Direct Tax Laws & International Taxation · Profits and Gains of Business or Profession

Safe Harbour for Income Attribution in Composite Income

Updated 5 October 2026

Composite income apportionment treats a fixed percentage of income from growers who also process produce as business income, so you need not trace the split. The old Rules 7A, 7B and 8 did this; confirm the equivalent Income-tax Rules, 2026 provisions. Apply the percentage to composite income; the balance is agricultural income.

Understand Safe Harbour for Income Attribution

Some incomes cannot be neatly split. A planter who grows and processes a crop earns one lump of income. Part of it comes from farming. Part of it comes from the processing, which is business. Tracing each part exactly is hard, so the law gives a fixed rule.

That fixed rule is the composite income apportionment rule. If your case is one of the specified cases, you do not argue about the split. You apply the prescribed percentage. This gives certainty to the assessee and the department. It is not the transfer pricing safe harbour under Rules 10TD and 10TE, which is a different topic.

The classic examples are the composite incomes of growers who also process: rubber, coffee and tea. Under the old Rules, the business share was 35% for rubber (Rule 7A), 25% for coffee grown and cured and 40% for coffee grown, cured, roasted and ground (Rule 7B), and 40% for tea manufactured by the grower (Rule 8; the other 60% was agricultural). Treat these as the pattern to recognise. The Income-tax Rules, 2026 are expected to carry equivalent provisions. Confirm the rule numbers, the exact cases and the percentages from the notified Income-tax Rules, 2026 and the ICAI study material before the exam, because your answer must follow the rule as notified.

The percentage applies to the composite income, which is the profit computed on the whole activity after the allowed deductions. The business share is taxed under the head Profits and Gains of Business or Profession. The balance is agricultural income, which is dealt with under the exempt agricultural income provisions.

The key skill is application. You read the case, spot whether it is a specified case, pick the correct percentage, and split the income. Then you carry each part to the right place in the computation.

Key rules to remember

Business income under the apportionment rule: Business income = Composite income × prescribed percentage ÷ 100; Use the percentage given in the notified Rules for the specified case. If the question states a percentage, use that.
Balance income: Balance income = Composite income − Business income; In the grower-processor cases this balance is treated as agricultural income, outside the business head.
Composite income: Composite income = Receipts of the whole activity − Allowable expenses of the whole activity; Compute this first, as if the activity were one business, before applying the percentage.
Pattern of legacy percentages: Business share: rubber 35% (old Rule 7A); coffee grown and cured 25% and coffee grown, cured, roasted and ground 40% (old Rule 7B); tea 40% business, 60% agricultural (old Rule 8); Pattern from the older law. The Income-tax Rules, 2026 are expected to carry equivalent provisions; verify each case, rule number and percentage against the notified Rules and ICAI material before relying on it.

How to solve Safe Harbour for Income Attribution questions

Quickest way: Three-line attribution

When to use it: Use this when the question is short, the case is clearly specified and the percentage is given or well known.

Line 1: Composite income = receipts − expenses.
Line 2: Business income = composite income × percentage.
Line 3: Balance = composite income − business income, shown as agricultural income.
Add one sentence naming the composite income apportionment rule, as confirmed in the Income-tax Rules, 2026, as the basis.

Common mistakes in Safe Harbour for Income Attribution

Applying the percentage to gross receipts instead of composite income
Students confuse this with presumptive rules that work on turnover.
Fix: Always deduct allowable expenses first. The percentage applies to the profit of the whole activity.
Using the prescribed percentage for a case that is not specified
Students see a farm and processing and assume the rule applies.
Fix: Match the activity to the cases listed in the notified Rules first. If it does not match, do not apply it.
Taxing the whole composite income as business income
The word 'business' in the heading hides the split.
Fix: Only the prescribed share is business income. The balance is agricultural income and is not taxed as business.
Using the wrong percentage for a variant of the same crop
Students memorise one coffee figure and use it for all coffee.
Fix: Note the stage of processing. Cured only and cured, roasted and ground can carry different percentages.
Quoting the 1961 Act rule numbers or 'assessment year'
Old notes and habits carry over.
Fix: Cite the Income-tax Rules, 2026 as notified, and use the term 'tax year'.
Mixing this rule up with the transfer pricing safe harbour
Both topics use the idea of a ready rule that avoids a detailed argument.
Fix: Composite income apportionment splits business and agricultural income. The transfer pricing safe harbour deals with international transactions and arm's length price. Keep them separate.

Worked examples

Example 1

Case: Greenleaf Plantations Ltd grows tea and manufactures it in India for sale. For tax year 2026-27 its receipts from sale of the manufactured tea are ₹1,00,00,000 and allowable expenses of the whole activity are ₹40,00,000. Assume the prescribed business share for this case is 40%, as stated in the question. Find the business income and the balance.

Show the solution

The activity is growing and manufacturing tea. It is a composite activity covered by the composite income apportionment rule. Cite it as Rule 8 (tea) of the Income-tax Rules, 1962, or the corresponding provision as notified.
Composite income = ₹1,00,00,000 − ₹40,00,000 = ₹60,00,000.
Business income = ₹60,00,000 × 40% = ₹24,00,000.
Balance = ₹60,00,000 − ₹24,00,000 = ₹36,00,000, treated as agricultural income.

Answer: Business income is ₹24,00,000. The balance ₹36,00,000 is agricultural income and is not taxed under the business head.

Example 2

Case: Kerala Rubber Co. grows rubber and processes the latex into sheets for sale. For tax year 2026-27 its receipts are ₹80,00,000 and allowable expenses of the whole activity, including depreciation, are ₹50,00,000. It also has a separate trading business with profit of ₹5,00,000. Assume the business share for the rubber case is 35%, as stated. Find the income under the business head.

Show the solution

Rubber growing with processing is a specified composite case, so the apportionment rule applies. Cite it as Rule 7A (rubber) of the Income-tax Rules, 1962, or the corresponding provision as notified.
Composite income = ₹80,00,000 − ₹50,00,000 = ₹30,00,000.
Business share = ₹30,00,000 × 35% = ₹10,50,000.
Balance = ₹30,00,000 − ₹10,50,000 = ₹19,50,000, agricultural income.
The separate trading profit is ordinary business income of ₹5,00,000. It is not split.
Total under the business head = ₹10,50,000 + ₹5,00,000 = ₹15,50,000.

Answer: Income under the business head is ₹15,50,000. Agricultural income is ₹19,50,000.

Exam tips

Name the composite income apportionment rule as your provision line. Cite Rule 8 (tea), Rule 7A (rubber) or Rule 7B (coffee) of the Income-tax Rules, 1962, or the corresponding provision as notified, and use 'tax year'. Never write 'assessment year'.
In a case-scenario MCQ, first check the activity is specified, then apply the percentage to profit, not to receipts.
If the question states the percentage, use it and mention it. If it does not, quote the percentage from the rule text you have verified.
Show the split in a small working note with three figures: composite income, business income and balance. Marks follow the working.
Keep any separate business income out of the split and add it afterwards.