What are the 10 points to remember for Agriculture Income?

Arjuna (Fictional Character): Krishna, lately we have seen serious hike in the prices of tomatoes and other farm produces. What about the Income tax on sale of tomatoes?  What exactly is included in the agricultural activities?

Krishna (Fictional Character): Arjuna, To classify an activity as Agricultural activities it should be proved by the crop cultivation, Harvesting, farming, raising livestock activities, leasing of land for agriculture activities,  or uses that are connected to livestock farming, fish farming.

For example- Assessee is producing tomatoes by planting seeds, harvesting etc. and selling those tomatoes to the agent will be considered as agricultural income but the selling of those purchased tomatoes by the agent will taxed as PGBP income in the hand of that agent.

Arjuna (Fictional Character): Krishna, What are the 10 things that one should keep in mind relating to Agriculture Income from Income Tax Perspective?

Krishna (Fictional Character): Arjuna, if a person holds agricultural land and cultivating agricultural produce (tomatoes) he should keep following 10 things that one should remember for Agricultural Income under Income Tax Act, 1961:

A. INCOME

1. Income from sale of agriculture produce (tomatoes) by farmers will be treated as agricultural income and not as Business Income.

2. If a person gives the land on rent for agriculture activity then, it will be classified as agricultural income.

But if a person build a house on the agricultural land and gives on rent then it will be considered as income from house property and not as agricultural income.

3. If a person was cultivating tomatoes on land and he decides to  sell the land which was used for agriculture, then capital gains shall be exempted only if it satisfies the conditions of Agriculture Land as per Section 2(47) of Income Tax Act, 1961. Else, capital gain shall be taxable even if agriculture activity was carried out on the land.

B. EXPENSES

4. Any expenditure incurred on cultivation, harvesting for agricultural produce will be allowed as a deduction from the agriculture income Also if any payment in cash is made to farmer for purchase of agriculture produce, the limit of Rs 10,000/- will not apply under Rule 6DD of Income Tax Act

C. TAXATION

5. If Assessee has income solely from agricultural activities then it would not be taxed, i.e., it is exempted u/s 10(1).

However the Income Tax Act has drawn a method to indirectly tax agricultural income through partial integration where the assesse has non-agricultural income which exceeds the basic exemption limit and agricultural income exceeds Rs. 5,000.

D. DOCUMENTS REQUIRED

6. Documents of Land in possession containing area of land cultivated on which agricultural activity is carried out

7. Details of what was cultivated/grown during the year

8. Documents in relation to Sales and expenses incurred towards the said Agricultural Activity.

9. Details of percentage of yield in Acre/Hectare.

10. Separate books of accounts should be maintained for accounting of Agriculture Activities.

Arjuna (Fictional Character): Krishna, what should one learn from this?

Krishna (Fictional Character): Arjuna, the common understanding among the common public is that no tax is levied on agricultural income. However, methods like partial integration are adopted by the act so as to tax a component of one’s total agricultural income. Further, department is now looking into the detailed documents which are maintained by persons showing agriculture income, hence documents should be kept very properly by the assesses. Now the Income Tax Department are making use of technology and drones for verifying whether agricultural activities are actually being carried out or not by taxpayers.