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Agricultural Income and Its Tax Treatment [Section 2(1A) to 10(1)]

Agricultural Income
Contents :
  1. Meaning and Definition of Agricultural Income.
  2. Conditions Satisfied for Agricultural Income.
  3. Income Treated as Agricultural Income.
  4. Income Not Treated as Agricultural Income.
  5. Income from Manufacture of Rubber (Rule 7A).
  6. Income from Manufacture of Coffee (Rule 7B).
  7. Income from Growing and Manufacturing of Tea (Rule 8).
  8. Scheme of Partial Integration of Non-Agricultural Income with Agricultural Income.
  9. Determination of Tax Liability.
Q: What is agricultural income? Discuss the incomes which are treated and not treated as agricultural income.
Q: Discuss the scheme of partial integration of non-agricultural income with agricultural income. Also explain the determination of tax liability under agricultural income.
Q: Explain the Rule 7A, 7B and 8 under the agricultural income.

Agricultural Income

Agricultural Income :

Agricultural income as defined in Section 2(1A) is exempt from income-tax in the case of all assesses. This exemption has been granted on account of the constitutional provisions relating to the powers of the Central and the State Governments for levying tax on agricultural income.
Under the Constitution only the State Governments are empowered to levy tax on agricultural income. Hence, the Central Government while imposing income-tax on incomes of various types has specifically excluded agricultural income from the purview of Central income-tax. This exemption would, however, be available only in cases where the income in question constitutes agricultural income within the meaning of Section 2(1A).

Definition of Agricultural Income [Section 2(1A)] :

Section 10(1) exempts agricultural income from income-tax. By virtue of Section 2(1A) the expression "agricultural income" means:

1) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes : Section 2 (1A)(a).

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 : Section 2 (1A)(6).

3) Income attributable to a farm house subject to certain conditions : Section 2 (1A)(b).

4) Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income. (With effect from the year 2009-10)

5) Any income derived from any building or land with respect to which a process of cultivation is carried on.

For the term Agricultural Income the following conditions must be satisfied :
  1. A rent or revenue must be derived from land.
  2. The land must be located in India.
  3. Such land must be used for agriculture purpose.
  4. The income derived from Farm house also is treated as agriculture income if it satisfies certain conditions.
To be an agricultural income, the basic operations should be performed on such land which it relates. Income resulting from basic operations combined with subsequent operations will also be agricultural income.
Basic operations :
1) Tilling of the land
2) Sowing of seeds
3) Planting
Subsequent operations :
1) To grow or put out leaves
2) Weeding
3) Digging the soil around the growth
4) Preservation of plants from insects, etc.

With effect from 1 April 2009 income derived from saplings or seeding grown in a nursery is considered as an agricultural income.

Income Treated as Agricultural Income :

Following incomes are treated as agricultural income :
  1. Income from sale of replanted trees.
  2. Rent received for agricultural land.
  3. Income from growing flowers and creepers.
  4. Share of profit of a partner from a firm engaged in agricultural operations.
  5. Interest on capital received by a partner from a firm engaged in agricultural operations.
  6. Income derived from sale of seeds.
Income Not Treated as Agricultural Income :

Following incomes are not treated as agricultural income:
  1. Income from poultry farming.
  2. Income from bee hiving.
  3. Income from sale of spontaneously grown trees.
  4. Income from dairy farming.
  5. Purchase of standing crop.
  6. Dividend paid by a company out of its agriculture income.
  7. Income of salt produced by flooding the land with sea water.
  8. Royalty income from mines.
  9. Income from butter and cheese making.
  10. Receipts from TV serial shooting in farm house are not agriculture income.
  11. Income from Plantation companies.
Income from Manufacture of Rubber (Rule 7A) :

1. Income derived from the sale of centrifuged latex or cenex or latex based crepes (such as pale latex crepe) or brown crepes (such as estate brown crepe, remilled crepe, smoked blanket crepe or flat bark crepe) or technically specified block rubbers manufactured or processed from field latex or  coagulum obtained from rubber plants grown by the seller in India shall be computed as if it were income derived from business, and thirty-five per cent of such income shall be deemed to be income liable to tax.

