2023 (2) TMI 1415 - AT - Income Tax

Conversion of grapes into raisins involves substantial processing; Rule 7 invoked to classify income as non-agricultural business

ITAT, Pune dismissed the appeal, holding that conversion of grapes into raisins involved substantial inputs (manpower, electrical power, buildings, ... Applicability of provisions of Rule 7 of the Income Tax Rules, 1962 for the purpose of determination of non-agricultural income - Appellant is engaged in the business of growing grapes on its own lands and grapes so grown were subject to further processing to convert the grapes into raisins - whether the process undertaken by the appellant for conversion of grapes into the raisins is an ordinarily process employed by the cultivator to render the grapes fit to be taken into the market? HELD THAT:- As held in the case of CIT vs. P.K. Veeran [1964 (3) TMI 126 - KERALA HIGH COURT], the question as to the process employed by an assessee was a process ordinarily employed by the cultivator to render the produce fit to be taken into the market was essential question of fact. The Hon’ble Supreme Court in the case of CIT vs. R. Venkataswamy Naidu [1956 (2) TMI 3 - SUPREME COURT] held that the onus lies upon the assessee claiming exemption to prove that the claim of the assessee falls within the exemption condition. Though in the written submission filed before us, the appellant made a bald submission that there was no ready market for the grapes grown, this fact was not proved by adducing the necessary evidence. More particular, in view of the fact that the appellant firm also engaged in trading of raisins, the submission made by the assessee cannot be given any credence. Process undertaken by the appellant for conversion of grapes into raisins is not a manual process, but a process employed involving man power, electrical power, buildings, furniture and application of chemicals etc, which is not a process ordinarily employed by the cultivator to render the agricultural produce fit to be taken into the market. Therefore, having due regard to facts of case, we are of considered opinion that the AO had correctly invoked the provisions of Rule 7 of Income Tax Rules, 1962 for the purpose of determination of business income of tax. In these circumstances, we do not find any merit in the ground of appeal filed by the assessee. Appeal filed by the assessee stands dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the process of converting grapes into raisins undertaken by the assessee is an 'ordinarily employed' process by a cultivator to render agricultural produce fit to be taken to market such that the resulting receipts retain agricultural character and are exempt under s.10(1) (as applied via Rule 7 of the Income Tax Rules, 1962). 2. Whether the Assessing Officer and the appellate authority were justified in invoking Rule 7(1) of the Income Tax Rules, 1962 to determine and attribute a portion of receipts as non-agricultural (business) income on the facts of conversion of grapes into raisins. 3. Allocation of burden of proof: whether the assessee discharged the onus to establish that (a) there was no ready market for fresh grapes necessitating conversion, or (b) the conversion process was an ordinarily employed market-preparation process. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of 'ordinarily employed' test to conversion of grapes into raisins Legal framework: Rule 7(1) of the Income Tax Rules, 1962 authorizes apportionment/determination of non-agricultural income where an activity mixes agricultural and non-agricultural processes; exemption under s.10(1) applies where proceeds are from agricultural produce or where conversion is by processes ordinarily employed to render produce fit for market. Precedent treatment: Earlier authorities recognized that where cultivators employed only ordinary processes to render produce marketable (e.g., converting sugarcane to jaggery where no market for raw sugarcane existed), the product retained agricultural character; conversely, where conversion produced a distinct commercial product subject to separate taxation, Rule 7 has been applied. Relevant conflicting authorities were considered and distinguished on facts. Interpretation and reasoning: The Court examined the nature of the process described by the Assessing Officer - dipping in chemical solutions, controlled drying at 35°C-41°C, use of land/buildings, machinery, electrical power, manpower and production infrastructure - and noted raisins were subject to VAT as a commercial product. The Court emphasized that fresh grapes are marketable in raw form; hence conversion to raisins is not necessary merely to render grapes marketable. The technical sophistication, inputs and the existence of an independent market for raisins supported the conclusion that the conversion produces a distinct, commercial product rather than being a mere ordinary market-preparation step. Ratio vs. Obiter: Ratio - where raw agricultural produce is marketable in its original state, a subsequent technically involved conversion producing a distinct commodity (subject to VAT) is not an 'ordinarily employed' process to render produce fit for market and may attract Rule 7 apportionment. Obiter - references to specific temperature ranges and equipment are factual findings supporting the ratio in this case. Conclusions: The process of conversion in the present facts is not an 'ordinarily employed' process to render grapes fit to market; therefore Rule 7(1) is appropriately applicable to determine non-agricultural income. Issue 2 - Validity of invoking Rule 7(1) to determine business income Legal framework: Rule 7(1) allows determination of the proportion of receipts attributable to non-agricultural operations when agricultural produce undergoes processing beyond ordinary preparation; authorities have applied Rule 7 when a distinct commercial product emerges. Precedent treatment: The Court considered authorities cited by both sides. Decisions relying on lack of ready market for raw produce (where conversion was merely preservative/market-making) were distinguished on the basis of factual absence of ready market. Coordinate bench decisions applying Rule 7 where similar processing and trade activities existed were regarded as supporting the Rule 7 invocation. Interpretation and reasoning: Given admitted facts that the assessee also carried on trading in raisins and that fresh grapes are saleable in the market, the conversion served commercial ends and involved industrial inputs. The Assessing Officer's factual findings regarding nature of process and existence of separate market for raisins were affirmed as material bases for applying Rule 7. The Court found no challenge to the computation methodology; only the factual premise of applicability was contested and resolved against the assessee. Ratio vs. Obiter: Ratio - on these facts, invoking Rule 7(1) to apportion and compute non-agricultural (business) income is justified. Obiter - the Court's categorization of the specific ancillary inputs (e.g., buildings, power) as indicia of non-ordinary processing reinforces but does not alone constitute a general rule. Conclusions: The Assessing Officer and the appellate authority correctly applied Rule 7(1) to determine and compute non-agricultural income arising from the conversion of grapes into raisins; the appeal against that determination is dismissed. Issue 3 - Burden of proof on assessee to establish exemption condition Legal framework: The onus rests on the assessee claiming exemption to prove facts bringing the receipts within exempted class (i.e., that processing was ordinarily employed to render produce marketable or that no ready market existed), per established jurisprudence. Precedent treatment: Courts have held that the question whether a process is 'ordinarily employed' is primarily a question of fact; failure to adduce evidence on market conditions and customary practices leads to adverse factual conclusions. Interpretation and reasoning: The Court observed the assessee's assertion that no ready market existed for grapes was not supported by evidence; moreover, the assessee's admitted trading in raisins undermined the contention that conversion was compelled by absence of market for fresh grapes. Absent documentary or witness evidence proving customary practice or market necessity, the assessee failed to discharge the onus. Ratio vs. Obiter: Ratio - where an assessee asserts exemption based on ordinary agricultural processing or market absence, contemporaneous and probative evidence is required; absent such evidence, factual findings by the revenue that processing is not ordinary must stand. Obiter - the Court's remark that trading activity weakens the assessee's claim is contextual to facts. Conclusions: The assessee failed to prove that conversion was an ordinarily employed process or necessitated by lack of market for fresh grapes; therefore the onus remained unmet and supports the application of Rule 7 and resultant taxability. Cross-references See Issue 1 and Issue 2: the factual finding that fresh grapes were marketable is pivotal to both the 'ordinarily employed' test and the justifiability of invoking Rule 7(1); see Issue 3 for the assessee's burden to prove contrary facts.