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Agriculture Income in Income Tax

Agriculture Income

Agriculture Income Introduction

A. Income derived from land can be termed agricultural income if the following conditions are satisfied:

  1. Rent or revenue should be derived from the land;
  2. Land should be situated in India; and
  3. Land should be used for agricultural purposes.​

B. ​​Any income derived by performing the marketing process by the cultivator is an agricultural income if the following conditions are fulfilled:

  1. ​The process to which the agricultural produce is subjected should be ordinarily employed by a cultivator or receiver of rent-in-kind.
  2. The process should be employed to render the produce fit to be taken to market and not for any other purpose.​

C. ​Any income arising to the cultivator or receiver of rent-in-kind from the sale of produce of any land (situated in India and used for agricultural purposes) is agricultural income, provided the produce should not be subjected to any process except the process ordinarily employed to render the produce fit for sale.​​​

 

When income from farm building may be treated as agricultural income under Section 2(1A)(c)?

​Income from a farm building may be treated as agricultural income if the following conditions are satisfied:

(a)  If such a building is:

Owned and occupied by the receiver of revenue or rent; or

Occupied by the cultivator or receiver of rent-in-kind;

(b)  If such building is on or in the immediate vicinity of the land, situated in India, and used for agricultural purposes;

(c)   If such building is used as a dwelling-house, as a store-house, or as an out-building (out-house) by the receiver of the rent or revenue (in cash) or the cultivator or the receiver of rent-in-kind because of his connection with the land;

(d)  If the land is assessed to land revenue in India or is subject to a local rate. Where it is not assessed to land revenue or local rate, it should be situated in a rural area.​

When agricultural land is considered situated in a rural area?

​​Agricultural land is considered situated in a rural area if it is situated beyond the jurisdiction of a municipality or cantonment board having a population of 10,000 or more, and does not fall within the following distances (to be measured aerially):

​Up to 2 km from local limits of the municipality or cantonment board if the population of such municipality or cantonment board exceeds 10,000 but does not exceed 1,00,000;

Up to 6 km from local limits of the municipality or cantonment board, if the population of such municipality or cantonment board exceeds 1,00,000 but does not exceed 10,00,000;

Up to 8 km from the local limits of the municipality or cantonment board, if the population of such municipality or cantonment board exceeds 10,00,000.​

When income from nursery operation shall be deemed agricultural income?

​Any income derived from saplings or seedlings grown in a nursery shall be deemed agricultural income.​

 

What is the provision of Rule 7 of the Income-tax Rules, 1962?

​Rule 7 applies to the income, which is partially agriculture income and partially business income.

Rule 7 provides that where the cultivator or receiver of rent-in-kind utilizes agricultural produce in his business as raw material, the market value of such produce is deducted while computing the taxable profits of such business.

Similarly, if sale receipts of the agricultural produce are included in the accounts of the business, it shall be deducted.

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

How to determine the market value of agricultural produce where produce is ordinarily sold in the market?

​If agricultural produce is ordinarily sold in the market in its raw state or after the​ application of any process ordinarily employed by the cultivator or the receiver of rent-in-kind to render it fit for the market, the market value is determined according to the average price at which the produce has been sold during the relevant previous year.​

How to determine the market value of agricultural produce where produce has no market?

​​If produce has no market in its raw form or after the application of ordinary marketing process, the market value shall be the aggregate of the following:

  1. ​Expenses of cultivation;
  2. Land revenue or rent paid for the area in which it was grown; and
  3. Such amount of profits as the Assessing Officer may find reasonable, having regard to the circumstances of the case.​

 

What is the provision of Rule 7A of the Income-tax Rules, 1962?

​​Rule 7A prescribes that the income derived from the sale of the following produce of rubber plants grown in India shall be computed as if it were income derived from normal business:

  1. ​Centrifuged latex;
  2. Cenex;
  3. Latex based crepes (such as pale latex crepe);
  4. Brown crepes (such as estate brown crepe, re-milled crepe, smoked blanket crepe, or flat bark crepe);
  5. Technically specified block rubbers manufactured or processed from field latex;
  6. Coagulum obtained from rubber plants.

