Income Tax Appellate Tribunal - Pune
Ajeet Seeds Ltd.,, Aurangabad vs Department Of Income Tax on 21 March, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
Before Shri Shailendra Kumar Yadav, Judicial Member,
and Shri G.S.Pannu, Accountant Member.
ITA.No.109 to 115/PN/2012
(Asstt. Year : 2002-03 to 2008-09)
ACIT, Central Circle,
Aurangabad. .. Appellant
Vs.
Ajeet Seeds Ltd.,
2nd Floor, Tapadiya Terraces,
Adalat Road,
Aurangabad. .. Respondent
Assessee by : Shri Sunil Ganoo
Department by : Shri Mukesh Verma
Date of Hearing : 21.03.2013
Date of Pronouncement : 22.03.2013
ORDER
PER SHAILENDRA KUMAR YADAV, JM:
All these appeals pertain to the same assessee on similar issues and also arising from the consolidated order of the CIT(A). So these are being disposed off by a common order for the sake of convenience.
2. In the A.Y. 2002-03 the Revenue has raised the following grounds:
1 On the facts and in the circumstances of the case, the learned CIT(A) erred in admitting the grounds of appeal of the assessee in respect of additions which were made on agreed basis i.e. additions/disallowance conceded by the assessee during assessment proceedings.
2 On the facts and in the circumstances of the case, the learned CIT(A) erred in holding that the Hon'ble Bombay High court has not laid down that appeal against addition of surrendered amount is per se incompetent, in the case of Ramchandra & Company Vs CIT(1987)168 ITR 375.2
3 On the facts and in the circumstances of the case, the learned CIT(A) has erred in allowing relief on the issues related to the disallowance/addition in respect of excessive payment for purchase of seeds from directors u/s. 40A(2)(b), disallowance of live stock expenses and treating of agricultural income in respect of sale breeder and foundation seeds as non agricultural income on the ground that such additions were conceded by the assessee due to misconception and misunderstanding of law and fact.
4 On the facts and in the circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs.10,14,138/- on account of sale of breeder and foundation seeds, as non agricultural income.
5 On the facts and in the circumstances of the case, the learned CIT(A) erred in relying on the ratio of the decision of the Hon'ble IT.AT. Bangalore in the case of Advante India Ltd. Vs D.C.I.T. [2010] 5 ITR 57 (Bangalore Tribunal), which is distinguishable on the facts of the case.
6 On the facts and in the circumstances of the case, the learned CIT(A) erred in treating sale of breeder & foundation seeds as agricultural income in contrary to the finding of the Hon'ble ITAT, Hyderabad in the case Vibha Agrotech Ltd vs. ITO [120 ITD 182].
7 On the facts and in the circumstances of the case, the learned CIT(A) erred in deleting the addition of 8,56,883/- made under section 40A(2)(b) of the Act without appreciating the fact that the payments made to the Directors for procurement of seeds was unreasonable.
8 On the facts and in the circumstances of the case, the learned CIT(A) erred in deleting the addition made of'4,50,000/- on account of disallowance of interest under section 36(1)(iii) of the Act to the extent of advance given without charging of interest thereby relying upon wrong facts that the company to whom advance was given was a BIFR company.
9 On the facts and in the circumstances of the case, the learned CIT(A) erred in deleting the addition made of Rs.13,54,916/- on account of shortage of agricultural expenses added by Assessing Officer as unexplained expenditure.
3. Brief facts of the case are that the assessee is a company engaged in the business of processing and growing of various seeds. A search & seizure action u/s. 132 of the Act has been conducted in the case of the assessee on 10.10.2007. The assessee has filed returns of income in response to notices 3 u/s.153A of the Act. The details of income returned, additions made and income assessed by the Assessing Officer u/s.143(3) r.w.s. 153A are as under:
Particulars A.Y. A.Y. A.Y. A.Y. A.Y. A.Y. A.Y. 02-03 03;04 04-05 05-06 06-07 07-08 08-09 Income returned (-) (-) 373450 12917672 (-) (-) (-) 22808624 9732222 31728474 26807733 16497279 Additions U/s 40A(3) cash 4064 17869 39237 45491 69054 113066 225775 payments U/s 40A(2)(b) 856883 716263 626933 579990 345442 772229 826388 payment to Directors Disallowance of 30343 29310 33319 21224 26642 7679 live stock expenses Disallowance of 506005 146199 424950 82608 14064 - depreciation on agricultural implements Income from sale 12303 20506 14188 11850 16947 2426 13838 of milk Profit on sale of 1014138 3325158 1111945 553070 553166 970272 779837 breeder and foundation seeds Disallowance of 450000 450000 450000 450000 450000 450000 450000 interest u/s 36(1)(iii) Agricultural 1354916 428843 660226 - - -
expenses
estimated at
higher figure by
the A.O.
