📘 IAS Prelims 2025 — GS-I Q.5 | Classroom Explanation

📌 Question

Q.5) 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

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

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🧑‍🏫 Classroom Explanation

This question tests precise statutory definitions, not general intuition about agriculture.
UPSC deliberately uses “allied activities” to mislead.

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🔍 Statement-wise Analysis

❌ Statement I: Incorrect

• Key UPSC trap:
Not all rural or agriculture-related activities qualify as “agricultural income”.

• Under the Income-tax Act, 1961, agricultural income is exempt only if it fits the statutory definition, such as:

• Income from cultivation of land
• Rent or revenue from agricultural land
• Income from sale of produce grown on land

• Allied activities are NOT agricultural income, for example:

• Poultry farming
• Dairy farming
• Bee-keeping
• Wool rearing

➡️ These are treated as business income and are taxable.

❌ Hence, Statement I is incorrect.

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✅ Statement II: Correct

• Capital asset definition (Section 2(14), Income-tax Act):
“Capital asset” excludes rural agricultural land.

• Rural agricultural land = NOT a capital asset, therefore:

• Sale of such land does not attract capital gains tax

• Distance-based classification:

• Agricultural land outside municipal limits (based on population thresholds and distance norms) is rural
• Agricultural land within specified urban limits is treated as a capital asset and taxable

➡️ This is a well-established and frequently tested rule.

✅ Hence, Statement II is correct.

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🧮 Final Evaluation

✔️ Statement I: ❌ Incorrect
✔️ Statement II: ✅ Correct

➡️ Correct answer: (d)

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🎯 UPSC Elimination Logic

• Agricultural ≠ Tax-exempt automatically
• Allied activities ≠ agricultural income
• Income tax exemptions depend on legal definition, not common sense

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🔗 Bridge Points (High Shelf-Life Value)

• Expect future questions on:

• Difference between agricultural income and agribusiness income
• Capital gains treatment of land
• Rural vs urban land classification
• Tax treatment of allied rural activities

• Frequently confused pair:

• Rural agricultural land → not a capital asset
• Urban agricultural land → capital asset

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📍 GS Mapping

• GS Paper II
• Subject: Indian Economy / Taxation
• Theme: Agricultural income, Capital assets, Direct taxes
• Question Nature: Static law with recurring applicability

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