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Facts
The Revenue appealed against the CIT(A)'s order deleting additions made by the AO. The issues concerned the deletion of additions related to agricultural income, sampling expenses, staff welfare/business promotion/telephone expenses, and capital gains from the sale of land claimed as agricultural.
Held
The Tribunal upheld the CIT(A)'s decision on agricultural income and sampling expenses, finding sufficient evidence and deeming ad-hoc disallowances unjustified. For staff welfare and business promotion expenses, it confirmed a partial disallowance but deleted the disallowance on telephone expenses. The Tribunal also affirmed the CIT(A)'s decision regarding the capital gain, holding that the land was not agricultural.
Key Issues
Whether the CIT(A) erred in deleting additions made by the AO on grounds related to agricultural income, sampling expenses, staff welfare/business promotion/telephone expenses, and capital gains on land claimed as agricultural.
Sections Cited
143(3), 40A(3), 37, 68, 2(14)(iii), 54, 54F
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Income Tax Appellate Tribunal, DELHI BENCHES: C : NEW DELHI
Before: SHRI S. RIFAUR RAHMAN & SHRI ANUBHAV SHARMA
Assessment Year: 2012-13 ACIT, Vs Kundan Veer Singh Bhullar, Circle-30(1), A-4, Green Avenue, New Delhi. Shiv Marg, Vasant Kunj, New Delhi. PAN: ADIPB1537E (Assessee) (Respondent) Assessee by : Shri Ruchesh Sinha, Advocate Revenue by : Shri Om Parkash, Sr. DR Date of Hearing : 06.05.2025 Date of Pronouncement : 13.06.2025 ORDER
PER ANUBHAV SHARMA, JM:
This appeal is preferred by the Revenue against the order dated 18.10.2019 of the Commissioner of Income-tax (Appeals)-34, New Delhi (hereinafter referred to as the Ld. First Appellate Authority or ‘the Ld. FAA’, for short) in Appeal No.123/19-20 arising out of the appeal before it against the order dated 25.03.2015 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the ACIT, Circle-33(1), New Delhi (hereinafter referred to as the Ld. AO).
The grounds of appeal
taken by the Revenue read as under:- “1. That, in facts and circumstances of the case, Ld. CIT(A) erred in deleting addition of Rs. 10,00,000/- made on account of Agricultural Income.
2. That, in facts and circumstances of the case, Ld. CIT(A) erred in deleting addition of Rs. 8,38,412/- ignoring the fact that in absence of party wise details and bills of expenses, applicability of section 40A(3) of the I.T. Act could not be known.
3. That, in facts and circumstances of the case, Ld. CIT(A) erred in deleting addition of Rs. 20,233/- ignoring the fact no evidences have been filed by the assessee in support of the claim that all these domestic travel expenses were incurred for wholly & exclusively for business purpose within applicability of section 37
4. That, in facts and circumstances of the case, Ld. CIT(A) erred in deleting addition of Rs. 1,90,15,785/- ignoring the fact that registered deed for said property is stating nature of land being agricultural and assessee’s contention of farm house was found to be incorrect & wrong as per Inspector’s report
5. The assessee craves, leave to add, alter or amend any of the grounds of appeal before or during the course of hearing of the appeal.”
3. Heard and perused the records. Ground No.1; In regard to this ground it can be observed that the assessee has shown agricultural income of Rs.7,25,300/- which has been claimed as exempt from tax. The AO has asked the assessee to furnish complete details of agricultural income with necessary evidences. The assessee has filed the detail stating that he has earned agricultural income at Rs.10 lacs from agricultural land situated at village Bhullarwala, Distt. Muktsar, Punjab and after reducing expenses net agricultural income was at Rs.7,25,300/-. The assessee has filed the two copies of Form J issued by M/s Dhingra Bros. He has also filed the photocopy of Girdawari of land dated 08.08.2011 in Punjabi language and claimed that the assessee is the owner of 25 acres of land, but failed to furnish the details and evidences of agricultural activities. Therefore AO has treated agricultural income as income from undisclosed sources u/s 68 of the Act. In the computation of income the assessee has shown agriculture income of Rs.7,25,300/- which has been claimed as exempt from tax. AO observed that assessee had declared net agricultural income at Rs. 7,25,300/- after adjusting expenses of 2,74,700/- incurred on agricultural operation out of agricultural income of 10,00,000/-. AO asked for details of ownership of land with evidences in respect of agricultural income such as particulars of agricultural activities, complete details of expenses on seeds, irrigation, fertilizers, wages, marketing, transport expenses and other expenses along with the bills & evidences. However as no details or evidences were submitted by the assessee, the AO disallowed sum of Rs.10,00,000/- as the genuineness of credit in the books of the assessee was not established. During the course of Appellate proceedings, assessee in his submission stated that he owns 40 acres of land and during 2011-12, he had undertaken agricultural activities on the said land. He has grown different crops from time to time which includes rice, jawar, wheat etc and for growing the same, he has incurred expenses such as purchase of seeds, electricity expenses for irrigation facilities, purchase of pesticide, labour expenses and has sold these crops to Dhingra Brothers. Assessee has also stated that he has bartered some part of agricultural produced against purchase of seeds, fertilizers etc. 3 3.1 Thus, the ld.CIT(A) has rightly appreciated the fact that the documentary evidences in the form of ownership of land and ‘girdavari’ entries showing standing crop and cultivation of land are sufficient evidences of earning agricultural income by a person who owns more than 40 acres of land. The assessee has filed the two copies of Form J issued by M/s Dhingra Bros., for which there is no allegation, on basis of enquiry that same is not genuine. The emphasis on proving the same by purchase of seeds, electricity expenses, etc., is stretching too far the scope of inquiry and doubting the income. More so, when in the proceeding years as well as in subsequent years the agricultural income from the same land was accepted. The findings of the CIT(A) require no interference. The ground has no substance.
