Q. Consider the following statements:
- In India, income from allied agricultural activities like poultry farming and wool rearing in rural areas is exempted from any tax.
- 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? (UPSC Prelims 2025)
Answer:
Statement 1 is not correct but Statement 2 is correct
Notes: The correct answer is
[D] Statement 1 is not correct but Statement 2 is correct. The Income Tax Act, 1961, provides specific exemptions for "agricultural income," but the definition is strictly interpreted by the judiciary and tax authorities.
- Statement 1 (Incorrect): Under Section 10(1) of the Income-tax Act, only "agricultural income" is exempt from tax. However, the courts have ruled that "allied activities" like poultry farming, dairy farming, and wool rearing (apiculture, sericulture, etc.) do not constitute agricultural income because they do not involve the primary use of land for cultivation. Income from these activities is generally taxable under the head "Profits and Gains of Business or Profession," though certain deductions (like Section 80JJAA) might apply in specific cases.
- Statement 2 (Correct): According to Section 2(14) of the Income-tax Act, the definition of a "capital asset" excludes rural agricultural land in India. This means that if a farmer sells rural agricultural land, any profit made from the sale is not subject to Capital Gains Tax. For land to be considered "rural," it must be located outside the jurisdiction of a municipality or cantonment board and beyond specific distance limits (2km to 8km) based on the local population.
While "agricultural income" includes rent or revenue derived from land used for agricultural purposes and income from the sale of produce, the lack of "soil-centric" activity in poultry and wool rearing excludes them from the tax-free umbrella provided to traditional crop cultivation.