Composite income partially derived from agriculture, is differentiated in the manner indicated in Rule 7 of the Act. A major area of overlap between agricultural and non-agricultural income is that of agro-processing. Courts have held that agricultural operations are those which directly involve spontaneous growth from the soil, like ploughing, harvesting etc. This means that poultry and animal husbandry are treated as non-agricultural activities, while forestry, pisciculture and floriculture are considered to be agricultural activities. The relative jurisdictions of State and Central governments in determining agricultural income have been indicated in judicial pronouncements.
Rule 7 deals generally says that in cases in which income is partially agriculture 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 shall be deducted from the sale receipts and will be treated as agriculture income. Remaining will be treated as non agricultural income.
INCOME WHICH IS PARTIALLY AGRICULTURAL INCOME AND PARTLY FROM BUSINESS
| Nature Of Business | Business Income | Agricultural Income |
| Growing and Manufacturing Tea[Rule 8] | 40% | 60% |
| Growing and Selling of Rubber[Rule 7A] | 35% | 65% |
| Sale of Coffee grown and cured by the Seller [Rule 7B(1)] | 25% | 75% |
| Sale of Coffee grown, cured, roasted and grounded by the seller with or without mixing chicory [Rule 7B(2)] | 40% | 60% |
| For other Composite Business [Rule 7] | In computing Business Income the Market Value of the agricultural produce is to be deducted. | Market Value of Agricultural Products. |
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 from 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) Less: M.V. of agricultural used as raw material Less: Industrial Expenses |
| (b) | Agricultural Income = | M.V.of agricultural produce used as raw material Less: Cost of cultivation |
Note: Cost of cultivation is not to be charged as expenses.
Related Cases:
S. 9(1)(vi) of IT Act, 1961, art. 5, 7 & 12 of DTAA between India & Australia—Double taxation avoidance agreement—In terms of the agreement for basic engineering and procurement service, the services rendered and the work undertaken by the applicant for an Indian company fall within the scope of “royalties” as per DTAA between India and Australia and the receipts are taxable in India by virtue of art. 12(2), r/w S. 9(1)(vi) as the exclusion clause under art. 12(4) is not attracted in absence of connection between the PE of the applicant in India and services—Worley Parsons Services Pvt. Ltd., In re (2009) 223 CTR 46 (AAR)
S. 7 of the Wealth-tax Act, 1957—Valuation of assets—Assessee is owner of a building constructed on a freehold plot of land in 1961. Since assessee was failed to produce the copy of the lease-deed and the affidavit produced by assessee is disbelieved/discarded, the rent is to be taken for valuation of bulding only, and the valuation of the land is to be assessed separately, and that also by taking into account the UIT rates for residential land, and by making addition for the locational advantage—CIT vs. Gajendra Singh Jhala
S. 7 of IT ACT, 1961—Acquisition of Immovable Properties—Ramesh D Hariani vs. Wealth Tax Officer. [2012] 137 ITD 128 (ITAT-MUMBAI)
S. 7B, r/w S. 7A, of the Companies (Profit) Surtax Act, 1964—Advance tax—CIT vs. Amrit Banaspati Co. Ltd.
S. 7C of the Companies (Profits) Surtax Act, 1964—Interest payable by assessee—McDowell & Co. Ltd Vs. CIT [2006] 285 ITR 196 (KAR)
S. 7 of the Wealth-tax Act, 1957—Valuation of assets—Commissioner of Wealth-tax vs. T.V. Sundaram Iyengar & Sons Ltd.
Reference:
As Per Rule 7, of the Income Tax Act, 1961-
Income which is partially agricultural and partially from business.
7. (1) In the case of income which is partially agricultural income as defined in section 2 and partially income chargeable to income-tax under the head “Profits and gains of business”, in determining that part which is chargeable to income-tax the market value of any 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 such business or the sale receipts of which are included in the accounts of the business shall be deducted, and no further deduction shall be made in respect of any expenditure incurred by the assessee as a cultivator or receiver of rent-in-kind.
(2) For the purposes of sub-rule (1) “market value” shall be deemed to be :—
(a) where agricultural produce is ordinarily sold in the market in its raw state, or after application to it of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render it fit to be taken to market, the value calculated according to the average price at which it has been so sold during the relevant previous year;
(b) where agricultural produce is not ordinarily sold in the market in its raw state or after application to it of any process aforesaid, the aggregate of—
(i) the expenses of cultivation;
(ii) the land revenue or rent paid for the area in which it was grown; and
(iii) such amount as the Assessing Officer finds, having regard to all the circumstances in each case, to represent a reasonable profit.