AGRICULTURAL INCOME

Meaning of agricultural Income, Examples, Non Agricultural Income , Is Agricultural Income taxable? Case study, Examples of Agricultural Income and Non-Agricultural Income

1. AGRICULTURAL INCOME PREPARED BY- C A ANNIE STEPHEN - Ms. JUNITTA STEPHEN

2. INTRODUCTION Agricultural income earned by a taxpayer in India is exempt under Section 10(1) of the Income Tax Act, 1961. Agricultural income is defined under section 2(1A) of the Income-tax Act .

3. Meaning of Agricultural Income Section 2 (1A) of the Income Tax Act, 1961 defines “agricultural income” as an income under the following three sources: ( i ) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes (ii) any income derived from such land by agricultural operations including processing of the agricultural produce, raised or received as rent-in-kind so as to render it fit for the market, or sale of such produce [sec. 2(1A)(b)]; and (iii) income attributable to a farm house subject to the conditions

4. Conditions- that the building is situated on or in the immediate vicinity of the agricultural and is used as a dwelling house, storehouse, or other out-building and the land is assessed to land revenue or a local rate of tax or, alternatively, the building is situated on or in the immediate vicinity of land which (though not assessed to land revenue or local rate) is situated in a rural area [sec. 2(1A)(c)].

5. Rural area would mean the land is situated in Not more than 2kms. from the local limits of any municipality or cantonment board and which has a population of more than 10,000 but not exceeding 1,00,000; or not being more than 6kms. from the local limits of any municipality or cantonment board and which has a population of more than 1,00,000 but not exceeding 10,00,000; or not being more than 8kms. from the local limits of any municipality or cantonment board and which has a population of more than 10,00,000.

6. Agricultural operation includes efforts made to render the produce fit to be taken to market and also include activities such as Cultivation/ tilling of land of the land Sowing of seeds Planting Weeding Tending Pruning Drying Polishing chaffing Harvesting

7. The revenue must not include any income arising out of transfer of such land. Such incomes will be taxable under the head capital gains

8. C ertain points have to be kept in mind FOR AGRICULTURAL INCOME: ( i ) Existence of a land. (ii) Usage of land for agricultural operations such as sowing ,tilling, harvesting, weeding and also includes processes undertaken to make the produce fit for sale in the market. (iii) Cultivation on Land is a must: The ambit of agriculture covers all land produce like grain, fruits, tea, coffee, spices, commercial crops, plantations, groves, and grasslands. (iv) efforts must be involved as spontaneous growth will not be included in agricultural income

9. However, the breeding of livestock, aqua culture, dairy farming, and poultry farming on agricultural land cannot be construed as agricultural operations. (iv) Ownership of Land is not essential: In the case of rent or revenue, it is essential that the assesse has an interest in the land (as an owner or a mortgagee) to be eligible for tax-free income. He could be a tenant or a sub-tenant.

10. Exceptions: a. If a person sells processed produce without carrying out any agricultural or processing operations, the income would not be regarded as agricultural income. b. Likewise, in cases where the produce is subjected to substantial processing which changes the very nature of the product (for instance, canning of fruits), the entire operation is not considered as an agricultural operation. Its partly business income. c. Income from trees OF SPONTANEOUS GROWTH is not considered as an agricultural income since there is no operations like cultivation and soil treatment.

11. Taxation of agricultural income Agricultural income is exempt from income tax. However, the Income-tax Act has laid down a method to indirectly tax such income. This method or concept may be called as the partial integration of agricultural income with non-agricultural income. It aims at taxing the non-agricultural income at higher rates of tax.

12. Following are some of the examples of agricultural income: Income derived from sale of replanted trees. Income from sale of seeds. Rent received from agricultural land. Income from growing flowers and creepers. Profits received from a partner from a firm engaged in agricultural produce or activities. Interest on capital BY a partner from a firm, engaged in agricultural operations

13. Examples of Non-Agricultural Income Income from poultry farming. Income from bee hiving. Any dividend that an organization pays from its agriculture income. Income from the sale of spontaneously grown trees. Income from dairy farming. Income from salt produced after the land has flooded with sea water. Royalty income from mines. Income from butter and cheese making. Receipts from TV serial shooting in farm house.

