Definition – Section 2(1A) – Bare Act:
“agricultural income” means—
(a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes;
(b) any income derived from such land by—
(i) agriculture; or
(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or
(iii) 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 paragraph (ii) of this sub-clause;
(c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on :
(i) the building is on or in the immediate vicinity of the land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the land, requires as a dwelling house, or as a store-house, or other out-building, and
(ii) the land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such or where the land is not so assessed to land revenue or subject to a local rate, it is not situated—
(A) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board and which has a population of not less than ten thousand; or
(B) in any area within the distance, measured aerially,—
(I) not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than ten thousand but not exceeding one lakh; or
(II) not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than one lakh but not exceeding ten lakh; or
(III) not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than ten lakh.
Explanation 1.—For the removal of doubts, it is hereby declared that revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of this section.
Explanation 2.—For the removal of doubts, it is hereby declared that income derived from any building or land referred to in sub-clause (c) arising from the use of such building or land for any purpose (including letting for residential purpose or for the purpose of any business or profession) other than agriculture falling under sub-clause (a) or sub-clause (b) shall not be agricultural income.
Explanation 3.—For the purposes of this clause, any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.
Explanation 4.—For the purposes of clause (ii) of the proviso to sub-clause (c), “population” means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year;
Income is Agricultural only if it is from the following 3 sources:
|Any rent or revenue derived from land which is situated in India and is used for agricultural purposes. *
||Any income derived from such land by agricultural operations including processing of agricultural produce,raised or received as rent in kind or any process ordinarily employed by cultivator or receiver of rent-in-kind so as to render it fit for the market,or sale of such produce. *
||Any income derived from any building owned and occupied by the assessee, receiving rent or revenue from the land,by carrying out agricultural operations. *
|The land should either be assessed to land revenue in India or be subject to a local rate assessed and collected by officers of the Government.
||Where such a land revenue is not assessed or not subject to local rate, the land should not be situated within the jurisdiction of a municipality. **
||The revenue must not include any income arising out of transfer of such land.
** – should not be situated within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board, and which has a population of more than ten thousand (according to the last preceding census which has been published before the first day of the previous year in which the sale of land takes place); or it should not be situated:
- more than 2kms. from the local limits of any municipality or cantonment board and which has a population of more than 10,000 but not exceeding 1,00,000; or
- not being more than 6kms. from the local limits of any municipality or cantonment board and which has a population of more than 1,00,000 but not exceeding 10,00,000; or
- not being more than 8kms. from the local limits of any municipality or cantonment board and which has a population of more than 10,00,000.
A direct nexus between the agricultural land and the receipt of income by way of rent or revenue is essential. (For instance, a landlord could receive revenue from a tenant.)
|Existence of Land
||Usage of Land for Agricultural Operations
||Cultivation of Land is a must
||Ownership of Land is not essential
Usage: Agricultural operations means efforts induced for the crop to sprout out of the land. The ambit of agricultural income covers income from agricultural operations, which includes processes undertaken to make the produce fit for sale in the market. Both, rent or revenue from the agricultural land and income earned by the cultivator or receiver by way of sale of produce are exempt from tax only if agricultural operations are performed on the land.
Cultivation: Some measure of cultivation is necessary for land to have been used for agricultural purposes. The ambit of agriculture covers all land produce like grain, fruits, tea, coffee, spices, commercial crops, plantations, groves, and grasslands. However, the breeding of livestock, aqua culture, dairy farming, and poultry farming on agricultural land cannot be construed as agricultural operations.
Ownership: In the case of rent or revenue, it is essential that the assessee has an interest in the land (as an owner or a mortgagee) to be eligible for tax-free income. However, in the case of agricultural operations, it is not necessary that the cultivator be the owner of the land. He could be a tenant or a sub-tenant. In other words, all tillers of land are agriculturists and enjoy exemption from tax. In certain cases, further processes may be necessary to make a commodity marketable out of agricultural produce. The sales proceeds in such cases are considered agricultural income because the producer’s final objective is to sell his products.
(Supreme Court Decision in CIT vs Raja Benoy Kumar Sahas Rpy (1957) 32 ITR 466)
2 types of Operations should be carried out on Land:
|Cultivation, Tilling, Sowing, Planting, etc. demanding labour & skill and further they are directed to make the crop sprout from land
||Weeding, Digging, Removal, Tending, Pruning, Cutting, Prevention from Insects, Pests, cattle, etc. After the crop sprouts, for Efficient Production of crops
The cultivation of the land does not comprise merely of raising the products of the land in the narrower sense of the term like tilling of the land, sowing of the seeds, planting, and similar work done on the land but also includes the subsequent operations set out above all of which operations, basic as well as subsequent, form one integrated activity of the agriculturist and the term “agriculture” has got to be understood as connoting this integrated activity of the agriculturist. One cannot dissociate the basic operations from the subsequent operations, and say that the subsequent operations, even though they are divorced from the basic operations can constitute agricultural operations by themselves. If this integrated activity which constitutes agriculture is undertaken and performed in regard to any land that land can be said to have been used for “agricultural purposes” and the income derived therefrom can be said to be “agricultural income” derived from the land by agriculture.
