Agricultural Income Tax

Know About Agricultural Income Tax - In Details

Online Legal India LogoBy Online Legal India Published On 15 Sep 2022 Updated On 06 Jan 2023 Category Income Tax

Any money obtained from the rent or revenue of property utilised for agriculture is referred to as agricultural income. According to section 10(1) of the Income Tax Act of 1961, agricultural income is not subject to income tax. The State Government can/may collect agricultural income tax treatment from other sources, but the Central Government has no authority in this regard. But we'll talk about it here when agricultural income tax treatment can be non-agricultural income.

Meaning of Agricultural tax treatment Income
 

According to Section 2(1A) of the Income Tax Act of 1961, agricultural income is defined.

Any rent or revenue obtained from land utilised for agriculture in India, whether in the form of cash or in-kind goods, is referred to as agricultural income tax treatment.

A grower or rent recipient of that produce in-kind who is able to take it to market should make income from agriculture.

No process other than the process to make it marketable can be conducted; instead, the money should come from the sale of the product that a cultivator or rent receiver produces or receives.

The building's revenue should be subject to the following Restrictions:
 

  • A cultivator or someone receiving rent-in-kind should occupy the building, which must be located in India.

  • The building must be a residence, a storehouse, or other outbuildings when it is connected to a cultivator's or renter's land.

According to Section 10(1) of the Income Tax Act, an individual whose primary source of income is agriculture will not be included in the calculation of total income. As a result, the agricultural income tax treatment is free from income tax. The onus is on the assessee to draw/ demonstrate that their income fits into this category. In this instance, the court ruled that the onus is on the assessee to demonstrate that the money he has earned qualifies as agricultural income under Section 10(1) of the Income Tax Act.

Conditions for income to qualify as agricultural income
 

There are few requirements that must be met for revenue to qualify as agricultural income

Land should generate income

The first criterion is that all income must come from the land and nothing else. A farmer who produces on the soil may own or occupy the land, or a renter may get the produce. Land can be a piece of property used for farming or a structure that a farmer or renter should own or occupy. The farmhouse or building must be situated on the same piece of property and utilised as a home, a store, or other outbuildings.

Rent or revenue should be the source of income. Rent is a payment made by one person to another in exchange for the right to use certain property; it may be made in cash or in kind. In the matter of Durga Narain Singh v. CIT [(1947) 15 ITR 235], revenue has a broader definition. Rent-free income is included in "revenue." Revenue from land is derived from change fees collected from tenants following their transition to occupancy holding. Land can only generate income if it is a reliable, immediate source of income rather than an auxiliary or secondary source. Where income is derived from an indirect source then it will not be considered income derived from land.

In this instance, a dividend paid by a company out of its agricultural income taxability is not considered to be revenue derived from the land because shareholding, rather than owning land, is an efficient and direct source of income.

Let’s discuss this situation with some illustrations:
 

  1. If Person X is the land's owner and Rents the Land to Mr Y for Agriculture. That land is used by Mr Y to raise wheat. If so, how much tax is due?

Answer: No, it is not taxable because the money received by the rent-receiver and the farmer here is in accordance with the conditions.

Land must be situated in India

A further requirement is that the land must be located in India, whether it is in an urban or rural setting. Additionally, Section 2(1A) of the Income Tax Act refers to the areas. Officers of the government are permitted to collect land tax in the following areas:

  • If it is located in a region that is under the control of the municipality or cantonment board and has a population of at least 10,000.
  • Any location within the range
  • Not being more than two kilometres from any municipality's or cantonment board's local limits, and having a population no. of more than 10,000 but not more than one lakh.
  • Not being more than six kilometres from any municipality's or cantonment board's local limits, and having a population of more than 100,000 but not more than 100,0000.
  • Having a population of more than ten lakh and not being more than 08 kilometres from the local limits of any municipality or cantonment authority/ board.
  • Foreign agricultural revenue will not be excluded under the definition of agricultural income; rather, it will be regarded as income from other sources.

