TAX PLANNING THROUGH AGRICULTURAL INCOME IN INDIA



Introduction As per Income Tax Act, 1961, Agricultural Income is exempt from tax meaning there by that earning from Agricultural Activity are not to be taxed. On reading of basic propositions emerging from decision of Supreme Court in CIT vs. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 and changes in nature of agricultural activity since this decision and amendment in law thereof following essentials can be listed for an income to be treated as Agricultural Income –

(a) There should be a land – In case of rent it is essential that assessee have an interest in such land. However, in case of agricultural operations it is not necessary that the person conducting the operations be the owner of the land. (b) The land is used for basic agricultural operations or subsequent operations- Agricultural Operation includes processing of agricultural produced to make it fit for sale. Any person who actually carries out basic agricultural operation is eligible for tax benefit. (c) Land should be Cultivated – For rent received to be treated as agricultural income, there must be actual agricultural activity on such land during the previous year. However, it is pertinent to note that income from Breeding of livestock, Aqua-culture, Poultry farming and Dairy farming on Agricultural Land are not income from agricultural activity. Therefore, activities not involving any basic operation on the land would not constitute agriculture merely because they have relation to or connection with the land Salient Features 2.1 Incomes that will be treated as agricultural income include – (a) Income from growing flowers, exotic or otherwise on Agricultural Land, (b) Rent received from agricultural land, provided agricultural activity is being conducted by the lessee of land (c) Share of profit and interest on capital received by a partner from firm engaged in agricultural operations, (d) Income derived from saplings or seedlings grown in Nursery. (e) Income from Hydroponic Farming and greenhouses. (f) Income from growing creepers and climbers on Agricultural Land. (g) Individuals and HUF can Sell Agricultural land and acquire another agricultural land from such sale proceeds. In this case the original land should have been used for agricultural purpose in preceding two years from date of sale.

2.2 Incomes that will not be treated as “Agricultural Income” include –


(a) Income from sale of spontaneously grown trees not being part of any systematic agricultural activity, (b) Dividend distributed by an Indian Company, amongst its shareholders out of its agricultural income earnings during a financial year, (c) Receipts from Shooting of films, TV Serials and Series or any such incidental activities on an agricultural land, B.Nagi Reddi vs. CIT [125 Taxmann 20] Madras (2002) (d) Income from Breeding of livestock, Aqua-culture, Poultry farming and Dairy farming on or from said Agricultural Land. (e) Income from Bee Keeping activity

2.3 Agricultural Income is computed same as business income. However, if a person simply trades in processed produce, without carrying out the actual agricultural activity and being able to prove such agricultural activity, the income so earned would not be regarded as agricultural income.

2.4 It is pertinent to note that the losses from agricultural operations can be carried forward for eight years and set off against agricultural income earned in succeeding years. Conclusion While dealing with cases of agricultural income and planning thereof, the assessee may be advised to form a separate legal entity in the nature of a Partnership Firm or a Company registered under the Companies Act or a Family Beneficiary Trust depending on the facts involved in each case for exclusively carrying on agricultural operations. The total amount of income resulting from such separate legal entity established solely for the purpose of earning agricultural income being in the nature of a Partnership Firm, Company or a Family Beneficiary Trust would become exempt from taxation.

 

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