Because it's the primary key, you can't change it - SQL relies on the PK for it's indexing.
To change the type of teh primary key column, you have to remove teh primary key, change your table, and the re-establish the PK:
ALTER TABLE tbl_item_rate
DROP CONSTRAINT PK_tbl_item_rate
ALTER TABLE tbl_item_rate
ALTER COLUMN c_item_code varchar(25)
ALTER TABLE tbl_item_rate
ADD CONSTRAINT PK_tbl_item_rate PRIMARY KEY (c_item_code)