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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: SHRI WASEEM AHMED, & SHRI SIDDHARTHA NAUTIYAL
आदेश/O R D E R
PER BENCH:
The captioned two appeals have been filed at the instance of the Revenue against the order of the Learned Commissioner of Income tax(Appeals), Jamnagar, dated 16/09/2013 arising in the matter of assessment order passed under s. 143 of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Years 2008-09 & 2009-10.
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The Revenue has raised the following grounds of appeal:
The Ld.CIT(A)-II, Rajkot has erred in law and and on fact by deleting the disallowance of Rs.1,54,48,763/- made in assessment order, which is @ 15% of turnover of agricultural income of Rs.31,20,56,318/- treating the same as income from other sources on the ground that sales and purchase figures in respect of agricultural income. 2. The Ld.CIT(A)-II, Rajkot has erred in law and on fact by the disallowance u/s.14A of Rs.1,09,45,108/- made in assessment order holding that certain expenses, viz, Employee cost, Depreciation, advertisement expenses, Administration expenses etc. should not be forms part of the proportionate disallowance u/s.14A of the Act. 3. It is, therefore, prayed that the order of the Ld.CIT(A) may be set aside and that of the Assessing Officer be restored.
The first issue raised by the Revenue is that the Ld. CIT(A) erred in deleting the addition made by the AO for Rs. 1,54,48,763/- on account of income from the other sources.
The facts in brief are that the assessee in the present case is a Private limited company and engaged in the business of manufacturing of pumps and trading of Agro inputs, lease farming etc. The assessee in the year under consideration has shown agriculture sales of Rs. 31,20,56,318/- against which it claimed an agricultural expense to the tune of Rs. 20,90,64,568/- leaving a surplus expense of Rs. 10,29,01,750/- representing the agricultural income.
4.1 As per the assessee, it has taken land on lease from various parties at Lodhika in which agricultural operations were carried out. This was the first year of the assessee in which it has shown income from agriculture operation. The AO during the assessment proceedings observed certain facts which are detailed as below:
i. The lease agreement were not registered/authorized as well as there was no witness. Thus, the authenticity of such lease agreement was in doubt.
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ii. There was no evidence available on record that the agriculture operation was carried out in the beginning of the Financial Year under consideration. iii. The assessee is showing net profit per acre of Rs. 26388 per annum whereas the meagre amount of lease charges is ranging between Rs. 400 to 500 per annum. There was huge difference between the above and thus it can be inferred that the assessee has shown inflated agriculture income. iv. Most of the lease agreement were not entered in the month of April, May and June 2007 and there is harvesting season in the month of March and April in Saurashtra Gujarat. Thus, it implies that the crop pertaining to the month of March and April were not belong to the assessee. As such the assessee should have shown less income from the agriculture operation being the first year of the operation. v. Most of the purchases were in cash though the assessee was availing loan facility from many banks accordingly the purchases cannot be verified.
In view of the above, the AO computed 15% of agricultural income as income from other sources and made the addition of Rs. 1,54,48,763/- to the total income of the assessee.
Aggrieved assessee preferred an appeal before the ld. CIT(A) who deleted the addition made by the AO by observing as under: 6.10 I have duly considered the assessment order, submission of the appellant, repot of the AO and counter submission of the appellant on the issue. 6.11 After perusing the above, the following picture emerges. The appellant had taken 3903 Acres of agricultural land on lease from the farmers across the Saurashtra. Chart showing name of farmer, area of land hired, location of land, crop produced etc. has already been furnished to the AO during the appellant and also remand proceedings. Therefore, this fact is not in dispute. The irrigation status of such land is available from the revenue records which was in the possession of the AO, while finalizing the assessment. Crop wise agricultural income and the details of area under cultivation for each crop and number of times the crop has been taken on such land is also on record. It is also a fact that, all the sales are made in cash only. The appellant also furnished lease agreements executed with farmers. All these, beyond doubt, prove that the appellant is holding substantial agricultural land on lease and earning agricultural income from agricultural operations. It is also seen that, to verify the" genuineness of agricultural holding and agricultural income, the AO, during the assessment proceedings deputed his inspector reported that, he has seen grown crops on the agricultural lands and was also satisfied with the
