2025 (6) TMI 43 - AT - Income Tax

Assessee's agricultural income claims upheld after authorities failed proper verification and inquiry procedures

Patel Kalubhai Arjanbhai (HUF) Versus Income Tax Officer Ward 7 (2) (1), Ahmedabad

Patel Kalubhai Arjanbhai (HUF) Versus Income Tax Officer Ward 7 (2) (1), Ahmedabad - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:(a) Whether the appeal filed by the assessee should have been dismissed on account of the pending application under the Vivad se Vishwas Scheme, 2024 (VSV), or whether it was maintainable for adjudication on merits.(b) Whether the agricultural income declared by the assessee for the Assessment Year (AY) 2017-18, specifically the amount of Rs. 5,36,211/-, which was disallowed and added to income as 'income from other sources', was rightly treated so by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) (CIT(A)).(c) Whether the AO and CIT(A) were justified in relying on the assessment order of the immediately preceding year (AY 2016-17), which was an ex parte assessment, as a basis for disallowing the agricultural income in the impugned year.(d) Whether the AO and CIT(A) conducted proper enquiry and verification of the agricultural income declared by the assessee, and whether the assessee's evidentiary submissions and explanations were duly considered.2. ISSUE-WISE DETAILED ANALYSISIssue (a): Maintainability of Appeal in light of Vivad se Vishwas Scheme (VSV) ApplicationRelevant Legal Framework and Precedents: The Vivad se Vishwas Scheme, 2024, is a statutory scheme aimed at settlement of tax disputes. Under the scheme, a taxpayer may file an application to settle disputes and withdraw appeals. If the application is accepted and taxes paid as per the scheme, the appeal is to be treated as withdrawn.Court's Interpretation and Reasoning: The assessee had filed Form No.1 under the VSV scheme during pendency of appeal before CIT(A), and subsequently, the application was approved by the department requiring payment of disputed taxes. However, the assessee failed to pay the disputed taxes, resulting in failure of the settlement application.Application of Law to Facts: Since the settlement application failed due to non-payment, the appeal was not to be dismissed as withdrawn but was maintainable for adjudication on merits.Treatment of Competing Arguments: The assessee initially contended that the appeal should be kept in status quo for benefit under VSV. Later, acknowledging failure to pay, the assessee chose to contest the appeal on merits. The Tribunal accepted this position.Conclusion: The appeal was maintainable and rightly heard on merits despite the pending VSV application.Issue (b) and (c): Validity of Disallowance of Agricultural Income and Reliance on Preceding Year's Ex Parte AssessmentRelevant Legal Framework and Precedents: Agricultural income is exempt under the Income Tax Act but must be genuine and substantiated. The principle that an ex parte assessment cannot be used as a binding precedent for subsequent years without independent verification is well recognized. The burden lies on the Revenue to disprove the genuineness of agricultural income.Court's Interpretation and Reasoning: The AO disallowed Rs. 5,36,211/- of agricultural income on the ground that in the preceding year (AY 2016-17), agricultural income was accepted only up to Rs. 4 lacs and balance was added back based on an ex parte assessment. The CIT(A) confirmed this addition, reasoning that landholding remained the same and thus agricultural income could not have increased substantially.Key Evidence and Findings: The assessee submitted detailed evidence including ownership of approximately 50 Bighas of land, 450 mango trees, seasonal crops (groundnut, cotton), books of accounts, 7/12 land records, agricultural sale and purchase bills, cash and bank books, and ledgers. The assessee also demonstrated that the preceding year's assessment was ex parte and hence unreliable as a precedent.Application of Law to Facts: The Tribunal found that the AO and CIT(A) failed to conduct any independent enquiry into the agricultural income for the impugned year. The CIT(A)'s enquiries pertained only to cash transactions and family expenses, which were irrelevant to the genuineness of agricultural income. No inquiry was made about the purchasers of agricultural produce or verification of sales, which are critical to establish agricultural income.Treatment of Competing Arguments: The Revenue argued that CIT(A) made independent enquiries during appellate proceedings but the assessee did not respond to queries, justifying confirmation of addition. The Tribunal rejected this, holding that the queries were irrelevant to agricultural income and the non-response could not justify disallowance when the assessee had already submitted extensive documentary evidence.Conclusion: The Tribunal held that the disallowance of Rs. 5,36,211/- was unjustified. The reliance on the preceding year's ex parte assessment was improper. The AO and CIT(A) failed to discharge their duty to verify the genuineness of agricultural income. Accordingly, the addition was to be deleted.Issue (d): Adequacy of Enquiry and Consideration of EvidenceRelevant Legal Framework and Precedents: The Revenue authorities are required to conduct proper enquiry and consider all relevant evidence before making additions. The principle of natural justice and fair hearing requires that the assessee's submissions be duly considered.Court's Interpretation and Reasoning: The Tribunal noted that the AO ignored the detailed submissions and documentary evidence furnished by the assessee. The CIT(A), although acknowledging the ex parte nature of preceding year's assessment, did not conduct a meaningful enquiry into agricultural income but focused on unrelated cash transactions.Application of Law to Facts: The Tribunal found that the authorities below failed to point out any infirmity in the evidence submitted by the assessee regarding agricultural income. The queries raised by CIT(A) did not relate to agricultural income and thus were inadequate to disprove the claim.Treatment of Competing Arguments: The Revenue's reliance on non-response to irrelevant queries was rejected. The Tribunal emphasized that the absence of response to irrelevant queries cannot justify disallowance when the assessee had otherwise substantiated the claim.Conclusion: The enquiry by Revenue authorities was inadequate and misdirected. The assessee's agricultural income was substantiated and should be accepted.3. SIGNIFICANT HOLDINGSThe Tribunal held:'I do not find any merit in the order of the authorities below in treating the income returned by the assessee to the extent of Rs. 5,36,211/- as its 'income from other sources'. Undoubtedly, the authorities below had drawn on the assessment made in the case of the assessee in immediately preceding assessment year to disbelieve agricultural income to this extent as being genuine. But it is a fact on record that the assessee had pointed out why the agricultural income assessed in the immediately preceding year cannot form the basis for the impugned year also, pointing out that it was an ex parte assessment, framed without hearing the assessee... It is amply evident that the assessee had demonstrated with evidence, the genuineness of agricultural income returned by it... The Ld. CIT(A)'s order, therefore, confirming the addition on account of the fact that the assessee did not respond to enquiry conducted by him during appellate proceeding is completely mis-directed.'Core principles established include:An ex parte assessment order cannot be mechanically relied upon as a basis for disallowance in subsequent years without independent verification.The Revenue must conduct relevant and meaningful enquiries into the genuineness of agricultural income, including verification of agricultural land, crops, and sales, rather than irrelevant cash transactions.The assessee's detailed documentary evidence substantiating agricultural income must be given due weightage.Failure to respond to irrelevant queries does not justify disallowance of income properly substantiated.Final determination on the principal issue was that the addition of Rs. 5,36,211/- by treating it as 'income from other sources' was unsustainable and was deleted. The appeal was allowed accordingly.