Taxation of Agricultural Income in India under the Income Tax Act of 1961

Introduction

The Income Tax 1961 is the regulation and code for levying and calculating taxes that occur from the income of the citizens and it is a compulsory and mandatory statute, on violation of which it is deemed to be an offence. The description of Agricultural Income is provided under Article 366(1) of the Indian Constitution, which means agriculture income as is defined under Section 2(1A) of the income tax act. It means any rent, revenue derived from land which is situated in India and is used for (saplings or seedlings grown in a nursery) agricultural purposes for market or sale produce, which fulfils the specified conditions mentioned under the Act i.e, income from the sale of agricultural land and compensation received from the government for acquiring agricultural land, etc.

Under section 10(1)[1] agricultural income is exempted from tax and Entry 46 of the state list[2]provides details for such taxes. Therefore the central government cannot install, levy, and implement agricultural taxes and only the state governments can do so in their respective states. Part IV of 1st schedule[3] and Sections 2(2) and 2(13)[4] deals with the computation of 'net agricultural income' to determine the rate of income tax applied for non-corporate assesses.

Rules 7, 7A,7B & 8 of the Income Tax Rules of 1962 provide details for the income which is partly agricultural and partly from business in nature. In the matter of Binoy Kumar's Case[5] the supreme court discussed the proper interpretation of agriculture under the IT Act, in which the term agriculture is not defined, the court here said that the term agriculture comprises of 2 words i.e, 'cultural- the cultivation of 'agar' i.e, land. The production of a product through the use of human labour & skills is called agricultural activity for trade and commerce services.

History of Agricultural Income

The History of Agricultural Income can be dated back to the 1960s when Entry 82 of the 7th Schedule in the Union list provides information on taxes other than agricultural income. The old Income-tax Act of 1860 introduced tax legislations in India and taxed agricultural income till 1886. Even the amended Income tax act of 1961 and states like Bihar, Bengal, Orissa, Assam, UP, Cochin, Hyderabad, Old Mysore state, Travancore, and Madras had some provisions for taxes of agricultural income. India has been one of the oldest nations to introduced income tax since 1886 but a certain need for agricultural income tax was felt which gave the state government the power to levy it with the doctrine of Separation of powers.

Agriculture plays an important role in the GDP of the country as more than 60 percent of the population engaged in this primary activity of agriculture. In only the two periods of 9 years i.e, 1860-1865 and 1869-1873, the agricultural income has remained exempted from Tax. The Indian Taxation Inquiry Committee in 1925 observed that there was no need for theoretical or historic justification for the prolonged exemptions from the tax and suggested to include the agricultural income for tax but it remains unchanged till this day, but there are many administrative and political objections to the removal of tax exemption from agricultural income.

A number of states such as Rajasthan and UP reversed their taxation policies over the decade and took back agricultural tax. The reform attempts go back cine 1947 and the expert financial committee reports suggested the Constituent Assembly formulate certain provisions with the consults of states.

The report of the Raj committee of 1972[6] on wealth and income taxation is said to be the most comprehensive one. This issue was brought up in the Vijay Kelkar committee of 2002[7] also were while addressing the problem the committee said the states should be persuaded to pass a resolution that authorizes the central government to pass tax legislation on agricultural income in their respective states. Prime Minister Modi at present, in a conference with some tax advisors and administrators in June of 2016 brought the latest attempt for any talk of the amendment.

Essential conditions for Agricultural Income for tax exemption:

• Income derived from land: the first and foremost requirement is that income should have a source from the land and not from any other asset or source. This land can be occupied on rent or owned by a cultivator who produces different agricultural products on that particular land-only or is a rent recover of that produce, this land can be a farming or building/farmhouse one and situated on that same land and can be used as a store-house, dwelling house, etc.
• Income should be in the mode of rent or revenue: in the matter of Durga Narain Singh's case [8], the case said that revenue can cover all other income other than rent such as mutation fees received from the tenant which is derived from land as revenue. In another case[9]the dividend paid by the company from its agricultural income will amount to revenue and thus was said to be derived from another source as the income was not immediately obtained through the land.
• The land must be situated in India: Section 2(1A) these lands can be an urban or rural area where land revenue can be collected by the government are:-
• If the land is situated under the jurisdiction of Municipal or Cantonment with a population under 10,000.
• Any area within the radius of – not more than 2km from local limits of the stated authorities and has a population of more than 10,000 but not more than 1 lakh, not more than 6km radius from such authorities and has a population of more than 1lakh but not more than 10 lakh, not more than 8km radius from above-stated authorities with a population of more than 10 lakhs.
• Any agricultural Income from any foreign currency or country will be deemed as income from other sources and tax will not be exempted.
• Land must be used for agricultural operations only: In another leading case [10], the court said that "basic operations include subsequent operations for one integrated activity and if this integrated activity constitutes agriculture is undertaken & performed in regards to the land, that land can be said to be used for agricultural purposes and the income derived from there can say to be agricultural income". The notable point is that any income which is from the sale of produce without carrying out agricultural operations can not say to be an agricultural income. To be an agricultural income it is important to carry out only those operations that are deemed to be in relationship with those agricultural activities which are required to make the product for trade and marketable purposes along with other basic agricultural operations.

