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2013 (11) TMI 894 - AT - Income TaxDisallowance u/s 40A(2) - Difference in purchase price - Held that - Assessing Officer has not brought on record any evidence that the fair market value of the seeds purchased by the assessee company was less than the actual expenditure incurred. The purchase of seeds was for legitimate business needs of the assessee. The excessive payment cannot be presumed and it has to be established by the Assessing Officer. The CBDT has issued Circular No.6P dated 6th July, 1968 wherein it has been laid down that the Income Tax Officer is expected to exercise his judgment in reasonable and fair manner. It should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and same should not be applied in a manner which will cause hardship in bonafide cases. In the case under appeal, it was noticed that the assessee has incurred huge losses in the years under appeal and has substantial carried forward losses of earlier years. In view of this fact, there could not be any possibility of evasion of tax by purchasing seeds from Directors of the company at excessive price. It was also noticed from the assessment order that the assessee has agreed for the addition u/s.40A(2). However, it was noticed that the addition has been agreed to due to misunderstanding/misconception of provisions of law and is against the clarification given by the CBDT vide Circular dated 6th July, 1968. In view of the above, the CIT(A) was justified in observing that the assessee is entitled to contest the addition - Decided against Revenue. Disallowance of live stock expenses - Held that - Assessing Officer has taxed receipt from sale of milk as income in all the years under consideration. The milk which has been sold has been produced by cows and buffalos i.e., live stock. The live stock expenses related to the income earned from sale of milk was allowable expenditure. The live stock have been used for both agricultural as well as dairy farming activities. Accordingly, the Authorised Representative requested 50% expenses for maintaining live stock to be allowed. The said contention of the Authorised Representative was accepted by the CIT(A) and the Assessing Officer was rightly directed to allow 50% of the live stock expenses disallowed by him. Accordingly, disallowance to the extent of Rs.15,172/-, Rs.14,655/-, Rs.16,659/-, Rs.10,612/-, Rs.13,321/-, Rs.3,840/- in A.Ys. 2002-03 to 2007-08 respectively were rightly deleted by the CIT(A) - Decided against Revenue. Sale of seeds - nature of income - Held that - foundation seeds or hybrid seeds produced in own land or lands taken on lease will be the result of agricultural operations and the profits arising out of such activities shall be treated as agricultural income. - Assessing Officer was not justified in treating agricultural income in respect of sale of breeder seeds and foundation seeds as non-agricultural income Exemption of agricultural income u/s 10 - contract farming - Assessee produce basic seeds in its own lands and hybrid seeds on the lands leased by it AO s objection are that the germplasm is generated out of scientific research and, therefore, it is not agricultural activity Held that - Simply because the basic seeds are not fit for human consumption, it cannot be said that the produce is not agricultural produce. The assessee procures germ plasm and sows in its own field, and carries on all agricultural operations and produces the basic seeds. The Basic Seeds so harvested are again put through agricultural operations intimately connected with leasehold land for finally bringing out the Hybrid Seeds. Only for the reason that the Basic Seeds are sown in leasehold land and the manpower required are arranged through contract farming, it does not mean that the operations carried out by the assessee are not agricultural operations. Assessee has carried out basic as well as secondary agricultural operations. Therefore, entire such income of the assessee is agricultural in nature - Decided against Revenue. Disallowance of interest u/s.36(1)(iii) - Loan given to sister concern - Held that - It could not be said that in the cases where appeal is not preferred against the order of the Assessing Officer, addition was correctly made. The assessee has pointed out that Vikrant Malleables Pvt. Ltd. is declared sick by BIFR as per RBI instructions and interest could not be charged to such unit and hence the principal itself is doubtful of recovery and there was no question of recovering interest. As per the provisions of section 153A, it is evident that assessee has to file return of income as per the applicable provisions of the Income Tax Act and as if the return is filed u/s.139 of the Act. It is nowhere stated that in the above provisions that the deduction u/s.24 to which assessee is entitled could not be claimed in the return to be filed in response to notice u/s.153A, which has not been allowed in the original assessment and which has not been contested in appeal. It is settled law that the provisions of the Income Tax Act and the machinery of the Income Tax Department is for assessing and taxing correct income of the assessee as per the provisions of the Act. In view of the above, the Assessing Officer was not justified in disallowing interest u/s.36(1)(iii) amounting to Rs.4,50,000/- in each year under appeal and he was rightly directed to delete the same in all these years. This factual and legal finding needs no interference from our side because Vikrant Malleables Pvt. Ltd. was undisputedly declared sick by BIFR as per RBI instructions, interest could not be charged on such units. Hence, principal itself was doubtful of recovery at relevant point of time. So there is no question of recovery of interest - Decided against Revenue.
