2011 (2) TMI 241 - HC - Income Tax

Addition - Agriculture income - Bogus capital formation through shares - Rule 7 of the Income Tax Rules, 1962 - In the return, the assessee claimed that the income from above two sources was his agricultural income under Section 2(1A) of the Act. The assessing officer, however, disallowed the above claim of the assessee and on observing that the agricultural income claimed by the assessee was covered under Rule 7 of the Income Tax Rules, 1962 and accordingly, calculated the non-agricultural income at Rs. 74,73,041/-, bringing it to the ambit of tax. - Held that - calculation made by the AO while working out nonagricultural income in the hands of the assessee, find that such addition/disallowance in the hands of the assessee on account of non-agricultural income is not justified, as the conversion of raw seeds into pea seeds cannot be held as non-agricultural merely on the ground that there was a complete change from raw seeds into pea seeds which was not justified keeping in view the fact that the assessee changed such raw seeds into pea seeds, observing that the same was a highly perishable item which would have resulted in prospective loss in absence of marketability for the same. - Decided in favor of assessee. Shares - genuineness of transaction -s per the material on record, in spite of the sale of shares having taken place in the year 1998, the payment thereof was made to the assessee in the next assessment year - no explanation, much less a plausible explanation had been furnished by the assessee as to why the payment was delayed for about one year and three months - Held that - transaction of purchase and sale of shares of M/s. Rassi Cement Ltd. was not a genuine transaction. - Decided against the assessee.

Issues Involved:
1. Whether the processing of raw peas into pea seeds constitutes an agricultural activity under Section 2(1A) of the Income-Tax Act, 1961.
2. Whether the Tribunal erred in holding that the assessee employed ordinary agricultural procedures for converting raw peas into pea seeds.
3. Whether the Tribunal erred in holding that there is no incremental profit to be taxed as non-agricultural income under Rule 7(1) and 7(2).
4. Whether the transaction of purchase and sale of shares of M/s. Rassi Cement Ltd. was genuine.

Detailed Analysis:

Issue 1: Agricultural Activity under Section 2(1A)
The primary issue was whether the assessee's activity of converting raw peas into pea seeds qualifies as an agricultural activity, thereby making the income derived from it exempt under Section 2(1A) of the Income-Tax Act, 1961. The Tribunal found that the conversion process did not involve any substantial technique or mechanism and was done because there was no ready market for raw peas, which are perishable. The Tribunal held that the activity constituted an agricultural operation as it involved basic operations like uprooting, drying, thrashing, and winnowing, which are necessary to render the produce fit for market. This aligned with the principles laid down in the Supreme Court's decision in Raja Benoy Kumar Sahas Roy's case, which defined agriculture as an integrated activity involving both basic and subsequent operations on the land.

Issue 2: Ordinary Agricultural Procedures
The Tribunal observed that the assessee employed ordinary agricultural procedures such as uprooting the plant, drying, thrashing, and winnowing to convert raw peas into pea seeds. These activities were deemed necessary due to the perishability of raw peas and the lack of a ready market. The Tribunal concluded that these operations were ordinarily employed by a cultivator to render the produce fit for market, thus qualifying as agricultural activities under Section 2(1A)(b)(ii). The Revenue's contention that the process was not ordinarily employed by a cultivator was rejected based on the Tribunal's findings.

Issue 3: Incremental Profit and Non-Agricultural Income
The Tribunal found that the Assessing Officer (AO) had incorrectly calculated the non-agricultural income by considering the cost of raw pea seeds at 960 kgs instead of 4000 kgs per acre. The Tribunal noted that the CIT(A) had also erred in restricting the non-agricultural income to 30% without a proper basis. The Tribunal accepted the assessee's claim that the production of raw pea seeds was 4000 kgs per acre, and the processed pea seeds were 960 kgs per acre. Since the prevailing market rate for raw pea seeds was accepted as Rs. 7 per kg, the Tribunal concluded that there was no incremental profit to be taxed as non-agricultural income under Rule 7(1) and 7(2).

Issue 4: Genuineness of Share Transactions
In Income Tax Appeal No. 74 of 2010, the additional issue was whether the transaction involving the purchase and sale of shares of M/s. Rassi Cement Ltd. was genuine. The Tribunal's decision to delete the addition made by the AO on account of bogus capital formation was challenged. The Court noted that M/s. Rassi Cement Ltd. was not listed on the Stock Exchange, and the assessee could not provide a plausible explanation for the significant appreciation in share value within two months. Additionally, the payment for the shares was delayed by about one year and three months without any explanation. The Court found the Tribunal's findings to be based on misappreciation of evidence and held that the transaction was not genuine. Consequently, the question was answered in favor of the Revenue.

Conclusion:
The appeals concerning the agricultural income from pea seeds were dismissed, affirming that the income derived from converting raw peas into pea seeds is agricultural income and not taxable. However, the appeal regarding the genuineness of the share transaction was partly allowed, holding that the transaction was not genuine and thus taxable.

← Previous Next →