2005 (1) TMI 320 - AT - Income Tax

Tribunal rules partnership firm's agricultural income as exempt under Income Tax Act

The Tribunal held that the share of the assessee in the agricultural income of the partnership firm should be considered as agricultural income exempt ... Agricultural Income Issues Involved:1. Whether the assessee is entitled to exemption for agricultural income under section 10(1).2. Whether the agricultural income should be treated as income from other sources.3. Applicability of section 10(2A) for share of profit from the partnership firm.4. Validity of the assessment of agricultural income and unexplained cash credit.Detailed Analysis:1. Entitlement to Exemption for Agricultural Income under Section 10(1):The assessee claimed an exemption for agricultural income amounting to Rs. 1,17,368 under section 10(1) of the Income Tax Act. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disputed this claim. The AO noted that the income was received from a partnership firm, M/s. Balaji Farm House, which was not separately assessed to tax. The CIT(A) acknowledged the agricultural operations but held that the exemption could only be claimed by the firm itself, not by the individual partner, as per section 10(1). However, the Tribunal found that the share of the assessee in the agricultural income of the firm should be regarded as agricultural income under Rule 5 of Part-IV of the First Schedule to the Finance Act, 1999, and thus, exempt under section 10(1).2. Treatment of Agricultural Income as Income from Other Sources:The AO treated the agricultural income as unexplained cash credit under section 68, adding Rs. 1,49,418 to the total income of the assessee. The CIT(A) overturned this, stating there was no basis to doubt the agricultural operations and the credit of agricultural income. The Tribunal agreed with the CIT(A), noting that the agricultural income should not be treated as unexplained cash credit and should be exempt under section 10(1).3. Applicability of Section 10(2A) for Share of Profit from the Partnership Firm:The AO argued that the exemption should be claimed under section 10(2A), which applies to a partner's share in the total income of a firm that is separately assessed. Since M/s. Balaji Farm House was not assessed as a firm under section 184, the AO held that the exemption under section 10(2A) was not applicable. The Tribunal confirmed that section 10(2A) was not applicable because the firm was not separately assessed.4. Validity of the Assessment of Agricultural Income and Unexplained Cash Credit:The AO questioned the genuineness of the agricultural activities and treated part of the income as unexplained cash credit. The CIT(A) found no basis to doubt the agricultural operations and ruled that the credit of agricultural income could not be treated as unexplained. The Tribunal upheld this view, emphasizing that the share of the assessee in the agricultural income of the firm should be treated as agricultural income and exempt under section 10(1).Conclusion:The Tribunal concluded that the share of the assessee in the agricultural income of M/s. Balaji Farm House should be regarded as agricultural income, exempt under section 10(1). The AO was directed to modify the assessment order accordingly, treating the agricultural income as exempt and not as unexplained cash credit. The appeal filed by the assessee was allowed.