35% of such income shall be deemed to be income liable to tax, and 65% of such income is treated as agriculture income.​

 

​Which deduction is allowed while computing income from the sale of the produce of rubber plants?

​​​While computing such income, the assessee is entitled to claim the deduction in respect of the cost of planting rubber plants in replacement of plants that have died or become permanently useless in an area already planted if such area has not previously been abandoned.

However, in determining such cost, no deduction shall be allowed in respect of the amount of any subsidy which is received from or through the Rubber Board constituted under​ Section 4 of the Rubber Act, 1947.​

What is the provision of Rule 7B of the Income-tax Rules, 1962?

​Rule 7B prescribes that the income in respect of the sale of coffee grown and cured in India shall be computed as if it were income derived from a normal business. 25% of such income is deemed as business income, and 75% of such income is deemed as agriculture income.

Further, income derived from the sale of coffee grown, cured, roasted, and grounded in India, with or without mixing chicory or other flavouring ingredients, shall be computed as if it were income derived from a normal business. 40% of such income shall be deemed to be income liable to tax, and 60% of such income is treated as agriculture income.​

Which deduction is allowed while computing income from the sale of coffee grown, cured, roasted, and grounded in India?

​Rule 7B prescribes that the income in respect of the sale of coffee grown and cured in India shall be computed as if it were income derived from a normal business. 25% of such income is deemed as business income, and 75% of such income is deemed as agriculture income.

Further, income derived from the sale of coffee grown, cured, roasted, and grounded in India, with or without mixing chicory or other flavouring ingredients, shall be computed as if it were income derived from a normal business. 40% of such income shall be deemed to be income liable to tax, and 60% of such income is treated as agriculture income.​

What is the provision of Rule 8 of the Income-tax Rules, 1962?

​Rule 8 prescribes that the income in respect of the business of growing tea leaves and manufacturing tea is computed as if it were derived from normal business after making all permissible deductions. 40% of such income is deemed as business income, and 60% of such income is deemed as agriculture income.​

Which deduction is allowed while computing income in respect of the business of growing tea leaves and manufacturing tea?

​​​While computing such income, the assessee is entitled to claim the deduction in respect of the cost of planting bushes in replacement of bushes that have died or become permanently useless in an area already planted if such area has not previously been abandoned.

However, in determining such cost, no deduction shall be allowed in respect of the amount of any subsidy which is received from or through the Tea Board established under​ Section 4 of the Tea Act, 1953.​

What is the tax treatment of agriculture income?

​​Agricultural income is exempt from tax under Section 10(1) of the Income-tax Act. However, the agriculture income is included in the total income of a specified assessee (individual, HUF, BOI, AOP, or Artificial Juridical Person) where such income exceeds Rs. 5,000 and the non-agricultural income exceeds the maximum exemption limit.

The manner of tax computation in the case of partial integration regime is as below:

Step 1: Calculate net agricultural income.

Step 2: Calculate tax on the aggregate of non-agricultural total income and net agricultural income, as if such income is the total income.

Step 3: Calculate tax on the aggregate of net agricultural income and maximum exemption limit as if such income is the total income.

Step 4: The amount of tax calculated in Step 2 shall be reduced by the amount of tax calculated in Step 3.

Step 5: The result of Step 4 shall be reduced by rebate under Section 87A, if applicable. The resultant figure shall be increased by surcharge and health and education cess.​

What is the taxability of capital gain arising from the sale of agricultural land?

​​​For capital gain purposes, agricultural land is classified into two categories;

​Rural Agricultural Land and

Urban Agricultural Land.

Any gain arising from the transfer of rural agricultural land is not chargeable to tax under the head Capital Gains because such land is specifically excluded from the definition of a capital asset. Whereas the gain arising from the transfer of urban agricultural land is chargeable to tax under the head Capital Gains.​

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