Agriculture Income under Income Tax Bill, 2025

The scope of the definition of “Agricultural Income” is quite wide under the Income Tax Act, 1961 as well as under proposed Income Tax Bill, 2025. It covers not only the income of the cultivators but also covers the rental income generated by landowners from renting of such land. Such agricultural income may be derived in cash or in kind. The definition of “Agricultural Income” is given in the clause (5) of the section 2 of the Income Tax Bill, 2025. We will make detailed analysis of the definition in this article.

Clause (5) of Section 2 of Income Tax Bill 2025:

Lets’ try to understand the above sub-clauses (a) & (b) of the above definition.

Rent or Revenue derived from a land which is situated in India and is used for agricultural purposes:

Rental income derived from a land shall be treated as “Agricultural Income” in the case where all these conditions are satisfied:

• There should be a rental income or revenue derived from land;
• Such land should be situated in India; and
• Such land should be used for agricultural purposes;

Note:

• From the above reading, it implies that if the rental income is received from a land situated in a foreign territory, the entire amount of income shall be taxable either as “Business Income” or “Other Sources Income”.
• There is no distinction between lease or sub-lease of agriculture land. Therefore, the ownership of land is not important. The rent may be received by land owner from the tenant or by tenant from sub-tenant. Both qualifies as agricultural income if the land is used for agricultural purposes.
• Rent could be in cash or in kind.
• The term “Revenue” is much wider than “Rent” and would include any other income derived from such land.

Any Income derived from such land from agriculture or processing or sale of produce:

• The word “Agriculture” is not defined in the proposed Income Tax Bill 2025. “Agriculture” can be defined as tilling of land, sowing of the seeds and similar operations. Such operations will include basic operations which are absolutely necessary for the purpose of raising produce from the land and also include subsequent operations which are to be performed once crop sprouts from the land like weeding, digging etc. These subsequent operations are in continuation & conjunction of the basic operations.
• One important aspect to understand is that the income should be derived from land from agriculture. Thus, if an agriculturist derives also the income from activities like dairy farming, breeding & rearing of livestock, poultry farming etc., these will not qualify as “Agriculture Income”.

Process ordinarily employed to render the produce raised or received by him fit to be taken to market

• In case of various crops, certain processes are required to make the produce fit for being taken to market. The income from such processes employed to render the product fit for market would be agricultural income.
• But, such process must be employed by the cultivator or receiver of rent-in-kind and the process must be applied to make the process fit to be taken to market.
• Such process can be manual or mechanical.
• For example: Process of removal of hay from the paddy to obtain rice and then removal of chaff from the rice grain before packing them for market sale.

Sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described above

Any income earned by the cultivator or receiver of rent-in-kind from sale of the produce shall be agricultural income. But in case any processes are undertaken other than the processes as discussed above, then income shall be bifurcated into two parts i.e. partly agriculture income and partly non-agriculture income. This scenario is quite common in case of produce like tea, coffee, sugarcane, cotton etc. These produces undergo manufacturing process and therefore, income arising on sale thereof is treated as partly business income & partly agricultural income.

How to apportion income between agriculture income & business income

Following will be the process of apportionment as below:

• First calculate the market value of agricultural produce which has been raised by the assessee or received by him as rent-in-kind.
• Such market value shall be considered as the cost of raw material in the business.
• Thus, the market value as above shall be deducted from sale proceeds of business to ascertain profits of business.

How to calculate market value of agriculture produce

Income from Farm Building

Any income from farm building would be agricultural income if the following conditions are satisfied:

• The building is on or in the immediate vicinity of the land; and
• Such building is required as a dwelling house, or as a store-house, or other out-building, by the receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the land;

Further conditions to be satisfied:

(a)The land should be assessed to land revenue in India, or is subject to a local rate assessed and collected by officers of the Government as such or;

(b) Where the land is not so assessed to land revenue or subject to a local rate, it is not situated in any area as specified below:

(i) In any area comprised within the jurisdiction of a municipality or cantonment board and which has a population of not less than 10,000 or

(ii) In any area within such distance, measured aerially, in relation to the range of population as shown hereunder-

Note: Any income arising from transfer of any land which is situated in any area falling in (i) or  (ii) above will not be considered agricultural income and therefore attract capital gains tax.

Income from Nursery

Any Income derived from saplings or seedlings grown in a nursery would be deemed to be agricultural income. It is not material that basic or subsequent operations have been carried out on land or not in the case of a nursery.

Disclaimer: The above information is meant for educational purposes only. Readers are requested to act diligently and under consultation with any professional before applying the information contained in this article. For any support mail at: support@taxwink.com