Composite Income (Partly Agricultural and Partly Non-agricultural Income) of Company and Its Splitting-up under Rules 7, 7A, 7B and 8
BACKGROUND AND MEANING OF COMPOSITE INCOME
Agricultural income of a company is fully exempted as per Section-10(1) of the Income Tax Act, 1961. But sometimes, particularly in case of agro-based industries, income of a company may comprise both agricultural and non-agricultural income. This is called “Composite Income”. Generally in such companies agricultural produces are used as raw materials for production of industrial products. Hence, practically such industries earn income by selling the industrial products manufactured from self-grown agricultural raw materials.
So, Composite Income = Agricultural Income + Non-agricultural Income
For eg – Sugarcane manufacturing unit, tea manufacturing unit, coffee manufacturing unit etc.
CALCULATION OF TOTAL INCOME AND SPLITTING UP
Separation or splitting up of composite income is necessary for calculation of tax liabilities of such companies as per the Income Tax Act. In case of composite income, a part of the income is attributed to the agricultural operation and another part is attributed to industrial operation. For eg, in sugarcane industry, the income attributed to raising of sugarcane i.e. agricultural operation is “Agricultural income” and the income attributed to manufacturing of sugarcane i.e. industrial operation is “Non-agricultural income”. But before it, it is necessary to calculate the total composite income. As per Rule-7, the total income in such case is calculated as below:
Total Income = Sale Proceeds – Cost of cultivation – Industrial expenses
For eg- Say XYZ Ltd. manufactures sugar from self cultivated sugarcanes. It produces sugarcane by spending Rs. 3,00,000. It uses whole quantity of sugarcane for producing sugar and spends Rs. 1,50,000 in processing as industrial expenses. It sells the sugar for Rs. 8,00,000. Hence, total income shall be calculated in the following manner:
Total Income = 8,00,000 (Sales proceeds) – 3,00,000 (Cost of cultivation) – 1,50,000 (Industrial expenses) = Rs. 3,50,000
After splitting up, the agricultural component of total income will be exempted whereas the non-agricultural component will be taxable under the head ‘Profit and Gain from Business and Profession’
RULE-7 – GENERAL RULE (APPLICABLE TO ALL EXCEPT TEA, COFFEE AND RUBBER)
(a) Calculation of non-agricultural component – The market value of the agricultural produce raised by the assessee or received as rent-in-kind and utilized as raw material, shall be deducted from total composite income of such assessee and not the actual cost of cultivation for determining non-agricultural income.
Non-agricultural Income = Sales Proceeds of Industrial Product – Market value of agricultural produce – Industrial expenses
(b) Calculation of agricultural component – The difference between the market value of such agricultural produce (used as raw material for industrial production) and the cost of cultivation shall be treated as agricultural income.
Note – Market Value under Rule 7(2) means: i) Average selling price in the relevant previous year, if the produce is ordinarily sold in market ii)If the produce is not ordinarily sold in market, the market value = cultivation expenses + land revenue or rent of land + a reasonable amount of profit which in opinion of the Assessing officer is considered proper.
Agricultural Income = Market value of agricultural produces (used as raw material) – Cost of cultivation
RULE-7A- GROWING AND MANUFACTURING OF RUBBER IN INDIA
Covered Income – Income derived from sale of centrifuged latex or cenex or latex based crops.
Composite Income = Sales proceeds of Rubber – Cost of cultivation – Industrial expenses
Agricultural Income = 65% of the composite income which will be exempted.
Non-agricultural Income = 35%of the composite income which will be charged to tax under the head ‘Profits and Gains from Business and Profession’
RULE-7B- GROWING AND MANUFACTURING OF COFFEE IN INDIA
Composite income is calculated in the same way as above.
Case-I: If Coffee is grown and cured by seller under Rule 7B(I)
Agricultural Income = 75% of the composite income (exempted)
Non-agricultural income = 25% of the composite income (chargeable to tax)
Case-II: If coffee is grown, cured, roasted and grinded by the seller with or without mixing flavoring ingredients under Rule-7B(IA)
Agricultural Income = 60% of the composite income (exempted)
Non-agricultural income = 40% of the composite income (chargeable to tax)
RULE-8- GROWING AND MANUFACTURING OF TEA IN INDIA
Agricultural Income = 60% of the composite income (exempted)
Non-agricultural income = 40% of the composite income (chargeable to tax)
Note – While computing such income, an allowance shall be made in respect of cost of planting bushes in replacement of business 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 which is exempted from tax u/s-10. This is applicable to coffee manufacturing as well.
