Sunday, 15 January 2012

Agriculture Income

            In India Agriculture income is tax free.Following information will help
      the readers in planning their Agriculture income.
      Rent or Revenue
      As per the Income Tax Act, "Rent" is described as periodical or
      pre-determined payment in cash or kind, while "Revenue" implies a sharing
      agreement depending on agricultural produce.
      Cultivation of land to some extent is necessary for the income to be
      treated as agricultural income. While growing of crops is covered under
      agriculture's ambit, activities like poultry farming, dairy farming,
      aquaculture and sericulture on the same land are not treated as
      agricultural activity. There is no tax on rent or revenue accruing from
      such land. The land should be assessed to land revenue in India or subject
      to a local rate. Moreover, a direct link needs to be established between
      the land and revenue.
      Thus, while rent on land being tilled will be treated as income, interest
      on late payments is taxable. Owners of agricultural land, tenants who have
      sub-leased the land and mortgagees of such land - all enjoy tax-free
      agricultural income.
      With SEBI cracking down on plantation companies, a lot less is heard
      nowadays on that front. As these companies were offering tax-free income,
      many urban residents were attracted to such schemes for it was their only
      way of earning agricultural income. What needs to be examined here is
      whether the buyer gets leasehold rights to the land, or to some trees, or
      whether he gets rent. If the scheme provides for the investor owning the
      trees or getting leasehold rights on the land, then it is considered to be
      agricultural income, and hence tax-free. In the absence of either of the
      two, any other income is considered non-agricultural income, chargeable to
      Agricultural operations
      All tillers (whether a tenant or sub-tenant of the land) are deemed as
      agriculturists and enjoy freedom from tax. Processing of agricultural
      produce to make it fit for sale in the markets is also covered under the
      ambit of agricultural income. Here, ownership of the land is not a
      In many cases, raw agricultural produce may not fetch the right market
      price. To make it marketable, further processing may be necessary. Even
      though the final objective of the processor is to sell the produce at a
      higher price, such sales are treated as agricultural income. But if the
      farmer buys processed product and sells at a profit, such income will be
      Further, if substantial value addition is involved (with the whole
      character of the primary produce undergoing a sea change), the entire
      operation is not treated as agricultural income. In such cases, the
      process will be broken down into primary, secondary and tertiary
      activities. While the primary and secondary activities will be treated as
      agricultural income, the rest will be treated as business income
      Similarly, if you get tempted to get into lumberjacking or cutting down a
      large growth of trees for tax-free profits, you could be in for a nasty
      shock. This income will not be treated as agricultural income, as your
      involvement lies only in cutting, sawing and selling of the trees etc and
      such profits will be taxed. Activities such as cultivation, soil treatment
      and others associated with farming have to be indulged in for such an
      activity to be non-taxable.
      The definition of "farmhouse" covers buildings owned and occupied by
      cultivators of agricultural land as well as assessees who receive rent or
      revenue from such land. According to the law, the sole purpose of such
      houses should be as residing places or usage as storehouses. But there are
      ample instances of these "farmhouses" being used for private parties,
      conferences, marriages and even being rented out with the revenue being
      shown as agricultural income! So now, thanks to the first millennium
      budget, all non-agricultural income from farmhouses are subject to tax.
      Sale of agricultural land
      Earlier, profit on sale of agricultural land was exempt from tax. But now,
      agricultural land situated in an urban area or within a distance of 8 km
      from any notified municipal or cantonment board area is considered a
      capital asset. Thus, profit from the sale of such land is liable to be
      taxed as a capital gain. But agricultural land outside the purview of the
      8 km limit will be deemed to be in a rural area. Thus, profit from sale or
      transfer of such land would be considered tax-free.
      Although agricultural income is fully exempt from tax, individual assesses
      are required to club agricultural income along with other sources of
      income while filing returns based on the specific slab rates. Resultantly,
      the rate of taxation is higher for them. The methodology followed for
      calculating assessees' tax liability with agricultural income is:
        Tax is first calculated on the assessee's net agricultural income plus
        total non-agricultural income.
        Tax is then calculated on the basic exemption slab increased by the
        assessee's net agricultural income.
        Amount of tax payable by the assessee is the difference between the
        above two
      This methodology is followed only if assessee's non-agricultural income is
      in excess of the basic exemption slab (Rs 50,000 for assessment year
      1999-2000) and agricultural income is higher than Rs 600. Be careful while
      filing returns and clearly mention agricultural income. Any discrepancy
      can be met with severe fines and penalties. Also, all receipts of such
      income and land records should be kept at hand to show the authorities in
      case of enquiries.
      Agricultural income" means
        any rent or revenue derived from land which is situated in India and is
        used for agricultural purposes;
        any income derived from such land by
          agriculture; or
          the performance by a cultivator or receiver of rent-in-kind of any
          process ordinarily employed by a cultivator or receiver of
          rent-in-kind to render the produce raised or received by him fit to be
          taken to market; or
          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 described in paragraph
          (ii) of this sub-clause;
        any income derived from any building owned and occupied by the receiver
        of the rent or revenue of any such land, or occupied by the cultivator
        or the receiver of rent-in-kind, of any land with respect to which, or
        the produce of which, any process mentioned in paragraphs (ii) and (iii)
        of sub-clause (b) is carried on:
        Provided that
