Lecture Note 5: Income from Agriculture (Sections 40–44)
Capital Gains (Sections 57–61)
Course: Fundamentals of Tax, VAT & Public Financial Management
Instructor: Mainul Huda Tushar
Topic Coverage: Chapter IV – Income from Agriculture (Income Tax Act 2023)
Chapter VI – Capital Gains (Income Tax Act 2023)
1. Overview of Agricultural Income (Section 40)
1.1 Definition
Agricultural income includes income earned from activities directly or indirectly related to
agriculture.
Key Inclusions
• Cultivation of land (traditional + modern methods)
• Horticulture
• Animal husbandry
• Poultry & fish farming, Dairy (milk production)
• Nursery operations
• Timber, grass, shrubs
• Fruit, flower, honey, and seed production
• Reptile farming
The definition is very wide, extending beyond traditional farming to commercial agro-based
activities.
1.2 Special Rule: Tea & Rubber
• 60% → Agricultural Income
• 40% → Business Income
This creates dual classification, requiring allocation between heads.
2. Special Agricultural Income (Section 41)
This section deals with disposal of agricultural assets.
2.1 Sale of Agricultural Assets
Let:
• A = Sale proceeds
• B = Acquisition cost
• C = Written Down Value (WDV)
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Case 1: Sale Price > Acquisition Cost
Income Split:
• Capital Gain = A – B
• Agricultural Income = B – C
Case 2: Sale Price ≤ Acquisition Cost but > WDV
• Entire amount = A – C → Agricultural Income
2.2 Insurance / Compensation Cases
Same logic applies when asset is:
• Destroyed
• Demolished
• Discarded
2.3 Negative Difference Rule
If (A – C) is negative:
• Treated as agricultural expense
• Allowed as general deduction
3. General Deductions (Section 42)
3.1 Basic Rule
Expenses must be:
• Not capital
• Not personal
• Wholly & exclusively for agriculture
3.2 Allowable Expenses
(a) Land-related (should be paid)
• Land tax
• Rent
• Development costs
(b) Financing
• Interest on agricultural loans
(c) Operational
• Cultivation expenses
• Transport, processing
• Machinery repair
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(d) Risk & Protection
• Insurance premiums
• Natural disaster protection
(e) Depreciation & Amortization
• As per Third Schedule
(f) Livestock Loss
• Purchase price – sale/meat proceeds
(g) Training & Research
• Govt-approved training
• Agricultural R&D (in Bangladesh)
3.3 Apportionment Rule
Only agriculture-related portion is deductible.
4. Non-Maintenance of Accounts (Section 43)
When Applicable
If:
• No proper accounts
• Unreliable records
• Non-standard accounting
Deemed Expense Rule
• 60% of market value of produce = Allowable expense
Effectively:
• 40% becomes taxable agricultural income
Exception
Not applicable for:
• Sharecropping (adhi, barga, bhaga)
5. Disallowance of Deduction (Section 44)
5.1 TDS Compliance
No deduction allowed unless:
• Tax deduction/collection at source rules (Part VII) are followed
5.2 Application of Section 55
• General disallowance rules apply (e.g., illegitimate or non-compliant expenses)
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6. Practical Problems & Solutions
Problem 1: Sale of Agricultural Machinery
Given:
• Sale price (A) = Tk. 500,000
• Cost (B) = Tk. 400,000
• WDV (C) = Tk. 250,000
Solution:
• Capital Gain = A – B = 500,000 – 400,000 = Tk. 100,000
• Agricultural Income = B – C = 400,000 – 250,000 = Tk. 150,000
Problem 2: Sale Below Cost but Above WDV
Given:
• A = Tk. 300,000
• B = Tk. 400,000
• C = Tk. 200,000
Solution:
• Agricultural Income = A – C = 300,000 – 200,000 = Tk. 100,000 - (No capital gain)
Problem 3: Insurance Compensation
Given:
• Insurance received (A) = Tk. 600,000
• Cost (B) = Tk. 450,000 & WDV (C) = Tk. 300,000
Solution:
• Capital Gain = A – B = 150,000
• Agricultural Income = B – C = 150,000
Problem 4: No Books of Accounts
Given:
• Market value of produce = Tk. 1,000,000
Solution:
• Deemed Expense = 60% = Tk. 600,000
• Agricultural Income = 40% = Tk. 400,000
Problem 5: Livestock Loss
Given:
• Purchase price of cow = Tk. 80,000
• Sale of meat = Tk. 30,000
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Solution:
• Deduction = 80,000 – 30,000 = Tk. 50,000
Problem 6: Mixed Expense
Given:
• Total expense = Tk. 100,000
• 70% related to agriculture
Solution:
• Allowable deduction = 70,000
1. Overview of Capital Gains (Section 57)
1.1 Definition
Capital gains arise from:
“Profits and gains arising from transfer of ownership of capital assets.”