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agricultural activities on the lands, as can be seen from Page 4 of Assessment Order. To corroborate his findings, he also took statements of land owners, who stated that they had given their agricultural land on lease to the appellant. Therefore, the issue related to the holding of agricultural land by the appellant and carrying agricultural operation cannot be said to be in dispute. 6.12 It is also seen that, during the remand proceedings, the AO had written a letter dated 13.04.2012 to the Bhashkaracharya Institute of Space Application & Geo-informatics, Gandhinagar seeking information on Survey Nos. of the agricultural lands held by the appellant and also the agricultural crops that could be achieved on said pieces of land, In response, the said department has furnished a C.D., containing satellite maps of villages and Talukas, wherein, the agricultural lands held by the appellant are located. The appellant vide their letter dated 13.03.2013 have filed the comments on the data received from the said department. Nothing incriminating or no glaring infirmities are found from the information so received from the above institution. 6.13 So far as the allegation of the AO that the lease agreements are on plain paper and not on non-judicial paper and also they are not registered or notarized nor signed by any witnesses is concerned, the same is shallow because, there is no legal mandate to execute notarized lease agreement. Legal sanctity of such agreements only comes to fore when there is a dispute between the two agreeing parties. There may even be verbal agreements. Further, the appellant's contention that it was restrained by law to acquire agricultural land without prior sanction/approval prevented it from making the lease agreement sacrosanct in the eyes of law, has considerable force. Again, the fact in no way proves that land was not taken on lease and no agricultural activities were carried out. Therefore, the crux of the matter remains unchanged. 6.14 So far as AO's allegation that the assessee's claim of average reverjue per acre of land appears to be exaggerated, is also hypothetical in nature. No record or evidence in this regard was brought on record to corroborate such a finding. He also failed to appreciate the fact that, the larger the land tract, the more is the yield. The number of yields also increases as the sole agenda of the appellant is to extract maximum from the land under its control. The appellant furnished details of land under cultivation, crops taken and yield per acre for different crops vide letter dated 16,12.2010, from which it can be seen that, it took multiple crops during the year. Besides, fertility of lands, quality of seeds, knowhow of crop, availability of resources such as water, pesticides etc., availability of funds, application of technology, marketing skills etc, contribute a lot in generation of income. 6.15 So far as AO's allegation that net profit of 33%, is abnormally high and no farmer in his senses would give his land on a meager lease rent of Rs 4000-6000 per acre per annum is concerned, it is again reiterated that, this never controverts the fact that the appellant had not taken land on lease and not carried out agricultural | activities or such activity suffered any kind of infirmity. Further, agricultural ' expenditure of 30% to 40% has been accepted by various Courts, including the Rajkot Bench IT AT. Therefore, the profit of 33% in no way is abnormal or substantial. 6.16 So far as the allegation that, all the purchases and sales in respect of' agricultural income are in cash which raises doubts about the genuineness and correctness of both purchases as well as sales are concerned, the appellant's t contention that this being the first year of operation and due to the fact that the! agricultural sector is highly unorganized, prevented it from carrying out transactions! bank, has some force. Further the fact that, the farmers who has leased out the agricultural land are scattered and always prefer cash payments, might have encouraged the appellant to deal with the farmers in cash. 6.17 All in all, I find that the AO has failed to justify his finding that the 15% of the income had its source from 'other income'. Since the appellant is having income from business of manufacturing and trading activities, there may be a possibility that it might divert some
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agricultural expenses and show them as business expenses, and thus, recording higher exempt income. But such a stand also gets mitigated because, I find that the AO has made separate disallowance u/s. 14A of the I T Act. Therefore, to sum up, as the AO had failed to bring on record that the appellant had not earned agricultural income to the extent of 15% of the total claim of agricultural income, and as there is no basis for arriving at such a ratio of 15%, I have no alternative but to delete the entire addition. In the result, this ground of appeal is allowed.
Being aggrieved by the order of the Ld. CIT(A) the Revenue is in appeal before us.
