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Assessment of 'Agricultural Income'

1. 'DEFINITION’ Of Agricultural Income [ Section 2(1A)]

Agricultural income including the following:

  1. any rent or revenue derived from land which is situated in India and is used for agricultural purposes [sec. 2(1A)(a)];

  2. any income derived from such land by agricultural operations including processing of the agricultural produce, raised or received as rent-in-kind so as to render it fit for the market, or sale of such produce [sec. 2(1A)(b)]; and

  3. income attributable to a farm house subject to the condition that the building is situated on or in the immediate vicinity of the land and is used as a dwelling house, storehouse, or other out-building and the land is assessed to land revenue or a local rate or, alternatively, the building is situated on or in the immediate vicinity of land which (though not assessed to land revenue or local rate) is situated in a rural area [sec. 2(1A)(c)].

The above three types of income shall be treated as 'agricultural income' only when the prescribed conditions are satisfied.

Meaning & Need for Assessment of Agricultural Income :
  • Section 10(1) exempts agricultural income from tax. The reason for exemption for agricultural income from Central taxation is that the Constitution gives exclusive power to make laws with respect to taxes on agricultural income to the State Legislature. However, in some cases agricultural income is taken into consideration to determine tax on non-agricultural income. 

  • From the assessment year 2009-10, any income derived from saplings or seedings grown in a nursery shall be deemed to be agricultural income. 

  • Rural area - Rural area for the above purpose is as follows –

From the assessment year 2014-15 - Any area which is outside the jurisdiction of a municipality or cantonment board having a population of 10,000 or more and also which does not fall within distance (to be measured aerially) given below –

2 kilometres from the local limits of municipality / cantonment board.

If the population of the municipality/cantonment board is more than 10,000 but not more than 1 lakh

6 kilometres from the local limits of municipality / cantonment board.

If the population of the municipality/cantonment board is more than 1 lakh but not more than 10 lakh
8 kilometres from the local limits of municipality / cantonment board. If the population of the municipality/cantonment board is more than 10 lakh
 

Need for Assessment of Agricultural Income :

Agriculture is the main part of the Indian economy. 70% of Indian population is based upon agriculture and derives its income from agricultural operations. But u/s 10(1) of the Act agricultural income is fully exempted from tax. As a result agricultural income does not form part of total income. The agricultural income is exempted from tax as under Article 270 of Indian Constitution. Central Government cannot levy any tax on such income because agriculture is a State subject. In a case J. Ragho Rama Reddy v. I.T.O. (1988) 169 I.T.R. 174 (A.P.) it has been held that Parliament is not competent to tax agricultural income. The State governments are free to levy any tax on agricultural income.

Due to green revolution, the agricultural incomes increased and a demand was raised to levy tax on agricultural incomes. A committee on taxation of agricultural income and wealth was set up under the chairmanship of Dr. K.N. Raj. This committee also recommended that agricultural income must remain exempted from tax. On the other hand, it suggested a system of integration of agricultural income with non-agricultural income in certain cases. From assessment year 1974-75, this scheme of assessment of agricultural income was introduced and which is known as present treatment or its assessment.

2. How To Determine Agricultural Income

The three basic tests which must be satisfied to treat a particular income as agricultural income are given below. It is essential that all the following three tests must be fulfilled

Test (A) —Income derived from land

It is essential that for any income to be termed as agricultural income land must be effective and i,n,nediate source of inc ome and not indirect and secondary. (C.!. T. vs. Kamakshya Narain Singh). As a result, interest on arrears of land revenue, dividend paid by a company out of its profits which included agricultural income also (Bacha Guzdar vs. C.I.T.) and salary paid to a manager for managing agricultural farms (Premier Construction Co. Ltd. vs. C.I.T.) are not agricultural incomes because in all these cases land is not the effective and immediate source of income.

