We grow our own raw material and process it in our own factory. How is the business profit computed, and can we also claim the cultivation expenses?
Rule 7 of the Income-tax Rules, 1962 governs income that is partly agricultural income as defined in section 2 and partly income chargeable under "Profits and gains of business". In determining the part chargeable to income-tax you DEDUCT the market value of the agricultural produce the assessee has raised, or received as rent-in-kind, which has been used as raw material in the business or whose sale receipts are included in the business accounts — and no further deduction is made for any expenditure incurred by the assessee as a cultivator or receiver of rent-in-kind. Sub-rule (2) then fixes "market value": where the produce is ordinarily sold in the market in its raw state, or after a process ordinarily employed to render it fit for market, it is the average price at which it was so sold during the relevant previous year; where it is not ordinarily so sold, it is the aggregate of the expenses of cultivation, the land revenue or rent paid for the area in which it was grown, and such amount as the Assessing Officer finds to represent a reasonable profit.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text), reported as Rule 7 of the Income-tax Rules, 1962, as reproduced by the Supreme Court in Thiru Arooran Sugars Ltd., Madras v. CIT, Madras (C.A. Nos. 6636-6640/83 and connected matters, decided 30 July 1997, AIR 1997 SC 3575) and, as to sub-rule (1), by the ITAT Chennai in K.P.R. Mill Limited v. ACIT, Corporate Circle 2, Coimbatore (ITA No. 1915/Mds/17, 24 January 2018); and, as to both sub-rules, by the ITAT Mumbai in Addl. CIT, Large Tax Payer Unit, Mumbai v. M/s. Reliance Industries Ltd. (ITA Nos. 4361/Mum/2012 and connected appeals, 12 April 2017) at paras 35-36. It bears on section Rule 7, section 2(1A), section 10(1), section Rule 7A, section Rule 7B, section Rule 8, section 295 of the Income Tax Act 1961, in Capital Gains Exemptions, Deductions & Disallowances, How Tax Law Is Read and Assessment & Scrutiny matters.
Rule 7 is the general rule, and it is displaced wherever one of the special rules applies: Rule 7A for rubber, Rule 7B for coffee and Rule 8 for tea each fix a percentage and leave nothing to be valued. Where Rule 7 does apply, the whole dispute is normally about the market value figure, because that figure is simultaneously the agricultural income taken out and the cost of raw material allowed to the business — raise it and the business profit falls, lower it and the business profit rises. Two features control the argument. First, the closing words of sub-rule (1) are a bar, not a machinery provision: once the market value is deducted, no further deduction is allowed for anything spent as a cultivator, so cultivation costs cannot be claimed twice. Second, sub-rule (2) is an ordered pair of alternatives, and clause (b) — cost of cultivation plus land revenue or rent plus a reasonable profit — is reached ONLY where the produce is not ordinarily sold in the market in its raw state or after a marketing process. Where there is an ordinary market, clause (a) applies and the average price at which the assessee actually sold during the relevant previous year is the measure. The Supreme Court has held, in the sugarcane context, that a concourse of buyers and sellers in the ordinary sense is not required and that a controlled price fixed under a control order can be taken as the market price.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Rule 7, as reproduced by the Supreme Court, is headed "Income which is partially agricultural and partially from business" and reads: "(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 the 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."
Not a judgment in itself. The rule, as judicially reproduced, requires the market value of the assessee's own agricultural produce to be deducted in arriving at the business profit, bars any further deduction for expenditure incurred as a cultivator or receiver of rent-in-kind, and supplies a two-limb definition of market value turning on whether the produce is ordinarily sold in the market.
Not a judgment; no judicial reasoning is stated for the rule as such. On the scheme, the Supreme Court in CIT v. Willamson Financial Services (12 December 2007) at its paragraph 24 explained that the task of apportionment is simplified by Rules 7 and 8 framed in exercise of powers conferred by section 295(2)(b), that under Rule 7 the market value of the agricultural produce used as raw material in the business is deductible from the business profits as representing agricultural income, and that under Rule 8, which applies only where the assessee himself grows tea-leaves and manufactures tea in India, forty per cent of the profits on sales is taxable as business income while the balance is exempt as representing agricultural income.
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 the 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.