In another leading case[11] the court found no nexus between the product and the production practices and thus the court held that only a few changes are allowed where its marketing is required in relation to the product and even after such change the product should retain its original character and should not result in the production of some other commodity altogether. It is also evident that the total income of a person of the previous year whose source of income is agriculturally based will not fall under the category of his total income. In another case[12] the court held that the burden of proof will be on the assessee to establish that the income derived by him is agricultural income for which it claims the exemption of taxes. Section 54B provides relief to a person who sells any agricultural land and he uses money from that transaction to acquire another land. According to section 2(14), no tax is required to be paid on the sale of agricultural land.

In simpler words to claim exemption from taxes under agricultural criteria, it is necessary that any activity did o that land should be related to agriculture purposes only. In the matter of Raja Benoy [13] the apex court provided certain principles for the terms 'agriculture' and 'agricultural purposes'. The court also provided two types of operations i.e, Basic operation– includes the exercise of human and labor skills upon the land where only having agricultural land will not suffice and Subsequent operations– where certain activities are carried out after the product has been grown like harvesting, putting fertilizers & pesticides, irrigations, and cutting, etc.

Subsequent operations must in done in the continuation of basic operations to constitute land with agricultural purposes for tax exemption. The only production of grains in not sufficient it should be shown that its marketing is also done. In the matter of Vibhuti Narayan's case [14] income from the nursery was not deemed to be agricultural income unless maintained by a farmer for aid and necessary adjunct to the primary process of agriculture, whereas, in the matter of Saundarya Nursery [15] the madras high court deemed nursing activities as agricultural income.

• Income derived from revenue or rent and marketing processes of agricultural produce from land: rent can be in-kind or cash and revenue should fulfill the condition that Rent or revenue received should be earned directly and immediately from land and income from other assets will not be included which was determined another decided case[16]. The marketing of products of the agricultural process should be performed by any employed person or by a cultivator or rent receiver and that produces should be legal enough not to be sent into the market. If any product can be sold in the raw form then that income will be deemed to be partly agricultural and partly from business as stated in the case of Brihan Maharashtra Sugar Syndicate[17]. Partial integration is income derived from agricultural income with non-agricultural income.

Issues & Misuses of Agricultural Income

The main issue is that if we implement any agricultural income tax then will it change the basic character of the Income-tax act. Different committees and academics have suggested to implant certain tax structure for agricultural income whereas some say to let it as it already is and this debate has raised these certain points:

• Government being financially deficit/ Revenue loss: The low taxation sometimes results in the deterioration of finances of the state. The ministry of finance of the central government asked to develop a report wherein the NCAER said that 1/6th population in India has become rich and reside in rural areas and even the low-income workers are gradually increasing their income rate. Rural areas have the most non-farm income, though this inequality in the income of different farmers has been prevalent in India since time immemorial especially in the British raj period. The latest data show that around 56 million workers in the unorganized sector and around 42 million workers in the organized sectors are taxpayers and 120 million potential payers are yet to be found and be identified as such surveys take a lot of time, energy, and funds. In India share of the total of 9% of the agricultural income is part of the total GDP and it is said that if another hidden income is to be brought out accounted for then it will add up 19% more revenue than the already existing 9% into the GDP.
• The difference in income of rich and poor farmers: In some states like Punjab, Haryana, and western Uttar Pradesh the farmers secure more than middle-class income and thus are compatible pay taxes but do not because pay it due to legislations. This has caused a mass difference in the income of farmers and has lead to distortions in equity. A report by RBI found out that there are around 225 million units in rural India which makes roughly 66% of the population and they are out of the purview and authority of income tax and only urban areas are required to pay the income tax by and large. But this is not ideal because there should be no distinction between rural and urban.
• Farmers being economically and socially deprived: most farmers live in rural areas where caste-based discrimination is still practiced where they are exploited with practices of forced labor or bonded laborers. And even if they work independently then they are under a pile of debts from their moneylenders due to crop failures and other causes. They can neither afford nor be asked to pay taxes. Many farmers even commit suicide due to poverty and others might even do not own their own lands. So it is important to realize that this tax if imposed would have to be federal legislation done by our states and not the center because in every state problems of farmers are different.
• Misuse of the tax exemption: People in holdings of large lands tend to do not involve themselves in farming practices but show the land agricultural on paper and invest in a large amount of agricultural labor with minimum wages for some other business. The actual farmers tend to get nothing and such frames fund this as an untenable source of fixed income wherein they sell their land for temporary revenue to either kick start another crop harvesting or to get some food or to pay off the debts or all of the above together. But here those who buy these lands do not change the land's status from agriculture, use it for other business and derive or call its income as agricultural income which allows them an escape to pay taxes, and this profit is called black money. The Wanchoo committee[18] found that this black money can further be used to buy land or open other businesses on them with the status of agricultural land and derive evade paying taxes and cheat the authorities and because of this reason, the authorities are misled and misguided about the actual fact. Many rich people like politicians, film stars, government servants, etc own such agricultural farmlands to either divert their black money and wash it or keep it hidden off the record. There have been various newspaper articles wherein the government has tried to stash back the black money which is store in foreign bank deposits with secret account names, which has affected the Country's GDP and GDI.

Objections on imposing an agricultural income tax

The biggest challenge for agriculture tax has been political and social because more than two-thirds of the population lives in rural areas that are financially not good and are engaged in agricultural practices. Such laborers are threatened with low productivity for which implementing tax would be destructive for them who can not even feed themselves properly twice a day.

• Political challenge: The challenge can be understood reasonably as the main issue is political which brings the implementation of this tax in the negatives. If any tax amendment is passed regarding agricultural income all types of farmers with a population of 600 million will be affected, this act will only agitate them and the government could lose their vote banks and confidence from such a large population. Moreover, this tax will have to be passed by the State only as our Constitution does not give the center this power. Though some advisors suggest a constitutional amendment to allow the central government to levy agricultural income tax under Article 368[19].
• Social and economical challenges: The other big challenge is to identify such individual farmers, most of them are landless laborers or own a very small amount of land. These farmers are both economically and socially backward and face inequalities in their daily lives. As the value of output and the net income earned by farmers is very tedious, this tax amendment if implemented will ultimately pass on the consumer who will have to pay more at higher prices and more tax.

What is the need for agriculture income tax & suggestions?

It is evident that if no tax was needed on agricultural income then this question would not have a raised. As stated above many farmers or businessmen who might or might not carry out the agricultural practices use the opportunity of not paying taxes as a means to exercise certain economical activities which they do not want to show in the records or to the authorities, so as to get more profits and income and even make use of black money. A considerable amount of money is being exchanged under the table to escape the taxes in an open manner. This is done by either diverting funds to agriculture on papers and showing the property as agricultural when it is not. This gives rise to another question what can actually be done to resolve this issue?

Some of the taxes collected by the center can be reassigned for states to provide financial stability and with this, around 95% of farmers of Below the Poverty Line will continue to get the benefit of this exemption. The governments should install a unified and uniform system of agricultural tax with integrating non-agricultural income with agricultural income like GST because land revenue hasn't been able to deal with this issue. This will help to flow more tax without affecting the actual poorer farmers. If implemented this tax will be subsumed under GST like all the other taxes did and the income tax payable to the farmers will be only that income which is non-agricultural and the main agricultural incomes of farmers would remain outside the ambit of the taxes and still will be an exemption. Pressure should be laid more to stabilize and densify the National Agricultural Market reasonably and it will help in identifying and tracking the persons who escape with large transactions and misuse this advantageous provision.

The finance ministry, lawyers, lawmakers, and even academics since the last 5 decades are trying to work and correct this situation. In the Administration Reform Committee report[20] it was found that the exemption has been used to launder funds and avoid taxes which distorts both horizontal and vertical equity and encourages more non-agricultural income laundering. The office of Comptroller and Auditor General of India (CAG) took it into notice and consulted with the Income Tax Department about the problem with no large successful outcome.

