Tax treatment of Agricultural Income

Agricultural Income – Tax treatment / Taxability

Agricultural Income : Agriculture income is exempt under the Indian Income Tax Act. This means that income earned from agricultural operations is not taxed. The reason for exemption of agriculture income from Central Taxation is that the Constitution gives exclusive power to make laws with respect to taxes on agricultural income to the State Legislature. However while computing tax on non-agricultural income agricultural income is also taken into consideration.

What does the term Agricultural Income mean?

As per Income Tax Act income earned from any of the under given three sources meant Agricultural Income;

(i) Any rent received from land which is used for agricultural purpose: Assessees do not have to pay tax on rent or revenue from agricultural land. Such land should, of course, be assessed to land revenue in the country or be subject to a local rate. Further, there must be a direct link between the agricultural land and the receipt of income by way of rent or other revenue (for instance, a landlord could receive revenue from a tenant).

(ii) Any income derived from such land by agricultural operations including processing of agricultural produce, raised or received as rent in kind so as to render it fit for the market, or sale of such produce.

(iii) Income attributable to a farm house subject to the condition that building is situated on or in the immediate vicinity of the land and is used as a dwelling house, store house etc. Income from such farm houses is considered agricultural income. The definition of `farm houses’ covers buildings owned and occupied by both cultivators of agricultural land and assessee who receive rent or revenue from agricultural land. The sole purpose of such farmhouses should be for use as dwellings for the cultivators or use as store houses. Normally, the annual value of a building is taxable as `income from house property’. However, in the case of a farm house, the annual value would be deemed agricultural income and would, thus, be exempt from tax.

(iv) Income earned from carrying nursery operations is also considered as agricultural income and hence exempt from income tax.

In order to consider an income as agricultural income certain points have to be kept in mind:

(i)  There must me a land.

(ii)  The land is being used for agricultural operations:- Agricultural operation means that efforts have been induced for the crop to sprout out of the land. The ambit of agricultural income also covers income from agricultural operations, which includes processing of agricultural produce to make it fit for sale. Like the people who receive passive agricultural income in the form of rent or revenue, the people who actually carry out agricultural operations are also eligible for tax-free agricultural income.

(iii) Land cultivation is must:- 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.

(iv) If any rent is being received from the land then in order to assess that rental income as agricultural income there must be agricultural activities on the land.

(v) In order to assess income of farm house as agricultural income the farm house building must be situated on the land itself only and is used as a store house/dwelling house.

(vi) Ownership is not essential. In the case of rent or revenue, it is essential that the Assessee have an interest in the land (as an owner or mortgagee) to be eligible for tax-free income. However, in the case of agricultural operations it isn’t necessary that the person conducting the operations be the owner of the land. He could be just a tenant or a sub-tenant. In other words, all tillers of land are agriculturists and enjoy exemption from tax. In some cases, further processes may be necessary to make a marketable commodity out of agricultural produce. The sales proceeds in such cases are considered agricultural income even though the producer’s final objective is to sell his products.

Note :

Exemption for Low Agricultural Income:

• Agricultural income of up to Rs. 5,000 per annum is exempt from income tax.

Full tax rebate is available in the following cases:

• When the total agricultural income is less than Rs. 5,000 per year.
• When agricultural income is the sole income source.
• When the total income (excluding agricultural income) is below the basic exemption limit.

Certain income which is treated as Agriculture Income;

(a) Income from sale of replanted trees.

(b) Rent received for agricultural land.

(c)  Income from growing flowers and creepers.

(d) Share of profit of a partner from a firm engaged in agricultural operations.

(e) Interest on capital received by a partner from a firm engaged in agricultural operations.

(f)  Income derived from sale of seeds.

Certain income which is not treated as Agricultural Income;

(a) Income from poultry farming.

(b) Income from bee hiving.

(c) Income from sale of spontaneously grown trees.

(d) Income from dairy farming.

(e)  Purchase of standing crop.

(f)  Dividend paid by a company out of its agriculture income.

(g) Income of salt produced by flooding the land with sea water.

(h) Royalty income from mines.

(i)  Income from butter and cheese making.

(j) Receipts from TV serial shooting in farm house is not agriculture income.