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Handle my notice → Ask a CA on WhatsAppRule 7 of the Income-tax Rules, 1962 governs income that is partly agricultural income as defined in section 2 and partly income chargeable under "Profits and gains of business". In determining the part chargeable to income-tax you DEDUCT the market value of the agricultural produce the assessee has raised, or received as rent-in-kind, which has been used as raw material in the business or whose sale receipts are included in the business accounts — and no further deduction is made for any expenditure incurred by the assessee as a cultivator or receiver of rent-in-kind. Sub-rule (2) then fixes "market value": where the produce is ordinarily sold in the market in its raw state, or after a process ordinarily employed to render it fit for market, it is the average price at which it was so sold during the relevant previous year; where it is not ordinarily so sold, it is the aggregate of the expenses of cultivation, the land revenue or rent paid for the area in which it was grown, and such amount as the Assessing Officer finds to represent a reasonable profit. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section Rule 7, section 2(1A), section 10(1), section Rule 7A, section Rule 7B, section Rule 8, section 295 of the Income Tax Act 1961. It is reported as Rule 7 of the Income-tax Rules, 1962, as reproduced by the Supreme Court in Thiru Arooran Sugars Ltd., Madras v. CIT, Madras (C.A. Nos. 6636-6640/83 and connected matters, decided 30 July 1997, AIR 1997 SC 3575) and, as to sub-rule (1), by the ITAT Chennai in K.P.R. Mill Limited v. ACIT, Corporate Circle 2, Coimbatore (ITA No. 1915/Mds/17, 24 January 2018); and, as to both sub-rules, by the ITAT Mumbai in Addl. CIT, Large Tax Payer Unit, Mumbai v. M/s. Reliance Industries Ltd. (ITA Nos. 4361/Mum/2012 and connected appeals, 12 April 2017) at paras 35-36. Rule 7 is the general rule, and it is displaced wherever one of the special rules applies: Rule 7A for rubber, Rule 7B for coffee and Rule 8 for tea each fix a percentage and leave nothing to be valued. Where Rule 7 does apply, the whole dispute is normally about the market value figure, because that figure is simultaneously the agricultural income taken out and the cost of raw material allowed to the business — raise it and the business profit falls, lower it and the business profit rises. Two features control the argument. First, the closing words of sub-rule (1) are a bar, not a machinery provision: once the market value is deducted, no further deduction is allowed for anything spent as a cultivator, so cultivation costs cannot be claimed twice. Second, sub-rule (2) is an ordered pair of alternatives, and clause (b) — cost of cultivation plus land revenue or rent plus a reasonable profit — is reached ONLY where the produce is not ordinarily sold in the market in its raw state or after a marketing process. Where there is an ordinary market, clause (a) applies and the average price at which the assessee actually sold during the relevant previous year is the measure. The Supreme Court has held, in the sugarcane context, that a concourse of buyers and sellers in the ordinary sense is not required and that a controlled price fixed under a control order can be taken as the market price. If it applies to you, the first step is this: Check first whether Rule 7A, 7B or 8 covers your produce. If it does, Rule 7 does not apply and the fixed percentage governs; do not attempt a market-value computation.
Rule 7, as reproduced by the Supreme Court, is headed "Income which is partially agricultural and partially from business" and reads: "(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 the 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." It was decided by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Not a judgment in itself. The rule, as judicially reproduced, requires the market value of the assessee's own agricultural produce to be deducted in arriving at the business profit, bars any further deduction for expenditure incurred as a cultivator or receiver of rent-in-kind, and supplies a two-limb definition of market value turning on whether the produce is ordinarily sold in the market.
Not a judgment; no judicial reasoning is stated for the rule as such. On the scheme, the Supreme Court in CIT v. Willamson Financial Services (12 December 2007) at its paragraph 24 explained that the task of apportionment is simplified by Rules 7 and 8 framed in exercise of powers conferred by section 295(2)(b), that under Rule 7 the market value of the agricultural produce used as raw material in the business is deductible from the business profits as representing agricultural income, and that under Rule 8, which applies only where the assessee himself grows tea-leaves and manufactures tea in India, forty per cent of the profits on sales is taxable as business income while the balance is exempt as representing agricultural income. In the words reproduced by the source cited on this page: "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 the 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."
It was decided by the CBDT Circulars & Instructions and is reported as Rule 7 of the Income-tax Rules, 1962, as reproduced by the Supreme Court in Thiru Arooran Sugars Ltd., Madras v. CIT, Madras (C.A. Nos. 6636-6640/83 and connected matters, decided 30 July 1997, AIR 1997 SC 3575) and, as to sub-rule (1), by the ITAT Chennai in K.P.R. Mill Limited v. ACIT, Corporate Circle 2, Coimbatore (ITA No. 1915/Mds/17, 24 January 2018); and, as to both sub-rules, by the ITAT Mumbai in Addl. CIT, Large Tax Payer Unit, Mumbai v. M/s. Reliance Industries Ltd. (ITA Nos. 4361/Mum/2012 and connected appeals, 12 April 2017) at paras 35-36. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section Rule 7, section 2(1A), section 10(1), section Rule 7A, section Rule 7B, section Rule 8, section 295, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Not a judgment in itself. The rule, as judicially reproduced, requires the market value of the assessee's own agricultural produce to be deducted in arriving at the business profit, bars any further deduction for expenditure incurred as a cultivator or receiver of rent-in-kind, and supplies a two-limb definition of market value turning on whether the produce is ordinarily sold in the market. It arises in Capital Gains Exemptions, Deductions & Disallowances, How Tax Law Is Read and Assessment & Scrutiny matters, on section Rule 7, section 2(1A), section 10(1), section Rule 7A, section Rule 7B, section Rule 8, section 295 of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Establish whether the produce is ordinarily sold in the market in its raw state or after a marketing process. That single finding decides whether sub-rule (2)(a) or sub-rule (2)(b) applies, and the two produce very different figures. Under sub-rule (2)(a), compute the average price at which the produce was so sold during the RELEVANT PREVIOUS YEAR, and keep the sale data that supports it. Under sub-rule (2)(b), build the figure from cultivation expenses, land revenue or rent for the area, and a reasonable profit, and be ready to justify the profit element. Do not claim cultivation expenditure separately in the business computation once the market value has been deducted — the closing words of sub-rule (1) forbid it, and a double claim is the easiest disallowance the officer will make. Keep the agricultural and business accounts separable, because Rule 7 operates on "the sale receipts of which are included in the accounts of the business" as much as on produce physically used as raw material.
