Lakshmi Pavan – [2025] 180 taxmann.com 410 (Article)
1. Background
The Indian coffee industry, with its rich tradition of both robusta and arabica cultivation, is predominantly rural and rooted in agronomic practice. A recurring issue in direct tax practice is the correct treatment of income arising from the sale of unprocessed and uncured coffee beans—specifically, whether such income is to be classified as agricultural income and consequently exempt from tax, or whether there are circumstances in which it would attract tax under the Income-tax Act, 1961.
2. Definitional Framework—”Agricultural Income”
Section 2(1A) of the Income-tax Act, 1961 provides a comprehensive definition of “agricultural income,” which encompasses rent or revenue derived from land used for agricultural purposes and income derived from such land by agricultural operations, including the sale of produce.
The classic judicial pronouncement in CIT v. Raja Benoy Kumar Sahas Roy established that agriculture in its essence comprises two fundamental operations:
(a) basic or primary operations involving human skill and interaction with the soil (e.g., sowing, planting, and cultivation), and
(b) subsequent operations such as weeding, tending, pruning, cutting, and harvesting.
Crucially, it is not every receipt from land that qualifies as agricultural income—it must arise from the use of land for agricultural purposes and from the performance of systematic agricultural activity, resulting in the produce being reaped, harvested, or otherwise extracted from the land.
3. Coffee Cultivation—Industry Practices
Coffee is typically grown in plantations where scientific agricultural techniques are employed to achieve optimal bean quality. Once the ripe coffee cherries are harvested, the first point of sale in certain segments of the market (notably among small growers or in regulated markets) may occur before the beans undergo any mechanical or chemical processing such as curing, roasting, or grinding. In such cases, the produce sold consists of freshly harvested, unprocessed and uncured coffee beans.
4. Income Tax Implications—Analytical Reasoning
The Income-tax Act and the rules prescribe a composite treatment for income from coffee, tea, and rubber where processing activities like curing (drying and separating the beans) and further value-addition are undertaken by the grower. However, a careful reading of the statutory framework, in conjunction with the principles set down by the Supreme Court, clarifies a crucial point – where coffee beans are sold by a cultivator in their raw, unprocessed, and uncured state, the entire income is a direct result of agricultural operations and, therefore, qualifies as “agricultural income” within the meaning of section 2(1A).
This position is anchored in the recognition that the essential character of the income does not change unless and until a process is undertaken that transcends ordinary agricultural operations and imbues the produce with a commercial character distinct from its original, natural form. The rationale flows from the Supreme Court’s test – the land and the activities allied to the soil must predominate. The basic principle remains that where the only activity is cultivation, followed by harvesting and direct sale, without intervention of any kind of processing (such as curing, drying through mechanical processes, roasting, or grinding), there is nothing to detract from the agricultural character of the resulting income.
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