2012 (11) TMI 280 - AT - Income Tax

Disallowance of Purchases Held that - Assessee has not maintained proper books of accounts for his business and his business expenditure are not supported by proper bills and vouchers. AO has considered the purchases as supported by documents and considered the entire sales for determining the income of the assessee. - Assessee submits that his books of accounts can be rejected and income may estimated at 6 to 8% on sales. It is well established fact that every business has associated with expenditure. The percentage of net profit may very from business to business. The real estate sector may have net profit percentage between 5% to 20%. Considering the assessee nature and size of business net profit of 15% would be appropriate and accordingly AO is directed to adopt 15% net profit on sales and compute the profit from business - this ground is allowed in favour of assessee. Disallowance of Expenses Held that - Every business has its own ratio of expenses associated with sales. As the assessee has not substantiated business expenditure even at the time of appellate proceedings, thereby restricted the disallowances of expenses to 30%. Sale of agricultural land - Agricultural incomes chargeable as Income from other sources Held that - Assessee has not furnished details such as proof of agricultural operations carried out, details of purchases and expenditure incurred for agricultural operations, details of sale bills etc. just because he hold agricultural land it cannot be assumed that he is earning agricultural income as declared by the assessee - considering the facts of the case, Assessing Officer is directed to disallow only Rs. 5 lakhs out of the agricultural income claimed by the assessee instead of Rs. 10 lakhs disallowed by the Assessing Officer - assessee s appeal is partly allowed. Disallowance of Expenses Held that - Rs. 7,34,654/- being 20% of Rs. 18,36,635/- which has been disallowed by the Assessing Officer on the ground that not even a single voucher in respect of this expenditure was produced before the Assessing Officer. CIT(A) Hyderabad ought to have confirmed the disallowance of Rs. 18,36,635/- grounds raised by the department is not sustainable - In the result, assessee s appeal is partly allowed and Revenue appeal is dismissed.

Summary

Issues Involved:
1. Addition of Rs. 3,45,58,029/- as cost of agricultural land.
2. Taxability of agricultural land under section 2(14) of the Income-tax Act, 1961.
3. Disallowance of development and other expenditures.
4. Treatment of agricultural income as income from other sources.
5. Partial relief allowed by CIT(A) and disallowance of Rs. 18,36,635/-.

Detailed Analysis:

1. Addition of Rs. 3,45,58,029/- as cost of agricultural land:
The assessee contested the addition of Rs. 3,45,58,029/- by the CIT(A), arguing that the agricultural land sold was excluded from the definition of a capital asset under section 2(14) of the Income-tax Act, 1961. The CIT(A) and Assessing Officer (AO) considered only three sale deeds totaling Rs. 4,07,000/- and disallowed the remaining purchases due to lack of supporting documents. The Tribunal acknowledged that in real estate transactions, it is common for sale and purchase to occur through General Power of Attorney (GPA) holders and that the actual consideration paid often differs from the registered value. The Tribunal concluded that it is incorrect to disallow all purchases while considering all sales as income. The Tribunal directed the AO to estimate the net profit at 15% on sales and compute the business profit accordingly.

2. Taxability of agricultural land under section 2(14) of the Income-tax Act, 1961:
The assessee claimed that the agricultural land sold was not a capital asset as per section 2(14) and hence exempt from capital gains tax. The Tribunal did not explicitly address this issue as the primary focus was on the disallowance of purchases and the estimation of net profit.

3. Disallowance of development and other expenditures:
The AO disallowed the development expenditure of Rs. 24,83,579/- and 50% of other business expenses, citing a lack of substantiation. The Tribunal recognized that every business incurs expenses and that the AO's approach of disallowing all expenditures was incorrect. The CIT(A) had restricted the disallowance to 30% of the expenses. The Tribunal upheld the necessity of business expenditures and directed the AO to estimate the net profit at 15% on sales, implicitly acknowledging the legitimacy of some expenses.

4. Treatment of agricultural income as income from other sources:
The AO disallowed Rs. 10,00,000/- out of the claimed agricultural income of Rs. 14,85,600/-, treating it as income from other sources based on an inspector's report indicating no agricultural operations. The Tribunal agreed with the AO and CIT(A) that merely holding agricultural land does not substantiate agricultural income. However, the Tribunal reduced the disallowance to Rs. 5,00,000/-, directing the AO to disallow only Rs. 5,00,000/- instead of Rs. 10,00,000/-.

5. Partial relief allowed by CIT(A) and disallowance of Rs. 18,36,635/-:
The Revenue appealed against the partial relief granted by the CIT(A), specifically the allowance of Rs. 7,34,654/- out of the disallowed Rs. 18,36,635/-. The Tribunal, having allowed the assessee's appeal on merits by directing an estimation of net profit at 15%, dismissed the Revenue's appeal as unsustainable.

Conclusion:
The assessee's appeal was partly allowed with the Tribunal directing the AO to estimate the net profit at 15% on sales and compute the business profit. The disallowance of Rs. 10,00,000/- from agricultural income was reduced to Rs. 5,00,000/-. The Revenue's appeal was dismissed. The order was pronounced in the open court on 8th June, 2012.