AGRICULTURAL
INCOME
PRESENTED BY: Deeksha Singh Chauhan (2015/[Link].B./017)
Shivangi Bajpai (2015/[Link].B./049)
PRESENTED TO: Ms. Priyanka Anand
Asst. Professor of Law
INTRODUCTION
• Agriculture income is exempt under
Section 10(1) of the Indian Income
Tax Act 1961.
•Agricultural Income has been
defined under S. 2(1A)
CONSTIUTIONAL PERSPECTIVE
• Article 366(1) defines “agricultural
income” to mean agricultural income as
defined in Income tax Act.
• Entry 82 of List-I empowers the Central
Government to levy taxes on income
other than agricultural income.
HISTORY
Income Tax Act, 1860
What changed in 1886?
-Resentment against colonial rule.
-In 1932, Federal Finance Committee of the
Round Table Conference and its report.
• Bihar was the first state to levy income tax
on agricultural income.
Reasons:
1) Partition of Bihar and Orissa
2) Permanent Land Revenue system
AGRICULTURAL INCOME 2(1A)(a)
Agricultural Rent or Revenue
• It requires three conditions to be satisfied:
1. the rent or revenue should be derived from land
2. the land should be situated in India; and
3. the land should be used for agricultural purposes.
1. Rent or Revenue Derived from Land —
• Rent : payment in money or in kind by one person in respect of
the grant of a right to use land.
• Revenue: used in broad sense of return, yield or income, and
not in the sense of land revenue.
• Revenue ‘derived from land’: land must be the immediate and
effective source of the revenue and not the secondary and
indirect source.
• In CIT v. Kamakshya Narain Singh 16 ITR 325 - held - the interest
on arrears of rent payable in respect of agricultural land is not
agricultural income.
2. Land situated in India –
• Foreign agricultural income falls outside this definition and is
not entitled to exemption u/s 10(1)
3. Land used for Agricultural Purpose –
• Mustafa Ali Khan v. CIT 16 ITR 330
• CIT v. Benoykumar Sahas Roy 32 ITR 466
- Basic Operations
- Subsequent Operations
- Commercial Crops
- Activities in connection with land
CLAUSE 2(1A)(b)
Income from Agricultural Produce and
Manufacturing Process
Primary conditions as specified under sub-cl(a)
must be met.
If a farmer harvests the
crops and sells the
agricultural produce.
If the Farmer harvests the
crops and then
manufactures biscuits
out of wheat produce
PARTLY AGRICULTURE & PARTLY
FROM MANUFACTURE
LAW: Rule 7, 7A, 7B and 8 of Income Tax
Rules, 1962.
• Sometimes, income comprises of both agricultural and non-
agricultural income.
Mr. X is the owner of agricultural land in India and produces
sugarcane by spending Rs. 2,00,000. Further, X set up an industrial
undertaking to manufacture sugar from sugarcane so produced.
Accordingly, he uses the whole quantity of sugarcane for
producing sugar and spends Rs, 2,50,000 as industrial expenses. He
ultimately sells the sugar so produced for Rs. 7,00,000.
• Total Income = Sale proceeds of sugar —
Cost of cultivation —
Industrial expenses
= Rs. (7,00,000 - 2,00,000 - 2,50,000)
= Rs. 2,50,000
• The above total income of Mr. X is the
composite income comprising of
agricultural income and non-agricultural
income.
TABLE - PARTLY AGRICULTURAL AND
PARTLY BUSINESS INCOME
Crop Rule Agricultural Business Income
Income
Growing and
Manufacture of 8 60% 40%
Tea
Rubber
manufacturing 7A 65% 35%
business
Coffee grown and
cured by seller 7B(1) 75% 25%
Coffee grown,
cured, roasted and
grounded by the
seller in India with
7B(1A) 60% 40%
or without mixing
chicory or other
flavouring
ingredients
Mr. Jhimmi is the owner of agricultural land in India and
produces tea by spending Rs. 1,00,000. Further, Jhimmi sets
up an industrial undertaking to manufacture tea from tea
leaves so produced. Accordingly, he uses the whole
quantity of tea produce for producing tea and spends Rs,
2,00,000 as industrial expenses. He ultimately sells the tea so
produced for Rs. 5,00,000.
