Taxation of Agricultural Income

CA V.K. Subramani

It is well known that agricultural income is exempt from income tax. Agriculture falls in State list and income-tax falls in Union list. Entry No.82 of List 1 of the Seventh Schedule empowers the Parliament to levy taxes on income other than agricultural income. Thus, the Central Government cannot tax agricultural income. However, for the limited purpose of computing the income tax at a higher rate it is added to total income for computing income-tax thereon and again such agricultural income is added to basic exemption limit for computing tax and providing the same as deduction. The resultant is the ultimate tax liability of the taxpayer.

It would be interesting to note that agriculture provides the highest occupation to the workforce in our country. But it is also a fact that agriculturists do not get fair price for their produce. The ongoing agitation is a reflection of so many marginal farmers in spite of their best efforts not getting remunerative prices for their commodities.

While banks treat lending advance for dairy, fishery, rearing sheep etc as agriculture, income tax law does not treat them as agriculture. The fundamental requirement for agricultural income is, it must involve some basic and subsequent operations on land. Basic operations include tilling of land, sowing of seeds and planting and subsequent operations would mean operation after the produce sprouts out and includes, weeding, manuring and harvesting. Both have to be present for treating the income as agricultural income. For example, if standing crop is sold it would not be agricultural income for the buyer as he would not have performed basic operations. As regards the cultivator he would have performed basic operations and subsequent operations except harvesting, hence it would be agricultural income such as sugar mill permitted to cut sugarcane directly from the lands of agriculturists.

Some of the agricultural produce have commercial value and therefore income tax rules provide the proportion of agricultural income when those produce are subjected to further process. They are coffee seeds, when roasted and powdered after cultivation and harvest. Similar is the case for tea and rubber. These could be found in rules 7, 7A, 7B and 8 of Income Tax Rules, 1962.