MURALIKRISHNA K,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX,, BANGALORE

This appeal by the assessee is directed against the order dated 11.07.2014 of the CIT(Appeals)-I, Bangalore relating to assessment year 2003-04.

The assessee is an individual engaged in the business of procuring man-power. For the assessment year under consideration, assessee filed return of income declaring an income of Rs.12,99,039 and agricultural income of Rs.10,75,000. Assessment u/s. 143(3) was completed by the AO making the following additions:-

Cash deposit in the bank account – Rs.35,72,550 : In the course of the assessment proceedings, the Assessing Officer found various deposits in assessee’s bank account in State Bank of Mysore. With regard to the deposit of Rs. 15 lakhs on 12.03.2003, Rs.9 lakhs on 25.03.2003 and Rs.9 lakhs on 29.03.2003, it was submitted that it was out of the agricultural income of Rs.10,75,000/- and share income from the HUF of Rs.6 lakhs and some other withdrawals from the bank account. The AO did not accept the contention of the assessee and made an addition of Rs.33 lakhs as unexplained credits in the assessee’s bank account.

Before the CIT(Appeals), it was submitted that the evidence of having received the agricultural income in the form of confirmation letters from the tenants of the agricultural lands held by the assessee had also been produced before the assessing authority at the time of the assessment proceedings. It was further submitted that assessee owns nearly 48 acres of land and sale deed for purchase of land was also produced before the AO. Further, the dates on which the amounts had been withdrawn from the bank and re-deposited was also placed before the AO. It was submitted that the AO without even verifying the details produced, proceeded to complete the assessment making the addition treating the same as unexplained credit.

The assessee stated before the CIT(A) his share from the HUF in which the assessee was a coparcener, to an extent of Rs.6 lakhs was also denied by the AO on the ground that it was not clear as to what the HUF was doing and its sources of income.

As regards the deposits between 05.04.2002 and 20.05.2002, it was submitted that this was the deposit of the return of advance amount given for purchase of land. As the transaction did not materialize, the agreements were destroyed and the amount returned. In fact, these amounts had been paid for purchase of land and as the land was not suitable due to defective title, the assessee did not proceed with the transaction and took back the advance paid which was deposited in the bank account immediately on receipt.

With regard to the disallowance of the agricultural income shown to the extent of Rs. 10,75,000/- on the ground that proof regarding sale of agricultural produce and the details of expenditure incurred on labour had not been produced, the assessee submitted before the CIT(A) that agricultural operations were carried out by 10-12 farmers who had taken the agricultural lands of the assessee on lease and rental income was given to the assessee at Rs.22,500/- per acre. It was submitted that detailed rental agreements could not be entered into with the farmers as they would be getting the rights over the property and there was high chance that the assessee would loose the property itself. It was submitted that during the assessment year 2002-03, the Appellant had claimed agricultural income of Rs.5 lakhs. Copy of the return and the return of KVR HUF in which the assessee is a coparcener was filed before the CIT(A), wherein the amount of Rs.6 lakhs is also shown as given to the assessee.

The assessee submitted that the amount of Rs.35,72,550 includes receipt of agricultural income and the share of income from the HUF and consequently separate addition on agricultural income and share income from KVR HUF amounts to double addition.

With regard to cash deposits in the bank, the CIT(Appeals) at paras 3 to 3.3 has mentioned the details of cash deposits of the assessee with State Bank of Mysore bearing Account No.311208 and also the reply of the assessee dated 30.11.2005 to the AO. With regard to the claim of agricultural income of the assessee, the CIT(Appeals) observed that assessee is found to be the owner of about 48 acres of land in Nellore district which was purchased on 17.06.2000 from M/s. Vishwaprakruti Farms & Plantations Pvt. Ltd. The agricultural operations thereon were stated to be carried on by 10 to 12 farmers and it was claimed that they had grown tomatoes, vegetables etc. there in the first year of land ownership i.e. FY 2000-01 wherein the assessee had claimed agricultural income of Rs.3,73,000 and Rs.5,00,000 in FY 2001-02. The CIT(A) noted that the income has more than doubled in the next FY 2002-03 to reach Rs. 10,75,000.