14. COMMISSIONER OF INCOME TAX WEST BENGAL, CALCUTTA V. RAJA BENOY KUMAR SAHAS ROY.

15. It is a landmark case for the understanding of agriculture under the Income Tax Act. It was an interesting case wherein assesse was growing tress on a forest land. Growing of trees was inter alia includes cutting of tress and leaving the stumps to regrow. The Supreme court held such income as agriculture income and held as under:

16. The forest was 150 years old, and consisted of sal and piyasal trees. It was in parts denuded of trees from time to time by destructive elements and the assesse had to plant fresh trees in those parts. Considerable amount of human labor and skill had to be applied year after year for maintaining the 'forest, protecting the offshoots from the stumps of the trees that had been cut and sold and in reviving its denuded parts by fresh plantation. The staff employed by the assesse performed such operations as pruning, weeding, felling, clearing, cutting of channels, guarding the trees and sowing seeds by digging the soil in the denuded areas.

17. The Income-tax Officer rejected -the assessee's claim of exemption The Assistant Commissioner of Income-tax confirmed the assessment. The Appellate Tribunal held that the sowing of seeds were few and far between and the income, derived as it was from jungle products, was not agricultural income within the meaning of the Act. The High Court took a contrary view, held that tillage of the soil was not essential, and the income was agricultural income as human labour and skill had been expended on the land itself and answered the question in favour of the assessee .

18. Whether agriculture activity on urban land is exempt : Agriculture activity carried out on agriculture land whether it is rural or urban is exempt from tax hence profit from agricultural operation carried out at urban land is exempt from tax. Whether agriculture activity carried out by company is exempt : Section 10(1) speaks about exemption of agricultural income irrespective to the constituent of the person be it individual, HUF, Company, trust etc hence profit from agricultural activity carried out by company is also exempt from tax.

19. Agricultural income ? Profit on sale of fruits from the trees planted around the house/Bungalow is agricultural income : As per section 2(1A) any income derived from agriculture from land situated in India and used for agricultural purposes As the land is used for residential purpose hence profit on sale of such fruits will though be taxable , but not as agricultural income.

20. Income from export of agriculture produce If the exporter has resorted to agricultural activities then it is treated as agricultural income However if middlemen have undertaken the exports ,the same shall be taxable and not treated as agricultural income Whether claim received from Insurance company for damage of crop is agricultural income: Insurance claim received from insurance company for loss of crop is agricultural income because such claim is received against basic agricultural operations.

21. Where the assesse receives compensation for loss of trees from a company which was laying gas pipeline crossing his farm. The Ld. Hyderabad bench had treated such compensation as agricultural income being equal to sale of crop or claim from insurance company. (Sri meela Satynarayan HUF v/s ITO, Suryapet in ITA no 1047/ Hyd /2016 and therefore treated as agricultural income

22. Grass grown of specific quality- for lawns In Hortus Consultants P Ltd case where it was granted a contract to grow grass in soil or in peat moss with mesh to a certain height with three mowing and then to be lifted/rolled with the roots intact to a specific thickness and planted in a time definite seamless manner at the Jawaharlal Nehru Stadium The company claimed the whole income as agricultural income but ITAT held that Income up to growing of the grass was held to be agricultural income and thereafter the job of lifting/rolling/relaying will not be agricultural income.

23. EXAMPLES 1.  income from supplying surplus water to other agriculturists is held to be not an agricultural income.( Sri Ranga Vilas Ginning & Oil Mills  v  CIT  (1982) 133 ITR 85 , 2. Income from growing of mushroom has been held to be an agricultural activity 3. Income from breeding of livestock, poultry farming, brick making, stone quarry, Dog shelters, etc is not an agricultural income.

24. Income from fisheries has been held in CIT v V.T.S. Sevaga Pandia Thever  (1933) 1 ITR 78 (Mad) has been held to be not an agricultural income . Compensation/damages paid for loss of agricultural income due to late payment of instalments of the consideration price of rubber plantation site is held to be not an agricultural income in Malabar Industrial Co. Ltd. v CIT (2000) 243 ITR 831 (SC ) Income derived from letting out of land/ godowns for storing crop is non-agricultural income Interest on arrears of rent in respect of agricultural land is not an agricultural income and hence it will be taxable as regular income .

25. Income from sale of forests, trees, wild grass, fruit and flowers of spontaneous growth involving no human effort is non-agricultural income. Rent received for use of the garden for shooting films could not be treated as agricultural income, as it has no nexus with the land, except that it was carried out on the agricultural land. So, it is held to be not an agricultural income in B. Nagi Reddi  v CIT (2002) 258 ITR 719