KARNATAKA GINGER TRADING COMPANY ,KOODULUR VILLAGE, KUDIGE ROAD, KUSHALNAGAR vs. INCOME TAX OFFICER WARD, MADIKERI, MADIKERI, KARNATAKA

PER KESHAV DUBEY, JUDICIAL MEMBER:

These appeals at the instance of the assessee are directed against the separate orders of ld. CIT(A)/NFAC both dated 10/11/2025 vide DIN & Order No. ITBA/NFAC/S/250/2025- 26/1082441327(1) for the assessment year 2018-19 & vide DIN & Order No. ITBA/NFAC/S/250/2025-26/1082441817(1) for the assessment year 2020-21 passed u/s 250 of the Income Tax Act, 1961 (in short “The Act”). Since the issue involved in both these appeals is common in nature and identical principal issue, namely, the recharacterization of the assessee’s exempt agricultural income as “income from other sources”, these are clubbed together, heard together and disposed of by this common order for the sake of convenience and brevity.

ITA Nos.125 & 126/Bang/2026 Karnataka Ginger Trading Company, Kushalnagar Page 2 of 14

ITA Nos.125 & 126/Bang/2026 Karnataka Ginger Trading Company, Kushalnagar Page 3 of 14 11. The above addition has been made on presumptions and on ad hoc basis, therefore the same is not legally tenable. 12. The actions of the learned AO and CIT(A) are contrary to the provisions of the Act, facts of the case, arbitrary and without any application of mind. 13. The purpose of the assessment is to determine the correct income. The Learned CIT(A) and AO have erred in law and in fact in not appreciating the same and proceeding ahead with the sole intention of making an addition to the returned income. 14. The Learned CIT(A) and AO have erred in law and on fact in initiating penalty proceedings under section 270A of the Act. 15. The Learned CIT(A) and AO have erred in law and in fact in initiating penalty proceedings under section 271AAC (1) of the Act. 16. The learned AO and CIT(A) have erred in raising a demand vide issue of notice under section 156 of the Act. 17. The Learned CIT(A)/AO has erred in law by levying interest under section 234A/B and C of the Act. (Tax effect Rs 9,01,331/-)

ITA Nos.125 & 126/Bang/2026 Karnataka Ginger Trading Company, Kushalnagar Page 4 of 14 violation of the principles of natural justice. 5. The Learned CIT(A) and AO have erred in law and on facts in passing the impugned order without jurisdiction. 6. The learned CIT(A) and AO have erred in law and on facts in bringing to tax the income which is otherwise exempt. 7. The Ld.AO/CIT(A) have erred in passing the order by estimating the agricultural income, which is arbitrary and against the facts of the case. 8. The Ld.AO/CIT(A) have, after calling for the details of agricultural expenses and after obtaining the same, has estimated the agricultural income without mentioning the defects in the details submitted by the appellant.

ITA Nos.125 & 126/Bang/2026 Karnataka Ginger Trading Company, Kushalnagar Page 5 of 14 17. The Learned CIT(A)/AO has erred in law by levying interest under section 234A/B and C of the Act. (Tax effect Rs. 41,64,488/-)

Facts of the case for the AY 2018-19:

4.1 The assessee filed the original return of income for AY 2018-19 on 31.10.2018 declaring total income of Rs.8,36,910/- and claimed exemption of Rs.57,03,047/- on account of agricultural income. Subsequently, the case was selected for limited scrutiny under CASS for the reason “Agricultural income”. Accordingly, notices u/s 143(2) as well as 142(1) of the Act along with questionnaire was issued. In response, the assessee furnished the reply online through e-portal along with details, documents and information. The AO noticed that the assessee has claimed net agricultural income at Rs.57,03,047/- in the return of income by declaring gross agricultural receipts of Rs.1,38,55,365/-. During the course of assessment proceedings, the assessee furnished some sale bills and bank account statements showing the receipt of payment from purchasers of ginger. The AO noticed that in comparison to previous year, there is substantial increase in agricultural income, however the assessee could not produce any supporting documents. The assessee could not furnish the copy of transport bill regarding transportation of agricultural produce from location of agricultural land to the mandi/market which would have been proved that actually ginger sold was out of

