Rule 8

Rule 8 — the law in short

What the courts have decided on section Rule 8, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• CIT, Dibrugarh v Doom Dooma India Ltd Supreme CourtHelps taxpayer
  I grow and manufacture tea, so only part of my income is taxed under the Income-tax Act. When I carry the written down value forward, does the Assessing Officer deduct the whole year's depreciation or only the taxable proportion?
  Only the taxable proportion. Under s.10(1) read with rule 8 of the Income-tax Rules, 1962, 40 per cent of the income from the sale of tea grown and manufactured in India is the part liable to tax, and the Supreme Court held that in a rule 8 case the depreciation 'actually allowed' within s.43(6)(b) is the proportionate depreciation only. The Department's appeals, which sought to reduce the written down value by 100 per cent of the depreciation computed at the prescribed rate, were dismissed.
• CIT v. Willamson Financial Services (Supreme Court) — a Chapter VI-A deduction on a tea company's composite income is allowed AFTER the Rule 8(1) sixty-forty apportionment, not against the whole composite income Supreme CourtHelps department
  Our tea company exports. Should the section 80HHC deduction be worked out on the whole composite income before Rule 8 splits it sixty-forty, or only on the forty per cent that is taxable?
  Only on the forty per cent. The Supreme Court held that the deduction under section 80HHC is required to be allowed AFTER the apportionment of income under Rule 8(1), and answered the issue in favour of the Department. The legal fiction in Rule 8(1) is confined to that rule: it assigns chargeability and computability only to the non-agricultural forty per cent, and it cannot be extended into section 80HHC(3)(a), because deductions under Chapter VI-A are made from gross total income and are not part of the computation of income under the head "Profits and gains of business".
• Bacha F Guzdar v CIT Supreme CourtHelps department
  I hold shares in a tea company and 60 per cent of its income is exempt as agricultural income. Is 60 per cent of my dividend exempt too?
  No. The Supreme Court held that dividend from a tea company is not agricultural income in the shareholder's hands. Agricultural income means revenue received by direct association with land used for agricultural purposes; it does not extend to revenue that changes hands by way of distribution of dividends. In fact and truth the dividend is derived from the investment in shares and rests on the contractual relation between the company and the shareholder. The shareholder has no interest in the property of the company, which is a juristic person distinct from him, only a right to participate in profits.
• Goodricke Group Ltd v CIT-II, Kolkata — the s.33AB deduction is taken in computing the composite tea profit BEFORE rule 8 splits it sixty-forty, not on the forty per cent High CourtHelps taxpayer
  The Assessing Officer has applied rule 8 first and then given my tea company its section 33AB deduction on only forty per cent of the composite income, which has more than halved the claim. Which comes first — the section 33AB deduction or the sixty-forty apportionment?
  Section 33AB comes first. On 19 May 2011 a Division Bench of the Calcutta High Court held, in an appeal under section 260A for AY 1997-98, that the deduction under section 33AB is taken in computing the profit or loss of the composite tea business, and only after that profit or loss has been determined does rule 8 of the Income-tax Rules, 1962 come into play to work out how much of it is liable to tax. The Tribunal below had held the opposite — that the section 33AB deduction was to be calculated on forty per cent of the income determined under rule 8 — and the High Court set that finding aside as erroneous. The Court's route was the parenthesis in section 33AB(1)(b) itself, which fixes the ceiling by reference to the profits of the business "computed under the head 'Profits and gains of business or profession' before making any deduction under this section": that is a computation under Chapter IV-D, and rule 8 operates only on the figure that computation produces. In the same judgment, and on the assessee's own concession, the Court answered the section 80HHC question the other way — a Chapter VI-A deduction on a composite tea income comes AFTER the sixty-forty apportionment, following Union of India v Warren Tea Ltd (2004) 266 ITR 226 (Cal) and the Supreme Court in CIT v Williamson Financial Services (2008) 297 ITR 17.
• 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.
• 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.
• 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.