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Income Tax Appellate Tribunal, JAIPUR BENCHES,”A” JAIPUR
Before: SHRI SANDEEP GOSAIN, JM & DR. M.L. MEENA, AM vk;dj vihy la-@ITA. No. 131/JP/2022
The captioned appeal is filed by the assessee against the order dated 27.03.2022 passed by ld. Principal Commissioner of Income Tax, Jaipur-2 (hereinafter referred to as the PCIT) U/s 263 of the Act in respect of assessment year 2017-18. The appellant-assessee has raised the following grounds of appeal:-
1. Under the facts and circumstances of the case, order passed by the Ld. PCIT is illegal & band in law and the same be quashed.
2 Rajasthan State Seeds Corporation Ltd.
2. The ld PCIT has erred on facts and in law in holding that the order passed by AO without making disallowance u/s 14A is erroneous in as much as prejudicial to the interest of Revenue and thereby directing him to make disallowance of Rs. 53,70,873/- u/s 14A of the Act against the agricultural income of Rs. 2,21,21,815/- declared by the assessee. 3.The ld. PCIT has erred on facts and in law in holding that the order passed by AO without making addition of subsidy receipt of Rs. 5,99,50,737/- in the income is erroneous in as much as prejudicial to the interest of revenue and thereby directing him to assess the same in the income.
4. The appellant craves to alter, amend and modify any grounds of appeal
5. Necessary cost be awarded to the assessee.”
Briefly the facts of the case are that the assessee’s case was selected under compulsory scrutiny and the AO has passed the assessment order u/s 143(3) of the IT Act dated 23.12.2019. The ld. Pr.CIT noted that the expenses incurred by the assessee company for the purpose of development of Agricultural farms taken on lease from the government has been debited to profit and loss account considering as Revenue expenditure as related to agricultural income. However no complete and separate details available on record in respect of aforesaid expenses. He has further observed that the assessee company has shown receipts of subsidy of Rs. 5,99,50,737/- which is not found recorded as income in the accounts and therefore the same remained untaxed as income of the assessee. The PCIT has 3 Rajasthan State Seeds Corporation Ltd. further noted that the assessment order was passed in a routine and perfunctory manner.
3. The ld. PCIT being not satisfied with the reply filed by the assessee has observed vide in para 5 to 7 as under:- “5. The reply filed by the assessee has been considered and found not tenable for following reasons: (i) The submissions given by the assessee have not been put forth before the AO during the assessment proceedings. (ii) The company has submitted that it has not incurred any expenses on earning agriculture income because all the land have been given on contract farming. The land given by the company to the farmers for executing agricultural operations is fully monitored by the company. The farmer is given all relevant help in all the agricultural operations performed by it, under the watchful eyes of scientists of the company. The harvest is taken by the company and the farmer is given the price for it. Therefore, farmer is basically performing all the agricultural operations in a control environment under the watchful eyes of company employees. The submission given by the company that it had not incurred any expenditure on earning agriculture income is far from the trust because proper accounting of expenditure on agriculture has not been made. Further Note 31(b) of the audit report explicitly states that expenses incurred by the company for the purpose of development of farms taken on lease from the Govt have been charged to P&L account being considered as revenue expenditure. Therefore, it is a clear case which attracts section 14A and disallowance is computed as under: In view of above there is disallowance u/s 14A of the Act, which is computed as under:
Total Investment related to agriculture segment as on 31.3.2016 (opening balance) Rs.50,29,17,635 Total investment related to agriculture segment as on 31.3.2017 (Closing balance) Rs.57,12,57,132 Annual average of above two is Rs.53,70,87,383 Disallowance u/s 14A @ 1% of opening and closing balances of investment Rs.53,70,873 6. Further, the company has received subsidy CCS (GOI+ State) of Rs 5,99,50,737 which has not been found recorded as income in the accounts. As per provisions of section 2(24)(xviii) of the Act any assistance in the form of a subsidy or grant by the central Govt. or state Govt. is to be considered as income of the recipient.
7. In view of the above, I hold that the order passed by the AO was erroneous and prejudicial to the interests of revenue. AO completed the assessment without application of mind. The order passed by the AO on 23.12.2019, thus, deserves to be set aside to be made afresh in the light of observations given in para above.”
Following the judgments pronouncement by the Hon’ble Apex Court in the case of Malabar Industrial Limited v/s CIT 2431 ITR, Pr.CIT hold that the assessment order, dated 23.12.2019 passed by the AO for the assessment year under consideration, as erroneous and so far as prejudicial to the interest of the Revenue under clause (a) & (b) of Explanation (2) U/s 263 of the Income Tax Act.
