2022 (6) TMI 231 - AT - Income Tax

Disallowance of exemption u/s 10(1) - Admission of additional evidence - HELD THAT - Having admitted the said documents, the matter is restored to the file of the AO with the following directions - AO shall examine the case of the assessee de-novo in the light of these documents/ statements and any other documents , record etc and thereafter record a categorical finding whether the nature of the activities of the assessee are agricultural in nature and whether the assessee is entitled to claim deduction u/s 10(1A) of the Act or not . AO may exercise his power as conferred under the IT Act for examining and enforcing attendance of any person whether farmers, organizers or the officials of the company for the purpose of recording statements, etc. AO while deciding the issue shall follow principles of natural justice and afford opportunity of hearing to the assessee in accordance with law and permit the assessee to file any document or evidence to prove its case In the light of the above, the grounds raised by the revenue against the action of the CIT(A) in deleting the disallowance of exemption claimed by the assessee u/s 10(1) of the Act are treated as allowed for statistical purposes. Disallowance u/s 14A - HELD THAT - As submitted by the ld. DR that whether the nature of the business of the assessee is agricultural or not to be decided by the AO and, therefore, the outcome of the result will have bearing on the application of section 14A. Therefore, we remit the issue to the file of the AO with a direction to compute the disallowance u/s 14A based on the outcome of the nature of the business of the assessee. Thus, the ground raised by the assessee is treated as allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of exemption claimed under Section 10(1) of the Income Tax Act.
2. Disallowance of expenditure under Section 14A of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Exemption Claimed Under Section 10(1):

The appellant company, engaged in research, production, and sale of agricultural seeds, filed its return of income for AY 2012-13, claiming an exemption under Section 10(1) for agricultural income amounting to Rs. 50,94,74,053/-. The Assessing Officer (AO) disallowed this exemption, arguing that the company's activities were commercial rather than agricultural. The AO noted that the company engaged in scientific and technological processes to produce hybrid seeds, which involved agreements with farmers to carry out specialized tasks. The AO concluded that the company was not directly involved in agricultural activities but rather in the commercial production of seeds.

The CIT(A) deleted the disallowance made by the AO, following a previous ITAT decision in the assessee's favor for AY 2011-12. However, the Revenue appealed, arguing that the company did not lease land or conduct agricultural activities itself, but rather procured hybrid seeds from farmers.

The ITAT examined additional evidence submitted by the Revenue, including statements from farmers and organizers, which indicated that the farmers themselves bore the risks and rewards of cultivation, and the company merely provided inputs and purchased the seeds. The Tribunal found that the company did not lease land or engage in agricultural activities as claimed. The Tribunal admitted the additional evidence and remanded the case to the AO for a fresh examination of whether the company's activities were agricultural in nature and eligible for exemption under Section 10(1).

2. Disallowance of Expenditure Under Section 14A:

The AO disallowed an amount of Rs. 1,48,39,684/- under Section 14A read with Rule 8D, related to expenditure incurred in earning exempt income. The AO observed that the company had significant investments in equity shares of subsidiaries and associates, generating exempt dividend income. The AO was not satisfied with the company's explanation that no expenditure was incurred for earning this income.

The CIT(A) confirmed the disallowance. The assessee argued that there were sufficient funds available and that the interest-bearing funds were not used for investments generating exempt income. The Tribunal noted that the determination of whether the company's activities were agricultural would impact the Section 14A disallowance. Therefore, the Tribunal remanded this issue to the AO for fresh adjudication based on the outcome of the primary issue regarding the nature of the company's activities.

Conclusion:

The ITAT allowed the appeals for statistical purposes, directing the AO to re-examine the nature of the company's activities and the applicability of Section 10(1) exemption. Consequently, the AO was also directed to recompute the disallowance under Section 14A based on the findings regarding the nature of the company's business.