ITA Nos.125 & 126/Bang/2026 Karnataka Ginger Trading Company, Kushalnagar Page 6 of 14 agricultural activity and not by trading activity. Further, the assessee did not furnish any copy of girdawari report/khuatauni (details of crops cultivated) issued by Land Revenue authority indicating crop cultivated by it during the year under consideration in support of claim of agricultural income. In view of the above facts, the AO held that the assessee has diverted its regular income as agricultural income which is exempt from tax and hence to protect any possible leakage to the revenue the AO found appropriate to restrict agricultural income at 20% of the total sale value of ginger i.e. Rs.1,38,55,365/-, which worked out at Rs.27,71,073/- as income from agricultural activity and rest amount of Rs.29,31,974/- (Rs.57,03,047/- - Rs.27,07,073/-) was added to the total income of the assessee as income from other sources. The AO completed the assessment proceedings on a total assessed income of Rs.37,68,884/- and agricultural income of Rs.27,71,073/-.

Facts of the case for the AY 2020-21:

4.2 The assessee e-filed his original return of income for the AY 2020-21 on 11.2.2021 declaring total income of Rs.14,03,050/- and claimed agricultural income of Rs.1,75,11,241/- as exempt u/s 10 of the Act. Subsequently, the case was selected for complete scrutiny to verify the following issues.

Thereafter, statutory notices u/s 143(2) and 142(1) of the Act were issued along with the show cause notice dated 17.3.2022. After carefully considering the information and written submission filed by the assessee, the AO concluded the assessment proceedings with the following observations:

ITA Nos.125 & 126/Bang/2026 Karnataka Ginger Trading Company, Kushalnagar Page 7 of 14 i. The assessee has diverted its regular income as agricultural income for claiming exemption under the Act and hence to protect the possible leakage to the revenue, the AO found appropriate to restrict agricultural income @ 20% of total sale value of ginger i.e. Rs.2,96,10,800/- shown by the assessee which worked out at Rs.59,22,160/- as income from agricultural activity and the rest of the amount out of the agricultural income declared by the assessee of Rs.1,15,89,081/- (Rs.1,75,11,241/- - Rs.59,22,160/-) was added to the total income of the assessee as income from other sources u/s 56 of the Act. ii. As the assessee had not deducted TDS on rent paid of Rs.3,94,000/- and accordingly as per provisions of section 40(a)(ia) of the Act, 30% of the said expenditure which works out to Rs.1,18,200/- was disallowed and added back to the total income of the assessee under the head “profits & gains of business or profession” u/s 28 of the Act. iii. On perusal of the ledger account of rent paid to Shri Suja Unnikrishnan, the AO noticed that assessee firm had paid rent in cash of Rs.30,000/- each in two occasions totaling Rs.60,000/- in contravention to provisions of section 40A(3) of the Act. Accordingly, an amount of Rs.60,000/- was disallowed u/s 40A(3) of the Act and added back to the total income of the assessee.

The AO completed the assessment proceedings on a total income of Rs.1,31,70,331/- and assessed the agricultural income at Rs.59,22,160/-.

ITA Nos.125 & 126/Bang/2026 Karnataka Ginger Trading Company, Kushalnagar Page 8 of 14 5. Aggrieved by the aforesaid orders of AO, the assessee preferred an appeal before the ld. CIT(A)/NFAC.

