The Hindu Business Line : Agricultural income and aggregation

ALL INCOME which arises or accrues to a minor has to be clubbed with the income of his parent. This provision, introduced by the Finance Act, 1992, took effect from assessment year 1993-94. The only exception to clubbing is if the minor child suffers from any disability of the nature specified in Section 80U of the Income-tax Act.

This provision, as contained in Section 64(1A) of the I-T Act, was challenged in the Syed Askari vs Union of India [1994 209 ITR 746 Patna] case. The court held that clubbing was not ultra vires the Constitution. What is the legal position if a minor has only agricultural income? Will this income be clubbed in the hands of the parent? This interesting issue came up before Mumbai Bench of Tribunal in the Smt. Babita P Kanungo vs Dy. CIT (2004 96 ITD 91) case.

Facts, issues

The only point for consideration in this case was whether agricultural income derived in the hands of the minor can be included as part of the total income of the parent. But total income, as defined in Section 2(45) of the Act, does not include agricultural income and, therefore, how does one apply clubbing provisions where the total income has to be considered without the element of agricultural income.

The assessing officer (AO) and the Commissioner of Income-Tax (Appeals) took the stand that the clubbing provisions would operate and agricultural income has to be included along with the total income of the parent for rate purposes. The matter reached the Tribunal.

Tribunal decision

The Tribunal held that total income as defined in the Act is devoid of agricultural income and, hence, clubbing minor's agricultural income with the parent does not arise. The Bench reasoned: "We find that the provisions of Section 64(1A) is in respect of clubbing of total income of a minor child with the income of his parent. Total income is defined by Section 2(45) which says that total income means the total amount of income referred to in Section 5, computed in the manner laid down in this Act.

"... We are of the considered opinion that the agricultural income of the minor children of the assessee cannot be clubbed with the agriculture income of the assessee under Section 64(1A) and it cannot be said that the agricultural income of the minor children of the assessee is agricultural income of the assessee... and, therefore, in view of Section 2(2) of the Finance Act, 1997, this agricultural income of the minor children of the assessee cannot be included in the total income of the assessee for rate purposes. We hold accordingly and both these grounds of the assessee are allowed."

In effect, if a minor child has only agricultural income, fears of clubbing are ill-founded.

It is generally felt that agricultural income is completely exempt from tax and has to be ignored in any form of computation. This erroneous presumption has to be clarified as the law relating to agricultural income and taxation, though controversial, has to be viewed in the right perspective.

The following steps are involved in dealing with cases where the assessee has both agricultural and non-agricultural incomes:

Step 1: Net agricultural income is to be computed as if it were income chargeable to income-tax.

Step 2: Agricultural and non-agricultural income of the assessee will then be aggregated, and income-tax is calculated on the aggregate income as if such aggregate income were the total income.

Step 3: The net agricultural income is then increased by the first slab of income on which tax is charged as nil rate (that is, Rs 1,00,000) and income-tax is calculated on net agricultural income, so increased as if such income were the total income of the assessee.

Step 4: The amount of income-tax determined at step two will be reduced by the amount of income-tax determined under step three.

Step 5: Any tax rebate under Chapter VIII shall be deducted.

Step 6: Find out the balance. Add surcharge and education cess.

Step 7: The amount so arrived at is the income-tax payable by the assessee.

Several committees have dealt with the subject of taxing agricultural income, but have not arrived at any effective conclusion. There is much scope for raising revenue from the agricultural sector notwithstanding political hurdles.

If the agricultural economy has to be integrated with the mainstream economy this tax aberration has to be removed. To start with, why not a presumptive tax of, say, 1 per cent on all agricultural receipts?

(The author is a Chennai-based chartered accountant.)

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