ACIT, Cen.Cir.Aurangabad, Aurangabad V. Ajeet Seeds Ltd., Aurangabad

ITA 109/PUN/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1982 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 2 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2002-2003
• Appeal Filed On: 20-01-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MUKESH VERMA
• Keywords: Unexplained expenditure; Business income; Depreciation; Business expenditure; Earning of tax free income; Proportionate interest; Cost of acquisition; Fair market value; Agreed addition; Capital expenditure
• Section: 40A(3); 143(3); 153A; 68; 69; 145; 132; 154

Judgement Text

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., 2 ND 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 F OR THE SAKE OF CONVENIENCE. 2. IN THE A.Y. 2002-03 THE REVENUE HAS RAISED THE F OLLOWING GROUNDS: 1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, T HE 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, T HE 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 RAMCHA NDRA & COMPANY VS CIT(1987)168 ITR 375. 2 3 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, 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), DI SALLOWANCE OF LIVE STOCK EXPENSES AND TREATING OF AGRICULTURAL IN COME 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.10,14,13 8/- 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 S EEDS AS AGRICULTURAL INCOME IN CONTRARY TO THE FINDING OF THE HON'BLE ITAT, HYDERABAD IN THE CASE VIBHA AGROTECH LTD VS. IT O [120 ITD 182]. 7 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, T HE 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 O F SEEDS WAS UNREASONABLE. 8 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, T HE LEARNED CIT(A) ERRED IN DELETING THE ADDITION MADE OF'4,50,00 0/- 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 T O WHOM ADVANCE WAS GIVEN WAS A BIFR COMPANY. 9 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, T HE LEARNED CIT(A) ERRED IN DELETING THE ADDITION MADE OF RS.13,5 4,916/- 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 O F VARIOUS SEEDS. A SEARCH & SEIZURE ACTION U/S. 132 OF THE AC T 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. 02-03 A.Y. 03 ; 04 A.Y. 04-05 A.Y. 05-06 A.Y. 06-07 A.Y. 07-08 A.Y. 08-09 INCOME RETURNED (- ) 22808624 (- ) 9732222 373450 12917672 (- ) 31728474 (- ) 26807733 (- ) 16497279 ADDITIONS U/S 40A(3) CASH PAYMENTS 4064 17869 39237 45491 69054 113066 225775 U/S 40A(2)(B) PAYMENT TO DIRECTORS 856883 716263 626933 579990 345442 772229 826388 DISALLOWANCE OF LIVE STOCK EXPENSES 30343 29310 33319 21224 26642 7679 DISALLOWANCE OF DEPRECIATION ON AGRICULTURAL IMPLEMENTS 506005 146199 424950 82608 14064 - INCOME FROM SALE OF MILK 12303 20506 14188 11850 16947 2426 13838 PROFIT ON SALE OF BREEDER AND FOUNDATION SEEDS 1014138 3325158 1111945 553070 553166 970272 779837 DISALLOWANCE OF INTEREST U/S 36(1)(III) 450000 450000 450000 450000 450000 450000 450000 AGRICULTURAL EXPENSES ESTIMATED AT HIGHER FIGURE BY THE A.O. 1354916 428843 660226 - - - DISALLOWANCE OF TECHNICAL KNOWHOW BEING CAPITAL EXP. - 5375000 - - - DISALLOWANCE OF DONATION - 9250 - - - AGRICULTURAL EXP. DISALLOWED IRREGULAR ASSESSMENT U/S 143{3) DATED 23/03/06 - 3017478 - - COMMISSION BEING CAPITAL EXPENDITURE DISALLOWED IN REGULAR ASSESSMENT U/S 143(3) DATED 23/03/06 - 540000 - - EXPENDITURE PERTAINING TO PRECEDING YEAR DISALLOWED IN REGULAR ASSESSMENT U/S 143(3) DATED 23/03/06 - 80770 - - INCOME FROM SALE OF BREEDER & - FOUNDATION SEEDS AS PER ORDER U/S 143(3) DTD.31/03/06 - - 2699190 - - - - UNRECORDED/ UNEXPLAINED EXPENDITURE - - - 672486 - 218968 UNEXPLAINED CASH - - - - - - 340207 4 DISCREPANCY IN STOCK - - - - - - 5581000 TOTAL ADDITION 4228652 14156646 6065988 2417319 1475315 2534640 8217045 LOSS OF EARLIER YEAR ADJUSTED 4424424 6439438 7716110 - - - 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) OBSERV ED 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 ASSESS EE 