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Agricultural Income
Agriculture income is exempt under the Income Tax Act 1961. The reason for exemption of agriculture 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. From the assessment year 1974-75, agricultural income is taken into consideration to determine tax on non-agricultural income in certain cases.

What Is Agricultural Income?

As per Income Tax Act 1961, any income, which is derived from any of the following sources, will be treated as agricultural income 1. Any rent or revenue derived from land which is situated in India and is used for agricultural purposes. 2. Any income derived from such land by agricultural operations including processing of the agricultural produce, raised or received as rent in kind so as to render it fit for the market or sale of such produce. 3. Income attributable to a farm house subject to certain conditions 4. Income earned from saplings or seedlings grown in a nursery

Rent or Revenue derived from Land

According to section 2 (1A), if the following three conditions are satisfied, then the income derived from land can be termed as agricultural income Rent or revenue should be derived from land and it may be in cash or in kind The land is one which is situated in India. If the land is situated in a foreign country, then the income derived from it will not be considered as agricultural income.

The land should be used for agricultural purposes. The term agricultural purposes has not been defined under the Income Tax Act 1961. Therefore we should have a look upon the following important points Basic operations: Prior to germination, some basic operations are essential to constitute agriculture. The basic operations would involve expenditure on human skill and labour upon the land itself and not merely on the growth from the land. The examples of basic operations are tilling of land, sowing of seeds, planting and similar kind of operations on the land. Subsequent operations:Besides the basic operations, there are some subsequent operations which are performed after the produce sprouts from the land. The examples of subsequent operations are weeding digging the soil around the growth, removal of undesirable undergrowths and all operations which foster the growth and the preserve the same, not only from insects and pests but also from degradation, tending pruning, cutting, harvesting and rendering the produce fit for the market. The subsequent operations are performed in conjunction with and in continuation of the basic operations which constitute part of the integrated activity of agriculture. Agriculture not merely includes food & grains:Agriculture does not merely imply raising of food and grains for the consumption of men and animals. It also includes all products from the performance of basic as well as subsequent operations on land. These products may be grain or vegetable or fruits including plantation and groves or grass or pasture for consumption of beasts or articles of luxury such as betel, coffee, tea, spices, tobacco etc. or commercial

crops like cotton, flax, jute, hemp etc. All these products are raised from the land and the term agriculture can not be confined merely to the production of food and grains products for human beings but must be understood as comprising all the products of the land which have some utility either for consumption or for trade. Some connection with land not sufficient:The mere fact that an activity has some connection with the land or in some way dependant on land is not sufficient to bring it within the scope of the term agriculture. For example, breeding and rearing of livestock, cheese and butter making and poultry farming would not come under the agricultural purposes. Income from nursery operations:There was a judicial controversy whether income from nursery operations would qualify as agriculture income within the definition given under section 2(1A). With a view to give finality to the issue, section 2(1A) has been amended with affect from the assessment year 2009-10 so as to provide that any income derived from saplings or seedlings grown in a nursery shall be deemed to be agriculture income. Accordingly, irrespective of the basic operations have been carried out on land, such income will be treated as agriculture income and thus qualify for the exemption under section 10(1).

Income derived from agricultural land by agricultural operations

Section 2(1A) gives the following three instances of agriculture income Any income derived by agriculture from land situated in India and used for agricultural purposes. Any income derived by a cultivator or receiver of rent in kind of any process employed to render the produce raised or received by him to make it fit to be taken to market. Any income derived by such land by 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 performed other than a process of the nature. These incomes are agriculture income if such incomes are derived from land which is situated in India and is used for agricultural purposes. Any surplus arising on sale or transfer of agricultural land is not treated as rent or revenue derived from the land.

Income derived from Marketing Process

Sometimes it becomes difficult to find ready market of the crop as harvested. In order to make the produce a commodity which is saleable, it becomes necessary to perform some kind of process on the produce. The income arising by way of enhancement of value of such produce, by performing such process to make the raw produce fit for market, is also agriculture income. However, the following conditions must be satisfied The process must be one which is usually employed by a cultivator or receiver of rent in kind. The process must be applied to render the produce fit to be taken to market. For example, tobacco leaves are ordinarily dried to make them suitable for sale. Therefore, the income from the ordinary process employed to dry the tobacco leaves to make them fit to be taken to market, is agriculture income. The ordinary

process employed to render the produce fit to be taken to market includes thrashing, winnowing, drying, crushing, boiling etc. Moreover, if marketing process is performed on a produce which can be sold in its raw form without requiring any process to make it fit for marketing, then the income derived from it is partly agricultural and partly non agriculture. For example, if sugarcane is generally sold in a given area without being subject to any process, the process of converting sugarcane into sugar would not be agriculture process and income attributable to the process of converting sugarcane into sugar would not be agriculture income. Section 2(1A)(b) does not contemplate sale of commodity different from what is cultivated and processed and where the assess was growing mulberry leaves, feeding them to silkworms and obtaining silk cocoons, income from sale of silk cocoons would not be agriculture income.

