Rule 7 deduction for farm-to-factory transport charges was allowed as part of manufacturing input cost.

Rule 7 permits deduction of the market value of agricultural produce raised by the assessee and used as raw material in business, while disallowing only expenditure incurred in the assessee's capacity as cultivator or receiver of rent-in-kind. Transport charges for carrying sugarcane from the assessee's own farm to its factory were not cultivation expenses; they formed part of the cost of bringing the produce to the manufacturing unit. On that basis, the deduction was consistent with the market-value method under rule 7, and the assessee was entitled to deduct those transport charges.

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Issues: Whether the assessee, while computing business income from sugar manufacture, was entitled under rule 7 to deduct transport charges incurred for carrying sugarcane grown in its own farm to its factory.

Analysis: Rule 7 requires deduction of the market value of agricultural produce raised by the assessee and used as raw material in the business, and prohibits any further deduction only in respect of expenditure incurred by the assessee in its capacity as a cultivator or receiver of rent-in-kind. The transport charges in question were not expenditure incurred for raising or cultivating the sugarcane, but were part of the cost of bringing the produce to the factory for use in manufacturing activity. The assessee was to be treated like other cane growers whose transport cost was allowed in fixing the price at the factory gate, and the deduction claimed was therefore consistent with the market-value basis contemplated by rule 7.

Conclusion: The assessee was entitled to deduct the transport charges from the cost of sugarcane supplied by it to its factory, and the question was answered in its favour.

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