CONCEPT OF INCOME TAX ON AGRICULTURE INCOME (DAIRY FARMING & POULTRY FARMING) IN INDIA

Agricultural Income :Agriculture income is exempt under the Indian Income Tax Act. This

means that income earned from agricultural operations is not taxed. 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. However while

computing tax on non-agricultural income agricultural income is also taken into consideration.

What does the term Agricultural Income mean?

As per Income Tax Act income earned from any of the under given three sources meant Agricultural Income;

(i) Any rent received from land which is used for agricultural purpose: Assessees do not have to pay tax on rent or revenue from agricultural land. Such land should, of course, be assessed to land revenue in the country or be subject to a local rate. Further, there must be a direct link between the agricultural land and the receipt of income by way of rent or other revenue (for instance, a landlord could receive revenue from a tenant).

(ii) Any income derived from such land by agricultural operations including processing of agricultural produce, raised or received as rent in kind so as to render it fit for the market, or sale of such produce.

(iii) Income attributable to a farm house subject to the condition that building is situated on or in the immediate vicinity of the land and is used as a dwelling house, store house etc. Income from such farm houses is considered agricultural income. The definition of `farm houses’ covers buildings owned and occupied by both cultivators of agricultural land and assessees who receive rent or revenue from agricultural land. The sole purpose of such farmhouses should be for use as dwellings for the cultivators or use as store houses. Normally, the annual value of a building is taxable as `income from house property’. However, in the case of a farm house, the annual value would be deemed agricultural income and would, thus, be exempt from tax.

(iv) Income earned from carrying nursery operations is also considered as agricultural income and hence exempt from income tax.

mind:——

(i) There must me a land.

(ii) The land is being used for agricultural operations:- Agricultural operation means that

efforts have been induced for the crop to sprout out of the land. The ambit of agricultural income

also covers income from agricultural operations, which includes processing of agricultural

produce to make it fit for sale. Like the people who receive passive agricultural income in the

form of rent or revenue, the people who actually carry out agricultural operations are also eligible for tax-free agricultural income.

(iii) Land cultivation is must:- Some measure of cultivation is necessary for land to have been used for agricultural purposes. The ambit of agriculture covers all land produce like grain, fruits, tea, coffee, spices, commercial crops, plantations, groves, and grasslands. However, the breeding of livestock, aqua culture, dairy farming, and poultry farming on agricultural land cannot be construed as agricultural operations.

(iv) If any rent is being received from the land then in order to assess that rental income as agricultural income there must be agricultural activities on the land.

(v) In order to assess income of farm house as agricultural income the farm house building must be situated on the land itself only and is used as a store house/dwelling house.

(vi) Ownership is not essential. In the case of rent or revenue, it is essential that the Assessee

have an interest in the land (as an owner or mortgagee) to be eligible for tax-free income.

However, in the case of agricultural operations it isn’t necessary that the person conducting the

operations be the owner of the land. He could be just a tenant or a sub-tenant. In other words, all

tillers of land are agriculturists and enjoy exemption from tax. In some cases, further processes

may be necessary to make a marketable commodity out of agricultural produce. The sales

proceeds in such cases are considered agricultural income even though the producer’s final

objective is to sell his products.

Certain income which is treated as Agriculture Income—

(a) Income from sale of replanted trees.

(b) Rent received for agricultural land.

(c) Income from growing flowers and creepers.

(d) Share of profit of a partner from a firm engaged in agricultural operations.

(e) Interest on capital received by a partner from a firm engaged in agricultural operations.

(f) Income derived from sale of seeds.

Certain income which is not treated as Agricultural Income—-

(a) Income from poultry farming.

(b) Income from bee hiving.

(c) Income from sale of spontaneously grown trees.

(d) Income from dairy farming.

(e) Purchase of standing crop.

(f) Dividend paid by a company out of its agriculture income.

(g) Income of salt produced by flooding the land with sea water.

(h) Royalty income from mines.

(i) Income from butter and cheese making.

(j) Receipts from TV serial shooting in farm house is not agriculture income.

