GITAM DEEMED TO BE UNIVERSITY

VISAKHAPATANAM

2022-2023

TOPIC: TAX TREATMENT OF AGRICULTURAL INCOME

SUBJECT: TAXATION LAW

Submitting to:
Lakshmi talasila
M

Submitting by:
Konnojushivasree
121933201022
Bba.llb 8th semester

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 DECLARATION
I declare the assignment titled "TAX TREATMENT OF AGRICULTURAL INCOME"
submitted by me to GITAM School of Law, GITAM Deemed to be University, Visakhapatnam,
is a project work carried out by me under the guidance of LAKSHMI MA’AM. I hereby declare
that this project's work has not been submitted nor will ever be submitted, nor will ever be
submitted elsewhere.

Place: Visakhapatnam Konnoju Shivasree

Date: 02/04/2023 Signature of the candidate

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 ACKNOWLEDGEMENT

I want to express my sincere gratitude to LAKSHMI MA’AM, for guiding me and

providing valuable suggestions and constructive criticism. From the bottom of my heart, I would
like to thank you for constantly motivating me and encouraging me in all my endeavors.

I would also like to express my sincere gratitude to The Director, Prof. DR. Anita Rao,
and my College, GITAM School of Law, for giving me this opportunity.

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INTRODUCTION:

Any money obtained from the rent or revenue of property utilized for agriculture is referred to as
agricultural income. Section 10(1) of the I.T. Act of 1961 states that agricultural income is not
subject to income tax. The State Government can collect agricultural payments from other
sources, but the Central Government has no authority.
What is Agricultural Income?
Agriculture income is defined as follows per Section 2(1A) of the Income Tax Act:
Any land in India used exclusively for agricultural purposes.
Any revenue obtained from using that land for agricultural purposes.
Any money obtained from such land, including the processing of agricultural products raised or
received as rent in kind, as well as any processes utilized by the cultivator or received as rent in
style to prepare the produce for sale or market.
Any land the assesses owns occupies and from which the assesses obtains any income also
receives rent or generates money for agricultural purposes. Ideally, the structure would be
located on or close to agricultural land. The assesses must also use the structure as a house, a
residence, or a storage facility.1

Conditions for income to be considered as agricultural income

 The existence of land
 The land should be used for Agricultural Purposes
agricultural operations or purposes refer to work done to cause crops to grow on the used land.
Such land is not subject to tax on the rent it receives or the income it generates. Although such
agricultural land can be liable to local taxes or land revenue taxes. The profits obtained from the
land used for agricultural purposes ought to be directly related. For instance, a landlord is not
required to pay taxes on rent paid on land utilized for farming.
 Cultivation of the Land is a must.
The land must be under some form of cultivation to be regarded as being used for agriculture.
Producing fruits, grains, tea plantations, commercial crops, grasslands, and groves all fall under

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the ambit of agriculture. However, using the property for dairy, cattle, or poultry farming would
ensure it is considered agricultural land.

 Ownership of Property is not Necessary.

It is not a requirement that the individual conducting agricultural activities is the land's owner;
instead, the assesses who receives any rent or revenue from the ground must have some vested
interest to be eligible for tax-free income. For instance, a renter of the land who uses it for
agriculture will benefit from tax exemption. Also, it may be essential to do additional processing
on agricultural products to prepare them for market or sale. Those items' sales profits are also
regarded as agrarian revenue.

Exceptions
1. The income from such a sale would only be regarded as agricultural income if the
commodity was sold by engaging in farm or processing activity.
2. The entire operation would not be considered rural income in cases where the product has
undergone considerable processing that completely alters its nature. Fruits can be canned,
for instance. In these situations, the revenue earned will need to be split into two parts:
one portion will be used for agricultural income, and the other will be used for additional
payment, such as commercial revenue from the canning of fruits.
3. Tree cutting and timber sales are not regarded as agricultural income. This results from
the absence of active farming practices such as soil preparation and cultivation 2.
Incomes that are treated as Agricultural Income
1. It is obtained from agricultural land as rent.
2. Revenue from the selling of "replanted" trees.
3. Income from flower and creeper cultivation.
4. Profits from the sale of seeds.
5. When the assesses owns a portion of the profits from an agricultural company.
6. If a company that engages in agricultural activities pays any interest on capital.
Incomes that are not treated as Agricultural Income
1. Earnings from bee hives.

