For centuries Agriculture has been the backbone of our nation. Even today a huge portion of the country’s rural population is dependent on agriculture for their livelihood. Agriculture is not just a source of income for those working in the sector, but it also satisfies the absolute basic need of food for humans. It is a risky and unpredictable sector though. One cannot control the climatic conditions nor the condition of the soil/water and other necessary things required for a successful harvest. Farmers often face losses and the unpredictable nature discourages many from working in the field of agriculture. However, it is necessary to have a strong agriculture industry in a country such as ours to feed our ever-growing population as well as to keep up with the export demands and enhance our economy. For all these reasons, SECTION 10(1) of the Income Tax Act,1961 (the Act) exempts agricultural income from being taxed i.e in India, agricultural income is not taxable.
Definition of Agricultural Income
SEC 2(1A) of the Act defines the term ‘agricultural income’. According to the definition, agricultural income is:
- Any rent or revenue derived from a land located in India and used for agricultural purposes
- It is extremely important that the land is used for agricultural purposes only if the exemption is to be applicable. To understand what constitutes ‘agricultural purposes’, one has to refer to the meaning of agriculture as given in CIT v. Raja Benoy Kumar Sahas Roy(1957) 32 ITR 466 (SC). In this case, the Supreme Court divided agriculture into Basic operations and Subsequent operations. Basic operations are those performed before germination, such as tilling of land, sowing of seeds, et cetera. Subsequent operations are those performed after the sprouts emerge from the seeds that foster the growth and preserve the same, such as weeding, pruning, et cetera. Mere performance of subsequent operations on a land wherein the product has not been obtained by performing the basic operations on the same land would not constitute the land being used for agricultural purposes.
- It is also important to take note of the fact that agriculture is not just raising food and grains for consumption but basically includes producing all those products of land which can and are utilised for the purposes of consumption, trade or commerce and hence includes forest products as well. However, simply because an activity is connected to the land, it does not become an agricultural activity, such as breeding and rearing livestock.
- Income from nursery operations is also considered as income from agricultural purposes.
2. Income derived by agriculture by land situated in India and used for agricultural purposes, or derived by a cultivator or receiver of rent-in-kind from any process which is ordinarily performed to make the produce raised or received fit to be taken to the market, or from the sale of such products on which only ordinarily performed processes have been performed.
- A cultivator is a person who himself cultivates the produce. As for the receiver of rent-in-kind, it is important to take note of a system ordinarily used in India. Many people rent their land out to someone else to cultivate over it and ask for some amount of the products generated as the rent. Such kind of a person is known as a receiver of rent-in-kind.
- When the cultivator or receiver of rent-in-kind performs certain operations on the produce to render it fit to be taken to the market and sale, such as drying of tobacco leaves, then any income derived from such processes is agricultural income. However, if these processes don’t need to be performed for the product to be taken to the market and for its sale, then the income would be partly agricultural and partly non-agricultural.
3. Income attributable to farm building
- We need to understand what constitutes a farm building first.
This building must be occupied by the cultivator or the receiver of rent-in-kind. Then it must be on or in the immediate vicinity of the land used for agricultural purposes. Then this building must be required by the said person for dwelling or as a storehouse or other out-building by reason of connection with the land. Lastly, the land is assessed to land revenue or local rate, and if it is not, then it must be situated in a rural area. All of these conditions must be satisfied to exempt the said income.
- If this building is used for non-agricultural purposes, then the income won’t be exempt.
In composite businesses, the business is partly agriculture and partly non-agriculture. In such cases, the total income is split into agriculture and non-agriculture income and the non-agriculture income is included in the calculation of the gross income of the person. For example, a person working in the business of sale of coffee grown and cured by him, then 75% of his income is treated as agriculture income and the remaining 25% is treated as non-agriculture income.
Partial integration of agricultural income with non-agricultural income
The Raj Committee on Taxation of Agricultural Wealth and Income recommended this scheme since many people were trying to show their income earned from elsewhere as agricultural income to evade paying tax. Under this scheme, agricultural income is clubbed with non-agricultural income if the conditions are satisfied and the non-agricultural income is taxed as if it was placed in the top slab of the aggregate income.
The conditions for this scheme to apply are:
- The Taxpayer is either an individual, HUF, AOP/BOI or artificial juridical person. This scheme is not applicable to companies, firms and cooperative societies.
- The Agricultural income is above ₹5000/- (Rupees Five Thousand Only)
- The non-agricultural income exceeds the tax exemption limit.
Therefore, as seen above, agricultural income is exempt from taxation in India under the Income Tax Act, 1961. It is necessary to do so as it provides great relief to the farmers of India and also acts as an incentive for others to work in the same field. With the way the world is facing climatic issues, we’ve already started facing a shortage of food and we can only be sure that the situation will worsen in the future. There is a need for more people to work in the field of agriculture and bring innovations that would resolve our growing issues. There are also, however, safeguards in case somebody tries to exploit this exemption given by the Government of India.