Disallowance of - 5375000 - - -
technical
knowhow being
capital exp.
Disallowance of - 9250 - - -
donation
Agricultural exp. - 3017478 - -
disallowed
irregular
assessment u/s
143{3) dated
23/03/06
Commission - 540000 - -
being capital
expenditure
disallowed in
regular
assessment u/s
143(3) dated
23/03/06
Expenditure - 80770 - -
pertaining to
preceding year
disallowed in
regular
assessment u/s
143(3) dated
23/03/06
Income from sale - - 2699190 - - - -
of breeder & -
foundation seeds
as per order u/s
143(3)
dtd.31/03/06
Unrecorded/ - - - 672486 - 218968
unexplained
expenditure
Unexplained cash - - - - - - 340207
4
Discrepancy in - - - - - - 5581000
stock
Total addition 4228652 14156646 6065988 2417319 1475315 2534640 8217045
Loss of earlier 4424424 6439438 7716110 - - -
year adjusted
Assessed income (-) (-) (-) (-)
18579972 Nil Nil 7618880 30253159 24273093 8280234
3.1. Aggrieved by the same, appeals were preferred before the CIT(A) on all issues. In appeal, the CIT(A) observed that the Assessing Officer has made addition on 17 accounts as detailed in the above tabular chart while assessing the income of the assessee for the years under consideration. The substantial additions on various accounts were fairly accepted by the assessee and it had contested addition on 5 accounts only as mentioned in Grounds of appeal, as under:
A.Y. 2002-03 to 2008-09
1. Learned Deputy Commissioner of Income Tax (DCIT) erred in treating excess payment u/s 40A(2)(b) to directors, the same shall be allowed.
AY 2002-03 Rs.856883/-
AY 2003-04 Rs.716263/-
AY 2004-05 Rs.626933/-
AY 2005-06 Rs.579990/-
AY 2006-07 Rs.345442/-
AY 2007-08 Rs.772229/-
AY 2008-09 Rs.826388/-
2. Live stock expenses are disallowed which shall be allowed as expenses since sale of milk expenses are disallowed treating the income as business profit.
AY 2002-03 Rs.30343/-
AY 2003-04 Rs.29310/-
AY 2004-05 Rs.33319/-
AY 2005-06 Rs.21224/-
AY 2006-07 Rs.26642/-
AY 2007-08 Rs. 7679/-
AY 2008-09 --
3. Learned AO has erred in considering the Agricultural income as Non Agricultural Income in respect of sale of breeder and foundation seeds.
AY 2002-03 Rs.1014138/-
AY 2003-04 Rs.3325158/-
AY 2004-05 Rs.2699190/-
AY 2005-06 Rs.553670/-
5
AY 2006-07 Rs.553166/-
AY 2007-08 Rs.470272/-
AY 2008-09 Rs.779837/-
4. Interest of Rs.450,000/- wrongly disallowed treating loan given to sister concern out of borrowed fund.
AY 2002-03 Rs.450000/-
AY 2003-04 Rs.450000/-
AY 2004-05 Rs.450000/-
AY 2005-06 Rs.450000/-
AY 2006-07 Rs.450000/-
AY 2007-08 Rs.450000/-
AY 2008-09 Rs.450000/-
5. Wrongly estimated Agricultural Expenses @ 35% instead of actual expenditure incurred by the company.
AY 2002-03 Rs.1354916/-
AY 2003-04 Rs. 428843/-
AY 2004-05 Rs. 666226/-
AY 2005-06 --
AY 2006-07 --
AY 2007-08 --
AY 2008-09 --
3.2. The CIT(A) observed from the assessment order that out of 5 additions contested in appeal, additions on 3 accounts were agreed during the assessment proceedings. However, assessee has contested the same as assessee was of the opinion that said additions were agreed under mistaken belief of fact and law and also due to misunderstanding. The assessee claimed that on fact of the case, he is entitled to contest the said 3 additions as well. The assessee raised following arguments in support of its contentions before the CIT(A) which are reproduced as under:
(1) It is settled law that if an admission or surrender made by an assessee is shown to have been impelled by mistaken belief or misunderstanding etc., the same cannot act as an estoppel.
This proposition of law is supported by the decision of Hon'ble Supreme Court in the case of Narayanan Vs. Gopal AIR 1960 SC 235.
