Agricultural/Farming Income Income Tax Act, 1961

Under the Income Tax Act, 1961, agriculture income is defined and treated uniquely compared to other forms of income. This special treatment is rooted in the importance of agriculture to the Indian economy and the large population dependent on it for their livelihood.

Definition of Agricultural Income:

Section 2(1A) of the Income Tax Act, 1961 defines agricultural income as:

1. Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.
2. Any income derived from such land by agricultural operations including processing of the agricultural produce, raised or received as rent-in-kind so as to render it fit for the market, or sale of such produce.
3. Income derived from buildings on or identified with agricultural land. The crucial requirement here is that the building should be occupied by the cultivator or the receiver of rent or revenue of the land.

The interpretation of what constitutes “agricultural operations” includes all activities starting from basic operations like plowing and sowing to subsequent processes such as weeding, digging the soil around the growth, removal of undesirable undergrowths, and all operations which foster the growth and preservation of the same produce.

Tax Exemption of Agricultural Income

Agricultural income is exempt from income tax under Section 10(1) of the Income Tax Act, 1961. This exemption is pivotal in supporting the agricultural sector by alleviating the tax burden on farmers. However, the calculation of tax on non-agricultural income of individuals receiving agricultural income is influenced by the agricultural income in a manner that effectively raises the tax rate on non-agricultural income.

Integration of Agricultural and Non-Agricultural Income for Tax Calculation

Although agricultural income is exempt from tax, it plays a role in determining the tax rate applicable to non-agricultural income if the total income, including agricultural income, exceeds the basic exemption limit. This is done through a method called “partial integration” under Sections 2(1A) and 10(1). The steps are as follows:

1. Calculate the total income excluding agricultural income.
2. Add the basic exemption limit to the agricultural income.
3. Add the above result to the non-agricultural income.
4. Calculate tax on the total amount from step 3.
5. Subtract the tax calculated on the sum of the basic exemption limit and agricultural income from the tax computed in step 4.

The outcome ensures that a taxpayer with agricultural income does not pay more tax on non-agricultural income than a taxpayer with a similar amount of non-agricultural income but without any agricultural income.

Special Provisions and Considerations:

1. Lease Land for Agriculture:

Income derived from land given on lease for agricultural purposes can also be considered agricultural income if the land is being used directly for agricultural operations.

2. Composite Rent:

Where the rent received is partly agricultural and partly non-agricultural, the income needs to be appropriately apportioned.

3. Income from Farm Buildings:

Necessary farm buildings that are on or near the agricultural land and are used as dwellings for those employed on the land or for storing produce also qualify under agricultural income.

Judicial Interpretations and Rulings

Various rulings and judicial interpretations have clarified aspects of what constitutes agricultural income. For instance, income from dairy farming, poultry farming, stock breeding, or sale of spontaneously grown trees is not considered agricultural income. However, income from operations such as breeding and rearing of livestock, which are essentially agricultural operations, is considered agricultural.

Challenges and Criticisms

While the exemption of agricultural income under the Income Tax Act is aimed at supporting farmers, it is often criticized for enabling tax evasion, especially when high-income earners exploit this provision to shield their income from taxes by reclassifying it as agricultural. This has led to calls for more stringent definitions and perhaps limits on what can be exempted under this head.