Income from Agriculture Land

Introduction

Income from an agriculture land can be either from agriculture operations or from sale of agriculture land. Income-tax Act contains specific provisions to deal with these types of income. Income arising from agricultural operations is though exempt from tax but in certain situation it is included in total income to determine the exact tax on non-agriculture income. Whereas, capital gain arising from sale of a rural agriculture land is exempt from tax, while capital gain from sale of urban agriculture land is chargeable to tax.

1. About

1.1. Meaning of Agriculture Land

Income-tax Act provides various exemptions and concessions in respect of agricultural land in India. But, it doesn’t provide any guidance as to when a land is treated as an agricultural land. In ordinary sense, a land is said to be an agricultural land if it is used for agricultural purposes. However, for taxation matters, there are two important judgments

1.1-1. Classification in revenue records

If the land is classified into revenue records as an agricultural land and subjected to the payment of land revenue then it is certainly a strong piece of evidence of its character as an agricultural land. However, a land which had never been actually used for agriculture and never been ploughed or tilled could not be treated as an agricultural land just because it is entered in revenue records as an agricultural land.

1.1-2. Usage

A land could be said to be an agricultural land if it is either actually used, ordinarily used, or is meant to be used for agricultural purposes. However, the potential use of the land as agricultural land is wholly immaterial. Thus, land should be actually used for agricultural purposes at or about the relevant time. Further, it must be checked whether user of the land was for a long period or whether it was of a temporary character or by way of a stop-gap arrangement.

Here, it is to be noted that if the land is ceased to be put to agricultural use or it is put to an alternative use. It must be checked whether such cesser or alternative user was of a permanent or temporary nature. If it is of a temporary nature then the land could still be treated as an agricultural land.

1.1-3. Source of investment

The Court has observed that in determining the agricultural characteristics of a land, it should also be considered whether the income derived from the agricultural operations carried on in the land bore any rational proportion to the investment made in purchasing the land.

1.1-4. Location

The physical characteristics of land, surrounding situation and use of the lands in the adjoining area are some of the vital factors which should be considered to determine whether the land is an agricultural land or not. Further, it must be checked whether the land situated in a developed area and whether the land itself is developed by plotting and providing roads and other facilities.

1.2. Meaning of Agriculture Income

Main article: ‘Agriculture Income’

Any income arising from exploitation of an agricultural land may not constitute an ‘agriculture income’. The agricultural income has been specifically defined under the Income-tax Act. It includes rent or revenue derived from agriculture land, any income derived by agriculture, from marketing process, from sale of produce, from farm building or income derived from saplings or seedlings grown in a nursery.

1.3. Tax Implications

Main article: ‘Computation of tax on income from agricultural land’

1.3-1. Agricultural Income

Agricultural income is exempt from tax under Schedule II [Table S. No. 1] of the Income-tax Act. The agriculture income is exempt from tax due to the reason that the Constitution of India gives exclusive power to make laws with respect to taxes on agricultural income to the State Legislature. However, in some cases agricultural income is taken into consideration to determine tax on non-agricultural income. This scheme is called partial integration of agriculture income with non-agriculture income to determine the rate of tax on non-agriculture income.

1.3-2. Capital gains from agricultural land

For capital gain purposes, an agricultural land is classified into two categories; a) Rural Agricultural Land and b) Urban Agricultural Land. Any gain arising from transfer of rural agricultural land is not chargeable to tax under the head Capital Gains because such land is specifically excluded from the definition of capital asset. Whereas, gain arising from transfer of urban agricultural land is chargeable to tax under the head Capital Gains.

1.4. Income Partly Agricultural and Partly Business

Main article: Partly Agricultural and Partly Business Income

Where an entity carries both agricultural and non-agricultural activities, the profits arising from the business shall be both agricultural income and non-agricultural income. Such a situation arises in case of certain agro based industries where agricultural produce is produced by the same person who manufactures the industrial product by using such produce as raw material.

To deal with these situations, the Income-tax Act read with Rule 271 allows computation of income on presumptive basis under where some part of business income is treated as agricultural income while rest shall be non-agricultural income. These businesses include manufacturing of tea, coffee or rubber in India.

References

Smt. Sarifabibi Mohmed Ibrahim v. CIT [1993] 70 Taxman 301 and CWT v. Officer-in-Charge (Court of Wards) [1976] 105 ITR 133

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.