Treatment of agricultural income vs. Transfer of agricultural land under Income Tax

[Sandeep Rawat]

The various items of income referred to in the different clauses of section 10 are excluded from the total income of an assessee. These incomes are known as exempted incomes.  Consequently, such income shall not enter into the computation of taxable income.

1. AGRICULTURAL INCOME

Agricultural income [Section 10(1)]

Section 10(1) provides that agricultural income is not to be included in the total income of the assessee. The reason for totally exempting agricultural income from the scope of  central income- tax is that under the Constitution, the Central Government has no power to levy  a  tax  on  agricultural income

Definition of agricultural income [Section 2(1A)]

This definition is very wide and covers the income of not only the cultivators but also the  land holders who might have rented out the lands. Agricultural income may be received in cash or  in kind.

Agricultural income may arise in any one of the following three ways:-

1. It may be rent or revenue derived from land situated in India and used for agricultural purposes.
2. It may be income derived from such land by

• agriculture or
• the performance of a process ordinarily employed by a cultivator or receiver of rent in kind to render the produce fit to be taken to the market or
• The sale of such agricultural produce in the market.

3. Lastly, agricultural income may be derived from any farm building required for agricultural operations.

 NOTE     Partial integration of agricultural income with non-agricultural income

As in the above discussion, we have seen that agricultural income is exempt subject to conditions mentioned in the definition clause of section 2(1A). However, a method has been laid down to levy tax on agricultural income in an indirect way. This concept is known as partial integration of agricultural income with non-agricultural income. It is applicable to individuals, HUF, AOPs, BOIs and artificial juridical persons. Two conditions which need to be  satisfied  for  partial integration are:

1.       The net agricultural income should exceed ₹ 5,000 p.a., and

2.       Non-agricultural income should exceed the maximum amount not  chargeable to tax.

i.e., 5, 00,000 for resident very senior citizens, ₹ 3, 00,000 for resident senior citizens,₹ 2,50,000 for all others).

It may be noted that aggregation provisions do not apply to company, LLP, firm, co- operative society and local authority. The object of aggregating the net agricultural income with non- agricultural income is to tax the non-agricultural income at higher rates

2. TRANSFER OF AGRICULTURAL LAND

Section 45 provides that any profits or gains arising from the transfer of a capital asset affected in the previous year will be chargeable to income-tax under the head ‘Capital Gains’. Such capital gains will be deemed to be the income of the previous year in which the transfer took place.

CAPITAL ASSET

Definition: According to section 2(14), a capital asset means –

1. property of any kind held by an assessee, whether or not connected with his business or profession;
2. any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the SEBI regulations.

However, it does not include-

• Stock-in trade:
• Personal effects:
• Rural agricultural land in India i.e., agricultural land in India which is not situated in any  specified area. (SECTION 2 (14)iii)

As per the definition that only rural agricultural lands in India are excluded from the purview of the term ‘capital asset’. Hence urban agricultural lands constitute capital assets. Accordingly, the agricultural land described in (a) and (b) below, being land situated within the specified  urban limits, would fall within the definition of “capital asset”, and transfer of such land would attract capital gains tax -

1. 1. agricultural land situated in any area within the jurisdiction of a municipality or  cantonment board having population of not less than ten thousand according to last preceding census, or
   2. agricultural land situated in any area within such distance, measured aerially, in relation  to the range of population according to the last preceding census

 

In other words, the capital gains arising from the transfer of such urban agricultural lands would not be treated as agricultural income for the purpose of exemption under section 10(1). Hence, such gains would be exigible to tax under section 45.

• Specified Gold Bonds

2.1   EXEMPTION OF CAPITAL GAIN

2.1.A  Exemption under section 10           

The following are the exemption in respect of capital gains under section 10:

Exemption of capital gains on compulsory acquisition of agricultural land  situated within specified urban limits [Section 10(37)]

With a view to mitigate the hardship faced by the farmers whose agricultural land situated in specified urban limits has been compulsorily acquired, clause (37) provide to exempt the  capital gains arising to an individual or a HUF from transfer of urban agricultural land by way    of compulsory acquisition.

Such exemption is available where the compensation or the enhanced compensation or consideration, as the case may be, is received on or after 1.4.2004.

The exemption is available only when such land has been used for agricultural purposes  during the preceding two years by such individual or a parent of his or by such HUF.

2.1.B     Exemption Under Section 54B

Capital Gains on transfer of agricultural land [Section 54B] Eligible assessee – Individual & HUF

Conditions to be fulfilled

•There should be a transfer of urban agricultural land.

•Such land must have been used for agricultural purposes by the assessee, being an individual or his parent, or a HUF in the 2 years immediately preceding the date of  transfer.

•He should purchase another agricultural land (urban or rural)  within 2 years from the   date of transfer.

•If such investment is not made before the date of filing of return of income, then the  capital gain has to be deposited under the CGAS (Refer points (x) and (xi) at the end of 7.21). Amount utilized by the assessee for purchase of new asset and the amount so deposited shall be deemed to be the cost of new asset.

Quantum of exemption

•If cost of new agricultural land ≥ capital gains, entire capital gains is exempt.

•If cost of new agricultural land < capital gains, capital gains to the extent of cost of new agricultural land is exempt.

For further clarification and professional assistance, feel free to contact at [email protected]

(Mr. Sandeep Rawat has vast experience & knowledge in dealing with Direct and Indirect Taxation. He is Cofounder & Managing partner at SRTConsultancy & Co. )