Test (B)—Land is used for agricultural purposes

To term any income as agricultural income, it is necessary that income must be the result of agricultural operations performed on agricultural land. Agriculture means performance of some basic operations—ploughing, sowing, irrigating and harvesting and some subsequent operations—weeding, digging, pruning cutting etc. It involves employment of some human skill, labour and energy to get some income from land. (Raja Mustafa Au Khan vs. C.LT.).
Supreme Court in its decision in I CiT. vs. Raja Benoy Kurnar Sahas Ray (i957 32 i.T.R. 466] has observed:

  1. Agriculture in its primary sense denotes the cultivation of the field and it is restricted to the cultivation of land in strict sense of the term meaning thereby tilling of the land, sowing of seeds, planning and similar operations on the land.

  2. Operations to he performed subsequently like weeding, digging etc.

  3. Agriculture comprises within its scope all produce regardless of its nature. The produce may be grains, vegetables or fruits including plantations, groves and pastures, or articles of luxury such as betel, coffee, tea, spices, etc.

Test (C)—Land is situated in India

To qualify for exemption u/s 10(1) of the Act, it is necessary that agricultural income must he derived from land situated in India. In case income is derived from agricultural land situated outside India or is from any non-agricultural land, it will not be exempted u/s 10(1). It is taxable income under the head “Income from other Sources.”

3. Types Of Agricultural Income

On the basis of definition of agricultural income given above, it can be classified into five broad categories. These types of agricultural incomes are :

1. Any income received as rent or revenue from agricultural land

Rent can very simply be defined as a payment in cash or in-kind which the owner of the land receives from another person in consideration of a grant of a right to use land. When the owner of land is not performing agricultural operations himself but gives his land on contract basis, any amount received from the actual cultivator by the owner of the land shall be agricultural income. Such rent may he in cash or in-kind, i.e., a share in the produce grown by the cultivator.
The Privy Council decided in a case [C.i.T. vs. Karnakshya Narian Singh (1948) I.T.R. 395] that interest on arrears of rent payable in respect of agricultural land cannot be agricultural income, because it is neither ‘rent’ nor ‘revenue derived from land’.

The word revenue is used in a very broad sense of return, yield or income and not only in a narrow sense of land revenue [C. I. T. v. Kamakshya Narain Singh]. This term embraces income other than rent and that is why mutation fees received from the tenants on their getting occupancy holdings and fees paid by the tenants at the time of renewal of their lease, are revenue derived from land and as such exempted from tax.

In the above mentioned case the Privy Council has clearly laid down that revenue is derived from land only if the land is immediate and effective source of the revenue and not the secondary and indirect source. So any income or revenue which is indirectly derived from land cannot be presumed to he the agricultural income. This point is further clarified by the Supreme Court in a case Bacha Guzdar v. C.I.T. that dividend paid by a company to its shareholders out of its agricultural income is not an income derived from land since the immediate and effective source of dividend income to the shareholder is the shareholding in the company and not the land.

Income from sale of agricultural land. The Finance Act, 1989 has added an explanation to section 2(IA) as a result of which any revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land mentioned in section 2(14) (iii) (a) or (b). It has been made applicable retrospectively from 1-4-1970. It simply means that any income from transfer of urban agricultural land will not form part of agricultural income. It will he taxable income under the head “capital Gains. “.

2. Income derived from Agriculture

Income derived from land situated in India by applying agricultural operations shall be agricultural income. If all the basic operations like preparation of land for sowing, planting, watering, harvesting etc. are applied, any income resulting from such operations shall be agricultural income. On the other hand, if grass, trees etc. have grown spontaneously or without the aid of human skill, effort, labour etc., any income resulting from the sale of such grass, trees or lease rent of such land shall not he agricultural income.

Agricultural income also includes income from orchards or from horticulture.

It is further to he noted that if a particular income is derived from land but without applying agricultural operations, such an income although derived from land cannot become agricultural income and so any income having remote connection with land cannot he called as agricultural income. Income from poultry and dairy farming, fisheries, mining, stone quarries, breeding and rearing of livestock, all these incomes although remotely linked with land but cannot he called agricultural incomes because of the absence of important characteristics of agricultural income, i.e., cultivation of land.

