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Saturday, January 9, 2010

Agricultural Income_Tax Definition

Definition of Agricultural Income in Income Tax Ordinance,2001


By: Tariq H. Tunyo

See §.41 of Income Tax Ordinance, 2001.

1 Exemption of Agricultural Income

Agricultural income derived by a person is exempt from tax under the Income Tax Ordinance, 2001.

2 Definition of Agricultural Income

The term agricultural income has been exhaustively defined by the Income Tax Ordinance, 2001.

“Agricultural Income” means:

(a) any rent or revenue derived by a person from land

which is situated in Pakistan and
is used for agricultural purposes;

(b) any income derived by a person from land situated in Pakistan from:

(i) agriculture,

(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by such person to render the produce raised or received by the person fit to be taken to market,

Explanation: In case of share-cropping, landowner leases the land to a cultivator (i.e. tenant) and receives rent from him in cash or in kind. The cultivator or the landowner who has received the rent-in-kind may have to perform certain processes to make the produce fit to be taken to market.

For example, in case of cultivation of tea or tobacco, the tea or tobacco leaves need to be dried before they can be sold in the market. This process normally adds value to the produce raised or received in kind. Any income that is attributable to the performance process is also brought within the ambit of agricultural income; hence, exempt from tax.

Any income attributable to processes beyond the ones that make produce fit to be taken to market is chargeable to tax. For example, income attributable to grinding and packing of tea leave is taxable.

(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by such person, in respect of which no process has been performed other than a process of the nature described in sub-clause (ii); or

Explanation: Having performed the natural process to make the produce fit to be taken to market the landowner or cultivator sells the produce in the market. Any income that arises on such sale is treated as agricultural income and is exempt from tax.

(c) any income derived by a person from:

(i) any building owned and occupied by the receiver of the rent or revenue of any land described in clause (a) or (b);

(ii) any building occupied by the cultivator, or the receiver of rent-in-kind, of any land in respect of which, or the produce of which, any operation specified in sub-clauses (ii) or (iii) of clause (b) is carried on, but only where the building is on, or in the immediate vicinity of the land and is a building which the receiver of the rent or revenue, or the cultivator, or the receiver of the rent-in-kind by reason of the person’s connection with the land, requires as a dwelling-house, a store-house, or other out-building.

Explanation: A landowner may allow the tenant to use his agricultural buildings that are situated in the vicinity of land and are used for functions connected with agricultural land. Any income arising from such buildings is also exempted from tax by treated it as agricultural income.

3 Examples of agricultural incomes

Following are some of the examples of agricultural income:

- income from land used for grazing
- income from land used for growing tea, fruits, or flowers
- income from horticultural and fruit nurseries
- incomes from cultivated forest

4 Examples of non-agricultural incomes

Following are some of the examples of non-agricultural income:

- fee charged for cutting down timber
- profit on sale of timber by a middleman who bought it from the cultivator
- Income of sugar, tea, rice factories
- Income from sale of water for irrigation
- Income from dairy-farming, and poultry farming