PROPOSED AGRICULTURAL ACTIVITY

The purpose is to start a venture related with Agriculture activity

which presently enjoys 100% Income Tax exemption in India.

A. Agricultural land be hired on rental basis and cultivation of

High Value Agricultural products effected on such land by
ourselves. The proposed crops would be Saffron in Kashmir &
Hops and other exotic medicinal flowers and plant materials
in Himachal and Uttaranchal.

B. Collaborative farming be done with agricultural land owners

in different states, wherein genetically modified plants,
seeds and other input ingredients along with technical
know how is provided to the land owners on profit sharing
basis under a legal agreement.

1. Can the activities at A & B above be terms as agriculture

activities and the income generated from this activity
termed as tax free.

Ans. Yes, both activities are agricultural activities.Agricultural

income as defined u/s 2(1A)(b)(i) is exempt u/s 10(1) of the
Income Tax Act 1961, Hence tax free.

2. What are necessary documents to be maintained to prove

that the income is genuinely from Agricultural source.

Ans. Onus is on Assessee.The assessee has to place before the

income tax authorities proper material which will enable them to
come to a conclusion that the income which is sought to be
assessed is agricultural income.
 a) All documents like Pass Book,Land Patta,Chitta
Adangal and other

relevant documents.

b) Information on extent of Land owned ,Nature of crops

raised etc.

3. Is there any endorsement required from local Revenue

Authorities, relating with the activities( this may be difficult
due to reluctance on the part of land owners as the law “
LAND TO TILLERS” is applicable in the state of Jammu &
Kashmir)

4. Can a partnership firm get involved in the above said

activity. If yes, what documents will be required.

Ans. There are no restrictions in doing agricultural business in a

partnership.

5. Since the proposed activity is mostly in J&K state, can the

partnership deed be registered in Delhi.

Ans. Partnership Deed can be registered in Delhi.

6. Is it necessary to file a separate income tax return for the

agriculture income, since the proposed partners are already
filing returns for non agriculture income and are in the
highest bracket of Income Tax.

Ans. No separate income tax return is required, at the time of

filing the return

of partnership firm agricultural income is added.

 7. Are books of Account necessary to be maintained for
Agriculture activity

Ans. Yes, Books of accounts are necessary to be maintained.

8. Since the Agro products will be of very high value, any

special precaution to be taken for justification of such high
value transactions/ profits.

Ans. There should be proper maintenance of accounts as well as

proper documentation.

Agriculture Income

In India Agriculture income is tax free.Following information will help the readers in
planning their Agriculture income.

Rent or Revenue
As per the Income Tax Act, "Rent" is described as periodical or pre-determined
payment in cash or kind, while "Revenue" implies a sharing agreement depending on
agricultural produce.

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.

Thus, while rent on land being tilled will be treated as income, interest on late payments
is taxable. Owners of agricultural land, tenants who have sub-leased the land and
mortgagees of such land - all enjoy tax-free agricultural income.

With SEBI cracking down on plantation companies, a lot less is heard nowadays on that
front. As these companies were offering tax-free income, many urban residents were
attracted to such schemes for it was their only way of earning agricultural income. What
needs to be examined here is whether the buyer gets leasehold rights to the land, or to
some trees, or whether he gets rent. If the scheme provides for the investor owning the
trees or getting leasehold rights on the land, then it is considered to be agricultural
income, and hence tax-free. In the absence of either of the two, any other income is
considered non-agricultural income, chargeable to tax.

Agricultural operations
All tillers (whether a tenant or sub-tenant of the land) are deemed as agriculturists and
enjoy freedom from tax. Processing of agricultural produce to make it fit for sale in the
markets is also covered under the ambit of agricultural income. Here, ownership of the
land is not a necessity.

In many cases, raw agricultural produce may not fetch the right market price. To make it
marketable, further processing may be necessary. Even though the final objective of the
processor is to sell the produce at a higher price, such sales are treated as agricultural
income. But if the farmer buys processed product and sells at a profit, such income will
be taxed.

Further, if substantial value addition is involved (with the whole character of the primary
produce undergoing a sea change), the entire operation is not treated as agricultural
income. In such cases, the process will be broken down into primary, secondary and
tertiary activities. While the primary and secondary activities will be treated as
agricultural income, the rest will be treated as business income (taxable).

Similarly, if you get tempted to get into lumberjacking or cutting down a large growth of
trees for tax-free profits, you could be in for a nasty shock. This income will not be
treated as agricultural income, as your involvement lies only in cutting, sawing and
selling of the trees etc and such profits will be taxed. Activities such as cultivation, soil
treatment and others associated with farming have to be indulged in for such an activity
to be non-taxable.

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 are subject to tax.