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) ER RED IN TREATING EXCESS PAYMENT U/S 40A(2)(B) TO DIRECTO RS, 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 B E ALLOWED AS EXPENSES SINCE SALE OF MILK EXPENSES ARE DISALLO WED 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 AGRICULT URAL INCOME AS NON AGRICULTURAL INCOME IN RESPECT OF SAL E 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 TREA TING 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% IN STEAD 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 ACCOU NTS WERE AGREED DURING THE ASSESSMENT PROCEEDINGS. HOWEVER, ASSESS EE HAS CONTESTED THE SAME AS ASSESSEE WAS OF THE OPINION T HAT 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 ADDI TIONS AS WELL. THE ASSESSEE RAISED FOLLOWING ARGUMENTS IN SUPPORT OF I TS CONTENTIONS BEFORE THE CIT(A) WHICH ARE REPRODUCED AS UNDER: (1) IT IS SETTLED LAW THAT IF AN ADMISSION OR SURRE NDER MADE BY AN ASSESSEE IS SHOWN TO HAVE BEEN IMPELLED BY MISTA KEN BELIEF OR MISUNDERSTANDING ETC., THE SAME CANNOT ACT AS AN ESTOPPEL. THIS PROPOSITION OF LAW IS SUPPORTED BY THE DECISIO N OF HON'BLE SUPREME COURT IN THE CASE OF NARAYANAN VS. GOPAL AI R 1960 SC 235. (2) THE ADMISSION MADE IS ONLY A PIECE OF AN EVIDEN CE AND CANNOT BY ITSELF BE A CAUSE OF ACTION. AN AMOUNT CA NNOT BE ASSESSED MERELY ON ADMISSION. THE WORTH OF AN ADMIS SION HAS 6 TO BE CONSIDERED ALONGWITH OTHER MATERIAL AND ITS E FFECT 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. S TATE 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 I N 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 NECESSAR Y TO FILE RECTIFICATION APPLICATION BEFORE THE A.O. U/S 154 F OR FILING APPEAL AGAINST THE SAID AGREED ADDITION. THE APPELL ATE AUTHORITY CAN DISMISS THE APPEAL ON MERITS BUT NOT ON THE BASIS OF AGREED ADDITION. THIS PROPOSITION OF LAW I S 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 GI VEN ANY DIRECTIONS TO THE AR OF THE APPELLANT FOR AGREEING THE ADDITIONS MADE BY THE A.O. WHICH ARE BEING CONTESTED IN APPEA L 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. V S. ACIT, AHMEDNAGAR, ITA NO.1144/PN/2007 DATED 31/08/2009 - A.Y. 2004-05. (6) THE HON'BLE BOMBAY HIGH COURT IN RAMCHANDRA & C OMPANY VS. CIT (1987) 168 ITR 375, ON THE PECULIAR FACTS O F THE CASE HAS HELD THAT THE ADDITION SURRENDERED CANNOT BE CO NTESTED IN APPEAL. IN THAT CASE, THE ASSESSEE TRADED IN OIL SE EDS 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 UNACCO UNTED SALES. FURTHER, THE ASSESSEE DID NOT OBJECT TO THE SAID ADDITION IN THE GROUNDS OF APPEAL NOR DID HE APPROACH THE AS SESSING OFFICER WITH THE PLEA THAT THE ADDITION NEEDED RECT IFICATION AS THE SURRENDER WAS MADE UNDER A MISTAKEN BELIEF OF F ACTS. AT THE HEARING OF APPEAL, NO ONE APPEARED ON BEHALF OF THE ASSESSING OFFICER AND 'TAKING ADVANTAGE OF THIS FAC T' THE ASSESSEE RAISED ADDITIONAL GROUND OBJECTING TO THE ADDITION OF SURRENDERED AMOUNT. 7 3.3. THE ASSESSEE HAS RAISED THE SAID GROUND CHALLE NGING THE ADDITION AGREED UNDER MISTAKEN BELIEF. ACCORDINGLY , THE STATEMENT OF FACTS AND GROUNDS OF APPEAL WERE FORWARDED TO TH E ASSESSING OFFICER FOR CONTESTING THE SAME ON BEHALF OF THE RE VENUE IF NECESSARY. ACCORDING TO THE CIT(A), THE ASSESSEE H AS CONTESTED AGREED ADDITIONS ON 3 ACCOUNTS AND HAS NOT CONTESTE D AGREED ADDITIONS ON 12 ACCOUNTS AS IS EVIDENT FROM THE TAB ULAR CHART DISCUSSED ABOVE. THE SAID ADDITIONS ARE (I) U/S.40 A(2)(B) FOR PURCHASE OF SEEDS FROM DIRECTORS AND THEIR RELATIVE S ON ESTIMATE BASIS AT 7% OF THE PURCHASE COST, THE ADDITION AS P ER ASSESSEE IS AGAINST THE PROVISIONS OF CIRCULAR NO.6P DATED 6 TH JULY, 1968 (II) DISALLOWANCE OF LIVE STOCK EXPENSES IGNORING THE FA CT THAT THE LIVE STOCK HAS ALSO BEEN USED FOR PRODUCING MILK, SALE O F WHICH HAS BEEN TAXED BY THE ASSESSING OFFICER (III) ADDITION TOWAR DS LESS AGRICULTURAL EXPENSES CLAIMED I.E., ADDITION OF AGRICULTURAL EXP ENSES TO THE EXTENT THE SAME IS LESS THAN 35% OF THE GROSS AGRIC ULTURAL INCOME. IN VIEW OF