TABLE OF CONTENTS

1.INTRODUCTION…………………………………………….…………………2

2.History………………………………………………………….………………...3

3.Meaning of Agricultural Income………………..………………………………..6

4.Exceptions…………………………………………..……………………………8

5.Section 54B……………………………..……………….……………………….9

6.Conditions………………………………………………………………………..9

7. Taxability of Agricultural income post amendment

by Finance (No.2) Act, 2014…………………………..……………………….11

8.Tax Saving Tips…………………………………………………………………12

9. Frequently Asked Questions…………………………………………..……….13

10.BIBLIOGRAPHY……………………………………....…………………….18

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 INTRODUCTION

Agricultural income earned by a taxpayer in India is exempt under Section 10(1) of the
Income Tax Act, 1961. Agricultural income is defined under section 2(1A) of the Income-tax
Act.As per section 2(1A), 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.

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It is contended here that agricultural income-tax has an important role in mobilising
financial resources from the agricultural sector and in imparting a measure of progression to
rural fixation. Contrary to the general belief, imposition of ceilings on land holdings does not
detract from the need for an agricultural income-tax. In the States which now levy
agricultural income-tax, the yield from the tax has grown more or less in proportion to total
tax revenues. Nor does the fact of small peasant proprietors predominating in the rural
economy render the tax inapplicable for administrative reasons. The technique of
presumptive assessment, already in use in the country for assessment of land revenue, can be
used to assess the tax liability of small holders.

HISTORY

IMPOSED for the first time in Bihar in 1938. The agricultural income tax in its infamy , was,
for obvious reasons, a great favourite with economists and also received support from official
bodies reporting on taxation.

See. for example, Government of Madras Land Revenue Reforms Committee, Second
Report. Ch 3. Pps 39-46 and Government of India . Taxation Enquiry Commission Vol 3, Pps
198-205 and Pps 222-221). By 1951 seven State, were levying this tax: Bihar 11938), Assam
11939). West Bengal (19-44). Orissa (1918) U P (1948), Hyde rabad (1950) and T C (1951).
Two more States, Rajasthan and Madras joined in 1954.

This tax was repealed in Hyderabad and U P in 1957 and in Rajasthan in 1960, but
after the reorganisation of States, it was introduced in Keral a and Mysore I in 1957 for land
under commercial crops only). At present therefore, seven States are again levying it, namely,
Assam, Bihar, Kerala, Madras. Mysore, Orissa and West Bengal. We may now go on to
examine the coverage and the structure of this tax. One of the basic factors which determine
the coverage and structure, and therefore, naturally, the yield from a tax on income is the
'concept of income' which is to be used as a tax base.

In the case of the agricultural income tax, therefore, the concept of 'agricultural
income' on which this tax is based, is crucial. For the purposes of agricultural income-
taxation, the definition of 'agricultural income' given in the Indian Income Tax Ac t 1922,
Section 2-(2) is usually accepted. Liberally interpreted this includes most incomes originating
from the rural sector, including in come from the practice of agriculture, income from various
allied services and rents on both land and buildings in this sector. The judicial interpretation

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of these provisions has therefore been fairly liberal, both in the interpretation of the coverage
of the agricultural sector, and in including in income, for the purposes of a State, all
agricultural income accruing to the residents of the State and not only the income originating
in the State itself.

However, in one important sector. viz agricultural income of companies, judicial

interpretation has tended to somewhat limit the scope of Guzdur agricultural income. In the
case of Mrs. Bacha F Guzdur, Bombay. Vs Commissioner of Income Tax Bombay 1, the
Supreme Court of Indi a ruled that dividend income received by an assessee is not
agricultural income.

Thus the shareholders of a company earning agricultural income, were not liable to
pay agricultural income tax, either themselves or by deduction at source.

Thus the States could collect agriculturl income tax from companies only by taxing them
directly. Most of the States levying agricultural income tax, therefore, amended their tax
structure accordingly. [See for example Govt of West Bengal. The West Bengal Agricultural
Income Tax (Amendment) Act. 1957]- Actually apart from Madras and Mysore, which also
levy this tax mainly on plantations, the other States have a separate Schedule for the taxation
of agricultural income of companies, and in the process of amending this portion of their
Agricultural Income Tax Acts they also raised the rates of this tax.

Two Broad Types

There are two broad types of agricultural income tax structures in India . We may call one the
'scheduler agricultural income tax' and the other the 'plantation., agricultural income tax,' To
the former category belongs the more general type of agricuItural income tax. As it is in
operation in Assam, Bihar, Orissa and West Bengal and as it was in operation before it was
repealed in U P, Rajasthan and Hyderabad and to the latter category belongs the tax as it is in
operation in the Southern States of Madras, Mysore and Kerala (although here a more
complicated pattern has evolved).