8.1 The Ld.AR also submitted that the factum of agricultural operations carried on by the assesse on the leased lands is not in dispute, and that the entire sales turnover stood accepted by the Ld. A.O. It was contended that the assesse maintains regular books of

ITA Nos.125 & 126/Bang/2026 Karnataka Ginger Trading Company, Kushalnagar Page 9 of 14 account which are duly audited, that the audited financial statements were placed on record, and that no specific defect was pointed out therein, nor were the books rejected under section 145(3) of the Act, nor was any best-judgment assessment framed under section 144 of the Act. In such circumstances, it was argued, that the Ld.A.O could not have resorted to estimation. Reliance was placed, inter alia, on the decisions of the Hon’ble Karnataka High Court in CIT v. Anil Kumar & Co. [2016] 386 ITR 702 (Kar.), the Hon’ble Delhi High Court in PCIT v. R.G. Buildwell Engineers Ltd. [2018] 99 taxmann.com 283 (Del.), and the Gauhati Bench of the Tribunal in Sayqul Islam v. ITO [2021] 186 ITD 260.

8.2 It was further submitted that the re-characterization rested on a purely theoretical model, assuming a yield of 130 quintals per acre and a rate of Rs.40 per kg, to arrive at a notional “possible income” of Rs.4,06,22,400/-, whereas the assumed yield was excessive when compared with the agronomic range of 60 to 100 quintals per acre, and the rate adopted reflected retail rather than wholesale realisation. The learned A.R. pointed out that the assesse had applied identical procurement rates for ginger sourced from its own cultivation and from third-party farmers, that the workings were fully reconcilable with the audited Profit & Loss Account, and that no field verification or enquiry under section 133(6) of the Act from the lessors or the revenue authorities had been carried out.

8.3 The reliance placed on the absence of crop entries in the RTC was misplaced, the assesse being a lessee and not the recorded owner. It was also highlighted that the findings of the Assessing Officer (that the declared agricultural income was excessive) and of the CIT(A)/NFAC (that it was too low relative to the theoretical yield) were mutually destructive, betraying that the additions rested on conjecture. The assesse further relied on the consistency of agricultural income declared over more than eight assessment years,

ITA Nos.125 & 126/Bang/2026 Karnataka Ginger Trading Company, Kushalnagar Page 10 of 14 and on the decisions in Arundhathi v. ITO (ITA No.605/Bang/2021), CIT v. Neel Giri Krishi Farms (P.) Ltd. [2013] 218 Taxman 95 (All.), Lalchand Bhagat Ambica Ram v. CIT [1959] 37 ITR 288 (SC) and CIT v. Orissa Corporation (P.) Ltd. (SC), while distinguishing Sumati Dayal v. CIT (SC).

10.1 At the outset, we take a note of the fact that agriculture activity carried on by the assessee is not in dispute. The A.O. had in fact accepted the Assessee’s sales turnover, and the dispute is confined to the apprehension that a portion of the profit from the trading activity had been shifted to the exempt agricultural segment. Significantly, the books of account of the Assessee, which were audited, have not been rejected by invoking section 145(3) of the Act, no specific defect had been recorded therein, and no assessment under section 144 had been framed. We are of the considered opinion

ITA Nos.125 & 126/Bang/2026 Karnataka Ginger Trading Company, Kushalnagar Page 11 of 14 that in the absence of rejection of the books of account by recording cogent reasons, the A.O. cannot discard the results disclosed by the audited accounts and substitute it with his own estimate. This proposition is squarely covered, and binding upon us, by the decision of the Hon’ble jurisdictional Karnataka High Court in CIT v. Anil Kumar & Co. [2016] 386 ITR 702 (Kar.), wherein it was held that where the books of account have not been rejected and the assessment has not been framed under section 144, the authorities are in error in resorting to estimation of income. Respectfully following the binding jurisdictional precedent, we hold that the estimation undertaken in the present case, without rejecting the audited books, is unsustainable in law.

10.2 Even otherwise, on the merits, we find the basis of the estimation to be unsound. The re-characterization proceeds upon an assumed yield of 130 quintals per acre and an assumed price of Rs.40 per kg. The assumed yield is demonstrably on the higher side when tested against the agronomic range of 60 to 100 quintals per acre, and the rate adopted appears to reflect retail rather than wholesale realization, the Assessee’s business being wholesale in character. Crucially, no field verification was conducted, and no enquiry under section 133(6) of the Act was made from the lessors of the land or the local revenue authorities to ascertain the true state of affairs. The reliance placed on the absence of crop particulars in the RTC extract is misplaced, since the Assessee is admittedly a lessee and not the recorded owner, and in Karnataka the RTC primarily reflects ownership; non-appearance of a lessee’s name or of crop entries, which are frequently not updated, cannot be elevated to proof of “no cultivation”.

