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

Tax Treatment of Partly Agricultural and Partly Non-Agricultural Income

Tax Treatment of on Composite Business Income i.e. Partly Agricultural and Partly Non-Agricultural Income as per Rules 7, 7A, 7B, 8.

For disintegrating a composite business income which is partly agricultural and partly non-agricultural, the  following rules are applicable— 

(A) Income from Growing and Manufacturing of any Product other than Tea [Rule 7]

he tax treatment of income from growing and manufacturing of any product other than tea is governed by Rule 7 of the Income Tax Rules, 1962.

Rule 7 provides that where income is partially agricultural in nature and partially from business, the market value of the agricultural produce which has been raised by the assessee or received by him as rent in kind and which has been utilised as a raw material in his business shall be deducted from the sale receipts and will be treated as agriculture income. The remaining will be considered as non agricultural income.

An assessee may have composite business income which is partially agricultural and partially non-agricultural, for example, where XYZ Ltd. grows potatoes and further processes its produce to sell them as wafers. In this case the company has composite income. i.e., from agriculture and from business. The composite income has to be disintegrated and for computing business income the market value of any agricultural produce raised by the assessee or received by him as rent in kind and utilised as raw material in his business is deducted. No further deduction is permissible in respect of any expenditure incurred by the assessee as a cultivator or receiver of rent in kind. For computing agricultural income the market value of agricultural produce will be total agricultural receipt on account of potatoes.

From such agricultural receipts, expenses such as cultivation expenses etc. incurred in connection with such receipt will be deducted and balance will be agricultural income which will be exempt.

For example, in the above case, if the market value of the potatoes grown by the company, which have been used for the purpose of making its own wafers, is Rs.5 lakhs and the cost of cultivation of such potatoes is Rs.4 lakhs, the agricultural income shall be Rs.1 lakh (Rs.5 lakhs – Rs.4 lakhs). This agricultural income of Rs.1 lakh shall be exempt.

Further for the purpose of computing business income from the sale of wafers produced from such potatoes, the company shall be allowed deduction of 5 lakhs as the cost of potatoes, being the market value of potatoes grown by it.

(B) Income from Growing and Manufacturing of Rubber [Rule 7A]

The tax treatment of income from growing and manufacturing of rubber in India is governed by Rule 7A of the Income Tax Rules, 1962.

Income from Growing Rubber

Income from growing rubber is considered agricultural income and is exempt from income tax in India, subject to certain conditions. However, 35% of the income from growing rubber is treated as business income and is taxable.

Income from Manufacturing Rubber

Income from manufacturing rubber is considered business income and is fully taxable.

Rule 7A

Rule 7A provides for the following tax treatment of income from growing and manufacturing of rubber:

Income derived from the sale of centrifuged latex or cenex or latex based crepes (such as pale latex crepe) or brown crepes (such as estate brown crepe, re-milled crepe, smoked blanket crepe or flat bark crepe) or technically specified block rubbers manufactured or processed from field latex or coagulum obtained from rubber plants grown by the seller in India      :          

35% of such income shall be deemed to be income liable to tax.

Example

Suppose a taxpayer grows and manufactures rubber in India. In the financial year 2023-24, the taxpayer's income from the sale of rubber is Rs. 100 crore. The taxpayer's income from growing rubber will be Rs. 65 crore (65% of Rs. 100 crore) and the taxpayer's income from manufacturing rubber will be Rs. 35 crore (35% of Rs. 100 crore).

The taxpayer's income from growing rubber will be exempt from income tax, but 35% of the taxpayer's income from growing rubber will be treated as business income and will be taxable. The taxpayer will also have to pay income tax on the taxpayer's income from manufacturing rubber.

Important Points

• The taxpayer can claim deduction for expenses incurred in growing and manufacturing rubber, such as the cost of seeds, fertilizers, pesticides, labor, and machinery.
• The taxpayer can also claim deduction for the cost of planting new bushes in replacement of bushes that have died or become permanently useless.
• The taxpayer will have to maintain proper records of income and expenses incurred in growing and manufacturing rubber.

