Income Tax on Agriculture (Part 2) Capital Gain on Sale of Agricultural Land

What is Agricultural Income and its Taxability

Income Tax on Agriculture (Part 2) Capital Gain on Sale of Agricultural Land: Tax treatment of agricultural income in India, which is usually exempt from income tax. Some taxpayers are required to pay tax on agricultural…

Aso read – Income Tax on Agriculture (Part 1)

Income from Nursery or Greenhouse

As seen above, if basic agricultural operations are not carried out, income from sale of such produce will not be considered as agricultural income. One notable point is that place of such subsequent agricultural operations is not relevant. If basic agricultural operations are carried out on land and subsequent operations are carried out in continuation of basic operations, income from such produce is considered as agricultural income. Hence, sapling or seeding grown in nursery or greenhouse is considered as agricultural income. But if nursery is maintained independently without carrying out basic operations on land, income from nursery will not be considered as agricultural income. Hence, if flower plants purchased from farm are sold in nursery, such income will not be considered as agricultural income. Similarly, if basic foundation seeds generated out of cultivation are sold by the farmer, income from seed production is considered as agricultural income.

Income from Turnkey Project for Plantation

In turnkey project for plantation, farmer sows seeds and develops plants in nursery owned by him. After such plants reach a certain height and/or health, they are transplanted to the land belonging to other company/institution for further care. Hence, ownership of such plants is transferred to the company/institution at this stage. Thereafter, the company/institution cares for survival of such plants. Hence, the project is divided in two stages. First stage is up to development of plants in nursery and second stage starts from transplantation of such plants. Even if basic operations are carried out at first stage, activity carried out at second stage is different and not continuous integrated operation. Second stage can be carried out by other agency also. This activity involves income derived from agricultural land as well as contract receipt. There is much dispute regarding taxability of income from such projects. In case of Forest Development Corporation vs. Additional Commissioner of Income Tax and Ors., it is decided that at first stage, primary source of income is agriculture land and at second stage income is derived from service contract. Hence, income received up to first stage should be considered as agricultural income and income received thereafter should be considered as business income.

Income from Sale of Livestock used for Dairy Farming

Livestock such as cow and buffalo is used for the business of sale of milk in dairy. Such activity is not considered as “agriculture”. Generally in dairy farming, stock account of cattle purchased and sold is not maintained. Hence, it is not possible to ascertain exact purchase price of particular cattle which was sold. But fixed stock of cattle capable of giving good yield of milk is maintained to ensure constant supply of milk to run a dairy business. Hence in dairy business, such cattle cannot be considered as stock in trade, but it provides source of income to the owner of such cattle. Actual stock in trade is milk. Animals used to generate milk constitute a plant from which stock of milk is derived. Hence, purchase price and expense on such livestock is considered as capital expenditure. It cannot be claimed as revenue expenditure. Also if such animals used otherwise than as stock in trade are sold, died or becomes permanently useless, difference between actual cost of such animals and amount, if any realised in respect of carcasses or animals is allowed as deduction u/s. 36(1)(vi) of the Income Tax Act. Also sale proceeds of such livestock are considered as trading receipt.

If the land falls within limits specified in Section 2(14)(iii) of the Income-tax Act, 1961, sale of such agricultural land will not be considered as capital asset and no capital gain will be charged on sale of such land. Similarly if the agricultural land is given on lease, gain on such transaction will not be taxable.

Capital Gain on Sale of Agricultural Land

If the land falls within limits specified in Section 2(14)(iii) of the Income-tax Act, 1961, sale of such agricultural land will not be considered as capital asset and no capital gain will be charged on sale of such land. Similarly, if the agricultural land is given on lease, gain on such transaction will not be taxable. But if agricultural land is converted into non agricultural and sub-plots of such land are sold, surplus resulting from this transaction will be considered as capital gain. If such agricultural land is converted into stock in trade and sub-plots of such land are sold after conversion into non-agricultural land, then conversion of agricultural land into stock in trade is considered as deemed transfer and it will attract capital gain and at the time of sale of such land, surplus will be charged as business income. Also in case of compulsory acquisition of agricultural land, compensation received in respect of award or agreement which has been exempted from levy of Income-Tax vide Section 96 of RFCTLARR Act shall also not be taxable under the provisions of Income Tax Act, 1961.

