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Agricultural Income –Taxability

Agricultural income earned by a taxpayer in India is exempt under Section 10(1) of the Income Tax Act, 1961.

Definition:

Agricultural income is defined under section 2(1A) of the Income-tax Act.

“Agricultural income generally 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 agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce. (c) Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A). Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.”

Thus, Section 2 (1A) of the Income Tax Act, 1961 defines “agricultural income” as an income under the following 3 sources:

(i) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes: The assessee will not be liable to pay tax on the rent or revenue arising from agricultural land subject to the conditions:

(a) 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.

(b) 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 (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 more than ten thousand (according to the last preceding census which has been published before the first day of the previous year in which the sale of land takes place); or it should not be situated:

i. 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

ii. 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

iii. 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.

(c) The revenue must not include any income arising out of transfer of such land.

Further, a direct nexus between the agricultural land and the receipt of income by way of rent or revenue is essential. (e.g., a landlord could receive revenue from a tenant)

(ii) Any income derived from such land by agricultural operations including processing of agricultural produce, raised or received as rent in kind or any process ordinarily employed by cultivator or receiver of rent-in-kind so as to render it fit for the market, or sale of such produce.

(iii) Any income derived from any building owned and occupied by the assessee, receiving rent or revenue from the land, by carrying out agricultural operations: The building must be on or in the immediate vicinity of the land. It must be used by the assessee as a dwelling house or store-house or an out-building, in connection with the land.

Hence, we can consider income attributable to a farmhouse as an agricultural income, subject to the above conditions. Normally, the annual value of a building is taxable as ‘income from house property’. However, 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.

In order to consider an income as agricultural income, certain points have to be kept in mind:

(i) Existence of a land.

(ii) Usage of land for agricultural operations: Agricultural operations means efforts induced for the crop to sprout out of the land. The ambit of agricultural income covers income from agricultural operations, which includes processes undertaken to make the produce fit for sale in the market. Either rent or revenue from the agricultural land and income earned by the cultivator or receiver by way of sale of produce are exempt from tax only if agricultural operations are performed on the land.

(iii) Cultivation of Land is a must: Some measure of cultivation is necessary for land to have been used for agricultural purposes. The ambit of agriculture covers all land produce like grain, fruits, tea, coffee, spices, commercial crops, plantations, groves, and grasslands. However, the breeding of livestock, aqua culture, dairy farming, and poultry farming on agricultural land cannot be construed as agricultural operations.

(iv) Ownership of Land is not essential: In the case of rent or revenue, it is essential that the assessee has an interest in the land (as an owner or a mortgagee) to be eligible for tax-free income. However, in the case of agricultural operations, it is not necessary that the cultivator be the owner of the land. He could be a tenant or a sub-tenant. In other words, all tillers of land are agriculturists and enjoy exemption from tax. In certain cases, further processes may be necessary to make a commodity marketable out of agricultural produce. The sales proceeds in such cases are considered agricultural income because the producer’s final objective is to sell his products.

From Courts judgments following emerge:

‘Agricultural land’ should comprise the following characteristics

a. It must be a land;

b. It must pertain to or be connected with cultivation;

c. It must involve expenditure of human labour and skill for the purpose of cultivation or for keeping it in a cultivable state

Agricultural land is land on which a prudent owner will undertake any of the processes of farming in its widest sense.

The actual conversion of the land for non-agricultural purposes will also affect the character of the land as agricultural land. Whether such a conversion has taken place will depend on the facts of each case

'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.

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.

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.

RENT/REVENUE - SUB-CLAUSE (a)

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.

REVENUE - SUB-CLAUSE (a)

That the word 'revenue' in section 2(1A) (a) has been used in a very wide sense is shown by that sub-clause itself. The sub-clause states 'any rent or revenue derived from land’ and 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.

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.

Income from the sale of forest trees or produce of spontaneous growth is not considered agricultural income. Similarly, aquaculture, fish farming, poultry farming, rearing of silkworms, dairy, or ginning cotton is not treated as agriculture. Income from a nursery is not necessarily agricultural income unless maintained by a farmer as an aid or necessary adjunct to the primary process of agriculture. Horticulture, or the cultivation of flowers, fruits, vegetable, or ornamental plants, is considered agriculture.

