PROJECT REPORT ON

AGRICULTURAL INCOME

UNIVERSITY OF MUMBAI

MASTER OF COMMERCE

(Advanced Accounting)

SEMESTER 3

2016-17

SUBMITTED BY

Name: ZARANA AGNIHOTRI

Roll No.: 52

PROJECT GUIDE

CA.NACHIKET PATWARDHAN.
 K.P.B HINDUJA COLLEGE OF COMMERCE

315, NEW CHARNI ROAD, MUMBAI-400 004

M.Com (Advanced Accounting)

3rd SEMESTER

AGRICULTURAL INCOME.

SUBMITTED BY

ZARANA AGNIHOTRI

Roll No.: 52

K.P.B. HINDUJA COLLEGE OF COMMERCE

315, New Charni Road, Mumbai 400 004 Tel.: 022- 40989000 Fax: 2385 93 97. Email:

NAAC Re-Accredited A
9001:2008 THE BEST COLLEGE OF UNIVERSITY OF MUMBAI FOR THE ACADEMIC YEAR 2010
Prin. Dr. Minu Madlani (M. Com., Ph. D.)
CERTIFICATE

This is to certify that Ms. ZARANA AGNIHOTRI of M.Com

(Accounting) Semester 3rd [2016-2017] has successfully

completed the Project on AGRICULTURAL INCOME under

the guidance of CA.NACHIKET PATWARDHAN .

Internal Examiner External Examiner

Principal College Seal

DECLARATION
I Mr. / Ms. ZARANA AGNIHOTRI student of M.Com-Business
Management, 4th semester (2016-2017), hereby declare that I
have completed the project on AGRICULTURAL INCOME

The information submitted is true and original copy to the best

of our knowledge.

(Signature)

Student
 AGRICULTURAL INCOME

INDEX
Sr. Topics
No.
1 INTRODUCTION

2 KINDS OF AGRICULTURAL INCOME

 3 NON AGRICULTURAL INCOME

4 TAXABILITY OF AGRICULTURAL INCOME POST

AMENDMENT BY FINANCE (NO.2) ACT, 2014

5 TAX ON AGRICULTURAL INCOME

6 CALCULATION

7 CASE STUDY

8 BIBLIOGRAPHY

INTRODUCTION:

Income received from the following sources is called Agricultural Income

according the income tax ordinance.
 Income received from land situated in his own country.
Land is used for agricultural purposes.

Agricultural income [2(1A)] has not been taxed right from the beginning under
the Income-tax Act. The justification for such exemption is that income from
agriculture is taxed in the form of land revenue. Another reason for its being
kept outside the purview of the Income-tax Act, 1961, is that agriculture being a
State subject, the Central Government is not entitled to tax this source of
income. The State Governments are of course, free to tax this source. A few of
them are, in fact, doing so. The position under the Income-tax Act is that section
10(1) exempts agricultural income from income-tax. Because of the exemption
it enjoys, it is necessary to clearly understand the definition of the term
Agricultural Income. In the exact sense, Agricultural Income as defined u/s
2(1A) includes the various types of incomes.

KINDS OF AGRICULTURAL INCOME:

According to the definition given u/s 2(1A), agricultural income can be
classified into the following five kinds:
Rent or revenue derived from land.
 Income derived from land by agriculture.
Income by the performance of any process to render the produce fit to be
marketed.
Income by the sale of the produce raised or received by him as rent.
Income from building owned and occupied by the cultivator or the
receiver of rent-in-kind. (Provided it is in the immediate vicinity of the
land and is used as a dwelling house or a store house or an out-building in
connection with it. The land on which the building is situated must also
fulfil the conditions already mentioned.)

FOLLOWING ARE THE AGRICULTURAL INCOMES:

Income from land leased out as grazing land for cattle required for agricultural
purposes.
TYPES OF AGRICULTURAL INCOME
On the basis of definition of agricultural income given above, it can be
classified into five broad categories. These types of agricultural incomes are :

Following are the important kinds of agricultural income:

Income of the Cultivator:
By cultivating the agricultural land a lessee receives the income, which is called
agricultural income.
Rent of land:
Rent received by the owner of agricultural land is also called agricultural
income.

Selling of crop:
Cash received by selling the agricultural product is also called agricutural
income. For example: if a producer sells the 1000 Kg sugar and receives Rs
50,000 will be called agricultural income.

Building:
Income received from any building which is used for agricultural purposes is
called agricultural income.

Process of production:
By growing the agricultural product a cultivator receives the income. It is also
called agricultural income.

1. Any income received as rent or revenue from agricultural land

Rent can very simply be defined as a payment in cash or in-kind which the
owner of the land receives from another person in consideration of a grant of a
right to use land. When the owner of land is not performing agricultural
operations himself but gives his land on contract basis, any amount received
from the actual cultivator by the owner of the land shall be agricultural income.
Such rent may he in cash or in-kind, i.e., a share in the produce grown by the
cultivator.

