2025 (6) TMI 1137 - AT - Income Tax

Taxpayer's agricultural income claims upheld with documentary evidence of 40+ acre land ownership and cultivation

ACIT, Circle-30 (1), New Delhi Versus Kundan Veer Singh Bhullar

ITAT Delhi upheld CIT(A)'s deletion of additions regarding agricultural income, sampling expenses, and business expenses. The tribunal found documentary ... Addition made on account of Agricultural Income - CIT(A) deleted addition - HELD THAT:- CIT(A) has rightly appreciated the fact that the documentary evidences in the form of ownership of land and ‘girdavari’ entries showing standing crop and cultivation of land are sufficient evidences of earning agricultural income by a person who owns more than 40 acres of land. Assessee has filed the two copies of Form J issued by M/s Dhingra Bros., for which there is no allegation, on basis of enquiry that same is not genuine. The emphasis on proving the same by purchase of seeds, electricity expenses, etc., is stretching too far the scope of inquiry and doubting the income. More so, when in the proceeding years as well as in subsequent years the agricultural income from the same land was accepted. The findings of the CIT(A) require no interference. The ground has no substance. Allowability of Sampling expenses/finishing charges - as observed by the AO that assessee has made most of the payments in cash with no detail of nature of expenses or supplier details on ledger account - CIT(A) deleted addition - HELD THAT:- CIT(A) has taken a reasonable call on the basis of evidences that the expenditure commensurate with the nature of work. Sampling expenses were required for procurement of the orders with regard to different households and furnishing articles manufactured by the assessee. Thus, sampling work is of the nature which is recurring and got done on urgent basis. Therefore, ad hoc disallowance in such circumstances were not justified. The findings of the ld.CIT(A) require no interference. The ground has no substance. Allowable business expenses - staff welfare expenses, business promotion expenses and telephone expenses - CIT(A) deleted addition partly - HELD THAT:- Without bringing on record that the specific travel taken by the assessee was not for business purpose, ad hoc disallowance was not justified. The assessee is in a business where for procurement of orders and certainly for business promotion, the assessee may require frequent travelling. No defect in the books and vouchers have been pointed out nor they are doubted to be not genuine. Thus, the findings of the CIT(A) require no interference qua the deletion made. Deduction u/s 54 and 54F - LTCG - Nature of land 0 AO held that the deduction claimed u/s 54 and 54F being residential property claimed by the assessee is not allowable as the same is actually agricultural land for which assessee has claimed wrong deduction - CIT(A) held in view of the provisions of Section 2(14)(iii) of the IT Act 1951, the said land is clearly not an agricultural land - HELD THAT:- It is very apparent from the findings of the ld.CIT(A) that it is after the receipt of remand report from the AO the issue has been decided in favour of the assessee. During the remand proceedings the Inspector of the Department has found two rooms for residence and wash room along with electricity, water connection and other basic amenities and the caretaker of the property residing in the said dwelling unit for two years. The findings were that there was no farm house which indicate that there was no agricultural activity. The ld.CIT(A) has duly appreciated that the land within the periphery of five kilometers of Sohna falls in the municipal limits and cannot be considered as agricultural land. This Bench is conscious and has taken a judicial notice of the fact that in the peripheral area of five kilometers in Sohna there is extensive urbanization. Thus, the findings of the ld.CIT(A) require no interference. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal are:Whether the addition of Rs. 10,00,000/- on account of agricultural income, disallowed by the Assessing Officer (AO) under section 68 for lack of evidences, was rightly deleted by the Commissioner of Income-tax (Appeals) (CIT(A)).Whether the disallowance of Rs. 8,38,412/- on account of sampling expenses under section 40A(3) of the Income Tax Act, 1961 (the Act), due to absence of party-wise details and bills, was justified.Whether the disallowance of Rs. 20,233/- relating to domestic travel expenses under section 37, due to absence of evidence proving these were incurred wholly and exclusively for business purposes, was sustainable.Whether the disallowance of Rs. 1,90,15,785/- claimed as deduction under sections 54 and 54F on the ground that the purchased property was agricultural land and not residential property, was justified.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Agricultural Income Addition of Rs. 10,00,000/-Legal Framework and Precedents: Agricultural income is exempt under the Act, but the assessee must prove ownership of agricultural land and genuineness of agricultural activities. Section 68 relates to unexplained cash credits, requiring the assessee to prove the source of income.Court's Interpretation and Reasoning: The AO disallowed the agricultural income claiming lack of sufficient evidence such as bills for seeds, irrigation, fertilizers, wages, and marketing expenses. The assessee produced Form J copies from M/s Dhingra Bros. (buyers), Girdawari entries showing ownership of 25 acres, and claimed ownership of 40 acres with cultivation of various crops.The CIT(A) held that the documentary evidence of ownership and cultivation was sufficient to establish agricultural income. The Tribunal agreed that demanding detailed proof of every agricultural expense was excessive and that the Form J and Girdawari entries were credible, especially as there was no allegation of forgery or non-genuineness. The Tribunal noted that agricultural income from the same land