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This article is written by Ronika Tater, from the University of Petroleum and Energy Studies, School of Law. This article discusses the critical assessment of Section 10(1) of the Income Tax Act, 1960 through the constitutional provision with the help of case laws and regulations in India and also legal consequences of taxing agriculture income in India by throwing some light on the present scenario.

Introduction

Agriculture is said to be the primary occupation and the only source of income for the large rural population in India. The country entirely depends on agriculture for its basic food requirements. The government has many schemes, policies and other measures to promote growth in this sector by exempting agriculture income from tax act. Historically, taxing agriculture income goes back to the 1960s and in the Seventh Schedule of Constitution, Entry 82 in the Union List mentions taxes other than agricultural income, and Entry 46 in the State list mentions taxes on agricultural income. 

Hence, agricultural income is valid under both the centre and state list. Income Tax Act of 1860, introduces the income tax in India and till 1886 agricultural income was taxed. The Income Tax Act of 1961 had provisions for an exemption for taxing agricultural income. However, States can implement agricultural income tax acts, such as plantations. In many states of India, agricultural Income Tax Acts are applicable as in most of the North-East States, Uttar Pradesh, Hyderabad, Travancore, Cochin, Madras, etc.

A critical assessment of Section 10(1) of the Income Tax Act, 1961

The Income Tax Act provides its own definition for agriculture income under Section 2 (1A) of the Income Tax Act, which means any rent or revenue derived from the land and any income derived from such land and from any building, provided that such building should be used by the assess for agricultural purpose. The Memorandum of the Finance Bill, 2008 widened the scope of ‘Agricultural Income’, which refers to income derived from the land which is situated in India and is used for agricultural purposes. Such agricultural income is exempt from tax under Section 10(1) of the Income Tax Act, 1961. The judicial authority while considering whether income derived from nursery operations constitutes agricultural income or not, considered on the facts of the case below-mentioned:

  1. Whether the nursery is maintained by carrying out a basic operation on land and is in a continuous process, then the income derived would include in the exemption clause.
  2. If not, then the income is non-agricultural income and liable to be included in the total income for taxable income.

The court under such circumstances, proposed to amend the definition of Section 2(1A) and extended that any income derived from saplings or seedlings grown in a nursery is deemed to be agricultural income regardless, of whether the basic operation has been carried out on the land, such income qualify for the exemption under Section 10(1) of the Act.

Further, for computation of income tax, the agriculture income is aggregated with non-agriculture income, only if the assessee is an individual or has non-agricultural income which exceeds the taxable limit or if it exceeds a limit of five thousand rupees. The tax assessment for an individual and company differs. In the case of B. Nagi Reddy v. CIT 2002, the court held that shooting of films that has no nexus with agriculture operation or with land should be exempted from considering agricultural income and under Section 10(1) income earned by the assessee will not be recognized as agricultural income, but it was business income and it shall be taxable as business income in the hands of the assessee. 

new legal draft

How is cultural income tax calculated with example

The aggregation of agricultural income with non-agricultural income and computation of income tax for the assessment year 2020-21 shall be in the following manner:

  • Step 1: Net agricultural income is to be computed as if it were income chargeable to income-tax.
  • Step 2: Agricultural and nonagricultural income of the assessee will then be aggregated and income-tax is calculated on the aggregate income as if such aggregate income were the total income.
  • Step 3: The net agriculture income is then increased by the first slab of income on which tax is charged at nil rate and income-tax is calculated on net agricultural income so increased as if such income were the total income of the assessee.
  • Step 4: the amount of income-tax determined in step 2 will be reduced by the amount of income-tax determined under step-3.
  • The balance amount is then added with the health and education cess.
  • The final amount derived is the income tax payable by the assessee for the assessment year.

Illustration: For the assessment year 2020-21, net agricultural income as per Section 2(1A) of an assessee is Rs. 4,00,000 and non-agricultural income is Rs. 12,85,000. The taxpayer contributes Rs. 40,000 towards the public provident fund. Find out the tax of the following taxpayer:

  1. An individual (22 years).
  2. An Indian company.

Solution: Gross total income (Rs. 12,85,000) less deduction under Section 80C (Rs. 40,000) will be the total income Rs. 12,45,000.

Computation of tax in the case of an individual in the following steps:

  1. Income tax on Rs. 16,45,000 (i.e. agricultural income: Rs. 4,00,000 add non-agriculture income Rs. 12,45,000) is 3,06,000.
  2. Income tax on agricultural income: Rs 4,00,000 add exempted slab of income Rs. 2,50,000 is Rs. 42,500.
  3. Income tax computed at (a) minus income tax computed at (b) is Rs. 2,63,500.
  4. Add: Health and Education cess at the rate of 4 percentage is Rs. 10,540.
  5. Tax payable (rounded off) is Rs. 2,74,040.

Computation of tax in the case of an Indian company tax liability will be as follows:

  1. Tax on agricultural income of a firm or company is not considered as per Section 10(1) hence, Rs. 4,00,000 will be exempted.
  2. Tax on non-agricultural income of Rs. 12,85,000 at the rate 30 percentage (income is above Rs,10,00,000) is Rs. 3,85,000.
  3. Add: Education cess at the rate of 2 percentage is Rs. 15,420.
  4. Tax liability (rounded off ) is Rs. 4,00,920.