Income from sale of agricultural land. The Finance Act, 1989 has added an
explanation to section 2(IA) as a result of which any revenue derived from land
shall not include and shall be deemed never to have included any income arising
from the transfer of any land mentioned in section 2(14) (iii) (a) or (b). It has
been made applicable retrospectively from 1-4-1970. It simply means that any
income from transfer of urban agricultural land will not form part of agricultural
income. It will be taxable income under the head Capital Gains.

2. Income derived from Agriculture

Income derived from land situated in India by applying agricultural operations
shall be agricultural income. If all the basic operations like preparation of land
for sowing, planting, watering, harvesting etc. are applied, any income resulting
from such operations shall be agricultural income. On the other hand, if grass,
trees etc. have grown spontaneously or without the aid of human skill, effort,
labour etc., any income resulting from the sale of such grass, trees or lease rent
of such land shall not he agricultural income.

Agricultural income also includes income from orchards or from horticulture.

It is further to he noted that if a particular income is derived from land but
without applying agricultural operations, such an income although derived from
land cannot become agricultural income and so any income having remote
connection with land cannot he called as agricultural income. Income from
poultry and dairy farming, fisheries, mining, stone quarries, breeding and
rearing of livestock, all these incomes although remotely linked with land but
cannot he called agricultural incomes because of the absence of important
characteristics of agricultural income, i.e., cultivation of land.

Income which is in the nature of by-products of agricultural land such as selling

of milk, the pasturing of cattle etc. can safely he included in agricultural income
provided the endeavour is agricultural and it is reasonably connected with land
used for agricultural purposes.

3. Any income accruing to the person by the performance of any process to

render the produce marketable.
If, in the ordinary course, a process is to he employed by the cultivator himself
or the landlord who receives the produce as rent-in-kind, any income derived
from such a process shall he agricultural income. Such a process must be
employed to render the produce fit for marketing. The process may he manual
or mechanical. It should be noted that the produce should not change its original
character in spite of the processing unless the produce cannot be sold in that
form or condition.

Following points are to he noted in this connection :

(a) The process must he one which is ordinarily employed by the cultivator.
(b) The process is employed to render the produce fit to be taken to the
market.
(c) The produce must retain its original character in spite of process unless
the produce is having no market if offered for sale in its original condition.

4. Any income received by the person by the sale of produce raised or

received as rent-in-kind.
Any income derived by any person by the sale of agricultural produce raised by
him or received as rent-in-kind shall also be agricultural income. Sometimes
such person puts some extra effort by selling the produce through his own shop,
any extra profit raised due to shopping activities shall not he agricultural
income.

5. Income from buildings used for agriculture.

Any income derived from a building used for agricultural operations shall be
agricultural income provided
(a) The building from where the income is received, is in the immediate vicinity
of the land and is occupied by the owner, or by the cultivator or by the receiver
of rent-in-kind.

(b) Building is used as a dwelling house or a store house or other out-building.

The cultivator or the receiver of the rent-in-kind, by reason of his connection
with the land, is in need of the house as a dwelling house or as a house to store
the goods required for agricultural operations.

(c) The land if assessed to land revenue in India or is subject to a local rate
assessed and collected by officers of the Govt. and in case the land is not
assessed to land revenue or to local rate, it should not be situated within the
urban areas.

Explanation:
Rent, revenue or income received from the sale of any product grow in his own
country land is called agricultural income. The product must be produced by
employing the human labour.
Note: If anything which is produced from the land without human effort then it
will be called non-agricultural income.

Example 1: Spontaneous trees grown without human labour is non-agricultural

income.

Example 2: A person grows rice and sells the crops. The amount receives is
called agricultural income.
Example 3: A landlord grows plants and trees on his land. The income he
derives from that is called agricultural income.

Example 4: A landlord receives the rent in the form of crops this share of
product is also called agricultural income.

NON AGRICULTURAL INCOME:

Following incomes are not included in agricultural income.
Any income received from the land which is not used for agricultural
purposes.
Income not received from land.
 Income received from the land which is not situated in his own country.

Examples:
Income received from flour mill.
Income from market.
Income from selling trees.
Income from cutting trees.
Income received from land used for storing timber.
Income from mining.
Income from supply of water for irrigation.
Income from stone quarries.
Income from fisheries.
Income from sale of earth for the bricks making.
Income from cotton ginning factory.

TAXABILITY OF AGRICULTURAL INCOME POST

AMENDMENT BY FINANCE (NO.2) ACT, 2014:
Agricultural income is exempt from Income Tax under section 10(1) of the
Income Tax Act, 1961. However, its included, for rate purposes, in computing
the Income Tax Liability if following two conditions are cumulatively satisfied:

Net Agricultural income exceeds INR 5,000/- for P.Y. 2014-15, and
Total income, excluding net Agricultural income, exceeds INR 2,50,000/-.

