MRS. SISILY JOSE,CHENNAI vs. ITO, NCW-19(4), CHENNAI

At the outset, we find that there is a delay of 35 days in appeal filed by the assessee, for which the assessee has filed affidavit stating the reasons for delay, wherein, it is submitted that due to non-receipt of the appellate order through due channels. Hence, there was a delay in filing the appeal by the assessee. After considering the Affidavit filed by the assessee and also hearing both the parties, we find that there is a reasonable cause for the assessee in not filing appeal on or before the due date prescribed under the law and thus, in the interests of justice, we condone delay in filing of appeal and admit the appeal filed by the assessee for adjudication.

The assessee raised the following grounds of appeal:

The order of the Commissioner of Income Tax (Appeals) (CIT (A)), as they pertain to the issues contested in this appeal, is opposed to law and facts and circumstances of the care.

The brief facts emanating from the records are that the assessee is an Individual having agricultural income and income from other source. During the Financial Year 2019-20 relevant to the assessment year (A.Y.) 2020-21, the assessee had filed her return of income and declared taxable income of Rs.4,08,815/- and exempt agricultural income of Rs.43,43,129/-. The assessment of the assessee was selected for Limited Scrutiny through CASS on the issue of Agriculture Income.

The Assessing Officer, Faceless Assessment Unit, Income Tax Department (hereinafter referred to as ‘AO’), made an addition of agricultural income of Rs.39,81,121/- to the total income as ‘Unexplained money u/s.69A’ and raised a demand amounting to Rs. 42,01,763/- and also initiated penalty proceedings.

Aggrieved by the above order of the AO, the assessee filed an appeal before the ld.CIT(A). The Ld.CIT(A), deleted the addition of agricultural income as unexplained money, however, treating the agricultural income as cultivation and treatment of smoked rubber sheets is income from sale of centrifuged latex under Rule 7 and 7A of the Income Tax Rules as partly agricultural and partly business in nature.

Aggrieved by the order of the ld.CIT(A), the assessee is in appeal before us.

The ld.AR for the assessee submitted that the assessee had submitted before the Ld.CIT(A), that the assessee had carried on agricultural activity of rubber cultivation and rendering the rubber (latex) fit to be taken to the market by preserving it into Ribbed Smoked Sheets for making it marketable cannot be considered as business activity.

Further the ld.AR submitted that as per Rule 7A of the Income Tax Rules, 1962, income derived from sale of centrifuged latex or cenex, or latex based crepes (such as pale latex crepe) or brown crepes such as estate brown crepe, remilled crepe, smoked blanket crepe or flat bark crepe or technically specified block rubbers manufactured or processed from field latex or coagulum obtained from rubber plants grown by the seller in India shall be computed as if it were income derived from business and 35% of such income shall be deemed to be income liable to tax.

The ld.AR also stated that as per Rule 7A submitted as above, mere drying or smoking of rubber sheets for preserving it fit into take into market does not involve any manufacturing or processing envisaged in Rule 7A as it involves elaborate process with the use of large machinery which a small or marginal farmer can neither undertake nor profitable for them to do so. The assessee had furnished confirmation letter form the Rubber Research Institute, Rubber Board of India, a Statutory Body constituted under the Rubber Act, 1947 under :-5-: ITA. No.:1637 /Chny/2025 the Ministry of Commerce and Industry, Government of India, set up for the overall development of the rubber industry in the country which has the technical expertise about the rubber has in its letter dated 05.06.2023 to the assessee confirmed that ribbed smoked rubber sheets are not in the category of manufactured products, whereas it can only be considered as marketable form of natural rubber. A copy of the said letter is attached in the Paper Book.

Further, he submitted that converting the field latex into rubber sheet, dry or smoke for rendering the produce fit to be taken to market into marketable form is part of the agricultural activity and can only be considered as agricultural activity and not a business activity so as to treat 35% of the income from sale of the smoked sheets are business income. The ld.AR argued that the ld.CIT(A), has failed to consider the technical opinion of the premier statutory body under the Government of India which has expertise in rubber and rubber industry, that smoked or ribbed rubber sheets does not involve any manufacturing or production process and the ld.CIT(A), was unjustified in holding that Rule 7 and 7A has application in the assessee case and treating 35% of the income as business income which was illegal, arbitrary and bad in law.

