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

Agricultural income" means

1. any rent or revenue derived from land which is situated in India and is used for agricultural purposes;
2. any income derived from such land by
   1. agriculture; or
   2. 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
   3. 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;
3. 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
   1. 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
   2. 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
      1. 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
      2. 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