Previous Year Question
Consider the following statements:
Statement I: In India, income from allied agricultural activities like poultry farming and wool rearing in rural areas is exempted from any tax.
Statement II: In India, rural agricultural land is not considered a capital asset under the provisions of the Income-tax Act, 1961.
Which one of the following is correct in respect of the above statements?
Both Statement I and Statement II are correct and Statement II explains Statement I
Both Statement I and Statement II are correct but Statement II does not explain Statement I
Statement I is correct, but Statement II is not correct
Statement I is not correct, but Statement II is correct
Correct Answer: D
Detailed Solution
Statement I is incorrect.
Agricultural income is exempt from Union income tax under Section 10(1) of the Income-tax Act, 1961. However, every activity conducted in a rural area or broadly associated with agriculture does not legally constitute agricultural income.
Under Section 2(1A), agricultural income principally covers:
Rent or revenue derived from land situated in India and used for agricultural purposes.
Income derived through basic agricultural operations on such land.
Income from an ordinary process employed by a cultivator to make agricultural produce marketable.
Income from a farm building subject to prescribed conditions.
Income from poultry farming is not derived directly from cultivation of land. Similarly, income merely from rearing sheep and producing wool does not arise from agricultural operations performed on land. Such income may ordinarily be taxable as business income.
The expression “exempted from any tax” is also excessively broad. Merely conducting an activity in a rural area does not make the resulting income tax-exempt.
Statement II is correct.
Under Section 2(14) of the Income-tax Act, rural agricultural land is excluded from the definition of a capital asset. Consequently, gains from its transfer are generally not chargeable to capital-gains tax.
However, every agricultural landholding is not rural agricultural land. Agricultural land located within a municipality or cantonment board, or within specified population-based aerial distances, may be classified as urban agricultural land and treated as a capital asset.
The distance criteria from municipal limits are:
Population above 10,000 but not exceeding 1 lakh—up to 2 km.
Population above 1 lakh but not exceeding 10 lakh—up to 6 km.
Population above 10 lakh—up to 8 km.
Agricultural land outside the prescribed urban limits may qualify as rural agricultural land and is not treated as a capital asset under Section 2(14).
The two statements also have no explanatory relationship. Statement I concerns the taxability of income from allied activities, whereas Statement II concerns the capital-asset status of agricultural land.