THE FACTS OF THE CASE AND VARIOUS DECISI ONS RELIED BY THE APPELLANT, THE CIT(A) WAS OF THE CONSIDERED VIEW TH AT THE ASSESSEE IS ENTITLED TO CONTEST THE ADDITIONS ON ABOVE THREE AC COUNTS WHICH HAS BEEN AGREED UNDER MISTAKEN BELIEF AND MISUNDERSTAND ING OF FACTS. THIS REASONED FACTUAL FINDING OF THE CIT(A) NEEDS N O INTERFERENCE FROM OUR SIDE. WE FIND THAT THE HON'BLE BOMBAY HIG H COURT IN THE CASE OF RAMCHANDRA & COMPANY VS. CIT (1987) 168 ITR 375 WAS NOT APPLICABLE TO THE FACTS OF THE ASSESSEES 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 R ESPECT OF DISALLOWANCE U/S.40A(2)(B) ON ACCOUNT OF ALLEGED EX CESSIVE PAYMENT TO DIRECTORS. THE ASSESSING OFFICER HAS MADE THE A DDITION VIDE PARA 7 OF ASSESSMENT ORDER FOR A.Y. 2002-03, THE SA ME PARA HAS BEEN REITERATED IN ALL THE ASSESSMENT YEARS UNDER A PPEAL, WHICH IS EXTRACTED BELOW: 8 THE ISSUE REGARDING EXCESS PAYMENTS TO THE DIRECTO RS IN TERMS OF PROVISIONS OF SECTION 40A(2)(B) IS DISCUSS ED. AS HAS BEEN AGREED IN THE INDIVIDUAL CASE OF DIRECTORS, WH ICH 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. T HE YEAR WISE AGGREGATE POSITION THAT FINDS THE FOLLOWING PI CTURE, ON ACCOUNT OF PURCHASE OF SEEDS FROM THE PERSONS VIZ S /SHRI PADMAKAR MULAY, RANJEET MULAY, SMT.LATA MULAY, SAME ER PADMAKAR MULAY, SMT. ROHINI RANJIT MULAY AND SMT.RU PALI 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 O F THE AFORESAID INDIVIDUAL IN WHOSE CAST SUCH RECEIPT/PAY MENTS HAS BEEN TREATED AS INCOME FROM OTHER SOURCES. THE YEAR WISE AGGREGATE PAYMENTS MADE AS UNDER: 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. BEFOR E 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 PRO DUCE SOLD I.E. SEEDS SOLD TO THE APPELLANT COMPANY HAS BEEN AGREED ONLY TO AVOID PROTRACTED LITIGATION AND BUY PEACE OF MIND. IT W AS SUBMITTED ON BEHALF OF THE ASSESSEE BEFORE THE CIT(A) THAT HE AG REED DUE TO MISCONCEPTION AND MISUNDERSTANDING OF LAW. ON MERI T, LD. AUTHORISED REPRESENTATIVE CONTESTED BEFORE THE CIT( A) IN VIEW OF THE PROVISIONS OF SECTION 40A(2)(B) AND ALSO EXPLANATOR Y NOTES ON THE PROVISIONS OF THE SAID SECTION IN CBDT CIRCULAR DAT ED 6 TH JULY, 1968. THE SUBMISSIONS OF THE ASSESSEE IN SUPPORT OF GROUN D NO.1 BEFORE THE CIT(A) ARE EXTRACTED AS UNDER: (I) THE CBDT HAS INTERALIA LAID DOWN IN THE EXPLANA TORY NOTES ON THE PREVISIONS OF SEC. 40A(2) IN THE CIRCULAR NO. 6P(LX XVI-66) OF 1968 DATED 6 TH JULY, 1968 THAT, 'THE REASONABLENESS OF ANY EXPENDITURE IS TO BE JUDGED HAVING REGARD TO THE FA IR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHIC H THE PAYMENT IS MADE OR LEGITIMATE NEEDS OF THE BUSINESS OR PROF ESSION OR THE A.Y. A GGREGATE AMOUNT PAID 7% THEREOF 2002 - 0 3 1,22,41,187 8 ,56,833 2003 - 04 1,02,32,332 7,1 6 ,263 2004 - 05 8 9,56,190 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 8,26,3 88 9 BENEFIT DERIVED BY OR ACCRUING TO, THE TAXPAYER FRO M EXPENDITURE. SUCH PORTION OF THE EXPENDITURE WHICH, IN THE OPINION OF THE ITO IS EXCESSIVE OF UNREASONABLE ACC ORDING TO THESE CRITERIA IS TO BE DISALLOWED IN COMPUTING THE PROFI T OF THE BUSINESS OR PROCESSION. IT IS FURTHER STATED THAT 'THE ITO IS EXPECTED TO E XERCISE HIS JUDGMENT IN THE REASONABLE AND FAIR MANNER. IT SHOU LD BE BORNE IN MIND THAT THE PROVISION IS MEANT TO CHECK EVASION OF TAX THROUGH EXCESSIVE OR UNREASONABLE PAYMENT TO RE LATIVE AND ASSOCIATE CONCERNS AND SHOULD NOT BE APPLIED IN A M ANNER WILL CAUSE HARDSHIP IN BONA FIDE CASES.' LEARNED A.O. HAS NOT GIVEN ANY COGENT REASON AND NO T BROUGHT ANY SUPPORTING DOCUMENTARY EVIDENCE IN SUPPORT OF H IS 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 PUN JAB AND HARYANA IN THE CASE OF ANUPAM KUMAR REPORTED IN 299 ITR 179 HAS HELD THAT: 'IN ABSENCE OF COGENT MATERIAL T HE ASSESSING OFFICER COULD NOT HAVE PRESUMED AND MADE ASSESSMENT AND OBSERVED THAT IT WAS A SETTLE LAW TH AT, 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 AD DITION U/S 40A(2) IN THE CASE OF CIT VS INDO SAUDI SERVICES (T RAVEL) P, LTD. REPORTED IN (2009) 