Crude palm oil processing income is business income where factory-based industrial steps exceed ordinary agricultural processing.

Income from extracting crude palm oil from oil palm fruit and kernel is treated as business income to the extent it results from factory-based industrial processing beyond the ordinary cultivation-related steps covered by section 2(1A) of the Income-tax Act. The note distinguishes limited agricultural processing from sterilisation, stripping, digesting, pressing, clarification and centrifuging carried out with substantial industrial infrastructure, which converts the raw produce into a value-added product. Where agricultural and business elements coexist, Rule 7 applies to apportion the composite income and exclude the market value of the agricultural produce from the business computation.

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Issues: Whether the income derived from extraction of crude palm oil from the fruit and kernel of oil palm constitutes agricultural income within section 2(1A) of the Income-tax Act, 1961, or business income liable to assessment under section 28, and whether Rule 7 of the Income-tax Rules, 1961 applies to bifurcate the income.

Analysis: The definition of agricultural income covers income derived from land by agriculture and by only such processing as is ordinarily employed by a cultivator or receiver of rent-in-kind to make the produce fit to be taken to market. The extraction undertaken here involved sterilisation, stripping, digesting, pressing, clarification, centrifuging and other factory-based mechanical processes requiring substantial industrial infrastructure and investment. Such processing went beyond ordinary cultivation activity and could not be equated with the limited processes contemplated by section 2(1A). The activity of converting the raw produce into crude palm oil was therefore an industrial one, while the underlying crop value remained agricultural. In such a case, Rule 7 governs computation of the composite income and the market value of the agricultural produce is to be excluded while assessing the business element.

Conclusion: The income from extraction and sale of crude palm oil is assessable as business income to the extent of the value-added industrial activity, and Rule 7 applies to apportion the mixed income. The finding is against the assessee and in favour of the Revenue.

Ratio Decidendi: Processing that exceeds the ordinary cultivation-related steps contemplated by section 2(1A) and involves industrial factory operations renders the resulting income business income, with Rule 7 applying where agricultural and business components coexist.

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