Kindly note that the aforementioned condition at Serial No.2 shall change to
INR 3,00,000/- in case if the Assessee is an individual who falls in the age
bracket of 60 to 79 Years during the P.Y. 2014-15, and to INR 5,00,000/- in case
if the Assessee is an individual who is of the age of 80 Years or more during the
P.Y. 2014-15.

Once the aforementioned conditions are satisfied then we shall compute the Tax
liability in the following manner:

First, include the Agricultural income while computing your income Tax
liability. Example Let us say that an Individual Assessee has a Total income of
INR 7,50,000/- (excluding Agricultural income) and a Net Agricultural income
of INR 100,000/-. Then, per this step, Tax shall be computed on INR 7,50,000/-
+ INR 1,00,000/- = INR 8,50,000/-. Thus, income Tax amount as per this step
shall be INR 95,000/- for an individual who is below the age of 60 Years during
the P.Y. 2014-15.

Second, add the applicable basic Tax slab benefit, as applicable, to the Net
Agricultural income. Thus, per our example mentioned above we shall add INR
2,50,000/- to INR 1,00,000/- as the applicable Tax slab benefit available to an
individual below 60 Years of age is INR 2,50,000/-. Now we will compute
income Tax on INR 3,50,000/- (Tax slab benefit 2,50,000 + Net Agricultural
income 1,00,000). The amount of Tax shall be INR 10,000/-.

Third, subtract the Tax computed in Second step from the Tax computed in
First step = INR 85,000/-. Thus, this is the income Tax liability subject to
deductions, Education cess etc., as applicable.
The aforementioned treatment of Agricultural income has been illustrated
subject to Finance (No.2) Act, 2014.

TAX ON AGRICULTURAL INCOME:

Agricultural income in India is categorised as a valid source of income and
basically includes income from sources that comprise agricultural land,
buildings on or related to an agricultural land and commercial produce from an
agricultural land. This income is considered for rate purposes while calculating
the income tax liability of an individual.
Key points to remember while considering if an income is actually a valid
agricultural income
Income should be from an existent piece of land
Income should be from a piece of land that is used for agricultural
operations
Income should stem from produce achieved after cultivation of the land
Income can be from a land that is not under the assessees ownership
Is Agricultural Income Taxable?
By default, agricultural income is exempted from taxation and not included
under total income. The Central Government cant impose or levy tax on
agricultural income. The exemption clause is mentioned under Section 10 (1) of
the Income Tax Act of India. However, state governments can charge
agricultural tax. As of the latest amendment, income from agriculture, if within
INR 5000 in a financial year, will not be accounted for tax purposes. Anything
above that will be taxable as per the applicable rates. As per the finance act, the
total tax liability for a person would include the agriculture income added to the
non-agricultural portion. Though being exempted from tax through Section 10
(1), tax on agricultural income still persists in the state level if the mentioned
income exceeds INR 5000 per year and if the total income excluding
agricultural income is more than the basic exemption limit. For firms, non-
individuals and companies it is easier to pay the associated tax as the tax is
charged at a flat rate on the chargeable income. For salaried individuals, it might
increase the tax they need to pay because of the aggregation of income.
CALCULATION:
Calculation of Tax taking Agricultural Income into Account:
In case the agricultural land is not falling under the scope of the aforementioned
section, one would need to do a separate evaluation just for that aspect of tax. If
the agricultural income is well within INR 5000, the returns need to be filed
through ITR 1, else ITR 2 needs to be used wherein there is a separate column
for declaring the details of the income.

The tax calculation done here is in accordance with the fact that the income
from agricultural sources is falling under Section 2 (1A) of the IT Act.
For all other normal purposes, the tax calculation will involve the following
steps:

Including the Agricultural Income Considering B is the base income of the

individual and A is the agricultural income, tax first needs to be computed on
the amount of B+A. Lets call this tax as T(B+A)

Adding the basic tax slab benefit Depending upon changes in the Income
Tax rules, the basic tax slab might change, but for claritys sake, lets consider
that as S. That needs to be added to the agricultural income and another tax is be
calculated on the amount. Lets call this tax as T(S+A)
Income Tax liability This is the tax that is subject to deductions. Thus IT =
T(B+A) T(S+A)
One should always remember to aggregate the agricultural income while
calculating tax since that can allow one to avoid unnecessary extra taxes or
interest on taxes.

I am a salaried person but I also have additional income from a piece of

agricultural land that I own. How should I compute tax and show the
income while filing returns?
Jatin Srivastava

We have assumed that the income earned by you from the agricultural land is
covered under section 2(1A) of the Income-tax Act and accordingly exempt
from tax under section 10.