5 Rajasthan State Seeds Corporation Ltd.
The learned counsel for the assessee submitted before us that the ld. Pr.CIT has erred and facts in law in holding that the assessment order passed by the AO without making disallowance U/s 14A as erroneous so far as prejudicial to the interest of the Revenue and without making addition of subsidy receipts of Rs. 5,99,50,737/- in the income of the appellant- assessee as erroneous in so far as prejudicial to the interest of the Revenue. In support of the contention of the ld. AR filed written synopsis which reads as under:-
“1. It is submitted that at Para 5&6 of its order, the Ld. PCIT at one hand is concluding that the amount of Rs.53,70,873/- needs to be disallowed u/s 14A and Rs.5,99,50,737/- is to be considered as income of the assessee and on the other hand directing the AO to examine and verify the issues in light of the observation made in this order and thereby set aside the assessment order to the AO.
2. Thus once the Ld. PCIT concludes that these two amounts is required to be disallowed/ added to the total income of assessee, her finding at the same time directing the AO to examine and verify the issues is contradictory in itself. The Ld. PCIT cannot blow hot and cold in the same breathe. In this connection, reliance is placed on paragraph 22 of the order of the Mumbai Bench of the Tribunal in the case of Sir Dorabji Tata Trust Vs. DCIT(E) 188 ITD 38 dt. 28.12.2020 (Mum.) (Trib.) where it was observed as under:- “22. Having said that, we may also add that while in a situation in which the necessary inquiries are not conducted or necessary verifications are not done, CIT may indeed have the powers to invoke his powers under s. 263 but that it does not necessarily follow that in all such cases the matters can be remitted back to the assessment stage for such inquiries and verifications. There can be three mutually exclusive situations with regard to exercise of powers under s. 263, r/w Expln. 2(a) thereto, with respect to lack of proper inquiries and verifications. The first situation could be this. Even if necessary inquiries and verifications are not made, the CIT can, based on the material before him, in certain cases straight away come to a conclusion that an addition to income, or disallowance from expenditure or some other adverse inference, is warranted. In such a situation, there will be no point in sending the matter back to the AO for fresh inquiries or verification because an adverse inference against the assessee can be legitimately drawn, based on material on record, by the CIT. In exercise of his powers under s. 263, the CIT may as well direct the AO that related addition to income or disallowance from expenditure be made, or remedial measures are taken. The second category of cases could be when the CIT finds that necessary inquiries are not made or verifications not done, but, based on material on record and in his considered view, even if the necessary inquiries were made or necessary verifications were done, no addition to income or disallowance of expenditure or any other adverse action would have been warranted. Clearly, in such cases, no prejudice is caused to the legitimate interests of the Revenue. No interference will be, as such, justified in such a situation. That leaves us with the third possibility, and that is when the CIT is satisfied that the necessary inquiries are not made and necessary verifications are not done, and that, in the absence of this exercise by the AO, a conclusive finding is not possible one way or the other. That is perhaps the situation in which, in our humble understanding, the CIT, in the exercise of his powers under s. 263, can set aside an order, for lack of proper inquiry or verification, and ask the AO to conduct such inquiries or verifications afresh.”
3. In view of above, the findings of the Ld. PCIT setting aside the assessment order should be expunged and the issue involved be decided by the Hon’ble ITAT on merit, otherwise in the guise of the directions given by the Ld. PCIT, the AO will be left with no alternative except to make the disallowance/ addition which will cause injustice to the assessee.
1. It is submitted that the Ld. PCIT has not correctly appreciated the facts. The State Government has given certain farm land in earlier years on leasehold basis. On these farm lands no lease rent has been paid/ provided in the books of accounts (PB 50, Note No.31). During the year under consideration all these farm lands has been given on contract. The assessee vide letter dt. 28.02.2022 has provided the details of income from farm contract along with sample contract of farm land given on contract at Sri Ganganagar(PB 4-10). From the same it is evident that these farm lands has been given on fixed contract basis whereby the contractor is to pay fixed amount to the assessee and all expenditure is to be borne by him. Therefore, in the year under consideration assessee has not incurred any expenditure on earning the farm income and therefore, no disallowance u/s 14A is called for.
2. It may also be noted that even the calculation of investment related to agriculture segment worked out by the PCIT for making disallowance u/s 14A is incorrect. This is because the freehold land and leasehold land as appearing in the Balance Sheet are not farm land rather on these lands the assessee has installed seed processing plants as explained in letter dt. 28.02.2022. Similarly the advance given to the seed growers has no relationship with the farm land in as much as advance is given to the seed growers as per its purchase policy and such advance is adjusted against the purchase of seeds made from these growers (PB 11-18). Thus, these amounts are not investment related to agriculture segment. Hence, 1% of the alleged investment proposed for disallowance u/s 14A calculated at Rs.53,70,873/- is prima facie incorrect. In view of above, disallowance proposed by PCIT be directed to be deleted.
