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5. Partly Agricultural and Partly Non-agricultural Income [ Assessments of 'AGRICULTURAL INCOME']

 

Sometimes, income comprises of both agricultural as well as non-agricultural income. Such a situation arises in case of certain ‘Agro based industries where agricultural produce is used as raw material and it (i.e., raw material) is produced by the same person (i.e., industrialist) who manufactures industrial product by using such raw material. Such industries (i.e., persons), earn income by selling the industrial product manufactured from self grown agricultural raw material. For example, Mr. X is the owner of agricultural land in India and produces sugarcane by spending Rs. 2,00,000. Further, X set up an industrial undertaking to manufacture sugar from sugarcane so produced. Accordingly, he uses the whole quantity of sugarcane for producing sugar and spends Rs, 2,50,000 as industrial expenses. He ultimately sells the sugar so produced for Rs. 7,00,000.

 

In this case, the total income of Mr. X shall be calculated as follows :

 

Total Income = Sale proceeds of sugar — Cost of cultivation — Industrial expenses


= Rs. (7,00,000 - 2,00,000 - 2,50,000)


= Rs. 2,50,000

 

The above total income of Mr. X is the composite income comprising of agricultural income and non-agricultural income. The income attributable to agricultural operations (i.e., raising of sugarcane) is agricultural income and the income attributable to industrial operations (i.e., manufacturing sugar from sugarcane) is non-agricultural income.

 

In such a situation, it becomes necessary to disintegrate (bifurcate) the two incomes because agricultural income is exempt from tax and non-agricultural income is taxable.

 

Rules 7, 7A, 7B and 8 of Income Tax Rules, 1962 provide the method of seggregating the two incomes. These rules deal with calculation of agricultural income and non-agricultural income in such cases of composite income.

 

1.       Rule 7—General Rule [Applicable to all except Tea, Coffee and Rubber]

As per Rule 7, while calculating non-agricultural income, the market value of the agricultural produce raised by the assessee or received as rent-in-kind and utilized as raw material, will be deducted act of the total profits (composite income) of such assessee and not the actual cost of cultivation. However, difference between the market value of such produce (used as raw material) and the cost of cultivation shall be treated as agricultural income. Then

 

(a)

 

Non-agricultural Income  = Sale proceeds of industrial product (e.g., Sugar)  - M.V. of agricultural used as raw material  - Industrial Expenses

 

Note : . Cost of cultivation is not to be charged as expenses.

 

(b)

 

Agricultural Income = M.V. of Agricultural produce used as raw material  -  Cost of cultivation

 

2.       Meaning of ‘Market Value’ [Rule 7(2)].      

Market value means

 

(i) Average selling price in the relevant previous year, if the produce is ordinarily sold in the market.

 

(ii)  If the agricultural produce is not ordinarily sold in the market, the total of followings shall he treated as ‘market value’ :
      (a) the expenses of cultivation;
      (b) the land revenue or rent of the land on which the produce is grown;
     (c) a reasonable amount of profit which in the opinion of Assessing Officer is considered proper.

 

3.       Rule 7A—Growing and manufacturing of Rubber in India

Income derived from the sale of centrifuged latex or cenex or latex based crops.
In other words, first of all, Total Income/Composite income shall be calculated as follows:

 

Composite Income or Total Income = Sale proceeds of Rubber (i.e., Industrial product)

 

- Cost of cultivation (i.e., Agricultural expenses)

 

- Industrial expenses

 

Now,               Agricultural income  =  65% of composite income

 

and                 Non-agricultural income  =  35% of composite income

 

Then, 35% of total income of such rubber industries will be chargeable to tax under the head ‘Profit and Gains of Business or Profession.’

 

While computing such income, an allowance shall be made in respect of the cost of planting rubber plants in replacement of plants that have died or became permanently useless in an area already planted, if such area has not previously been abandoned. For the purpose of determining such cost, no deduction shall he made in respect of the amount of any subsidy which is exempt from tax u/ s 10(31).