Searched for later treatment; none was found. That is not the same as a source affirming it. No instrument amending rule 7 of the Income-tax Rules, 1962 was found, and the rule's own text could not be obtained: the generic rule labels serve other instruments entirely — the SEBI regulations, the Direct Tax Vivad se Vishwas Rules 2020 and 2024, the Senior Citizen Savings Scheme Rules, the Benami Rules 2016, the Faceless Assessment Scheme 2019, the Equalisation Levy Rules 2016 and the National Savings Certificates Rules — and the older address that the department's own index still returns for this rule is dead. Against that, the rule as reproduced by the Supreme Court in 1997 and by the Tribunal in 2017 and 2018 is in identical terms, which is inconsistent with an intervening amendment. This states the law under the Income-tax Act, 1961 and the Rules made under it, which govern up to AY 2026-27 and the disputes arising out of those years. Two qualifications. Agreement between three judicial reproductions spanning twenty years is good evidence that the rule has not moved, but it is not a reading of the rule as it stands, and anyone quoting it in a proceeding should take the words from the Rules themselves. And the rule is displaced wherever Rule 7A, Rule 7B or Rule 8 applies, so the first question in any dispute is which rule governs the crop; nothing in this entry decides that, and an argument built on Rule 7 for a crop covered by one of the special rules will not survive the objection. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
No published text of Rule 7 itself could be obtained. The text above is therefore taken from two judicial reproductions: the Supreme Court in Thiru Arooran Sugars Ltd. v. CIT, Madras (30 July 1997), which sets out sub-rules (1) and (2) in full, and the ITAT Chennai in K.P.R. Mill Limited v. ACIT (ITA No. 1915/Mds/17, 24 January 2018), which sets out sub-rule (1). The two reproductions of sub-rule (1) differ in two immaterial respects — the Supreme Court prints "in determining the part which is chargeable" and "the head 'Profits and gains of business'", the Tribunal prints "in determining that part which is chargeable" and "the head 'profits and gains of business'". The difference is flagged rather than silently resolved. Sub-rule (2) is corroborated on a second route: the ITAT Mumbai in Addl. CIT, Large Tax Payer Unit, Mumbai v. M/s. Reliance Industries Ltd. (ITA Nos. 4361/Mum/2012 and connected appeals, 12 April 2017) reproduces Rule 7 in full at its paragraphs 35 to 36 — sub-rule (1) and the whole of sub-rule (2) with clauses (a) and (b)(i), (ii) and (iii). That reproduction resolves both divergences in favour of the Tribunal reading: it prints "in determining that part which is chargeable" and the lower-case "profits and gains of business". It also prints "such amount as the Assessing Officer finds" without brackets, which is why the 1997 report shows "(Assessing) Officer" — the expression had been substituted for "Income-tax Officer". One further textual point: one rendering of the 1997 judgment prints clause (b)(iii) as "the represent a reasonable profit", while the 2017 reproduction prints "to represent a reasonable profit"; the 2017 reading is the one set out in the facts above, and the other is treated as a slip in that report rather than as the rule. Because no text of the rule itself could be read, it cannot be stated that Rule 7 is in this form today; what can be stated is that it was in this form when those judgments reproduced it. Published rules carry no date of their own in any event, so even a published text would not have dated it. The date carried by this entry is not a decision date and not a commencement date. No commencement date for Rule 7 could be established, and every other date available — the date of a judgment reproducing the text, or the vintage of a published edition — would be read as the day the position took effect, which it is not. The text and the percentages are verified; only the date they took effect from is not. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Not a judgment in itself. The rule, as judicially reproduced, requires the market value of the assessee's own agricultural produce to be deducted in arriving at the business profit, bars any further deduction for expenditure incurred as a cultivator or receiver of rent-in-kind, and supplies a two-limb definition of market value turning on whether the produce is ordinarily sold in the market.
TaxSphere, “Statutory position — Rule 7: where income is partly agricultural and partly business, the market value of the assessee's own produce comes out and nothing else does”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-rule-7-income-partially-agricultural-and-partially-from-business-market-value-deduction/ (validity last checked 2026-09-09)
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