Explanation

Under Section 10(1) of the Income Tax Act, 1961, pure agricultural income is exempt from tax. This includes income from cultivating and selling agricultural produce, sale of agricultural land, and compensation received from the government for land acquisition.

However, Statement I is incorrect. Income from allied agricultural activities such as poultry farming, dairy farming, and wool rearing is not classified as agricultural income under the Act. These activities, despite being carried out in rural areas, are subject to tax by the central government. The exemption applies strictly to pure agricultural operations — not to allied or ancillary activities.

Statement II is correct. Under Section 2(1A) of the Income Tax Act, rural agricultural land is explicitly excluded from the definition of a capital asset. As a result, any income earned from such land — whether rental income or income from growing and selling produce — is not liable to capital gains tax. It is important to note that this exemption applies only to rural agricultural land. Urban agricultural land, on the other hand, is treated as a capital asset and is fully liable to capital gains tax upon sale.

Therefore, Statement I is incorrect and Statement II is correct.