The Hindu Business Line : Nipping the tax bud from nursery income

It is not thatannual Budgets always impose fresh levies on taxpayers. We do come across instances of Finance Ministers being over-considerate and giving relief to taxpayers based on judicial rulings. Handling of agricultural income in this year’s Budget is one such. In Para 167 of the Budget speech, the Finance Minister observed:

“Agricultural income is exempt from income-tax. However, courts have ruled that growing saplings or seedlings on land is agricultural but growing them in pots is not agriculture. This does not seem fair. Hence I propose to exempt from tax income arising from saplings or seedlings grown in a nursery.”

Connection with land

It has been axiomatic that for any income to be considered agricultural, there should be some connection with the land and basic agricultural operations should have been carried out.

In fact, in a Madras High Court case, the assessee used to grow agricultural produce such as paddy and other fruit-bearing trees in his garden and had permitted film producers to shoot in the garden on payment of hire charges.

A claim was made that the hire charges should be taken as agriculture income on the ground that but for the agricultural activity, the film producers would not have been interested in shooting their film on the land and, therefore, the the income earned by way of hire charges should be treated as relatable to the land.

The Madras High Court negatived the claim and pointed out that the shooting of the films had absolutely no nexus whatsoever with either the agricultural operations or with the land. The income earned by permitting film production in the garden was held non-agricultural in nature (B. Nagireddy vs CIT 258 ITR 719).

Where a part of the activity of the nursery involves purchases and sales of the plants, profits arising from such trading should be considered as liable for income-tax. This was the ruling of the Income-Tax Appellate Tribunal (ITAT) in the Sudisha Farm Nursery vs ITO (2004 88 ITR 638 Delhi) case.

Finance Bill, 2008 confers exemption for income from nurseries. Agricultural income is defined in Section 2(1A) of the Income-Tax Act, 1961 to mean income derived from land and used for agricultural purposes.

Facts dependent

The question of exempting nursery income has been held by courts as dependant on the facts of each case. If the nursery is maintained by carrying out basic operations on land and subsequent operations are carried out in continuation of the basic operations, then income from such nursery will be agricultural income. But if the nursery is maintained independently without resorting to basic operations on land, then income from such nursery would not be agricultural income and would be liable to tax.

Finance Bill, 2008 gives finality to the issue and amends Section 2(1A) so as to provide that any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income, irrespective of whether the basic operations have been carried out or not on the land.

Such income will be treated as agricultural income qualifying for exemption under Section 10(1) of the Act. For this purpose, Explanation 3 is added to Section 3(1A) in the definition of agricultural income.

It will be a matter of interest to note that the Madras High Court had held income from nurseries to be exempt in CIT vs Soundarya Nursery (2000 241 ITR 530). This view was followed by the Uttarkhand High Court in CIT vs Green Gold Tree Farmers P Ltd (2008 299 ITR 262).

Clause 3 of the Finance Bill, 2008 declares that the amendment to Section 2(1A) by way of insertion of Explanation 3 will take effect from April 1, 2009, and will accordingly apply in relation to the assessment year 2009-10 and subsequent assessment years. Probably the amendment could have been declared as clarificatory so that it will apply to all pending assessments also.

Can States intervene?

Will the income from nurseries be taxable under the State agricultural income-tax law? After all, if the Central legislation has declared the income as agricultural in nature, the State legislation should come into the picture.

Tax experts have been pleading that agricultural income should be brought under the Central income-tax net, not merely for the sake of revenue but to plug the loophole of regular taxable income being disguised as agricultural income.

The Kelkar Task Force had recommended in Para 10.37 of its report in December 2002 that States should agree under Article 252 of the Constitution to authorise the Central Government to impose income-tax on agricultural income. The taxes so collected by the Centre should be assigned to the States.

Budget 2008 makes the intention of the Central Government clear. The debate on taxing agricultural income under the Central law is finally concluded in favour of the taxpayer.

(The author is a former Chief Commissioner of Income-Tax.)

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