ACIT, BANGALORE vs. M/S KARNATAKA GLOBAL LTD.,, BANGALORE

Facts apropos are that assessee engaged in the business of floriculture, ISP services, Project services and software development, had filed its return of income declaring income for the impugned year at nil after claiming exemption for agricultural income of Rs.10,71,09,148/-. During the course of the assessment proceedings assessee was required to explain the claim with regard to the agricultural income. As per the assessee, its total agricultural income arose out of the sale of mother plants and other floriculture items. The sales claimed by the assessee consisted of the following : Domestic sales Rs. 1,79,33,098/- Export sales to subsidiary Rs.22,74,57,820/- Export sales to other parties Rs. 7,26,162/-

Of the above, the sum of Rs.22,74,57,820/- were export sales were to a wholly owned subsidiary of the assessee called M/s. Ethiopian Meadows in Ethiopia. Assessee had also filed an audit report in form 3 CEB relating to the international transactions as required u/s.92 CA of the Income-tax Act, 1961 (' the Act' in short). As per such audit report, ALP of the ITA.198/Bang/2012 Page - 3 international transactions on sales effected by the assessee to its subsidiary in Ethiopia were as under

As per the AO it was clear from the above audit report that for every sale effected to the subsidiary, assessee was raising two invoices. ALP for the supplementary invoice was certified by the auditor as zero in each case. AO after verification found that only the primary invoice was routed through the Customs and not the supplementary one. In his opinion there ITA.198/Bang/2012 Page - 4 were no underlying goods to support such supplementary invoices. Explanation of the assessee was sought, especially with regard to the supplementary invoice. In reply assessee stated that the plants which were sold were perishable in nature. According to the assessee the sale price was split into two and only if the buyer, which was the subsidiary of the assessee could use the plants, the supplementary invoice was raised.

However AO was not impressed by the above reply. According to him assessee had not paid the mandatory cess of 0.5% to the customs station and there were no GR forms which would enable the bank to authorise receipt of the export proceeds, arising out of supplementary invoice. AO also noted that despite several opportunities being given, assessee had not substantiated its claim of agricultural income arising out of the supplementary invoices. Further as per the AO against the purported horticulture sale of Rs.22,74,57,819/-, what was actually received from the subsidiary was only Rs.3,62,72,680/-. Sum of Rs.12 crores was squared up vide a journal entry dt.30.01.2006 transferring such sum to a head called “Advance to Ehiopian Meadows Plc”. Balance shown as receivable from the subsidiary at the end of year was Rs.7,11,85,138/-. Thus as per the AO against the claimed sale of Rs.22,74,57,826/-, to the subsidiary what was ITA.198/Bang/2012 Page - 5 brought in by the assessee was only Rs.3,62,72,680/-. Even these proceeds, as per the AO were lower than the total amount of primary invoices, which came to Rs.4,90,20,714/-. Thus as per the AO there was an artificial boosting of income by the assessee. He held that actual agricultural income against the alleged sale of Rs.22,74,57,819/-, the subsidiary was Rs.4,90,20,714/- only. Balance sum was considered as inflation of agricultural income by the assessee and held as not eligible for exemption from income-tax. Addition of Rs.17,84,37,105/- was made.

Aggrieved assessee moved in appeal before the CIT (A). Argument of the assessee was that computation of agricultural income was not in the domain of the AO. As per the assessee, procedural irregularity pointed out by the AO with reference to routing of the invoices through Customs authorities would not discredit itsclaim. Assessee pointed out that the sum of Rs.12 crores was not a contra entry but were conversion of a part of the dues to share capital. Further as per the assessee contention of the AO that agricultural income was inflated and artificial, was only a surmise without any evidence in support. Argument of the assessee was that there was a legitimate reason for raising two invoices for each transaction. As per the assessee even if the agricultural income was from domestic transactions it ITA.198/Bang/2012 Page - 6 still remained exempt. Thus according to the assessee addition made by the AO was not justified.

CIT (A) was appreciative of the above contentions. According to him, claim of the assessee that first invoice was at a notional value and the second invoice was raised based on ultimate realisation was an acceptable one. As per the Ld. CIT (A), this was a general practice followed in floriculture exports. Further as per the CIT (A) once there was an export of agricultural produce and realisation, exemption claimed for agricultural income could not be denied for non adherence to procedures and minor errors in documentation. He accepted the contention of the assessee that agricultural income arising out of the sales whether in India or outside India was eligible for exemption. He deleted the addition made by the AO.

Now before us, Ld. DR strongly assailing the order of CIT (A) submitted that there was no procedure like the one followed by the assessee where two invoices could be raised for sale of perishable goods. As per the Ld. DR second invoice was never routed through the Customs. Assessee’s own auditors had certified the ALP value of such second invoices as nil. As per the Ld. DR assessee had discontinued this practice in later years. Even the amounts as per the primary invoice were not realised by the assessee.