In continuation of his arguments he relied on the decision of Hon’ble Kerala High Court in the case of Deputy Commissioner of Agricultural Income- tax and SalesTax v. Sherneilly Rubber and Cardamom Estates Ltd., held that where latex is hardened by the application of sulphuric acid, shaped in the form of sheets and dried with the help of smoke for purposes of preserving the latex

The ld.AR submitted that the Hon’ble Keral High Court in the case of Meenachil Rubber Marketing And Processing Co-operative Society Limited Versus Commissioner Of Income-Tax [1990(1) TMI 12 – Kerala High Court] while considering allowability of deduction u/s.80P (2)(a)(iii) of the Act held as under:

The Hon’ble Kerala High Court in the case of Commissioner of Income Tax, Thiruvanathapuram Versus State Farm Corporation of Kerala Ltd., [2011(1) TMI 265 – Kerala High Court] discussed in detail about the taxability under Rule 7A and held as under:

The ld.AR stated that the assessee had submitted before the Ld.CIT(A) that Rule 7 and 7A devolves around the manufacture of centrifuged latex only and attributing income from Ribbed Smoked Sheets as 35% business is contrary to the facts and bad in law.

The ld.AR submitted the ld.CIT(A) has failed to consider the submissions made by the petitioner and considered Rs.13,93,392/- as business income under Rule 7 and 7A. In support of the assessee’s claim she had submitted adequate documents to prove the agricultural activity pertains to treatment of raw rubber into Ribbed Smoked Sheets and that Rule 7 and 7A pertains to manufacture of centrifuged latex only. Therefore, the ld.AR argued that the ld.CIT(A) has erred in not considering the submission of the assessee and :-8-: ITA. No.:1637 /Chny/2025 attributing the agricultural activity as manufacture of centrifuged latex. In light of the above arguments and submissions and the judicial pronouncements, the ld.AR stated that it is very clear that the finding of the ld.CIT(A), holding that the assessee’s activity as that of manufacture of centrifuged latex by applying Rule 7A and upholding the assessment order is unjustified, illegal and against judicial pronouncements and hence prayed to allow the income from sale of smoked rubber sheets as agricultural income by setting aside the order of the ld.CIT(A).

Per contra, the ld.DR for the revenue supported the order of the ld.CIT(A) and submitted that there is no error in the decision of the authorities. Further, she also submitted that the ld.CIT(A) has analysed the Rule 7 and 7A before arriving at the conclusion to tax 35% of the agricultural income under the head income from business. Hence, the ld.DR prayed for confirming the order of the ld.CIT(A).

We have carefully considered the rival submissions, the material placed on record, gone through the orders of the authorities and the precedents cited.

The assessee filed an appeal before the ld.CIT(A) and he deleted the addition of agricultural income as unexplained money, however, treating the agricultural income as cultivation and treatment of smoked rubber sheets is income from sale of centrifuged latex under Rule 7 and 7A of the Income Tax Rules as partly agricultural and partly business in nature.

The only issue before us to decide is whether the income from sale of smoked rubber sheets is liable to be assessed as agriculture income or under Rule 7 and 7A of the Income Tax Rules, 1962 to bring 35% of the income as business income under the Act.

According to the ld.AR, the assessee had carried on agricultural activity of rubber cultivation and rendering the rubber (latex) fit to be taken to the market by preserving it into Ribbed Smoked Sheets for making it marketable cannot be considered as business activity.

The Rule 7A of the Income Tax Rules, 1962, provides for computation of income from the sale of centrifuged latex, crepes, and technically specified block rubbers manufactured or processed from field latex obtained from rubber plants. It deems 35% of such income as business income and the balance as agricultural income.

The crucial question, therefore, is whether ribbed smoked sheets fall within the ambit of the products specified in Rule 7A. From the plain reading of the Rule and the clarification of the Rubber Board, ribbed smoked sheets (RSS)

This view finds strong support from the judgment of the Hon’ble Kerala High Court in Sherneilly Rubber & Cardamom Estates Ltd. (supra), wherein it was held that conversion of latex into smoked sheets is only a step taken to render the produce fit for marketing and does not constitute manufacture.

The Ld. CIT(A)’s reliance on Rule 7 and 7A, therefore, appears misplaced, since the Rule applies to income derived from the manufacture or processing of centrifuged latex and not to the simple smoking or drying of latex sheets.

Further, the technical opinion of the Rubber Research Institute, Rubber Board of India — a statutory expert body — confirming that ribbed smoked sheets are not a manufactured product, lends authoritative support to the assessee’s contention.

In the present facts and circumstances of the case and considering the judicial precedents, we hold that the assessee’s activity of converting field latex into ribbed smoked sheets constitutes an integral part of the agricultural operation, and the entire income therefrom is agricultural income exempt under section 10(1) of the Act.

In view of the foregoing discussion, we set aside the order of the Ld. CIT(A) to the extent it treats 35% of the agricultural income as business income under Rule 7A, and direct the Assessing Officer to treat the entire income from sale of ribbed smoked rubber sheets as agricultural income.

In the result, the appeal filed by the assessee is allowed.