The learned DR before us vehemently supported the stand of the AO by reiterating the findings contained in the assessment order which we have already adverted to in the preceding paragraph. Therefore we are not repeating the same for the sake of brevity. The ld. DR also filed the written submission as reproduced below: The assessee has shown agricultural income at Rs. 10.29 crores on cultivation of 3903 acres for the first time and during the assessment proceedings, the assesse submitted lease agreement of agricultural lanes on plain paper without notarisation/registration or any witnesses. Also, the entire agricultural activity was done through cash only and no banking channel was used even though the assesse had shown sale of agricultural products at Rs. 31.21 crore. Further, almost 99% of purchase &, sale vouchers do not hear any signature and self-made resulting non-involvement of any third party Keeping in view of these discrepancies, the AC rejected the bock results of agricultural income and treated 15% of agricultural receipts as taxable income under income from, other sources. The AO also made disallowance u/s 14A of the Act on a/c of exempt income in the nature of agricultural income by applying rule 8D(2)(ii) & 8D(2)(iii) of the IT Rule The Ld. CIT(A) granted relief stating that the AO failed to justify his finding. It is also observed that there may be possibility that it might divert some agricultural expenses and show them as businesses expenses and, thus recording higher income, which has already been taken care of by disallowance u/s 14A of the Act. Ld. CIT(A) partly allowed the disallowance u/s 14A of the Act by directed the AO to exclude the certain expenses viz. Employee Cost, Depreciation, advertisement expenses, administrative expenses, etc for calculating disallowance as per Rule 8D. Brief Points to be considered by the Hon’ble ITAT, Rajkot Bench, 1. The CIT(Appeals] did not considered the fact that the agreements between the farmers and the assessee company are on plain paper and not on non-judicial stamp paper as also not notarized or registered. The same were also not made in presence of any witness and or a notary which would conclusively prove that the lease agreements were actually entered into+ and that too in the beginning of the FY 2007-08. Thus the very nature of agreement is dubious and doubtful piece of paper which can hardly be termed as an agreement. 2. The CIT(Appeals) did not considered the (act that the assessee company entered into agreement in the month of April to June 2007, thus it is understood that most of the crops; harvested in the month of March to May 2007 did riot belong to the assessee company
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i.e. the assessee company does not get income from the first harvest of the financial year. Thus, the agricultural income of the assessee per acre for AY 2008-09 should be less than in the subsequent years, which does not appear to be case. So the assessee has shown Inflated agricultural income. 3. The CIT(A) did not consider the findings of the AO that the argument of the assessee that it did not sold the crop in the harvesting period but it stored it and sell in market at the right time when the rates in the market are better, was not verifiable because the assessee does not own any godowns or cold storage and not shown am rent payment for such godown and transportation expenses under the agricultural expenses. These facts clearly shows that, the assessee has shown inflated sale proceeds resulting into higher exempt income. 4. The CIT (Appeals) has ignored the fact that all the purchases arid sales relating to agricultural income are in cash and the same is not supported by corroborative evidence, since the vouchers and bills are self created without the necessary signature of the purchasers. These vouchers and bills are multiple in nature not exceeding Rs. 20,000/-. In some cases multiple vouchers of Rs. 19000/- were made for receipt of sale proceeds from a single entity in a single day. 5. There is no involvement of any third party evidencing confirmation of production/sales/expenses. The CIT(Appeals) has not considered the fact that hew so much produce was transported or scored, since neither there is claim of such expenses nor any evidences of the same produced. Also the assessee does not own any godown or cold storages neither have debited any rent for leasing of godowns and cold storages. 6. The CIT(Appeals) did not considered the fact that despite large companies involved in commercial farming like Pepsi Foods, Cargill etc, there is no evidence of selling on such large magnitude of agricultural produce. Thus, the CIT(Appeals) failed to consider the contradiction wherein the assessee company boats huge agricultural production and cultivation and high per acre yield but when it comes to selling of these agricultural produces, it fails to give any V substantial evidence. 7. The CIT(Appeals) failed to appreciate the fact that the assessee company had taken 3903 acres of land on lease and the average yield per acre comes to Rs. 79,953/- and net agricultural income per acre comes to Rs. 26,388/- sifter deduction of lease rent of Rs. 4,000/- to Rs. 6,000/-. In support of high yield, in its very first year, the assessee company did not furnished any details pertaining to use of superior quality of seeds and techniques, which are not available to ordinary farmers. This figures is stark contrast to the fact that this is the first year of agricultural operations and the assessee company did not have any prior knowledge of technical know how to carry out new business. Further, since the agricultural income is so high, no farmer would give his land on a meagre rent of Rs. 4,000 – 6,000 per acre per annum. 8. The CIT(A) did not consider the fact that the certificate of IDBI and CRISIL rating of the assessee pertains to AY 2011-12 and do not support the contention regarding correctness and genuineness of its agricultural income for AY 2008-09.