The Ld. PCIT in the show cause notice reproduced at Pg3 & 4 of her order observed that assessee has received different subsidies but subsidy of Rs.5,99,50,737/- received under Centre Sector Scheme (CSS) is not found recorded as income. The assessee in its reply dt. 28.02.2022 explained that such subsidy is part of CSS sales recorded in books of accounts for which unit wise details was furnished. However, the Ld. PCIT at Para 6, Pg 7 without appreciating the reply ofassessee held that such amount is to be considered as income of the assessee.
2. It is submitted that as per the financial statements (PB 47), the revenue from operations is Rs.293,34,23,467/-. The unit wise break up of such receipt is at PB 19. It comprise of sale of CSS Rs.6,01,83,950/-, sale of certified seed Rs.99,58,18,838/- and sale of foundation seed Rs.21,60,10,334/-. Out of it, the sale in respect of which subsidy is received from the Government is Rs.5,99,50,737/- as per the table reproduced at Pg 6 of the order determined as under:-
Sale of Foundation Seeds (CSS Scheme) Rs.6,01,83,950/- Sale of Certified Seeds Rs.3,61,92,914/- Sale of Foundation Seeds Rs.1,75,82,877/- Total Rs.11,39,59,741/- Less:-Amount paid by farmers Rs. 5,73,71,149/- Amount adjusted from subsidy Rs. 5,65,88,592/- Add:- Subsidy against training expenses Rs. 33,62,145/- Total Subsidy Rs.5,99,50,737/-
The above subsidy is part of the sale price as is evident from the sample sale bills placed at PB 39-41 wherefrom the total value of the invoice the subsidy receipt from the Government is reduced but for accounting purposes the sale is booked at the gross amount and the subsidy is separately debited to grant-in-aid account against which the subsidy received from the Government is adjusted. This is evident from the ledger account of grant-in-aid for production along with the copy of journal voucher placed at PB21-38. Thus, the subsidy received is part of the sale value of seeds credited to P&L A/c. Therefore, the direction given by PCIT to include it as income of the assessee would result in double taxation. It may be noted that the details of grant utilization is given at Point No.41 of the financial statements (PB 51-52)and the corresponding amount is verifiable from Note No.16, 17 & 18 of financial statements (PB 47-48). However, since the CSS subsidy is part of the sale of product, the same is not separately reflected. Thus, once such subsidy is a part of the sale of product, the addition proposed by the Ld. PCIT is unwarranted and the same be directed to be deleted.”
The ld. DR stands by the impugned order passed by the PCIT.
We have heard the rival submissions and perused the facts of the case and citations relied. The PCIT noted that the appellant company had given lands to the farmers for executing agricultural operations, extending all relevant help to farmers in all the agricultural 9 Rajasthan State Seeds Corporation Ltd. operations performed by them, under the watchful eyes of scientists of the company and being fully monitored by the company. The harvest is taken by the company and the farmer is given the price for it. Thus, the farmers are basically performing all the agricultural operations in a control environment under the watchful eyes of company employees. The submission given by the company that it had not incurred any expenditure on earning agriculture income doesn’t appear to be true because proper accounting of expenditure on agriculture operations and input supplies has been maintained and that again Note 31(b) of the audit report explicitly states that expenses incurred by the company for the purpose of development of farms taken on lease from the Govt have been charged to P&L account being considered as revenue expenditure.
We are not convinced with the argument of the Ld AR that the subsidy is part of the sale price as per the sample sale bills wherefrom the total value of the invoice, the subsidy receipt from the Government is reduced, but for accounting purposes the sale is booked at the gross amount and the subsidy is separately debited to grant-in-aid account against which the subsidy received from the Government is adjusted. Further, this is a new fact not coming either of the assessment order of the PCIT order which is to be verified with the ledger account of grant- in-aid for production along with the copy of journal voucher placed at PB21-38.
10 Rajasthan State Seeds Corporation Ltd.
In view of the Mumbai Bench of the Tribunal order in the case of “Sir Dorabji Tata Trust Vs. DCIT(E)’, (Supra) we , in the given fact of the present case, we understand that the PCIT was satisfied that the necessary inquiries are not made and necessary verifications are not done, and that, in the absence of this exercise by the AO, a conclusive finding is not possible one way or the other. That is perhaps the situation in which, in our humble understanding, the CIT, in the exercise of his powers under s. 263, can set aside an order, for lack of proper inquiry or verification, and ask the AO to conduct such inquiries or verifications afresh.
Accordingly, we hold that the ld. Pr.CIT is justified facts in law in holding that the assessment order passed by the AO without making enquiries in respect of disallowance U/s 14A as erroneous so far as prejudicial to the interest of the Revenue in respect of subsidy receipt of Rs. 5,99,50,737/-. Thus, the impugned order is sustained.
Order pronounced in the open Court on 10/08/2022.