The CIT(A) further observed that the assessee, admittedly, does not maintain any books of account in respect of any agricultural operations and neither do the 10 to 12 farmers who are stated to have carried on the agricultural operations as tenants. Regarding the assessee’s claim that these farmers had taken the agricultural lands of the assessee on lease and rental income was received at Rs.22,500 per acre and detailed rental agreements could not be entered into with the farmers as they would be getting the rights over the property and there was high chance that the assessee would loose the property itself, the CIT(A) observed that evidence furnished before him in the form of photocopies stated to be confirmations from the tenants for the amount paid to the assessee was of poor evidentiary quality which nether carry the identity particulars nor the address of the persons or even the date of confirmation.

The CIT(Appeals) concluded that due to lack of appropriate evidence, the claim of availability of agricultural income is not established.

The CIT(Appeals) held that AO has erred by making a separate addition in respect of agricultural income treating it as ‘income from other sources’ after disbelieving the said source as explanation for part of the cash deposit and since the cash deposits are treated as unexplained income, taxing the agricultural income as ‘other sources’ will lead to double taxation. Hence, the CIT(A) directed the AO to delete the separate addition towards agricultural income. In short, the CIT(A) did not accept the claim of cash deposits made out of unevidenced agricultural income.

Aggrieved, the assessee is in appeal before the Tribunal.

The assessee has filed additional grounds of appeal which read as follows:-

The ld. counsel for the assessee submitted that additional grounds raised are purely questions of law and no new facts have to be looked into. The plea of the ld. counsel for the assessee is accepted and additional grounds are admitted.

The ld. counsel for the assessee before us reiterated the contentions put forth before the CIT(Appeals) with respect to agricultural income. The ld. counsel submitted that vegetables were sold through commission agents who frequented the farm lands and the consideration is received at the time of harvesting of crops. He also filed confirmations with confirmations with detailed identification and addresses of tenant farmers. The CIT(A) observed that the AO had not accepted the claim earlier, but in the remand report the AO was convinced with the assessee’s claim that lands were given to about 10 to 12 farmers who had grown tomatoes and various other vegetables and agricultural income was received out of sale proceeds. The AO had thus stated that for 46 acres 39 guntas, total agricultural income comes to Rs.10,56,937 and not Rs.10,75,000 and therefore difference of Rs.18,063 is to be treated as agricultural income.

We have heard both the sides and gone through the records. It is not disputed that the assessee owns 46 acres 39 guntas of land which is cultivable. Hence the assessee’s claim of agricultural income at Rs.22,500

The next issue is the claim of receipt of Rs.6 lakhs from KVR HUF. During the course of assessment proceedings, the assessee explained that HUF was generating agricultural income and assessee being coparcener of HUF was given income out of HUF. The assessee had furnished the return of income of HUF for the relevant assessment year wherein the rental income of Rs.2,39,830 and agricultural income of Rs.45,000 had been declared. The AO was of the view that when HUF’s income is only to the tune of Rs.2,84,830, there could be no possibility of assessee getting Rs.6 lakhs towards his share.

The ld. counsel for the assessee pointed out that the amount was received out of “HUF funds”. The HUF has been earning income over a period of time and that there were adequate accumulated funds, out of which the assessee could draw Rs.6 lakhs during the relevant year.

The CIT(Appeals) held at para 4 of the impugned order as follows:-

Aggrieved, the assessee is in appeal before us and stated that the assessee had already furnished return of income of HUF showing the rental income of Rs.2,89,830 and agricultural income of Rs.45,000 for this year. Further, he also argued that accumulated funds and assets of the HUF were already existent and assessee could draw Rs.6 lakhs from the HUF funds during the relevant year.

We find that the assessee has filed the return of income of HUF. Availability of funds of the HUF shall be established by the assessee before the Assessing Officer and hence we set aside this issue to the file of the Assessing Officer. The assessee shall explain and prove that accumulated funds are available in support of his claim.

With respect to explanation for balance cash deposits in the bank account which is related to cash withdrawals of the said bank account on various dates totaling to Rs.12,58,265, the CIT(Appeals) held at para 5.1 of the impugned order as follows:-

The CIT(Appeals) therefore concluded that the cash deposits in the bank account have not been evidenced by the assessee and hence considered the same considered as his unexplained income.