The exemption limit for agriculture income

The agricultural income in the case of the firm and company agricultural income is nil, but in the case of an individual, HUF, AOP/BOI if the agricultural income exceeds 5000 limits then the income tax is calculated partially on net agricultural income with non-agricultural income; in the case of resident senior citizen 60 years or more but less than 80 years is 3,00,000 lakh, in the case of super senior resident individual 80 years or more is 5,00,000 lakh, in the case of any individual or every HUF for the assessment year is 2,50,000 lakh.

The constitutional validity of S.10(1) of the Income Tax Act, 1961

Taxation is a statutory field and the two well-settled principles of interpretation of taking statutes are below-mentioned:

  1. There is no equity in tax, and the principle of strict or literal construction applies in interpreting tax statutes.
  2. If there are two reasonable interpretations of the taxing statute, the one that favours the assessee has to be accepted. 

It is contended that a wide and liberal meaning should be given to an exemption clause in regard to taxing statute. The charging section must always be interpreted strictly unless a particular type of income is made taxable, the authorities cannot levy the tax. In the case, Commissioner of Agriculture Income Tax v. Jagdish Chandra Deo Dhabal Deb, 1949, it was held that as the assessee was carrying on a regular operation in forestry which requires the expenditure of skill and labour upon the land on which the forest grows. 

Hence, income derived from the sale of forest timber is agricultural income. While deciding whether an income earned from the agricultural land is an agricultural income or not, in the case of B. Nagi Reddy v. CIT 2002, the Madras High Court held that shooting films is an activity and has no nexus with the agricultural operation or with the land which may have been used for agricultural purpose and yielding agricultural income. However, income earned by the assessee by way of shooting in his garden cannot be considered as agricultural income, but it was business income and the exemption is not applied in this case.

Further, exemption provision cannot be unduly extended to produce unintended results in derogation of plain and literal meaning. The full effect should be given to exemption notification. In the case, Motiram Tolaram v. Union of India, it was held that ambiguity or doubt in exemption provision should be resolved in favour of revenue and not in favour of an assessee.

Should the agricultural income be taxed or not

The idea of taxing agricultural income is reasonable looking at the growth and development of the nation. However, the issue is so politically motivated as the implementation of this provision would affect the lives of numerous people which has a direct relation to casting votes at the time of the election. To avail the benefit of this Act, it requires the farmers to be classified as socially and economically deprived of resources. 

Here, the major problem will be identifying the individuals, provided that many people hold small pieces of land or are landless labourers and identifying what is to be taxed, it is difficult to identify the value of the output or the net income earned by the farmer. Individuals use their black money to convert into white money by reading the words of the tax provision rather than going on the spirit of the law. 

Also, at the time of plantation of rubber and wheat in the same land in the ratio of 3:2, the assessee takes advantage of window dressing since rubber is 60 percent exempted in the tax provision and wheat is fully exempted under the section. Further, terrorism is also motivated by the exemption of agricultural income as the blood money is converted into white money in the books of account to depict the wrong picture to the government. However, in case if this is implemented the tax would affect the consumer, as they have to pay a higher price for the product.

Advantages and disadvantages of taxing agricultural income

The advantage of taxing the agricultural income in the country

  • To prevent the investment of black money, money-laundering, blood money, window dressing used to evade tax.
  • It would lead to account-keeping thereby improving the overall structure of the country.
  • Government while facilitating loans, could easily identify the borrowers on the basis of the income tax return.
  • It would add some additional revenue in the books of the government.
  • Keep a check on the rich farmers or big agro companies, who are largely benefitted from this exemption.
  • The primary objective is to safeguard the poor farmers from moneylenders.
  • If tax is imposed on agricultural income above a certain threshold, it would be easy to track the rich farmers from the poor farmers. 

The disadvantage of imposing a tax on agricultural income in the country

  • It would ultimately increase the prices for the consumers.
  • Illiteracy is still the major issue in this country and it would create a panic in the country.
  • Most of the farmers have a small plot, therefore, the tax revenue will be very low.
  • Administratively it is difficult to implement in a dynamic country like India.
  • There is a possibility of harassment of the poor cultivators at the hands of the administration.

Hence, it is pivotal to consider the advantages and disadvantages before forming any policy on taxation of agricultural income.

Recommendations

The following are the recommendations in relation to taxation of agricultural income:

  • The implementation process should be considered after looking at various spheres of the tax laws. The taxes collected by the centre would be assigned to the states. 
  • Most agriculture farmers would remain out of the tax net due to the social and economical threshold. 
  • There must be a uniform system of taxation across the country and we must integrate agriculture income taxation with non-agriculture income taxation. 
  • Agricultural income would be considered an indirect tax and included under Good and Service Tax, although the income of the farmer will still be outside the sphere of income tax and we can consider an exemption for specific crops. This would aid in tracking people who evade tax in the name of agricultural income. 

Conclusion

“Every government has a right to levy taxes. But no government has the right, in the process of extracting tax, to cause misery and harassment to the taxpayer and the gnawing feeling that he is made a victim of palpable injustice” by Nani Palkhivala. However, the benefit of the provision has been wrongly interpreted by some individuals leading to a discrepancy in the system. The government should step forward and look into the mechanism to regulate considering the growth and development of this country.

References


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