2016 (4) TMI 306 - AT - Income Tax

Tribunal Upholds Disallowance of Lease Rent for Agricultural Land & Treatment of Agricultural Income

The Tribunal dismissed the appeals for A.Y. 2009-10 and A.Y. 2010-11, upholding the CIT(A)'s decisions. The disallowance of lease rent paid for ... Agriculture income - Held that:- As decided in assessee's own case 7/12 extracts reflected that mango trees, coconut trees, guava, jamun, rice, cashew nut etc. are being grown. The finding recorded by the learned CIT(A) has not been controverted by the learned D.R. by bringing any positive material on record, we, therefore, find no reason to interfere with the findings recorded by the learned CIT(A) holding that the assessee had earned agricultural income of ₹ 9,97,800/-. Disallowance u/s 14A - Held that:- As decided in assessee's own case with regard to lease rent expenditure incurred by the assessee, the learned CIT(A) has disallowed the same on the plea that the expenditure was incurred for earning exempt income. We also find that the lease rent was paid to the directors of the assessee company for leasing the lands to the assessee which deserves to be disallowed u/s 14A of the Act to the extend attributable to earning of exempt income. Applicability of section 74A - CIT(A) recorded a categorical finding to the effect that it constitutes only around 15% of the gross receipt, therefore, only loss incurred thereon is liable to be disallowed u/s 74A to be set off against other income - Held that:- As decided in assessee's own case Section 74A is not applicable for the activity of breeding of horses since these horses are maintained for breeding and selling and not for running horse races. The activity of breeding of horses is similar to that of poultry or piggeries etc. where the animals are bred for the purpose of selling. Section 74A is not applicable for such breeding activity. The ld. CIT(A) also found that during the remand proceedings, the A.O. reported that income and expenditure pertaining to breeding activity and racing activity were found to be captured under two different accounting codes in respect of both the assessment years. The ld. CIT (A) also found that an amount of ₹ 1.94 crores is recovered on account of livery expenses from other horse owners, who have utilized the stables and other services of the stud farm of the assessee. After considering the remand report and corroborative evidences filed before him, the ld. CIT(A) reached to the conclusion that only the business loss in respect of horse breeding activity was liable to be set off against business income whereas loss of ₹ 1,18,63,894/- is from horse racing activity not eligible for set off against business income in view of provisions of section 74A of the Act. The findings recorded by the ld. CIT(A) are as per material on record, thus we do not find any reason to interfere in the findings of ld. CIT(A) and accordingly we confirm the same Issues Involved:1. Disallowance of lease rent paid for use of land for agriculture.2. Agricultural income treated as income from other sources.3. Losses from the activity of owning and maintaining horses not being allowed to be set off with the business income under section 74A(3) of the Act.Issue-Wise Detailed Analysis:1. Disallowance of Lease Rent Paid for Use of Land for Agriculture:The assessee contended that the lease rent paid for agricultural land should be allowable as it was incurred wholly and exclusively for the stud farm business. However, the Tribunal upheld the CIT(A)'s decision that the lease rent paid amounting to Rs. 29,24,264/- was disallowed under section 14A of the Act. The Tribunal noted that this issue was previously decided against the assessee by the Coordinate Bench in the assessee's own case for A.Y. 2007-08 and 2008-09, where it was held that the lease rent paid for land used to grow grass naturally was not allowable as it was considered an expenditure for earning exempt income.2. Agricultural Income Treated as Income from Other Sources:The Revenue challenged the CIT(A)'s decision to treat Rs. 9,97,800/- as agricultural income. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had demonstrated that agricultural operations were carried out on the leased land, producing grass and other crops. The Tribunal referred to the Coordinate Bench's decision in the assessee's own case for A.Y. 2007-08 and 2008-09, which confirmed that the grass grown was paddock grass, specially planted as feed for horses, thus constituting agricultural activity. Therefore, the income was correctly treated as agricultural income and not as income from other sources.3. Losses from Activity of Owning and Maintaining Horses:The assessee argued that the entire expenditure incurred in the horse breeding business should be allowed as a deduction and that the provisions of section 74A were not applicable. The Revenue contended that the activities of horse breeding and horse racing were interconnected and should not be separately indicated in the return of income. The Tribunal upheld the CIT(A)'s decision, which distinguished between the horse breeding activity and the racing activity. It was held that the horse breeding activity was a distinct business activity and the losses from this activity could be set off against other business income. However, the losses from the racing activity could not be set off against other business income and had to be carried forward under section 74A(3) of the Act. The Tribunal referred to the Coordinate Bench's decision in the assessee's own case for A.Y. 2007-08 and 2008-09, which confirmed that only the losses from the racing activity were to be carried forward under section 74A(3).Conclusion:The appeals of both the assessee and Revenue for A.Y. 2009-10 and A.Y. 2010-11 were dismissed. The Tribunal upheld the CIT(A)'s decisions on all issues, following the precedents set by the Coordinate Bench in the assessee's own cases for previous assessment years. The disallowance of lease rent paid, the treatment of agricultural income, and the bifurcation of losses from horse breeding and racing activities were all affirmed as per the earlier judgments.