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Agricultural Income and some beliefs / misbeliefs under Income Tax

Keeping the conversation between Lord Krishna and Arjuna in “Bhagwat Gita” as foundation, we will learn certain basic financial and tax matter. Let us try to get answers to our questions in a bit different and joyful manner. The character of Arjuna will be played by the common man or tax payer and the character of Lord Shri Krishna the Expert for giving solutions to all problems. Conversation is named as “KARNITI”.

Arjuna: As India is an agricultural country, only 3% to 4% citizen pay Income Tax. Dear Krishna, tell some provisions under Income Tax related to Agricultural Income. So that misunderstanding of the taxpayers who are also engaged in agriculture activities may be resolved.

Lord Krishna: Listen friend, first of all let us understand how farming is done, because non-agricultural income or income from agro based businesses are taxable. Only agricultural income is tax free. Farmer while cultivating performs operations such as, tilling of land, sowing of the seeds, preserving the crop from insects and pests, etc. and then crop is harvested. After deduction of expenses from the sale proceeds of agricultural produce the balance is agricultural income. For e.g. income from sale of food grains, vegetables, cotton, sugarcane, flowers, fruits, sprouts, etc. produced by performing the operations mentioned above is agricultural income. Apart from this, if agricultural land is given on rent for agriculture purpose only then the rental income will also be considered as agricultural income. Further income from nursery operations like floriculture and horticulture is also considered as agricultural income. If a person does not perform agricultural operations and only do buying and selling of agricultural products, then it will not be considered as agricultural income. For e.g. income of a merchant or commission agents purchasing food grains or farm produce from the farmer and selling in the market is not an agricultural income.           

Arjuna: Kindly explain with example non-agricultural income and Agro based income?

Lord Krishna: Non-agricultural income means income derived from non-farming operations for e.g. forestry, breeding of livestock, dairy farming, poultry farming, renting of tractor, farm equipment’s, renting of agricultural land or farm house for other functions, selling water from the well, etc. Further Agro based Income means income derived from further processing of agricultural produce. For e.g. producing jaggery from sugarcane, producing medicines, juices and other food items from fruits, flowers and agricultural produce. Non-agricultural income and agro based income are taxable income. 

Arjuna: Krishna, What precautions should be taken by a taxpayer having taxable income from business, salary or other sources along with agriculture income? 

Lord Krishna: Taxpayer is required to include his agricultural income along with his other taxable income while calculating income tax. If a person is having only agriculture income, then he is not required to file Income Tax Return. Further for agricultural produce of tea, coffee, rubber and seed there are special provisions under income tax act.   

Arjuna: Now, please explain how to keep record of agricultural income and expenses?

Lord Krishna: The land on which agriculture operations are performed is recorded in land record documents i.e. generally called 7/12 (Sathbara) extract. In that copy of 7/12 extract area and type of crop cultivated should be mentioned. The sales of agriculture produce should correlate with the details mentioned in the 7/12 extract. Quantity of crop produce per acre should be as per type of land i.e. irrigated or non-irrigated land. Further, the bills or supporting for the expenditure incurred such as seeds, insecticide, pesticide, electricity, labour, water bills, etc. should be properly maintained. When the agriculture produce is sold to the APMC or merchant by the farmer then the receipts (Pattya) of the same should be maintained with accurate information of the name and address of the farmer, weight, rate of the crops, etc. Accordingly it should be taken for income tax purpose. If the records are not properly maintained, Income Tax Department may derive income from agriculture by considering income of the neighbor farmers in that vicinity or according to set of rulings. The restriction under Income Tax Act of cash expenses and payment above Rs. 20,000/- is not applicable when payments made to farmers. As most of the agricultural transactions are made in cash, Income Tax Department is always vigilant on such transactions.

Arjuna: Lord Krishna, nowadays rates of agricultural land are increasing. What are the provisions of Income Tax, if agricultural land is sold?

Lord Krishna: See Arjuna, as per Income Tax Act, a limit of area in kilometer from boundaries of the municipality / city / village is prescribed, which is based on the population. If agricultural land sold is situated within such limit then income tax will be applicable. The same is given below:

1. If the population of the municipality is more than 10,000 but not more than 1 Lakh then the distance of 2 kilometers.

2. If the population of the municipality is more than 1 Lakh but not more than 10 Lakh then the distance of 6 kilometers.

3. If the population of the municipality is more than 10 Lakh then the distance of 8 kilometers.

It is recommended to refer the relevant provision of Income Tax Act before dealing in land transactions.

Arjuna: Great! If the young generation takes interest in agriculture then it will obviously help in economic growth of our nation. What they should learn from the above agricultural related information?

Lord Krishna: Agriculture depends on nature, but with use of new technology and hard work, there will be financial benefit in agriculture sector. The study of ups and downs in market rates of agricultural commodities will be more beneficial. It is said in Agriculture that, “God proposes but merchant disposes” which means when there is ample agriculture produce, market rates are low vice versa when there is shortage of agriculture produce rates are high. As there is no proper infrastructure for storage of agriculture produce in our country lots of produce get wasted and stockiest take the financial benefit of situation. For this current onion prices is the best example. Government has given various benefits to farmers for e.g. agriculture debt waiver scheme, relaxation in payment of interest, subsidy, free electricity, etc. One should not earn by using these benefits inappropriately. Government has specific purpose behind these schemes. Needy people should get the benefit of these government schemes. But today it has become business of many to use these benefits inappropriately. Agriculture not only gives money but also gives good health and peace of mind.

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Category Income Tax, Other Articles by - CA Umesh Sharma