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    Implications of Income Tax on Agricultural Income in India

    Section 10 (1) of Income Tax Act, 1961, specifically exempts agriculture income for the purpose of calculation of total income. The reason behind this is the parliament has no power to levy tax on agricultural income. 

    What is Agricultural income:- 

    Section 2(1A) defines agricultural income as:

     

    1. any rent or revenue derived from land which is situated in India and is used for agricultural purposes;

     

    1. any income derived from such land by –

     

    1. agriculture; or

     

    1. 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

     

    • 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 ;

     

    1. 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.

     

    Land situated outside India:

     

    If agricultural land is situated outside India, entire income would be taxable in the hands of the assessee.

     

    Indirect way of taxing Agriculture Income by aggregating the agricultural Income with non-agricultural income:

     

    The aggregation provisions are applicable only if the following two conditions are satisfied:

     

    1. The net agricultural income should exceed ?5,000 p.a; and

     

    1. Non-agricultural income should exceed the maximum amount not chargeable to tax i.e Basic Exemption Limit.

     

     

     

     

     

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    Non applicability of aggregation provisions:

     

    The aggregation provisions do not apply for company, firm assessed as such (FAS), co-operative society and local authority.

     

    Aggregation provisions:

     

    The objective of aggregating the net agricultural income with non-agricultural income is to tax the non-agricultural income at higher rates.

     

    Computation of tax by applying aggregation provisions:

     

    S.no

    Particulars

    Amount(`)

     

     

     

    a

    Net agricultural income

    Xxx

     

     

     

    b

    Non-agricultural income

    Xxx

     

     

     

    c

    Tax on “a + b”

    Xxx

     

     

     

    d

    Tax on “a + basic exemption limit”

    Xxx

     

     

     

    e

    Tax payable “(c - d) +cess”

    Xxx

     

     

     

     

    Exercise:

     

    Agriculture Income is `5,00,000 and non-agriculture income is `5,00,000 and the maximum amount that is not chargeable to tax is `2,50,000.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

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    Implications of income tax on Agricultural Income in India

     

     

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    Income from Nursery:

     

    Explanation 3 to Section 2 (1A) provides that the income derived from saplings or seedlings grown in a nursery would be deemed to be agricultural income, whether or not the basic operations were carried or not.

     

    Income from farm building:

     

    Income from any farm building which satisfies the following conditions would be treated as agricultural income and would be exempted from tax:

     

    1. The building should be on or in the immediate vicinity of the agricultural land;
    2. It should be owned and occupied by the receiver of the rent or revenue of the land or occupied by the cultivator; and
    3. The receiver of the rent or revenue or the cultivator or the receiver of rent in kind should, by reason of his connection with such land require it as dwelling house or other out building.

     

    In addition to the above three conditions any one of the following two conditions should also be satisfied:

     

    1. The land should either be assessed to land revenue in India or be subject to a local rate assessed and collected by the officers of the Government as such or; and

     

    1. Where the land is not so assessed to land revenue in India or is not subject to local rate:
      1. It should not be situated in any area as comprised within the jurisdiction of a municipality or a cantonment board and which has a population not less than 10,000.
      2. It should not be situated in any area within such distance, measured aerially, in relation to the range of population according to the last preceding census as shown hereunder –

     

     

    Shortest distance from the local limits of a

    Population as per latest census available on the

     

    municipality

    first day of previous year

     

     

     

    A

    2 Kilometres

    >10,000 <=1,00,000

     

     

     

    B

    6 Kilometres

    >1,00,000<=10,00,000

     

     

     

    C

    8 Kilometres

    >10,00,000

     

     

     

     

    Apportionment of income in certain cases:

     

    Sometimes, income comprises of both agricultural income as well as non-agricultural income. Such a situation arises in cases where agricultural incomes like tea, cotton, tobacco, sugarcane etc. which are subjected to a manufacturing process before sale. The profit on such sale consists of both agricultural income and business income. The portion of profit which represents agricultural income is exempted from tax.

     

    Rule 7- General Rule (Applicable to all except Tea, Coffee, and Rubber):

     

    • Non-agricultural income = Sale proceeds of industrial product(-) Market value of agricultural produce used as Raw material (-) industrial expenses.

     

    • Agricultural income = Market value of agricultural produce used as Raw material (-) cost of cultivation.

     

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    Implications of income tax on Agricultural Income in India

     

     

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    Market value means:

     

    • Average selling price in the relevant previous year or
    • If the agricultural produce is not ordinarily sold in the market ,the total of the following is treated as market value
    1. The expenses of cultivation
      1. The land revenue or rent of the land on which the produce is grown
      2. The reasonable amount profit in opinion of Assessing Officer is considered proper.

     

    Rule 7A- Income from growing and manufacturing of rubber:

     

    Agricultural income= 65% of composite income

     

    Non-agricultural income = 35% of composite income

     

    Composite income= Sale proceeds of Rubber (-) cost of cultivation (-) industrial expense

     

    Rule 7B –Income form growing and manufacturing of Coffee:

     

    Case-1: If Coffee is Grown and cured by seller

     

    Agricultural income=75% of composite income

     

    Non Agricultural income =25%of composite income

     

    Case-2: If Coffee is grown, cured, roasted and grinded by the seller

     

    Agricultural income=60% of composite income

     

    Non-Agricultural income=40% of composite income

     

    Composite income= Sale proceeds of Coffee - cost of cultivation – industrial expense

     

    Rule 8- Growing and manufacturing of Tea in India

     

    As per Rule 8,

     

    Agricultural income=60% of composite income

     

    Non Agricultural income =40% of composite income

     

    Composite income= Sale proceeds of Tea - cost of cultivation – industrial expense

     

    “Faith is the bird that feels the light when the dawn is still dark.”

     

    – Rabindranath Tagore

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