Agriculture income

Section 10(1) of income tax act provides that agriculture income is not to be included in total income of assessee.

Further, the reason for total exemption of agriculture income from scope of central income tax is that the under constitution , the central government has no power to levy income tax on agriculture income.

Index

• Definition of agriculture income

• What are the examples of agricultural income and non-agricultural income?

• Income which is partly agricultural and partly from business

• Scheme of partial integration of agricultural income with non-agricultural income

• Computation of tax in case covered by the scheme and illustration on that

• Computation of net agricultural income

Definition of agriculture income

This definition is very wide and covers the income of not only the cultivators but also land holders who might have rented out the lands. Further, agriculture income may be received in cash or in kind.

Agriculture income may arise in any one of the following three ways:

I) It may be rented or revenue derived from land situated in India and used for agricultural purposes.

II) It may be income derived from such land by

1. agriculture, or
2. the performance of a process ordinarily employed by a cultivator or receiver of rent in kind to render the produce fit to be taken to the market or
3. the sale , by cultivator or receiver of rent in kind , of such agriculture produce raised or received by him, in respect of which no process has been performed other than a process of the nature mentioned in point (2) above.

III) Lastly, agricultural income may be derived from any farm house¹ subject to condition that the building is situated on or in the immediate vicinity of the land is used as a dwelling house, storehouse, or other out-building and the land is assessed to land revenue or a local rate or, alternatively, the building is situated on or in the immediate vicinity of land which is situated in rural areas. .

Section 10(1) exempts agricultural income from tax. The reason for exemption for agricultural income from central taxation is that the constitution gives exclusive power to make laws with respect to taxes on agricultural income to the state legislature.

However, in some cases agricultural income is taken into consideration to determine tax on non-agricultural income.

From the assessment year 2009-20, any income derived from sapling or seedings grown in a nursery shall be deemed to be agricultural income.

Rural areas for the above purpose is as follows:

Any area which is outside the jurisdiction of a municipality or cantonment board having a population of 10,000 or more and also which does not fall within distance given below:

2 Kilometers from the local limits of municipality/cantonment board	If population of the municipality /cantonment board is more than 10,000 but not more than 1 lakh
6 kilometers from the local limits of municipality/ cantonment board	If population of the municipality /cantonment board is more than 1 lakh but not more than 10 lakh
8 kilometers from the local limits of municipality/ cantonment board	If population of the municipality /cantonment board is more than 10 lakh

For the above purpose, “population” means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year.

What are the examples of agricultural income and non-agricultural income?

Example of agricultural income

• Rent received from agricultural land

• Income from sale of seed and replanted trees

• Income from growing flowers and creepers

• Profit of partners received from firm engage in agricultural produce
• Rent received from land used for grazing of cattle required for agricultural activities
• Income from growing of bamboo.

Example of non-agricultural income

• Income from bee hiving or dairy farming

• Income from butter and cheese making
• Income from fisheries
• Income from breeding of livestock.

Income which is partly agricultural and partly from business

For disintegrating a composite business income which is partly agricultural and partly non-agricultural income is covered under rules [7,7A,7B and 8]² of income tax rules are as follows:

Income3	Non-Agricultural Income	Agricultural Income	Income Tax-Rules
∎ Growing and manufacturing tea in India4	40%	60%	Rule 8
∎ Sale of centrifuged latex or cenex or latex based crepes or brown crepes or technically specified block rubbers manufactured or processed from field latex or coagulum obtained from rubber plants grown by seller in India	35%	65%	Rule 7A
∎ Sale of coffee grown or cured by seller	25%	75%	Rule 7B (1)
∎ Sale of coffee grown , cured , roasted and grounded by seller in India with or without mixing chicory or other flavoring ingredients	40%	60%	Rule 7B (1A)

Rules 7, 7A, 7B & 8 of Income-tax Rules, 1962 provide the basis of apportionment of income between agricultural income and business income

Any other case [Rule7]

For disintegrating a composite business income which is partly agricultural and partly non-agricultural, the market value of any agricultural produce , raised by the assesee or received by him as rent-in-kind and utilized as raw material in his business, is deducted .

No further deduction is permissible in respect of any expenditure incurred by the assessee as a cultivator or receiver of rent-in-kind .

Income from growing and manufacturing of rubber [Rule 7A]

Illustration:

Mr. Vshal manufactures latex from the rubber plants grown by him in India. These are then sold in the market for ₹30 lacs. The cost of growing rubber plants is ₹10 lacs and that of manufacturing latex is ₹ 8 lacs. Compute his total income.

Solution: The total income of Mr. Vishal comprises of agricultural income and business income.

Total profit from sale of latex = 30 lacs -₹10 lacs- ₹8lacs = ₹12 lacs

Agricultural income 65% of ₹12 lacs= ₹7.8 lacs

Business income 35% of ₹12 lacs = ₹4.2 lacs

Points to be noted:

1.W.e.f. the a.y. 2001-02, an explanation was inserted to clarify that any income from such building or land arising from the use of the building or land for nay purpose other than agriculture shall not be included in the definition of “Agricultural Income”.

2. These rules are applicable whether income is positive or negative . For instance loss from the activity of growing and manufacturing tea in India to the extent of 40% is treated as business loss which can be set off against any normal business income under section 70 and 60% is taken as agricultural loss.

3. Income i.r.o. the business given above is, in the first instance , computed under the act as if it were derived from business after making permissible deduction . 40% or 35% or 25 % of income so arrived at is treated as business income and the balance is treated as agricultural income. Further, salary and interest received by a partner from a firm is taxable only to the extent of 40% or 35% or 25% and balance is treated as agricultural income.