Per contra, Ld. AR submitted that AO himself had stated that assessee was not doing any trading. As per the Ld. AR, Ethiopian Meadows, a subsidiary of the assessee was selling the plants and saplings in the Dutch Auction house and the actual realisation would be known only on the auction floor. As per the Ld. AR at the time of sending the saplings to the subsidiary, a notional amount was shown in the invoice since the actual amount that could be realized would be known only after the auction. As per the Ld. AR this was the reason why supplementary invoice was raised. Such supplementary invoice was raised once the realisation from auction were known. Ld. AR submitted that even if the agricultural income shown by the assessee was disbelieved, there was no case for an addition, since there was nothing on record to show that assessee had derived any taxable income to that extent. Just because the supplementary invoice was not routed through RBI or because cess was not paid on the figures shown in the supplementary invoice, could not discredit the claim of the assessee. As per the Ld. AR supplementary invoices were made available to the Customs authorities. In any case according to him, no comparable case was shown by the AO for coming to a conclusion that the yield of the assessee was much higher than the accepted standards. According to the Ld. AR, inflation of agricultural income by itself would ITA.198/Bang/2012 Page - 9 not get converted to undisclosed income.

We have perused the orders and heard the rival contentions. Ld. AR of the assessee has not disputed the contention of the Department that the total area under cultivation was 10 hectares where there were six numbers of green houses covering 5 hectares. It is also not disputed that two hectares of open field were used for growing root stock / bud wood. One hectare was used for propagation and two hectares were used for building and pathways. Claim of the assessee is that it had sold more than 9,00,000 mother plants to its subsidiary in Ethiopia from the above holding. As per the Department, assessee could not have raised more than 3,30,000 plant saplings from the above holding.

Leaving this apart, what we find is that assessee had along with its return filed audit report in form 3 CEB which is required to be furnished u/s.92 E for international transactions with AEs. AO had compiled the figures given at para three above from such report. It is clear from the said report that against the claimed sale of Rs.22,74,57,819/-, ALP was only Rs.4,20,20,714/-. This is not the opinion of the AO / TPO, but it is the opinion of the auditors of the assessee. What the AO did was to accept the ALP determined by the auditors of the assessee in accordance with Section ITA.198/Bang/2012 Page - 10 92E of the Act. A reading of the table would clearly show that the determination of ALP with regard to supplementary invoices were zero. It is clear that there was no under lyng of agricultural goods or any goods for that matter which were sold. Contention of the assessee that supplementary invoice was based on prices fetched on auction sales by its subsidiary when the goods were ultimately sold at the auction floors in Dutch auction, falls flat when we consider the dates on which supplementary invoices raised on Ethiopian Meadows were accounted by the assessee in its books. Both the invoices viz., the original invoice and supplementary invoice, in each case was accounted on the same day. If the version of the assessee that supplementary invoice was raised based on final auction figures was correct, then definitely the accounting for such supplementary invoice, even if we consider it to have been pre-dated could have happened only on a date subsequent to the auction.

Coming to the claim of the assessee that computation of agricultural income is not within the purview of the AO, a look at section 10(1) and Section 2(1A)of the Act, can solve this issue. Section 10(1) of the Act specifically states that agricultural income cannot be included in the total income of the assessee. It is therefore necessary for an AO to determine ITA.198/Bang/2012 Page - 11 whether the agricultural income claimed by an assessee is correct or not, and whether it falls within the definition of that term given in Section 2(1A). When an assessee asserts that the income raised by it is on account of sale of agricultural produces, onus is on the assessee to prove such agricultural income. In our opinion, assessee before us has failed to discharge this onus. Despite number of opportunities given by the AO assessee was unable to establish how it could raise so much plants and saplings from five hectares of green house area.

As for the claim of the Ld. AR that even if the agricultural income is found to be incorrect, it would not warrant addition since there was no real income, we are afraid we cannot accept. This for the reason that a sum of Rs.12 crores out of the dues shown by the assessee as receivable from its subsidiary has been converted by the assessee to share capital or treated as share application money. Whether converted to share capital or to transferred to share application money, there is an infusion of capital which is not a fictitious, but a real one.

CIT (A) in our opinion was oblivious to the date of accounting of the supplementary invoice by the assessee which was on the very same day when it had raised original invoice. He was also oblivious to the ALP of ITA.198/Bang/2012 Page - 12 the goods relating to the supplementary invoice fixed by the auditors at zero. He considered the raising of bogus invoices to inflate the agricultural income as mere non-compliance with procedures of the RBI or Customs. What we observe is that assessee had claimed agricultural income which was not possible from the type of holding it had, and had adopted dubious methods for this. Nothing was brought on record to show that there was any industrial practice in floriculture where two invoices were raised on the same day, on purportedly for a notional value and other purportedly based on subsequent realization. To be precise there cannot be any industrial practice of that sort at all. We are of the opinion that CIT (A) fell in error in deleting the addition made by the AO. We reverse the order of CIT (A) and reinstate the addition.

In the result, appeal of the Revenue is allowed. Order pronounced in the open court on 12th day of April, 2016.