Thus, tax is imposed when:
• A capital asset exists, and
• Ownership of that asset is transferred.
1.2 Essential Elements
For capital gain taxation:
1. There must be a capital asset
2. There must be a transfer
3. Profit or gain must arise from such transfer
1.3 Definition of Capital Asset (Section 2(77))
Section 2(77) defines “capital asset” as:
Included Assets
A capital asset means—
(a) Property of Any Nature
Any property of any kind held by an assessee.
Examples:
• Land
• Building
• Machinery
• Vehicles used in business
• Intellectual property
• Agricultural machinery
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(b) Business or Undertaking
Any business or undertaking:
• wholly, or
• as a unit.
Example:
• Transfer of an entire business division.
(c) Stocks or Shares
Any stock or share held by the assessee.
Examples:
• Shares in listed companies
• Preference shares
• Equity investments
Exclusions from Capital Asset
The following are not capital assets:
(i) Stock-in-Trade / Raw Materials
Assets held for business trading purposes are excluded.
Examples:
• Inventory
• Finished goods
• Raw materials
• Merchandise for resale
These are taxed under business income instead of capital gains.
(ii) Personal Effects
Movable personal-use assets are excluded if:
• held exclusively for personal use; and
• not used for business purposes.
Examples:
• Wearing apparel
• Jewelry
• Furniture
• Fixtures
• Handicrafts
• Personal vehicles
• Household equipment
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1.4 Important Exception: Fair Value Adjustment
The proviso to section 57 states:
Notional gains created merely because of:
• International Accounting Standards (IAS), or
• International Financial Reporting Standards (IFRS)
using Fair Market Value Method shall not be treated as taxable capital gains unless actual transfer
occurs.
Example
If land value increases in financial statements due to revaluation:
• No actual sale
• No actual transfer
➢ No capital gain tax
This provision prevents taxation of unrealized accounting profits.
2. Computation of Capital Gains (Section 58)
2.1 Basic Formula
Capital Gain = Open Market Sale/Transfer Price – Cost of Acquisition
Let:
• A = Open market transfer price
• B = Cost of acquisition
Then:
Capital Gain = A – B
3. Open Market Sale or Transfer Price
3.1 Determination Rule
Open market value means the higher of:
A:
Amount actually received or accrued
B:
Fair Market Value (FMV) on transfer date
Thus:
Open Market Value = Higher of:
• Actual consideration
• FMV
This provision prevents undervaluation of assets to evade tax.
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Example
Actual sale price = Tk. 8,00,000
FMV = Tk. 10,00,000
Then:
• Open market value = Tk. 10,00,000
Capital gain will be computed using Tk. 10,00,000.
4. Cost of Acquisition
4.1 Components of Cost
Cost of acquisition includes:
(a) Purchase Price
Original purchase amount of the asset
(b) Transfer-related Expenses
Expenses wholly related to transfer:
• Registration
• Legal fees
• Stamp duty
• Brokerage
(c) Development Cost
Improvement/development expenditure
However, development cost already allowed as deduction under:
• Section 38, 42, 49, 50 & 64
cannot be added again.
This avoids double deduction.
5. Special Cases of Acquisition (Section 58(2)(b)(ii))
When asset is acquired through:
• Gift
• Will
• Inheritance
• Succession
• Trust
• Liquidation distribution
• Partition of firm/AOP/HUF
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Then:
Fair Market Value on date of ownership by transferee
shall be treated as cost of acquisition.
