Merely increasing/ reducing agriculture expenses/ income not result in taxable income

Merely increasing agriculture expenditure & reducing agriculture income will not result in income from other sources – ITAT

In a recent judgment, ITAT Bengaluru has held that increasing or decreasing of any agriculture expenditure is irrelevant if income of the assessee is solely agriculture in nature & merely by increasing agriculture expenditure & reducing the exempted agriculture income will not result in income from other sources automatically

ABCAUS Case Law Citation:
ABCAUS 4149 (2024) (07) ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) National Faceless Appeal Centre in confirming the action of the Assessing Officer (AO) in estimating the agricultural expenditure at a certain percentage of agricultural income.

The appellant assessee had been deriving income only from the source of agriculture and had been filing return of income regularly by declaring agricultural income in the past.

For the financial year under consideration, the assessee filed its return of income declaring interest income and agricultural income.

Thereafter the case had been selected for limited scrutiny under CASS to verify the ‘agricultural income’. During the course of assessment proceedings the assessee furnished a break-up of agricultural income derived in respect of different agricultural produce. The AO observed that the pepper sale formed the major chunk of the agricultural produce sold by the assessee, which was about 63% of the gross agricultural produce. Further the AO was of the opinion that as the expenditure shown by the assessee of the gross agricultural produce was very meagre and in the absence of any bills with regard to the expenditure incurred in connection with the agricultural activity.

The AO adopted 30% of the gross agricultural income as the expenditure in connection with the agricultural activity and accordingly computed assessee net agricultural income and the excess of expenditure was brought to tax as income from other sources and accordingly concluded the assessment under Section 143(3) of the Income Tax Act, 1961.

The CIT(A) confirmed the view taken by the AO and dismissed the appeal observing that the assessee could not explain why the cultivation expenses were low corresponding to the high Agricultural income.

The Tribunal observed that the assessee was holding a large area of agricultural land where the assessee was doing agriculture. The fact that only main source of Income of the assessee was from Agriculture activities also not disputed by the authorities below.

The Tribunal noted that as per Section 4(1) of the Act the charge of tax is on total income. Agriculture income is exempt u/s 10(1) of the Act which falls in Chapter III of the Act. Heading of the Chapter III is “Incomes which do not form part of total income”. Thus the item of Income specified in Section 10(1) of the Act or Chapter III of the Act would not be a part of total Income. There cannot be a charge of Tax u/s 4(1) of the Act on anything other than total income.

The Tribunal expressed surprise how by increasing the agriculture expenditure & reducing the Agriculture Income which are exempted u/s 10(1) of the Act would give rise to Total Income chargeable to tax u/s 4(1) of the Act under head “Income from Other Sources”.

The Tribunal opined that the question of increasing or decreasing of any agriculture expenditure may become irrelevant if income of the assessee is considered solely agriculture in nature & therefore merely by increasing the agriculture expenditure & reducing the exempted Agriculture income will not resulted in Income from other sources automatically unless the AO brought some material on record to show that the assessee earns any other income also.

The Tribunal observed that it is also well settled that the AO cannot “step into the shoes of an assessee”, or question or even sermons to his beleaguered assessees on the conduct of the business. This is more particularly so, when there is nothing in the enacted laws, that requires an assessee to conform to a particular set of business practices.

The Tribunal opined that merely on the basis of some estimation & assumption of the AO, increasing of Agriculture expenditure & consequently reducing the agriculture income will not automatically culminate in Income from Other Sources without any material being brought on record to show that agriculture expenses are not genuine or they are understated.

The Tribunal opined that the AO had merely acted on the basis of surmises and conjuncture in adopting the estimate of 30% of gross agriculture income as Expenditure in connection of agriculture activities without carrying out further verification.

Accordingly, the Tribunal set aside the order of the first appellate authority and directed the AO to delete the addition.

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