UNDERSTANDING THE TAXATION OF AGRICULTURAL INCOME IN INDIA

Author: Amita Fulekar,

Maharashtra National Law University

INTRODUCTION:

A taxpayer in India who earns agricultural income is exempt from paying income tax under Section 10(1)[i]. Aggregate agricultural income is defined in Section 2(1A)[ii].

Land rent or revenue garnered from land located in India and is used for agriculture purpose is defined broadly in section 2(1A)[iii] as follows: (a) Any lease or revenue received from land spread across India and is used for agricultural purposes. (b) Any income derived from agricultural operations carried out on such land, including the production of agricultural produce in order to make it marketable and the sale of such produce, is deductible. If a farm house generates revenue, it is subject to the specific restrictions set forth in Section 2[iv] with respect to such revenue (1A)[v]. Any revenue generated by the sale of sapling or seedlings that have been cultivated in a nursery would be categorized as agricultural income.

Agricultural Income Definition

According to the Income Tax Act, agricultural income is defined as the total of the three principal activities listed below:

In India, rental income or revenues from agricultural land are the most common sources of income. The monetary value associated to the right to use the land is referred to as rent. There is a plethora of potential sources of revenue that can be generated through land ownership. A tax for the renewals of a land grant on lease, for example, would be considered a type of charge. The price of the land, on the other hand, is not included in the revenue from land. Agriculture provides revenue in a variety of ways, including the following:

Agricultural land provides revenue in a variety of ways, including:

Agriculture: In the case CIT v. Raja Benoy Kumar Sahas Roy[vi], the Supreme Court defined agriculture, explaining that it is comprised of two sorts of operations: fundamental operations and succeeding operations.

A few of the most fundamental activities would be land cultivation (and hence tilling), seed sowing, and plantation, or any procedures that require human expertise & effort on the ground. In addition to operations essential for the growth and retention of the harvest, such as weeding & drilling dirt around the crops grown, there are operations needed to prepare the product for market use, such as tending, trimming, cutting, and harvesting, which are all included in the following list. Revenue obtained from sapling or seedlings planted in a nursery is likewise considered agricultural revenue, irrespective of whether the nursery's principal operations are carried out on the premises or off the premises.

The cultivation of a field crops or the acceptance of rent in kind results in the cultivation or receipt of rent in kind of a technique that culminates in the agriculture products being fit for market by the grower or receivers of rent in kind: In this context, manual or mechanical actions that are often employed to prepare agricultural products for sale while keeping their original characteristics are referred to as "processing." Through the selling of agricultural products such as these: It is common practise to divide income earned by sales into two categories: agricultural (exempt) income and non-agricultural (taxed) income when the produce does not go through the regular processing steps required to prepare it for market.

In order to distinguish between agricultural & non-agricultural commodities such as teas, coffee, and rubber, the Income Tax has enacted legislation establishing this distinction.

Farm structures that are necessary for agricultural operations produce revenue in three ways:

The following conditions must be met in order for money obtained from farm construction to be classified as agricultural income:

Because of his or her connection with the land, the renter or farmer is required to use the building as a residence and/or storage, and the building must be placed on or near to the agricultural property. The building must also be used for the purposes of residence and/or storeroom.

Either of the two conditions listed below must be satisfied: The property is either valued by land revenue or through a standard rate assessed and handled by government authorities; OR, the land is assessed by a third party, such as a private party. The land must not be located in the following areas if none of the preceding conditions are met.

Income taxation in the agricultural sector

Agricultural revenue is exempt from taxation, as previously mentioned. A system for indirectly taxing such income is established under the Income-tax Act, which is discussed more below. This strategy or notion is considered to as partial incorporation of agricultural & non-agricultural incomes in some circles, such as the United Nations Development Programme. Its goal is to raise the tax rate on non-agricultural income from its current level. This technique is suitable if and only if the following conditions are satisfied: Applicability:

It is mandatory for individual people, HUFs, AOPs, BOIs, & artificial juridical persons, among other entities, to apply this approach to calculate their taxable earnings. As a result, corporations, partnerships/limited liability firms, co-operative societies, and municipal governments are excluded from the application of this method.

· There is more than Rs. 5,000 in net agricultural revenue per year, while non-agricultural revenue is comprised of the following:

· Person under the age of 60, as well as all other qualified individuals, can get more than Rs. 2,50,000.

· Individuals between the ages of 60 – 80 might expect to get more than Rs. 3,000,000.

· For population over the age of 80, the amount is more than Rs. 5,00,000

· The Income Tax Act of 1961 defines agriculture income as income obtained from the three sources listed below in Section 2 (1A) of the Act:

Any rent or revenue derived from agricultural land located in India is classified as follows: If the following conditions are met, the assesses would be free from paying tax on rent or revenue earned from agricultural land:

(a) The land should be assessed to land taxes in India or subject to a local rate assessed and collected by government officials.