EXCEPTIONS – NOT AGRICULTURAL INCOME:
- If a person sells processed produce without carrying out any agricultural or processing operations, the income would not be regarded as agricultural income.
- Likewise, in cases where the produce is subjected to substantial processing which changes the very nature of the product (for instance, canning of fruits), the entire operation is not considered as an agricultural operation. The profit from the sale of such processed products will have to be apportioned between agricultural income and business income.
- Income from trees that have been cut and sold as timber is not considered as an agricultural income since there is no active involvement in operations like cultivation and soil treatment.
- Income from sale of Forest Trees of spontaneous or natural growth where only forestry operations in the nature of these subsequent operations are performed would, therefore, not be agricultural income. (Maharjadhiraj Sir Kameshwar Singh vs. CIT (1957) 32 ITR 587 (SC)). However, where fresh trees have been planted in old forests, the income attributable to such plantation activity would be Agricultural Income.
SOME QUERIES ANSWERED:
- Is the Income earned from “Contract Farming” business taxable?
- If you are farmer cultivating crop for a company or firm than the income is not taxable but if you are a company or a firm getting crop cultivated by the farmers under “Contract Farming” agreement than all the income is taxable. In a recent judgment on petitions by Namdhari Seeds Pvt. Ltd., a Division Bench of the Karnataka High Court held that such income of agri-business firms come under the purview of business income which attracts tax under the provisions of the Income Tax Act. In this case, the firm had claimed as agricultural income the amount generated by it from the sale of hybrid seeds grown on land belonging to various persons under “contract farming” agreements. As per the Income Tax Act, according to the firm, income derived from agricultural land qualifies as agricultural income and it is not necessary to own land to derive agricultural income. Though the Income Tax Department had rejected this claim, the Income Tax Appellate Tribunal had, in its 2006 order, treated 90 per cent of the firm’s income as agricultural income. However, the High Court pointed out that the entire terms of agreement would indicate that the foundation seeds grown by the farmer would be purchased by the firm at the end for a certain price provided seeds fulfilled the specifications as per the agreement. “It (agreement) is nothing short of a fertile womb being offered by a surrogate mother for the growth of a child of someone else. The assessee firm supervises and oversees the sowing, cultivation right from the process of sowing till the end to get the qualified foundation seeds to carry on its trade in selling certified seeds. The firm also provides scientific advice. However, the firm is not carrying out none of the normal activities of farming. “Such input or scientific method in giving advice to the farmer cannot be termed as either basic agricultural operation or subsequent operation ordinarily employed by the farmer or agriculturist. If the basic operations of agriculture are not carried out by the firm, then the harvested foundation seeds purchased by it, and converting them to certification seeds also cannot be termed as an integral part of the foundation activity of agriculture,” the court said while treating the entire income generated by the company as business income.
- Advanta India Ltd., Bangalore vs Assessee on 10 May, 2012: ITA No.819 & 820/Bang/2010: If we examine the operations carried out by the assessee in the previous year relevant to the assessment year in appeal, we find that the production of Basic Seeds as well as Hybrid Seeds are the results of basic of agricultural operations carried on by the assessee company in its own land as well as in leasehold land. The method of contract farming does not take away the character of the basic operations carried out by the assessee company which are agricultural in nature. The assessee company procures germplasm and sows in its own field, and carries on all agricultural operations and produces the Basic Seeds. The Basic Seeds so harvested are again put through agricultural operations intimately connected with leasehold land for finally bringing out the Hybrid Seeds. Only for the reason that the Basic Seeds are sown in leasehold land and the manpower required are arranged through contract farming, it does not mean that the operations carried out by the assessee company are not agricultural operations. As a matter of fact, it is to be seen that the assessee company has carried out basic as well as secondary agricultural operations. Therefore, without any fear of contradiction, it is possible for us to hold that entire such income of the assessee is agricultural in nature which is to be excluded from the nature of total income.
- Does interest on arrears of rent qualify as agricultural income and will this be exempt from tax?
- Sometimes, a tenant could slip up on rent or revenue payments (either in cash or kind) and have to pay arrears. If the landlord charges interest on such arrears, the income would not be considered as an agricultural income, but would be deemed income by way of interest and would, hence, be chargeable to tax. While ‘rent’ presupposes periodical and pre-determined payment (either in cash or kind), ‘revenue’ implies a sharing arrangement that depends on the actual agricultural produce. In either case, ownership of agricultural land or interest in such land is essential, which means, the owners of agricultural land, tenants who are given a sub-lease, and people who are mortgagees of agricultural land, all enjoy tax-free agricultural income.
- If agricultural produce is processed to make it marketable at a place other than the agriculture land, then the amount charged for such processing will be an agricultural income or not?