Recording Agriculture income. Most people declare agricultural income on an ad hoc basis, and taxmen generally accept these figures, as long as they are not too obviously wrong. When calculating agricultural income, keep the following in mind:

· Area of the land and area under actual cultivation

· Nature of the produce

· Cost of inputs. (manure, labour, water and electricity)

· Equipment: tractors and other implements

Urban assessees often have some ancestral agricultural land, which is actually cultivated by a tenant or relatives. In such cases, it’s good to take a confirmatory letter from them to the effect that the amount paid to the assessee is towards his share in the agricultural income. If an assessee claims that he himself is carrying out the cultivation, he should maintain the normal account of income and expenditure.

Ownership: If you think you are eligible for rebates and breaks given to agricultural income, you must be able to prove that you have an interest in the land as owner, landlord or person having derivative interest. Agricultural income cannot be said to accrue to every person through whose hands the produce of the land passes.

There is also a popular belief that all ancestral properties are HUF properties. Very often, people tend to exclude the agricultural income from ancestral lands on the ground that it belongs to the HUF.

The bottom-line is that if you do own or rent agricultural land, or if a substantial part of your income comes from this land, you can end up paying minimal amounts as tax. But before you declare any agricultural income, make sure that you are within the provisions of the tax laws, or the tax department could harvest your flourishing income.

“Agricultural income is exempt from income-tax. However, courts have ruled that growing saplings or seedlings on land is agricultural but growing them in pots is not agriculture. This does not seem fair. Hence I propose to exempt from tax income arising from saplings or seedlings grown in a nursery.”

Where a part of the activity of the nursery involves purchases and sales of the plants, profits arising from such trading should be considered as liable for income-tax.

Farmhouses: 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 is subject to tax.

As dictated by the Constitution of India, agriculture is the subject matter of the states and not the central government. Moreover, for income tax, which happens to be the central government's domain, agricultural income has to be taken into account for the purpose of determining the tax rate.

The A.O. disallowed the claim of the assessee's agriculture income primarily on the basis that the assessee has incurred all the expenses in cash. The sales have also been carried out in cash. The books of accounts and the vouchers maintained by the assessee are self-generated. Even it was also observed that purchases carried out by the assessee are not verifiable.

Sufficient evidence was not placed before the AO to prove that it was engaged in field cultivation in the sense of tilling of the land, planting and similar basic operations which are supported by the evidence of expenditure incurred on human labour and skill upon the land itself to make the crop sprout out of the land. After the sprouting out of the crop from the land the subsequent operations which have to be resorted to by the agriculturist for the efficient production of the crop, such as weeding, digging the soil, removal of undesirable growths, preservation of the crop from insects and pests and putting the fencing from depredation by cattle, tending, pruning, cutting, making of culverts and providing excess inside the farm house by making pavements have all been carried out.

Books of Accounts to be maintained:

Journal Books, Cash and bank book, Purchase Register, Sale Register, Ledger Books, Purchase & Sale Accounts, Expenditure Accounts, Assets Accounts

Documents:

Vouchers, Receipts, Invoices, Labour Attendance & Wage Sheet,

Financial Statements:

Profit & Loss Account, Balance Sheet along with Schedules

Indian Accounting Standard (Ind AS) 41 Agriculture

In order to address the issue of black money, the government banned cash transactions of Rs 2 lakh and above starting April 1, 2017. Any amount over Rs 2 lakh will have to be paid by account payee cheque, bank draft or electronic bank transfer. (Section 269ST of Income Tax Act, 1961)

Note:

a. Agricultural income is considered for rate purpose while computing the tax liability for Individual/HUF/AOP/BOI/Artificial Judicial Person. (If it exceeds Rs.5, 000/-)

b. Losses from agricultural operations could be carried forward and set off with agricultural income for the next 8 assessment years.

c. Agriculture income is computed in a manner similar to business income.

Exceptions:

a. If a person sells processed produce without carrying out any agricultural or processing operations, the income would not be regarded as agricultural income.

b. Likewise, in cases where the produce is subjected to substantial processing which changes the very nature of the product (for instance, canning of fruits), the entire operation is not considered as an agricultural operation. The profit from the sale of such processed products will have to be apportioned between agricultural income and business income.

c. Income from trees that have been cut and sold as timber is not considered as an agricultural income since there is no active involvement in operations like cultivation and soil treatment.