Income from Farm Building

Income from a house property which satisfies the following cumulative conditions, would be treated as agriculture income and would be exempt from tax by virtue of section 10(1) The building should be occupied by the cultivator or receiver of rent in kind who can be a landlord or a tenant. It should be on or in the immediate locality of land situated in India and used for agricultural purposes. The cultivator or receiver in kind should by reason of his connection with the agriculture land requires the building as a dwelling house or as a store house or other out building The land is assessed to land revenue or local rate or the land is situated outside the urban area. Here urban area means any area which is comprised within the control of any municipality or cantonment board having a population of not less than 10000 persons upto a maximum of 8 kilometers or within notified distance from the limits of any such municipality or cantonment board.

If all these above conditions are satisfied, the income from a farm building is exempt from tax. Use of building for any other purposes other than agriculture:Income would be exempt from tax if land or building is used for agriculture purposes. If the land or building is used for any other purpose then the exemption is not available. For example, if a farmer gives his building on rent for residential purposes then such income would be chargeable to tax.

Cases when Income held to be Agriculture Income

In the following cases, income is held as agriculture income 1. If denuded parts of the forest are replanted and subsequent operations in forestry are carried out, the income arising from the sale of replanted trees. 2. Profit on sale of standing crop or the produce after harvest by a cultivating owner or tenant of land. 3. Rent for agriculture land received from sub tenants by mortgagee in possession. 4. Compensation received from an insurance company for damage caused by hail storm to the green leaf forming part of assessees tea garden. 5. Income from growing flowers and creepers. 6. Salary received by a partner for rendering services to a firm which is engaged in agricultural operations, is agriculture income. 7. Interest on capital received by a partner from the firm engaged in agricultural operations. 8. If nursery is maintained by carrying out basic as well as subsequent operations then the income from such nursery would be agriculture income.

Cases when Income held to be Non-Agriculture Income

In the following cases, income is held as non agriculture income 1. Annual annuity received by a person in consideration of transfer of agricultural land. 2. Interest on arrears of rent in respect of agricultural land as it is neither rent nor revenue derived from land. 3. Interest accrued on promissory notes obtained by a Zamindar from defaulting tenants. 4. Income from sale of wild grass and reeds of spontaneous growth. 5. Remuneration received by a managing agent at a fixed percentage of net profit from a company having agriculture income. 6. Interest received by a money lender in the form of agriculture produce. 7. Income from sale of agricultural produce received by way of price for water supplied to land. 8. Commission received by the landlord for selling agriculture produce of his tenant. 9. Royalty income of mines 10. Income from poultry farming 11. Receipts from TV serial shooting in farm house 12. Maintenance allowance charged on agriculture land

Treatment of Partly Agriculture Income

For decomposing a composite business income, which is partly agricultural and partly non agricultural, the following rules are applicable Income Growing and Manufacturing Tea in India Rubber Plants grown by the seller in India Sale of coffee grown & cured by seller (normal) Sale of coffee grown, cured, roasted and grounded by the seller in India Non-Agricultural Income 40% 35% 25% 40% Agricultural Income 60% 65% 75% 60%

Computation of Agriculture Income

For computation of agriculture income, the agriculture income is aggregated with non agriculture income if following three conditions are satisfied Assessee is an individual, HUF, AOP/BOI etc. Assessee has non agriculture income which exceeds the minimum taxable limit Agricultural income exceeds Rs. 5000 The aggregation of agriculture income with non agriculture income and computation of income tax for the Assessment year 2011-12 shall be done in the following manner

Step 1 : Net agriculture income is to be computed if it would be chargeable to income tax. In case of an assessee engaged in business of growing and manufacturing tea, 60% of income computed is agriculture income. Step 2 : Agricultural and non agricultural income of the assessee will be aggregated and income tax is calculated on the aggregate income. Step 3 : Then the net agricultural income is increased by the first slab of income which tax is charged at nil rate i.e. Rs. 190000 in case of resident woman below 60 years, Rs. 250000 in case of resident senior citizen(between 60-80 years), Rs. 500000 in case of super senior resident individual(80 years or more), Rs. 180000 in case of an other individual or every HUF. Step 4 : The amount of income tax determined at step 2 will be reduced by the amount of income tax determined under step 3. Step 5 : Find out the balance. Add education cess and secondary & higher secondary education cess. Step 6 : The amount so arrived at is the income tax payable by the assessee.

Practical Question
For the assessment year 2011-12, net agricultural income of an assessee is Rs. 86000 and non agricultural income is Rs. 1285000. the taxpayer contributes Rs. 40000 towards PPF. Find out the tax if the taxpayer is an individual (22 years). Solution:-

Particulars Income tax on Rs. 1331000 (i.e. agricultural income Rs. 86000 + non agriculture income Rs. 1245000) Less:- Income tax on agriculture income ( Rs. 86000 + exempted slab of income Rs. 180000)

Amount (Rs.) 251300


242700 Add:- Education cess @ 2% Secondary & Higher secondary education cess @ 1% Tax Payable 4854 2427 249981