4. Ground No. 2: The assessee has debited finishing charges of Rs.1.56 Crore in profit and loss account which includes sampling expenses of Rs.16,76,824/-. The AO has asked the assessee to furnish detail of these expenses with necessary evidences and details of TDS on these expenses. It is observed by the AO that assessee has made most of the payments in cash with no detail of nature of expenses or supplier details on ledger account. The assessee failed to furnish evidences that these expenses were incurred wholly for the purpose of business therefore AO has disallowed 50% of these expenses i.e. Rs.8,38,412/- and added it to the taxable income of the assessee. The AO observed from the details of sampling expenses that almost on daily basis, multiple entries of cash expenses have been shown claiming the same as 'Sampling expenses'. The assessee has furnished the complete details of sampling expenses alongwith invoices before the AO but payments were made in cash and assessee has not provided the party wise detail therefore AO has taken a view that assessee failed to furnish evidences that these expenses were incurred wholly for the purposes of the business. On the basis of these facts AO has disallowed a sum of Rs. 8,38,412/- on adhoc basis holding that there is no evidence of frequent change of designs etc. requiring incurring of sampling expenses on frequent basis.
During the course of appellate proceedings before CIT(A), assessee has submitted that these expenses have been incurred in order to prepare a range of sample of different designs & patterns for approval by the customers. Sampling expenses are one of the major expenses incurred to attract new buyers as well as retain the older ones. The assessee has produced sampling bills and vouchers and Ledger of sampling expenses before AO in original vide submission dated 09.03.2015. Ld. CIT(A) observed that; “From the perusal of bills and vouchers, it is obvious that petty purchases have been made for items such as nets, beads and photo shoot etc. The assessee is engaged in the business of trading of men, women and children clothing and wearing apparel of every kind, nature and description and furniture, carpets, furnishing fabric and all type of household utensils, curtains, glass woods etc. The major source of revenue is the fabric business. The sampling expenses were required to be incurred in the line of the business of the assessee. The expenses were incurred in order to prepare range of sample of different designs and patterns for approval by the customers. The assessee has brought documentary evidences on record in support of sampling expenses and 5
furnished ledger accounts and bills before the AO for verification. AO has not doubted about the genuineness of the expenses and disallowance could not be made only on the basis that expenses were incurred in cash. Considering the above facts AO is not justified in disallowing 50% of sampling charges on adhoc basis at Rs.8,38,412/- and addition made by the AO is hereby deleted.”
Very apparently, the ld.CIT(A) has taken a reasonable call on the basis of evidences that the expenditure commensurate with the nature of work. Sampling expenses were required for procurement of the orders with regard to different households and furnishing articles manufactured by the assessee. Thus, sampling work is of the nature which is recurring and got done on urgent basis. Therefore, ad hoc disallowance in such circumstances were not justified. The findings of the ld.CIT(A) require no interference. The ground has no substance.