(2) The admission made is only a piece of an evidence and cannot by itself be a cause of action. An amount cannot be assessed merely on admission. The worth of an admission has 6 to be considered alongwith other material and its effect depends to a large extent upon the circumstances in which it is made. No amount of admission contrary to law can create estoppel against law. These propositions of law are supported by the decisions in the cases of Asitkumar Ghosh Vs. CIT (1953) 24 ITR 576 (CaL), Mathuraprasad & Sons Vs. State of Punjab (1962) 13 STC 180 (SC).
(3) Even if an assessee shows income in his return the Income Tax Officer cannot assess it merely on that account and has to consider its taxability de hors the said admission. This proposition, of law is supported by the decisions in the cases of CIT Vs. Bharat General Insurance Co. Ltd. (1970) 81 ITR 303 (Delhi), Director of Inspection Vs. Pooranmall & Sons 1974 CTR 243 (SC) 96 ITR 390 (SC).
(4) In case of agreed addition under misapprehension/mistaken belief, it is not necessary to file rectification application before the A.O. u/s 154 for filing appeal against the said agreed addition. The Appellate Authority can dismiss the appeal on merits but not on the basis of agreed addition. This proposition of law is supported by the decision in the case of Chhatmal Agrawal Vs. CIT 1978 CTR 368 (P&H).
(5) The Managing Director of the company has not given any directions to the AR of the appellant for agreeing the additions made by the A.O. which are being contested in appeal and hence the appellant is entitled to contest the said additions in appeal. This proposition of law is supported by the decision of Hon'ble ITAT, Pune in the case of Agasti SSK Ltd. Vs. ACIT, Ahmednagar, ITA No.1144/PN/2007 dated 31/08/2009 - A.Y. 2004-05.
(6) The Hon'ble Bombay High Court in Ramchandra & Company Vs. CIT (1987) 168 ITR 375, on the peculiar facts of the case has held that the addition surrendered cannot be contested in appeal. In that case, the assessee traded in oil seeds and other items and maintained separate trading account with quantity tally. In one account there was discrepancy of 360 bags which the assessee was unable to reconcile. The Assessing Officer therefore added sale proceeds of 360 bags as unaccounted sales. Further, the assessee did not object to the said addition in the grounds of appeal nor did he approach the Assessing Officer with the plea that the addition needed rectification as the surrender was made under a mistaken belief of facts. At the hearing of appeal, no one appeared on behalf of the Assessing Officer and "taking advantage of this fact" the assessee raised additional ground objecting to the addition of surrendered amount.
73.3. The assessee has raised the said ground challenging the addition agreed under mistaken belief. Accordingly, the statement of facts and grounds of appeal were forwarded to the Assessing Officer for contesting the same on behalf of the Revenue if necessary. According to the CIT(A), the assessee has contested agreed additions on 3 accounts and has not contested agreed additions on 12 accounts as is evident from the tabular chart discussed above. The said additions are (i) u/s.40A(2)(b) for purchase of seeds from Directors and their relatives on estimate basis at 7% of the purchase cost, the addition as per assessee is against the provisions of Circular No.6P dated 6th July, 1968 (ii) disallowance of live stock expenses ignoring the fact that the live stock has also been used for producing milk, sale of which has been taxed by the Assessing Officer (iii) addition towards less agricultural expenses claimed i.e., addition of agricultural expenses to the extent the same is less than 35% of the gross agricultural income. In view of the facts of the case and various decisions relied by the appellant, the CIT(A) was of the considered view that the assessee is entitled to contest the additions on above three accounts which has been agreed under mistaken belief and misunderstanding of facts. This reasoned factual finding of the CIT(A) needs no interference from our side. We find that the Hon'ble Bombay High Court in the case of Ramchandra & Company vs. CIT (1987) 168 ITR 375 was not applicable to the facts of the assessee's case. The CIT(A) found that the additions were to be decided on merit and same could not be dismissed on technical grounds.