(C)      Income from Growing and Manufacturing of Coffee [Rule 7B]

The tax treatment of income from growing and manufacturing of coffee in India is governed by Rule 7B of the Income Tax Rules, 1962.

Income from Growing Coffee

Income from growing coffee is considered agricultural income and is exempt from income tax in India, subject to certain conditions. However, 25% of the income from growing coffee is treated as business income and is taxable.

Income from Manufacturing Coffee

Income from manufacturing coffee is considered business income and is fully taxable.

Rule 7B

Rule 7B provides for the following tax treatment of income from growing and manufacturing of coffee:

Income from the sale of coffee grown and cured by the seller in India:

25% of such income shall be deemed to be income liable to tax.

Income from the sale of coffee grown, cured, roasted and grounded by the seller in India:

40% of such income shall be deemed to be income liable to tax.

Example

Suppose a taxpayer grows and manufactures coffee in India. In the financial year 2023-24, the taxpayer's income from the sale of coffee is Rs. 100 crore. The taxpayer's income from growing coffee will be Rs. 60 crore (60% of Rs. 100 crore) and the taxpayer's income from manufacturing coffee will be Rs. 40 crore (40% of Rs. 100 crore).

The taxpayer's income from growing coffee will be exempt from income tax, but 25% of the taxpayer's income from growing coffee will be treated as business income and will be taxable. The taxpayer will also have to pay income tax on the taxpayer's income from manufacturing coffee.

Important Points

• The taxpayer can claim deduction for expenses incurred in growing and manufacturing coffee, such as the cost of seeds, fertilizers, pesticides, labour, and machinery.
• The taxpayer can also claim deduction for the cost of planting new bushes in replacement of bushes that have died or become permanently useless.
• The taxpayer will have to maintain proper records of income and expenses incurred in growing and manufacturing coffee.

(D) Income from Growing and Manufacturing of Tea [Rule 8]

Income from Growing Tea

Income from growing tea is considered agricultural income and is exempt from income tax in India, subject to certain conditions. However, 40% of the income from growing tea is treated as business income and is taxable.

Income from Manufacturing Tea

Income from manufacturing tea is considered business income and is fully taxable.

Rule 8

Rule 8 of the Income Tax Rules, 1962 provides for the computation of income from the manufacture of tea. According to Rule 8, income from the manufacture of tea is computed as if it were income derived from business, and 40% of such income shall be deemed to be income liable to tax.

Example

Suppose a taxpayer grows and manufactures tea in India. In the financial year 2023-24, the taxpayer's income from the sale of tea is Rs. 100 crore. The taxpayer's income from growing tea will be Rs. 60 crore (60% of Rs. 100 crore) and the taxpayer's income from manufacturing tea will be Rs. 40 crore (40% of Rs. 100 crore).

The taxpayer's income from growing tea will be exempt from income tax, but the taxpayer's income from manufacturing tea will be taxable. The taxpayer will have to pay income tax on Rs. 16 crore (40% of Rs. 40 crore).

Important Points

• The taxpayer can claim deduction for expenses incurred in growing and manufacturing tea, such as the cost of seeds, fertilizers, pesticides, labor, and machinery.
• The taxpayer can also claim deduction for the cost of planting new bushes in replacement of bushes that have died or become permanently useless.

More topics on Agricultural Income :

1. ‘DEFINITION’ Of Agricultural Income
2. Tests To Determine Agricultural Income
3. Types Of Agricultural Income
4. Partly Agricultural and Partly Non-agricultural Income
5. Illustrations Of Agricultural and Non-Agricultural Incomes
6. Tax on Non-Agricultural Income if the Assessee has both Agricultural & Non-Agricultural Income
7. Computation of Net Agricultural Income