310 ITR 306 (BOM). THE COPY OF T HE 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 T HE PROVISION OF SECTION 145 CAN INVOKE. ASSESSING OFFICER HAS NO T REJECTED BOOKS OF THE APPELLANT. WITHOUT INVOKING THE PROVI SION OF SECTION 145 OF THE I.T. ACT, THE LEARNED ASSESSING OFFICER IS NOT HAVING ANY JURISDICTION TO MAKE ANY SUCH ADDITION T O THE RETURN OF INCOME. THUS, ADDITIONS MADE BY THE LEARN ED ASSESSING OFFICER, IS NOT JUSTIFIED AND HENCE THE S AME MAY PLEASE BE DELETED. (III) APPELLANT RELIED UPON THE FOLLOWING DECISI ON. 1. THE HON'BLE SUPREME COURT HAS OBSERVED IN THE CA SE OF CIT VS GANGADHAR BANERGEE & CO. (P) LTD. (1965) 57 ITR 176 (SC) THAT. 'THOUGH HE OBJECT OF THE SECTION IS TO PREVEN T EVASION OF TAX, THE PROVISION MUST BE WORKED NOT FROM THE STAN D POINT OF TAX COLLECTOR BUT FROM THAT OF A BUSINESSMAN.... TH E ITO MUST TAKE AN OVERALL PICTURE OF THE FINANCIAL POSITION O F 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. UN DER BOARD CIRCULAR NO.6-P DATED JULY 6, 1968 NO DISALLOWANCE WAS TO BE MADE UNDER SECTION 40A(2) IN RESPECT TO THE PAYMENT S 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 FACI LITIES. THE REASONABLENESS OF ANY EXPENDITURE IS TO BE SEEN FRO M THE VIEWPOINT OF THE BUSINESSMAN AND NOT FROM THE VIEWP OINT OF THE REVENUES AUTHORITIES. (III) IN VIEW OF THE FACES NARRATED ABOVE AND IN TH E CIRCUMSTANCES OF THE CASE, AND AS THERE WAS NO ATTE MPT TO EVADE THE TAX AND CONSIDERING THE PRINCIPLES LAID D OWN 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 THEREF ORE THERE IS NO REASON TO APPLY THE PROVISION OF SECTION 40A( 2)(B). 4.2. THE CIT(A) HAVING CONSIDERED THE SAME, OBSERVE D THAT FOR INVOKING THE PROVISIONS OF SECTION 40A(2)(B), FOLLO WING CONDITIONS SHOULD BE FULFILLED. (A) THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FAC ILITIES FOR WHICH THE PAYMENT IS MADE IS LESS THAN THE ACTUAL E XPENDITURE INCURRED. (B) THE PAYMENT HAS NOT BEEN MADE FOR LEGITIMATE BUSINE SS NEEDS OF THE ASSESSEES BUSINESS. (C) THE BENEFIT DERIVED BY OR ACCRUING TO THE ASSESSEE FROM THE SAID PAYMENT IS NOT COMMENSURATE WITH THE QUANTUM O F PAYMENT. 4.3. THE CIT(A) ON PERUSAL OF THE ASSESSMENT ORDER NOTICED THAT THE ASSESSING OFFICER HAS NOT BROUGHT ON RECORD ANY EVI DENCE THAT THE FAIR MARKET VALUE OF THE SEEDS PURCHASED BY THE ASS ESSEE COMPANY WAS LESS THAN THE ACTUAL EXPENDITURE INCURRED. THE PURCHASE OF SEEDS WAS FOR LEGITIMATE BUSINESS NEEDS OF THE ASSE SSEE. THE 11 EXCESSIVE PAYMENT CANNOT BE PRESUMED AND IT HAS TO BE ESTABLISHED BY THE ASSESSING OFFICER. THE CBDT HAS ISSUED CIRC ULAR NO.6P DATED 6 TH 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 P ROVISION IS MEANT TO CHECK EVASION OF TAX THROUGH EXCESSIVE OR UNREAS ONABLE PAYMENTS TO RELATIVES AND ASSOCIATE CONCERNS AND SA ME SHOULD NOT BE APPLIED IN A MANNER WHICH WILL CAUSE HARDSHIP IN BONAFIDE CASES. IN THE CASE UNDER APPEAL, IT WAS NOTICED TH AT 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 E XCESSIVE PRICE. IT WAS ALSO NOTICED FROM THE ASSESSMENT ORDER THAT THE ASSESSEE HAS AGREED FOR THE ADDITION U/S.40A(2). HOWEVER, IT WA S 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 CI RCULAR DATED 6 TH JULY, 1968. IN VIEW OF THE ABOVE, THE CIT(A) WAS J USTIFIED 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 VALU E OF GOODS PURCHASED BY THE ASSESSEE COMPANY AND WITHOUT PROVI NG THAT THE PURCHASE PRICE PAID IS EXCESSIVE. IN VIEW OF THIS, ADDITIONS WERE NOT JUSTIFIED. ACCORDINGLY, ADDITIONS U/S.40A(2) AMOUN TING 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. THI S 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. 12 5. 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. 