ITAT Restores Coffee Income Computation Matter for Fresh Examination

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) on 15 April held that Rule 7B of the Income Tax Rules, 1962 applies to income derived from coffee grown, cured, roasted and processed by the assessee, and not the general provisions of Rule 7.  A Bench comprising Vice President Prashant Maharishi and Judicial Member Soundararajan K. restored the matter involving Shri Bennur Siddegowda Santhosh to the Assessing Officer for fresh verification of agricultural and business income arising from coffee operations.

The assessee, engaged in coffee plantation and curing business through his proprietary concern M/s Mudramane Coffee Curers, had treated the entire income from coffee operations as agricultural income. The Assessing Officer reopened the assessment after observing that the assessee had disclosed substantial agricultural income and had not offered any portion as business income under Rule 7B of the Income Tax Rules.

The AO held that under Rule 7B(1A), income derived from the sale of coffee grown, cured, roasted and ground by the seller is partly taxable as business income. Accordingly, 40% of the income from coffee operations was treated as taxable business income and an addition of Rs. 28.91 lakh was made for AY 2016-17. Similar additions were made for AYs 2017-18 and 2020-21. The Commissioner of Income Tax (Appeals) upheld the reassessment order.

Before the ITAT, the assessee argued that Rule 7, being the general provision relating to composite agricultural and business income, should apply instead of Rule 7B. It was also submitted that the proprietary concern had purchased coffee from outside planters in addition to processing coffee grown by the assessee, making it difficult to separately identify the lots. The Tribunal pointed out that “Rule 7B of the Income Tax Rules specifically provides in respect of the income from the manufacture of coffee grown and cured by the seller.”

The Tribunal observed that Rule 7 is a general provision, whereas Rule 7B specifically governs income from coffee grown and processed by the seller. It held that where coffee is grown, cured, roasted and ground by the assessee, 40% of such income is taxable as business income, while 60% retains the character of agricultural income.

The Bench further noted that income arising from the processing and sale of coffee purchased from outside planters would not qualify for the agricultural income exemption, as such transactions had no agricultural element attributable to the assessee’s own estate. “Such income did not have any element of agricultural income which is chargeable to tax.”

The ITAT restored the matter to the file of the Assessing Officer with directions to verify the quantity of coffee grown by the assessee’s own estate and separately reconcile the income arising from coffee purchased from third-party planters. Therefore, all three appeals were allowed for statistical purposes.

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