2024 (7) TMI 1049 - AT - Income Tax

HUF wins appeal as agricultural expenditure addition deleted without proper verification or material evidence

A.S. Srinath (HUF) The Income Tax Officer Versus The Income Tax Officer Ward 1 & TPS Shivamoga

ITAT Bengaluru allowed the assessee HUF's appeal against addition of agricultural expenditure. The HUF cultivated coffee, pepper, areca nut, coconut, ... Expenditure in connection with the agricultural activity - assessee HUF is holding 8 acres 27 guntas of agricultural land at Purle Village in Shimoga Taluk of Karnataka State where the assessee is cultivating coffee, pepper, areca nut, coconut, banana and coco - whether the CIT(A) is justified in confirming the order of the AO specially when no adverse materials were brought on record and the additions were based on pure estimate, imagination and surmises? HELD THAT:- Agriculture income is exempt u/s 10(1) of the I. Tax Act, 1961 which falls in Chapter III of the Act. Heading of the Chapter III is “Incomes which do not form part of total income”. Thus the item of Income specified in Section 10(1) of the Act or Chapter III of the Act would not be a part of total Income. There cannot be a charge of Tax u/s 4(1) of the Act on anything other than total income. We could not understand how by increasing the agriculture expenditure & reducing the Agriculture Income which are exempted u/s 10(1) of the Act would give rise to Total Income chargeable to tax u/s 4(1) of the Act under head “Income from Other Sources”. We are of the opinion that the question of increasing or decreasing of any agriculture expenditure may become irrelevant if income of the assessee HUF is considered solely agriculture in nature & therefore merely by increasing the Agriculture expenditure & reducing the exempted Agriculture income will not resulted in Income from other sources automatically unless the AO brought some material on record to show that the assessee HUF earns any other income also. It is also well settled that the AO cannot “step into the shoes of an assessee”, or question or even sermons to his beleaguered assessees on the conduct of the business. This is more particularly so, when there is nothing in the enacted laws, that requires an assessee to conform to a particular set of business practices. Merely on the basis of some estimation & assumption of the AO, increasing of Agriculture expenditure & consequently reducing the Agriculture income will not automatically culminate in Income from Other Sources without any material being brought on record to show that agriculture expenses are not genuine or they are understated. AO has merely acted on the basis of surmises and conjuncture in adopting the estimate of 30% of gross agriculture income as Expenditure in connection of agriculture activities without carrying out further verification. We note that both the authorities have failed to discharge their duties properly as none of the parties have brought any substantial material on record to prove that assessee has incurred expenses over & above what has been stated by the assessee HUF. We are not in a position to sustain the order of the CIT(A) as the same appeared to be on assumptions & estimations, guess & surmises to sustain the addition made by the AO and therefore, we are inclined to set aside the order of the first appellate authority and direct the AO to delete the addition. Appeal of assessee allowed. Issues involved:1. Assessment of agricultural expenditure against agricultural income.2. Determination of income from other sources based on estimated expenditure.3. Justification of estimating agricultural expenditure at 30% of gross agricultural income.4. Consideration of relevant evidence to prove agricultural expenses.5. Application of tax laws on total income and exempt agricultural income.Issue 1: Assessment of agricultural expenditure against agricultural income:The appeal challenges the order of the National Faceless Appeal Centre regarding the estimation of agricultural expenditure for Assessment Year 2017-18. The Assessing Officer (AO) observed a discrepancy in the expenditure claimed by the assessee in relation to the gross agricultural produce, leading to the adoption of 30% of the gross agricultural income as expenditure. The AO treated the excess expenditure as income from other sources, resulting in a tax liability. The appellant contested this assessment, arguing that the expenditure estimation was unrealistic and not supported by evidence.Issue 2: Determination of income from other sources based on estimated expenditure:The CIT(A) upheld the AO's decision, emphasizing the analysis conducted to justify the estimated expenditure and subsequent addition to taxable income. The appellant's argument that the excess expenditure was wrongly classified as income from other sources was dismissed, as the AO's analysis concluded that the amount in question constituted additional income beyond the declared agricultural income. The CIT(A) found no inconsistency in the AO's order and confirmed the assessment under Section 143(3) of the Income Tax Act.Issue 3: Justification of estimating agricultural expenditure at 30% of gross agricultural income:The appellant raised concerns about the estimation of agricultural expenditure at 30% of the gross agricultural income, contending that it was based on mere assumptions and conjecture. The authorities defended this approach by citing variations in expenditure percentages across assessment years and the need for a reasonable expenditure estimate. However, the Tribunal noted the lack of concrete evidence to support the chosen percentage and questioned the validity of increasing expenditure to reduce exempt agricultural income without demonstrating additional sources of income.Issue 4: Consideration of relevant evidence to prove agricultural expenses:During the proceedings, the appellant presented documentation, including sale bills, land records, and crop information, to support the declared agricultural income. The appellant argued that the AO failed to provide evidence of income from sources other than agriculture, emphasizing the need for consistency in assessing agricultural expenses. The Tribunal acknowledged the documentation submitted by the appellant but highlighted the absence of substantial evidence to dispute the declared expenses or prove the existence of alternative income sources.Issue 5: Application of tax laws on total income and exempt agricultural income:The Tribunal analyzed the provisions of the Income Tax Act related to total income and exempt agricultural income under Section 10(1). It emphasized that charging tax on total income does not extend to exempt agricultural income and questioned the rationale behind increasing agricultural expenditure to generate taxable income without evidence of additional income sources. The Tribunal concluded that the AO's reliance on estimations without substantial proof was unjustified, leading to the decision to set aside the CIT(A)'s order and direct the AO to delete the additional tax liability.In conclusion, the Tribunal allowed the appeal, highlighting the lack of concrete evidence supporting the estimation of agricultural expenditure and the addition of income from other sources. The decision underscored the importance of substantiated assessments in determining taxable income, particularly concerning agricultural activities and exempt income under the Income Tax Act.