2002-0 3. SAME HAS BEEN FOLLOWED IN OTHER YEARS, WHICH IS EXTRACTED AS UNDER: AS REGARDS LIVE STOCK EXPENSES, IT IS SEEN THAT LI VE STOCK EXPENSES ARE DEBITED AS BUSINESS EXPENDITURE THE IN COME OF WHICH IS EXEMPT. AS SUCH, RELEVANT EXPENSES DEBITE D ARE NOT ALLOWABLE AS BUSINESS EXPENDITURE. THE POSITION IN THIS REGARD FOR ALL THE YEAR BEING SIMILAR TO THAT FOR A.Y. 200 3-04, 2004-05 FOLLOWING DISALLOWANCE BEING LIVE STOCK EXPENSES TR EATED AS NON BUSINESS EXPENSES IS MADE TO WHICH THE PARTY PRESEN T 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 W AS AGREED ONLY TO AVOID PROTRACTED LITIGATION AND TO BUY PEACE. T HE ADDITION WAS AGREED DUE TO MISCONCEPTION OR MISUNDERSTANDING OF LAW AND FACTS COULD BE CONTESTED. THE LD. AUTHORISED REPRESENTAT IVE POINTED OUT THAT THE ASSESSING OFFICER HAS TAXED RECEIPT FROM S ALE OF MILK AS TAXABLE INCOME AND HAS DISALLOWED THE EXPENSES INCU RRED FOR LIVE STOCK STATING THAT THE SAME IS IN RESPECT OF EXEMPT INCOME WHICH IS NOT JUSTIFIED ON PART OF THE ASSESSING OFFICER. A CCORDINGLY 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 DISA LLOWED THE SALE OF MILK CONSIDERING IT AS A BUSINESS INCOME. IT IS PRAYED THAT, THE LIVE STOCK EXPENSES ARE PARTLY FOR AGRICU LTURAL 13 ACTIVITIES AND PARTLY FOR MILK SELLING ACTIVITIES. HENCE, 50% OF THE SAME SHALL BE TREATED AS FOR COMMERCIAL ACTIVIT IES AND 50% FOR AGRICULTURAL ACTIVITIES OR ALTERNATIVELY THE SA LE 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 K INDLY BE DELETED. 5.2. THE CIT(A) HAVING OBSERVED THAT THE ASSESSING OFFICER HAS TAXED RECEIPT FROM SALE OF MILK AS INCOME IN ALL TH E YEARS UNDER CONSIDERATION. THE MILK WHICH HAS BEEN SOLD HAS BE EN PRODUCED BY COWS AND BUFFALOS I.E., LIVE STOCK. THE LIVE STOCK EXPENSES RELATED TO THE INCOME EARNED FROM SALE OF MILK WAS ALLOWABLE E XPENDITURE. THE LIVE STOCK HAVE BEEN USED FOR BOTH AGRICULTURAL AS WELL AS DAIRY FARMING ACTIVITIES. ACCORDINGLY, THE AUTHORISED RE PRESENTATIVE REQUESTED 50% EXPENSES FOR MAINTAINING LIVE STOCK T O BE ALLOWED. THE SAID CONTENTION OF THE AUTHORISED REPRESENTATIV E WAS ACCEPTED BY THE CIT(A) AND THE ASSESSING OFFICER WAS RIGHTLY DIRECTED TO ALLOW 50% OF THE LIVE STOCK EXPENSES DISALLOWED BY HIM. A CCORDINGLY, DISALLOWANCE TO THE EXTENT OF RS.15,172/-, RS.14,65 5/-, RS.16,659/-, RS.10,612/-, RS.13,321/-, RS.3,840/- I N 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 T AXED, 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 I N RESPECT OF ADDITION ON ACCOUNT OF TREATING AGRICULTURAL INCOME IN RESPECT OF SALE OF BREEDER AND FOUNDATION SEEDS AS NON-AGRICUL TURAL INCOME. THE ASSESSING OFFICER HAS MADE THE SAID ADDITION VI DE PARA 11 OF THE ASSESSMENT ORDER FOR A.Y. 2002-03. SAME HAS BE EN FOLLOWED IN SUBSEQUENT YEARS. THE ASSESSING OFFICER HAS RAISED FOLLOWING CONTENTIONS FOR TREATING AGRICULTURAL INCOME IN RES PECT OF SALE OF BREEDER AND FOUNDATION SEEDS AS NON-AGRICULTURAL IN COME: 14 (1) THE ISSUE AS TO WHETHER THE SALE OF BREEDER AND FOUNDATION SEEDS RESULTS INTO AGRICULTURAL INCOME O R 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 CAS E OF SHRI SUDHAKAR MULAY VIDE ORDER DATED 30/07/2007 HAS NOT UPHELD THE AO'S ACTION; FURTHER THE CIT, AURANG ABAD 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 C ASE OF SHRI SACHIN M, MULAY. THE CONTENTION OF THE APPE LLANT THAT THE DEPARTMENT HAS ACCEPTED THE ISSUE DECIDED BY THE CIT IN FAVOUR OF THE APPELLANT AND HENCE NO ADD ITION SHOULD BE MADE CANNOT BE ACCEPTED AS EACH ASSESSMEN T 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 RE CEIVER OF RENT IN KIND OF ANY PROCESS ORDINARILY EMPLOYED BY A CULTIVATOR OR RECEIVER. THE PROCESS OF DEVELOPING O R GROWING SEEDS READY FOR THE PURPOSE OF CULTIVATION CANNOT BE CONSIDERED AS A PROCESS ORDINARILY EMPLOYED BY F ULLEST 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 U NDER STRICT SUPERVISION OF SCIENTIST AND TECHNICAL PERSO NS IN ORDER TO MAINTAIN SPECIFIC, GENERIC, PURITY AND IDE NTITY. THE BREEDER SEEDS AND FOUNDATION SEEDS ARE REQUIRED ONLY BY SEED COMPANY AND NOT PRODUCTS WHICH ARE SOL D ORDINARILY. THE ASSESSEE HAS ALSO GROWN CERTIFIED S EEDS AT ITS FARMS WHICH DOES NOT REQUIRE SPECIALIZED PROCES S WHICH ARE BASICALLY THE SEEDS REQUIRED BY THE FARME RS FOR CROPS. THE A.O, HAS, THEREFORE, DISALLOWED 40% OF T HE NET INCOME DERIVED