Conversion of grapes into raisins by agriculturist qualifies as agricultural activity; delete 60% business income allocation

ITAT held that conversion of grapes into raisins by the agriculturist using traditional methods constitutes agricultural activity. The tribunal found no material to contradict the assessee's factual claim and noted prior acceptance in AY 2018-19 and a government circular exempting such supplies from GST. Consequently, the ITAT directed the AO to delete the 60% allocation of agricultural receipts as business income and allowed the assessee's appeal.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether receipts from sale of raisins, produced by drying grapes through traditional sun-drying methods by an agriculturist, constitute agricultural income or non-agricultural (business) income for income-tax assessment purposes.

1.2 Whether the Assessing Officer's application of a 60:40 bifurcation (60% treated as business income; 40% as agricultural income) of total agricultural receipts is sustainable in absence of material showing use of scientific/industrial processes, machinery, or trading activities.

2. ISSUE-WISE DETAILED ANALYSIS

2.1 Issue 1 - Characterisation of raisins produced by traditional sun-drying as agricultural income

2.1.1 Legal framework

2.1.1.1 Agricultural income is determined by whether the activity is integral to cultivation or is a process ordinarily employed by cultivators to render produce fit for market; processes that merely preserve or prepare produce by simple, traditional means may remain agricultural for tax purposes.

2.1.1.2 Relevant administrative guidance (Circular No.247/04/2025-GST, para 2.2) indicates that an agriculturist supplying raisins produced by such methods is not liable for registration under section 23(1) of the CGST Act and is exempt from GST - an indicium of non-industrial, agricultural character.

2.1.2 Precedent treatment (followed/distinguished/overruled)

2.1.2.1 A coordinate Bench decision treating conversion of grapes into raisins as non-agricultural was relied upon by Revenue; that decision involved a partnership agro-farm engaged in large-scale trading and conversion using chemical dips, controlled drying (35-41°C), land/buildings, machinery, power and manpower and resulted in a commercially distinct product subject to VAT - facts demonstrating an industrial/commercial process.

2.1.2.2 The Tribunal in the present matter distinguished that precedent on its facts: absence of scientific methods, chemicals, machinery or organized processing; presence of traditional sun-drying by a cultivator; and prior acceptance by the Revenue in an earlier assessment year that similar activity was agricultural.

2.1.3 Interpretation and reasoning

2.1.3.1 The Court examined the factual record (photographic/ documentary material at pages 18-20 of the Paper Book) and found no material produced by the Assessing Officer to rebut the assessee's factual claim that conversion was effected by traditional sun-drying without machinery or chemical treatment.

2.1.3.2 The Tribunal reasoned that where the conversion process is traditional, simple and incidental to cultivation - performed by the cultivator on his produce to render it fit for market - such activity retains the character of agricultural activity rather than becoming a separate commercial processing business.

2.1.3.3 The GST circular and earlier departmental acceptance for AY 2018-19 reinforced the conclusion that the activity lacked the industrial/ commercial features necessary to displace the agricultural character.

2.1.4 Ratio vs. Obiter

2.1.4.1 Ratio: Where conversion of crop to a saleable form is carried out by the cultivator by traditional, non-industrial methods (no chemicals, no mechanised drying, no organized processing infrastructure), such conversion is agricultural income; Revenue must produce material establishing non-traditional, industrial or trading attributes to classify receipts as business income.

2.1.4.2 Obiter: Observations comparing VAT/GST incidence and broader tax policy implications were referred to for support but do not constitute the primary legal holding beyond the factual threshold applied here.

2.1.5 Conclusion on Issue 1

2.1.5.1 The Court concluded that, on the facts before it, the conversion of grapes to raisins by traditional sun-drying performed by the cultivator is agricultural activity; therefore the receipts from sale of raisins fall within agricultural income for the assessment year under consideration.

2.2 Issue 2 - Validity of the Assessing Officer's 60:40 bifurcation of agricultural receipts

2.2.1 Legal framework

2.2.1.1 Where a part of a cultivator's receipts arises from activities that are non-agricultural, Rules (including Rule 7(1) invoked in analogous cases) and principles permit allocation between agricultural and non-agricultural income, but such allocation must be based on relevant material and appropriate fact-finding.

2.2.2 Precedent treatment (followed/distinguished/overruled)

2.2.2.1 The Tribunal distinguished precedents where bifurcation or application of Rule 7(1) was applied because records showed industrial processing, commercial trading, mechanisation, or chemical treatment; those precedents are not followed here because their factual predicates are absent.

2.2.3 Interpretation and reasoning

2.2.3.1 The Assessing Officer applied a fixed 60:40 split in favour of business income without adducing material demonstrating that 60% of the receipts were attributable to non-agricultural processing or trading activities.

2.2.3.2 Absent evidence of scientific methods, mechanisation, separate commercial processing facilities, trading business or VAT/GST treatment indicating commercial character, a mechanical application of the 60:40 ratio is not sustainable.

2.2.3.3 Prior departmental acceptance (AY 2018-19) that conversion was agricultural and the GST circular indicating non-registration for raisin supplies by agriculturists are relevant contemporaneous indicia undermining the basis for bifurcation.

2.2.4 Ratio vs. Obiter

2.2.4.1 Ratio: An Assessing Officer must base any bifurcation of receipts between agricultural and non-agricultural income on material evidencing non-agricultural processing or commercial activity; absent such material, presumptive or mechanical apportionment (e.g., 60:40) must be set aside.

2.2.4.2 Obiter: Reference to methodological details of computing non-agricultural income under Rule 7(1) in other cases is explanatory and fact-specific, not binding for cases lacking comparable facts.

2.2.5 Conclusion on Issue 2

2.2.5.1 The Tribunal directed deletion of the Assessing Officer's addition of Rs. 18,84,665 (representing 60% of the contested receipts), holding the 60:40 bifurcation unsustainable on the record.

3. FINAL CONCLUSIONS (CROSS-REFERENCES)

3.1 Cross-reference to Issue 1: Because the conversion process here was shown to be traditional and incidental to cultivation (Issue 1), the factual foundation for the AO's apportionment (Issue 2) failed.

3.2 The Court allowed the appeal, holding the receipts from sale of raisins to be agricultural income and directing deletion of the AO's 60% business income addition.

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