Direct
Taxation
Agricultural
Income and Tax Liability
Part A: Discussion about what is agricultural income
and its tax treatment as per the provisions of the Income Tax Act, 1961 along with
the methodology of computing tax liability when the taxpayer has both agricultural
and non-agricultural incomes.
Part B: 5 Illustrations with Solutions.
Definition:
Article 270 of the Constitution
of India empowers Government of India to collect tax on income other than
agricultural income. Agricultural income has been placed in the State list and
as such the Central Government cannot levy tax on agricultural income.
As per Section 2(1A) of the
Income Tax Act, 1961, the term 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 any agricultural land by agricultural operations, such as −
(i) The 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 (ii)
above.
(c) Any income derived
from any farm building provided the following conditions are
satisfied −
(i) The building is owned and occupied by the
cultivator or receiver of rent-in-kind as a landlord or occupied by the cultivator as a tenant;
(ii) The building is on or in the immediate
vicinity of land (which is situated in a rural area) and is used for
agricultural purposes; and
(iii) The building is used by the cultivator or
receiver of rent-in-kind as a dwelling house or a store house.
It may be pointed out
that u/s 10(1) of the Income Tax Act, 1961 agricultural income,
covered by the aforesaid definition, is exempt from income-tax. However,
in case of certain categories of assessee e.g. individuals and HUFs having
income more than maximum amount not liable for tax, agricultural income is
taken into consideration to determine tax on non-agricultural income.
Essential Conditions:
Agriculture not
involving any basic operation like tilling, sowing or dissemination of seeds
and planting on land would not constitute agriculture merely because they have
relation or connection with land. Term agriculture does not include breeding
and rearing of live stock, dairy farming, butter / cheese making, poultry, etc.
[CIT v/s Raja Benoy Kumar Saha Roy (1957) 32 ITR 466 (SC)]
Agricultural
Incomes:
1.
Income of the owner by performing slaughter
tapping himself and then selling the rubber.
2.
Lease rent received for leasing out land for
grazing of cattle required for agricultural pursuits.
3.
Compensation received from an insurance
company for damage caused by hail storm to the green leaf forming part of
assessee’s tea garden.
4.
Income derived from the sale of seeds derived
from cultivation by the assessee.
5.
Income by way of sale of firewood and grazing
permits and charging compounding fee for trespasses into the plantation.
6.
Profit on sale of standing crop or the
produce after harvest by a cultivating owner or tenant of land.
7.
Rent for agricultural land received from
sub-tenants by mortgagee-in-possession.
8.
Income from growing flowers and creepers.
9.
Salary received by a partner for rendering
services to a firm which is engaged in agricultural operations.
10.
Interest on capital and share of profit received
from the firm engaged in agricultural operations.
Non
Agricultural Incomes:
1.
Dividend received from company
having only agricultural income is not agricultural income for a shareholder.
2.
Income from conversion of
sugarcane into Gur is not agricultural income.
3.
Income from agricultural lands situated
outside India is not agricultural income.
4.
Interest on arrears of rent in
respect of agricultural land is not agricultural income.
5.
Income from sale of forest
trees, fruits and flowers growing on land naturally, spontaneously and without
the intervention of human agency is not agricultural income.
6.
Income from sale of wild grass
and reeds of spontaneous growth is not agricultural income.
7.
Profit accruing from the purchase
of a standing crop and resale of it after harvest by a merchant, having no
interest in land except a mere licence to enter upon the land and gather upon
the produce is not agricultural income.
8.
Remuneration received by managing agent at a
fixed percentage of net profit from a company having agricultural income is not
agricultural income.
9.
Interest received by a money-lender in the
form of agricultural produce is not agricultural income.
10.
Income derived from land let out
for storing crops is not agricultural income.
11.
Any loan obtained by a shareholder out of accumulated
profits of the company having only agricultural income, which is liable to be
treated as deemed dividend, is not
agricultural income.
12.