FROM THE SALE OF BREEDER AND FOUNDAT ION SEEDS TREATING THE SAME AS NON-AGRICULTURAL COMMERC IAL INCOME THE A.O. HAS WORKED OUT THE SAID DISALLOWANC E AS UNDER A.Y. SALE OF BREEDER & FOUNDATION SEED E XPENSES @ 1/3 RD NET INCOME 40% OF COL.4 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 A SSESSEE MADE BEFORE THE CIT(A) ARE EXTRACTED AS UNDER: 'WHERE CONTRACT OF FARMING IS ENGAGED IN THE BUSINE SS OF RESEARCH IN PRODUCTION AND SALE OF HYBRID SEEDS UND ERTAKES AGRICULTURAL OPERATIONS FORM THE STAGE OF SOWING TH E SEEDS TILL HARVESTING THE HYBRID SEEDS IN THE LAND TAKEN ON LE ASE FOR THIS PURPOSE, IS IT HIS BUSINESS. CAN SUCH INCOME BE TRE ATED AS AGRICULTURAL INCOME? THIS ISSUE CAME UP BEFORE TRIB UNAL 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 KUM AR SAHAS ROY (1957) 32 ITR 422 466 (SC) WAS THAT BASIS AND F URTHER OPERATION SHOULD HAVE BEEN CARRIED OUT IN THE LAND OF THE PERSON, WHO HAS INTEREST IN SUCH LAND. THE INCOME F ROM SUCH OPERATION COULD BE AGRICULTURAL INCOME IN THE HANDS OF CONTRACT FARMER, WHO HAS ACQUIRED LEASEHOLD INTERES T ON SUCH LAND, WHICH IS SUFFICIENT FOR THE PURPOSE OF REQUIR EMENT OF OWNERSHIP, SO THAT ASSESSEE WAS ELIGIBLE FOR EXEMPT ION. IT WAS SO HELD FOLLOWING THE DECISION IN CIT VS MADDI VENKATASUBBAYYA (1951) 20 ITR 151 (MAD). IT WAS UND ER THESE CIRCUMSTANCES, THE TRIBUNAL POINTED OUT THAT THE AR GUMENTS OF THE REVENUE THAT ASSESSEE FOLLOWING SCIENTIFIC METH OD OF INTERNATIONAL TECHNOLOGY SHOULD LOSS THE CLAIM, WER E HELD TO BE 'ALL THE MATTERS STRANGE TO THE STRICT CODE OF INCO ME-TAX AND ARE NOT RELEVANT FOR THE CONCLUSION IN THIS CASE.' 6.2. THE CIT(A) HAVING CONSIDERED THE SAME, OBSERVE D THAT FOUNDATION SEEDS, BREEDER HYBRID SEEDS PRODUCED BY THE ASSESSEE HIMSELF RESULTS INTO AGRICULTURAL INCOME OR NON-AGR ICULTURAL INCOME HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE I TAT BANGALORE BENCH IN THE CASE OF ADVANTA INDIA LTD. VS. DCIT (2 010) 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 TECHNOLOG Y, MARKETING EXPERTISE, INTEGRATED SCIENTIFIC AND COMMERCIAL ACT IVITY 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 FOUNDA TION SEEDS OR HYBRID SEEDS PRODUCED IN OWN LAND OR LANDS TAKEN ON LEASE WILL BE 16 THE RESULT OF AGRICULTURAL OPERATIONS AND THE PROFI TS ARISING OUT OF SUCH ACTIVITIES SHALL BE TREATED AS AGRICULTURAL IN COME. IN VIEW OF ABOVE, THE CIT(A) WAS JUSTIFIED IN FOLLOWING THE DE CISION OF ITAT, BANGALORE BENCH, IN FAVOUR OF THE ASSESSEE ALSO FOL LOWING THE CASE OF INDO AMERICAN EXPORTS AND NAMDHARI SEEDS PVT. LT D. IN THEIR COMMON ORDER DATED 14.07.2006 BEARING ITA NO.1040/B ANG/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 NA MDHARI SEEDS PVT. LTD. (SUPRA) HELD THAT THE ASSESSING OFFICER W AS NOT JUSTIFIED IN TREATING AGRICULTURAL INCOME IN RESPECT OF SALE OF BREEDER SEEDS AND FOUNDATION SEEDS AS NON-AGRICULTURAL INCOME. NOTHI NG CONTRARY WAS BROUGHT TO OUR KNOWLEDGE ON BEHALF OF THE REVENUE. UNDER THE FACTS AND CIRCUMSTANCES, THE CIT(A) HAS RIGHTLY DEL ETED 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.Y S. 2002-03 TO 2008-09, RESPECTIVELY. THIS FACTUAL AND LEGAL FIND ING 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 R EGULAR ASSESSMENTS ALREADY MADE PRIOR TO SEARCH ARE NOT CO NTESTED BY THE ASSESSEE IN APPEAL AND THE STAND NOW TAKEN TO THE E FFECT THAT AS VIKRANT MALLEABLES PVT. LTD. IS UNDER BIFR, INTERES T COULD NOT BE RECOVERED FROM THE SAID COMPANY WAS NOT FOUND ACCEP TABLE. ACCORDINGLY, ADDITIONS WERE MADE IN ALL THESE YEARS WHICH WERE APPEALED BEFORE THE CIT(A) WHEREIN CERTAIN CONTENTI ONS WERE RAISED. THE SUBMISSIONS MADE BEFORE THE CIT(A) ARE REPRODUC ED AS UNDER: 'THE. LEARNED A.O. HAS DISALLOWED PROPORTIONATE INT EREST 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 INSTRUC TIONS. INTEREST CAN NOT BE CHARGED TO SUCH UNIT, HENCE IT IS PRAYED THAT, PROPORTIONATE INTEREST PAYMENT DISALLOWED SHA LL BE ALLOWED IN COMPUTING THE INCOME. FURTHER, THE LEARNED A.O, SHOULD HAVE BEEN NOTED TH AT, REAL