mr. D owns the land and gives it to Mr. A for Agricultural operation. Mr. A uses that land for Dairy Farming. Agricultural income will not be exempted because dairy farming is not an agricultural activity.

  

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When Agricultural income consists of both Agricultural and non-agricultural income

Income which is partially agricultural and partially non-agricultural is determined under rules 7, 7A, 7B and 8 of Income Tax Rules.

Rule 7.- under this rule, income which is partially agricultural income and partially income chargeable under the head  “profits and gains of business” then in determining chargeable income, the government will determine the market value of agricultural produce which is raised by the assessee or rent received by him and which has been utilised as a raw material in a business then only that amount shall be deducted and no further deduction shall be made.

Rule 7A.- Income derived from the sale of centrifuged latex or Cenex or latex-based crepes (such as pale latex crepe) or brown crepes (such as estate brown crepe, remilled crepe, smoked blanket crepe or flat bark crepe) or technically specified block rubbers manufactured or processed from field latex or coagulum obtained from rubber plants grown by the seller in India in the first instance, be computed as if it were income derived from business. 35% of the income shall be deemed to be income from business and shall be taxable.

No deduction shall be made from the income in respect of the amount of subsidy if allowance made in respect of the cost of plating rubber plants in replacement of dead plants or become permanently useless in an area already planted if such area has not been abandoned.

Rule 7B.- income derived from the sale of coffee grown and cured by the seller in India shall be computed as income derived from the business. 25% of such income shall be taxable.

Income derived from the sale of coffee grown, cured, roasted and grounded by the seller in India, with or without mixing chicory or other flavoring ingredients, shall be computed as income derived from the business. 40% of such income shall be deemed to be taxable.

No deduction shall be made from the income in respect of the amount of subsidy if allowance made in respect of the cost of plating rubber plants in replacement of dead plants or become permanently useless in an area already planted if such area has not been abandoned.

Rule 8.- the income derived from the business of growing tea leaves and manufacturing tea shall be computed as it was derived from business and 40% of the income shall be deemed to be taxable under the Act.

CIT v. AFT Industries Ltd. [2004] 141 taxman 433 (cal.)

The cess levied under the West Bengal Rural Employment Production Act, 1976 and the West Bengal Primary Education Act, 1973 is permissible as a deduction in computing the income from the business. The cess does not fall under the prohibitory item of deduction.

CIT v. R.M. Chidambaram Pillai [1977] 106 ITR 292 (SC) 

SC held that salary and interest received by a partner from a firm growing leaves and manufacturing tea are taxable only to the extent of 40% and the balance of 60% income shall be treated as agricultural income. 

No deduction shall be made from the income in respect of the amount of subsidy if allowance made in respect of the cost of planting bushes in replacement of dead bushes or become permanently useless in an area already planted if such area has not been abandoned.

Computation of Tax on Non-Agricultural Income when Income has Agricultural Income also

Agricultural income is exempted from taxation, but in some conditions, the Income Tax department laid down a way for indirect tax from such incomes which we have discussed. This method called as partial integration of agricultural income with non-agricultural income. According to this method, higher rates of taxes imposed on non-agricultural income. There are some requirements for the applicability of this method:

  1. The taxpayer should be an individual, a Hindu undivided family, a body of an individual, an association of person or an artificial juridical person.
  2. The Non-agricultural income of the taxpayer exceeds the maximum amount non-chargeable to tax. Non-agricultural income should exceed the amount of rs.2,50,000 for the individual below than 60 yrs. of age and rs.3,00,000 for the individual above than 60 yrs of age. 
  3. Agricultural income should be more than rs. 5000.

Calculation of Tax is done in the following manners

To calculate the total tax payable, there are four steps as follows:

Step 1: – Add agricultural income to non-agricultural income and calculate tax as if this is total income.

Step 2: – Add agricultural income to the maximum amount non- chargeable to tax and calculate tax as if this is total income.

Step 3: – Deduct tax computed in step 2 from tax computed in step 1. The amount so computed is the actual tax payable.

Step 4: -Add surcharge, education cess, and secondary and higher education cess.

Examples

  1. Let’s say, A person of age 30 yrs  Mr. A has a business of manufacturing and income from that business is Rs. 5,00,000 and his agricultural income is Rs. 6,00,000. How much tax Mr. A will pay.

Step 1.- his Non-agricultural income + Agricultural income, i.e. 5,00,000+6,00,000= 11,00,000, now, tax on rs.11,00,000

             1,12,500+30% of (total income – 10,00,000) = 1,42,500

Step 2.- 6,00,000+2,50,000 (i.e., agricultural income+exemption limit)= 8,50,000, now, tax on 8,50,000

             25000+20% of (total income – 5,00,000) = 95,000

95,000 is a taxable amount from total income

Step 3.-  deduct tax computed in step 2 from step 1, i.e.,

               1,42,500 – 95000= 47,500

Rs. 47,500 is the amount.

Step 4.- add education cess, 2% of income tax, i.e., 950

              47,500+950 = 48,450 is the actual payable tax.

2. An individual of the age of 22 yrs., his net agricultural income is rs. 86,000 and non-agricultural income is Rs. 12,65,000. He contributes Rs. 40,000 towards Public Provident Fund. calculate the amount of tax payable by him.

Step 1.- agricultural income + non-agricultural income,i.e., 

              12,65,000+86,000 = 13,51,000 (deduct the amount of PPF) = 13,11,000

           1,12,500 + 30% of (total income – 10,00,000) = 2,05,800

Step 2.- agricultural income + exemption limit, i.e.,  86000+2,50,000 = 3,36,000

                5% of (3,36,000 – 2,50,000) = 4300

Step 3.- deduct 205800 – 4300 = 2,01,500 is the actual amount.

Step 4.- add education cess 2% of income tax, i.e., 4,030

              Add secondary and higher education cess 1% of income tax, i.e., 2,015

             Actual amount of tax = (2,01,500+4,030+2,015) = 2,07,545. 

Conclusion 

Agricultural income is exempt from income tax but State government by indirect ways. There are so many methods and requirements for agricultural income as we have discussed. Any other process will compute it as partly agricultural income and partly non-agricultural income.

 

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