 

4.       Rule 7B—Growing and manufacturing of coffee in India

Any income derived by a person from selling coffee (in India) manufactured from self-grown coffee (in India) shall also be composite income comprising of agricultural income and nonagricultural income.

 

In such a case also, first of all total income/composite income shall he calculated as follows:

 

Composite income or Total income  =  Sale proceed of coffee (i.e., Industrial product)

 

- Cost of cultivation (i.e., Agricultural expenses)

 

- Industrial expenses

Now,

 

a. Case [ I ] .   If coffee is grown and cured by seller [Rule 7B(I)]

 

Agricultural Income = 75% of composite income

 

and     Non-agricultural income = 25% of composite income

 

Thus, 25% of total income of such coffee industries will be chargeable to tax under the head ‘Profits and Gains of Business or Profession’.

 

b. Case [ II ]    If coffee is grown, cured, roasted and grinded by the seller with or without mixing chicory or other flavouring ingredients, [Rule 7B(IA)]

 

Agricultural income = 60% of composite income

 

and Non-Agricultural income = 40% of composite income

 

Thus, 25% or 40% (as the case may be) of total income of such coffee industries will be chargeable to tax under the head ‘Profits and Gains of Business or Profession.’

 

While computing such income (i.e. the incomes referred to in sub-rules (1) and (IA), an allowance shall be made in respect of the cost of planting coffee plants in replacement of plants that have died or become permanently useless in an area already planted, if such area has not previously been abandoned. For the purpose of determing such cost, no deduction shall be made in respect of the amount of any subsidy which is exempt from tax u/s 10(31).

 

5.       Rule 8—Growing and manufacturing of Tea in India

 

Any income derived by a person from selling tea (in India) manufactured from self grown tea leaves (in India) shall also be composite income comprising of agricultural income and nonagricultural income. Rule 8 provides method for separate calculation of the two incomes.

 

As per rule 8, in such a case, first of all, composite income shall be calculated as follows:

 

Composite Income/ Total Income  =

 

Sale proceeds of Tea (i.e., Industrial Product)  -  Cost of cultivation (i.e., Agricultural expenses)  -  Industrial Expenses

 

Note. M.V. of tea leaves is not to be deducted as cost.

 

Now,                           Agricultural Income = 60% of Composite Income

 

Non-Agricultural Income = 40% of Composite Income

 

Then, 40% of total income of such sugar industries will be chargeable to tax under the head ‘Protits and Gains of Business or Profession’.

 

While computing such income, an allowance shall be made in respect of the cost of planting bushes in replacement of bushes that have died or become permanently useless in an area already planted, if such area has not previously been abandoned. For the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which is exempt from tax u/s 10(30).

 

It is for the assessee to prove whether a particular income is agricultural income or business income. He will have to satisfy the authorities in this regard.

 

In case any salary is received by a partner from a firm (whether assessed as PFAF or P.F. A.O.P) which is engaged in the business of growing tea leaves and manufacturing tea, 60% of such salary shall be agricultural income and 40% shall be non-agricultural income. [C.l.T. v. R.M. Chindambaram Pillai (1977) 106 ITR 292 (SC)]

 

Any compensation received from an insurance company or any other agency due to damage of agricultural produce caused by hail storms or other natural calamities is agricultural income. It will not be allocated into 60% or 40% ratio in case of tea business as it will be fully agricultural income. [C.I.T. v. B. Gupta (Tea) (P) Ltd., (1969) 74 ITR 337 (Cal.)]

 

TABLE - PARTLY AGRICULTURAL AND PARTLY BUSINESS INCOME

Crop

Rule

Agricultural Income

Business Income

Growing and Manufacture of Tea

8

60%

40%

Rubber manufacturing business

7A

65%

35%

Coffee  grown and cured by seller

7B(1)

75%

25%

Coffee  grown, cured, roasted and grounded  by the seller in India with or without mixing chicory or other flavouring ingredients

7B(1A)

60%

40%

 

 
 
 
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