🧷 Authentic Classroom Explanation by IAS Monk

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📌 The Question:

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?

(a) Both Statement I and Statement II are correct and Statement II explains Statement I
(b) Both Statement I and Statement II are correct but Statement II does not explain Statement I
(c) Statement I is correct but Statement II is not correct
(d) Statement I is not correct but Statement II is correct

✅ Correct Answer: (d) Statement I is not correct but Statement II is correct

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🧠 Curiosity Raiser

Why does the law carefully separate agriculture from allied activities even though both happen in rural India?
Because taxation follows economic character, not geographical location.

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📘 Enrichment Notes (Highly Testable)

🔹 Agricultural Income (Tax Exempt)

As per the Income-tax Act, 1961, agricultural income includes:

• Rent or revenue from agricultural land
• Income from cultivation and sale of agricultural produce
• Income from sale of replanted trees, seeds
• Income from flowers and creepers

❌ What is NOT agricultural income?

• Poultry farming
• Dairy farming
• Bee-keeping
• Wool rearing
• Dividends from agricultural companies

➡️ These are treated as non-agricultural income and are taxable
❌ Hence, Statement I is incorrect

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🔹 Capital Asset & Agricultural Land

Under Section 2(14) of the Income-tax Act:

• Rural agricultural land is NOT a capital asset
• Therefore, capital gains tax does not apply on its sale

Distance-based exclusion from capital asset:

• Beyond municipal limits (2 km / 6 km / 8 km depending on population)

➡️ Urban agricultural land = capital asset = taxable
✅ Hence, Statement II is correct

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🧘‍♂️ IAS Monk Whisper

Tax law does not ask where you work, but what you truly earn.