Section
10
Section
10 of the Income Tax talks about the various kinds of exemption of the income
tax.
Agriculture income is exempt from the income tax under section 10(1) of the
income tax act. But India has also witnessed many unlawful means by which
non-agricultural income by many people have tried to be shown under this
category of income and get exempted from the tax imposed.
If your other income is taxable under the act, then your agricultural income
will be considered for rate purposes only (not taxed). For e.g., if your
taxable income is 3 lakhs along with the agricultural income of 10 lakhs, then
your income will not be taxable. But if it is vice-versa then it will not be
treated as agricultural income.
Agricultural income means under section 2(1)(a) of the act:
a) any rent or revenue derived from land, which is situated in India and is used for agricultural purposes,
(if the government or any industry whatsoever acquired the land and given you the compensation, then it will not be called revenue generated from agricultural land for exemption purpose under the Income Tax Act.)
b) any income derived from such land by:
1) Agriculture or
2) The performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market or
3) The sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph 2 of this sub-clause.
Whether the ownership of land is important in order to show the revenue generated from agricultural land and get an exemption?
No, it is not important. even the person given the land on rent will also enjoy
the income tax exemption. this is not a condition laid down in the act.
Bacha F. Guzdar v CIT[1]
The issue before the Supreme Court: Whether
dividend received from tea companies is an agricultural income or not?
Dividend paid by the company out of
its agricultural income to its shareholders will not come under the exemption
of section 10(1) of the act as the immediate source of source income is
dividend and not the land. The Supreme Court said that the immediate
source of income should be from land only, which to be situated in India.
For e.g.: A resident of India, have
his land, let say in Nepal, then the income generated out of the land will be
taxable in India under the IT Act.
CIT V Raja Binoy Kumar Sahas Roy[2]
The respondent had 6,000 acres of forest land which was originally of
spontaneous growth. He claimed the income derived from selling trees to be his
agricultural income. ITAT (Income Tax Appellate Tribunal) said that there are 2
types of tress, self-grown trees and trees upon which efforts be made to grow. ITO
(Income Tax Officer) said there is no evidence with regard to the trees are
developed by the assessee himself. ITAT said, that ITO has not made any inquiry
with regard to the portion of the area, which the assessee has grown himself
and area which is self-grown. Even the High Court said the same. Assessee
got the benefit of doubt, which is even given by the Supreme Court because
already many years has been elapsed now and the inquiry cannot be made now, and
the court treated the entire income as agricultural income.
Supreme Court (Jts. N.H. Bhagawati)
laid down the certain principle, to examine the claim of income as
agricultural income:
1) Basic operation: expenditure of
human skill and labour on land tilling, sowing of seeds, disseminating of
seeds, planting or other similar work done on the land.
and,
2) Subsequent operations: weeding,
digging, fostering the growth, pruning, tending, removing of undesirable undergrowth’s
to be removed. These are in continuation of same and therefore acquire characteristics
of agricultural income.
Also, the mere performance of these
subsequent operations on the products of the land, where such products have not
been raised on the land by the performance of the basic operations which we
have described above would not be enough to characterise them as agricultural
operations.
Also, the Supreme Court has observed
that the products which grow wild on the land or are of spontaneous growth, unassisted
by human skill and labour, and human skill and labour are spent merely in
fostering the growth, preservation and regeneration of such products of the land
are not products of agriculture and the income derived therefrom is not
agricultural income
Whether
the process of converting the jaggery out of the sugarcane will be considered
as agricultural income?
Jaggery
is only "fit to be taken to the market", just one aspect of the conditions
is satisfied. hence, it will not be qualified to come under the ambit of
agricultural income. value addition has a very limited scope, like making the
land fit for cultivation etc. But, after a limit, the value addition will lose
its character-forming a part of agricultural income.
There
are many products which cannot be sold to the market without processing them.
Income Tax Rules, rule 7(A) and 7(B) have been laid down the conditions for
evaluating if any product falls under the agricultural income or not.
What
is agricultural land?
Income
generated from the agricultural land will be treated as agricultural income.
Any
income derived from any building owned and occupied by the receiver of the rent
or revenue of any such land, or occupied by the cultivator or the receiver of
rent-in-kind, of any such land with respect to which, or the produce of which,
any process mentioned in paragraph 2 and 3 of sub-clause is carried on
provided that-
a) The building is on or the immediate vicinity of the land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the land, requires as a dwelling house or as a storehouse or other outbuilding and,
b) The land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the government as such or where the land is not so assessed to land revenue or subject to a local rate, it is not situated.
Your
house or storehouse or whatever dwelling is should be in the vicinity of the
agricultural land. 'Vicinity' is not defined strictly by law but should be reasonably
located to the agricultural land. Then the land comes under the ambit of
agricultural land.