4. Ground No.1 for A.Ys. 2002-03 to 2008-09 is in respect of disallowance u/s.40A(2)(b) on account of alleged excessive payment to Directors. The Assessing Officer has made the addition vide para 7 of assessment order for A.Y. 2002-03, the same para has been reiterated in all the assessment years under appeal, which is extracted below:
8"The issue regarding excess payments to the Directors in terms of provisions of section 40A(2)(b) is discussed. As has been agreed in the individual case of Directors, which has been accepted to be non-agricultural income in the hands of Directors in individual capacity, the following payments are considered as excess payments and are added back. The year wise aggregate position that finds the following picture, on account of purchase of Seeds from the persons viz S/Shri Padmakar Mulay, Ranjeet Mulay, Smt.Lata Mulay, Sameer Padmakar Mulay, Smt. Rohini Ranjit Mulay and Smt.Rupali Mulay covered u/s 40A(2)(b) of the Income-tax Act, 1961. The excess payments are taken @ 7% of the purchases as agreed by the party present during the course of hearing of the aforesaid individual in whose cast such receipt/payments has been treated as income from other sources. The year wise aggregate payments made as under:
A.Y. Aggregate Amount paid 7% thereof
2002-03 1,22,41,187 8,56,833
2003-04 1,02,32,332 7,16,263
2004-05 89,56,190 6,26,933
2.005-06 82,85,565 5,79,990
2006-07 49,26,745 3,45,442
2007-08 1,00,31,837 7,72,229
2008-09 1,18,05,539 8,26,388
4.1. Accordingly additions were made for all above years by invoking provisions of section 40A(2)(b) of the Act. Matter was carried before the CIT(A) for all the years. Before the CIT(A), it was submitted on behalf of the assessee that in case of Directors of the company, the addition of 7% of the agricultural produce sold i.e. seeds sold to the appellant company has been agreed only to avoid protracted litigation and buy peace of mind. It was submitted on behalf of the assessee before the CIT(A) that he agreed due to misconception and misunderstanding of law. On merit, Ld. Authorised Representative contested before the CIT(A) in view of the provisions of section 40A(2)(b) and also explanatory notes on the provisions of the said section in CBDT Circular dated 6th July, 1968. The submissions of the assessee in support of Ground No.1 before the CIT(A) are extracted as under:
(i) The CBDT has interalia laid down in the explanatory notes on the previsions of sec. 40A(2) in the Circular No. 6P(LXXVI-66) OF 1968 DATED 6TH JULY, 1968 THAT, "The reasonableness of any expenditure is to be judged having regard to the fair market value of the goods, services or facilities for which the payment is made or legitimate needs of the business or profession or the 9 benefit derived by or accruing to, the taxpayer from expenditure. Such portion of the expenditure which, in the opinion of the ITO is excessive of unreasonable according to these criteria is to be disallowed in computing the profit of the business or procession.
It is further stated that "The ITO is expected to exercise his judgment in the reasonable and fair manner. It should be borne in mind That the provision is meant to check evasion of tax through excessive or unreasonable payment to relative and associate concerns and should not be applied in a manner will cause hardship in bona fide cases."
Learned A.O. has not given any cogent reason and not brought any supporting documentary evidence in support of his contention. The addition is made only on suspicious, assumption, presumption, doubt and surmises basis. Further, it is submitted that, the Hon'ble High Court of Punjab and Haryana in the case of Anupam Kumar reported in 299 ITR 179 has held that: "in absence of cogent material the assessing officer could not have presumed and made assessment and observed that it was a settle law that, SUSPICIOUS, however so strong, cannot take place of a legal proof quoting the judgment of Hon'ble Supreme Court in the case of Uma Charan Sing and Bor's 37 ITR 271. Thus, the learned A.O. is not justified to make the addition merely on surmises and conjectures".
Following the guide lines of the circular, recently the Hon'ble Jurisdictional Bombay High Court has deleted the addition u/s 40A(2) in the case of CIT vs Indo Saudi Services (Travel) P, Ltd. reported in (2009) 310 ITR 306 (Bom). The copy of the circular is enclosed herewith (Ann A - Pages 01 to 03).
(ii) Further, the Assessing Officer has not pointed out any specific defects in the books of account by which the provision of section 145 can invoke. Assessing Officer has not rejected books of the Appellant. Without invoking the provision of section 145 of the I.T. Act, the learned Assessing Officer is not having any jurisdiction to make any such addition to the return of income. Thus, additions made by the learned Assessing Officer, is not justified and hence the same may please be deleted.
(iii) Appellant relied upon the following decision.
1. The Hon'ble Supreme Court has observed in the case of CIT vs Gangadhar Banergee & Co. (P) Ltd. (1965) 57 ITR 176 (SC) that. "Though he object of the section is to prevent evasion of tax, the provision must be worked not from the stand point of tax collector but from that of a businessman.... The ITO must take an overall picture of the financial position of the business. He should put himself in the position of the prudent 10 businessman or the director of the company and deal with a sympathetic and objective approach."
2. The Hon'ble Jurisdictional Bombay High Court has held in the case of CIT vs Indo Saudi Services (Travel) P. Ltd. (2009) 310 (Bom), that: The sister concern was assessed to tax and assessment orders had been placed on the record. Under Board circular No.6-P dated July 6, 1968 no disallowance was to be made under section 40A(2) in respect to the payments made to the relatives and sister concern where there was no attempt to evade the tax.
