Consider the following statements: [Agriculture]

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?

The correct option is: Statement I is not correct but Statement II is correct.

Explanation of Statement I:
Statement I is incorrect. Under Section 10(1) of the Income-tax Act, 1961, only agricultural income is exempt from tax in India. However, the definition of agricultural income under Section 2(1A) is strictly confined to revenue or rent derived from land used for agricultural purposes, and income from basic operations like tilling, sowing, and harvesting. Allied agricultural activities, such as poultry farming, dairy farming, wool rearing, and breeding of livestock, do not fall under the statutory definition of agricultural income. Consequently, income generated from these allied activities is taxable as business income under the head "Profits and Gains of Business or Profession" (PGBP), rather than being exempted from tax.

Explanation of Statement II:
Statement II is correct. According to Section 2(14) of the Income-tax Act, 1961, the definition of a "capital asset" explicitly excludes agricultural land in India, provided it is rural agricultural land. To qualify as rural, the land must not be situated within the jurisdiction of a municipality or cantonment board with a population of 10,000 or more, or within specified distances (ranging from 2 to 8 kilometers) from their local limits depending on the population. Because rural agricultural land is not considered a capital asset, any gains arising from its transfer or sale are not subject to capital gains tax in India.