Commission earned by a broker
for selling agricultural produce of an agriculturist is not agricultural
income.
13.
Any capital gain arising from the transfer of
agricultural land is not agricultural income.
14.
Income from fisheries is not
agricultural income.
15.
Income from poultry/dairy farming
is not agricultural income.
Agricultural Income and Income-tax:
(i) Provisions u/s 10(1) - Section 10(1) provides that agricultural
income is not to be included in the total income of the assessee. The reason
for totally exempting agricultural income from the scope of central income tax
is that under the Constitution, the Parliament has no power to levy a tax on
agricultural income.
(ii) Indirect way of taxing agricultural income - However, since 1973,
a method has been found out to levy tax on agricultural income in an indirect
way. This concept is known as partial
integration of taxes. It is applicable to individuals, HUF, AOP,
BOI and artificial juridical persons. Two conditions which need to be satisfied
for partial integration are:
1. The net agricultural income of
the taxpayer should exceed Rs 5,000 for the year, and
2. Non-agricultural income of the
taxpayer should exceed the amount of basic exemption limit.
Computation
of tax where there are both agricultural and non-agricultural incomes
Step 1:
Add non-agricultural
income with net agricultural income. Compute tax on the aggregate amount.
Step 2:
Add net agricultural
income and the amount of basic exemption limit available to the assessee (i.e. Rs
2, 50,000/Rs 3, 00,000/Rs 5, 00,000 as applicable). Compute tax on the
aggregate amount.
Step 3:
Deduct the amount of income
tax calculated in step 2 from the amount of income tax calculated in step 1
i.e. Step 1 − Step 2.
Step 4:
Deduct any applicable
rebate from the amount of tax obtained in step 3.
Step 5:
Add surcharge, if
applicable, to the amount obtained in step 4 above.
Step 6:
The sum so arrived at
shall be increased by health and education cess.
These steps are
applicable whenever tax liability is to be worked out (e.g. self-assessment
tax, advance tax, tax on regular assessment).
Tax treatment of income which
is partly agricultural and partly from business:
For disintegrating a composite business income which
is partly agricultural and partly non-agricultural, the following income tax
rules are applicable:
|
Rules |
Income |
Non-Agr |
Agr |
|
7A |
Sale of centrifuged latex or cenex or latex based
crepes (such as pale latex crepe) or brown crepes (such as
estate brown crepe, remilled crepe, smoked blanket crepe or flat bark crepe)
or technically specified block rubbers manufactured or processed from field latex or coagulum obtained from rubber plants grown by the seller in
India
|
35% |
65% |
|
7B(1) |
Sale of coffee grown and cured by seller |
25% |
75% |
|
7B(1A) |
Sale of coffee grown, cured, roasted and
grounded by seller in India with or without mixing chicory or
other flavouring ingredients |
40% |
60% |
|
8 |
Growing and manufacturing tea in India |
40% |
60% |
Non-Agr = Non-Agricultural
Agr = Agricultural
Important
note:
As per Rule: 7,
the market value of any agricultural produce, raised by the assessee or
received by him as rent-in-kind and utilised as raw material in his business,
is deductible for disintegrating a composite business income which is partly
agricultural and partly non-agricultural. No further deduction is permissible
in respect of any expenditure incurred by the assessee as a cultivator or
receiver of rent-in-kind.