3. Voltamp Transformers (P) Ltd. Vs CIT (1981) 129 ITR 105 Guj has observed that: Reasonableness is to be decided on the basis of fair market value of the goods, services or facilities. The reasonableness of any expenditure is to be seen from the viewpoint of the businessman and not from the viewpoint of the revenues authorities.
(iii) In view of the faces narrated above and in the circumstances of the case, and as there was no attempt to evade the tax and considering the principles laid down in the decision cited supra, justified and hence it is requested to your kind honour that the addition may please be deleted.
(iv) Further, both the assess i.e. company and the directors are in higher slab of taxation and therefore there is no reason to apply the provision of section 40A(2)(b).
4.2. The CIT(A) having considered the same, observed that for invoking the provisions of section 40A(2)(b), following conditions should be fulfilled.
(a) the fair market value of the goods, services or facilities for which the payment is made is less than the actual expenditure incurred.
(b) the payment has not been made for legitimate business needs of the assessee's business.
(c) the benefit derived by or accruing to the assessee from the said payment is not commensurate with the quantum of payment.
4.3. The CIT(A) on perusal of the assessment order noticed that the 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 11 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. In view of above legal and factual discussion, the CIT(A) observed that the addition made by the Assessing Officer u/s.40A(2)(b) is without bringing on record any evidence of fair market value of goods purchased by the assessee company and without proving that the purchase price paid is excessive. In view of this, additions were not justified. Accordingly, additions u/s.40A(2) amounting to Rs.85,68,883/-, Rs.7,16,263/-, Rs.6,26,933/-, Rs.5,79,990/-, Rs.3,45,442/-, Rs.7,72,229/- and Rs.8,26,388/- for A.Ys. 2002-03 to 2008-09 respectively, were rightly deleted. This factual and legal finding needs no interference from our side because the Assessing Officer has not established that fair market value of seeds purchased by assessee company was less than actual expenditure incurred. We up hold the same.
125. The next issue is with regard to disallowance of live stock expenses. The Assessing Officer has disallowed the said expenses vide para 8 of the assessment order for A.Y. 2002-03. Same has been followed in other years, which is extracted as under:
"As regards Live Stock expenses, it is seen that live stock expenses are debited as business expenditure the income of which is exempt. As such, relevant expenses debited are not allowable as business expenditure. The position in this regard for all the year being similar to that for A.Y. 2003-04, 2004-05 following disallowance being live stock expenses treated as non business expenses is made to which the party present agreed.
Assessment Year Expenses debited
2002-03 Rs.30,343/-
2003-04 Rs.29,310/-
2004-05 Rs.33,319/-
2005-06 Rs.21,224/-
2006-07 Rs.26,642/-
2007-08 Rs.7,679/-
2008-09 Rs.Nil
Accordingly, addition year wise as above is made to which the party present agreed."
5.1. Matter was carried before the First Appellate Authority, wherein it was submitted that above said addition was agreed only to avoid protracted litigation and to buy peace. The addition was agreed due to misconception or misunderstanding of law and facts could be contested. The Ld. Authorised Representative pointed out that the Assessing Officer has taxed receipt from sale of milk as taxable income and has disallowed the expenses incurred for live stock stating that the same is in respect of exempt income which is not justified on part of the Assessing Officer. Accordingly same needs to be corrected. The assessee also submitted before the CIT(A) as under:
"(i) The company is maintaining live stock for the purpose of Agricultural activities and also have some milking live stock (Buffalos and Cows). The learned Assessing Officer has disallowed entire live stock expenses and also disallowed the sale of milk considering it as a business income. It is prayed that, the live stock expenses are partly for agricultural 13 activities and partly for milk selling activities. Hence, 50% of the same shall be treated as for commercial activities and 50% for agricultural activities or alternatively the sale of milk shall be treated as agricultural income.
In view of the above facts and circumstances of the case, it is requested that, the addition made by the A.O. may kindly be deleted."
5.2. The CIT(A) having observed that the 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). This factual finding needs no interference from our side. We uphold the same because once income on sale of milk has been taxed, corresponding expenses thereof have to be allowed, as done by the CIT(A). We uphold the same.
6. The next issue for A.Ys. 2002-03 to 2008-09 is in respect of addition on account of treating agricultural income in respect of sale of breeder and foundation seeds as non-agricultural income. The Assessing Officer has made the said addition vide para 11 of the assessment order for A.Y. 2002-03. Same has been followed in subsequent years. The Assessing Officer has raised following contentions for treating agricultural income in respect of sale of breeder and foundation seeds as non-agricultural income:
14(1) The issue as to whether the sale of breeder and foundation seeds results into agricultural income or non-
agricultural income has been elaborately discussed in the assessment order u/s 143(3) dated 29/03/2006 and. 31/03/2006 for A.Y.2003-04 & 2004-05 respectively. The assessee has not filed appeal against the addition made in the said order.
