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AGRICULTURAL INCOME

What is agricultural Income


Section 2(1A)

(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 agricultural or by the process employed to
render the produce fit for market or by sale of such produce by a cultivator or receiver of
rent-in-kind;
(c). any income derived from a building provided following conditions are satisfied: -
(i). The building is situated on or immediate vicinity (surrounding area) of the
agricultural land.
(ii). It is occupied by the cultivator or receiver of rent – in-kind.
(iii). It is used as dwelling house, store house or out house and
(iv). The land is assessed to land revenue or it is not situated in specified area.
What is specified area
(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 kilometers, 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.

Points to Note

1. The Land must be an agricultural land and it should be situated in India. If agricultural
Land is not situated in India then the income will be chargeable as business income and
not agricultural Income.
2. The agricultural income of the cultivator as well as the rent (both in money and in
kind) received by the owner of the Agricultural land is exempt from tax.
3. The agricultural income of the cultivator or the receiver of rent in kind to make the
agricultural produce fit to market is also exempt from tax. See here the tobacco can not be
sold without drying it hence the activities till drying of tobacco will be treated as
agricultural activity but the Industrial activity like ginning and pressing of cotton can not
be included because cotton can be sold in the market without separating it from the cotton
seed.
4. The agricultural activity involves the basic operation as well as subsequent operations
also. The operation on land by the cultivator on the land like tilling (Plough, dig,
cultivate), Sowing the seeds and similar operation of the land are called basic operations.
See here that the Basic agricultural operations are made on the land itself and not on the
growth of the land i.e. on the crop. The subsequent operation on the crop are weeding
(removing the wild plants), digging the soil around the growth and operations to preserve
the growth.
The basic operations performed by the cultivator on the land are surely the part of
agricultural activity for the purpose of this exemption but subsequent operations will only
form part of the agricultural activity if these are performed in continuation of the basic
operations by the cultivator or the receiver of rent in kind.
If the standing crop is purchased by a person and subsequent operations are done by him
then the income will not be treated as agricultural income.
The principal for determination of basic and subsequent operations have been described
in the case of CIT vs. Raja Benoy Kumar Sahas Roy by Hon. Supreme court of India .

What is added by Finance Act. 2008


The finance Act, 2008 has added the following two types of nursery activities in the
definition of Agricultural income for which there was a controversy before this
enactment:-
1. Sapling:-Develop the small trees and sale them for further growth.
2. Seedling: - Develop the seeds.

Income which is partially agricultural and partially from business

Rule 7 If agricultural produce cultivated is used as raw material in the business of


cultivator, he can deduct the market price of such raw material from the
income of his business.
where agricultural produce is not ordinarily sold in the market in its raw state
or after application to it of any process aforesaid, the aggregate of

(i) the expenses of cultivation;
(ii) the land revenue or rent paid for the area in which it was
grown; and
(iii) such amount as the Assessing Officer finds, having regard to all
the circumstances in each case, to represent a reasonable profit.

Special treatment for Rubber, Coffee and Tea

In respect of composite activity of Growing and manufacturing of certain products the


ratio of Agricultural Income and the Business income is determined by the Income Tax
Rules and these are as under:-

Rule Produce Agricultural Income Business Income


7A Rubber 65% 35%
7B Coffee Grown and 75% 25%
cured
7B Coffee Grown, cured, 60% 40%
roasted and grounded
8 Tea 60% 40%

Partial integration of Agricultural Income for Tax Purpose

The Finance Act, 1973 introduced for the first time a scheme of partially integrated
taxation of non-agricultural income with incomes derived from agriculture for the
purposes of determining the rate of income-tax that will apply to certain non-corporate
assessees. The scheme is since continued by the Annual Finance Acts. The provisions
applicable for the assessment year 2008-09 are contained Part IV of the First Schedule to
the Finance Act, 2008.

How to calculate Tax

(a). Tax on total Income + Agricultural Income


(b). Tax Agricultural Income + Basic Exemption Limit.
(c). Tax payable by assessee= (a) - (b).

Points to Note

1. If Total Income is below taxable limit then agricultural Income will not be included
even for calculation of tax purpose.
2. In case of Individual , HUF , AOP/BOI and Every other artificial person (except where
taxability is on maximum marginal rate) the agricultural income is included to calculate
the tax with total Income
2. In case of Companies, firm and other assesses where taxability is on fixed rate there is
no need to calculate the tax on Agricultural Income.

Rate of Tax

For Individual, HUF, AOP/BOI and other artificial person the rate of tax for assessment
year 2008-09 is as under:-

Up to 1.10 Lakhs (This is the Basic NIL


exemption Limit*)
Above 1.10 Lakhs to 1.50 lakhs 10%
Above 1.50 Lakhs to 2.50 lakhs 20%
Above 2.50 lakhs 30%
The basic exemption Limit for 1.45 lakhs
Female(Lady ) assesses
The basic exemption Limit for senior 1.95 Lakhs
citizens(having age of 65 years or more )
The net effect of calculation

The net effect of calculation of tax when the agricultural income is also earned by the
assessee along with the total income (in excess of Basic exemption Limit) is to tax the
Total income at higher rate if the total income got the second or third slab due to
inclusion of the Agricultural Income. Let us try to understand this with the help of an
example.