Income which is in the nature of by-products of agricultural land such as selling of milk, the pasturing of cattle etc. can safely he included in agricultural income provided the endeavour is agricultural and it is reasonably connected with land used for agricultural purposes [Beohar Singh vs. CIT. 16 I.T.R. 433, 443].

3. Any income accruing to the person by the performance of any process to render the produce marketable

If, in the ordinary course, a process is to he employed by the cultivator himself or the landlord who receives the produce as rent-in-kind, any income derived from such a process shall he agricultural income. Such a process must be employed to render the produce fit for marketing. The process may he manual or mechanical. It should be noted that the produce should not change its original character in spite of the processing unless the produce cannot be sold in that form or condition.

Following points are to he noted in this connection :

  1. The process must he one which is ordinarily employed by the cultivator.

  2. The process is employed to render the produce fit to be taken to the market.

  3. The produce must retain its original character in spite of process unless the produce is having no market if offered for sale in its original condition.

This can further he elaborated with following examples

  1. Unginned cotton can be sold in its original form and if any profit is attributable to the ginning operation, such a profit shall not be agricultural income as ginning operation is not a must to render the produce fit to be taken to the market [Sheolal Ramlal v. C.I.T. 4 I.T.C. 375].

  2. Tahacco leaves need to be dried to make them suitable for the market and thus profit earned by selling dried tobacco shall be agricultural income. [C.LT. v. Katragadda Madhusudhana Rao 12 I.T.R. 1]

  3. Drying and curing of coffee after picking beans, husking of paddy, conversion of latex into sole crepe or smoked sheets. [c.I.T v. Woodlands State Ltd. (1965) 58 I.TR. 612] etc. are otner examples of processes carried on to make the produce marketable.

4. Any income received by the person by the sale of produce raised or received as rent-in-kind

Any income derived by any person by the sale of agricultural produce raised by him or received as rent-in-kind shall also be agricultural income. Sometimes such person puts some extra effort by selling the produce through his own shop, any extra profit raised due to shopping activities shall not he agricultural income.

5. Income from buildings used for agriculture

Any income derived from a building used for agricultural operations shall be agricultural income provided

  1. The building from where the income is received, is in the immediate vicinity of the land and is occupied by the owner, or by the cultivator or by the receiver of rent-in-kind.

  2. Building is used as a dwelling house or a store house or other out-building.

  3. The cultivator or the receiver of the rent-in-kind, by reason of his connection with the land, is in need of the house as a dwelling house or as a house to store the goods required for agricultural operations.

  4. The land if assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Govt. and in case the land is not assessed to land revenue or to local rate, it should not be situated within the urban areas.

4. Partly Agricultural and Partly Non-agricultural

Sometimes, income comprises of both agricultural as well as non-agricultural income. Such a situation arises in case of certain ‘Agro based industries where agricultural produce is used as raw material and it (i.e., raw material) is produced by the same person (i.e., industrialist) who manufactures industrial product by using such raw material. Such industries (i.e., persons), earn income by selling the industrial product manufactured from self grown agricultural raw material.

For example :

Mr. X is the owner of agricultural land in India and produces sugarcane by spending Rs. 2,00,000. Further, X set up an industrial undertaking to manufacture sugar from sugarcane so produced. Accordingly, he uses the whole quantity of sugarcane for producing sugar and spends Rs, 2,50,000 as industrial expenses. He ultimately sells the sugar so produced for Rs. 7,00,000.

In this case, the total income of Mr. X shall be calculated as follows :

Total Income = Sale proceeds of sugar - Cost of cultivation - Industrial expenses
= Rs. (7,00,000 - 2,00,000 - 2,50,000) = Rs. 2,50,000

The above total income of Mr. X is the composite income comprising of agricultural income and non-agricultural income. The income attributable to agricultural operations (i.e., raising of sugarcane) is agricultural income and the income attributable to industrial operations (i.e., manufacturing sugar from sugarcane) is non-agricultural income.