When this was brought into the parliament for resolving the governate directed to issue such claims only to the person who provides supporting verifying identity documents which provide evidence that their land and income is legally and in reality an agricultural one.

Registration of farmers at mandis will also be helpful as more the registrations are done more it will be easy to calculate and identify and differentiate the actual farmers and the culprits, illegal practices. The irregular intermediaries during the selling of crops should be curtailed. The government will have to be bolder and break the traditional laws to implement new provisions for better accuracy and to resolve the problems without actually making farmers being devoid of the advantageous exemption.

Conclusion

Agricultural Income in India is under the authority of the local, state, and central levels. There are so many modes and essentials for agricultural income which is neither in a union or concurrent list and is only state list and hence states only possess this power.

There are various methods to compute agricultural income and partly agricultural income with other or partly non-agricultural income. It is very necessary to install a uniform method of taxation in India to avoid any serious distortions and lower overall tax compliance. It has been suggested that agricultural tax should be converted in the form of property tax which can be easily maintained and implemented by the central government too along with the state government, this will result in increasing the rate of taxation which will help in the development of the country.

Various committees and academics have suggested this option. There is a vast difference between the two concepts of tax which is levied and the rate of tax. Though it should also be noted that merely because the amount of agricultural income falls relevant in determining the rate it cannot be regarded as an essential element for tax as it remains a tax on the non-agricultural income. The implementation of agricultural income taxation will demand something out of the box. The government should use biometric verification to record all the sales and purchases of this agricultural land to enhance the audit structure and make it more accurate.

India is a socialist welfare country whose constitution obliges it provides security and protection from every trouble, thus the government has to see people of all the factions and sections and have to implement a policy that suits the majority. Reforming a law that affects such a vast and exploited population is a very serious and tedious job and hence requires a lot of mind—logic, and reason.

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Bibliography

• CA Sandeep Kanoi, "Agricultural Income – Tax treatment / Taxability", TaxGuru, Available Here
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• Agriculture Income, Tax2Win, Available Here
• Blough, Roy. "Conflict and Harmony in Taxation." Proceedings of the American Philosophical Society, vol. 88, no. 1, 1944, pp. 22–28. JSTOR, Available Here.
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• Azhar, B. A. "Taxation of Agricultural Income: A Holistic View." The Pakistan Development Review, vol. 30, no. 4, 1991, pp. 1065–1072. JSTOR, www.jstor.org/stable/41259521. Accessed 2 Feb. 2021.
• Yogesh Singh, Jagran Josh, Taxing Agricultural Income In India, Jagran Josh, Available Here

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References

[1] Income Tax Act, 1961

[2] The Constitution of India

[3] Ibid

[4] Income Tax Act, 1961

[5] CIT v. Raja Benoy Kumar Sahas Roy, (1957) 32 ITR 466 SC

[6] https://www.economicsdiscussion.net/agricultural-economics/raj-committee-additional-taxation-on-agriculture/21639

[7] https://www.gktoday.in/gk/vijay-kelkar-committee-2002-recommendations-on-direct-taxes/

[8] Durga Narain Singh v. CIT, (1947) 15 ITR 235

[9] Bacha F. Guzdar v. CIT, 1955 AIR 740, 1955 SCR (1) 876

[10] Commissioner of Income-tax v. Gaurishankar Agarwal, (1980) 131 ITR 27

[11] E Palaniappa v. ITO, (2009) 121 TTJ 541, ITO

[12] Sri Ranganatha Enterprises v. CIT, [1998] 232 ITR 568 (kar.)

[13] CIT v. Raja Benoy Kumar Sahas Roy,(1957) 32 ITR 466 (SC)

[14] H.H. Maharaja Vibhuti Narain Singh v. State of Uttar Pradesh,[1967] 65 ITR 364 (All.)

[15] CIT v. Saundarya Nursery, [2000] 241 ITR 530 (Mad.)

[16] Pratap Singh v. Province of Bihar, [1949] 17 ITR 202 (pat.)

[17] [1946] 14 ITR 611 (Bom.)

[18] Gulati, I. S. "Wanchoo Report: A Critique." Economic and Political Weekly, vol. 7, no. 28, 1972, pp. 1314–1317.

[19] The Constitution of India, 1950

[20] Administrative Reforms Commission, Available Here

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