Sunday, February 22, 2009

Income from Agriculture including Plantations

INCOME FROM AGRICULTURE INCLUDING PLANTATIONS

Our country is predominantly one with agricultural back ground. At the time we attained independence nearly 87% of the people were involved in the field of agriculture. With advancement of industrialization, gradually industrial development has eroded into this sector, which has to a sizable extent decimated the availability of agricultural land. Further our rural folks had the conventional implements such as yoke and other equipments, which could not generate better yield. Our irrigation potential, seed processing, type of crops, (seasonal/cash crop) were not well known to our people as our agriculturists were not well trained in the field, but had been carrying on the routine pattern of crop. In order to provide at least some bit of land to the massive landless workforce, late Vinobahaji launched the Bhoodan Movement at Ponchampalle in Andhra Pradesh. The use of organic and in organic manure has brought out some trend of promotion in agriculture. In order to harness all these effects and to make it more productive a number of schemes have been developed in our country to educate the agricultural folks on the manner of preparation of land for agriculture, sowing of seeds, applying fertilizer, irrigation operations. Since geographically it would not be convenient, from the point of view of diverse culture both linguistic and conventional barriers, it was decided to keep agriculture under Entry 82 of the Union List and entry 46 of the state list of Schedule VII of the Constitution.( to work concurrently on the field)

The object behind is to advise the states concerned of the need for promoting agriculture according to the type of soil, provide infrastructure to the rural folks akin to their capacity. While the states would be provided necessary subsidy in supply of fertilizer, seeds and other connected stuff for agriculture. While this is the general perception, which is taken care of by the concerned state governments, in co-ordination with the Central Government, let us analyze the roll the Income-tax Act also plays in encouraging this sector.

Section 2(1A) of the Income-tax Act, 1961 ( which presently governs the taxing statutes) provides an exhaustive definition for agricultural income:

  1. Any rent or revenue derived from land which is situated in India and is used for agricultural purposes. This is further clarified to state that i) any income derived from such land by agriculture or ii) 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
  2. 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 making it fit to be carried to the market
  3. 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 land with respect to which , or the produce of which, any process discussed earlier is carried on
The import of this definition is that any land which is classified as agricultural land should be one in which normal agricultural operations ordinarily done should be done. The produce reaped as a result of such operations, by way of sale in the market, realizing the monetary worth thereof shall be regarded as agricultural income. In this process, the cultivator or the lessor of the land who receives either money or rent in kind for leasing of the land, as a result of agricultural operations shall be deemed to have obtained such income from agriculture. Similarly any building which is in the vicinity of the agricultural land, if it is occupied either by the cultivator or the lessor and derives any income from such building would also be deemed to have obtained the income from agricultural operations. The other conditions are that the building or land should be subjected to a local rate or tax. In other words the cultivator or the lessor ought to have subjected the property to local tax and such tax should have been collected by the Officers intended for the purpose. The agricultural income so derived from the said source enjoys blanket exemption from tax irrespective of the volume and quantum.

However, there are certain restrictions are imposed before extending the benefit of exemption - They are:

  1. not situated in any area which is comprised in the jurisdiction of a Municipality or a notified area or a cantonment or a placed where the population according to the last census exceeds 10000 people living in that area
  2. the land should not be within 8 kilometer radius of any Municipal limits, Cantonment or Board or any notified area.

The import of this provision is to restrict the benefit of exemption only to such agricultural lands which are only in rural areas and not in urban area or other positions as discussed. The Supreme Court in the leading case of Raja Bhenoy Kumar Sahas Roy 32 ITR 466 has laid down certain parameters to identify what is an agricultural operation; according to which:

  1. efforts taken to prune the land i.e. ploughing/tilling
  2. sowing seeds
  3. transplantation of such seedlings
  4. growing such seedlings by providing irrigation facilities including providing manure
  5. threshing to segregate the corns.

This can be done either directly by the cultivator or by the owner through some workmen. In all such events, the sale proceeds realized on sale of the produce brought out by the agricultural operations shall be regarded as agricultural income.

It can be seen that as a measure of encouraging agricultural activities in our country income derived from agriculture has been extended blanket exemption. It is further clarified that income from agriculture is the one which remains as gain from agricultural operations after deducting all expenses which are exclusively laid out for agricultural operations. It is immaterial as to the nature of crop cultivated, Be it sugar cane, wheat, paddy, Bajra, millet or any other seed, including cash crops like vegetables, fruits.

It should also be noted in this connection that by virtue of the recent amendment, the Income-tax Act also provides for blanket exemption on income derived from running of nurseries where the flower or other decorative plants are grown in pots and sold. This benefit is also applicable to income derived on sale of saplings (to encourage provision of flora and fawna in the arena) Such incomes are also included within the scope of agricultural income from the assessment year 2009-2010 onwards.

Yet another point to be noted is that only income generated from specific agricultural operations would enjoy the benefit of exemption. Proceeds derived from sale of trees of spontaneous growth, such as silver oak trees, Rose wood (unless they are actually planted and nurtured in the manner provided for agricultural operations) would not get the benefit of exemption. However growing Casuarina tree or shade trees in certain plantations, to provide shade to coffee plantations which are actually planted and brought up with proper watering and treatment would get the benefit of exemption. The same treatment would be extended for orchards where fruits trees are grown and fruits marketed.

I would also like to clarify in this connection that when agricultural produce is reaped from the land on harvesting, the barest minimum operation needed can alone be done to retain the character of agricultural produce. To illustrate, in a given case, if paddy or wheat is cultivated and harvested, it should be sold as paddy or wheat. The minimum operation intended here is to segregate them from the hay or tem and make them as actual paddy. Similarly ground nut, if decorticated and actual kernels are sold, they are agricultural produce. On the other hand if paddy is hulled and rice is brought out, it gets converted into a new product which will not be regarded as agricultural income. Similarly sugar cane sold in the raw form is agricultural income; while the products brought out from it by way of jaggery or sugar/candy would be business income.

Another intriguing point I would like to bring out is that agricultural income irrespective of the volume is tax free. At the same time, if the recipient of agricultural income also earns income which exceeds the taxable minimum, then the agricultural income would be aggregated with the other income and taxed at the rate as applicable to such aggregated income. Then pro rata rebate on the agricultural income by adding the agricultural income along with the limit laid down for taxable minimum and the tax on such figure would be allowed as a rebate. This is illustrated by a simple example. In case a person derives agricultural income of Rs. 2 lakhs and other income Rs.3 lakhs. Tax would be worked out at the rate applicable to the aggregated income viz. 2 plus 3. From this tax on Rs.2 lakhs plus the taxable minimum viz. Rs.1,50,000 (which is the rate in currency for the current financial year) would be reduced. The tax after deducting the rebate would be payable by him. This provision is to collect some element of tax in tune with the benefit derived by an entity from sources other than agriculture. This is because predominantly agriculture as an industry has to be encouraged. At the same time persons who are affluent should also contribute in proportion to their income from other sources, as lawful citizens of the country.

1 comment:

Unknown said...

great review of changing trend on Indian thinking of agriculture

Hope to see posting related to Online tax filing India


thanks