We have heard the ld. DR and perused the materials available on record. The assessee in the present case has shown gross turnover of agricultural produce amounting to ₹ 31,20,56,318.00 against which the expenses were claimed at ₹ 20,90,64,568.00 leaving surplus balance of ₹ 10,29,92,750.00 as income from the
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agricultural operations. According to the AO, the income shown by the assessee from the agricultural operations, being exempted from tax and therefore, the same was not free doubts on account of various reasons which have already been discussed in the preceding paragraph. Thus, the AO inferred that a sum of ₹ 1,54,48,763.00 being 15% of the agriculture income represents income from other sources and hence, an addition was made to the total income of the assessee. However, the learned CIT-A was pleased to delete the addition on the reasoning that there was no material brought on record that impugned amount of ₹ 1,54,48,763.00 represents the income from other sources and not from the operation of agricultural activity.
9.1 Admittedly, the AO has not brought any primary and direct evidence for holding that the amount of income of ₹ 1,54,48,763.00 represents the income from other sources. Since it has been alleged by the AO about the income from other sources of ₹ 1,54,48,763.00, the onus lies upon the AO to bring such source based on documentary evidence. However, the AO was able to bring sufficient circumstantial evidences on the surface which are creating lot of doubts about the genuineness of the agricultural income of the assessee. But to our understanding the doubts cannot take the colour of the evidence for making any addition to the total income of the assessee. As such the defects as pointed out by the AO are the reasons to investigate the facts of the case in detail. As such, based on the defects, the addition cannot be made to the total income of the assessee.
9.2 Be that as it may, the circumstantial evidences, brought on record by the AO cannot be ignored altogether. On the basis of "surrounding circumstances" & "human probabilities" the Hon’ble Supreme Court pronounced the judgment against the assessee in the case of Smt. Sumati Dayal reported in 80 taxman 89, referring to the similar facts as stated above. In the present case the AO based on his analysis has demonstrated that on the principles of "preponderance of possibilities" or "human probabilities", the agricultural income shown by the assessee is not free from doubts. Under the concept of Preponderance of possibilities, it does not mean
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bringing any primary or direct evidence. Thus we are of the considered view the justice would be rendered to both the assessee and the revenue if the addition is sustained to the extent of 7.5% of the agriculture income shown by the assessee.
9.3 We also disagree with the finding of the learned CIT-A that the provisions of section 14-A read with rule 8D will cover up the expenses claimed by the assessee against the agricultural income by diverting to the taxable activity. It is for the reason that the AO has doubted on the source of agricultural income of the assessee whereas the provisions of section 14A read with rule 8D deals with the expenses incurred in relation to exempted income. Thus, both the disallowance in dispute before us are operating in different segment and therefore no reference can be made while adjudicating the issue on hand to the provisions of section 14A read with rule 8D of Income Tax Rule. Hence, the ground of appeal of the Revenue is partly allowed.
The second issue raised by the revenue is that the Ld. CIT(A) erred in deleting the addition made by the AO for Rs.1,09,45,108/- under the provision of section 14A of the Act.
The assessee in the year under consideration has shown exempted income being from agriculture operation. However, the assessee has not shown any expenses against such income therefore the AO invoked the provisions of section 14A r.w. Rule 8D of Income tax rules and made the disallowance of Rs. 1,09,45,108/- and added to the total income of the assessee.
Aggrieved assessee preferred an appeal to the Ld. CIT(A) who has partly confirmed the order of the AO by observing as under: Though principally I agree with the disallowance made u/s.14A of the IT Act though. I also force in the arguments of the A.R of the appellant that the certain expenses, viz., Employee cost, Depreciation. Advertisement expenses Administration expenses etc. should not be forms part of the proportionate disallowance. Therefore, the AO is directed to wok out the disallowance u/s.14A of the Act and as per the formula stipulated under Rule 8D i.e AXB/C wherein, (A) is the expenditure by way of interest (B) is the average of total assets as appearing in the balance sheet on the first day and the last day of the previous year.
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Being aggrieved by the order of the Ld.CIT(A) the revenue is in appeal before us.
