Correct Option (D)
Statement I is incorrect. Under the Income-tax Act, 1961, 'agricultural income' is exempt from income tax. However, income derived from allied agricultural activities such as poultry farming, dairy farming, bee-keeping, or wool rearing is generally not classified as agricultural income. Such income is considered non-agricultural and is therefore taxable under the provisions of the Income-tax Act, 1961.
Statement II is correct. Section 2(14) of the Income-tax Act, 1961, explicitly excludes rural agricultural land from the definition of a 'capital asset'. Consequently, the sale of rural agricultural land does not attract capital gains tax. The determination of whether agricultural land is rural or urban for tax purposes is based on specific criteria, including population density and distance from a municipality or cantonment board.
Incorrect Options
Options 1, 2, and 3 are incorrect because Statement I is factually inaccurate. Income from allied agricultural activities is generally taxable and not exempt under the Income-tax Act, 1961. Although Statement II is correct, the incorrectness of Statement I renders options asserting both statements are correct or Statement I is correct invalid.