7. The ground No.3: The assessee has claimed the staff welfare expenses at Rs.1,63,578/-, business promotion expenses at Rs.1,76,691/- and telephone expenses at Rs.2,58,903/- totaling to Rs.5,99,172/-. The AO has asked the assessee to furnish the detail of expenses and justify that expenses were incurred wholly and exclusively for the purpose of business activities. It is observed by the AO that staff welfare expenses were incurred on tea snacks, lunch, dinner etc. which have been claimed for business purposes. The business promotion expenses were incurred for various kind of gifts item and no evidence was filed by the assessee. For telephone expenses assessee has not maintained any log book. Therefore AO has disallowed 10% of expenses and added Rs.59,917/- in the taxable income of the assessee. During the course of appellate proceedings before ld. CIT(A), assessee has filed written submission which is reproduced as under:- “The ld. Assessing officer has erred both on facts and in law by disallowing a sum of Rs. 59,917 (10 % of 599,172) by holding that "on perusal of details of expenses under the head staff welfare and sale promotion expenses, it has been observed that the expenses have been incurred on tea, snacks, lunch/dinner, hotel expenses etc. and also for various kind of gifts item which have been claimed for the purpose of business. However, the assessee could the assessee could not furnish any evidence to prove that the aforesaid expenses claimed in the profit & loss account, as mentioned above, were incurred wholly and exclusively for the purpose of business. Similarly, no evidence have been filed to prove that the telephone expenses wholly / pertained to the business. Therefore, after considering the facts of the case, it is found reasonable to disallow 10% of these expenses i.e. Rs. 59,917/- for non business use." Documents already submitted during scrutiny proceedings : The assessee has already submitted the following documents during scrutiny proceedings u/s 143(2): • Ledger of Staff welfare submission dated 09.03.2015 • Complete Bills of Staff welfare submission dated 09.03.2015 • Ledger of Business promotion submission dated 19.01.2015 • Complete bills of Business promotion submission dated 19.01.2015. • Ledger of Telephone expense submission dated 19.01.2015 (The above documents were duly submitted to the Ld. Assessing officer. We are producing herewith a copy of the invoices to support the above expenses for your kind verification.) Now we offer our submission: The learned Assessing Officer has erred both on facts and in law by adding a sum of Rs. 59,917 on adhoc basis. Kindly note that assessee has duly disallowed 10% of telephone expenditure on account of personal expenditure while filing its return of income. The same can be traced from the computation of income as filed by the assessee. (Computation is annexed for your ready reference) Also note that the assessee had duly provided the set of complete bills of Staff welfare and business promotion expenses vide submission dated 09.03.2015.
Kindly note that the assessee has provided all the documents and details as & when required by the assessing officer and nothing was rejected. The assessing officer does not contend the genuineness of the books of accounts or the expenses incurred. The assessing officer did not point out even a single rupee as disputed amount or entry. None of the balances or entries was highlighted as disputed or unacceptable. The learned assessing officer has not pointed out a single expense in the books of accounts which could be treated as expenditure which is non¬business in nature. In fact all the bills/vouchers related to Staff welfare & business promotion had been produced in original in front of the assessing officer on 09.03.2015& nothing was rejected. If the assessing officer wished for more information or documents, he should have communicated it to the client .The assessing officer was provided all that he asked for. Hence the contention that expenses are not wholly & exclusively for the purpose of business is completely baseless & ill-founded. The assessing officer's adhoc addition without pointing out specific particulars not eligible for deduction, is bad both in the eyes of law and on fact. The addition is totally based on surmises & conjectures. The addition made on estimated basis is not justified. Moreover the assessing officer has failed to prove that there is any concealment of income and hence disallowance on the ground that the same has been done on adhoc basis is neither justified nor sustainable. Accordingly, ft is prayed before you milord to delete the above addition.”
Ld. CIT(A) has considered the aforesaid and partly allowed the deletion by following findings; “11.3 I have considered the facts of the case, finding of the AO and submissions of the assessee. The assessee had claimed Rs. 5,99,172/- in aggregate for Staff Welfare expenses, Business promotion & Telephone expenses in Profit & Loss A/c apart from other expenses. AO disallowed a sum of Rs. 59,917/- out of such expenses as the assessee could not furnish any evidence to prove that the aforesaid expenses claimed in Profit & Loss A/c, were incurred wholly and exclusively for the purpose of business. The assessee had submitted Ledger of Staff welfare expenses, business promotion expenses and telephone expenses during the assessment proceedings. It is seen that AO disregarded the fact that 8
assessee has duly disallowed 10% of telephone expenditure on account of personal expenditure while filing its return of income. Thus no further disallowance is called for in respect of telephone expenses. With regard to staff welfare expenses and business promotion expenses assessee failed to establish that expenses incurred wholly and exclusively for business purposes. The expenses were incurred for tea, snacks, lunch, dinner, hotel accommodation and purchasing of gifts and these expenses incurred for personal purposes could not be ruled out. Considering the above facts, 10% disallowance out of the business promotion expenses at Rs.17,669/- and staff welfare expenses at Rs.16,357/- is justified and addition made by the AO to the extent is hereby confirmed and addition made by making disallowance of telephone expenses at Rs.25,890/- is hereby deleted.”
We are of the considered view that without bringing on record that the specific travel taken by the assessee was not for business purpose, ad hoc disallowance was not justified. The assessee is in a business where for procurement of orders and certainly for business promotion, the assessee may require frequent travelling. No defect in the books and vouchers have been pointed out nor they are doubted to be not genuine. Thus, the findings of the ld.CIT(A) require no interference qua the deletion made.