Issues Involved:
1. Admission of grounds of appeal by CIT(A) for additions made on an agreed basis. 2. Treatment of agricultural income from the sale of breeder and foundation seeds. 3. Disallowance of excessive payments to directors under section 40A(2)(b). 4. Disallowance of live stock expenses. 5. Disallowance of interest under section 36(1)(iii) on loans to sister concerns. 6. Estimation of agricultural expenses at 35%. Detailed Analysis: 1. Admission of Grounds of Appeal by CIT(A) for Additions Made on an Agreed Basis: The Revenue contended that the CIT(A) erred in admitting the grounds of appeal for additions conceded by the assessee during assessment proceedings. The CIT(A) allowed the assessee to contest these additions, citing that the admissions were made under a mistaken belief of law and facts. The CIT(A) referenced various judicial precedents, including the Supreme Court's decision in Narayanan Vs. Gopal, which supports the notion that admissions made under mistaken belief cannot act as estoppel. The Tribunal upheld the CIT(A)'s decision, emphasizing that the additions should be decided on merit rather than technical grounds. 2. Treatment of Agricultural Income from the Sale of Breeder and Foundation Seeds: The Assessing Officer treated income from the sale of breeder and foundation seeds as non-agricultural income, arguing that the process involved was not ordinarily employed by cultivators. The CIT(A) disagreed, relying on the ITAT Bangalore's decision in Advanta India Ltd. vs. DCIT, which held that such income constitutes agricultural income if the seeds are produced on the assessee's land or leased land. The Tribunal upheld the CIT(A)'s decision, noting that the Assessing Officer failed to provide substantial evidence to classify the income as non-agricultural. 3. Disallowance of Excessive Payments to Directors under Section 40A(2)(b): The Assessing Officer disallowed payments to directors, deeming them excessive under section 40A(2)(b). The CIT(A) found that the Assessing Officer did not provide evidence that the payments exceeded the fair market value. The Tribunal supported the CIT(A)'s view, emphasizing that the Assessing Officer must establish that the fair market value of the goods or services was less than the actual expenditure incurred. The Tribunal also referenced the CBDT Circular No. 6P, which advises a fair and reasonable judgment in such matters. 4. Disallowance of Live Stock Expenses: The Assessing Officer disallowed live stock expenses, treating them as non-business expenses. The CIT(A) noted that the Assessing Officer taxed the income from the sale of milk but disallowed corresponding expenses, which was inconsistent. The Tribunal upheld the CIT(A)'s decision to allow 50% of the live stock expenses, recognizing that the expenses were partly for agricultural and partly for dairy farming activities. 5. Disallowance of Interest under Section 36(1)(iii) on Loans to Sister Concerns: The Assessing Officer disallowed interest on loans given to Vikrant Malleables Pvt. Ltd., a BIFR-declared sick company. The CIT(A) found that the disallowance was unjustified as the principal itself was doubtful of recovery, and interest could not be charged under RBI guidelines. The Tribunal upheld the CIT(A)'s decision, noting that the Assessing Officer did not establish a nexus between the interest-free advances and the borrowed funds. 6. Estimation of Agricultural Expenses at 35%: The Assessing Officer estimated agricultural expenses at 35% of receipts, resulting in additional agricultural expenditure. The CIT(A) observed that the estimation lacked evidence and was arbitrary. The Tribunal upheld the CIT(A)'s decision to delete the additions, emphasizing that the Assessing Officer should not make additions on an estimate basis without rejecting the audited books of accounts. Conclusion: The Tribunal dismissed all appeals filed by the Revenue, upholding the CIT(A)'s decisions on all contested issues. The Tribunal emphasized the need for substantial evidence and fair judgment in tax assessments, aligning with judicial precedents and CBDT guidelines.
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