(2) The decision of CIT(Appeals), Aurangabad in the case of Shri Sudhakar Mulay vide order dated 30/07/2007 has not upheld the AO's action; further the CIT, Aurangabad has not accepted the AO's action vide order u/s 264 in the case of Shri P.H. Mulay dated 15/03/2007, Shri Ranjeet P. Malay dated 20/03/2007 and also in the case of Shri Sachin M, Mulay. The contention of the appellant that the department has accepted the issue decided by the CIT in favour of the appellant and hence no addition should be made cannot be accepted as each assessment is a separate and independent proceedings.
(3) The agricultural income as per section 2(lA)(b) of the Act means any income derived from agricultural land by agriculture for the performance by cultivator or receiver of rent in kind of any process ordinarily employed by a cultivator or receiver. The process of developing or growing seeds ready for the purpose of cultivation cannot be considered as a process ordinarily employed by fullest stretch of imagination.
(4) The breeder seed is to be produced under strict supervision of scientist and technical persons themselves. The foundation seed is to be produced under strict supervision of scientist and technical persons in order to maintain specific, generic, purity and identity. The breeder seeds and foundation seeds are required only by Seed Company and not products which are sold ordinarily. The assessee has also grown certified seeds at its farms which does not require specialized process which are basically the seeds required by the farmers for crops. The A.O, has, therefore, disallowed 40% of the net income derived from the sale of breeder and foundation seeds treating the same as non-agricultural commercial income The A.O. has worked out the said disallowance as under -
A.Y. Sale of Expenses Net Income 40% of
Breeder & @ 1/3rd Col.4
Foundation
Seed
1 2 3 4 5
2002-03 37,88,017 12,62,672 25,25,345 10,14,138
2005-06 20,76,262 6,92,088 13,64,176 5,53,670
2006-07 20,74,372 6,91,457 13,82,915 5,53,166
2007-08 36,38,518 12,12,839 24,25,679 9,70,272
2008-09 32,39,387 10,79,795 21,59,592 7,79,837
15
6.1. Matter was carried before the First Appellate Authority wherein it was submitted that the Assessing Officer was not justified in making addition. The submissions of assessee made before the CIT(A) are extracted as under:
"Where contract of farming is engaged in the Business of Research in production and sale of hybrid seeds undertakes agricultural operations form the stage of sowing the seeds till harvesting the hybrid seeds in the land taken on lease for this purpose, is it his business. Can such income be treated as agricultural income? This issue came up before Tribunal in Advanta India Ltd. Vs. Dy.CIT (2010) 5 ITR (Tri) 37 (Bang). All the law has been laid down in CIT vs Raja Benoy Kumar Sahas Roy (1957) 32 ITR 422 466 (SC) was that basis and further operation should have been carried out in the land of the person, who has interest in such land. The income from such operation could be agricultural income in the hands of contract farmer, who has acquired leasehold interest on such land, which is sufficient for the purpose of requirement of ownership, so that assessee was eligible for exemption. It was so held following the decision in CIT vs Maddi Venkatasubbayya (1951) 20 ITR 151 (Mad). It was under these circumstances, the tribunal pointed out that the arguments of the Revenue that assessee following scientific method of international technology should loss the claim, were held to be "all the matters strange to the strict code of income-tax and are not relevant for the conclusion in this case."
6.2. The CIT(A) having considered the same, observed that foundation seeds, breeder hybrid seeds produced by the assessee himself results into agricultural income or non-agricultural income has been decided in favour of the assessee by the ITAT Bangalore Bench in the case of Advanta India Ltd. vs. DCIT (2010) 5 ITR 57 (Bang.Trib). In the said case, reasons pointed out by the Assessing Officer to deny the claim of exemption made by the assessee were that assessee was following international technology, marketing expertise, integrated scientific and commercial activity etc. The Tribunal in the case of Advanta India Ltd. (supra) held that all these reasons/matters were strange to the strict code of Income Tax Act. The ITAT, Bangalore Bench has concluded that foundation seeds or hybrid seeds produced in own land or lands taken on lease will be 16 the result of agricultural operations and the profits arising out of such activities shall be treated as agricultural income. In view of above, the CIT(A) was justified in following the decision of ITAT, Bangalore Bench, in favour of the assessee also following the case of Indo American Exports and Namdhari Seeds Pvt. Ltd. in their common order dated 14.07.2006 bearing ITA No.1040/Bang/2002 and ITA.No.3102/Bang/2004 wherein similar issue was in favour of assessee. Thus the CIT(A) following the ratio laid down in the case of Advanta India Ltd., Indo American Exports and Namdhari Seeds Pvt. Ltd. (supra) held that the Assessing Officer was not justified in treating agricultural income in respect of sale of breeder seeds and foundation seeds as non-agricultural income. Nothing contrary was brought to our knowledge on behalf of the Revenue. Under the facts and circumstances, the CIT(A) has rightly deleted the addition of Rs.10,14,138/-, Rs.33,25,158/-, Rs.26,99,190/-, Rs.5,53,670/-, Rs.5,53,166/-, Rs.4,70,272/-, Rs.7,79,837/- for A.Ys. 2002-03 to 2008-09, respectively. This factual and legal finding needs no interference from our side. We up hold the same.