INCOME SHOULD BE TAX CONSIDERING FACTS AND AS THE S AID CONCERNED IS BIFR THERE IS NO POSSIBILITIES TO RECO VER EVEN PRINCIPLE AND INTEREST TOO. THUS, SAID SUM ADDITION MAY PLEASE BE DELETED. FURTHER, IT IS SIGNIFICANT TO NOTE HERE THAT THE SA ID FUNDS WERE PROVIDED. FROM THE OWN FUNDS OF THE APPELLANT COMPA NY. THE LEARNED A.O. HAS NOT PROVED ANY NEXUS BETWEEN THE I NTEREST FREE ADVANCES MADE BY THE ASSESSEE TO ITS SISTER CO NCERN 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 ANYTHIN G TO SHOW NEXUS BETWEEN THE INTEREST FREE ADVANCES MADE BY TH E ASSESSEE TO ITS SISTER CONCERN AND THE BORROWED FUN DS WERE NO JUSTIFICATION FOR DISALLOWANCES OF INTEREST FREE AD VANCES MADE BY THE ASSESSEE TO ITS SISTER CONCERN AND THE BORRO WED FUNDS WERE NO JUSTIFICATIONS FOR DISALLOWANCE OF INTEREST PAID ON BORROWINGS. IN THE LIGHT OF THE ABOVE, IT IS REQUESTED THAT, TH E DISALLOWANCE MADE BY THE A.O. MAY KINDLY BE DELETED.' 7.1. HAVING CONSIDERED THE SUBMISSIONS MADE ON BEHA LF OF THE ASSESSEE, THE CIT(A) OBSERVED THAT IN ORIGINAL ASSE SSMENT FOR A.YS. 2002-03 AND 2004-05, THE ASSESSEE HAS NOT CONTESTED THE SAID ADDITION AND HENCE THE ADDITION IS JUSTIFIED IN ASS ESSMENT 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 TH E CASES WHERE APPEAL IS NOT PREFERRED AGAINST THE ORDER OF THE AS SESSING OFFICER, ADDITION WAS CORRECTLY MADE. THE ASSESSEE HAS POIN TED OUT THAT VIKRANT MALLEABLES PVT. LTD. IS DECLARED SICK BY BI FR AS PER RBI INSTRUCTIONS AND INTEREST COULD NOT BE CHARGED TO S UCH UNIT AND HENCE THE PRINCIPAL ITSELF IS DOUBTFUL OF RECOVERY AND THERE WAS NO QUESTION OF RECOVERING INTEREST. AS PER THE PROVIS IONS OF SECTION 153A, IT IS EVIDENT THAT ASSESSEE HAS TO FILE RETUR N 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 ASSES SEE IS ENTITLED 18 COULD NOT BE CLAIMED IN THE RETURN TO BE FILED IN R ESPONSE TO NOTICE U/S.153A, WHICH HAS NOT BEEN ALLOWED IN THE ORIGINA L ASSESSMENT AND WHICH HAS NOT BEEN CONTESTED IN APPEAL. IT IS SETTLED LAW THAT THE PROVISIONS OF THE INCOME TAX ACT AND THE MACHIN ERY OF THE INCOME TAX DEPARTMENT IS FOR ASSESSING AND TAXING C ORRECT INCOME OF THE ASSESSEE AS PER THE PROVISIONS OF THE ACT. IN VIEW OF THE ABOVE, THE ASSESSING OFFICER WAS NOT JUSTIFIED IN D ISALLOWING INTEREST U/S.36(1)(III) AMOUNTING TO RS.4,50,000/- IN EACH Y EAR UNDER APPEAL AND HE WAS RIGHTLY DIRECTED TO DELETE THE SAME IN A LL THESE YEARS. THIS FACTUAL AND LEGAL FINDING NEEDS NO INTERFERENC E FROM OUR SIDE BECAUSE VIKRANT MALLEABLES PVT. LTD. WAS UNDISPUTED LY DECLARED SICK BY BIFR AS PER RBI INSTRUCTIONS, INTEREST COUL D NOT BE CHARGED ON SUCH UNITS. HENCE, PRINCIPAL ITSELF WAS DOUBTFU L 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 ACC OUNT OF ESTIMATION OF AGRICULTURAL EXPENSES AT 35% AS AGAIN ST ACTUAL EXPENSES CLAIMED BY THE ASSESSEE. THE ASSESSING OF FICER 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 ASS ESSMENT ORDER FOR A.Y. 2002-03. FOR SAKE OF CONVENIENCE THE SAID PARA IS REPRODUCED AS UNDER: ON GOING THROUGH THE DETAILS OF AGRICULTURAL INCOM E IT IS NOTICED THAT FOR THE A.Y. 2002-03 TO 2004-05 THE AS SESSEE HAS DEBITED EXPENSES WHICH ARE NOT FULLY SUPPORTED. BE SIDES, THE EXPENSES DEBITED ARE FOUND LESS OF 35% OF AGRICULTU RAL EXPENSES WHICH IS THE NORMAL % (PERCENTAGE) OF EXPE NSES FOR AGRICULTURAL ACTIVITIES. AFTER DISCUSSION, THE PAR TY PRESENT HAS AGREED FOR ADDITION OF THE AMOUNT BY WHICH THE EXPE NSES DEBITED FALLS SHORT OF 35% OF THE RECEIPTS, BEING U NEXPLAINED EXPENDITURE. THE YEAR WISE PICTURE THEREOF IS AS U NDER: 19 A.Y. AGRICULTURAL RECEIPT 35% AMOUNT DEBITED SHOWN IN BOOKS DIFFERENCE 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 F OR A.Y. 2005-06 TO 2008-09 EXCEEDS 35% OF RECEIPTS, THE AFO RESAID 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 APPELL ATE AUTHORITY AND IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT THE ESTIMATION OF AGRICULTURAL EXPENSES AT 35% RESULTED INTO REDUC TION IN AGRICULTURAL INCOME AND HENCE THE SAME HAS NOT