The land should not be situated within the jurisdiction of a municipality (whether referred to as a municipality, local authority, notified area committee, town committee, or by any other name) or municipal corporation board with a population of more than ten thousand people in cases where such land revenue is not assessed or is not subject to local rate (as determined by the most recent preceding census published prior to the first day of the preceding fiscal year). Located more than 2 kilometres away from the central boundaries of any municipality or cantonment platform with a population greater than 10,000 but less than 1,00,000; or less than 6 kilometres away from local limits of any municipal government or cantonment platform with a population greater than 1,00,000 but less than 10,00,000; or less than 8 kilometres away from local limits of any municipality or cantonment platform with a population greater than 10,00,000.

(b) It is necessary to exclude from the revenue any money received from the acquisition of such land.

There must also be a direct link here between agricultural land and the receipt of money in the form of rent or revenue in order for this to be possible. (For example, a landlords may receive a profit from a tenant's lease.) In addition, any income earned from agriculture activities on such land, including the processing of agricultural produce cultured or received as rent in kind, or any procedure conventional welding by a cultivator or rent-in-kind recipient to prepare such produce for market or sale, is included in this definition.

Income obtained from the assesses ownership & occupation of any building, from the assessment of rent or revenue on the assessor’s land, or from agriculture activities is included in this category. The structure must be located on or next to the land in order to be considered. A residential house, a storeroom, or an outbuilding should be used by assesses in association with the land in order for the sale to be valid.

As a result, if the abovementioned conditions are met, money owed to a farmhouse can be deemed agricultural income. Normally, the annual worth of a building is subject to taxation as’ revenue from house property.' But in the instance of a farm house, its annual worth is deemed agricultural revenue and as a result, it is not subject to taxation. In addition to the aforementioned sources of income, agricultural income is generated from the sale of sapling or seedlings cultivated in nurseries.

Is the revenue from agriculture subject to taxation?

According to Section 10(1)[vii], agricultural income is free from taxation. Farm revenue cannot be taxed by the federal government because of constitutional restrictions. Individuals' income tax burden is determined in part by the amount of agricultural income they earn. If the below two conditions are met, agricultural income is taken into account for rate purposes. The previous year's net agricultural revenue was more than Rs. 5,000/-, according to the government.

The total income, excluding net agricultural income, is greater than the baseline exemption amount (Rs. 2,50,000 for individuals below 60 years of age and Rs. 3,00,000 for individuals above 60 years of age).

If these conditions were met, the following formula is used to estimate the tax liability:

Consider the following scenarios:

Step 1: Agricultural revenue is X and non-agricultural income is Y. The tax on X+Y is denoted by the letter B1.

Step 2: Suppose that the benchmark exempt slab for income paying taxes is A. This is the first step in calculating the baseline exemption slab. The tax on A+X equals the tax on B2.

Step 3: The true tax liability must fall between B1 and B2 on the income tax return.

Please keep in mind that if an individual's agriculture production income is less than Rs. 5,000, the individuals personal agricultural revenue must be stated on the person's income tax return (ITR). If an individual's agriculture income exceeds Rs. 5,000, he or she is required to file Form ITR 2 with the government.

Section 54B of the Income Tax Act of 1961

Agricultural land sales are free from income tax under Section 54B[viii], provided that the proceeds are used to acquire further agricultural land after the sale. It is necessary to meet the following requirements in order to be eligible for a tax benefit under Section 54B of the Income Tax Act:

Individuals and HUFs are the only ones who can take advantage of this benefit.

In order to qualify for a land transaction, an individual or his or her parents must have used the agricultural land for agricultural purposes for at least two years immediately prior to the land transaction. In the case of HUF, the land must be used by any member of the organisation.

The taxpayer is required to purchase new farmland within 2 years of the sale of his or her previous farming operation. If the event necessitates the acquisition of more agricultural land, the term for purchasing extra agricultural land will be computed from the day on which compensation is received. Consider the fact that, under Section 10(37)[ix], if agricultural land is owned mandatorily having regard to any law, the recognition for but has been authorised by the centralized administration or banking regulator, and the consideration has been received on or after January 4, 2004, the accounting profit is not taxable.

When assessing a profit as agricultural revenue, it is important to keep the following points in mind:

The physical presence of a piece of land: In the case of agricultural operations, the effort required to induce a crop to grow out of the soil are referred to as "agricultural operations." Profits from agricultural activities, which include the processes used to prepare items for market sale, are included in the category of agricultural revenue. If agriculture actions are carried out on the land, both the rent or revenue received from the land and the income made by the cultivator or receiver from the sale of produce are free from federal and state taxes.

For land to be used for agricultural purposes, cultivation is required. Land must be cultivated: Land must be cultivated in order for it to be used for agricultural purposes. Agriculture includes all land-based items such as grain, fruits, tea, coffee, & spices, as well as cash crops, plantations, groves, including grasslands. It also includes commercial crops, plantations, cultivated areas, and grasslands. Cattle breeding, fisheries, dairy production, and pisciculture on farmlands, on the other extreme, are not deemed agricultural operations under the definition.

Ownership of land is not a requirement: The assesses has an interest in the land in order to be eligible for tax-free income from rent or revenue (as an owner or a mortgagee). In the form of agricultural operations, on the other hand, the cultivator does not necessarily have to be the landowner. He may be a tenant or a sub-tenant, depending on the situation. In other respects, all landowners are considered agriculturists and are therefore free from paying taxes. When converting agricultural produce into a marketable commodity, meantime may be required in some circumstances. This is because the ultimate purpose of the producer is to sell his products, and hence the sales proceeds are considered agriculture revenue in these situations.