In
any area which is comprised within the jurisdiction of a municipality (whether
known as municipality, municipal corporation, notified area committee, town
area committee, town committee or by another name) or a cantonment board and
which has a population of not less than ten thousand.
In any area within the distance, measured aerially-
a) Not being more than 2 km from the local limits of any municipality or cantonment board referred to in above term and which has a population of more than 10,000 but not exceeding 1 lakh or,
b) Not being more than 6 km from the local limits of any municipality or cantonment board referred to in item above and which has a population of more than 1 lakh but not exceeding 10 lakhs or,
c) Not being more than 8 km from the local limits of any municipality or cantonment board referred to in item above and which has a population of more than 10 lakhs.
Q) There is a firm and
there are partners in that firm. The firm is earning only agricultural income
as per the Partnership deed. One of the partners is getting a salary from the
firm. What is the nature of the salary of the partner getting from the firm?
-
It is not an agricultural income.
Any income derived from the sapling or seedlings grown in a nursery shall be deemed to be agricultural income. Nursery income is hence an agricultural income and it is exempted from Income Tax.
Q) If you sell your agricultural land, will the money derived will become
agricultural income?
No,
it will not be an agricultural income. It is a capital gain because it derived
out of capital assets under the Income Tax Act.
Revenue derived from land shall not include and shall be deemed never to have
included any income arising from the transfer of any land referred to in item
(a) or item (b) of sub-clause (3) of clause 14 of section 2 of the act.
a) In any area which is comprised within the jurisdiction
of a municipality (whether known as a municipality, municipal corporation,
notified area committee, town area committee, town committee, or by any other
name) or a cantonment board and which has a population of not less than ten
thousand according to the last preceding census of which the relevant figures
have been published before the first day of the previous year; or
b) In any area within such distance, not being more than
eight kilometres, from the local limits of any municipality or cantonment board
referred to in item (a), as the Central Government may, having regard to the
extent of, and scope for, urbanisation of that area and other relevant
considerations specify in this behalf by notification in the Official Gazette,
CIT v R.M. Chidambaram Pillai[3]
The respondents were partners in
firms which owned tea estates, the composite income of which consisted
largely of agricultural and
partly of non-agricultural income.
In addition to their share in profits, they were entitled to
salaries. They claimed that their salaries to be treated as under rule 24 of
Income Tax Rules 1922 and only 40% of their salary fall into non-agricultural
income. Whereas ITO charged their whole salary to be treated as taxable income.
The Supreme Court given the judgement
in favour of respondents. The true character of salary is the same as that of
profits. The general concept of a partnership is
that a firm is not an entity or 'person' in law but is merely an association of
individuals and a firm name is only 'a collective name of those individuals who
constitute the firm.
The necessary inference from the
premise that a partner- ship is only a collective of separate-persons and not a
legal person in itself lends to the further conclusion that the salary
stipulated to be paid to a partner from the firm is in reality a mode of
division of the firm's profits, no person being his own servant in law since a
contract of service postulates two different persons.
B Nagi Reddi v CIT[4]
Income derived from giving farmhouse
and garden for film shooting. The assessee claim that they have derived the
income in the form of agricultural income and hence be exempted. But the Madras
High Court held such income will not be an agricultural income. The
term “agriculture” cannot be dissociated from the primary significance thereof
which is that of basic and subsequent operations, i.e., cultivation of land etc.
Assesses activities does not involve any basic operation on the land and hence
would not constitute agriculture merely because they have relation to or
connection with the land.
DCIT
v Inventaa Industries, 2018
The firm called growing mushroom vertically, under the controlled conditions.
It is called Vertical Mushroom Farming in the laboratory. The assessee claimed
it to come under agricultural land. but CIT said the following income derived
will not form part of the agricultural income as it is away from land, it not
an agricultural activity.
Hyderabad
ITAT (Income Tax Appeal Authority) held it to be not an agricultural income and
hence taxable under the IT Act. The ingredient of land is must, hence even the
income derived by the firm is taxable.
Perspective
Interpretation of law - The purpose of the very section is to protect the
interest of farmers by the legislature. If it is allowed to come under the
ambit of agricultural income, then the whole purpose of providing relief to the
farmers would be defeated.
Income which is partially Agricultural and partially from Business in nature: Income Tax Rules 1962
1. Growing and Manufacturing Tea
Rule 8 - 40% Business Income - 60% Ag. Income
2. Manufacturing Rubber
Rule 7(A) - 35% Business Income - 65% Ag. Income
3. Growing Coffee
Rule 7(B) - 25% Business Income - 75% Ag. Income
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