• Total Income = Sale proceeds of Tea — Cost of
cultivation — Industrial expenses
= Rs. (5,00,000 - 2,00,000 – 1,00,000)
= Rs. 2,00,000
For tea, the division according to notional
percentage is
• 60% and 40%
• Agricultural Income= 60% of 2,00,000
• Non Agricultural Income= 40% of 2,00,000
Agricultural Land is exempt from
taxation under the category of
“Capital Gains”
CLAUSE 2(1A)(c)
Agricultural House Property
S. 22 of the Income Tax Act delivers in House
Property.
Agricultural income from house property is exempted if the
following conditions are fulfilled:
1) The building must be on or in the immediate vicinity of the
land.
2) It must be used by the assesee as a dwelling house or
store-house or an out-building, in connection with the land.
• In the case of a farm house, the annual value would be
deemed agricultural income and thus, be exempt from
tax.
• In addition to the above, income derived from saplings or
seedlings grown in nursery is also considered as agricultural
income.
3.) The land should either be assessed to land
revenue in India or be subject to a local rate
assessed and collected by officers of the
Government.
4.) In instances where such a land revenue is not
assessed or not subject to local rate, the land
should not be situated within the jurisdiction of a
municipality or a cantonment board subject to
conditions of population.
5) The land is situated in a place which has a population of
more than ten thousand); or it should not be situated:
• 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.
COMPUTING TAX LIABILITY
• Agricultural income is included in the total income of the assessee
for deciding the tax rate .
• Applicable to Individual, HUF, BOI, AOP or an artificial judicial
person.
• In computing the Income Tax Liability the following two conditions
must be cumulatively satisfied:
• Net Agricultural income > Rs. 5,000/- for P.Y.
and
• Total income > Rs. 2,50,000/-
(excluding net Agro. income) (exemption limit)
Cont. -
I. Total Income = Agricultural income + Total
income (excluding net agro.
income)
II. Calculate tax liability on Total income (I.)
III. Add basic exemption limit to the agricultural
income
IV. Calculate tax liability on amount calculated in
(III.)
V. Deduct amount of tax calculated in (IV.) from
tax liability as per (II.)
VI. Add education cess
VII. Total tax liability = (V.) + (VI.)
Example –
• For the PY 2016-17, Mr. A has agricultural income of Rs.
2,50,000 and salary income of Rs. 7,50,000.
Calculate the tax liability.
Tax Slab –
Income Tax Slab Tax rate
Zero – 2,50,000 NIL
2,50,000-5,00,000 5%
5,00,000-10,00,000 20%
Above 10,00,000 30%
Solution –
I. Total income = Rs. 2,50,000+ 7,50,000
= Rs. 10,00,000
II. Tax liability on total income
= 0+12,500+1,00,000
=Rs. 1,12,500
III. Agricultural income + Basic Exemption limit
= Rs. 2,50,000 + Rs. 2,50,000
= Rs. 5,00,000
IV. Tax liability on Rs. 5,00,000 = 0+12,500
= 12,500
V. Tax liability (X) = 1,12,500 – 12,500
= Rs. 1,00,000
V. Add: Education Cess @ 3% = 3,000 + 1,00,000
VI. Total Tax liability = Rs. 1,03,000
KELKAR COMMITTEE (2002)
• The Committee advocated for levying tax on agriculture income.
• The states could pass a resolution under article 252 of the
Constitution authorising the centre to impose tax on agricultural
income.
• A separate income tax return form will be prescribed for such tax
payers.
• It will help mobilise additional revenue by states without touching
95% of the genuine farmers, who would in anyway not fall under
income tax net when exemption limit becomes Rs. 1 lakh per
annum.
Should Agricultural Income be taxed?