Agricultural income and capital asset — UPSC Prelims PYQ 2025

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.

Both Statement I and Statement II are correct and Statement II explains Statement I
Both Statement I and Statement II are correct but Statement II does not explain Statement I
Statement I is correct but Statement II is not correct
Statement I is not correct but Statement II is correct

Agricultural income is exempted from tax under the Income-tax Act, 1961. It is important to note that income from allied agricultural activities like poultry farming, wool rearing, etc. are not considered as agricultural income.
- Hence, tax may be levied on incomes from such activities. However, many states levy a tax on agricultural income under their respective state policies.

According to section 2(1A) of the Income Tax Act, agricultural income is defined as follows:
- Rent earned from any land in India which is used for agricultural purposes, or
- Any income from the production of agricultural goods which cannot be sold without first processing them to make them saleable for the market, i.e., these goods cannot be sold raw. For instance, Oats cannot be sold without processing (removal of husk).
- Any income from growing and selling agricultural produce on agricultural land. For instance, revenue from the sale of tomatoes grown on agricultural land.
Taxes on agricultural income fall under Entry 46 in the State List.
Thus, only State Governments can levy tax on agricultural income. The central government can levy tax on incomes other than agricultural income.

Rural agricultural Land is not a capital asset as per the provisions of the Income-tax Act.

Statement I can be inferred as wrong because the phrase “exempted from any tax” makes it inherently suspicious. It is highly unlikely that allied activities such as poultry farming or wool rearing would be completely outside any taxation system. Once Statement I is eliminated, only option (d) is left.