In such a situation, it becomes necessary to disintegrate (bifurcate) the two incomes because agricultural income is exempt from tax and non-agricultural income is taxable.

Rules 7, 7A, 7B and 8 of Income Tax Rules, 1962 provide the method of segregating the two incomes. These rules deal with calculation of agricultural income and non-agricultural income in such cases of composite income.

(A) Income from Growing and Manufacturing of any product other than Tea [Rule 7]

An assessee may have composite business income which is partially agricultural and partially non-agricultural, for example, where XYZ Ltd. grows potatoes and further processes its produce to sell them as wafers. In this case the company has composite income i.e. from agriculture and from business. The composite income has to be disintegrated and for computing business income the market value of any agricultural produce raised by the assessee or received by him as rent in kind and utilised as raw material in his business is deducted. No further deduction is permissible in respect of any expenditure incurred by the assessee as a cultivator or receiver of rent in kind. For computing agricultural income the market value of agricultural produce will be total agricultural receipt on account of potatoes. From such agricultural receipts, expenses such as cultivation expenses etc. incurred in connection with such receipt will be deducted and balance will be agricultural income which will be exempt.

For example, in the above case, if the market value of the potatoes grown by the company, which have been used for the purpose of making its own wafers, is Rs. 5 lakhs and the cost of cultivation of such potatoes is Rs. 4 lakhs, the agricultural income shall be Rs. 1 lakh (5 lakhs - 4 lakhs). This agricultural income of Rs. 1 lakh shall be exempt. Further for the purpose of computing business income from the sale of wafers produced from such potatoes, the company shall be allowed deduction of `5 lakhs as the cost of potatoes, being the market value of potatoes grown by it.

(B) Income from Growing and Manufacturing of Rubber [Rule 7A]

  1. 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, re-milled 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 shall be computed as if it were income derived from business, and 35% of such income shall be deemed to be income liable to tax.

  2. In computing such income, an allowance shall be made in respect of the cost of planting rubber plants in replacement of plants that have died or become permanently useless in an area already planted, if such area has not previously been abandoned, and for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which, under the provisions of section 10(31), is not includible in the total income.

(C) Income from Growing and Manufacturing of Coffee [Rule 7B]

  1. Income derived from the sale of coffee grown and cured by the seller in India, shall be computed as if it were income derived from business, and 25% of such income shall be deemed to be income liable to tax.

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

(D) Income from Growing and Manufacturing of Tea [Rule 8]

Where the assessee has a business of growing tea leaves and then processing it (or manufacturing the same), the procedure adopted to disintegrate is as under:

Step 1:        Compute the income of growing as well as manufacturing tea under the head 'profits and gains of business or profession' after claiming the deductions available under that head.

Step 2:        60% of the income computed in Step 1 will be treated as net agricultural income and 40% of such income, so arrived at, is treated as business income.

TABLE - PARTLY AGRICULTURAL AND PARTLY BUSINESS INCOME

Corp

Rule

Agricultural Income

Business Income

Growing and Manufacture of Tea

8

60%

40%

Rubber manufacturing business

7A

65%

35%

Coffee grown and cured by seller

7B(1)

75%

25%

Coffee grown, cured, roasted and grounded by the seller in India with or without mixing chicory or other flavouring ingredients

7B(1A)

60%

40%

5. Examples Of Agricultural & Non-Agriculturlal Incomes

Illustration of Agricultural Income :

  1. Income from the sale of trees from the forests where the trees were replanted and subsequent operations in forestry were carried out. [C.LT. v. Raja Benoy Kuinar Sahas Roy]

  2. Income from sale of dried tobacco leaves in which green tobacco leaves are dried by using some process.

  3. Amount received as compensation for dispossession of agricultural land—when an agriculturist assessee gets compensation from a person who was keeping unlawful possession of land owned by assessee as the compensation is for the agricultural income assessee would have earned. [Commissioner of Income-tax v. Manna Bamji & Co. 86 I.T.R. 29]

  4. Grazing fees realised from piece of land which was used for grazing animals used for agricultural purposes. [C.l.T. v. Raja Shamsherjang Bahadur]

