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Sometimes, income of a person comprises of both agricultural as well as non-agricultural income. Such a situation is common 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. AB is the owner of agricultural land in India and produces maize by spending 10,00,000. Further, AB set up an industrial undertaking to manufacture maize flour from maize so produced. Accordingly, he uses he whole quantity of maize for producing maize flour and spends Rs, 12,50,000 as industrial expenses. He ultimately sells the maize flour so produced for 25,00,000.

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

Total Income = Sale proceeds of maize - Cost of cultivation - Industrial expenses

= (25,00,000 -10,00,000-12,50,000) The above total income of Mr.AB is the composite income comprising of agricultural income and non-agricultural income. The income attributable to agricultural operations (i.e., raising of maize) is agricultural income and the income attributable to industrial operations (i.e., manufacturing maize flour from maize) is non-agricultural income.

Since only agricultural income is exempt from tax it is necessary to bifurcate the two incomes. Rules 7, 7A, 7B and 8 of Income Tax Rules, 1962 provide the method of calculation of agricultural income and non-agricultural income in such cases of composite income.

Taxability In Case Of Partly Agricultural And Partly Non-Agricultural Income

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 - M.V. of Agricultural produce used as raw material - industrial expense

Note. Cost of cultivation is not to be charged as expense.

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

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 be 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 proper is considered correct.

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 = Total Income Sale proceeds of Rubber (i.e., Industrial product)-Cost of cultivation (i.e., Agricultural expenses)- Industrial expenses

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 be made in respect of the amount of any subsidy which is exempt from tax u/s 10(31).

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 non-agricultural income.

In such a case also, first of all total income/composite income shall be 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

 

Case I. If coffee is grown and cured by seller

  • Agricultural Income 75% of composite income
  • 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'.

Case II. If coffee is grown, cured, roasted and grinded by the seller with or without mixing or other flavouring ingredients.

  • Agricultural income = 60% of composite income
  • Non-Agricultural income = 40% of composite income

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.

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 India) shall also be composite income comprising of agricultural income and non-agricultural 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.

  • 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 "Profits 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.

So, in this way, we can distribute the composite income in case of agricultural income and non-agricultural income according to Rules 7, 7A, 7B and 8 of the Income Tax Rules, 1962.


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Category Income Tax, Other Articles by - Ritik Chopra 



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