2011 (10) TMI 154 - HC - Income Tax

Agriculture income - Exemption u/s 10(1) - Revision u/s 263 - The Assessing Officer having selected the case for scrutiny issued notice to the assessee to explain the sudden change of source of income from business to agricultural income on the face of the activity not being changed. Assessee replied that on acquiring knowledge through various mediums, an opinion on the activity of the firm was sought for and as opined by the experts, the firm decided to change the heading of income from business income to agricultural income . - AO concluded that, After verification of facts brought on record by the assessee, the contention of the assessee that the income derived from the above activities is by performance of agriculture is accepted - Held that - there was no discussion as to how the said conclusion was arrived at except extracting the contentions of the assessee. There was no consideration of the facts as pleaded by the assessee itself for the previous assessment years or the assessment years in question. Thus, there was an incorrect assumption of facts or incorrect application of law which would satisfy the requirement of order being erroneous. - Revision of order by CIT upheld. Whether the Tribunal was right in holding that the income derived by the assessee from manufacturing of seeds and sale of the same would amount to agricultural income which would be exempted u/s. 10(1) of the Income-tax Act. - Held that - Income earned by the assessee is not agricultural income. - Decided against the assessee.

Issues Involved:
1. Whether the income derived from the manufacturing and sale of seeds amounts to agricultural income exempt under Section 10(1) of the Income-tax Act.
2. Whether the assessee could hold agricultural land under Section 79A of the Karnataka Land Reforms Act, 1961.
3. Whether the activity of trading in imported seeds on leased land and contract farming qualifies as agricultural income exempt under Section 10(1) of the Income-tax Act.
4. Whether the order passed by the Commissioner under Section 263 of the Income-tax Act was erroneous and prejudicial to the interests of the Revenue.

Detailed Analysis:

Issue 1: Agricultural Income Exemption under Section 10(1) of the Income-tax Act
The Tribunal held that the income derived from the manufacturing and sale of seeds qualifies as agricultural income exempt under Section 10(1) of the Income-tax Act. The Assessing Officer initially accepted this claim based on the assessee's representation and expert opinion. However, the Commissioner of Income-tax (CIT) issued a show-cause notice, arguing that the income should not be classified as agricultural since the seeds were produced on land not owned by the assessee but on a contract basis. The CIT found the Assessing Officer's order erroneous and prejudicial to the Revenue, leading to the exercise of revisional jurisdiction under Section 263.

Issue 2: Holding Agricultural Land under Section 79A of the Karnataka Land Reforms Act, 1961
The Tribunal did not address whether the assessee could legally hold agricultural land under Section 79A of the Karnataka Land Reforms Act, 1961. The Revenue contended that this oversight contributed to the erroneous classification of income as agricultural.

Issue 3: Trading in Imported Seeds and Contract Farming
The Tribunal also considered whether trading in imported seeds on leased land and contract farming could be classified as agricultural income exempt under Section 10(1) of the Income-tax Act. The Revenue argued that the activity did not qualify as agricultural income since the land was not owned by the assessee. The Tribunal's decision to classify this income as agricultural was challenged by the Revenue.

Issue 4: Exercise of Revisional Jurisdiction under Section 263 of the Income-tax Act
The core issue was whether the order passed by the Commissioner under Section 263 was erroneous and prejudicial to the interests of the Revenue. The Tribunal initially held that the Assessing Officer's order was one of the possible views and thus not erroneous. However, the High Court disagreed, stating that the Assessing Officer's order lacked proper inquiry and consideration of facts, rendering it erroneous and prejudicial to the Revenue.

The High Court emphasized that for the CIT to exercise revisional jurisdiction under Section 263, two conditions must be met: the order must be erroneous and prejudicial to the interests of the Revenue. The court found that the Assessing Officer's order met both conditions due to incorrect assumptions and lack of detailed inquiry. The court cited several judgments to support the principle that an order cannot be deemed erroneous merely because the CIT disagrees with it unless the view taken by the Assessing Officer is unsustainable in law.

Conclusion:
The High Court set aside the Tribunal's order and restored the CIT's order, concluding that the income derived from the manufacturing and sale of seeds, trading in imported seeds, and contract farming did not qualify as agricultural income exempt under Section 10(1) of the Income-tax Act. The court also upheld the CIT's exercise of revisional jurisdiction under Section 263, finding the Assessing Officer's order erroneous and prejudicial to the interests of the Revenue.

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