- Any processing done on Agricultural produce to make it marketable is a part of agricultural operations and such amount recovered will be treated as agricultural income only. Say for example trashing of wheat, mustard, etc is part of agricultural operations only and the amount recovered will be treated as agricultural income only no matter processing takes place on the land itself or some other place. But in certain cases like in the case of tea, coffee, sugarcane where a major processing (change of very nature of the product) is being done, then some part of the processed produce (tea, coffee & sugar) is taxed as non-agricultural income and rest is exempt as agricultural income.
- What if agriculture operation is carried on urban land?
- If agricultural operations are carried out on land, either urban or rural, the income derived from sale of such agricultural produce shall be treated as agricultural income and will be exempt from tax.
- If any industrial organization grows crops and sells half of the produce as raw material in the market and remaining (further processed) as finished goods, what will be the tax treatment?
- Agricultural income is exempt from income tax. It does not matter whether the agricultural operations are done by an industrial organization or an individual. If any industrial organization grows crops and sells half of the produce as raw material in market and remaining (further processed) as finished goods, the income which is earned on the first half of produce (sold in market as raw material) is totally exempt from tax. In case of the remaining produce which is further processed, scheme of presumptive taxation is applicable. Rule 7, 7A, 7B & 8 of Income tax Rules deals with such type of income. Rule 7A deals with Income from manufacture of rubber, 7B deals with Income from manufacture of coffee and Rule 8 deals with Income from manufacture of tea. Rule 7 says that in cases where income is partially agricultural in nature and partially from business, the market value of the agricultural produce which has been raised by the assessee or received by him as rent in kind and which has been utilised as a raw material, shall be deducted from the sale receipts and will be treated as agriculture income. The remaining will be considered as non agricultural income.
- In my agriculture farm, I have 5 cows in Pune (Maharashtra). The product being milk is the main produce, and not a byproduct. Is this income an agriculture income or a taxable income? (This milk is sold to dairy product plant in nearest Co-op Society).
- Dairy farming is not an agricultural income.
- Why rent on land is treated as agricultural income?
- Rent received from agricultural land used for agricultural purpose is treated as agricultural income. This is prescribed by the law.
- Can Interest on Crop Loan be claimed as an exemption?
- The interest earned on Crop Loan cannot be claimed as an exemption by the provider of loan since the condition of ownership of land being not essential holds true only if the assessee has interest in the land. The provider of the loan may not have an interest in the land because it may be his ordinary business to provide Crop Loan. However, the farmer to whom the crop loan is provided can claim the same as a deduction while computing his tax liability.
- If an assessee sells the fruits of the trees planted by him around his home, will the income so earned be agricultural income?
- The trees planted by him should be on a land which can be classified as an agricultural land by fulfilling the conditions mentioned earlier in this article. If the land is agricultural, then the income earned by selling of fruits can be treated as agricultural income.
- I have taken certain agricultural land on lease and crops are being grown on the said land for many years. Now the said land alongwith growing crops has been acquired by the Govt. The Govt. paid separate compensation for the land and the crop. Whether the compensation received in lieu of crop is agriculture income or not? Further note that assessee has not further invested the amount in agriculture land received as compensation against crop.
- The compensation paid for the crops by the Govt. can be considered to be as good as income earned by purchase of standing crop, which is not an agricultural income. Hence the compensation against crop is taxable in the hands of receiver of the compensation.
- Whether income earned from export of agricultural produce is exempt from income tax?
- The conditions for considering the income as agricultural in nature have to be satisfied if the agricultural produce has to be exempt from income tax. Middlemen dealing in trade of agricultural produce are generally not entitled to exemption due to lack of satisfaction of the conditions.
- I have an income of Rs.1,45,000 from my business and an agricultural income of Rs. 8,40,000. Do I need to file the return of income?
- The process of computation of tax liability is followed only if the assessee’s non-agricultural income is in excess of the basic exemption slab. In this case, the income from business of the assessee is lower than the basic exemption limit. However, the returns have to be filed with regards to the disclosure of agricultural income.
- An assessee wants to buy farms which bear coconut trees, on a lease for a period of one year. State whether sale of coconuts is said to be an agricultural income or not?
- The land on which the coconut trees are planted should be an agricultural land which can be classified by fulfilling the conditions mentioned earlier in this article. If the land is agricultural, then the income earned by selling of coconuts can be treated as agricultural income.
- I had sold an agricultural land in a rural area, which is outside jurisdiction of the Municipal Authority. Whether the sales proceeds are exempt or taxable?
- The scope of agricultural income excludes the revenue which is earned by transfer of agricultural land not falling under the definition of Capital assets u/s. 2(14). By definition of a capital asset under Section 2(14), an agricultural land in an area falling out of jurisdiction of the Municipal Authority (which has a population of more than 10,000), is not a capital asset. Section 10(37) allows income from transfer of such a land to be classified as a capital gain via clause (i). Under Section 54B, a capital gain arising out of this transaction will be exempt provided the conditions (mentioned earlier in this article) are satisfied.
- Is receipt from sale of rubber trees an agricultural income?
- Yes, receipt of sale of rubber trees is an agricultural income if the conditions for land being agricultural in nature are satisfied.
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CA. Khyati B. Vasani
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