6. Time of Taxability (Section 59)
Capital gain is taxable in:
The income year in which transfer takes place.
Thus:
• Agreement date
• Registration date
• Possession date
may become relevant depending on nature of transfer.
7. Limitation on Deduction (Section 60)
No expenditure is allowable under this chapter if:
• Tax deduction at source (TDS) was required, but
• TDS was not deducted/paid properly.
This section ensures:
• TDS compliance
• Proper withholding enforcement
8. Fair Market Value Adjustment Power (Section 61)
8.1 Undervaluation Rule
If:
FMV exceeds declared consideration by more than 15%
then:
• Deputy Commissioner of Taxes (DCT) may determine FMV,
subject to approval of Inspecting Joint Commissioner.
Purpose:
• Prevent artificial undervaluation
Example
Declared value = Tk. 10 lakh
FMV = Tk. 12 lakh
Difference = 20%
Since excess >15%:
• DCT may substitute FMV.
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9. Government Purchase Option (Section 61(2))
If:
FMV exceeds declared acquisition value by more than 25%
then:
• DCT may offer to purchase the asset
at declared value.
Purpose:
• Discourage underreporting of acquisition value
10. Special Exemption for Firm Conversion (Section 61(3))
Capital gain exemption applies where:
• All assets of partnership firm transferred to a new company
under Companies Act 1994
AND
• Consideration invested into equity shares of new company
Then:
• Capital gain is exempt from tax
This provision facilitates:
• Corporate restructuring
• Business formalization
10A. Rate of Tax on Capital Gains (Seventh Schedule)
Capital gains are taxed under the Special Tax Rate provisions of the Seventh Schedule.
The applicable rate depends on:
• nature of taxpayer, and
• type and holding period of asset.
10A.1 Capital Gain of Company, Fund & Trust
Capital gain earned by:
• company,
• fund, or
• trust
is taxable at:
15%
irrespective of holding period.
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10A.2 Listed Securities Transaction
Capital gain arising from transfer of securities of listed companies by taxpayers other than:
• company,
• fund,
• trust
is taxable at:
15%
Examples:
• Listed shares traded on stock exchange
• Public company securities
10A.3 Other Capital Assets
For capital gains other than listed securities:
(a) Disposal Within 5 Years
If asset is disposed of within:
5 years from acquisition or receipt
then:
• Capital gain is included in total income
• Taxed at normal applicable slab/rate
Thus:
• no special 15% rate applies.
(b) Disposal After 5 Years
If asset is disposed of:
after 5 years
then:
• Capital gain taxed separately at:
15%
12. Practical Problems & Solutions
Problem 1: Basic Capital Gain
Given:
• Sale price = Tk. 15,00,000
• Cost = Tk. 10,00,000
Solution:
• Capital Gain = 15,00,000 – 10,00,000
= Tk. 5,00,000
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Problem 2: FMV Higher Than Sale Price
Given:
• Actual sale price = Tk. 12,00,000
• FMV = Tk. 15,00,000
• Cost = Tk. 8,00,000
Solution:
Open Market Value = Higher of:
• 12,00,000
• 15,00,000
Thus:
• Capital Gain = 15,00,000 – 8,00,000
= Tk. 7,00,000
Problem 3: Inherited Property
Given:
• Asset inherited from father
• FMV on date of inheritance = Tk. 20,00,000
• Sold later for Tk. 30,00,000
Solution:
• Cost of acquisition = Tk. 20,00,000
• Capital Gain = 30,00,000 – 20,00,000
= Tk. 10,00,000
Problem 4: Development Cost
Given:
• Purchase price = Tk. 5,00,000
• Legal expense = Tk. 50,000
• Development expense = Tk. 1,00,000
• Sale value = Tk. 10,00,000
Solution:
Cost of acquisition:
= 5,00,000 + 50,000 + 1,00,000
= Tk. 6,50,000
Capital Gain:
= 10,00,000 – 6,50,000
= Tk. 3,50,000
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Problem 5: Section 60 Disallowance
Given:
• Brokerage expense = Tk. 1,00,000
• TDS applicable but not deducted
Solution:
• Expense disallowed
Therefore:
• Cost cannot include brokerage expense
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