However, for the limited purpose of determining the tax rate, while calculating
tax liability for the financial year (FY), you would be required to include the
agricultural income in the total income provided the following two conditions
are cumulatively satisfied:
1. Net aggregate agricultural income during financial year 2015 (FY15) exceeds
Rs. 5,000 (otherwise the entire agricultural shall not be included for rate
purpose); and
2. Total income, excluding net agricultural income, exceeds applicable basic
income exemption, i.e., Rs.2.5 lakhs for FY15.
The basic income exemption for an individual of age between 60 and 80 years is
Rs.3 lakhs for FY15. Further, the basic exemption for an individual above 80
years of age is Rs.5 lakhs.
For easy understanding, the steps for computing tax liability for FY15 have
been outlined below, assuming your age is below 60 years.
Step 1: Lets say your total income of Rs.12 lakhs comprises net agricultural
income of Rs.1 lac and salary income of Rs.11 lakhs. Accordingly, basic tax on
the aggregate income of Rs.12 lakhs shall amount to Rs.1.85 lakhs.
Step 2: Add the applicable basic tax slab benefit, i.e., Rs.2.5 lakhs to the net
agricultural income. Accordingly, in this case, the total income shall be Rs.3.5
lakhs (i.e. Rs.2.5 lakhs plus Rs.1 lac). So, the tax amount would work out to Rs.
10,000.
Step 3: Subtract the tax computed at step 2 from the tax computed at step 1
(Rs.1.85 lakhs minus Rs. 10,000), i.e., Rs.1.75 lakhs. Accordingly, the net basic
tax would be Rs.1.75 lakhs.
If total taxable income during FY15 exceeds Rs.1 Crore, surcharge at 10% on
basic rate should be applied. Education cess should be applied on basic tax rate
and surcharge, if applicable. If agricultural income is not covered under section
2(1A), a separate evaluation would be needed. If your aggregate agricultural
income is up to Rs. 5,000 during FY15, then the entire income shall be exempt
from tax. Accordingly, you need to disclose the agricultural income in the
income tax return (ITR) 1 form to be compliant from the disclosure perspective.
But if the agricultural income exceeds Rs. 5,000, then form ITR 2 applies,
which has a separate column for disclosure of agricultural income.
CASE STUDY:

CIT v/s Rai Shamsherjung Bahadur 24 ITR 1 (A11).

Income derived from running of a dairy, which is quite incidental to agriculture
and planting bushes in replacement of bushes that have died or become per-
manently useless.

CIT v/s Kokine Dairy, Ranggon 6 ITR 502.

Income from the sale of dried tobacco leaves has been held to be agricultural
income since tobacco leaves are ordinarily dried to make them fit for sale.

CIT v Katragadda Madhusudhana Row 6 ITR (Mad.)

Rent for agricultural land received from sub-tenants by the mortagagee in pos-
session is agricultural income.

Raja Mustafa Ali Khan CIT 161 ITR 330 (P.C.).

Sum received from an insurance company for damage caused by hailstorm to
the green leaf forming part of the assessees tea garden is agricultural income.

CIT v Gupta (Tea) P. Ltd. 74 ITR 337.

When there was no market for the sugarcane produced by the assessee in its
natural condition, income received by the assessee from sale of jaggery was
exempt from tax as agricultural income.

CIT v H.G. Date 82 ITR 71 (Bom.).

Nazar or Salami paid by a tenant to the landlord for the recognition of a non-
transferable holding is rent or revenue and is exempt from tax.
Nawabzadi Mehar Bano Khanum v Secretary of State 2 ITC 99.
Income derived from toddy is agricultural income when it is received by the
actual cultivator, whether owner or lessee of the land on which the trees grow. If
the income is obtained by a person who has not produced the trees from which
the toddy is tapped or has not done any agricultural operation whereby those
trees have been raised, it is not agricultural income.

CIT v Yagappa Nadar ILR 50 Mad 923.

Weighing charges levied by a landlord from his tenants in addition to the rent
under agreement entered into with the tenant are agricultural income.

The Probynabad stud farm, 4 ITR 114 (Lah).

Following incomes though connected with land are not agricultural incomes
Income from sale of wild grass, bamboo and tree of spontaneous growth.

Rani Tara Kumari Devi v CIT 14 ITR 787.

Income derived from land used for stone quarries.

Raja Durga Narain v CIT 15 ITR 235.

Income from land used for brick making or brick kiln purposes.

Kuer v CIT 5 ITC 42 (Pat).

Income from land used for holding weekly (or other) markets.
There are certain incomes which are neither wholly agricultural in nature nor
can they be said to arise from business. On the other hand they include some
elements of agriculture and some those of business. Profits of a sugar mill
which grows its sugarcane can be cited as one of the examples.
 BIBLOGRAPHY

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