Agricultural Income (C)

7/30/2019 Agricultural Income (C)

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PERSONAL COPY/ NOT FOR SALE OR CIRCULATION (Session 2012-13)

Naveen Mittal https://sites.google.com/site/srmeenav/ Page 1 of 4

AGRICULTURAL INCOME

Section 10(1) exempts agricultural income from tax and also provides for its exclusion in

computing the total income of the assessee. The reason of exemption of 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 Legislatures. From the assessment year

1974-75, agricultural income is, however, taken into account to determine tax on non-agricultural income in certain cases.

MEANING of agricultural income:

By virtue of section 2(1A)the expression agricultural income means:

1. Any rent or revenue derived from land (may be in cash or in kind) which is situatedin India and is used for agriculturalpurposes [Sec. 2(1A)(a)]

2. Any income derived from land (which is situated in India and is used foragricultural purposes) by agricultural operations. Under section 2(1A)(b),

following are the three instances of agricultural income:

a. Any income derived by agriculture from land situated in India and used foragricultural purposes;

b. Any income derived by a cultivator or receiver of rent-in-kind of any processordinarily employed to render the produce raised or received by him to make it fit

to be taken to market; or

c. Any income derived by such land by the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him in respect of which no process has

been performed other than a process of the nature described in (b).

However, it is to be noted that any surplus arising on sale or transfer of agricultural

land (in urban area) is not treated as rent or revenue derived from land.

Explanation of point (2):

Sometimes it becomes difficult to find ready market of the crops as harvested. In

order to make the produce a commodity which is saleable, it becomes necessary to

perform some kind of process on the produce. The income arising by way of

enhancement of value of such produce, by performing such process to make the raw

produce fit for market, is also agricultural income. However, the following conditions

must be satisfied:

a. The process must be one which is ordinarily employed by a cultivator or receiver-in-kind; and

b.

The process must be applied to render the produce fit to be taken to market.

For instance, tobacco leaves are ordinarily dried to make them suitable for sale.

Therefore, the income from the ordinary process employed to dry the tobacco leaves

to make them fit to be taken to market, is agricultural income. The ordinary process

employed to render the produce fit to be taken to market includes thrashing,

winnowing, cleaning, drying, crushing, boiling and decanting, etc., though the nature

of process depends upon quality of the produce and varies from time to time and place

to place.

Moreover, if marketing process is performed on a produce which can be sold in its

raw form (without requiring any process to make it fit for marketing), income derivedtherefrom is partly agricultural and partly non-agricultural. For instance, if sugarcane


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is generally sold in a given area without being subjected to any process, the process of

converting sugarcane into gur would not be agricultural process and income

attributable to the process of converting sugarcane into gur would not be agricultural

income Brihan Maharashtra Sugar Syndicate Ltd. v. CIT [1946] 14 ITR 611

(Bom.).

Section 2(1A)(b) does not contemplate sale of commodity different from what is

cultivated and processed and where the assessee was growing mulberry leaves,

feeding them to silkworms and obtaining silk cocoons, income from sale of silk

cocoons would not be agricultural income K. Lakshmanan Co. V. CIT [1999] 239

ITR 597 (SC).

3. Income from farm building [Sec. 2(1A)(c)]:Bona fide annual property of house property is taxable under section 22. However,

income from a house property which satisfies all the following conditions would be

treated as agricultural income and, consequently, it would be exempt from tax by

virtue of section 10(1):a. The building should be occupied by the cultivator (as a landlord or as a tenant) or

receiver of rent-in-kind (as a landlord);

b. It should be on or in the immediate vicinity of land, situated in India and used foragricultural purposes;

c. The cultivator or receiver of rent-in-kind should by reason of his connection withthe agricultural land requires the building as a dwelling house or as a store house

or other out-building; and

d. The land is assessed to land revenue or local rate or, alternatively, the land(though not assessed to land revenue or local rate), is situated outside urban

area, i.e., any area which is comprised within the jurisdiction of any

municipality/ cantonment board having a population of not less than 10,000

persons or within notified distance (up to a maximum of 8 kilometres) from the

limits of any such municipality or cantonment board.

Income would be exempt from tax only if land and building is used for agricultural

purposes.

Tax treatment of income which is PARTIALLY agricultural and partially from

business [Rules 7, 7A, 7B and 8]:

Income Non-agricultural

income

Agriculturalincome Income-taxRules

Growing and manufacturing tea/ coffee/

rubber in India*

40% 60% Rule 8

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 obtainedfrom rubber plants grown by the seller in

35% 65% Rule 7A


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India

Sale of coffee grown and cured by seller 25% 75% Rule 7B(1)

Sale of coffee grown, cured, roasted and

grounded by seller in India with or

without mixing chicory or other

flavouring ingredients

40% 60% Rule 7B(1A)

*If a person directly sells green tea leaves, income therefrom is 100% agricultural income.

It is to be noted that income in respect of the business given above in the table is, in the first

instance, computed under the Act as if it were derived from business after making

permissible deduction. 40 or 35 or 25 per cent of the income so arrived at is treated as

business income and the balance is treated as agricultural income. Salary and interest

received by a partner from a firm (growing leaves and manufacturing tea or any other activity

mentioned in the table) is taxable only to the extent of 40 or 35 or 25 per cent and the balance

is treated as agricultural income.

SCHEME OF PARTIAL INTEGRATION of non-agricultural income with agricultural

income:

The scheme of partial integration of non-agricultural income with agricultural income is

applicable if the following conditions are satisfied:

1. The taxpayer is an individual, a HUF, a body of individual, an association of personsor an artificial juridical person.

2. The taxpayer has non-agricultural income exceeding the amount ofexemption limit[i.e., ` 5,00,000 (in the case of a resident super senior citizen who is 80 years or

more), ` 2,50,000 (in the case of a resident senior citizen who is 60 years or more), `

1,90,000 (in the case of a resident woman below 60 years) and`

1,80,000 (in the caseof any other individual or every HUF) for the relevant previous year].

3. The agricultural income of the taxpayer exceeds 5,000.If the above conditions are satisfied, then the scheme of partial integration of tax on non-

agricultural income with income derived from agriculture is applicable.

It is to be noted that this scheme is NOT applicable in the case of a firm, company, co-

operative society etc.

Procedure of computing tax covered by the scheme:

Step 1: Net agricultural income is to be computed as if it were income chargeable to

income-tax.Step 2: Agricultural and non-agricultural 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 agricultural income will then be increased by the amount of exemption

limit (i.e., 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 was the total

income of the assessee.

Step 4: The amount of income-tax determined at step 2 will be reduced by the amount of

income-tax determined under step 3.

Step 5: Find out the balance. In the balance so arrived, add surcharge and cess. It is to be

noted that for applicability of surcharge, non-agricultural income is considered.Step 6: This will be the total income-tax payable by the assessee.


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Points to be noted:

1. Agricultural income outside India is taken as non-agricultural income and thus,taxable in India.

2. Partners receive salary, interest and share of profit from the firm out of agriculturalincome. Salary and interest are taken as agricultural income of partners by virtue of

specific provisions of section 28. However, share of profit received by the partnersfrom their firm (whether out of agricultural income or non-agricultural income) is

exempt from tax under section 10(2A). Moreover, under rule 5 of the Part IV of the

First Schedule to the Finance Act, 2010, share of profit from a firm out of agricultural

income is not considered as agricultural income of partners.

3. The terms agriculture and agricultural purposes have not been defined in the Act;one has, therefore, to depend upon ordinary meaning and decided cases.

Agricultural Income (C)

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