2016 (9) TMI 259 - AT - Income Tax

Taxing Agricultural Income as Income from other sources - Held that - It is a matter of record that the assessee is declaring agricultural income in the return of income filed with the Revenue year to year and the same was accepted by the Revenue in preceding years even under scrutiny assessments framed u/s 143(3) of the Act. The exemption from income-tax can be granted u/s 10(1) of the Act to the agricultural income earned by the assessee if the agricultural activities are actually carried out on the said land by the assessee during the assessment year as stipulated and mandated under Section 2(1A) of the Act to enable earning of agricultural income to fall within exemption as provided u/s 10(1) of the Act. One of the objects for exemption from income-tax is to encourage cultivation or actual utilization of land for agricultural purposes and hence if there is neither anything in its condition, nor anything in the evidence to indicate the intention of its owners or possessors so as to connect it with an agricultural purpose, the land could not be agricultural land . We are also fully aware that principles of res-judicata is not applicable to the income tax proceedings but principle of consistency is to be followed. In our considered view keeping in view the facts and circumstances of the case, this issue needs to be set aside and restored back to the file of the A.O. for denovo determination of the issue on merits Disallowance u/s. 14A - Held that - Keeping in view the peculiar facts and circumstances of the case, a reasonable disallowance is to be made as the assessee has explained and jsutify the expenses having regard to the accounts of the assessee as per mandate of Section 14A(2) of the Act and in our considered view, keeping in view totality of the circumstances surrounding the assessee case and explanation submitted by the assessee , interest of justice will be best served if disallowance u/s 14A of the Act with respect to indirect expenditure incurred by the assessee with regard to earning of exempt income is restricted to ₹ 2,500/- which in our considered view is reasonable disallowance in the instant case. We order accordingly.

Summary

Issues Involved:

1. Taxing Agricultural Income as "Income from other sources" - ? 1,40,600/-
2. Disallowance under Section 14A - ? 3,13,336/-

Issue-wise Detailed Analysis:

1. Taxing Agricultural Income as "Income from other sources" - ? 1,40,600/-

The assessee declared ? 1,40,600/- as agricultural income. The Assessing Officer (AO) requested details and proof of this income, but the assessee only provided land records (7/12 extracts) without evidence of agricultural produce sales or expenses. Consequently, the AO treated the income as "income from other sources." The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this decision, noting the absence of evidence of agricultural activities during the relevant year, despite prior acceptance of similar claims. The Tribunal observed that the assessee failed to produce relevant evidence for the year in question and emphasized that exemption under Section 10(1) of the Income Tax Act requires proof of actual agricultural activities as defined under Section 2(1A). Therefore, the Tribunal remanded the issue back to the AO for a fresh determination, allowing the assessee to present further evidence.

2. Disallowance under Section 14A - ? 3,13,336/-

The AO disallowed ? 3,13,336/- under Section 14A read with Rule 8D, including ? 2,93,929/- for interest expenses and ? 19,406/- as 0.5% of average investments. The assessee argued that sufficient own funds were available to cover the investments, citing the Bombay High Court decisions in Reliance Utilities and Power Ltd. and HDFC Bank Ltd. The Tribunal agreed, noting that the assessee's own capital exceeded the investments, thus presuming investments were made from own funds. Consequently, the interest disallowance of ? 2,93,929/- was deleted. Regarding the 0.5% disallowance, the assessee detailed expenses, arguing most were unrelated to earning exempt income. The Tribunal, considering the explanations, deemed a reasonable disallowance of ? 2,500/- appropriate, reducing the original disallowance.

Conclusion:

The Tribunal partly allowed the appeal, remanding the agricultural income issue for further examination and reducing the disallowance under Section 14A to ? 2,500/-. The order was pronounced in open court on 28th July, 2016.