The learned DR before us vehemently supported the stand of the AO by reiterating the findings contained in the assessment order which we have already adverted to in the preceding paragraph. Therefore we are not repeating the same for the sake of brevity. The ld. DR also filed the written submission as reproduced below:
The CIT(A) himself has admitted that there may be a possibility of diversion of some agricultural expenses to business expenditure even though he failed to accept the treatment of 15% agricultural income as taxable income on the ground that the disallowance u/s 14A has already been made to take care of such diversion. On the other hand, the CIT(A) did not confirm the disallowance u/s 14A on various counts such as Employee Cost, administrative expenses, depreciation, advertisement expenses etc. 10. Though the CIT(Appeals) principally accepted the disallowance made u/s 14A of the Act but directed that Employee cost, Depreciation, Advertisement expenses, Administrative Expenses, etc should not be considered for proportionate disallowance. The same was inferred without taking into consideration the following facts: • No separate books of account is maintained by the assessee for agricultural activity and non-agricultural activity. • The details of agricultural expenses clearly shows that no fixed expenses such as employee cost, administration expenses, day-to-day supervision expenses, etc, are shown under the agricultural expenses. Even sates expenses., accounting charges, auditing fees and several compliance cost have not been considered by the CIT(A) before directing to exclude the entire indirect cost except finance cost. • The net profit of the assessee company from agricultural activity is shown @33.00% in comparison to @8.91% in non-agricultural activity. The CIT(A) failed to examine the reason for such huge variation before directing to exclude the major expenses on premises, administration, advertisement, etc for calculating disallowance u/s 14A of the Act read with Rule 8D. • The CIT(A) has not recorded any finding on the issue and just mentioned that he find force in the argument of the AR for exclusion of certain expenses for calculation of disallowance u/s 14A r.w.r. 8D.
We have heard the ld. DR and perused the materials available on record. There is no dispute to the fact that the rule 8D of Income Tax Rule was made applicable with effect from the assessment year 2008-09 which is the year under consideration before us. Admittedly, the assessee in the year under consideration has shown exempted income being from agricultural operation. But the assessee
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against such income has not made disallowance of any expense in pursuance to the provisions of section 14A read with rule 8D of Income Tax Rule. Accordingly the AO has worked out the disallowance of ₹ 1,09,45,108.00 after considering the financial statements of the assessee whereas the learned CIT-A agreed for the disallowance of the expenses against the exempted income but in accordance to the provisions of rule 8D of Income Tax Rule. Under the provisions of law it has been prescribed that if the AO is not satisfied with the contention of the assessee, having regard to the books of accounts, about the expenses against the exempted income, the only option available is to make the disallowance in pursuance to the provisions of rule 8D of Income Tax Rule. Thus, we do not find any infirmity in the order of the learned CIT-A. Hence, the ground of appeal of the Revenue is hereby dismissed.
In the result, the appeal filed by the revenue is partly allowed.
Coming to ITA No. 78/Rjt/20164 an appeal by the Revenue for A.Y. 2009- 10
The Revenue has raised the following grounds of appeal: 1. The Ld.CIT(A)-II, Rajkot has erred in law and and on fact by deleting the disallowance of Rs.1,44,44,640/- made in assessment order, which is @ 15% of turnover of agricultural income of Rs.9,62,97,590/- treating the same as income from other sources by invoking provision of section 145(3). 2. The Ld.CIT(A)-II, Rajkot has erred in law and on fact by the disallowance u/s.14A of Rs.2,13,86,301/- made in assessment order holding that certain expenses, viz, Employee cost, Depreciation, advertisement expenses, Administration expenses etc. should not be forms part of the proportionate disallowance u/s.14A of the Act. 3. It is, therefore, prayed that the order of the Ld.CIT(A) may be set aside and that of the Assessing Officer be restored.
At the outset we note that the issues raised by the Revenue in its grounds of appeal for the AY 2009-10 are identical to the issues raised by the Revenue in ITA No. 504/Rjt/2013 for the assessment year 2008-09. Therefore, the findings given in ITA No. 504/Rjt/2013 shall also be applicable for the year under consideration i.e.
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AY 2009-10. The ground appeal of the Revenue for the assessment year 2008-09 has been decided by us vide paragraph No. 11 to 11.7 of this order partly in favour of the Revenue. The learned DR also agreed that whatever will be the findings for the assessment year 2008-09 shall also be applied for the year under consideration i.e. AY 2009-10. Hence, the grounds of appeal filed by the Revenue is hereby partly allowed.
In the result appeal of the Revenue is hereby partly allowed.
In the combined results, both the appeals of the Revenue are hereby partly allowed.
Order pronounced in the Court on 03/10/2022 at Ahmedabad.
Sd/- Sd/- (SIDDHARTHA NAUTIYAL) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 03/10/2022 Manish