Ground no. 4; We find that during the year assessee has shown capital gain of Rs.1,90,15,785/- and claimed deduction amounting to Rs.1,90,15,785/- u/s 54 and 54F of the Act. It is observed by the AO that assessee has purchased a property of total land 17 Kanal 7 Marla situated in the revenue state of village Balola Tehsil Sohna Distt. Gurgaon for which assessee claimed deduction u/s 54 that the above property is actually agricultural land. The AO has reproduced the last para of page 2 of the purchase deed and third para of page 3 of the purchase deed and observed that from the sale deed it is ample clear that total agricultural land measuring 2 acre 1 kanal and 7 marla was purchased by the assessee and in no way such a large portion of agricultural land can be used for residential property. Thus AO held that the deduction claimed u/s 54 and 54F being residential property claimed by the assessee is not allowable as the same is actually agricultural land for which assessee has claimed wrong deduction and AO has disallowed the claim of deduction u/s 54 and 54F at Rs. 1,90,15,785/- and added it to the taxable income of the assessee. The assessee has shown capital gain of Rs.1,90,15,785/- and claimed deduction amounting to Rs. 1,90,15,785/- u/s 54 & 54F of the IT Act 1961. The AO observed on Perusal of Purchase Deed of the property for which assessee claimed deduction u/s 54 that the said property is actually agricultural land. The purchased land measured 2 Acre 1 Kanal 7 Marla and such a large portion of agricultural land could not be a residential property, hence the same was agricultural land. Accordingly the AO disallowed the deduction u/s 54 and 54F amounting to Rs.1,90,15,785/-.
During the appellate proceedings before CIT(A), the assessee in his submission has highlighted the provisions of Section 2(14)(iii) which clearly specifies two conditions to be fulfilled in order to qualify for agricultural land. Firstly it should be outside the jurisdiction of municipality or cantonment board having population of 10,000 or more and secondly it should not fall within such notified distance from the local limits of such municipality or cantonment board. The assessee vide his submission dated 21.03.2015 submitted a certificate from Tehsildar of Sohna which clearly specifies that the said property is situated within 100 fts of municipality of Sohna. Further, As per the report released by Census India 2001, the population of Sohna municipality is 27,570. Since the property lies within the municipality having population more than 10,000, therefore as per Income Tax Act, 1961, it cannot be termed as agricultural land. Further, the second condition of the Act talks about the notified distance of property from the Municipality. The Government of India vide its Notification no. [SO 9447] (File No. 164/3/87- ITA.I)], dated. 6-1-1994 notified the limit to obtain the scope of urbanization. The above notification specifies the urbanization limit of Sohna is 5 kms from its municipal limits in all directions, which simply means any property situated within 5 kms of Sohna cannot be termed as agricultural land. Since the property in question is situated within 100 fts. from the local limits of Sohna municipality and also the population of the municipality is 27,570 , hence the same cannot be treated as agricultural land. Further, the property not only consist of large portion of land 11 but is also a dwelling unit consisting of 2 rooms for residence & a washroom along with electricity, water connection & other basic amenities. Ld. CIT(A) concluded as follows;
9.5 It is seen that in view of the provisions of Section 2(14)(iii) of the IT Act 1951, the said land is clearly not an agricultural land. Further in the case of assessee remand report is called for after verifying the contention of the assessee that property as per the certificate of Tehsildar is at a distance of 2 kilometer from the Municipal limits of Gurgaon and consists of 2 rooms and one bathroom. The remand report is submitted by the AO vide letter dated 01.05.2018 in which AO has reported that Shri Vikas Dahiya, ITI, visited Khewat No. 273, Khatauni No. 283 Rect. No. 13 Kila No. 21/1 (2-10) Rect. No. 14, Kila No. 25(8-0) Rect. No. 15 Kila No. 5/1 (4-11) Rect. No. 16 Kila No. 1/1/1 (2-6) field 4 total land 17 Kanal 7 Marla situated in the revenue estate of Village Balola Tehsil Sohna Distt Gurgaon (the Property) & found out that there was no Farm House on the said property. At the same time he also observed that there were 2 rooms for residence & a washroom along with electricity, water connection & other basic amenities & the caretaker of the property has been residing there since last 2 years, which clearly indicate that the said property is a dwelling unit & not a barren land.”
It is very apparent from the findings of the ld.CIT(A) that it is after the receipt of remand report from the AO the issue has been decided in favour of the assessee. During the remand proceedings the Inspector of the Department has found two rooms for residence and wash room along with electricity, water connection and other basic amenities and the caretaker of the property residing in the said dwelling unit for two years. The findings were that there was no farm house which indicate that there was no agricultural activity. The ld.CIT(A) has duly appreciated that the land within the periphery of five kilometers of Sohna falls in the municipal limits and cannot be considered as