Partly Agricultural and Partly Business Income

Introduction

Where an entity is engaged in a business that generates both agricultural and non-agricultural income, the income from agricultural operations shall be computed on a presumptive basis. Such option is provided in respect of income from the manufacturing and sale of tea, rubber and coffee. Profit attributable to agriculture is exempt, while business profit is liable to tax.

1. Method of apportionment

Where an entity carries both agricultural and non-agricultural activities, the profits arising from the business shall be both agricultural income and non-agricultural income. Such a situation arises in the case of certain agro-based industries where agricultural produce is produced by the same person who manufactures the industrial product by using such produce as raw material.

To deal with these situations, the Income-tax Act allows computation of income on presumptive basis where some part of business income is treated as agricultural income while the rest shall be non-agricultural income. These businesses include the manufacturing of tea, coffee or rubber in India. The profits arising from such business shall be apportioned into the agricultural profits and business profits in accordance with the following rules.

1.1. Profits from the manufacture and sale of tea

In the first instance, the income in respect of business of growing tea leaves and manufacturing tea is computed as if it were derived from normal business, after making all permissible deductions. The profits so arrived at shall be apportioned between agricultural profits and business profits. 60% of such profits is deemed to be agricultural profits and remaining 40% of such profits is deemed as business profits.

While computing the aforesaid income, the assessee is entitled to claim the deduction in respect of 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 received from or through the Tea Board.

1.2. Profits from growing coffee

In the first instance, the income in respect of sale of coffee grown and cured by the seller in India shall be computed as if it were income derived from normal business. The profits so arrived at shall be apportioned between agricultural profits and business profits. 75% of such profits is deemed to be agricultural profits and remaining 25% of such profits is deemed as business profits.

Income derived from the sale of coffee grown, cured, roasted and grounded by the seller in India, with or without mixing chicory or other flavouring ingredients, shall be computed as if it were income derived from normal business, and then 40% of such income shall be deemed to be income liable to tax and 60% of such income is treated as agriculture income.

While computing such income, the assessee is entitled to claim the deduction in respect of the cost of planting coffee plants in replacement of the plants that have died or become permanently useless in an area already planted, provided such area has not been previously abandoned. In determining such cost, no deduction will be allowed in respect of the amount of any subsidy which is received from or through the concerned board.

1.3. Profits from manufacture of rubber

In the first instance, the income derived from the sale of the following produces of rubber plants grown in India shall be computed as if it were income derived from normal business:

(a) Centrifuged Latex;

(b) Cenex;

(c) Latex-based crepes (such as pale latex crepe);

(d) Brown crepes (such as estate brown crepe, remilled crepe, smoked blanket crepe or flat bark crepe);

(e) Technically specified block rubbers manufactured or processed from field latex; or

(f) Coagulum obtained from rubber plants.

35% of such income shall be deemed to be income liable to tax and 65% is treated as agriculture income.

While computing such income, the assessee is entitled to claim the deduction in respect of the cost of planting rubber 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. In determining such cost, no deduction shall be made in respect of the amount of any subsidy which is received from or through the concerned board.

1.4. Use of agricultural produce in business

Where a cultivator or receiver of rent-in-kind utilises agricultural produce in his business as raw material, the market value of such produce is deducted while computing the taxable profits of such business. Similarly, if the sale receipts of the agricultural produce are included in the accounts of the business, it shall be deducted. Such deduction is allowed as such agricultural produce is exempt from tax. No further deduction is permissible in respect of any expenditure incurred by the assessee as cultivator or receiver of rent-in-kind. Such cases can be traced in sugar mills, flour mills, etc.

Example, if a sugar mill crushes the sugar cane grown by it, the market value of such sugar cane is to be deducted in computing taxable profits from the sale of sugar. If a sugar mill has debited only the cost of such sugar cane, the difference between the market value of such sugar cane and its cost price is further deducted while computing taxable profits.

1.4-1. Determination of market value

The market value of the agricultural produce shall be determined as follows:

a) Produce is ordinarily sold in the market

If agricultural produce is ordinarily sold in the market in its raw state or after application of any marketing process ordinarily employed by the cultivator or the receiver of rent-in-kind to render it fit for the market, the market value is determined according to the average price at which the produce has been sold during the relevant tax year.

b) Produce has no market

If produce has no market in its raw form or after application of the ordinary marketing process, the market value shall be the aggregate of the following:

1. Expenses of cultivation;

2. Land revenue or rent paid for the area in which it was grown; and

3. Such amount of profits as the Assessing Officer may find reasonable, having regard to the circumstances of the case.

1.4-2. Meaning of Market 

The market does not mean an open market where buyers and sellers get together for the purpose of purchase and sale of goods. No special significance can be read into the phrase ‘ordinarily sold’. The principle that the value of a property is the price it may fetch if sold in the open market is a well-known method of valuation. It is well-settled that the existence of an open market is not a pre-condition for the application of this principle. There may or may not be an actual market where buyers and sellers congregate to purchase and sell goods. Where there is no such open market, an estimate of the market price may be arrived at on a hypothetical basis

2. Overview

References

Thiru Arooran Sugars Ltd. v. CIT (1997) 227 ITR 432 (SC)

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.