Income Tax on Agriculture (Part 1), source of income should be agricultural land
Income Tax on Agriculture (Part 1): Agriculture plays a vital role in Indian economy. Agricultural income declared by individual assessee who filed returns is over 20 times of country’s GDP. Except for two short periods of nine years in all (1860-1865 and 1869-1873), agricultural incomes have been exempt from the general income tax. In 1925, the Indian Taxation Inquiry Committee observed that there is no historical or theoretical justification for the continued exemption from the income tax of incomes derived from agriculture. They found it justified to include agriculture income for rate purposes. It continues unchanged till date. Read on to know more…
From the inception of our republic under the constitution, agriculture and taxation of agricultural income is a state subject. Accordingly, Section 10(1) of the Income-tax Act, 1961 exempts agricultural income from taxation by the central government. Hence, plain reading of this section indicates that all agricultural income is exempt. But to understand provisions related to taxability of agricultural income, it is necessary to understand the meaning of “agricultural income”. To define agricultural income in one sentence, it can be mentioned that “income derived from agricultural land by carrying out agricultural operations is agricultural income”. But, some incomes are derived partly from agricultural and partly from non-agricultural operations. Also, it is difficult to define agricultural operations. Hence, a broad definition of “agricultural income” has been given under the Income Tax Act. Definition of “agricultural income” as Section 2(1A) of the Income tax Act, 1961 is “agricultural income” means:
(a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes;
(b) Any income derived from such land by-
(i) Agriculture; or
(ii) 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
(iii) the sale by a cultivator or receiver of rentin-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;
(c) 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;
(i) 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 storehouse, or other out-building, and
(ii) 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-
- (A) 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; or
- (B) in any area within the distance, measured aerially:
(I) not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than ten thousand but not exceeding one lakh; or
(II) not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than one lakh but not exceeding ten lakh; or
(III) not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than 10 lakh.
- 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.
- Income derived from any building or land referred to in sub-clause (c) arising from the use of such building or land for any purpose (including letting for residential purpose or for the purpose of any business or profession) other than agriculture falling under sub-clause (a) or sub-clause (b) shall not be agricultural income.
- For the purposes of this clause, any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.
- For the purposes of clause (ii) of the proviso to sub-clause (c), “population” means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year.”
The word “means” used in the beginning of the definition makes the definition restrictive. Hence, from the analysis of this broad definition, it can be concluded that two conditions are important to determine taxability of agricultural income.
(1) Source of income must be agricultural land ; and
(2) Basic agricultural operations like tiling of the land, sowing of seeds, planting etc. must be carried out on land.
If any of the above conditions is not followed, such income is not considered as agricultural income. Detailed analysis of agricultural income is as under:
Income from Sale of Produce without Carrying Out Agricultural Operations
As per definition of agricultural income, income derived from land by agriculture is considered as agricultural income. Meaning of “agriculture” is not defined under Income Tax Act. The word “agriculture” comes from Latin word ager, means the soil and cultivation. “Agriculture” can be defined as the cultivation and/or production of crop plants. Agriculture includes basic operations and subsequent operations. Hence, agricultural operations like tilling of the land, sowing of seeds, planting, etc. should be carried out along with subsequent operations, if necessary to make the product marketable, only subsequent operations are not sufficient to consider the income as agricultural income.
Hence, income from sale of trees as timber and selling of canned fruits and vegetables are chargeable as business income. But if subsequent agricultural operations like trashing of wheat, mustard is carried out along with basic operations to make the produce marketable income from such sale will be considered as agricultural income even if such further operations are not carried out at agricultural land. In case of Commissioner of Income Tax Vs. Gaurishankar Agrawal (1980), 131 ITR 27 it was decided that “basic operations including subsequent operations form one integrated activity and if this integrated activity which constitutes agriculture is undertaken and performed in regard to any land, that land can be said to be used for agricultural purpose and the income derived there from can be said to be agricultural income”. Here notable point is that only subsequent agricultural operations that are necessary to make the produce marketable should be carried out along with basic agricultural operations and after subsequent operations, the produce must retain its original character.
Only change that could be permitted in the produce is in relation to making it marketable. After such change it should not result into the production of different commodity. In case of E. Palaniappan vs. ITO (2009) 121 TTJ 541, ITO Chennai decided that “there is no nexus between jaggery and agricultural operations. The nature of commodity is different after the application of the process. Conversion of sugarcane into jaggery is not a necessary process performed by the cultivator to render the sugarcane fit for being taken to the market. As such profit from sale of jaggery falls beyond the ken of agriculture income”. Some judicial rulings are against this decision and considered profit from sale of jaggery as agricultural income. But it is always a matter of litigation. Similarly, if the farmer sells the ginned cotton, difference between the selling prices of ginned cotton and unginned cotton is taxable as business income. Also, even if such agricultural operations are carried out by industrial organisations, it is considered as agricultural income. In case of tea, coffee, rubber etc., some industrial operations are carried out to make the produce marketable. So, income from sale of tea, coffee, rubber etc. has to be bifurcated between agricultural income and non agricultural income as per rule 7A, 7B (1), 7B (1A) and rule 8 of Income Tax Rules.
Source of Income Should be Agricultural Land
One of the conditions for claiming income as agricultural income is that such income should be derived from agricultural land. The word “derived from” indicates direct linkage/immediate source of income and not an indirect source of income. Hence, there should be a direct nexus between income and the land. One notable point is that ownership of such agricultural land is not relevant to determine source of income. If primary/immediate source of income is not agricultural land, such income will be chargeable to tax. Hence, following income is not considered as agricultural income, as source of income is not agricultural land.
- (1) Income from shooting of TV serials or films in farm house,
- (2) Income from stone quarries, royalty income from mines etc.
- (3) Income from poultry farming, dairy farming, butter and cheese making
- (4) Income from bee hiving.
- (5) Income from sale of spontaneously grown trees.
- (6) Dividend paid by a company out of its agriculture income.
- (7) Salary of farm manager.
- (8) Income from fisheries.
- (9) Income from brick making.
- (10) Income from supply of water for irrigation purpose.
- (11) Income from production of salt for sea water.
- (12) Income from preservation, storage and sale of potatoes and other vegetables.
- (13) Rent of agricultural land used for aquaculture/ fisheries.
Income from Farmhouse
As per definition of agriculture income, any income derived from any building owned and occupied by the assessee, receiving rent or revenue from the land, by carrying out agricultural operations is exempt. Hence if agricultural land along with farmhouse is given on rent for agricultural purpose, such rental income is exempt. If such farmhouse is used by tenant as store-house for agricultural produce, such rental income is also exempt. But if only farmhouse is given on rent for residential purposes, such rental income will be taxable. Similarly if farmhouse is given on rent for commercial purpose e.g.to conduct social functions, such rental income will not be considered as agricultural income. Also, the land on which farm house is situated must be “agricultural land”.