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Taxation of Agricultural Income in India

Present article explains the Taxation norm under Agricultural income in the Indian Context. Several provisions of tax laws and Judicial precedents have been relied.

Introduction

Agriculture is considered the livelihood of the majority of Indians. Approximately 58% Indians are dependent on agriculture as their primary source of income.

Agricultural Income can be defined in layman terms to be the income derived from agricultural ventures.

Definition of Agricultural Income

According to Section 2(1A) of the Income Tax Act, 1961, agricultural income means:

  1. Rent or revenue derived from an agricultural land and is situated in India: Rent is the consideration paid for using the land of another. Such agricultural land must be situated in India.
  • Case law on this point is as follows- CIT v Kamakhya Narayan Singh[i], where it was held that arrears of rent from agricultural land cannot be considered as agricultural income.
  • Another important case law on this point is – Bacha F. Guzdar v CIT[ii], in this case, the assessee was a shareholder of a tea company and received dividend. He claimed exemption on account of it being an agricultural income. It was held that the assessee did not derive dividends directly from the land and hence, cannot be exempted under agricultural income.
  • Any rent or revenue which is received or derived from such land by use of any agricultural operations which render the produce fit for market or sale of such produce: An important case law on this point is that of CIT v Raja Benoy Kumar Sahas Roy[iii] where the Supreme Court defined agriculture as an activity which consists of two types of operations –
  1. Basic operations: includes cultivation of the land and the subsequent tiling, sowing of seeds, planting etc, basically all those activities which require human skill and efforts.
  2. Subsequent operations: include those operations which are done for the purposes of further growth andpreservation of the plants and includes weeding, digging, removal, etc.
  • Any income which is attributable to a farmhouse which is used for agricultural purposes. Such building should be in the immediate vicinity of the land and can be a dwelling house or an outhouse, etc.

Explanation 3 to Section 2(1A) makes it clear that any income which is derived from the sale of seedlings or saplings shall be considered as agricultural income.

Some examples of agricultural income are as follows:

  1. Income derived from sale of seeds.
  2. Income derived from sale of replanted trees.
  3. Rent received for agricultural land, etc.

Some examples of non-agricultural income are as follows:

  1. Income from poultry farming.
  2. Income from bee hiving.
  3. Dividend from an organization the deals in agricultural ventures.
  4. Income from dairy farming.
  5. Purchase of standing crop, etc.

Is Agricultural Income Taxable in India?

According to Section 10(1) of the Income Tax Act, 1961, agricultural income is exempted from taxation. The central government does not have the authority to levy tax on agricultural income.

However, the Income Tax Act has laid down a method to indirectly levy tax on agricultural income. This method is called the partial integration of agricultural income with non-agricultural income.

Individuals, Hindu Undivided Family, Association of Persons, Body of Individuals and Artificial Judicial Persons have to compulsorily calculate their income using this method. Companies, Limited Liability Partnership, firms, co-operative societies are exempt from this method.

This method is applicable in the case the following conditions are met:

  1. The net agricultural income is greater than Rs. 5,000 per year, and
  2. Non-agricultural income is –
  1. >2,50,000 for applicable persons (if individuals then under 60 years of age),
  2. >3,00,000 for individuals between 60-80 years of age,
  3. >5,00,000 for individuals above 80 years of age.
  • As can be seen from the above discussion, agriculture income is not per se taxable in India. But many economists and eminent jurists are of the view that agricultural income should be taxable. Let us look at the various views as to whether agricultural income should be taxable or not.

Why the Government should tax Agricultural Income?

Taxation of agricultural income has always been a very sensitive issue and none of the governments have shown any interest in taking corrective measures even though the official reports have repeatedly expressed concerns over non-agriculturists abusing the exemption given to agriculturists.

The fact that non-agriculturists abuse the exemption has been officially acknowledged several times in the past, however, little has been done to avoid that.

The exemption of agricultural income has been used as a tool of tax evasion and money laundering. In 2002, the Task Force on Direct Tax (the Kelkar Committee) in 2002 in its report said that exemption to agricultural income distorts both horizontal and vertical  equity and it also encourages the laundering of non-agricultural income as agricultural income.

This issue goes back to the 1970s. Economist Professor Arun Kumar says that two other committees – the Raj Committee and the Wanchoo Committee also mentioned the same in their reports in 1970s.

In 1925, the taxation enquiry committee noted that historically there is no need or no theoretical justification for the continued exemption of agricultural income from income tax.

NITI Aayog’s member in May 2017 suggested that the agricultural income above a certain threshold should be taxed.

However, given the extent of the informality of the agricultural sector, it will be difficult to implement a taxation scheme for the sector. According to the 2004 paper of the World Bank on “Taxing Agriculture in A Developing Country: A Possible Approach”, Indira Rajaraman analysed 70 countries in order to show how the dual problem of payments in cash or kind and a lack of accounting throws up barriers.

Conclusion

As we can see, agricultural income is more of a political issue and where some say that there should be slabs of tax just as in the case of other sources of income, others say that the rich farmer should be taxed. Whereas some say the idea of taxing agricultural income is of great disservice to the agricultural sector which is already in a deep crisis.

[i] CIT v Kamakhya Narayan Singh (1949) 51 BOMLR 182

[ii] Bacha F. Guzdar v CIT 1955 AIR 740

[iii] CIT v Raja Benoy Kumar Sahas Roy 1957 AIR 768

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