Clearly, despite agricultural income being tax-exempt, assessees have to be cautious while dealing with such income. They must make sure that they aggregate agricultural income with their total income to avoid interest payments and possible penalties for concealment of income. Assessees must also maintain credible records to provide the tax authorities with proof of ownership of agricultural land and evidence of having earned agricultural income.

FAQs:

1) Interest on arrears of rent qualify

Sometimes, a tenant could slip up on rent or revenue payments (either in cash or kind) and have to pay arrears. If the landlord charges interest on such arrears, the income would not be considered as an agricultural income, but would be deemed income by way of interest and would, hence, be chargeable to tax. While ‘rent’ presupposes periodical and pre-determined payment (either in cash or kind), ‘revenue’ implies a sharing arrangement that depends on the actual agricultural produce. In either case, ownership of agricultural land or interest in such land is essential, which means, the owners of agricultural land, tenants who are given a sub-lease, and people who are mortgagees of agricultural land, all enjoy tax-free agricultural income.

2) Agricultural produce is processed to make it marketable at a place other than the agriculture land

Any processing done on Agricultural produce to make it marketable is a part of agricultural operations and such amount recovered will be treated as agricultural income only. But in certain cases like in the case of tea, coffee, sugarcane where a major processing (change sue to very nature of the product) is being done, then some part of the processed produce (tea, coffee & sugar) is taxed as non-agricultural income and rest is exempt as agricultural income.

3) Agriculture operation on urban land

If agricultural operations are carried out on land, either urban or rural, the income derived from sale of such agricultural produce shall be treated as agricultural income and will be exempt from tax.

4) Industrial organization grows crops and sells half of the produce as raw material in the market and remaining (further processed) as finished goods

Agricultural income is exempt from income tax. It does not matter whether the agricultural operations are done by an industrial organization or an individual. If any industrial organization grows crops and sells part of the produce as raw material in market and remaining (further processed) as finished goods, the income which is earned on the first part of produce (sold in market as raw material) is totally exempt from tax.

In case of the remaining produce which is further processed, scheme of presumptive taxation is applicable. Rule 7, 7A (manufacture of rubber), 7B (manufacture of coffee) & 8 (manufacture of tea) of Income tax Rules deals with such type of income.

Rule 7 says that in cases where income is partially agricultural in nature and partially from business, the market value of the agricultural produce which has been raised by the assessee or received by him as rent in kind and which has been utilised as a raw material, shall be deducted from the sale receipts and will be treated as agriculture income. The remaining will be considered as non-agricultural income.

5) In agriculture farm if you have cows

Dairy farming is not an agricultural income.

6) Interest on Crop Loan given to another farmer

The interest earned on Crop Loan cannot be claimed as an exemption by the provider of loan since the condition of ownership of land being not essential holds true only if the assessee has interest in the land. The provider of the loan may not have an interest in the land because it may be his ordinary business to provide Crop Loan. However, the farmer to whom the crop loan is provided can claim the same as a deduction while computing his tax liability.

7) Income from sale of fruits of the trees planted around home

The trees planted should be on a land which can be classified as an agricultural land by fulfilling the conditions mentioned earlier in this article. If the land is agricultural, then the income earned by selling of fruits can be treated as agricultural income otherwise it is taxable.

8) Compensation received in lieu of crop

The compensation paid for the crops by the Govt. can be considered to be as good as income earned by purchase of standing crop, which is not an agricultural income. Hence the compensation against crop is taxable in the hands of receiver of the compensation.

9) Income earned from export of agricultural produce

The conditions for considering the income as agricultural in nature have to be satisfied if the agricultural produce has to be exempt from income tax. Middlemen dealing in trade of agricultural produce are generally not entitled to exemption due to lack of satisfaction of the conditions.

10) Farms which bear coconut trees, on a lease

The land on which the coconut trees are planted should be an agricultural land which can be classified by fulfilling the conditions mentioned earlier in this article. If the land is agricultural, then the income earned by selling of coconuts can be treated as agricultural income.

11) Receipt from sale of rubber trees

Receipt of sale of rubber trees is an agricultural income if the conditions for land being agricultural in nature are satisfied.

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