CA Nirmal Ghorawat's Blog

1.            Continuation of Exemption of Agricultural Income under the New Code

Section 10 read with Entry in Sl. No. 1 of the Sixth Schedule of the Direct Taxes Code Bill, 2010 (hereinafter ‘DTC’) exempts Agricultural Income from Income Tax. The Discussion Paper on the Direct Taxes Code explains the rationale for the exemption and I quote, “On account of the assignment of the taxing powers under the Constitution to the States, agricultural income has been excluded from the scope of this Code.”

2.            Benefits of Exemption Extended to Urban Agricultural Land.

Clause (12) of Section 284 of the DTC Bill, 2010 defines Agricultural Land as “any land situated in India which is used for agricultural purposes and,-

(a)              is assessed to land revenue in India; or

(b)              is subject to a local rate assessed and collected by officers of the Government as such.”

Under the Income Tax Act, 1961 Agricultural Land means any land situated in India which is used for agricultural purposes and,-

(a)          is assessed to land revenue in India; or

(b)          is subject to a local rate assessed and collected by officers of the Government as such

but does not include:

(a)          in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year;

(b)          in any area within such distance, not being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette.

Since, the new definition of ‘Agricultural Land’ does not include the exceptions under the Income Tax Act, 1961 (italicised above), it is obvious that the benefit of exemption of Agricultural Income will after the commencement of DTC extend to Urban Land used for agricultural purposes.

3.            Capital Gains on Agricultural Land

Clause 284(151) of DTC Bill, 2010 defines ‘Investment Asset’ as any capital asset which is not a business capital asset. Further, clause 284(46) of DTC Bill, 2010 defines ‘Capital Asset’ as property of any kind held by the assessee which is not a business trading asset.

Thus, Agricultural Land has not been excluded from the purview of Investment and Capital Asset and will be liable to Income Tax on Capital Gains on Transfer of Agricultural Land. Section 55 of the DTC Bill, 2010 read with Entry in Sl. No. 01 of Table – Rollover Relief provides relief to an individual or HUF for rollover of an Investment Asset being Agricultural Land, if the new Investment Asset is one or more pieces of Agricultural Land.

4.            Agricultural Income to be taken into Consideration for Rate purposes.

PART II of the First Schedule – Rates of Income Tax under the DTC Bill, 2010 provide for aggregation of net agricultural income with ‘total income from ordinary sources’ for rate purposes. The proposed provisions are similar in material respects to existing provisions under the Annual Finance Act.

5.           Conclusion

• The benefit of Tax Exemption on Agricultural Income has not only been continued but extended to Urban Land used for agricultural purposes.
  
• Capital Gain on Agricultural Land is now liable to Income Tax subject to benefit of Roll-over of Investment in Agricultural Land.
  
• Agricultural Income will continue to be taken into consideration for Rate purposes in the like manner as under the present Income Tax Law.