(k) Income from Plantation companies:- Many plantation companies have launched schemes that offer tax-free agricultural income. These schemes are of various types: while some give investors leasehold rights to the land, some give rights to trees a certain level above the ground, even as others offer rent. If the scheme gives rise to ownership or leasehold interest in the land, then the income is considered to be rent or revenue in the hands of the investor. In the absence of ownership or leasehold rights, income from plantation companies is either considered interest or non-agricultural income chargeable to tax.

Certain points to be remembered——

(a) Agricultural income is considered for rate purpose while computing tax of Individual/HUF/AOP/BOI/Artificial Judicial Person.

(b) Losses from agricultural operations could be carried forward and set off with agricultural income of next eight assessment years.

(c) Agriculture income is computed same as business income.

Exceptions: – If a person just sells processed produce without actually carrying out any agricultural or processing operations, the income would not be regarded as agricultural income. Likewise, in cases where the produce is subjected to substantial processing that changes the very character of the product (for instance, canning of fruits), the entire operations cannot be regarded as agricultural operations. The profit from the sale of such processed products would have to be apportioned between agricultural income and business income. Further, the income from trees that have been cut and sold as timber is not considered agricultural income since there is no active involvement in operations like cultivation and soil treatment.

                                                    FAQ

Q. Do Interest on arrears of rent qualify as Agricultural Income and will this be exempt from tax?

Sometimes, a tenant could slip up on rent or revenue payments (either in cash or kind) and have

to pay arrears. If the landlord charges interest on such arrears, the income would not be

considered agricultural income, but would be deemed income by way of interest and would,

hence, be chargeable to tax. While `rent’ presupposes periodical and pre-determined payment

(either in cash or kind), `revenue’ implies a sharing arrangement that depends on the actual

agricultural produce. In either case, ownership of agricultural land or interest in such land is

essential. Which means, the owners of agricultural land, tenants who are given a sub-lease, and

people who are mortgagees of agricultural land, all enjoy tax-free agricultural income.

Q. if agricultural produce is processed to make it marketable at a place other than the agriculture land then amount charged for such processing will be agriculture income or not ?

A. Any processing done on Agricultural produce to make it marketable is a part of agricultural operations and such amount recovered will be treated as agricultural income only. Say for example trashing of wheat, mustard, etc is part of agricultural operations only and the amount recovered will be treated as agricultural income only no matter processing takes place on the land itself or some other place.

But in certain cases like in the case of tea, coffee, sugarcane where a major processing is being done then some part of the processed produce (tea, coffee & sugar) is taxed as non-agricultural income and rest is exempt as agricultural income.

Q. What if agriculture operation is carried on urban land?

A. No Matter whether the land is urban or rural agricultural land. If agricultural operations are carried out on land the income derived from sale of such agricultural produce shall be treated as agricultural income and will be exempt from tax.

Q. If any industrial organisation grow crops and sale half of the goods as raw material in market and remaining further processed and sold as finish goods what will be the tax treatment?

A. Agricultural income is exempt from income tax. no matter agricultural operations are done

by an industrial organisation or an individual. If any industrial organisation grow crops and sale

half of the goods as raw material in market and remaining further processed and sold as finish

goods the income earned on first half of produce which is sold in market as raw material is

totally exempt from tax.

The second half of the produce which is further processed in this case scheme of presumptive

taxation is applicable. Rule 7,7A,7B & 8 of Income tax rules deals with such type of income.

Rule 7A deals with Income from manufacture of rubber, 7B deals with Income from

manufacture of coffee and Rule 8 deals with Income from manufacture of tea. . Rule 7 deals

generally wich says that in cases in which income is partially agriculture and partially from

business the market value of the agricultural produce which has been raised by the assessee or

received by him as rent in kind and which has been utilised as a raw material shall be deducted

from the sale receipts and will be treated as agriculture income. Remaining will be treated as non

agricultural income.

Q. in my agriculture farm I am operating 5 cow in Jamshedpur, jharkhand. this is not by product, only product of milk. So is this income is agriculture income or taxable income? (This milk is sold to dairy product plant in nearest co-op society).

