Rule 7A

Rule 7A — the law in short

What the courts have decided on section Rule 7A, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Bennur Siddegowda Santhosh v. ITO, Ward-1, Chikmagalur (ITAT Bangalore) — Rule 7B, not the general Rule 7, governs coffee, and coffee bought from other planters and processed carries no agricultural element at all ITATCuts both waysNo later treatment found
  We grow coffee, cure it in our own concern and also buy coffee from other planters. The Assessing Officer has applied Rule 7B and taxed forty per cent. We say Rule 7 applies. Who is right?
  The Assessing Officer and the Commissioner (Appeals) were right that Rule 7B applies and the general Rule 7 does not. The Tribunal held that Rule 7 of the Income-tax Rules, 1962 provides for general agricultural income other than coffee and rubber, that Rule 7B is the specific provision for income from the manufacture of coffee, and that the assessee's case fell under Rule 7B(1A), so that forty per cent of the income is business income and sixty per cent is exempt as agricultural income. But it also held that coffee PURCHASED from other planters and processed and sold by the assessee's proprietary concern has no element of agricultural income at all and could not get the benefit of exemption, and it restored the whole issue to the Assessing Officer for the assessee to segregate the two streams.
• Mrs. Sisily Jose v. ITO, NCW-19(4), Chennai (ITAT Chennai) — converting field latex into ribbed smoked sheets is not "manufacture or processing" within Rule 7A, so the whole income remains agricultural ITATHelps taxpayerNo later treatment found
  My client taps rubber and makes ribbed smoked sheets to keep the latex from spoiling before sale. The Commissioner (Appeals) has applied Rule 7A and taxed thirty-five per cent as business income. Is that right?
  No. The Tribunal held that ribbed smoked sheets are merely dried and smoked latex, intended to prevent deterioration and make the product marketable, and that the process involves no chemical or mechanical treatment or transformation resulting in a new product — so it is not "manufacture" or "processing" in the sense contemplated by Rule 7A. Rule 7A applies to income from the manufacture or processing of centrifuged latex and the other products it names, not to the simple smoking or drying of latex sheets. The Tribunal set aside the Commissioner (Appeals)'s order to the extent it treated thirty-five per cent of the income as business income and directed the Assessing Officer to treat the entire income from the sale of ribbed smoked rubber sheets as agricultural income.
• 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 CBDT Circulars & InstructionsCuts both waysNo later treatment found
  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.
• Statutory position — Rule 8: tea grown and manufactured by the seller, forty per cent taxable and sixty per cent agricultural, and the sub-rule (2) replanting allowance CBDT Circulars & InstructionsCuts both waysNo later treatment found
  Our client grows tea and manufactures it in its own factory. What proportion of the composite income is taxable under the Income-tax Act, and what does sub-rule (2) allow for replanting?
  Rule 8(1) of the Income-tax Rules, 1962 provides that income derived from the sale of tea GROWN AND MANUFACTURED BY THE SELLER IN INDIA shall be computed as if it were income derived from business, and forty per cent of such income shall be deemed to be income liable to tax. The balance sixty per cent is agricultural income, exempt under s.10(1) and within the States' taxing power. Sub-rule (2) directs that in 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, and that in determining that cost no deduction shall be made in respect of any subsidy which, under clause (30) of section 10, is not includible in total income.
• Statutory position — Rule 7A (rubber) and Rule 7B (coffee): the fixed apportionment percentages, both coffee cases, and the replanting allowance CBDT Circulars & InstructionsCuts both ways
  My client grows rubber and my other client grows and cures coffee. What percentage of the income is business income in each case, and does it change if the coffee is also roasted and ground?
  Rule 7A: income 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, remilled 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, is computed as if it were business income and THIRTY-FIVE PER CENT of it is deemed to be income liable to tax — the balance sixty-five per cent being agricultural. Rule 7B has two cases: coffee GROWN AND CURED by the seller in India — TWENTY-FIVE PER CENT taxable, seventy-five per cent agricultural (sub-rule (1)); and coffee GROWN, CURED, ROASTED AND GROUNDED by the seller in India, with or without mixing chicory or other flavouring ingredients — FORTY PER CENT taxable, sixty per cent agricultural (sub-rule (1A)). Both rules carry a replanting allowance in their sub-rule (2), and the cost is not to be reduced by any subsidy that clause (31) of section 10 keeps out of total income.
• M/s. The Plantation Corporation of Kerala Ltd and M/s. The Velimalai Rubber Co. Ltd v ACIT, Kottayam ITATHelps departmentOverruled
  I am a rubber planter. I cleared an old unproductive block and replanted it, and claimed the cost under rule 7A(2). The Assessing Officer has disallowed it. Is there anything I can do?
  Not in Kerala. The Cochin Tribunal dismissed both appeals, holding itself bound by the Kerala High Court in Rehabilitation Plantations Ltd v CIT, which construed rule 7A(2) as covering only infilling — the replacement of dead or useless trees within an existing yielding area — and not the replanting of an area after cutting and removing an old plantation, and held that expenditure on planting and developing a plantation up to maturity must be capitalised. Rule 7A itself makes 35 per cent of the income from the specified rubber products taxable as business income and leaves 65 per cent as agricultural income for the State.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.