The total Income is 1.35 lakhs and Agricultural income is Rs. 50000.00. Now the Total
income and Ag. Income is Rs. 1.85 lakhs and the Basic exemption limit and Ag. Income
is Rs. 1.60 Lakhs. First we consider the Basic exemption Limit and Ag. Income and after
that tax the Balance of Total Income which is Rs.25000.00 and Taxable now @ 20%
hence the net tax is payable Rs. 5000.00 instead of Rs. 2500.00 which is payable on 1.35
lakhs of Income. This is alternate method of calculating and understanding the tax on
agricultural Income.
The tax can be calculated as under:-
Tax on Ag. Income and Total Income i.e. on 1.85 lakhs= 11000.00
Less:-Tax on Basic Ex. Limit + Ag. Income = 1.60 lakhs= 6000.00
Tax payable= 5000.00
This result can be tallied from the result mentioned in alternate method.

Instances of Agricultural income

1. Sale of Replanted trees.


2. Fees for Grazing: - The fees colleted from the owners of cattle normally used for
agricultural purpose for allowing them to graze on forest land covered by jungle and
grass grown spontaneously.
3. Rent for agricultural land received from sub-tenant by mortgagee in possession.
4. Compensation received from Insurance companies for destruction of Crop.
5. Income from growing Flowers and creepers (climbing plants).

Examples

Ex.1:-Mr. Kishan Singh has total Income of Rs. 1, 40,000.00 and his agricultural Income
is Rs. 2.50 Lakhs. Calculate his tax Liability.
Ans. Total Income + Agricultural Income= 1.40 Lakhs + 2.50 Lakhs= 3.90 Lakhs
Basic Exemption Limit + Agricultural Income = 1.10 Lakhs + 2.50 Lakhs=3.60 Lakhs
(a). Tax on Agricultural Income+ Total Income= 66000.00
(b). Tax on Basic Exemption + Total Income= 57000.00
(c) Tax payable = (a) – (b)= 6000.00
Ans. – 9000.00
Ex.2:- Mr. Ram singh has income from Business as Rs. 60000.00 and besides this he is
working as a part timer with a company and getting 45000.00 annually from there. His
agricultural Income is Rs. 1 lakh. Calculate his tax liability for the assessment year 2008-
09.
Ans. If the Total Income (Other than agricultural Income) is below taxable Limit then the
agricultural income is not taken into account for calculation of Tax. Here the income of
Mr. Ram Singh is below taxable limit because income from Business is Rs.60000.00 and
Salary Income is Rs. 45000.00 hence is total income is Rs. 105000.00 which is below the
taxable limit hence there is no need to calculate the tax on Ag. Income.
Ans. NIL
Ex.3:- Tata tea Ltd. is in the business of Growing and manufacturing of Tea. The Income
of the Company is 50 Crores. Compute the taxable income of the Company. What will be
the difference in your answer if the company is only involved Manufacturing of Tea.
Ans. The income is to be calculated as per Rule 8 of the Income tax Rules 1962 and
according to it 40% income of the company is Rs. Business income i.e. Rs. 20 Crores is
Business income and rest of 60% is Agricultural Income i.e. Rs. 30 Crores is Agricultural
Income.
Since the profit of partial agricultural and business income is applicable for the assesses
engaged in Growing or manufacturing of tea hence if the company is only involved in
Manufacturing of Tea and growing it then the whole income of Rs. 50 Crores will be
treated as business income .
Ex. 4:- Hindustan Latex limited derived income of Rs.10 Crores from sale of centrifuged
latex. Compute the taxable income.
Ans: - The income in the case of Rubber growing and manufacturing companies is to be
calculated 65% Agricultural Income and 35% Business income hence in this case 3.50
Crores as agricultural income and Rs.6.50 Crores as Business income- Rule 7A.

Example
Total Income= 4.50 Lakhs
Agricultural Income = 2.00 Lakhs
(a). Tax on 4.50 lakhs + 2.00 Lakhs(i.e. on Rs. 6.50 Lakhs)= 1.44 Lakhs
(b). Tax on 2.00 Lakhs + 1.10 Lakhs= (i.e. on Rs. 3.10 Lakhs)= 0.42 Lakhs
(c). Tax payable by the assessee= (a) – (b) = 1.44 Lakhs-0.42 Lakhs= 1.02 Lakhs
Here see that the assessee has to pay Rs. 0.84 Lakhs as tax on his total income but due to
aggregation of the Agricultural income the excess Tax required to be paid is Rs. 0.18
Lakhs i.e. Rs. 18000.00 and see this amount of 18000 is nothing but a amount of higher
slab taxation on Rs. 40000.00 @ 20% (10% Tax on 1.50 lakhs – 1.10 Lakhs Basic
Exemption Limit and 30% tax over income Rs. 2.50 Lakhs ) i.e. Rs. 8000.00 and 10% Rs.
1 Lakhs (Since the highest tax rate is on Income over 2.50 Lakhs hence on Rs. 1 lakh the
tax is paid by 10% more rate).