BACKGROUND AND MEANING OF COMPOSITE INCOME
Agricultural income of a company is fully exempted as per Section-10(1) of the Income Tax Act, 1961. But sometimes, particularly in case of agro-based industries, income of a company may comprise both agricultural and non-agricultural income. This is called “Composite Income”. Generally in such companies agricultural produces are used as raw materials for production of industrial products. Hence, practically such industries earn income by selling the industrial products manufactured from self-grown agricultural raw materials.
So, Composite Income = Agricultural Income + Non-agricultural Income
For eg – Sugarcane manufacturing unit, tea manufacturing unit, coffee manufacturing unit etc.
CALCULATION OF TOTAL INCOME AND SPLITTING UP
Separation or splitting up of composite income is necessary for calculation of tax liabilities of such companies as per the Income Tax Act. In case of composite income, a part of the income is attributed to the agricultural operation and another part is attributed to industrial operation. For eg, in sugarcane industry, the income attributed to raising of sugarcane i.e. agricultural operation is “Agricultural income” and the income attributed to manufacturing of sugarcane i.e. industrial operation is “Non-agricultural income”. But before it, it is necessary to calculate the total composite income. As per Rule-7, the total income in such case is calculated as below:
Total Income = Sale Proceeds – Cost of cultivation – Industrial expenses
For eg- Say XYZ Ltd. manufactures sugar from self cultivated sugarcanes. It produces sugarcane by spending Rs. 3,00,000. It uses whole quantity of sugarcane for producing sugar and spends Rs. 1,50,000 in processing as industrial expenses. It sells the sugar for Rs. 8,00,000. Hence, total income shall be calculated in the following manner:
Total Income = 8,00,000 (Sales proceeds) – 3,00,000 (Cost of cultivation) – 1,50,000 (Industrial expenses) = Rs. 3,50,000
After splitting up, the agricultural component of total income will be exempted whereas the non-agricultural component will be taxable under the head ‘Profit and Gain from Business and Profession’
RULE-7 – GENERAL RULE (APPLICABLE TO ALL EXCEPT TEA, COFFEE AND RUBBER)
(a) Calculation of non-agricultural component – The market value of the agricultural produce raised by the assessee or received as rent-in-kind and utilized as raw material, shall be deducted from total composite income of such assessee and not the actual cost of cultivation for determining non-agricultural income.
Non-agricultural Income = Sales Proceeds of Industrial Product – Market value of agricultural produce – Industrial expenses
(b) Calculation of agricultural component – The difference between the market value of such agricultural produce (used as raw material for industrial production) and the cost of cultivation shall be treated as agricultural income.
Note – Market Value under Rule 7(2) means: i) Average selling price in the relevant previous year, if the produce is ordinarily sold in market ii) If the produce is not ordinarily sold in market, the market value = cultivation expenses + land revenue or rent of land + a reasonable amount of profit which in opinion of the Assessing officer is considered proper.
Agricultural Income = Market value of agricultural produces (used as raw material) – Cost of cultivation
RULE-7A- GROWING AND MANUFACTURING OF RUBBER IN INDIA
Covered Income – Income derived from sale of centrifuged latex or cenex or latex based crops.
Composite Income = Sales proceeds of Rubber – Cost of cultivation – Industrial expenses
Agricultural Income = 65% of the composite income which will be exempted.
Non-agricultural Income = 35%of the composite income which will be charged to tax under the head ‘Profits and Gains from Business and Profession’
RULE-7B- GROWING AND MANUFACTURING OF COFFEE IN INDIA
Composite income is calculated in the same way as above.
Case-I: If Coffee is grown and cured by seller under Rule 7B(I)
Agricultural Income = 75% of the composite income (exempted)
Non-agricultural income = 25% of the composite income (chargeable to tax)
Case-II: If coffee is grown, cured, roasted and grinded by the seller with or without mixing flavoring ingredients under Rule-7B(IA)
Agricultural Income = 60% of the composite income (exempted)
Non-agricultural income = 40% of the composite income (chargeable to tax)
RULE-8- GROWING AND MANUFACTURING OF TEA IN INDIA
Agricultural Income = 60% of the composite income (exempted)
Non-agricultural income = 40% of the composite income (chargeable to tax)
Note – While computing such income, an allowance shall be made in respect of cost of planting bushes in replacement of business 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 which is exempted from tax u/s-10. This is applicable to coffee manufacturing as well.
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