Direct Taxation - Agricultural Income and Tax Liability

 

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.

Part A

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)

 

Part B

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.

 

Click here for Solution: 1 in PDF 

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.

 

Click here for Solution: 2 in PDF

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.

 

Click here for Solution: 3 in PDF

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).

 

Click here for Solution: 4 in PDF

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

 

Click here for Solution: 5 in PDF