The 'schedular agricultural income tax provide, three different schedules of rates for
individuals, undivided Hindu joint families and joint stock companies and associations.
Companies and associations are normally more heavily taxed than individuals. This tax is
general in nature and covers the whole of agricultural income was defined above). These

1
1955 AIR 740, 1955 SCR (1) 876

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taxes were originally designed mainly to tax rental incomes from Zamindari estates, but now
also cover the returns accruing to larger farming and other units in the agricultural sector. The
"plantations" type of agricultural income tax is sometimes levied as a direct tax on the
agricultural incomes of all plantations as in Kerala and Madras or sometimes do an
agricultural income tax on commercial crops as in Mysore (In Kerala and Mysore this tax is
levied in combination with a Basic Land Tax).

This tax is an excellent arrangement for taxing the profits of plantations, which present very
easily locatable sources of agricultural income. Actually the profits from most of the products
of plantations, e g tea, coffee, rubber and tobacco, have been rising; because of price-rises as
a result of rising of home and export demand.

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 Meaning of Agricultural Income:

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

(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:

 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

 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

 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. (For instance, 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

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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 assesee 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. Both, 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

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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.

Note:

a. Agricultural income is considered for rate purpose while computing the tax liability
for Individual/HUF/AOP/BOI/Artificial Judicial Person.

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

Tax on sale of agricultural land: Before 1970, profit on the sale or transfer of all agricultural
land was considered rent or revenue derived from the land. Such profit was, therefore, tax-
exempt as agricultural income.

There were several favorable judgments of various High Courts on the issue. However, via a
retrospective amendment that took effect from April 1, 1970, land qualifies to be an
agricultural land if the prescribed conditions are satisfied. An agricultural land does not form
part of the definition of a capital asset and hence, there will be no capital gains on the sale of
such land.

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 Any other land not forming part of the above will be a capital asset and sale of the
same shall attract tax on capital gains subject to Section 54B, which is explained below.

Section 54B: Capital gain on transfer of land used for agricultural purposes not to be
charged in certain cases

Section 54B gives relief to a taxpayer who sells his agricultural land and acquires another
agricultural land from the sale proceeds.

Conditions to be satisfied to claim the benefit of this Section:

a. The assessee must be an individual or a HUF.

b. The agricultural land should have been used for agricultural purposes. It may be a long
term asset or a short term asset.

c. It must have been used either by the assessee or his parents for agricultural purposes in
atleast two years immediately preceeding the date on which the transfer of land took place.

d. The assessee should have purchased another land, which is being used for agricultural
purposes, within a period of two years from the date of sale.

Note: In case of compulsory acquisition, the period of acquisition of new agricultural land
will be determined from the date of receipt of compensation. However, as per Section 10
(37), no capital gain would be chargeable to tax in case of an individual or HUF if
agricultural land is compulsorily acquired under any law and the consideration of which is
approved by the Central Government or RBI and received on or after 01-04-2004.

e. The whole amount of capital gain must be utilised in the purchase of the new agricultural
land. If not, the difference between the amount of capital gain and the new asset will be
chargeable as capital gains and the tax will be computed accordingly.

f. The new asset purchased should not be sold within a period of three years from the date of
acquisition.

g. If sold, the cost of the new asset will be reduced by the amount of capital gain (claimed as
exemption under Section 54B) for the purpose of computing tax on capital gains.

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h. Where the amount of capital gain is not utilised by the assessee for the purchase of the new
asset before the due date of furnishing his return of income, he may deposit it in the Capital
Gains Account Scheme (CGAS) of any specified bank.

i. In such a case, the cost of the new asset shall be deemed to be the amount already utilised
by the assessee for the purchase of the new asset together with the amount deposited in the
CGAS.

j. If the deposited amount is not utilised for the purchase of the new asset within the specified
period, then the unutilised amount shall be taxed as income in the year in which the period of
two years from the date of sale of the original asset expires.

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Taxability of Agricultural income post amendment by Finance (No.2) Act, 2014

Agricultural income is considered for rate purposes while computing the income tax liability,
if following two conditions are cumulatively satisfied:

i. Net Agricultural income exceeds Rs. 5,000/- for previous year, and

ii. Total income, excluding net Agricultural income, exceeds the basic exemption limit.

Note: If aggregate agricultural income of the assessee is up to Rs. 5,000/- during FY 2018,
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.

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 82500/- for an individual who is
below the age of 60 Years during the P.Y. 2017-18.

♠ 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 5000/-.

♠ Third, subtract the Tax computed in Second step from the Tax computed in First step =
INR 77,500/-. Thus, this is the income Tax liability subject to deductions, Education Cess
etc., as applicable.

This process of computation is, however, followed only if the assessee’s non-
agricultural income is in excess of the basic exemption slab.

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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.

To conclude, there is enough scope for taxing income from activities which are non-
agricultural in nature.

In fact, it is well known that agriculturists themselves do not have taxable income,
taking into account the fact that when it is divided amongst family members who are
involved in agricultural operations, each one of them would have income within the
exemption limit.

However, there are hundreds of thousands of middlemen like wholesalers, retailers,

distributors, etc. who earn substantial income from trading in agricultural produce as well as
fruits, flowers, etc. Such income or profits are fully taxable under the present law and,
therefore, if concerted efforts are made by the Tax Department to recover tax from them, the
need for widening the tax base to rope in agriculturists and farmers, would be eliminated.

