Question map
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?
Explanation
**Explanation:**
**Statement I is incorrect.** While agricultural income is generally exempt from income tax in India, allied agricultural activities like poultry farming and wool rearing are **not automatically exempt**. These activities are considered business income, not agricultural income, and are therefore taxable under the Income-tax Act, 1961. The exemption applies only to income derived from agricultural land through basic agricultural operations.
**Statement II is correct.** Under Section 194-IA of Income Tax Act, 1961, there are specific provisions for collection at source on transfer of certain immovable property[1] other than agricultural land, which indicates that agricultural land (particularly rural agricultural land) receives different treatment. Rural agricultural land is specifically excluded from the definition of "capital asset" under Section 2(14) of the Income-tax Act, 1961, meaning gains from its sale are not subject to capital gains tax.
Since Statement I is incorrect and Statement II is correct, option D is the right answer.
Sources- [1] https://cga.nic.in/DownloadPDF.aspx?filenameid=1787
PROVENANCE & STUDY PATTERN
Full viewThis is a classic 'Definition Trap'. The examiner exploits the layman's assumption that 'Rural/Farming = Tax Free'. You must distinguish between the strict legal definition of 'Agricultural Income' (exempt) and 'Allied Activities' (often taxable as business). Success here requires knowing statutory exclusions, not just general economic sentiments.
This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.
- Statement 1: Under the Income-tax Act, 1961 in India, are incomes from allied agricultural activities such as poultry farming and wool rearing in rural areas exempt from income-tax?
- Statement 2: Under the Income-tax Act, 1961 in India, is rural agricultural land treated as a capital asset for capital gains taxation?
States that the Income-tax Act, 1961 governs taxable income and that the Act specifies standard deductions and exemptions — showing exemptions must be read in the Act.
A student could use this to look up the Act's specific definition and list of exemptions (i.e., whether 'agricultural' or 'allied' incomes are enumerated or excluded).
Lists livestock types (sheep, goat, poultry, etc.) and says income from livestock/poultry is an important secondary rural income — indicating wool rearing and poultry are treated as rural livestock activities.
A student could compare this list to the Income-tax Act's legal definition of 'agriculture' or 'agricultural income' to see if such livestock/allied activities fall within exemptions.
Describes poultry as a significant rural employment and income source (eggs, meat, exports) — giving an economic example of allied agricultural activity.
Use this economic characterization to justify checking whether the Act or case law treats commercial poultry in rural areas as 'agricultural' for tax exemption purposes.
Explains poultry farming practices and scale (egg/meat production), noting low capital and rural job opportunities — another practical example of allied activity.
A student could test whether small-scale rural poultry (described here) matches any statutory or judicial criteria (e.g., rural location, nature of operations) used to grant agricultural exemptions.
Notes that livestock rearing provides non-farm employment and income in rural areas, suggesting blurred lines between agricultural and non-agricultural activities.
A student could use this to reason that tax treatment may depend on factual distinctions (e.g., commercial scale, processing), prompting a search of legal tests in the Act or rulings.
States that capital gains tax is governed by the Income-tax Act, 1961, so the question is about how that Act treats assets for capital gains.
A student could next look up the Act's definition of 'capital asset' (e.g., Section/definitions) to see whether agricultural land is included or excluded for capital gains.
Shows a constitutional pattern: Union List includes 'taxes on the capital value of the assets, exclusive of agricultural land' — implying agricultural land is treated differently from other capital-value taxes at the Union level.
A student could infer that agricultural land may be an exception in some capital-value tax rules and therefore check whether the Income-tax Act similarly carves out rural agricultural land from 'capital asset' or capital gains provisions.
Reiterates that tax categories often exclude agricultural land (e.g., taxes on capital value and estate duties are 'other than agricultural land'), indicating a legal pattern of special treatment for agricultural land.
Use this pattern to suspect the Income-tax Act may also treat agricultural land differently; then verify by consulting the Act's exclusions or judicial/administrative rules distinguishing rural agricultural land from taxable capital assets.
Shows State List items like 'Taxes on agricultural income' and 'Estate duty in respect of agricultural land', indicating states have specific powers and laws affecting taxation of agricultural land.
A student could infer that treatment of agricultural land for taxation may involve state-specific rules (e.g., definitions of 'rural' or 'agricultural' land), so they should check both central Income-tax Act provisions and any relevant state notifications or jurisprudence.
Describes special land‑reform and leasing laws applied to rural agricultural land, showing that rural agricultural land is governed by distinct statutory regimes.
Given these special laws, a student might reasonably expect corresponding special tax treatment and therefore check whether the Income-tax Act or its explanations treat such land as capital assets or exempt it for capital gains.
- [THE VERDICT]: Trap / Conceptual Bouncer. Source: Income Tax Act, 1961 Definitions (Section 2(1A) & Section 2(14)). Standard books (Singhania/Ramesh Singh) mention the exemption but often miss the 'Allied Activity' nuance.