(k) Income from Plantation companies:- Many plantation companies have launched schemes that offer tax-free agricultural income. These schemes are of various types: while some give investors leasehold rights to the land, some give rights to trees a certain level above the ground, even as others offer rent. If the scheme gives rise to ownership or leasehold interest in the land, then the income is considered to be rent or revenue in the hands of the investor. In the absence of ownership or leasehold rights, income from plantation companies is either considered interest or non-agricultural income chargeable to tax.

Certain points to be remembered;

(a) Agricultural income is considered for rate purpose while computing tax of Individual/HUF/AOP/BOI/Artificial Judicial Per.

(b) Losses from agricultural operations could be carried forward and set off with agricultural income of next eight assessment years.

(c) Agriculture income is computed same as business income.

Exceptions:– If a person just sells processed produce without actually 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 that changes the very character of the product (for instance, canning of fruits), the entire operations cannot be regarded as agricultural operations. The profit from the sale of such processed products would have to be apportioned between agricultural income and business income. Further, the income from trees that have been cut and sold as timber is not considered agricultural income since there is no active involvement in operations like cultivation and soil treatment.

Tax on Sale of agricultural land:- Before 1970, profit on the sale or transfer of all agricultural land was considered rent or revenue derived from the land. Such profit was, therefore, tax-exempt as agricultural income. There were several favorable judgments of various High Courts on the issue. However, via a retrospective amendment that took effect from April 1, 1970 LAND qualifies to be agricultural land if it is not situated 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 does not have a population of 10,000 or more according to the last preceding census which has been published before the 1st day of the previous year in which the sale of land takes place, and it is not situated less than eight kilometers from the local limits of any municipality or a cantonment board.

If, by the test above, the land is agricultural land, it will not form part of the definition of a capital asset and so there will be no capital gains on the sale of such land.

Agricultural land not forming part of the above will be a capital asset and sale of which will attract capital gains tax subject to Section 54B, which is explained below.

Section 54B – Capital gain on transfer of land used for agricultural purposes not to be charged in certain cases.

The agricultural land should have been used for agricultural purposes.

It must have been used either by the assessee or his parents in the two years immediately preceding the date on which the transfer of land took place.

The assessee should have purchased another land, which is being used for agricultural purposes, within a period of two years from the date of sale.

The whole amount of capital gain must be utilised in the purchase of the new agricultural land. If not, the difference between the amount of capital gain and the new asset will be chargeable as capital gains and the tax will be computed accordingly.

The new asset purchased should not be sold within a period of three years.

If sold, the cost of the new asset will be reduced by the amount of capital gain for the purpose of computing capital gains tax.

Where the amount of capital gain is not utilised by the assessee for the purchase of the new asset before the due date of furnishing his return of income, he may deposit it in the Capital Gains Account Scheme (CGAS) of any specified bank.

The return of income of the assessee should be accompanied by the proof of such deposit.

In such a case, the cost of the new asset shall be deemed to be the amount already utilised by the assessee for the purchase of the new asset together with the amount deposited in the CGAS.

If the deposited amount is not utilised for the purchase of the new asset within the specified period, then the unutilised amount shall be charged in the year in which the period of two years from the date of sale of the original asset expires.

Tax after including agricultural income in total income:- Although agricultural income is fully exempt from tax, the Finance Act, 1973, introduced a scheme whereby agricultural income is included with non-agricultural income in the case of non-corporate assessees who are liable to pay tax at specified slab rates. The process of computation is as follows:

(a) Income tax is first calculated on the net agricultural income plus the assessee’s total income from non-agricultural sources.

(b) Income tax is then calculated on the basic exemption slab increased by the assessee’s net agricultural income.

(c) The difference between (a) and (b) is the amount of tax payable by the assessee.

This process of computation is, however, followed only if the assessee’s non-agricultural income is in excess of the basic exemption slab.

Clearly, despite agricultural income being tax-exempt, assessees have to be extra careful while dealing with such income. They must make sure that they aggregate agricultural income with their total income to avoid interest payments and possible penalties for concealment of income. Assessees must also maintain credible records to provide the tax authorities with proof of ownership of agricultural land and evidence of having earned agricultural income.

Thanks and Regards

CA Manish Malu