Agricultural Income and its Tax Treatment [Section 2(1A)]

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1. Definition of Agricultural Income [Section 2(1A)]

Agricultural income including the following: 

(i)            Any Rent or Revenue derived from Land; U/s 2(1A) (a)

(ii)           Any Income derived from such Land by Agriculture or from Processing of Agricultural Produce; U/s 2(1A) (b)

(iii)          any Income from Farm Building. U/s 2(1A) (c)

The above three types of agricultural income and its Tax Treatment have been defined u/s 2(1A) (a), 2(1A) (b) and 2(1A)(c)  respectively. The definition is being discussed in detail as under:

Agricultural Income and its Tax Treatment [Section 2(1A)]
Agricultural Income

(1) Any Rent or Revenue derived from Land [Section 2(1A) (a)]:

The following conditions must be satisfied to treat income derived from land as ‘agricultural income’: 

(i) rent or revenue should be derived from land. 

(ii) such land should be situated in India. 

(iii) the land should be used for agricultural purposes. 

(ia) Rent from Land:

Rent should be a payment in cash or in kind or in money or in money’s worth, by one person to another in respect of a grant of a right to use land. To treat any income or revenue in the nature of rent, there should be an established relationship of a landlord and tenant or lessor and lessee between the parties. For example, the share of agricultural produce received by a landlord is though in kind but it is rent and thus agricultural income. 

(ib) Revenue from Land:

The expression ‘any revenue’ would mean income of every kind derived from agricultural land, other than: 

(a) rent, or 

(b) the income which falls under section 2(1A) (b) and (c). 

(ic) Rent or Revenue should be derived from Land:

This would mean that such rent or revenue should spring from land or arise from land. If the immediate and effective source is not land, the income cannot be considered to be agricultural income. The following incomes will not be agricultural income as these are not derived from land. 

  • Dividend received by a shareholder from a company carrying on agricultural operations is not agricultural income in his hands. The shareholder receives the dividend not by virtue of any activity of agriculture carried on by him, but by virtue of the investment of his funds in the company in buying up its shares. 
  • Loan obtained by a shareholder out of accumulated profits of a company having only agricultural income, which is liable to be treated as ‘deemed dividend’, is not agricultural income in the hands of the recipient. 
  • Interest on arrears of cess or rent payable by a tenant to his landlord is no doubt revenue but it is not revenue derived from land and hence it is not agricultural income. 
  • Commission earned by a broker for selling agricultural produce of an agriculturist is not agricultural income. 
  • Salami or Nazarana paid shall not be agriculture income in the hands of the recipient unless it is a payment of rent in advance. 

(2) any income derived from such Land by Agriculture or from Processing of Agricultural Produce; [Section 2(1A) (b)]:

Section 2(1A) (b) gives the following three instances of agricultural incomes: 

(1) Any income derived by agriculture from land situated in India and used for agricultural purpose. The following will be treated as income derived from agricultural land: 

(i) standing crop or the raw produce after harvest, sold by the agriculturist himself; 

(ii) crop used as raw material by the cultivator in his business. 

(2) 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. The produce raised from the land may not have a market in its native form. It may become necessary to perform a process on the produce to make it marketable or saleable. Such process may be called ‘marketing process or agricultural process’ for the sake of convenience. The gain in the value of the produce by such marketing process or agricultural process is also classified as income from agriculture. If marketing process is performed on agricultural produce which could be sold without such process as the produce was itself marketable, the income attributable to the process shall not be agricultural income. 

(3) Any income derived from 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 as referred in (2) above. Income from sale of agricultural produce is exempt from tax to the extent to which no process has been performed on the produce, except the marketing process, discussed above. If any other processes have been performed, the sale proceeds will have to be disintegrated to find out that part of it which constitutes agricultural income, so as to exempt that part alone from income-tax. 

(3) any Income from Farm Building [Section 2(1A) (c)] 

(i) Building is on or in the immediate vicinity of land situated in India which is used for agricultural purposes. 

(ii) It is occupied by cultivator or receiver of rent or revenue. 

(iii) It is used as (a) dwelling house; (b) store house; or (c) other out building.

(iv) The land is assessed to land revenue or a local rate. However, if it is not assessed to land revenue or local rate then such land should be situated outside urban area. 

If all the above conditions are satisfied then the income from farm building is exempt from tax

2. Exempted Agricultural Incomes 

Following incomes have been held to be agricultural income which is Exempted from Tax: 

(a) Income from toddy is agricultural income when it is received by the actual cultivator of the trees. 

(b) Where the owner himself performs slaughter tapping and then sells the rubber, the income is agricultural income. 

(c) Lease income derived by a lessor from lease of a coconut garden, to a lessee who pays rent and takes the  coconuts from the trees during the term of the lease and has to deliver possession of the coconut garden  back to the lessor at the end of the term, would be treated as agricultural income in the hands of the lessor.

(d) If the grass is grown by human effort, by tilling, sowing, planting of any particular kind of seed or cutting, or by any similar operations, basic operations would have been performed. Consequently, the crop would be agricultural and any income derived by the sale of grass would be agricultural income. 

(e) Income from growing flowers and creepers would be agricultural income. 

(f) Lease rent received for leasing out land for grazing of cattle required for agricultural pursuits, is agricultural income. 

(g) Compensation received from an insurance company on account of damaged caused to the crop is an agricultural income. 

(h) Seeds are clearly a product of agriculture and the income derived from the sale of seeds derived on account of cultivation by the assessee is an agriculture income. 

