EXEMPT INCOME

EXEMPT INCOME

AGRICULTURE INCOME

As per section 10(1) Income is exempt from Tax if its from agriculture land in India.

As per section 2(1A), Agriculture land means-

1. Rent from agricultural land (used for agriculture purposes).
2. Income from sale of agriculture produce. (Note 1).
3. Rent from house (use as dwelling house, store house).
4. Income from nursery.

Note 1: Rule 7- Sale of agriculture Produce.

Sale in Raw Form – Total agriculture income is exempt under such case.

Sale after optional process-

Agriculture Income (exempt)

PGBP Income (Taxable)

SPECIAL RULES FOR TEA, COFFEE & RUBBER

Example: Mr. Amar grows sugarcane and uses the same for the purpose of manufacturing in his factory. 40% of sugarcane produce is sold for Rs. 12 Lakhs, and the cost of cultivation of such sugarcane is Rs. 6 Lakhs. The cost of cultivation of the balance sugarcane (60%) is Rs. 15 Lakhs and the market value of the same is Rs. 25 Lakhs. After incurring Rs. 1.5 lakhs in the manufacturing process on the balance sugarcane, the sugar was sold for Rs. 30 lakhs.

Calculate Amar’s business income and agriculture income.

Answer:

COMPUTATION OF BUSINESS AND AGRICULTURE INCOME OF MR. AMAR

PARTIAL INTEGRATION IN CASE OF AGRICULTURE INCOME

Agriculture income is exempt from tax but for computation of tax it shall be considered if the following conditions are satisfied: -

COMPUTATION OF TAX LIABILITY

SECTION 14A

For computing total income under the five heads of income, No deduction shall be allowed in respect of expenditure incurred by the assessee in relation to exempt income.

Manner of computation of disallowance: Rule 8D

1. Where A.O is satisfied with the correctness of the claim of expenditure of the assessee – No action is required.
2. Where A.O is not satisfied with the correctness of the claim of expenditure by the assessee – expenses attributed to the exempt income shall be computed with Rule 8D of income tax rules.

Rule 8D: Expenditure relating to Exempt Income

Notes:

1. Provided that amount referred in (a) and (b) shall not be more than total expenditure claimed by the assessee.
2. Section 14A read along with Rule 8D provides for disallowance of expenditure even where the taxpayer has not earned any exempt income in a particular P.Y.

Kribhco (2012) (Delhi): Section 14A is applicable only if an income is exempt as per Chapter III of the Income Tax Act 1961.

• Deductions under Chapter VI-A are different from the exemptions.
• As per section 14A, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income (Exempt Income).

No Disallowance can be made u/s 14A in respect of income included in the total income in respect of which deduction is allowable u/s 80C to 80U.

Example: Mr. Kumar invested in securities & expenditure related to such investment is Rs. 2,00,000. Out of above securities, income from some securities is exempt & from other securities it is taxable. Expenditure directly attributed to exempt securities is Rs. 30,000. Investment value in securities from which income is exempt: Rs. 6,00,000 (Monthly Average of opening and closing & after that annual average). Calculate the expenses allowed to exempt income?

Answer: Expenditure related to Exempt Income is as Follows: -

Conclusion: So, in this question Rs. 1,10,000 expenditure is allowed as deduction.