# Composite Business

When an assessee both grows an agricultural produce in India AND manufactures something from that produce, the resulting income is composite — partly agricultural (exempt under section 10(1)) and partly business (taxable under PGBP). Income must be apportioned.

## (A) Notified Composite Businesses — Fixed Ratios (Rule 7A, 7B, 8)

Product	Business (PGBP) %	Agricultural %
Tea	40%	60%
Rubber (Latex)	35%	65%
Coffee (Grown & Cured)	25%	75%
Coffee (Grown, Cured, Grounded, Roasted)	40%	60%

The agricultural portion is exempt; only the business portion is taxed under PGBP.

## (B) Other Composite Businesses (Rule 7) — Market Value Method

Apply the following bifurcation:

Business Income:

Item	Amount
Sale Value of Final Product	XX
(-) Market Value of Agricultural Produce consumed in manufacturing	(XX)
(-) Manufacturing Expenses	(XX)
Business Income	XX

Agricultural Income:

Item	Amount
Market Value of Agricultural Produce consumed in manufacturing	XX
(-) Cost of Cultivation	(XX)
Agricultural Income (exempt)	XX

## Key Insight

The 'market value of the produce' is the bridge between the two computations — it is added back to agricultural income and deducted from business income. This avoids double counting.

Worked example

### Example 1

Example 1 — Tea: A tea company has composite income of ₹50 lacs from growing and manufacturing tea. Apportionment: PGBP = 40% × 50 lacs = ₹20 lacs (taxable). Agricultural income = 60% × 50 lacs = ₹30 lacs (exempt).

### Example 2

Example 2 — Rubber: A latex producer has composite income of ₹20 lacs. PGBP = 35% × 20 lacs = ₹7 lacs. Agricultural (exempt) = ₹13 lacs.

### Example 3

Example 3 — Other product (sugar mill): A sugar manufacturer grows sugarcane and makes sugar. Sale of sugar = ₹100 lacs. Market value of sugarcane consumed = ₹40 lacs. Manufacturing expenses = ₹30 lacs. Cost of cultivation of sugarcane = ₹25 lacs. Business Income = 100 − 40 − 30 = ₹30 lacs. Agricultural Income = 40 − 25 = ₹15 lacs (exempt).

### Example 4

Example 4 — Coffee (grown & cured only): Composite income = ₹40 lacs. PGBP = 25% × 40 = ₹10 lacs. Agricultural = 75% × 40 = ₹30 lacs.

⚠️ Common exam mistakes

Applying tea ratio (40:60) to all crops — fixed ratios apply ONLY to the notified items (tea/rubber/coffee).
Confusing the two coffee categories — grown & cured = 25:75 (PGBP:Agri); grown, cured, grounded & roasted = 40:60.
Failing to deduct market value of produce consumed when computing business income for non-notified products.
Treating the agricultural portion as taxable — it is exempt under section 10(1) but considered for rate purposes via partial integration.
Mixing up cost of cultivation (deducted from agricultural income) with manufacturing expenses (deducted from business income).

Bare-Act text Rules 7, 7A, 7B & 8 · Income-tax Rules, 1962 · click to expand

Rule 7 of the Income-tax Rules provides that in case of income partly agricultural and partly business in nature, market value of agricultural produce raised by the assessee and utilised as raw material shall be deducted while computing business income. Rule 7A: 35% of income from the manufacture of rubber shall be deemed to be income liable to tax. Rule 7B: 25% of income from coffee grown and cured shall be deemed to be business income; 40% if grown, cured, roasted and grounded. Rule 8: 40% of income derived from sale of tea grown and manufactured shall be deemed to be income liable to tax.

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Composite Business — Apportionment of Business & Agricultural Income

Worked example

⚠️ Common exam mistakes