7. The next issue pertains to A.Ys. 2002-03 to 2008-09 in respect of disallowance of interest u/s.36(1)(iii) on loan given to sister concern. The Assessing Officer has disallowed Rs.4,50,000/- in each year under appeal on account of interest free loan given to Vikrant Malleables Pvt. Ltd. The Assessing Officer has stated that the addition made in A.Ys. 2002-03 and 2004-05 in regular assessments already made prior to search are not contested by the assessee in appeal and the stand now taken to the effect that as Vikrant Malleables Pvt. Ltd. is under BIFR, interest could not be recovered from the said company was not found acceptable. Accordingly, additions were made in all these years which were appealed before the CIT(A) wherein certain contentions were raised. The submissions made before the CIT(A) are reproduced as under:
"The. learned A.O. has disallowed proportionate interest on loan given to Vikrant Malliable Pvt. Ltd. Assessee can not charge the interest to Vikrant Malliable Pvt. Ltd. As the same 17 company is declared sick by BIFR as per RBI instructions. Interest can not be charged to such unit, hence it is prayed that, proportionate interest payment disallowed shall be allowed in computing the income.
Further, the learned A.O, should have been noted that, real income should be tax considering facts and as the said concerned is BIFR there is no possibilities to recover even principle and interest too. Thus, said sum addition may please be deleted.
Further, it is significant to note here that the said funds were provided. from the own funds of the appellant company. The learned A.O. has not proved any nexus between the interest free advances made by the assessee to its sister concern and the borrowed funds. The Hon'ble Jurisdictional ITAT Pune in the case of Gandhi Bhandari & Co. vs ACIT (2003) 78 TTJ (Pune) 161 has held that: in the absence of anything to show nexus between the interest free advances made by the assessee to its sister concern and the borrowed funds were no justification for disallowances of interest free advances made by the assessee to its sister concern and the borrowed funds were no Justifications for disallowance of interest paid on borrowings.
In the light of the above, it is requested that, the disallowance made by the A.O. may kindly be deleted."
7.1. Having considered the submissions made on behalf of the assessee, the CIT(A) observed that in original assessment for A.Ys. 2002-03 and 2004-05, the assessee has not contested the said addition and hence the addition is justified in assessment for A.Ys. 2002-03 to 2008-09 u/s.143(3) r.w.s. 153A observed by the Assessing Officer. 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 18 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. Accordingly, the order of the CIT(A) on the issue is upheld.
8. The next issue is with regard to addition on account of estimation of agricultural expenses at 35% as against actual expenses claimed by the assessee. The Assessing Officer has made addition vide para 13 of the assessment order for A.Y. 2002-03. The Assessing Officer has made similar addition in A.Ys. 2003-04 and 2004-05 by reiterating the same para of the assessment order for A.Y. 2002-03. For sake of convenience the said para is reproduced as under:
"On going through the details of agricultural income it is noticed that for the A.Y. 2002-03 to 2004-05 the assessee has debited expenses which are not fully supported. Besides, the expenses debited are found less of 35% of agricultural expenses which is the normal % (percentage) of expenses for agricultural activities. After discussion, the party present has agreed for addition of the amount by which the expenses debited falls short of 35% of the receipts, being unexplained expenditure. The year wise picture thereof is as under:19
A.Y. Agricultural 35% Amount Difference Receipt debited shown in books 1 2 3 4 5 2002-03 1,88,09,997 65,83,429 52,28,500 13,54,916 2003-04 1,50,22,106 52,57,737 48,28,494 4,28,843 2004-05 1,47,41,890 51,59,661 44,93,435 66,66,226 2005-06 91,51,870 32,03,154 32,99,15 --
As the amount of expenses by the assessee itself for A.Y. 2005-06 to 2008-09 exceeds 35% of receipts, the aforesaid shortage for the A.Y. 2002-03 to 2004-05 are added back as unexplained expenditure to which the party present agreed."