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T. Padma, Dr., “Principle of Law of Taxation”, ALT Publication, 10th Edition

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 2. Income from raising poultry.
3. Revenue from the selling of naturally occurring trees.
4. Income from the dairy industry.
5. It is buying standing crop that has yet to be processed.
6. Dividend received from a business involved in agriculture.
7. Income from producing cheese and butter.
8. Revenue from plantation firms [Several plantation companies now release programs that
provide investors tax-free income. The schemes come in a variety of forms. Several
investors receive leasehold rights to the land, rent, and rights to the trees on the property.
The money received by the investor would be regarded as rent or revenue if the scheme
grants leasehold rights to him. Without leasehold or ownership rights, the money
obtained will be classified as interest or non-agricultural income, both of which are
subject to tax.
Tax on Sale of Agricultural Land
Until 1970, all profit made from the sale or transfer of agricultural property was regarded as
coming from farmland, and as a result, the revenues were exempt from taxes. The courts also
endorsed this idea. But starting in April 1970, this position was altered by a retroactive revision.
After the amendment, a piece of land was classified as agricultural if it wasn't located in a
municipality or cantonment board-governed area and the population of that area was less than
10,000 at the time of the most recent census, which was released before the first day of the year
before the sale of the land in question.
Any land that passes the previous test is not counted as a capital asset, and the sale of such land
cannot result in capital profits. Any agricultural land that does not pass the previous test will be
regarded as a capital asset. Any revenues from its sale will be taxed on capital gains, with some
exceptions allowed under Section 54B of the Income Tax Act.
According to Section 54B, in some circumstances, any capital gains that result from the sale or
transfer of agricultural land are not taxed as income.3
1. A Hindu Undivided Family (HUF) or a person should be the assessee.
2. The asset should have been used for agricultural purposes, whether it is a long-term asset
or a short-term one.

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 3. Before transferring or selling the land, the assessee or his parents must have owned and
used the property for at least two years.
4. After two years of selling the previous agricultural land, the assessee must buy a new
ground for farming.
5. He should use the entire sum he received from selling the last parcel of land to pay for
the new one.
6. Three years after the asset's acquisition date, the newly acquired asset cannot be sold. If
the new asset is sold, the amount of capital gain that the assessee claimed under Section
54B to compute capital gains will be deducted from the cost of the new asset.
7. Suppose the assessee does not use the proceeds from the sale of the prior asset to
purchase further support before filing his tax returns. In that case, he may deposit the
profits in the Capital Gains Account Program at any designated bank.

Necessary conditions for income to be Agricultural income

 Income should be derived from land.
The first criterion is that all income must come from the land and nothing else. A farmer who
produces on the soil may own or occupy the land, or a renter may get the produce. Land can be a
property used for farming or a structure a farmer or renter should own or occupy. The farmhouse
or building must be situated on the same property and utilized as a home, a store, or other
outbuildings.
Rent or revenue should be the source of income.
Rent is a payment made by one person to another in exchange for the right to use specific
property; it may be made in cash or kind.
Regarding Durga Narain Singh v. CIT [(1947) 15 ITR 235], revenue is broadly defined.
Rent-free income is included in "revenue." Revenue from land is derived from change fees
collected from tenants following their transition to occupancy holding.
Land can only generate income if it is a reliable, immediate source of income rather than an
auxiliary or secondary source. When revenue comes from an indirect source, it is not regarded as
income from land.

 The land must be situated in India.

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A further requirement is that the land be located in India, whether in an urban or rural setting.
Moreover, Section 2(1A) of the Income Tax Act refers to the areas. Officers of the government
are permitted to collect land tax in the following areas:
1. If it is located in a region under the control of the municipality or cantonment board and
has a population of at least 10,000.
2. Any place nearby,
3. That is less than two kilometers from the municipal or cantonment board's local limits
and has a population of at least 10,000 but not more than 100,000.
4. It is at most six kilometers from any municipality's or cantonment board's local limits and
has a population of at least 100,000 but not more than 100,000.
5. I have a population of more than ten lacks and at most eight kilometers from the local
limits of any cantonment board or municipality.
Foreign agricultural revenue will not be excluded under the definition of agricultural income;
rather, it will be regarded as income from other sources.
For instance, someone may own land in Africa and rent it to Mr. A for agricultural purposes. The
income that a person now receives will be counted toward their total income as income from
other sources.