3.  Taxable Non-Agricultural Incomes 

Following incomes have been held to be non-agricultural income, hence taxable: 

(a) Income from sale of forests, trees, wild grass, fruit and flowers grown spontaneously and without human effort.

(b) Income from salt produced by flooding the land with sea water and then extracting salt therefrom. 

(c) Income from stone quarries. 

(d) Income from breeding of livestock. 

(e) Income from dairy farming, butter and cheese making. 

(f) Income from poultry farming. 

(g) Income from fisheries. 

(h) Preservation of potatoes by refrigeration as it is not a process ordinarily employed by a cultivator. 

(i) Income from brick making. 

(j) Income from supplying surplus water to other agriculturists. 

(k) Interest on arrears of rent in respect of agricultural land. 

(l) Profit on sale of standing crops/agricultural produce purchased by the assessee. 

(m) Income derived from letting out of land/godowns for storing crops. 

(n) Royalty income of mines. 

4. Income which is Partially Agricultural and Partially from Business. 

(A) Income from Growing and Manufacturing of any Product other than Tea [Rule 7] 

An assessee may have composite business income which is partially agricultural and partially non-agricultural, for example, where XYZ Ltd. grows potatoes and further processes its produce to sell them as wafers. In this case the company has composite income i.e. from agriculture and from business.

The composite income has to be disintegrated and for computing business income the market value of any agricultural produce raised by the assessee or received by him as rent in kind and utilised as raw material in his business is deducted.  No further deduction is permissible in respect of any expenditure incurred by the assessee as a cultivator or receiver of rent in kind.

For computing agricultural income, the market value of agricultural produce will be total agricultural receipt on account of potatoes. From such agricultural receipts, expenses such as cultivation expenses etc. incurred in connection with such receipt will be deducted and balance will be agricultural income which will be exempt.

Example:

in the above case, if the market value of the potatoes grown by the company, which have been used for the purpose of making its own Wafers, is Rs.5 lakhs and the cost of cultivation of such potatoes is Rs.4 lakhs, the agricultural income shall be Rs.1 lakh (5 lakhs – 4 lakhs). This agricultural income of Rs.1 lakh shall be exempt.

Further for the purpose of computing business income from the sale of wafers produced from such potatoes, the company shall be allowed deduction of Rs.5 lakhs as the cost of potatoes, being the market value of potatoes grown by it.

(B) Income from Growing and Manufacturing of Rubber [Rule 7A]

(1) Income derived from the sale of centrifuged latex or cenex or latex based crepes (such as pale latex crepe) or brown crepes (such as estate brown crepe, re-milled 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 India shall be computed as if it were income derived from business, and 35% of such income shall be deemed to be income liable to tax.

(2) In computing such income, an allowance shall be made in respect of the cost of planting rubber plants in replacement of plants that have died or become permanently useless in an area already planted, if such area has not previously been abandoned, and for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which, under the provisions of section 10(31), is not includible in the total income.

(C) Income from Growing and Manufacturing of Coffee [Rule 7B]

(a) Income derived from the sale of coffee grown and cured by the seller in India, shall be computed as if it were income derived from business, and 25% of such income shall be deemed to be income liable to tax.

(b) Income derived from the sale of coffee grown, cured, roasted and grounded by the seller in India, with or without mixing chicory or other flavouring ingredients shall be computed as if it were income derived from business, and 40% of such income shall be deemed to be income liable to tax.

(D) Income from Growing and Manufacturing of Tea [Rule 8]

Where the assessee has a business of growing tea leaves and then processing it (or manufacturing the same), the procedure adopted to disintegrate is as under:

Step 1: Compute the income of growing as well as manufacturing tea under the head ‘profits and gains of business or profession’ after claiming the deductions available under that head.

Step 2: 60% of the income computed in Step 1 will be treated as net agricultural income and 40% of such income, so arrived at, is treated as business income.

5. Tax on Partial Integration of Non-Agricultural income with Agricultural Income

As already discussed, there is no tax on agricultural income but if an assessee has non-agricultural income as well as agricultural income, such agricultural income is included in his Total Income for the purpose of computation of Income-tax on non-agricultural income. This is also known as partial integration of agricultural income with non-agricultural income or indirect way of taxing agricultural income.

Such partial integration is done only in the case of:

(i) individual;

(ii) HUF;

(iii) AOP/BOI;

(iv) Artificial juridical person.

It is not done in the case of:

(i) firm;

(ii) company;

(iii) co-operative society;

(iv) local authority.

The partial integration is done to compute the tax on non-agricultural income only when the following two conditions are satisfied:

  1. non-agricultural income of the assessee exceeds the maximum exemption limit which is Rs.2,50,000 in the case of an individual (other than individual of the age of 60 years or above) and HUF, etc.; and
  2. the Net Agricultural Income exceeds Rs.5,000.

Computation of Tax on Non-Agricultural Income if the Assessee earns Agricultural income also.

The following steps should be followed to calculate the tax: 

Step 1: Add agricultural income and non-agricultural income and calculate tax on the aggregate as if such aggregate income is the Total Income. 

Step 2: Add agricultural income to the maximum exemption limit available in the case of the assessee and compute tax on such amount as if it is the Total Income. 

Step 3: Deduct the amount of income-tax as computed under Step 2 from the tax computed under Step 1. 

The amount so arrived at shall be total Income-tax payable by the assessee. 

Step 4: Claim rebate under section 87A if applicable. 

Step 5: Add surcharge if applicable + health and education cess @ 4%.

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