8.1. The matter was carried before the First Appellate Authority and it was submitted on behalf of the assessee that the estimation of agricultural expenses at 35% resulted into reduction in agricultural income and hence the same has not resulted into any taxable income. It was also submitted that in view of huge losses, there is no possibility of declaring less agricultural expenditure particularly as the assessee has not made any unexplained investment. The addition has been agreed due to misconception/ misunderstanding of the provisions of the Income Tax Act and the addition made by the Assessing Officer was legally not justified. Hence, same could be contested in appeal. The submissions of the assessee before the CIT(A) in this regard are extracted below:
"The learned A.O. has estimated 35% as expenses on agricultural activities.
Sir, in this regard it is submitted that, there is no hard and fast rules for considering the expenses at 35% of sale proceeds. Expenses on agricultural produce depend on various items to be grown. Company is maintaining the books of account and actual expenses on agricultural activity is duly recorded in the books of accounts. Hence, expenses are less than 35% of agricultural income considered as unrecorded expenses was not justified and therefore, it is requested that the addition made may kindly be deleted.
Section 68 to 69 A are not mandatory provisions but they are discretionary, since words used are "may" and not "shall". At the instance of the select committee, the word "may" has been introduced in the place of "shall". The use of world "may" gives discretion to the Income tax Officer to consider all the 20 circumstances and to decide whether or not the amount in question is the income of the assessee. He cannot outright reject the explanation of the assessee, as not believable. For this proposition appellant rely upon the Jurisdictional Pune Tribunal's decisions in the case of J P Sethi vs ITO (1989) 33 TTJ (Pune.) 576 (Para 13)
2. It is held in the case of Lajwanti Sial vs CIT (1956) 30 ITR 228 (Nag) that: the explanation, prima facia, reasonable cannot be rejected on arbitrary ground or on mere suspension on or imaginary or irrelevant grounds.
3. The learned A.O. merely disbelieved the facts and. estimated expenses, though the appellant company has maintain record in this regard and the same is duly audited under the provision of section 44 AB of the IT. Act. The learned A.O, neither rejected the books of account and nor brought on records any evidence to show and prove that the appellant company has incurred more expenditure on agricultural activities and recorded less in the books of account. There is no such evidence brought on record. The addition is made purely on suspicious ground. It is settled 1aw that, such suspicious how to strong can not take place of a legal proof as held by Hon'ble Supreme court in the case of Uma Charan Sing and Bor's 37 ITR 271 cited supra."
8.2. The CIT(A) having considered the submissions made on behalf of the assessee, observed that the Assessing Officer has worked out addition without any evidence and without any basis for estimating agricultural expenses at 35%. The Assessing Officer has simply stated that the assessee has agreed for addition. Further the estimation of expenses at 35% has resulted in additional agricultural expenditure in A.Y. 2002-03, 2003-04 and 2004-05. However, in subsequent years, the actual expenditure claimed by the assessee is more than 35%. Further, this additional agricultural income estimated by the Assessing Officer resulted into reduction in agricultural income. This does not necessarily mean that the assessee has spent on the said additional agricultural expenses out of books. The assessee company has incurred huge losses and it is not likely that the assessee company could have incurred and suppressed agricultural expenses. The books of account of the assessee company were regularly maintained and duly audited. The Assessing Officer has not brought on record any evidence that 21 the assessee has incurred agricultural expenses which are not recorded in the books of account. Considering all the facts, the CIT(A) has rightly observed that the Assessing Officer was not justified in estimating agricultural expenses at 35% as against actual expenditure debited in audited books of accounts. Accordingly, the CIT(A) was justified in deleting the addition of Rs.13,54,916/-, Rs.4,28,843/- and Rs.6,66,226/- for the A.Ys. 2002-03, 2003-04 and 2004-05 respectively. This factual and legal finding needs no interference from our side because the Assessing Officer should not make additions on estimate basis without rejecting audited books of accounts maintained by assessee. We up hold the same.
9. In the result, all the appeals filed by the Revenue are dismissed.
Pronounced in the open court on this the 22nd day of March, 2013.
Sd/- Sd/-
( G.S.PANNU ) ( SHAILENDRA KUMAR YADAV )
ACCOUNTANT MEMBER JUDICIAL MEMBER
gsps
Pune, dated the 22nd March, 2013
Copy of the order is forwarded to:
1. The Assessee
2. The ACIT, Central Circle, Aurangabad.
3. The CIT(A), Aurangabad.
4. The CIT(Central), Nagpur.
5. The DR "A" Bench, Pune.
6. Guard File.
By Order //TRUE COPY// Private Secretary, Income Tax Appellate Tribunal, Pune.