2. In computing such income, an allowance shall be made 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, and for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which, under the provisions of clause (31) of Section 10, is not includible in the total income.

Income from the Manufacture of Coffee (Rule 7B) :

1. Income derived from the sale of coffee grown and manufactured by the seller in India, with or without mixing of chicory or other flavouring ingredients, shall be computed as if it were income derived from business, and twenty five per cent of such income shall be deemed to be income liable to tax.
Income derived from the sale of coffee grown, cured, roasted and grounded by the seller in India, with or without mixing chicory or other flavouring ingredients shall be computed as if it were income derived from business, and 40% of such income shall be deemed to be income liable to tax.

2) In computing such income, an allowance shall be made in respect of the cost of planting coffee 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, and for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which, under the provisions of clause (31) of Section 10, is not includible in the total Income.

Income from Growing and Manufacturing of Tea (Rule 8) :

Out of the income derived from the sale of tea grown and manufactured by the seller in India, sixty per cent is treated as agricultural income and 40% as business income.
In computing the income, with all other costs, the cost of planting bushes in replacement of bushes that have died or become permanently useless shall be deducted.
(However, if the assessee has received any tax-free subsidy for replacement of the bushes, such amount shall not be deducted in computing the income.)

Provisions of Income which is Partially Agricultural and Partly from Business :

Nature of Business

Business Income

Agricultural Income

Growing and Manufacturing Tea [Rule 8]

40%

60%

Growing and Selling of Rubber [Rule 7A)

35%

65%

Sale of Coffee grown and cured by the Seller [Rule 7B(1)]

25%

75%

Sale of Coffee grown, cured, roasted and grounded by the seller with or without mixing chicory (Rule 7B(2)]

40%

60%

For other Composite Business (Rule 7]

In computing business income  the market value of the agricultural produce is to be deducted.

Market value of agricultural products.

 


Scheme of Partial Integration of Non-Agricultural Income with Agricultural Income (Section 10(1)) :

Section 10(1) provides that agricultural income is not to be included in the total income of the assessee.
However, since 1973, a method has been found out to levy tax on agricultural income in an indirect way. This concept is known as partial integration of taxes.

The scheme of partial integration of non agricultural income with agricultural income is applicable if the following conditions are satisfied :
1) It is applicable to individuals, HUF, unregistered firms, AOP, BOI and artificial persons.
2) The net agricultural income should exceed Rs.5,000 for the year.

Non-agricultural income should exceed the maximum amount not chargeable to tax. (e.g. Rs.3,00,000 for senior citizens, Rs.5,00,000 for super senior citizens, Rs.2,50,000 for all other individuals and HUFs).

Determination of Tax Liability :

While determining the tax-liability, due consideration is to be given to the following rules to arrive at the tax on non-agricultural income:

1) Compute the net agricultural income as if it were income chargeable to income-tax under the head - "Income from other sources".

2) Aggregate agricultural and non-agricultural income of the assessee and calculate income-tax on the aggregate income as if such aggregate income were the total income.

3) Increase the net agricultural income by the first slab of income on which tax is charged at nil rate and calculate income tax on net agricultural income, so increased, as if such income were the total income of the assessee.

4) The amount of income tax determined at (2) will be reduced by the amount of income-tax determined at (3).

5) The amount so arrived at will be the total income tax payable by the assessee.

From the amount of tax determined as above, the following tax reliefs/tax rebates are deductible:

1) Rebate under Section 86 in respect of share of profit from an association of persons.

2) Relief under Section 90/91 in respect of doubly taxed income.

3) Rebate under Section 87(A) if applicable.

The sum so arrived at will be the income-tax in respect of the total income.


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