10.3 We are also unable to overlook the internal contradiction in the approach of the both the Authorities. The A.O proceeded on the basis

ITA Nos.125 & 126/Bang/2026 Karnataka Ginger Trading Company, Kushalnagar Page 12 of 14 that the agricultural income declared was excessive and disproportionate, while the ld. CIT(A)/NFAC proceeded on the diametrically opposite premise that the agricultural income declared was too low when measured against the theoretical yield. Such mutually destructive reasoning is a sure indicator that the additions rest not on any objective material or verification but on surmise and conjecture. It is trite, as held by the Hon’ble Supreme Court in Lalchand Bhagat Ambica Ram v. CIT [1959] 37 ITR 288 (SC) and in Dhakeshwari Cotton Mills Ltd. v. CIT 26 ITR 775 (SC), that an assessment cannot be founded on pure suspicion, conjecture or surmise, and that there must be material to support it.

10.4 We further take note of the fact that the Assessee applied identical rates while procuring ginger from its own cultivation and from third-party farmers, and that the workings are capable of reconciliation with the audited Profit & Loss Account, no discrepancy having been demonstrated. In the absence of any material indicating inflation of the value of self-cultivated produce, the allegation of shifting of profits remains unsubstantiated. The consistency with which the Assessee has declared agricultural income over a span of more than eight assessment years lends further credence to the genuineness of the claim, and accords with the rule of consistency recognized in CIT v. Neel Giri Krishi Farms (P.) Ltd. [2013] 218 Taxman 95 (All.).

10.5 As regards the reliance placed by the Revenue on Sumati Dayal v. CIT, we find the same to be distinguishable. In that case, the explanation of the Assessee regarding alleged race winnings was found improbable on the test of human probabilities. Here, on the contrary, the surrounding circumstances - undisputed agricultural operations, documentary evidence of lease and cultivation expenditure, acceptance of the turnover, and a consistent history of

ITA Nos.125 & 126/Bang/2026 Karnataka Ginger Trading Company, Kushalnagar Page 13 of 14 agricultural income - support, rather than discredit, the Assessee’s claim. The test of human probabilities, when applied to the present facts, operates in the Assessee’s favour.

10.6 We are of the considered view that the re- characterization of the Assessee’s agricultural income as income from other sources is unsustainable, both on the legal ground of non- rejection of the books of account and on the merits of the case as discussed above. Accordingly, the addition of Rs.29,31,974/- for Assessment Year 2018-19 and the addition of Rs.1,15,89,081/- for Assessment Year 2020-21 are deleted, and the Assessee’s claim of exemption under section 10(1) of the Act is allowed for both these years under consideration.

10.7 Further with regard to the disallowances u/s 40(a)(ia) of the Act amounting to Rs.1,18,200/- and u/s 40A(3) of the Act amounting to Rs.60,000/- for the AY 2020-21 are concerned, no specific submissions were advanced before us, nor was any material placed on record to assail these disallowances. In the absence of any argument or supporting material, the grounds relating to these two disallowances are treated as not pressed and are accordingly dismissed.

10.8 The grounds challenging the validity of the notice issued under section 143(2) of the Act and the assumption of jurisdiction were not pressed at the time of hearing and accordingly dismissed as not pressed.

ITA Nos.125 & 126/Bang/2026 Karnataka Ginger Trading Company, Kushalnagar Page 14 of 14

Sd/- Sd/- (Prashant Maharishi) (Keshav Dubey) Vice President Judicial Member

Bangalore, Dated 19th June, 2026. VG/SPS

Copy to:

Asst. Registrar, ITAT, Bangalore.