4. Moreover, if person directly sells green teas leaves , income therefrom is 100% agricultural income.

Scheme of partial integration of agricultural income with non-agricultural income

As in the above discussion we have seen that agricultural income is exempt subject to conditions mentioned in definition clause of section 2(1A).

However, a method has been laid down to levy tax on agricultural income in an indirect way. This concept is known as partial integration of agricultural income with non-agricultural income. Further, it is applicable to individuals, HUF, AOPs, BOIs and artificial juridical persons.

Two conditions which need to be satisfied for partial integration are:

1. The net agricultural income should exceed ₹ 5,000 p.a., and
2. Non-agricultural income should exceed the maximum amount not chargeable to tax. (i.e. ₹5,00,000 for resident very senior citizens, ₹3,00,000 for resident senior citizens, ₹2,50,000 for all others).

Computation of tax in case covered by the scheme:

1. Add non-agricultural income with net agricultural income. Compute tax on the aggregate amount.
2. Add net agricultural income and the maximum exemption limit available to the assessee (i.e., 2,50,000/ 3,00,000/ ` 5,00,000). Compute tax on the aggregate amount.
3. Deduct the amount of income tax calculated in step 2 from the income tax calculated in step 1 i.e., 1 – 2.
4. The sum so arrived at shall be increased by surcharge, if applicable. It would be reduced by the rebate, if any, available u/s 87A.
5. Thereafter, it would be increased by health and education cess @4%.

The above concept can be clearly understood with the help of the following illustration:

Mr. Shyam a resident , has provided following particulars of his income for the P.Y. 2022-23.

I) Income from salary (computed) ₹ 2,80,000

II) Income from house property (Computed) ₹ 2,50,000

III) Agricultural income from land in Udaipur ₹4,80,000

IV) Expense incurred for earning agricultural income ₹1,70,000

Compute the tax liability for A.Y. 2023-24 assuming age is 45 years ?

Solution: Computation of total income of Mr. X for the A.Y. 2023-24

For the purpose of partial integration of taxes , Mr. Shyam has satisficed both the conditions i.e.

i) The net agricultural income should exceed ₹ 5,000 p.a., and

ii) No-agricultural income exceeds the basic exemption limit of ₹2,50,000.

Tax liability would be computed in following manner:

Now we will compute tax as per the scheme

Step 1 : ₹5,30,000+₹3,10,000 =₹8,40,000

(i.e., 5% of ₹2,50,000 plus 20% of ₹3,40,000)

Step 2 : ₹3,10,000+₹2,50,000 = ₹5,60,000

tax on ₹5,60,000 = ₹24,500

(i.e. 5% of ₹2,50,000 plus 20% of ₹60,000)

Step 3 : ₹80,500 – ₹24,500 = ₹56,000

Step 4 & 5 : total tax payable = ₹56,000 i.e. ₹56,000+4% of ₹56,000 = ₹58,240

Computation of net agricultural income

For the purpose of computing tax in the case of individuals, HUF etc. having net agricultural income in addition to the non-agricultural income , the net agricultural income for the assessment year 2023-24 will be computed as follows:

Rule: 1

Agricultural income of the nature referred in section 2(1A) (a) will be computed on the same basis as is adopted for the computation of income chargeable under the head ” Income from other sources” under section 57 to 59.

Rule: 2

Agricultural income of the nature referred in section 2(1A)(b) will broadly be computed as if it were income chargeable to tax under head” Profit and gain of business and profession ” and the provision of section 30 to 32 , 36,37 40,40A[ other than sub section (3) and (4), 41,43, 43A,43B and 43C will apply accordingly.

Rule: 3

Agricultural income of the nature referred in section 2(1A)(c) will be computed as if it were income chargeable under head ” Income from house property” u/s 23 to 27.

Rule: 4

Moreover,where an assessee derives income from sale of tea grown and manufactured by him in India, 60% of total income of such business , as computed in accordance with rule 8 of the income tax rules , will be regarded as agricultural income.

Rule: 5

Where assessee is a member of AOP or BOP (other than HUF, a company or firm) which in the previous year , has either no income chargeable to tax or has non-agricultural income not exceeding maximum amount not chargeable to tax in the case of an AOP or BOI.

But has agricultural income, then the agricultural income or loss of the association or body is to be computed i.a.w. these rules and the share of the assessee in the agricultural income or loss so computed will be regarded as agricultural income or loss of the assessee.

Rule: 6

Loss incurred in agriculture will be allowed to be set off against gains from agriculture. No set off will, however, be allowed in respect of assessee ‘s share in agricultural loss of an association of person or a body of individuals.

Rule:7

Further, any tax levied by a State Government on agricultural income will be allowed as deduction.

Rule:8

The unabsorbed loss from agricultural activities during the p.y. relevant to the a.y. 2015-16 to 2022-23 will be set off against the agricultural income of assessment year 2023-24 in chronological order.

Likewise, an unabsorbed loss from agriculture during the previous year relevant to the assessment year 2016-17 to 2023-24 will be taken into account in determining the net agriculture income for the purpose of payment of advance tax during the financial year 2023-24.

The se-off of loss will, either case , be allowed only if such loss has already been determined. Where a person is succeeded by another, person the person cannot claim set -off as discussed above.

Rule:9

Further, where net result of computation of agricultural income from various sources is a loss , the loss will be disregarded and net agriculture income of the assessee shall be taken as nil.

Rule:10

Lastly, the net agricultural income of the assessee will be rounded off to the nearest multiple of Rs. 10.