RESU LTED INTO ANY TAXABLE INCOME. IT WAS ALSO SUBMITTED THAT IN VIEW OF HUGE LOSSES, THERE IS NO POSSIBILITY OF DECLARING LESS AGRICULTU RAL EXPENDITURE PARTICULARLY AS THE ASSESSEE HAS NOT MADE ANY UNEXP LAINED INVESTMENT. THE ADDITION HAS BEEN AGREED DUE TO MIS CONCEPTION/ MISUNDERSTANDING OF THE PROVISIONS OF THE INCOME TA X ACT AND THE ADDITION MADE BY THE ASSESSING OFFICER WAS LEGALLY NOT JUSTIFIED. HENCE, SAME COULD BE CONTESTED IN APPEAL. THE SUBM ISSIONS OF THE ASSESSEE BEFORE THE CIT(A) IN THIS REGARD ARE EXTRA CTED 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 S ALE PROCEEDS. EXPENSES ON AGRICULTURAL PRODUCE DEPEND O N VARIOUS ITEMS TO BE GROWN. COMPANY IS MAINTAINING THE BOOKS OF ACCOUNT AND ACTUAL EXPENSES ON AGRICULTURAL ACTIVIT Y IS DULY RECORDED IN THE BOOKS OF ACCOUNTS. HENCE, EXPENSES ARE LESS THAN 35% OF AGRICULTURAL INCOME CONSIDERED AS UNREC ORDED EXPENSES WAS NOT JUSTIFIED AND THEREFORE, IT IS REQ UESTED 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 WORL D 'MAY' GIVES DISCRETION TO THE INCOME TAX OFFICER TO CONSIDER AL L THE 20 CIRCUMSTANCES AND TO DECIDE WHETHER OR NOT THE AMOU NT IN QUESTION IS THE INCOME OF THE ASSESSEE. HE CANNOT O UTRIGHT REJECT THE EXPLANATION OF THE ASSESSEE, AS NOT BELI EVABLE. FOR THIS PROPOSITION APPELLANT RELY UPON THE JURISDICTI ONAL PUNE TRIBUNAL'S DECISIONS IN THE CASE OF J P SETHI VS IT O (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, REASO NABLE CANNOT BE REJECTED ON ARBITRARY GROUND OR ON MERE S USPENSION ON OR IMAGINARY OR IRRELEVANT GROUNDS. 3. THE LEARNED A.O. MERELY DISBELIEVED THE FACTS AN D. ESTIMATED EXPENSES, THOUGH THE APPELLANT COMPANY HAS MAINTAIN RECORD IN THIS REGARD AND THE SAME IS DULY AUDITED UNDER T HE PROVISION OF SECTION 44 AB OF THE IT. ACT. THE LEAR NED A.O, NEITHER REJECTED THE BOOKS OF ACCOUNT AND NOR BROUG HT ON RECORDS ANY EVIDENCE TO SHOW AND PROVE THAT THE APP ELLANT COMPANY HAS INCURRED MORE EXPENDITURE ON AGRICULTUR AL ACTIVITIES AND RECORDED LESS IN THE BOOKS OF ACCOUN T. 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 LE GAL PROOF AS HELD BY HON'BLE SUPREME COURT IN THE CASE OF UMA CH ARAN SING AND BOR'S 37 ITR 271 CITED SUPRA.' 8.2. THE CIT(A) HAVING CONSIDERED THE SUBMISSIONS M ADE ON BEHALF OF THE ASSESSEE, OBSERVED THAT THE ASSESSING OFFICE R HAS WORKED OUT ADDITION WITHOUT ANY EVIDENCE AND WITHOUT ANY BASIS FOR ESTIMATING AGRICULTURAL EXPENSES AT 35%. THE ASSESSING OFFICE R HAS SIMPLY STATED THAT THE ASSESSEE HAS AGREED FOR ADDITION. FURTHER THE ESTIMATION OF EXPENSES AT 35% HAS RESULTED IN ADDIT IONAL AGRICULTURAL EXPENDITURE IN A.Y. 2002-03, 2003-04 A ND 2004-05. HOWEVER, IN SUBSEQUENT YEARS, THE ACTUAL EXPENDITUR E CLAIMED BY THE ASSESSEE IS MORE THAN 35%. FURTHER, THIS ADDITI ONAL AGRICULTURAL INCOME ESTIMATED BY THE ASSESSING OFFICER RESULTED INTO REDUCTION IN AGRICULTURAL INCOME. THIS DOES NOT NECESSARILY MEA N THAT THE ASSESSEE HAS SPENT ON THE SAID ADDITIONAL AGRICULTU RAL EXPENSES OUT OF BOOKS. THE ASSESSEE COMPANY HAS INCURRED HUGE L OSSES AND IT IS NOT LIKELY THAT THE ASSESSEE COMPANY COULD HAVE INC URRED AND SUPPRESSED AGRICULTURAL EXPENSES. THE BOOKS OF ACC OUNT 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 WHI CH ARE NOT RECORDED IN THE BOOKS OF ACCOUNT. CONSIDERING ALL THE FACTS, THE CIT(A) HAS RIGHTLY OBSERVED THAT THE ASSESSING OFFI CER WAS NOT JUSTIFIED IN ESTIMATING AGRICULTURAL EXPENSES AT 35 % AS AGAINST ACTUAL EXPENDITURE DEBITED IN AUDITED BOOKS OF ACCO UNTS. ACCORDINGLY, THE CIT(A) WAS JUSTIFIED IN DELETING T HE 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 FA CTUAL 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 A SSESSEE. WE UP HOLD THE SAME. 9. IN THE RESULT, ALL THE APPEALS FILED BY THE REVE NUE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS THE 22 ND DAY OF MARCH, 2013. SD/- SD/- ( G.S.PANNU ) ( SHAILENDRA KUMAR YAD AV ) ACCOUNTANT MEMBER JUDICIAL MEMBER GSPS PUNE, DATED THE 22 ND 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.