Interest on Rent of Agricultural Land

In some cases, interest is charged for arrears of rent of agricultural land. It is an arrangement between landlord and tenant to pay sum in addition to fix periodical and pre-determined payment for rent of agricultural land. In such cases, interest is charged for delayed payment of rent. Hence for the interest portion, source of income is not “agricultural land”. Hence, interest portion of rent received is separated from rental income and it will be chargeable to tax.

Compensation Received for Loss or Damage to Crop

Compensation received from insurance company for loss or damage of crop is considered as agricultural income. Hence, if amount received from insurance company for damage done by hail storm to growing crop, that crop represents basic agricultural operations. Therefore, any sum which represents profits of basic agricultural operations must be considered to be income from agricultural operations. Also as decided in case of Meela Satyanarayan vs. ITO, Suryapet on 30 August, 2017, if compensation received for loss of trees with roots on laying down gas pipelines, such income is exempt from tax.

Applicability of Section 14A Read with Rule 8D to Agricultural Income

The exemption from income tax can be granted u/s. 10(1) of the Income Tax Act to the agricultural income earned, if the agricultural activities are actually carried out on said land during the financial year as stipulated u/s. 2(1A) of the Act to enable earning to fall within exemption provided u/s. 10(1)) of the Act. One of the purposes for exemption from income tax is to encourage cultivation or actual utilisation of land for agricultural purposes and hence if there is neither in its condition nor anything in the evidence to indicate the intention of its owners or possessors so as to connect with an agricultural purpose, the land could not be “agriculture land”. Hence, even if record for ownership and cultivation of agricultural land is maintained, but if no record for proof of agricultural income is maintained, such income is taxable under the head “income from other sources.” Moreover if any person has different source of income including agricultural income, section 14A is also applicable. Section 14A of Income-tax Act directs to disallow expenditure in relation to earning exempt income and rule 8D prescribes the method of disallowance of such expenditure. Hence, if gross agricultural income is shown in financial statement, disallowance u/s. 14A will be made for expenses incurred. But if agricultural income returned is net of agricultural expenditure, no disallowance will be made u/s. 14A. But if such expenditure claimed is inadequate, addition will be made to total income.

Taxability of Cash Sale of Agricultural Produce

Section 269ST of the Income Tax Act, subject to certain exceptions, prohibits receipts of R2 Lakh or more otherwise than by account payee cheque/ draft or by use of electronic clearing system through a bank account from a person in a day or in respect of a single transaction or in respect of transactions relating to an event or occasion from a person. CBDT has issued circular No.27/2017 dated 3 November, 2017 clarifying that any cash sale of an amount of R2 Lakh or more by a cultivator of agriculture produce is prohibited. Moreover, PAN has to be quoted or Form 60 has to be furnished if cash sale transaction by a cultivator to trader is for more than R2 Lakh. Also cash purchase of agricultural produce is out of ambit of Section 40A(3) of the Act.

Income Tax on Agriculture in Other Countries

Tax on agriculture is taxed differently by different countries in the world. The United States taxes agriculture income as income from other businesses of a comparable size, but allows farmers to choose from federal corporation tax or federal income tax provided they are bounded by their choice for five years. In Canada also, farmer’s income from farm and forestry are taxed as business income although some tax advantages are given to farmers. In Germany, agriculture income is calculated according to four different methods: (1) book keeping, (2) keeping an inventory, (c) flat method and (4) income valuation by financial administration. Also, farmers are obliged to keep records if they exceed a certain size. The U.K. also taxes agriculture income in the same way income from other businesses and farmers are obliged to maintain books of accounts for tax computation. Also, other countries like Australia, Ireland, France treat agriculture income as other business income.

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