Please keep in mind that agriculture income is taken into consideration when determining the tax liability of an individuals, a HUF, an AOP, a BOI, or a Synthetic Judicial Person (AJP).

In addition, agriculture losses may be held forward and adjusted against agricultural revenue for next eight assessment years. Agriculture revenue is computed in a manner similar to that of a corporation.

Exceptions: A person's income is not deemed agricultural if they sell processed produce despite participating in agriculture or processing activities themselves.

The same is true when produce is subjected to extensive processing that modifies the nature of the product (for instance, canning fruits), in which case the entire business is not regarded an agricultural industry. Agricultural and commercial income must be divided equally from the profits generated from the sale of such processed products. As a result, earnings from trees felled and sold for timber is not counted as agricultural revenue because there is no active participation in agricultural operations such as cultivation or soil treatment.

According to Section 54B[x], capital gains on the transfer of land utilised for agricultural purposes are not subject to taxation under certain circumstances. Section 54B[xi] provides tax savings to a taxpayer who sells his farmland and uses the proceeds of the sale to purchase more agricultural land. To be eligible for the benefits of this Section, the following conditions must be met: a. The assessment must be an individual or a HUF. In the case of the agricultural land, this should be used for agriculture reasons instead. It can be a long-term asset or a short-term asset, depending on the situation.

For it to be considered agriculturally productive, it must have been used for agricultural purposes by the assessment or his parents for at least 2 years immediately preceding that date on which the transfer of property took place. The assesses should have acquired another piece of property that is being used for agriculture purpose within two years of the date of the sale in order to avoid the penalty.

It is important to note that in the case of compulsory purchase, the period for acquiring additional agricultural property will be set from the day on which compensation is received. Under Section 10 (37)[xii], however, if agriculture is compulsorily acquired under any law, and the consideration for which is accepted by the Central Government or the RBI, and the consideration is received on or after January 4, 2004, no capital gain will be charged to tax in the case of an individual or a family unit.

Amount of capital gain to be used in the purchase of new agricultural land. The entire amount of capital gain to be used in the acquisition of new agricultural land If this is not the case, the difference between the cost of capital gain and the value of the new property will be charged as capital gain, and the tax will be assessed in accordance with the amount of capital gain.

The new asset acquired should not be sold within three years of the date of purchase, unless the asset has been upgraded.

If the asset is sold, the cost of the replacement asset will be reduced by half of capital gain (claimed as an exempt under Section 54B) for the purpose of estimating capital gains tax on the sale.

In the event that the assesses does not use the amount of capital gain to purchase the new asset before the due date for filing his return of income, he may deposit the money in the Capital Gains Account Scheme (CGAS) of any designated bank.

As a result, the cost of a new asset is assumed to be the sum of the amounts already spent by the assesses in order to purchase the new asset, as well as the sum deposited in the Central Government Asset Storage System (CGAS).

The unutilized portion of the deposited sum will be taxed as income in the year in which the term of 2 years from the date of sale of the initial asset expires if it is not used to purchase a new asset within that time.

To be sure, regardless of the fact that agriculture is exempt from taxation, taxpayers must take prudence when dealing with this type of revenue. The agricultural revenue must be aggregated with the rest of the company's income in order to prevent interest costs & possible fines for deceit in income reporting. Aside from that, assesses must keep accurate documents to verify to the taxation that they own agricultural land and have received agricultural income.

CONCLUSION:

Briefly stated, there is ample room for taxation income derived from non-agricultural activity. Agriculturalists, it is widely established, do not have taxable income because, when their revenue is distributed among family members who are engaged in agricultural production, each of them has income that does not exceed the exemption ceiling set by the IRS. On the other hand, hundreds of thousands of intermediaries, such as wholesalers, merchants and distributors, make their living by selling agricultural products and fresh produce such as fruits and flowers. Under existing legislation, such incomes or profits are totally taxable, and if the Tax Department takes concerted efforts to collect taxes from them, the necessity for widening the tax base to also include agriculturists including farmers is rendered unnecessary.

BIBLIOGRAPHY:

1. https://taxguru.in/income-tax/income-tax-treatment-taxability-of-agricultural-income.html

2. https://www.coverfox.com/personal-finance/tax/agricultural-income/

3. https://cleartax.in/s/agricultural-income#income

REFERENCES: [i] Income Tax Act, 1961 sec 10(1) [ii] Income Tax Act, 1961 sec 2(1A) [iii] ibid [iv] Income Tax Act, 1961 sec 2 [v] Income Tax Act, 1961 sec (1A) [vi] CIT v. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC) [vii] Income Tax Act, 1961 sec 10(1) [viii]Income Tax Act, 1961 sec 54B [ix] Income Tax Act, 1961 sec 10(37) [x] Income Tax Act, 1961 sec 54B [xi] ibid [xii] Income Tax Act, 1961 sec 10(37)