Taxation of Agricultural Income- Detailed Analysis

1.  Agricultural Income in India is Exempt from Income Tax u/s 10(1) of Income Tax Act, but agricultural income from outside India is taxable.

Ex:- Mr. X has agricultural income in India, it is exempt from income tax but if he has agricultural income from Nepal, then it is taxable.

As per entry number 82 of Union List, Central Govt. shall have the powers to levy income tax on any income except agricultural income.

As per entry number 46 of State List, State Govt. shall have the power to levy tax on agricultural Income.

2. If any person has agricultural income as well as non-agricultural income, in such cases, his taxability shall be computed as per “Partial Integration Method” given below;

i) Compute Income Tax on the total of agricultural income plus non-agricultural income but without education cess.

ii) Compute Income Tax on the total of agricultural income plus exemption limit (say 2,50,000 i.e. upto which Income is not taxed) but without education cess.

iii)  Deduct tax at step # (ii) from tax at step # (i) and apply  health and education cess (4%).

iv) Partial integration is not applicable in case of Long-Term Capital Gains/Short-Term Capital Gains u/s 111A/Casual Income.

v) If agricultural income is upto Rs. 5,000/- or non-agricultural income is upto exemption limit, in that case, Partial Integration is not applicable.

vi) Partial Integration is not allowed in case of Partnership Firm or Company. Therefore it is applicable on slab rate only.

3. Agricultural Income is defined in 3 parts under Income Tax Actu/s 2 (1A)

i) Income from letting out of Agricultural Land u/s 2 (1A) (a).

ii) Income from Agricultural Operations u/s 2 (1A) (b).

iii) Income from a Farm Building u/s 2 (1A) (c).

i) INCOME FROM LETTING OUT OF AGRICULTURAL LAND:-

If any person has let out agricultural land, rent received shall be considered to be agricultural income. Ex. Mr. X has 10 acres of agricultural land and it has been let out at Rs. 2,00,000/- p.a., in this case rent received shall be considered to be agricultural income. If in this case, assessee has received rent in kind, even in that case, income shall be considered to be agricultural income and if such agricultural product has been sold in the market by the receiver of rent in kind, even in that case, it will be considered to be agricultural income.

If the amount of rent is in arrears and the assessee has received interest, in that case such interest shall not be considered to be agricultural income rather income is taxable u/h Other Sources.

ii) INCOME FROM AGRICULTURAL OPERATIONS:-

If any person has incomes from agricultural operations, it will be called agricultural income.

If any company is engaged in agricultural operations, income of company shall also be considered to be agricultural Income and shall be exempt from Income-Tax and if such company has distributed dividend to the shareholders, it will not be considered to be agricultural income of the shareholder, rather it will be considered to be his dividend income but if such dividend has been received from a domestic company, it will be exempt u/s 10(34) and the domestic company has to pay Additional Income-Tax.

If foreign company doing agricultural operations in India, its income shall also be exempt and if the foreign company has distributed dividend, such dividends shall be taxable in the hands of shareholders but foreign company shall be exempt from Additional Income-Tax.

If any partnership firm is engaged in agricultural activity, its income shall also be considered to be agricultural income and shall also exempt from Income-Tax and if such partnership firm has distributed profits to the partners, such share received by a partner shall be exempt from Income-Tax u/s 10(2A) or it can be considered to be agricultural income u/s 10(1). If any partnership firm is engaged in non-agricultural activities and has paid salary or interest to the partners, such salary or interest is taxable in the hands of partnership u/h Business and Profession.

If any partnership firm agricultural income and it has paid salary or interest to the partners, such income shall be considered to be agricultural income as decided in R. M. Chidambaram Pillai Vs. CIT.

If any person has agricultural activity as well as industrial activity, in such cases income shall be computed as per Rule 7 and it will be presume that the assessee has transferred his agricultural produce to his industrial unit at the market price and agricultural income shall be computed accordingly and while computing income of agricultural unit, such market price shall be debited to the P&L accounts cost of raw materials and income shall be computed accordingly. Ex: Mr. X has sugarcane field & also sugar factory and he has incurred Rs. 3,00,000/- on seeds & fertilizers to grow sugarcane crop and entire crop was transferred to his sugar factory when market price was Rs. 10,00,000/-, in this case agri-income shall be 7,00,000/- (10 Lacs – 3 Lacs) and while computing income of sugar factory, Rs. 10 Lacs shall be debited as cost of raw material & income shall be computed accordingly.

RULE-7A & 7B

As per rule 7A, if any person is engaged in the business of growing & manufacturing rubber, in such cases, income shall be computed combined and 35% of such income shall be considered to be business income and balance shall be considered to be agri-income.

As per rule 7B, if any person is engaged in growing & manufacturing of coffee, income shall be computed combined and 40% of such income shall be business income and balance agri-income. If any person is growing & curing coffee, 25% of such income shall be considered to be business income and balance agri-income.

RULE-8

As per rule 8, if any person is growing & manufacturing tea, income shall be computed combined and 40% of such income shall be business income and balance agri-income. If any person has sold forest produce like trees etc, it will not be considered to be agricultural income as decided by Supreme Court in Raja Benoy Kumar Sohas Roy Vs. CIT.

As per the decision given by Supreme Court, there must be agriculture to constitute agricultural income. The term ‘Agriculture’ shall includes,

• Basic Operations
• Subsequent Operations

Basic Operations:- It will include ploughing of the land and sowing of the seed and using fertilizers etc.

Subsequent Operations:-   It will include watering of plants at regular intervals and using pesticides and insecticides and also looking after plants otherwise. Ex: If any person has incomes from sale of seeds or from a nursery, it will be considered to be agricultural income. But, if any person has incomes from dairy farming, poultry farming, fisheries or animal husbandry etc. it will not be considered to be agriculture income.

If any person has adopted marketing operations/marketing process, in such cases income shall be considered to be agriculture income.

Marketing operations means, such essential operations without which agricultural produce can not be sold in the market. Ex: In case of wheat crop, threshing shall be marketing operation and entire income shall be agriculture income. If any person has transferred any agricultural land, it will not be considered to be agricultural income rather it will be considered to be capital gain.

iii)  INCOME FROM FARM BUILDING:-

Income from a Farm Building shall also be considered to be Agri-Income. If any assessee has any building in the agricultural field or is very near to the agricultural field and it being used for storing agricultural produce or agricultural implements or it is being used by the farmer as a dwelling unit, such building is called Farm Building and its income shall be computed as per provision of House Property and shall be considered to be Agri-Income.

Such building must be in the rural area and if it in the urban area it must be constructed on the land which has been classified as agricultural land.

(Author can be reached at [email protected])

(Republished With Amendments)