Sale of agricultural land

Earlier, profit on sale of agricultural land was exempt from tax. But now, agricultural land
situated in an urban area or within a distance of 8 km from any notified municipal or
cantonment board area is considered a capital asset. Thus, profit from the sale of such
land is liable to be taxed as a capital gain. But agricultural land outside the purview of
the 8 km limit will be deemed to be in a rural area. Thus, profit from sale or transfer of
such land would be considered tax-free.
Although agricultural income is fully exempt from tax, individual assesses are required
to club agricultural income along with other sources of income while filing returns based
on the specific slab rates. Resultantly, the rate of taxation is higher for them. The
methodology followed for calculating assessees' tax liability with agricultural income is:

• Tax is first calculated on the assessee's net agricultural income plus total non-
agricultural income.

• Tax is then calculated on the basic exemption slab increased by the assessee's
net agricultural income.

• Amount of tax payable by the assessee is the difference between the above two

This methodology is followed only if assessee's non-agricultural income is in excess of

the basic exemption slab (Rs 50,000 for assessment year 1999-2000) and agricultural
income is higher than Rs 600. Be careful while filing returns and clearly mention
agricultural income. Any discrepancy can be met with severe fines and penalties. Also,
all receipts of such income and land records should be kept at hand to show the
authorities in case of enquiries.

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 rent-in-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:
Provided that
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 store-house, 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 according to the last
preceding census of which the relevant figures have been
published before the first day of the previous year ; or
B. in any area within such distance, not being more than eight
kilometres, from the local limits of any municipality or cantonment
board referred to in item (A), as the Central Government may,
having regard to the extent of, and scope for, urbanisation of that
area and other relevant considerations, specify in this behalf by
notification in the Official Gazette.

Explanation: For the removal of doubts, it is hereby declared that 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 ;]

Definition of agriculture:

'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 - CIT v. Raja Benoy Kumar Sahas Roy
[1957] 32 ITR 466 (SC). n The word 'agriculture' means the performance of operations
like tilling of the land, sowing of the seeds or planting in order to raise products of some
utility. The nature of the products raised on the land is immaterial. The word 'agricultural'
means 'of or pertaining to agriculture; connected with husbandry or tillage of the ground'
- Smt. Manyam Meenakshamma v. CWT [1967] 63 ITR 534 (AP)/Syed Rafiqur Rahman
v. CWT [1970] 75 ITR 318 (Pat.).
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 -
Beohar Singh Raghubir Singh v. CIT [1948] 16 ITR 433 (Nag.).

AGRICULTURAL INCOME - ENTRY 82 OF THE UNION LIST AND ENTRY 46 OF

THE STATE LIST OF SEVENTH SCHEDULE TO THE CONSTITUTION

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 - J.
Raghottama Reddy v. ITO [1987] 35 Taxman 298 (AP).

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 - Raza
Buland Sugar Co. Ltd. v. CIT [1980] 123 ITR 24 (All.).

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. That sub-clause states, 'any rent or revenue derived
from land...'. 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 - Manubhai A. Sheth v. N.D. Nirgudkar, Second ITO [1981] 128 ITR 87 (Bom.).

DERIVED - SUB-CLAUSE (a)

The word 'derived' is not a term of art. Its use in the definition indeed demands an
enquiry into the genealogy of the product. But the enquiry should stop as soon as the
effective source is discovered. In the genealogical tree of the interest land indeed
appears in the second degree, but the immediate and effective source is rent, which has
suffered the accident of non-payment. And rent is not land within the meaning of the
definition - CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 (PC).

REVENUE DERIVED FROM LAND - SUB-CLAUSE (a)

To give the words 'revenue derived from land' the unrestricted meaning apart from its
association or relation with the land, would be quite unwarranted - Mrs. Bacha F.
Guzdar v. CIT [1955] 27 ITR 1 (SC).

SUCH LAND - SUB-CLAUSE (b)

The expression 'such land' in section 2(1A)(b) refers back to the land mentioned in
clause (a) and must have the same quality - Raja Mustafa Ali Khan v. CIT [1948] 16 ITR
330 (PC).

'MARKET' AS OCCURRING IN RULE 7 OF 1962 RULES

'Market' in the context of rule 7 does not mean an open market where buyers and
sellers get together for the purpose of purchase and sale of goods - Thiru Arooran
Sugars Ltd. v. CIT [1997] 93 Taxman 579/227 ITR 432 (SC).

PRODUCED ORDINARILY SOLD IN THEIR RAW STATE - RULE 7(2)(a) OF 1962

RULES

'Produce ordinarily sold in their raw state' must only mean the kind of produce which are
ordinarily sold. The phrase is not to be applied according to the individual fact-situation
of each case, but according to the nature of the produce - CIT v. Thiru Arooran Sugars
Ltd. [1983] 144 ITR 4 (Mad.).