The ld. counsel for the assessee before us submitted that with regard to the amount of Rs.4,59,000 which forms part of the deposit made on 25.03.2003, the same was the agricultural income received during the year out of the previous year’s income which has been declared by the assessee in his return of income. A copy of the return of income filed for the preceding year was furnished and thus the amount is fully explained.

With respect to the amount of Rs. 12,58,265 being the cash deposit out of the cash balance available, it was submitted that from the cash book extracts of the assessee from the beginning of the year, it may be noticed that the deposit of Rs. 12,58,265 which forms part of Rs. 15 lakhs deposited on 12.03.2003 was out of the cash balance available as on that date. The AO disbelieved the assessee as the AO was of the view that when the assessee is operating bank account, he would not have kept cash in hand. In this regard, the ld. counsel for the assessee submitted that cash book is a primary document and the assessee’s accounts had been audited and audit report u/s. 44AB had also been obtained. No discrepancy in this regard has been noted and thus the entries made in the cash book are correct. It was submitted that the fact that there is accumulation of cash in the cash book cannot be doubted and the AO cannot sit in judgment on the prudence of the person to keep cash in hand just to disbelieve and to make the impugned addition on surmise. It was his submission that the primary evidence of cash book being available which had been duly audited, the impugned addition is totally unwarranted which is only on mere surmise and required to be deleted in toto. In this connection, reliance was placed upon the judgment of the Karnataka High Court in the case of S.R. Venkata Ratnam vs. CIT (1981) 127 ITR 807 and also the recent judgment of the Karnataka High Court in the case of Smt. P.

We find that the cash book and the assessee’s accounts have been audited and audit report u/s. 44AB has also been obtained. No discrepancy has been noted and the entries made in the cash book are therefore correct. The fact that the cash book is available which has been audited makes the impugned addition unwarranted. Hence, the addition of cash deposits as unexplained income is deleted.

The next issue is with respect to capital gains. The AO noted that the assessee along with Sri G. Nityanand purchased a property at Hyderabad as per sale deed dated 7.12.1998 for Rs.1,40,000. Due to some dispute with the seller, actual possession of the land was taken only during FY 2002-03. Thereafter, the land was sold for Rs.18,00,000 as per sale agreement dated 27.11.2002. The assessee had declared long term capital gains of Rs.6,12,500. The AO held the transaction as resulting in shorter term capital gains of Rs.16,60,000 and brought to tax 50% thereof in the assessee’s hand at Rs.8,30,000.

Before the CIT(Appeals), the assessee filed additional ground of appeal claiming that the agricultural land in question was situated beyond the notified area and hence the sale was exempt u/s. 2(14) of the Act. However, in the absence of evidence of land location in support of the assessee’s claim, the CIT(Appeals) rejected the assessee’s claim.

Before us, it was submitted that the AO has accepted the profit on sale of land as long term capital gain in the return of income after verification of the period of holding. However, on further examination it was found by the assessee that the land is situated beyond the notified area and thus did not fall within the definition of capital asset u/s. 2(14) of the Act. It was accordingly submitted that no capital gain is liable to be taxed. It was further submitted that the assessee by oversight had offered the capital gain under long term capital gain and this declaration of the assessee was wrong. The entire profit on sale of land is required to be excluded from taxation since the land was not a capital asset. In this regard, a copy of the Notification and the phani extracts of the land has been filed.

The ld. counsel for the assessee further pointed out to a memo of the revenue department at page 125 of the paperbook, wherein it has been mentioned that the population in the Vattinagulapally Village of Rajendranagar Mandal as per 2001 census is 2204 persons and the population as per 2011 is 3673 persons, and the distance of Sy.No.189 from Vattinagula pally village is 2.5 Kms. Hence, we restore this issue to the file of the Assessing Officer and direct him to examine the details with respect to the land as to whether it satisfies the claim for exemption u/s. 2(14) of the Act.

Grounds No.5 & 6 are not pressed by the assessee.

In the result, the appeal by the assessee is partly allowed for statistical purposes.