Detailed Analysis Of Agricultural Income

This article is aimed at enlightening the exemption and allowance provided by the Income tax Act in respect of any 'agricultural income' earned by the assessee from carrying out any agricultural activities. To avail the benefit and exemption, we need to first understand the concept of "Agricultural activities" & "Agricultural Income".

Let's start with the general definition of the following terms:

AGRICULTURAL INCOME

In simple terms, it is the income generated from carrying out the agricultural activities or from the sale of agricultural produce or any rent derived from the land which is used for agricultural purpose.

As per Sec 2(1A) of the Income Tax Act, agricultural income means -:

ANY RENT OR REVENUE DERIVED FROM THE LAND WHICH IS SITUATED IN INDIA AND USED FOR AGRICULTURAL PURPOSE

This has clearly specifies two characteristic of land:

• Should be situated in India
• Should be used for agricultural purpose

What is agricultural purpose or we can say agricultural activity/operation carried out in land

Agricultural activity" means a condition or activity which occurs on land/ farm in connection with the commercial production of farm products and includes, but is not limited to, marketed produce at roadside stands or farm markets; including, but not limited to, use of current county road ditches, streams, rivers, canals, and drains, and use of water for agricultural activities; ground and aerial application of seed, fertilizers, conditioners, and plant protection products; keeping of bees for production of agricultural or apicultural products; employment and use of labour.

The traditional ideal of Agriculture conveying "doing activities only and only on land" has changed significantly and modern techniques are often adopted in carrying out agricultural operations. In this backdrop, it is a welcome decision and gains much importance as it visualises and accepts such modern ways of carrying out agricultural activities and expands the idea/scope of agriculture even for the tax laws. We will learn this concept in the lights of various judgment/ decision passed which has changed the general nature/definition of agricultural operations.

General operation- It includes include cultivation of the land and consequently tilling of the land, sowing of seeds, planting and all such operations that require the human skill and effort directly on the land itself.

Advanced operation-operations would include operations that are carried out for growth and preservation of the produce like weeding, digging soil around the crops grown etc and also those operations which would make the product fit for use in the market like tending, pruning, cutting, harvesting, etc.

Land includes "soil" and where soil is taken from land and any basic operation/ activity is carried on such soil by expenditure of human skills and labour, it is treated as an agricultural activity carried upon land itself.

CIT V. SOUNDARYA NURSERY wherein it was held that plants sold in pots constitute an agricultural activity and hence exempt. Income derived from saplings or seedlings grown in a nursery would also be considered to be agricultural income.

DCIT V. BEST ROSES BIOTECH LTD. wherein it was held that the activity of growing good quality rose flowers in a greenhouse is treated as agricultural activity even when the operations are carried out in soil which is detached from land.

CIT V. RAJA BENOY KUMAR SAHAS ROY wherein it was held that the income derived from the sale of mushroom will be treated as agricultural income.

Cultivation of mushroom is an agricultural activity since mushrooms are produced by resorting to basic operations on soil/land by expenditure of human skills and labour and they have utility for consumption, trade and commerce, merely because mushrooms are grown in controlled conditions, it does not disentitle the assessee to claim it as an agricultural activity.

K. VINUTHNA REDDY VS ITO Wherein it was held that where the land is kept vacant or used for research and development but not used for agricultural process then any rent derived from the land will not be exempt. Since it was necessary to carry out some basic operation on land like cultivation, weeding, digging the soil.

Hence, it can be concluded that any revenue derived from the land situated in India and used for agricultural operations are exempt from tax which can be in the form of

(i) sale of agricultural produce , such produce on which basic or advanced agricultural activity has been conducted which will not alter the basic characteristic of the produce but only make it fit for consumption are exempt.

(ii) any rent/lease charges received from the land which is used for agricultural operations as described above will be exempt from tax.

(iii) any income derived from the performance of any process in the land to render the produce raised fit to be taken to market.

EXCLUDE-THAT REVENUE DERIVED FROM LAND SHALL NOT INCLUDE AND SHALL BE DEEMED NEVER TO HAVE INCLUDED ANY INCOME ARISING FROM THE TRANSFER OF ANY LAND

INCOME DERIVED FROM THE BUILDING OWNED AND OCCUPED ON SUCH LAND USED FOR AGRICULTURAL OPERATION

There are two conditions specified under this head which must be cumulatively satisfied in order to be eligible as "agricultural income" which are as follows:

• The building is on or in the immediate vicinity of the land used for agricultural operations and such building is used as utilized for storing agricultural produce or agricultural implements or it is being utilized by the farmer as a dwelling unitetc.
• Such building should not be used for residential purpose by any other person other than cultivator/ receiver of rent/revenue or should not be used forbusiness purpose. For e.g-Use of land by the cultivator for running tea shop.
• Another important thing to be taken care of here is that the use of building for storage and dwelling unit should be used by the receiver of Rent/ Cultivator. If its used by any other person then it will not be treated as Agriculture income.
• Location of Land- It should be located either in the urban area or rural area

Urban Area

The land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government

Rural Area

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.
• 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.
• 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.
• Interest on arrear of rent will not classify as agricultural income.
• Income from Self grown tree, jungle, or vegetables grown on roof top is held by courts and tribunal as NOT an Agriculture Income.
• where the activities have only some distant relation to land like dairy farming, breeding, rearing of livestock, poultry farming, Dairy farming, bee hiving, etc. they do not form a part of agriculture income

Conclusion

Understanding these concepts hold crucial implications for the taxation of agricultural income. Better understanding of these provisions will be helpful for taxpayers and professionals in accurate tax reporting and compliance.