A. dairy farming is not an agricultural income.

Q. why rent on land treated as agricultural income? what difference is there if the land is in specified area?

A. Rent received from agricultural land used from agricultural purpose is treated as agricultural income. This is the law.

Q .Is the income from dairy exempt under the Income Tax Act?

A. Income from dairy is not exempt from tax for following reasons:

1. Tax on agriculture income is State Subject , so under Income Tax Act , section 10(1) exempts the income from agriculture.

2. What can be agriculture income is defined in section 2(1A) of the Income Tax Act . This definition does not mention Dairy Farming as agriculture operation.

3. What constitutes Agriculture Income have been raised before Supreme Court on the issue . As per Supreme Court decision , following fundamental things must be there , before an income can be called agriculture income:

1. The land should be used , which must be agriculture land.

2. The land must be assessed by the State Agriculture Revenue department. If not , the agriculture land must be beyond the limit of distance from municipal corporation or cantonment set out in section 2(1) of I.T.Act

3. There must be agriculture activity like tilling, sowing etc which are associated with agriculture operations.

Then only such income can be called the Agriculture Income.

Income from Self grown tree, jungle , or vegetables grown on roof top are held by courts and tribunal as NOT an Agriculture Income .

Income from dairy can not satisfy the conditions of it considered as Agriculture Income , there for it is not exempt

How to calculate Income Tax on Agriculture Income?—

What if your agricultural income is more than Rs 5,000 and if you also have income from salary / business / profession which is above the basic exemption limit?

In this scenario, your agricultural income has to be added(included) to the total income while calculating the tax liability for the given Financial Year (FY).

Below is the procedure to calculate the tax liability by taking Agricultural income into account;

• Step 1 – Add Agricultural income and other sources of income.

• Step 2 – Compute income tax (A) on the above aggregate income as per the applicable income tax rates.

• Step 3 – Add Agricultural income to the applicable basic exemption limit.

• Step 4 – Compute income tax (B) on the above aggregate income at the income tax rates prescribed.

• Step 5 – Income tax liability is A – B.

Let’s understand this with a simple example. Mr SINGH (35 years) is having Salary income of Rs 3,00,000 and net agricultural income of Rs 90,000/-. What is the income tax liability of Mr SINGH for AY 2016-17.

In the above scenario, the agricultural income is above Rs 5,000 and the other income is above the basic exemption limit. So, we need to include agricultural income to total income when computing tax liability.

1. Add Agricultural income and other sources of income. Aggregate income = Rs 3,00,000 + Rs 90,000 = Rs 3,90,000.

2. Compute income tax (A) on the above aggregate income as per the applicable income tax rates. Income tax @ 10% on Rs 3.9 Lakh is Rs 14,000. (Up to Rs 2.5 Lakh no tax and tax @ 10% on the remaining Rs 1.4 Lakh. Education cess ignored.)

3. Add Agricultural income to the applicable basic exemption limit. Aggregate income = Rs 90,000 + Rs 2.5 Lakh = Rs 3,40,000.

4. Compute income tax (B) on the above aggregate income as per the applicable income tax rates. Income tax @ 10% on Rs 3.4 Lakh is Rs 9,000.

5. Mr SINGH’s income tax liability is Rs 14,000 – Rs 9,000 = Rs 5,000.

So, it is clear that even though agricultural income is exempted under IT act, in actual practice it is not the case. Also, if you are in say 20% tax bracket, addition of agricultural income may take you to 30% tax slab rate. So, agricultural income is considered for determining the applicable income tax slab rate.

NB—How Agricultural Income is taxed after amendment by Finance (No. 2) Act, 2014?

Agricultural income will be considered while computing the income tax of a person if the following conditions are satisfied-

1. Net income from agricultural exceeds Rs. 5, 000 for the previous year, and

2. Total income, including agricultural income, exceeds the basic exemption limit.

This method is used to levy tax on agricultural income in an indirect way. This concept is also known as the partial integration of taxes

NB-The Govt rule about taxation is changing every year in India, Plz be confirmed regarding the latest changes in taxation while assessing your wealth.

Reference-on request