2021 (9) TMI 1093 - AT - Income Tax

Benefit of exemption claimed u/s 10(1) - Agricultural income - assessee is in the business of cultivation, production and marketing of hybrid seeds - HELD THAT - As in assessee s own case for assessment year 1998-99 to 2004-05 2011 (10) TMI 488 - KARNATAKA HIGH COURT had held that contract farming done by assessee cannot be treated as agricultural income and that assessee is not eligible to claim exemption under section 10(1) of the Act in respect of revenue generated from contract farming. Authorities below in the present facts of the case made categorical observation that assessee has not provided any details regarding about the revenue generated out of each streams of land. Admittedly, assessee still carries out the activities under the same 3 categories, as has been considered in the preceding assessment years by Hon ble High Court. The only income upheld by Hon ble High Court to be in the nature of business income in the preceding years, is the revenue generated from contract farming. Issue needs to be remanded to the Ld. AO for years under consideration for categorising the income earned by assessee under the 3 categories. For that assessee is directed to file the bifurcation of income generated from growing, processing and sale of seeds from owned and leased lands as well as contract lands. AO is then directed to disallow of the deduction claimed under section 10 (1) in respect of the income earned from growing, processing and sale of seeds from contract lands as per the observations of Hon ble Karnataka High Court (supra)in assessee s own case. Disallowance made under section 14A read with Rule 8D(iii) - no suo moto disallowance was made by the assessee towards earning of exempt income - HELD THAT - Disallowance under section 14A read with Rule 8D shall not exceed exempt income earned for the year. This principle is supported by the decision of Cheminvest Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT where it was clearly held that disallowance of expenditure u/s 14A shall not exceed exempt income earned for the year. Respectfully following the same we direct the Ld. AO to restrict the disallowance under section 14A read with rule 8D to the extent of dividend income earned by assessee during the year under consideration. Accordingly, this issue raised by assessee stands partly allowed.

Summary

Issues:
1. Disallowance of exemption claimed under section 10(1) of the Act.
2. Disallowance under section 14A read with Rule 8D of the Act.
3. Levying of Interest under sections 234B and 234D of the I.T. Act, 1961.

Issue 1: Disallowance of exemption claimed under section 10(1) of the Act:
The appellant contested the disallowance of exemption claimed under section 10(1) of the Act by the Assessing Officer and the Commissioner of Income tax (Appeals). The appellant argued that the exemption should be allowed as claimed and that the authorities erred in not following the binding directions of the High Court. The Tribunal noted that the appellant's revenue from contract farming was previously held as business income by the High Court. It directed the Assessing Officer to categorize the income earned by the appellant and disallow the deduction claimed under section 10(1) for income from contract lands, in line with the High Court's observations.

Issue 2: Disallowance under section 14A read with Rule 8D of the Act:
The appellant raised concerns regarding the disallowance made under section 14A read with Rule 8D of the Act. The Assessing Officer disallowed a percentage of the average value of investments in the hands of the assessee. The Commissioner of Income tax (Appeals) upheld this disallowance. The Tribunal observed that no suo moto disallowance was made by the assessee for earning exempt income and that no fresh investments yielding dividend income were made during the year. Following the principle that disallowance under section 14A should not exceed the exempt income earned during the year, the Tribunal directed the Assessing Officer to restrict the disallowance to the extent of dividend income earned by the assessee.

Issue 3: Levying of Interest under sections 234B and 234D of the I.T. Act, 1961:
The Assessing Officer had levied interest under sections 234B and 234D of the I.T. Act, 1961, which the appellant contended was erroneous and should be deleted. However, the Tribunal did not provide specific details on the outcome of this issue in the summarized judgment.

In conclusion, the Appellate Tribunal ITAT Bangalore partially allowed the appeals filed by the assessee for the assessment years under consideration. The Tribunal directed the Assessing Officer to recompute the disallowances under section 10(1) and restrict the disallowance under section 14A to the extent of dividend income earned by the assessee. The judgment highlighted the importance of following High Court directions and principles in determining deductions and disallowances under the Income Tax Act.