Introduction
Agricultural income is any income that is earned from any rent or revenue from a land or a building, which is used for an agricultural purpose. Agricultural income is exempt from income tax as per section 10(1) of the Income Tax Act, 1961. The Central Government has not any power in relation to this, but the State Government can collect agricultural income from other sources. But when agricultural income can be non-agricultural income, we will discuss it here.
Meaning of Agricultural Income
Agricultural income is defined under Sec. 2(1A) of the Income Tax Act, 1961.
Agricultural income is any rent or revenue by means of cash or in-kind, derived from a land, which is used for an agricultural purpose and land should be situated in India.
Income from agricultural should be produced by a cultivator or a rent receiver of that produce in-kind, which can be fit to take that into the market.
The income should be derived from the sale by a cultivator or a rent receiver of that product which is produced or received by him, no process can be performed other than the process to render it fit for the market.
Income which is derived from the building should follow some conditions:
The building should be situated in India;
It should be occupied by a cultivator or a receiver of rent-in-kind.
In the connection of the land of a cultivator or a rent receiver, the building required to be as a dwelling-house, store-house or other outbuildings.
Agricultural Income has been exempted from Income Tax under Sec. 10(1) of the Income Tax Act, where it has been given that, in computing, the total income of a previous year of a person whose source of income is agriculture will not fall under the category of total income. The burden of proof that an income fall under this category is on the assessee.
Sri Ranganatha Enterprises v. CIT [1998] 232 ITR 568 (kar.)
In this case, the Court held that the burden lies on the assessee to prove that the income derived by him is the agricultural income for which he is claiming an exemption under Sec. 10(1) of the Income Tax Act.
Some operations like tilling of land, sowing of the seeds, planting, etc.
Subsequent operation.- Subsequent operations are performed after the produce sprouts from the land. Like weeding (removal of wild plants), digging the soil around the growth, removal of undesirable undergrowths, removal of the crop from insects and pests, cutting, harvesting, rendering the produce fit for the market etc.. Subsequent operation must be in continuation of basic operations, mere performance of these activities on the land will not constitute agricultural operation.
CIT v. Raja Benoy Kumar Suhas Roy [1957] 32 ITR 466, where SC laid down the principles of basic operation and subsequent operation.
Mere connection with land will not be sufficient for Agricultural Purpose. There should be activities in connection with agriculture. Activities like dairy farming, poultry farming, cheese and butter making, etc. are not considered to be agricultural activities.
Illustrations
A landowner receives rent in-kind from a tenant who grows wheat on that land, now the landowner sells it in the market @ Rs. 20000. This income is derived from agricultural operation.
A landowner receives the rent of 1/3rd of whole wheat grown in his land. And he uses that wheat in making biscuits and sells it in the market. Here, this activity is not considered to be an agricultural operation because that income is business income.
The building must be occupied by the cultivator or the receiver of rent-in-kind;
The land must be situated in India and used for agricultural purposes;
The building which is used for agricultural operations by the cultivator or the rent receiver must be as a dwelling house, storehouse.
The land is assessed to land revenue or local rates or land is situated in rural areas.
Rural Areas for the above purpose are given under Sec.2(1A)(c)(ii) of the Act, any area not situated:
within the jurisdiction of municipality or cantonment board and where the population is not more than ten thousand.
within 2km from the local limits of municipality or cantonment board, where the population is more than 10000 but less than 1 lakh.
Within 6km from the local limits of municipality or cantonment board, where the population is more than 1 lakh but less than 10 lakh.
Within 8km from the local limits of municipality or cantonment board, where the population is more than 10 lakh.
The use of the building other than farming activity will not be exempted under Income Tax. E.g.- If an owner gives that building on rent for residential purpose then income derived from that building will not be exempted.
Illustrations
Mr. W owns farmland and there is a building attached to that land. Mr. W gives it on rent to Mr. H @ rs.4000(rs. 3500 for land and rs. 500 for a house). Income received by Mr.W will be exempted here because the land is used for an agricultural purpose and the building is attached to the land and used by cultivator as a dwelling house.
A person owns a building in a particular city and gives it on rent to Mr. X who is a farmer. Mr. X uses it as a dwelling house. Is it taxable or not? In this case, income is taxable because the building is not attached to any land, so it is not an agricultural income and taxable.
Mr. D owns the land and gives it to Mr. A for Agricultural operation. Mr. A uses that land for Dairy Farming. Agricultural income will not be exempted because dairy farming is not an agricultural activity.
deemed to be taxable under the Act.
CIT v. AFT Industries Ltd. [2004] 141 taxman 433 (cal.)
The cess levied under the West Bengal Rural Employment Production Act, 1976 and the West Bengal Primary Education Act, 1973 is permissible as a deduction in computing the income from the business. The cess does not fall under the prohibitory item of deduction.
CIT v. R.M. Chidambaram Pillai [1977] 106 ITR 292 (SC)
SC held that salary and interest received by a partner from a firm growing leaves and manufacturing tea are taxable only to the extent of 40% and the balance of 60% income shall be treated as agricultural income.
No deduction shall be made from the income in respect of the amount of subsidy if allowance made in respect of the cost of planting bushes in replacement of dead bushes or become permanently useless in an area already planted if such area has not been abandoned.
Computation of Tax on Non-Agricultural Income when Income has Agricultural Income also
Agricultural income is exempted from taxation, but in some conditions, the Income Tax department laid down a way for indirect tax from such incomes which we have discussed. This method called as partial integration of agricultural income with non-agricultural income. According to this method, higher rates of taxes imposed on non-agricultural income. There are some requirements for the applicability of this method:
The taxpayer should be an individual, a Hindu undivided family, a body of an individual, an association of person or an artificial juridical person.
The Non-agricultural income of the taxpayer exceeds the maximum amount non-chargeable to tax. Non-agricultural income should exceed the amount of rs.2,50,000 for the individual below than 60 yrs. of age and rs.3,00,000 for the individual above than 60 yrs of age.
Agricultural income should be more than rs. 5000.
Conclusion
Agricultural income is exempt from income tax but State government by indirect ways. There are so many methods and requirements for agricultural income as we have discussed. Any other process will compute it as partly agricultural income and partly non-agricultural income.
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