PERSONAL COPY/ NOT FOR SALE OR CIRCULATION (Session 2012-13)
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 nonagricultural 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 situated in India and is used for agricultural purposes [Sec. 2(1A)(a)] 2. Any income derived from land (which is situated in India and is used for agricultural 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 for agricultural purposes; b. Any income derived by a cultivator or receiver of rent-in-kind of any process ordinarily 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-inkind 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 receiverin-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 derived therefrom is partly agricultural and partly non-agricultural. For instance, if sugarcane Naveen Mittal https://sites.google.com/site/srmeenav/ Page 1 of 4
PERSONAL COPY/ NOT FOR SALE OR CIRCULATION (Session 2012-13)
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 for agricultural purposes; c. The cultivator or receiver of rent-in-kind should by reason of his connection with the 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 Nonagricultural income Growing and manufacturing tea/ coffee/ 40% rubber in India* Sale of centrifuged latex or cenex or latex 35% 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 obtained from rubber plants grown by the seller in Naveen Mittal Agricultural income 60% 65% Income-tax Rules Rule 8 Rule 7A
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PERSONAL COPY/ NOT FOR SALE OR CIRCULATION (Session 2012-13)
India Sale of coffee grown and cured by seller 25% Sale of coffee grown, cured, roasted and 40% grounded by seller in India with or without mixing chicory or other flavouring ingredients
75% 60%
Rule 7B(1) 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 persons or an artificial juridical person. 2. The taxpayer has non-agricultural income exceeding the amount of exemption 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 case of 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 nonagricultural 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, cooperative 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. Naveen Mittal https://sites.google.com/site/srmeenav/ Page 3 of 4
PERSONAL COPY/ NOT FOR SALE OR CIRCULATION (Session 2012-13)
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 agricultural income. 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 partners from 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.
Naveen Mittal
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