2023 (11) TMI 790 - AT - Income Tax

Revision u/s 263 - Characterization of income - CIT asking the AO to treat the agricultural income as unexplained income of the assessee - HELD THAT - In view of the exercise undertaken by the AO we are compelled to hold that the AO has made sufficient and adequate enquiry on the sole issue under the purview of limited scrutiny and thereafter, accepted the claim of assessee regarding exemption of agricultural income. Thus, we are not in agreement with the conclusion drawn by the Ld. PCIT that the AO has allowed claim of assessee without making any inquiry or verification. On the other hand, as we have noted above the AO has taken a plausible and sustainable view after detailed examination and verification of claim of assessee earning exempt agricultural income therefore, the assessment order cannot be alleged as erroneous and prejudicial to the interest of revenue. Our conclusion gets supports from the judgment of Malabar Industries ltd Vs. CIT 2000 (2) TMI 882 - SUPREME COURT The ld counsel has relied on the order of Rakesh Kumar Vs. CIT 2018 (12) TMI 1718 - ITAT DELHI wherein, it was held that when the AO has raised specific question on the issue of verified required details then it cannot be said that the assessment order is erroneous and prejudicial to the interest of the revenue. In our considered opinion, in such a condition the conclusion drawn by the ld PCIT to set aside the assessment order is not correct and sustainable. Decided in favour of assessee.

Issues Involved:
1. Legality of the PCIT's order under Section 263 of the Income Tax Act, 1961.
2. Reliability of the contract farming agreement.
3. Alleged collusion between the assessee and Avyukta Industries Pvt Ltd.
4. Compliance with the show cause notice queries.
5. Existence and role of Avyukta Industries Pvt Ltd.
6. Direction to the AO for making additions without proper hearing.

Summary:

1. Legality of the PCIT's Order:
The assessee filed an appeal against the order of the PCIT, Noida, dated 25.03.2022 for AY 2017-18. The primary contention was that the PCIT's order under Section 263 of the Income Tax Act, 1961, was illegal. The PCIT had held that the contract farming agreement was unreliable, and the agreement between the assessee and Avyukta Industries Pvt Ltd was collusive. The Tribunal found that the AO had conducted sufficient and adequate inquiry into the assessee's claim of exempt agricultural income, and the assessment order was not erroneous or prejudicial to the interest of the revenue.

2. Reliability of the Contract Farming Agreement:
The PCIT questioned the reliability of the contract farming agreement, alleging it was neither registered nor notarized. The Tribunal, referencing the Supreme Court's judgment in CIT Vs. Poddar Cement Pvt. Ltd, held that there is no legal requirement for such agreements to be registered or notarized under the Income Tax Act. The agreement was acted upon by both parties, and the Tribunal found no basis to dispute it.

3. Alleged Collusion:
The PCIT alleged collusion between the assessee and Avyukta Industries Pvt Ltd, stating that the company was not engaged in agricultural activities and was struck off from the Registrar of Companies records. The Tribunal noted that the company was engaged in the purchase and marketing of agricultural produce, which was supported by the memorandum of association and audited balance sheet. The fact that the company was struck off after the assessment period was not relevant to the assessment year in question.

4. Compliance with Show Cause Notice Queries:
The PCIT claimed that the assessee failed to answer specific queries in the show cause notice. However, the Tribunal found that the assessee had complied with the directions by filing proper replies and supporting evidence. The AO had issued notices and received detailed responses from the assessee, including documentary evidence of agricultural income, tenancy agreements, and bank statements showing receipt of sale proceeds.

5. Existence and Role of Avyukta Industries Pvt Ltd:
The Tribunal addressed the PCIT's doubts about Avyukta Industries Pvt Ltd's existence and role. The company was engaged in the business of purchasing and marketing agricultural produce, and its activities were consistent with the assessee's claims. The Tribunal found that the PCIT's observations were incorrect and not based on evidence.

6. Direction to the AO for Making Additions:
The Tribunal held that the PCIT was wrong in directing the AO to make additions without giving the assessee a proper opportunity for a hearing and considering the material and evidence already furnished. The AO had made sufficient inquiries and accepted the assessee's claim after detailed examination and verification. The Tribunal concluded that the PCIT's order was not sustainable and set it aside, restoring the original assessment order.

Conclusion:
The appeal was allowed, and the revisionary order passed under Section 263 of the Income Tax Act was set aside. The Tribunal restored the limited scrutiny assessment order dated 04.07.2019 for AY 2017-18. The order was pronounced in the open court on 18/08/2023.

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