  5. Income from growing of flowers i.e. floriculture by a landlord or a cultivator

  6. Sale of standing crop by a cultivator.

  7. Interest on capital and share of profit received by a partner from a firm engaged in agricultural activities.

Illustration of Non-Agricultural Income :

  1. Incomes from sale of trees from a forest where no tilling or other basic operations were carried and trees are of spontaneous growth

  2. Income from the sale of wild grass.

  3. Income from sale of gur or refined sugar acquired by using some manufacturing process.

  4. Income from sale of ginned cotton.

  5. Interest received by money-lender in the form of agricultural produce.

  6. Share of agricultural produce received by a person for supply of water.

  7. Remuneration received for managing agricultural farm.

  8. A Zamindar obtains promissory note from a defaulting tenant in respect of arrears of rent due to him, any interest which accrues on such note shall not be agricultural income.

  9. Commission received by the landlord for selling the agricultural produce of his tenants.

  10. Profit from sale or harvest of an agricultural crop, purchased by the assessee as standing crop, may be called as profit from trading operations.

  11. Income from sale of fruits of trees of spontaneous growth is not agricultural income

  12. Any annuity received (from agricultural land exchanged for annuity) is nc agricultural income.

  13. Remuneration received by a person for managing agricultural property is not agricultural income.

  14. Income from fisheries.

  15. Royalty income from mines and brick making.

  16. Interest on arrears of rent of agricultural land.

7. Tax on Non-Agricultural Income if the Assessee has both Agricultural & Non-Agricultural Income

As already discussed, there is no tax on agricultural income but if an assessee has non-agricultural income as well as agricultural income, such agricultural income is included in his Total Income for the purpose of computation of Income-tax on non-agricultural income. This is also known as partial integration of agricultural income with non-agricultural income or indirect way of taxing agricultural income.

Such partial integration is done only in the case of:

  1. individual;

  2. HUF;

  3. AOP/BOI;

  4. Artificial juridical person.

It is not done in the case of:

  1. firm;

  2. company;

  3. co-operative society;

  4. local authority.

The partial integration is done to compute the tax on non-agricultural income only when the following two conditions are satisfied:

  1. non-agricultural income of the assessee exceeds the maximum exemption limit which is Rs. 2,50,000 in the case of an individual (other than individual of the age of 60 years or above) and HUF, etc.; and

  2. the Net Agricultural Income exceeds Rs. 5,000.

Computation of tax where there is agricultural income also:

The following steps should be followed to calculate the tax:

Step 1: Add agricultural income and non-agricultural income and calculate tax on the aggregate as if such aggregate income is the Total Income.

Step 2:  Add agricultural income to the maximum exemption limit available in the case of the assessee and compute tax on such amount as if it is the Total Income.

Step 3:  Deduct the amount of income-tax as computed under Step 2 from the tax computed under Step 1.

The amount so arrived at shall be total Income-tax payable by the assessee.

Step 4:  Claim rebate under section 87A if applicable.

Step 5: Add surcharge if applicable + education cess and SHEC @ 3%.

Example :

Gross Total Income of Mr. Dust aged 50 years as computed under Income-tax Act, for the assessment year 2018-19 is Rs. 3,00,000. He deposits Rs. 20,000 in a PPF account.

Compute the tax payable by Mr. Dust assuming that he has agricultural income of

  1. Nil;

  2. Rs. 5,000; and

  3. Rs. 3,50,000.

Solution:

In Case of a & b

(a) and (b) Since the agricultural income is either Nil or does not exceed Rs. 5,000, there will be no partial integration and the Income-tax will be calculated on Rs. 2,80,000 (Rs. 3,00,000 – 20,000 deduction u/s 80C) as usual.

Tax on Rs. 2,80,000 will be Rs. 1,500 – Rs. 1,500 (Rebate u/s 87A) = NIL.

