Section 10(1) of the Income-tax Act, 1961 exempts agricultural income from income-tax.
Agricultural income including the following:
(i) any rent or revenue derived from land;
(ii) any income derived from such land by agriculture or from processing of agricultural produce;
(iii) any income from farm building.
(iv) Income of nursery : Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.
Agriculture income would, however, cover only those incomes which are derived by human effort.
Income which is Partially Agricultural and Partially from Business
(A) Income from growing and manufacturing of any product other than Tea [Rule 7]
An assessee may have composite business income which is partially agricultural and partially non-agricultural,
For example, where XYZ Ltd. grows potatoes and further processes its produce to sell them as wafers. In this case the company has composite income i.e. from agriculture and from business.
The composite income has to be disintegrated and for computing business income the market value of any agricultural produce raised by the assessee or received by him as rent in kind and utilised as raw material in his business is deducted. No further deduction is permissible in respect of any expenditure incurred by the assessee as a cultivator or receiver of rent in kind.
For computing agricultural income the market value of agricultural produce will be total agricultural receipt on account of potatoes. From such agricultural receipts, expenses such as cultivation expenses etc. incurred in connection with such receipt will be deducted and balance will be agricultural income which will be exempt.
For example. in the above case, if the market value of the potatoes grown by the company, which have been used for the purpose of making its own wafers, is Rs. 5 lakhs and the cost of cultivation of such potatoes is Rs. 4 Lakhs, the agricultural income shall be Rs. 1 Lakh ( Rs. 5 Lakhs – Rs. 4 Lakhs). This agricultural income of Rs. 1 Lakh shall be exempt. Further for the purpose of computing business income from the sale of wafers produced from such potatoes, the company shall be allowed deduction of Rs. 5 Lakhs as the cost of potatoes, being the market value of potatoes grown by it.
(B) Income from Growing and Manufacturing of Rubber [Rule 7A]
(1) Income derived from the sale of centrifuged latex or cenex or latex based crepes (such as pale latex crepe) or brown crepes (such as estate brown crepe, re-milled crepe, smoked blanket crepe or flat bark crepe) or technically specified block rubbers manufactured or processed from field latex or coagulum obtained from rubber plants grown by the seller in India shall be computed as if it were income derived from business, and
35% of such income shall be deemed to be income liable to tax.
(2) In computing such income, an allowance shall be made in respect of the cost of planting rubber plants in replacement of plants that have died or become permanently useless in an area already planted, if such area has not previously been abandoned, and for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which, under the provisions of section 10(31). is not includible in the total income
(C) Income from Growing and Manufacturing of Coffee [Rule 7B]
(1) Income derived from the sale of coffee grown and cured by the seller in India, shall be computed as if it were income derived from business, and 25% of such income shall be deemed to be income liable to tax.
(2) Income derived from the sale of coffee grown, cured, roasted and grounded by the seller in India, with or without mixing chicory or other flavouring ingredients shall be computed as if it were income derived from business, and
40% of such income shall be deemed lobe income liable to tax.
(D) Income from Growing and Manufacturing of Tea
Where the assessee has a business of growing tea leaves and then processing it (or manufacturing the same), the procedure adopted to disintegrate is as under:
Step 1: Compute the income of growing as well as manufacturing tea under the head ‘profits and gains of business or profession’ after claiming the deductions available under that head.
Step 2: 60% of the income computed in Step 1 will be treated as net agricultural income and 40% of such income, so arrived at, is treated as business income.
Tax on Non-Agricultural Income if the Assessee Earns Agricultural Income also
Such partial integration of agricultural income with non-agricultural income is done only in the case of:
- Artificial Juridical Person.
It is not done in the case of:
- Co-operative Society;
- Local Authority.
As already discussed, there is no tax on agricultural income but if an assessee has non-agricultural income as well as agricultural income, such agricultural income is included in his Total Income for the purpose of computation of Income-tax on non-agricultural income. This is also known as partial integration of agricultural income with non-agricultural income or indirect way of taxing agricultural income.
The partial integration is done to compute the tax on non-agricultural income only when the following two conditions are satisfied:
(1) Non-agricultural income of the assessee exceeds the maximum exemption limit which is Rs. 2,50,000 in the case of an individual (other than individual of the age of 60 years or above, the exemption limit shall be Rs. 2,50,000, if the individual, of whatever age, opts to be taxed under section 115BAC) and HUF, etc.; and
(2) The Net Agricultural Income exceeds Rs. 5,000.
Computation of Tax where there is Agricultural Income also:
The following steps should be followed to calculate the tax:
Step 1: Add agricultural income and non-agricultural income and calculate tax on the aggregate as if such aggregate income is the Total Income.
Step 2: Add agricultural income to the maximum exemption limit available in the case of the assessee and compute tax on such amount as if it is the Total Income.
Step 3: Deduct the amount of income-tax as computed under Step 2 from the tax computed under Step 1.
The amount so arrived at shall be total Income-tax payable by the assessee.
Step 4: Claim rebate under section 87A if applicable.
Step 5: Add Surcharge if applicable + Health and Education Cess @ 4%