2015 (3) TMI 644 - AT - Income Tax

Long term capital gain - treatment to agriculture land - whether the assessee is liable to pay tax only on the capital gain earned on the sale of its agricultural land situated at village Kishora, Sonepat, Haryana, as the same being out of the purview of definition of capital asset as per Section 2(14)(iii)? - Held that - We find that the A.O. has relied upon the information dated 14.03.2013 of the District Town Planner, Sonepat and the learned CIT(A) has also referred their letter dated 16.05.2014 in this regard that village Kishora is within 8 kms. limits of Municipal Council, Sonepat. This information has been contradicted by the District Town Planner, Sonepat, vide its letter dated 30.12.2013 that village Kishora is more than 8 kms. from the Municipality, Sonepat (page 106). We thus find that the District Town Planner is not clear on their stand nor they have mentioned about the mode, either aerial or motorable road adopted for the measurement of the distance. We, therefore, in the interest of justice, set aside the matter to the file of the Assessing Officer to examine the veracity of these two letters, one issued by Tehsildar, Sonepat and the another by Council Engineer, Municipal Council, Sonepat, as well as the mode i.e. aerial or motorable road for calculation of the distance adopted by the District Town Planner, Sonepat, followed by the A.O. as well as learned CIT(A) and decide the issue afresh about the distance in view of notification dated 06.01.1994 as land in question has been sold during the period falling in the A.Y. 2010-11, and our observations, after affording opportunity of being heard to the assessee. - Decided in favour of assessee for statistical purposes. Disallowance of business expenses - AO disallowed the claim of the assessee on the basis that there were no business receipts - Held that - Genuine expenditure incurred in the business cannot be denied only on the basis that there was no business receipts. The further contention of the learned AR remained that similar expenditure was allowed to the assessee in the assessment years 2006-07 to 2008-09 while in the assessment year 2009-10, there was no interest expenditure claimed by the assessee company. In the present year under consideration, interest income has been declared and various expenditures under the different heads was claimed. The further contention of the learned AR remained that the business expenditure relates to business activities of the assessee and during the year, no such expenditure was found which was either capital or personal in nature and there is nothing personal in nature, once expenditure relates to the assessee company. It was also submitted that the assessee has declared not only business income from agricultural activities but also earned interests on the funds kept in the bank. We find that the AO has made disallowance merely on the basis that no business activities were carried during the year, without examining the nexus between those expenses and the purpose on which those were spent for. We thus set aside the matter to the file of the A.O. to examine the claim and dispose of the issue by passing a speaking order after hearing the assessee. - Decided in favour of assessee for statistical purposes. Disallowance of agricultural income - Held that - Issue raised needs fresh consideration also keeping in mind that the assessee has not claimed benefit of exemption of agricultural income and the affidavit of the farmer confirming that the land was on batai filed as additional evidence before the learned CIT(A) has remained to be examined. The Assessing Officer is thus directed to decide the issue afresh after verifying the above submission of the assessee as well as the affidavit filed before the learned CIT(A) and after affording opportunity of being heard to the assessee.- Decided in favour of assessee for statistical purposes. Treatment of interest income - income from other sources or business income - Held that - when interest income is part of assessee s business activities and regularly been assessed, the action of the A.O. in making assessment under the head income from other sources cannot be justified. We also find substance in the alternative contention of the learned AR that even otherwise interest income has to be assessed after deducting interest expenditure. We thus set aside the matter to the file of the Assessing Officer to verify the above claim of the assessee and decide the issue afresh, after affording opportunity of being heard to the assessee - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Legality of the first appellate order.
2. Taxability of capital gain on the sale of agricultural land.
3. Disallowance of business expenses.
4. Disallowance of agricultural income.
5. Treatment of interest income.

Issue-wise Detailed Analysis:

1. Legality of the First Appellate Order:
The assessee contended that the first appellate order was legally untenable on various grounds. The CIT(A) did not follow the predecessor's directions to the AO for specific inquiries regarding the motorable road distance of village Kishora from the municipal limits as per the 1994 notification. The appellant also argued that the Central Government could only intervene in state subjects like agriculture through notifications or laws passed by Parliament, and the CIT(A) failed to recognize this. Additionally, the appellant sought time to inspect the assessment records and obtain relevant documents, which was denied. The CIT(A) also disregarded the decision of the Punjab & Haryana High Court in CIT vs. Satinder Pal Singh and the ITAT Jaipur bench decision, both of which were relevant to the case.

2. Taxability of Capital Gain on the Sale of Agricultural Land:
The issue was whether the assessee was liable to pay tax on the capital gain from the sale of agricultural land, which was argued to be outside the definition of a capital asset under Section 2(14)(iii) of the Income-tax Act, 1961. The AO and CIT(A) held that the land was within 8 kilometers of the municipal limits based on aerial distance as per the Finance Act, 2013 amendment. However, the assessee argued that the distance should be measured by the approach road as per the 1994 notification. The Tribunal admitted additional evidence, including letters from the Tehsildar and Municipal Engineer, indicating the land was more than 8 kilometers from the municipal limits. The Tribunal set aside the matter to the AO to verify the distance and decide afresh.

3. Disallowance of Business Expenses:
The AO disallowed Rs. 36,62,426/- claimed as business expenses on the basis that there were no business receipts, and the CIT(A) upheld this without specific submissions from the assessee. The assessee argued that it was engaged in agricultural business and had consistently claimed similar expenses in previous years, which were accepted. The Tribunal found merit in the assessee's contention that genuine business expenses cannot be denied solely due to the absence of business receipts. The matter was set aside to the AO for re-examination and a speaking order.

4. Disallowance of Agricultural Income:
The AO disallowed Rs. 3,28,534/- claimed as agricultural income, doubting the genuineness of the claim. The assessee argued that it had consistently declared agricultural income in previous years, which was accepted by the AO, and provided an affidavit from the cultivator. The Tribunal found that the issue required fresh consideration, particularly the affidavit from the farmer and the fact that the assessee did not claim exemption for agricultural income. The matter was set aside to the AO for re-verification and a fresh decision.

5. Treatment of Interest Income:
The AO treated Rs. 44,35,304/- as "income from other sources" instead of business income, contrary to the past practice where the assessee's interest income was assessed as business income. The assessee argued that interest income was part of its business activities and should be assessed after deducting interest expenditure. The Tribunal agreed that the AO's deviation from past practice was unjustified and set aside the matter to the AO for re-verification and a fresh decision.

Conclusion:
The appeal of the assessee was allowed for statistical purposes, with the Tribunal setting aside various issues to the AO for fresh consideration and verification, ensuring that the assessee is afforded an opportunity of being heard. The decision was pronounced in the open court on 10th March 2015.