Tax Saving Tip:

Form a company or a partnership firm for the sole purpose carrying on your agricultural
operations. As indirect effect of agricultural income is not applicable in a company or a firm,
the complete amount would become exempt from taxation.

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Frequently Asked Questions:

1. Does interest on arrears of rent qualify as agricultural income and will this be exempt
from tax?

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. If agricultural produce is processed to make it marketable at a place other than the

agriculture land, then the amount charged for such processing will be an agricultural
income or not?

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. Say for
example trashing of wheat, mustard, etc is part of agricultural operations only and the amount
recovered will be treated as agricultural income only no matter processing takes place on the
land itself or some other place.

But in certain cases like in the case of tea, coffee, sugarcane where a major processing
(change of 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. What if agriculture operation is carried 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.

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4. If any industrial organization grows crops and sells half of the produce as raw material
in the market and remaining (further processed) as finished goods, what will be the tax
treatment?

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 half of the produce as raw material in market and
remaining (further processed) as finished goods, the income which is earned on the first half
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, 7B & 8 of Income tax Rules deals with such type of
income. Rule 7A deals with Income from manufacture of rubber, 7B deals with Income from
manufacture of coffee and Rule 8 deals with Income from manufacture of tea. 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 my agriculture farm, I have 5 cows in Pune (Maharashtra). The product being milk is
the main produce, and not a byproduct. Is this income an agriculture income or a taxable
income? (This milk is sold to dairy product plant in nearest Co-op Society).

Dairy farming is not an agricultural income.

6. Why rent on land is treated as agricultural income?

Rent received from agricultural land used for agricultural purpose is treated as agricultural
income. This is prescribed by the law.

7. I have a business income of Rs 3,00,000 and agricultural income of Rs 4,00,000. These

figures relate to the Assessment year 2019-20. How will my tax liability be computed?

Agricultural income is exempt under Section 10(1) of the Act so long as the income is
derived from agricultural land situated in India. This income is, however, included merely for
rate purposes and rebate is allowed on the same in accordance with the Finance Act. The
inclusion of Agricultural income for rate purpose is only required if total income( excluding

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agricultural income) of an individual exceeds Rs. 2,50,000/- (assessee being aged less than 60
years of age).

Particulars Amount in Rs.

Business Income 3,00,000/-

Agricultural Income 4,00,000/-

Income Including Agricultural Income 7,00,000

Tax on 7,00,000/- 52500/-

Less: Rebate on Agricultural Income

(Tax on Rs. 4,00,000 + Rs. 2,50,000 being basic exemption) 42500/-

Net Tax Payable 10,000/-

Add: Health & Education Cess @ 4% 400/-

Total tax Payable 10,400/-

8. Can Interest on Crop Loan be claimed as an exemption?

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.

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9. If an assessee sells the fruits of the trees planted by him around his home, will the
income so earned be agricultural income?

The trees planted by him 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.

10. I have taken certain agricultural land on lease and crops are being grown on the said
land for many years. Now the said land alongwith growing crops has been acquired by the
Govt. The Govt. paid separate compensation for the land and the crop. Whether the
compensation received in lieu of crop is agriculture income or not? Further note that
assessee has not further invested the amount in agriculture land received as compensation
against 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.

11. Whether income earned from export of agricultural produce is exempt from income
tax?

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.

12. I have an income of Rs.1,45,000 from my business and an agricultural income of Rs.
8,40,000. Do I need to file the return of income?

The process of computation of tax liability is followed only if the assessee’s non-agricultural
income is in excess of the basic exemption slab. In this case, the income from business of the
assessee is lower than the basic exemption limit. However, the returns have to be filed with
regards to the disclosure of agricultural income.

13. An assessee wants to buy farms which bear coconut trees, on a lease for a period of one
year. State whether sale of coconuts is said to be an agricultural income or not?

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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.

14. I had sold an agricultural land in a rural area, which is outside jurisdiction of the
Municipal Authority. Whether the sales proceeds are exempt or taxable?

The scope of agricultural income excludes the revenue which is earned by transfer of
agricultural land not falling under the definition of Capital assets u/s. 2(14). By definition of a
capital asset under Section 2(14), an agricultural land in an area falling out of jurisdiction of
the Municipal Authority (which has a population of more than 10,000), is not a capital asset.
Section 10(37) allows income from transfer of such a land to be classified as a capital gain
via clause (i). Under Section 54B, a capital gain arising out of this transaction will be exempt
provided the conditions (mentioned earlier in this article) are satisfied.

15. Is receipt from sale of rubber trees an agricultural income?

Yes, 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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 BIBLIOGRAPHY

BOOKS

TAXATION LAWS – by K. Rai

DIRECT TAX LAW & INTERNATIONAL TAXATION - by T.N.Manoharan

TAXMANN – Vinod. K. Singhania

SITES

https://www.coverfox.com

https://www.epw.in

https://www.gconnect.in

https://taxguru.in

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