- [THE CONCEPTUAL TRIGGER]: Direct Tax Code & Constitutional Division of Powers (Union List Entry 82 vs State List Entry 46).
- [THE HORIZONTAL EXPANSION]: 1. **Agri Income (Sec 2(1A))**: Rent from land, Cultivation, Farm buildings (Exempt). 2. **Non-Agri Income**: Poultry, Dairy, Bee-keeping, Dividends from agri-companies (Taxable unless integral to cultivation). 3. **Capital Asset (Sec 2(14))**: Excludes Rural Agri Land (No Capital Gains Tax). 4. **Urban Agri Land**: IS a Capital Asset (Taxable). 5. **Rural Definition**: Area outside 2km (pop 10k-1L), 6km (1L-10L), or 8km (>10L) from municipality.
- [THE STRATEGIC METACOGNITION]: Whenever you see 'Exempted from tax', ask: 'Is there a direct nexus with the land?' The Supreme Court rules that if land is mere 'standing room' (like in poultry sheds), it is Business Income, not Agricultural Income. Don't rely on 'Poor Farmer' logic for tax questions.
Poultry, livestock and related activities are significant secondary income and employment sources for rural households.
High-yield for questions linking rural economy and livelihood: explains why policy or tax treatment of allied activities matters for rural welfare and income distribution. Connects to agriculture, rural development and employment topics and helps frame policy-evaluation or taxation questions.
- Geography of India ,Majid Husain, (McGrawHill 9th ed.) > Chapter 9: Agriculture > Poultry Farming in India > p. 97
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > ANIMAL REARING > p. 342
- Geography of India ,Majid Husain, (McGrawHill 9th ed.) > Chapter 7: Resources > Poultry Farming > p. 37
The Income-tax Act defines the scope of taxable income (salary, business/profession profits, rent, capital gains, other sources) which determines whether particular receipts are taxable.
Core for direct-tax questions: mastering the Act's classification helps determine if a specific activity's receipts are treated as agricultural income or chargeable under other heads. Links to public finance, fiscal policy and legal interpretation questions.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > DIRECT TAX > p. 86
The Act provides statutory exemptions or special tax treatments for designated activities or units (for example, phased income-tax exemptions for SEZ export income).
Important for answering whether an activity is exempt: understanding that exemptions are usually scheme-specific trains candidates to look for explicit legal provisions. Connects to questions on tax incentives, industrial policy and comparative treatment across sectors.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 14: Infrastructure and Investment Models > Incentives offered to SEZ Units: > p. 418
The constitutional lists treat taxes on the capital value of assets as excluding agricultural land, which is directly relevant to whether agricultural land is subject to central capital-value taxation.
High-yield for UPSC: understanding this allocation clarifies Centre vs State taxing powers and helps in questions about which kinds of property the central Income-tax Act can tax. It links to federal fiscal relations, legislative competence, and how tax policy on land is framed.
- Introduction to the Constitution of India, D. D. Basu (26th ed.). > Chapter 35: TABLES > DISTRIBUTON QFLEGISLATIVE POWER > p. 556
- Indian Polity, M. Laxmikanth(7th ed.) > Chapter 92: World Constitutions > 710,r/f Indian Polity > p. 710
Agricultural income and related duties are placed in the State List, highlighting a constitutional separation that affects how rural agricultural land income/gains are treated for taxation.
Important for UPSC because many questions probe the division of taxation powers and the special status of agricultural income; mastering this helps answer questions on exemptions, state policy on agriculture, and centre-state fiscal dynamics.
- Indian Polity, M. Laxmikanth(7th ed.) > Chapter 92: World Constitutions > STATE LIST (LIST-II) > p. 711
Property tax is levied on 'real property' including land and improvements, a concept that contrasts with constitutional exclusions for agricultural land and is relevant when distinguishing municipal/ state levies from central income taxes.
Useful for aspirants to differentiate local property levies from broader income or capital taxes; this aids in integrated answers on land taxation, municipal finance, and the multiple layers of taxation on land.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Global Minimum Corporate Tax (GMCT): > p. 172
- Introduction to the Constitution of India, D. D. Basu (26th ed.). > Chapter 35: TABLES > DISTRIBUTON QFLEGISLATIVE POWER > p. 556
The 'Partial Integration' Method: While agricultural income is exempt, it is added to your total income to determine the *tax slab rate* for your non-agricultural income (if Net Agri Income > ₹5,000). This prevents tax evasion using the exemption.
Apply the 'Corporate Test'. Poultry farming can be a multi-crore industrial operation (e.g., Venky's). Statement I claims it is exempted from *any* tax. It is illogical for the state to grant a blanket tax holiday to large corporate poultry industries just because they are in rural areas. Extreme claim = Likely False. S1 False → Answer D.
GS2 Federalism (Fiscal Powers): The Centre cannot tax agricultural income (State List Entry 46) or agricultural land wealth (Union List Entry 86 excludes it). This constitutional firewall is why Statement II is correct—the IT Act *must* exclude rural agri land to stay within Union competence.