Example: Someone in Africa owns the property, which they rent to Mr A for agricultural purposes. The income that person now receives will be counted towards their total income as income from other sources.

Land must be used for agriculture's fundamental operations.
 

The operation must be connected to agriculture in order to qualify for agricultural income exemption. That indicates that land should be used for agriculture.

What is meant by the word "Agricultural Purpose" now? The Supreme Court established the guidelines for the terms "Agriculture" and "Agricultural Purposes" in the landmark case of CIT v. Raja Benoy Kumar Suhas Roy [1957] 32 ITR 466.

SC divided operations into two types-
 

Basic operation-
 

The use of human skill and work on the land itself is required for basic operation; merely having agricultural land will not qualify as agricultural uses. Several tasks, including planting, seeding, and land preparation.

Subsequent operation-
 

The process continues when the product emerges from the ground. Like weeding (removal of wild plants), removing undesired undergrowths, clearing the crop of insects and pests, cutting, harvesting, making the produce marketable, etc. Simple fulfilment of these tasks on the land will not qualify as agricultural taxability operations; subsequent operations must continue basic operations.

If this integrated activity is carried out on land, it can be categorised as being done for "agricultural purposes," and the income generated by these activities is referred to as "agricultural income."

Agriculture is more than just growing crops and food for human consumption. It covers all byproducts of initial and subsequent operations carried out on land. We cannot limit it to the production of food and grains for human use; it may also include goods for trade and commerce, such as cotton, flax, jute, indigo, etc. It may also include forest products, such as timber, sal, tendu leaves, and all those forest products utilised for commerce.
 

In this instance, the SC determined that Section 2(1A)(b) of the Act does not allow for the sale of goods other than those that are grown and processed, and that income/ money obtained from the sale of silk cocoons may not consider agricultural income tax return when it comes to an assessee who grows mulberry leaves and feeds them to silkworms to produce silk.

Income from a Nursery:
 

The Hon'ble Allahabad High Court ruled in this case that money from a nursery is not considered agricultural income unless it is maintained by a farmer as a tool or an auxiliary to the main agricultural process, such as a paddy nursery or a nursery for tomato plants. In this case, the assessee used the nursery to grow beautiful plants, which cannot be regarded as a support activity for the main agricultural activity.

The Madras High Court stated that nursing activities involve carrying out numerous operations on land before the saplings were transplanted in a specific pot and then placed in shades for further operation and growth in the case of CIT v. Soundarya Nursery [2000] 241 ITR 530 (Mad.). As a result, the nursery's income will be regarded as agricultural income.

Rent or Revenue from Land
 

Rent or revenue is a form of income that the landowner or landlord derives through agricultural income.

Rent may/ shall be paid in money or in kind. For instance, if a person owns land and rents it to another person for Rs. 5,000 per year for agricultural uses, this amount of income is regarded as land rent in cash and is a component of agricultural income.

Another illustration of land rent is,

A tenant will provide the landlord with a third of the whole wheat they raise as payment for the land they are renting to Mr B for agricultural use. This is known as rent-in-kind.

The profit derived from the land is referred to as revenue. Let's imagine a landowner requests a farmer to plant wheat and agrees to get 50% of the crop's profits. This profit comes from the sale of land.

Three requirements should be met for rent or earnings from land
 

The most crucial need for receiving rent or revenue is that it must be generated from the land. Income derived from land shall not include rent or revenue received from assets other than real estate.

The landlord should only get money directly and immediately from that source. Revenue won't be regarded as agricultural income if the land is an indirect and secondary source. There is evidence to support the statement, including:

Province of Bihar v. Pratap Singh, 1949, 17 ITR 202 (pat.)
 

The Malikana allowance granted in this instance by the government to a landowner who has been evicted from his property is not income earned from the land because the immediate source of income is the government's legal obligation to pay compensation rather than the property itself.

Conclusion:
 

Income from agriculture is free from income tax, but the State government does so indirectly. As we have already covered, there are numerous needs and strategies for agricultural revenue. Any other method will calculate it as having a mixed agricultural and non-agricultural component.


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