In Case of (c) : Rs. 3,50,000 (Agricultural Income)

Particulars Amount (Rs.)
Step-1  
Aggregate of agricultural and non-agricultural income (Rs. 3,50,000 +Rs. 2,80,000)  
Tax on Rs. 6,30,000 38,500
Step-2  
Add Rs. 2,50,000 (Maximum exemption limit) to agricultural income of Rs. 3,50,000  
Tax on Rs. 6,00,000 32,500
Step-3  
Deduct Tax under Step 2 from Tax under Step 1 (Rs. 38,500 – Rs. 32,500) 6,000
Therefore, tax on non-agricultural income 6000
Less: Rebate u/s 87A 2,500
  3,500
Step-4  
Add: Education cess & SHEC – @ 3% 105
Therefore, total tax payable 3,610
 

8. Computation of Net Agricultural Income

For the purpose of computing tax in the case of individuals, Hindu undivided families, etc., having net agricultural income in addition to the non-agricultural income, the net agricultural income for the assessment year 2018-19 will be computed as follows:

  • Rule 1 - Agricultural income of the nature referred in section 2(1A)(a) will be computed on the same basis as is adopted for the computation of income chargeable under the head “Income from other sources” under sections 57 to 59.

  • Rule 2 - Agricultural income of the nature referred in section 2(1A)(b) will broadly be computed as if it were income chargeable to tax under the head “Profits and gains of business or profession” and the provisions of sections 30 to 32, 36, 37, 40, 40A [other than sub-sections (3) and (4)], 41, 43, 43A, 43B and 43C will apply accordingly.

  • Rule 3 - Agricultural income of the nature referred in section 2(1A)(c) will be computed as if it were income chargeable under the head “Income from house property” under sections 23 to 27.

  • Rule 4 - Where an assessee derives income from sale of tea grown and manufactured by him in India, 60% of the total income from such business, as computed in accordance with rule 8 of the Incometax Rules, will be regarded as agricultural income .

  • Rule 5 - Where the assessee is a member of an association of persons or a body of individuals (other than a Hindu undivided family, a company or a firm) which, in the previous year, has either no income chargeable to tax or has non-agricultural income not exceeding the maximum amount not chargeable to tax in the case of an association of persons or a body of individuals, but has agricultural income, then the agricultural income or loss of the association or body is to be computed in accordance with these rules and the share of the assessee in the agricultural income or loss so computed will be regarded as agricultural income or loss of the assessee.

  • Rule 6 - Loss incurred in agriculture will be allowed to be set off against gains from agriculture. No set off will, however, be allowed in respect of assessee’s share in agricultural loss of an association of persons or a body of individuals.

  • Rule 7 - Any tax levied by a State Government on agricultural income will be allowed as deduction.

  • Rule 8 - The unabsorbed loss from agricultural activities during the previous years relevant to the assessment years 2010-11 to 2017-18 will be set off against the agricultural income of assessment year 2018-19 in chronological order. Likewise, an unabsorbed loss from agriculture during the previous year relevant to the assessment years 2011-12 to 2018-19 will be taken into account in determining the net agricultural income for the purpose of payment of advance tax during the financial year 2018-19. The set off of loss will, in either case, be allowed only if such loss has already been determined. Where a person is succeeded by another person (otherwise than by inheritance), the person (other than the person who has incurred the loss) cannot claim the set off as discussed above.

  • Rule 9 - Where the net result of computation of agricultural income from various sources is a loss, the loss will be disregarded and the net agricultural income of the assessee shall be taken as nil.

  • Rule 10 - The net agricultural income of the assessee will be rounded off to the nearest multiple of Rs. 10.

More topics on Agricultural Income :

  1. ‘DEFINITION’ Of Agricultural Income
  2. Tests To Determine Agricultural Income
  3. Types Of Agricultural Income
  4. Partly Agricultural and Partly Non-agricultural Income
  5. Illustrations Of Agricultural and Non-Agricultural Incomes
  6. Tax on Non-Agricultural Income if the Assessee has both Agricultural & Non-Agricultural Income
  7. Computation of Net Agricultural Income

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