          the building is on or in the immediate vicinity of the land, and is a
          building which the receiver of the rent or revenue or the cultivator,
          or the receiver of rent-in-kind, by reason of his connection with the
          land, requires as a dwelling house, or as a store-house, or other
          out-building, and
          the land is either assessed to land revenue in India or is subject to
          a local rate assessed and collected by officers of the Government as
          such or where the land is not so assessed to land revenue or subject
          to a local rate, 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 has
            a population of not less than ten thousand according to the last
            preceding census of which the relevant figures have been published
            before the first day of the previous year ; or
            in any area within such distance, not being more than eight
            kilometres, from the local limits of any municipality or cantonment
            board referred to in item (A), as the Central Government may, having
            regard to the extent of, and scope for, urbanisation of that area
            and other relevant considerations, specify in this behalf by
            notification in the Official Gazette.
      Explanation: For the removal of doubts, it is hereby declared that revenue
      derived from land shall not include and shall be deemed never to have
      included any income arising from the transfer of any land referred to in
      item (a) or item (b) of sub-clause (iii) of clause (14) of this section ;]
      Definition of agriculture:
      'Agriculture' in its primary sense denotes the cultivation of the field
      and is restricted to cultivation of the land in the strict sense of the
      term, meaning thereby tilling of the land, sowing of the seeds, planting
      and similar operations on the land. These are basic operations and require
      the expenditure of human skill and labour upon the land itself. Operations
      which the agriculturist has to resort to and which are absolutely
      necessary for the purpose of effectively raising produce from the land,
      e.g., weeding, digging the soil around the growth, removal of undesirable
      undergrowth, and all operations which foster the growth and preservation
      of the same not only from insects and pests but also from depredation from
      outside, tending, pruning, cutting, harvesting and rendering the produce
      fit for the market, would all be agricultural operations when taken in
      conjunction with the basic operations. The human labour and skill spent in
      the performance of these subsequent operations cannot be said to have been
      spent on the land itself. The mere performance of these subsequent
      operations on the products of the land, where such products have not been
      raised on the land by the performance of the basic operations, would not
      be enough to characterise them as agricultural operations.
      Agriculture comprises within its scope the basic as well as the subsequent
      operations described above regardless of the nature of the products raised
      on the land. These products may be grain or vegetable or fruits - CIT v.
      Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 (SC). n The word
      'agriculture' means the performance of operations like tilling of the
      land, sowing of the seeds or planting in order to raise products of some
      utility. The nature of the products raised on the land is immaterial. The
      word 'agricultural' means 'of or pertaining to agriculture; connected with
      husbandry or tillage of the ground' - Smt. Manyam Meenakshamma v. CWT
      [1967] 63 ITR 534 (AP)/Syed Rafiqur Rahman v. CWT [1970] 75 ITR 318
      The essence of agriculture, even when it is extended to include
      'forestry', is the application of human skill and labour. Without that it
      can be neither art nor a science - Beohar Singh Raghubir Singh v. CIT
      [1948] 16 ITR 433 (Nag.).
      Reading entry 82 of the Union List and entry 46 of State List of the
      Seventh Schedule of the Constitution, it is clear that the Parliament is
      not competent to tax agricultural income. The expression 'agricultural
      income' occurring in the said entries has to be understood in the manner
      and in the sense defined in clause (1A) of section 2 - J. Raghottama Reddy
      v. ITO [1987] 35 Taxman 298 (AP).
      The word 'rent' means payment of money in cash or in kind by any person to
      the owner in respect of grant of right to use land. The expression
      'revenue' is, however, used in the broad sense of return, yield or income
      and not in the sense of land revenue only - Raza Buland Sugar Co. Ltd. v.
      CIT [1980] 123 ITR 24 (All.).
      That the word 'revenue' in section 2(1A)(a) has been used in a very wide
      sense is shown by that sub-clause itself. That sub-clause states, 'any
      rent or revenue derived from land...'. The word 'any' qualifies not merely
      the word 'rent' but also the word 'revenue'. The word 'any' when used
      affirmatively means 'whichever, of whatever kind, of whatever quantity'.
      Thus, the expression 'any revenue' would mean income of every kind -
      Manubhai A. Sheth v. N.D. Nirgudkar, Second ITO [1981] 128 ITR 87 (Bom.).
      The word 'derived' is not a term of art. Its use in the definition indeed
      demands an enquiry into the genealogy of the product. But the enquiry
      should stop as soon as the effective source is discovered. In the
      genealogical tree of the interest land indeed appears in the second
      degree, but the immediate and effective source is rent, which has suffered
      the accident of non-payment. And rent is not land within the meaning of
      the definition - CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR
      325 (PC).
      To give the words 'revenue derived from land' the unrestricted meaning
      apart from its association or relation with the land, would be quite
      unwarranted - Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1 (SC).
      The expression 'such land' in section 2(1A)(b) refers back to the land
      mentioned in clause (a) and must have the same quality - Raja Mustafa Ali
      Khan v. CIT [1948] 16 ITR 330 (PC).
      'Market' in the context of rule 7 does not mean an open market where
      buyers and sellers get together for the purpose of purchase and sale of
      goods - Thiru Arooran Sugars Ltd. v. CIT [1997] 93 Taxman 579/227 ITR 432
      'Produce ordinarily sold in their raw state' must only mean the kind of
      produce which are ordinarily sold. The phrase is not to be applied
      according to the individual fact-situation of each case, but according to
      the nature of the produce - CIT v. Thiru Arooran Sugars Ltd. [1983] 144
      ITR 4 (Mad.).

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