Format for Computation of Tax Liability of Mr/Mrs………… (Age
less than 60 years)
For the A. Y. 2022 - 23
|
Particulars |
Rs |
Rs |
|
Gross Total Income (excluding Agricultural Income) |
|
|
|
LESS: Deduction u/s 80C to 80U |
|
|
|
Net Income
(Non-agricultural) |
|
|
|
(a) Tax on total income (including net
agricultural income) i.e. Tax on............................. |
|
|
|
Up to Rs
2,50,000 |
Nil |
|
|
5% of Rs
2,50,000 |
|
|
|
20% of Rs
5,00,000 |
|
|
|
30% of Rs
Balance Amount |
|
|
|
(b) Tax on total of net agricultural income and
basic exemption i.e. Tax on.................................. |
|
|
|
Up to Rs
2,50,000 |
Nil |
|
|
5% of Rs
2,50,000 |
|
|
|
20% of Rs
5,00,000 |
|
|
|
30% of Rs
Balance Amount |
|
|
|
Income
Tax [a – b] |
|
|
|
ADD: Surcharge [Surcharge is nil, If Net Income (Non-agricultural) ≤
Rs 50,00,000] |
|
|
|
Income Tax and Surcharge (T) |
|
|
|
LESS: Rebate u/s 87A (Available only to a resident
individual) [100% of Income Tax or Rs 12,500, whichever is less] [Rebate is available, If Net Income
(Non-agricultural) ≤ Rs 5,00,000] |
|
|
|
Income Tax after Rebate (T) |
|
|
|
ADD: Health and education cess [4% of (T)] |
|
|
|
Tax Liability |
|
|
|
Tax Liability (Rounded off u/s 288B) |
|
|
Direct
Taxation
Agricultural
Income and Tax Liability
Selected
Problems and Solutions
Illustration: 1
For
the assessment year 2022-23, net agricultural income of Mrs. X (age: 37 years)
is Rs 8, 10,000 and non-agricultural income is Rs 4, 78,300. Mrs. X pays Rs
20,000 as life insurance premium (sum assured: Rs 3, 00,000) on the life of her
major son. Determine her tax liability.
Illustration: 2
For the assessment year 2022-23, net agricultural
income of Mrs. X is Rs 9, 46,000. Her non-agricultural income is Rs 4, 60,000.
Determine her tax liability on the assumption that she deposits Rs 70,000 in
public provident fund account and invests Rs 5,000 in NSC VIII Issue. None of
the parents of Mrs. X is a senior citizen.
Illustration: 3
For the assessment year 2022-23, Mr. X, an individual (age: 62 years),
submits the following information:
|
Particulars |
Rs |
|
Income
from House Property |
6,25,000 |
|
Income
from the business of growing and manufacturing coffee in India (gross) |
5,00,000 |
|
Expenditure
on earning coffee income |
2,000 |
Determine the tax liability of Mr. X for the
assessment year 2022-23 on the assumption that he contributes Rs 60,000 towards
public provident fund.
Illustration: 4
For the assessment year 2022-23, Mrs. X (date of
birth: 19.9.1975) furnishes the following information:
|
Particulars |
Rs |
|
Gross agricultural income |
12,21,000 |
|
Expenditure on earning agricultural
income |
90,000 |
|
Non-agricultural income |
22,50,000 |
Determine
the tax liability of Mrs. X for the assessment year 2022-23 on the assumption
that she contributes Rs 80,000 towards public provident fund and pays insurance
premium of Rs 90,000 on her life insurance policy (sum assured: Rs 3,00,000 and
the policy taken in June, 2021).
Illustration: 5
Find out the tax liability of X (26 years) from the
following data for the AY 2022-23:
|
Particulars |
Rs |
|
Agricultural business income from
Nepal (net profit on sale of crops) |
20,000 |
|
Agricultural business income from
Sikkim |
1,30,000 |
|
Share of profit from a firm (out of
agricultural income in India) |
60,000 |
|
Interest from the aforesaid firm |
30,000 |
|
Long term capital gain from sale of
agricultural land in Delhi |
76,000 |
|
Salary from MP Agricultural University
(Rs 80,000 per month) |
9,60,000 |
|
Interest on bank fixed deposit |
62,000 |
|
Loss from growing and manufacturing
tea in India |
(1,00,000) |
|
Life insurance premium (sum assured: Rs
2,00,000) on his own life |
10,000 |
|
Contribution towards university
provident fund |
57,000 |
Really, it is an outstanding and wonderful article. I learned everything about agricultural income and taxation of total income when it includes agricultural income.
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