Friday, May 10, 2013

For June 2013 ICWAI Stage I Examination (Paper 7): Agricultural Income at a Glance

As per section 10(1):
Agricultural income from an Indian agricultural land: Exempt.
Agricultural income from a foreign agricultural land: Taxable as income from other source.

Agricultural Income
As per Section 2(1A) agricultural income includes the following :
Ø  any rent or revenue derived from landused for agricultural purposes;
Ø  any income derived from such land by agriculture or from processing of agricultural produce to make it fit for the market;
Ø  any income from farm building situated on or in the immediate vicinity of agricultural land and used as (a) dwelling house; (b) store house; or (c) other out building. Further such land should be assessed to land revenue or a local rate. However, if it is not assessed to land revenue or local rate then such land should be situated outside urban area.

Ø  Salary received by a partner for rendering services to a firm/ interest on capital from such firm, which is engaged in agricultural operations, is agricultural income. It may be noted that share of profit from such firm is not taken as “agricultural income” as such share is exempt u/s 10(2A).
Ø  Income from growing flowers would be agricultural income.
Ø  The value of agricultural produce consumed by assessee for household purposes shall also be treated as agricultural income.
Ø  Any income from sale of saplings (small trees) or seedlings (plant grown from a seed) grown in a nursery shall be deemed to be agricultural income.

Agricultural purposes
Land is said to used for agricultural purposes where the following two types of operations are carried out on such land :
Basic Operations : These involve cultivation of the ground, tilling of the land, sowing of the seeds, planting and similar operations on the land.
Subsequent Operations : After the crop sprouts from the land, there are subsequent operations which have to be resorted to by the agriculturists for the efficient production of the crop such as, weeding (removal of wild plants), digging the soil around the growth, removal of undesirable growths, prevention of the crop from insects and pests, cutting etc. Basic operations must be performed before any income is called agricultural income. Subsequent operations should be in continuation.
Non- agricultural income
Ø  Income from sale of forests, trees, wild grass, fruit and flowers grown spontaneously and without human effort.
Ø  Income from salt produced by flooding the land with sea water and then extracting salt therefrom.
Ø  Income from stone quarries, brick making.
Ø  Income from breeding of livestock.
Ø  Income from dairy farming, butter and cheese making, Poultry farming, fisheries.
Ø  Preservation of potatoes by refrigeration as it is not a process ordinarily employed by a cultivator.
Ø  Income from supplying surplus water to other agriculturists.
Ø  Interest on arrears of rent in respect of agricultural land.
Ø  Harvest Crop on purchased land, Profit on sale of Crops.
Ø  Income derived from letting out of land/godowns for storing crops.
Ø  Royalty income of mines.
Ø  Annuity payable to vendor of agriculture land or payable to a person giving up his claims to piece of agricultural land.
Ø  Compensation/damages paid for loss of agricultural income due to late payment of instalments of the consideration price of rubber plantation site.
Ø  Registration fee collected from the contractor who is bidding at the auction conducted for sale of plantation is not an agricultural income as such registration fee had no nexus with land.

Income from growing and manufacturing of any product other than tea [Rule 7]
If an assessee uses agricultural produce as raw material, then market value of produce is treated as cost of raw material. No other expenditure regarding this is allowed. Agricultural income shall be market value of such produce less cost of cultivation which is exempted.
Example : Mr. A using industrial produce as raw material in its industrial production. Calculation of income of Mr. X is as follows:
Cultivation Cost of agricultural produce = 1,00,000;
Market Value of agricultural produce = 2,00,000
Manufacturing cost of final product = 5,00,000
Now on sale of final product:
                Sale Value = 15,00,000
                (-) Raw Material Cost = 2,00,000 (instead of 1,00,000)
                (-) Manufacture cost = 5,00,000
                Taxable Business Income = 8,00,000
                Agriculture Income = 2,00,000 - 1,00,000 = 1,00,000 ( Exempt)

Income which is partially agricultural and partially from business
Nature of Income
Amount of Agricultural Income
Non-agricultural Income   i.e. business income
 Income from sale of tea grown and manufactured by the assessee in India (Rule 8)
60% of such Income
40% of such Income
Income from rubber plants grown by the seller in India (Rule 7A)
65% of such Income
35% of such Income
Income derived from the sale of coffee grown and cured by the seller in India (Rule 7B)
75% of such Income
25% of such Income
Income derived from the sale of coffee grown, cured, roasted and grounded by the seller in India
60% of such Income
40% of such Income

INTEGRATION OF AGRICULTURAL AND NON-AGRICULTURAL INCOME (Indirect way of taxation of agricultural income for assessee’s who have the benefit of taxation on slab basis)
Applicable to :Individuals, HUF, BOI, AOP, Artificial Judicial Person.
If non-agricultural income exceeds the amount of exemption limit which is Rs. 5000.

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: Add surcharge, if applicable.
Step 5: Add education cess @ 2% and SHEC @ 1%.