 Land must be used for basic operations of Agriculture.

The operation must be connected to agriculture to qualify for agricultural income exemption. It
indicates that land should be used for agriculture.

What is meant by the word "Agricultural Purpose" now?

The Supreme Court established the guidelines for the terms "Agriculture" and "Agricultural
Purposes" in the case of CIT v. Raja Benoy Kumar Ushas Roy [1957] 32 ITR 466.

S.C. categorizes operations into two groups.

Essential operation: Only having agricultural land will qualify as agrarian purposes; the
necessary process includes the application of human skill and labor to the land itself—many
tasks, including planting, seeding, and land preparation.
The operation that comes after. After the crop emerges from the ground, activities are carried
out. Weeding (removal of wild plants), removing undesired undergrowth’s, clearing the crop of

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insects and pests, cutting, harvesting, making the produce marketable, etc. Simply fulfilling these
tasks on the land will not qualify as agricultural operations; subsequent operations must continue
basic operations.
Suppose this integrated activity is carried out on land. In that case, it can be categorized as being
done for "agricultural purposes," The income generated by these activities is referred to as
"agricultural income."

● Income from a Nursery

A nursery's income is never included in total revenue.
State of Uttar Pradesh v. H.H. Maharaja Vibhuti Narain Singh [1967] 65 ITR 364 (All.)
The Hon'ble Allahabad High Court ruled that money from a nursery is not considered
agricultural income unless a farmer maintains it as a tool or an auxiliary to the primary
agricultural process, such as a paddy nursery or a nursery for tomato plants. In this case, the
assesses used the greenhouse to grow beautiful plants, which cannot be regarded as a support
activity for the main agricultural activity.

When Agricultural income consists of both Agricultural and non-agricultural

income
Rules 7, 7A, 7B, and 8 of the IT Rules are used to determine the income that is partially
agricultural and partially non-agricultural.
Rules 7, 7A, 7B, and 8 of the IT Rules are used to determine the income that is partially
agricultural and partially non-agricultural.
Rule 7 states that when determining chargeable income, the government will determine the
market value of any agricultural products raised by the assesses or rent he received and used as a
raw material in a business. Only that amount will be deducted, and no further deductions will be
allowed. This rule applies to partially agricultural income and partly income chargeable under
the head "profits and gains of business."
Rule 7A. Income from the sale of technically specified block rubbers manufactured or processed
from field latex or coagulum obtained from rubber plants grown by the seller in India in the first
instance, be computed as if it were income from the business. Latex-based crepes, such as estate
brown crepe, re-milled crepe, smoked blanket crepe, flat bark crepe, or latex-based crepes, such

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as pale latex crepe, are technically specified block rubbers. 35% of the income will be
considered business income and subject to taxation.
Rule 7B. States that money from the sale of coffee that the seller grew and cured in India must
be calculated as income from the business. The pay will be taxed at a rate of 25%.
Revenue from the sale of coffee that the seller grew, cured, roasted, and ground in India, whether
or not chicory or other flavoring components were mixed in, is calculated as income from the
business. The pay will be considered taxed to the extent of 40%. No deduction from income will
be made for the subsidy amount if plated rubber plants are needed to replace those that have died
or become permanently worthless in an already planted area, provided the site has not been
abandoned.
Rule 8: The income from producing tea and cultivating tea leaves must be calculated as a
business income, and 40% of the payment must be considered taxable under the Act.

AFT Industries Ltd. v. CIT (2004:141 taxman 433) (cal.)

In calculating the business's income, the chess imposed by the West Bengal Rural Employment
Production Act of 1976 and the West Bengal Primary Education Act of 1973 may be deducted.
The chess does not qualify as an item of deduction that is prohibited.

Conclusion
Income from agriculture is free from income tax, but the State government does so indirectly. As
we have already covered, there are numerous needs and strategies for agricultural revenue. Every
other method will calculate it as having a mixed farming and non-agricultural component.

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