Agricultural Income and Tax Liability
Agricultural income has been placed in the State list and as such the Central Government cannot levy tax on agricultural income.
Sec. 2(1A)provides definition of 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 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 raised or received by him, in respect of which no process has been performed
other than a process of the nature described in para (ii) of the sub-clause: (c) any income derived from any
building owned and occupied by the receiver of rent or revenue of any such land provided the following conditions
(i) the building should be on or in the immediate vicinity of land and is used for agricultural purposes;
(ii) the cultivator or receiver of rent-in-kind uses the building as a dwelling house or a store house; and
(iii) the land is assessed to land revenue or local rate or the land is situated within the jurisdiction of municipality/cantonment having a population of not less than 10,000 persons or within distance of not more than 8 k.m.
It may be pointed out that sec. 10(1) exempts from income-tax ‘agricultural income’ covered by the aforesaid definition.
However, in case of certain category of assessees e.g. individuals. HUFs having income more than maximum amount not liable for tax, ‘agricultural income’ is taken into consideration to determine tax on non-agricultural income.
Following are certain instances defining the scope of agricultural income.
Rent or revenue should be derived from land:
— 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 in the hands of recipient.
— Interest on arrears of cess or rent payable by a tenant to his landlord is no doubt revenue but it is not revenue derived from land and hence it is not agricultural income.
— Commission earned by a broker for selling agricultural produce of an agriculturist is not agricultural income.
— Any capital gain arising from the transfer of agricultural land is not treated as revenue derived from land and hence it is not agricultural income.
Income held as not derived from land:
— Mutation fees paid by tenant on succession to a holding by inheritance.
— Fees paid by tenants for renewal of leases and fees paid for recognising the distribution of holding on partition would not be income derived from land, since they are payments made for administrative services rendered by the landlord, akin to registration fees.
— Receipts from the supply of water tank in an agricultural land
Use of building or land for agricultural purpose:
— Any income arising from the use of land or building for any purpose (including letting for residential purpose or for the purpose of any business or profession) other than agriculture shall not be agricultural income.
— Any income attributable to farm house situated in urban areas will not be treated as agricultural income unless the land on which the farm house is situated is assessed to land revenue or any local rate. On the other hand, in case of farm house situated in rural areas, the income will be treated as agricultural income even where the land on which farm house is situated is not assessed to land revenue or any local rate.
Agriculture Income and Income-tax :
Agricultural income [Section 10(1)] –
(i) 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, unregistered firms, AOP, BOI and artificial persons.
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 satisfied:
1. The net agricultural income should exceed Rs 5,000/- for the previous year, and
2. Non-agricultural income should exceed the maximum amount not chargeable to tax. (e. g. In the case of every individual, being a resident in India upto Rs. 2,50,000
In the case of every individual, being a resident in India who is of the age of sixty years or more but less than eighty years at any time during the previous year upto Rs. 3,00,000
in the case of every individual, being a resident in India, who is of the age of eighty years or more at anytime during the previous year,— Upto Rs. 5,00,000
It may be noted that aggregation provisions do not apply to company, firm assessed as such (FAS), co-operative society and local authority. The object of aggregating the net agricultural income with non-agricultural income is to tax the non-agricultural income at higher rates
Tax calculation in such cases is as follows :
Add non-agricultural income with net agricultural income. Compute tax on the aggregate amount.
Add net agricultural income and the maximum exemption limit available to the assessee (e.g.Rs,250,000/3,00,000 & 5,00,000). Compute tax on the aggregate amount.
Deduct the amount of income tax calculated in step 2 from the income tax calculated in step 1
i.e. Step 1– Step 2.
Deduct any applicable rebate from the amount of tax obtained in step 3.
Add surcharge, if applicable, to the amount obtained in step 4 above.
The sum so arrived at shall be increased by education and higher secondary cess.
These steps are applicable whenever tax liability is to be worked out e.g. self-assessment tax, advance tax, tax on regular assessment)