was accepted in subsequent years, reinforcing the genuineness.Key Evidence and Findings: Form J copies, Girdawari entries, ownership of 40 acres, and absence of adverse findings on the documents.Application of Law to Facts: The Tribunal found the AO's reliance on section 68 unjustified as the assessee had furnished adequate evidence to establish agricultural income.Treatment of Competing Arguments: The AO's demand for detailed agricultural expenses was rejected as overreaching. The assessee's evidence was accepted as sufficient.Conclusion: The addition was rightly deleted by CIT(A), and the Tribunal upheld this deletion.Issue 2: Disallowance of Rs. 8,38,412/- on Sampling Expenses under Section 40A(3)Legal Framework and Precedents: Section 40A(3) disallows expenditure if payment is made in cash exceeding prescribed limits without proper evidence. Expenses must be wholly and exclusively for business purposes.Court's Interpretation and Reasoning: The AO disallowed 50% of sampling expenses on the ground that payments were made in cash without party-wise details and that frequent sampling expenses lacked justification. The assessee submitted bills, vouchers, and ledger accounts showing sampling expenses were incurred for preparing different designs and patterns for customer approval, which is integral to the business of trading fabrics and furnishing articles.The CIT(A) observed that the AO did not question the genuineness of the expenses but merely disallowed on the basis of cash payments and lack of party-wise details. The Tribunal agreed with CIT(A) that sampling expenses were recurring, necessary for business promotion, and supported by documentary evidence. The ad hoc disallowance was therefore unjustified.Key Evidence and Findings: Sampling bills, vouchers, ledger accounts, and the nature of the business requiring frequent sampling.Application of Law to Facts: The Tribunal held that the expenses were incurred wholly and exclusively for business, and disallowance on an ad hoc basis without specific evidence was improper.Treatment of Competing Arguments: AO's concern over cash payments and lack of party-wise details was outweighed by the documentary support and business necessity.Conclusion: The disallowance was rightly deleted by CIT(A), and the Tribunal upheld this deletion.Issue 3: Disallowance of Rs. 20,233/- on Domestic Travel ExpensesLegal Framework and Precedents: Under section 37, expenses must be incurred wholly and exclusively for business to be deductible. Proper evidence is necessary to establish this.Court's Interpretation and Reasoning: The AO disallowed 10% of staff welfare, business promotion, and telephone expenses, partly on the ground that evidence was lacking to prove exclusive business purpose. The assessee submitted ledgers, bills, and disallowed 10% of telephone expenses for personal use in the return itself.The CIT(A) confirmed disallowance of 10% on staff welfare and business promotion expenses but deleted disallowance on telephone expenses, noting the assessee's prior disallowance of 10%. The Tribunal found that ad hoc disallowance without pointing out specific non-business expenses was not justified, especially since no defect or doubt was raised about the genuineness of books or vouchers.Key Evidence and Findings: Submission of ledgers and bills, prior disallowance of 10% telephone expenses, no specific objection by AO to genuineness.Application of Law to Facts: The Tribunal accepted the CIT(A)'s nuanced approach of partial disallowance and deletion of telephone expense disallowance, emphasizing the need for specific evidence for disallowance.Treatment of Competing Arguments: The AO's ad hoc disallowance was based on surmises and conjectures; the assessee's detailed submissions were accepted.Conclusion: The Tribunal confirmed partial disallowance on staff welfare and business promotion expenses but deleted the telephone expenses disallowance.Issue 4: Disallowance of Deduction of Rs. 1,90,15,785/- Claimed under Sections 54 and 54F on Purchase of Agricultural LandLegal Framework and Precedents: Sections 54 and 54F provide deduction on capital gains arising from sale of a capital asset if the gains are invested in residential property. Section 2(14)(iii) defines agricultural land and excludes land situated within municipality limits with population over 10,000 or within notified distance from municipal limits.Court's Interpretation and Reasoning: The AO disallowed the deduction on the ground that the purchased property was agricultural land as per the sale deed, which described the land as agricultural and measured 2 acres 1 kanal 7 marla. The AO held that such a large portion of agricultural land could not be residential property.The assessee submitted a certificate from the Tehsildar stating the property was within 100 feet of Sohna municipality, which had a population exceeding 27,000, and thus the land could not be agricultural land under the Act. The Government notification defined urbanization limits as 5 kilometers from municipal limits, and the property fell within this limit.The CIT(A) called for a remand report, which confirmed the presence of a dwelling unit with two rooms, washroom, electricity, water connection, and a caretaker residing there for two years, but no farm house. The CIT(A) concluded the property was a dwelling unit within municipal limits and thus not agricultural land.The Tribunal noted the urbanization around Sohna and judicially took notice of the fact that the land within 5 km of Sohna is urbanized. The Tribunal found no reason to interfere with the CIT(A)'s findings.Key Evidence and Findings: Tehsildar certificate, Census data, Government notification on urban limits, remand report confirming dwelling unit, absence of farm house.Application of Law to Facts: The property did not qualify as agricultural land under section 2(14)(iii) and was eligible for deduction under sections 54 and 54F.Treatment of Competing Arguments: AO's reliance on sale deed description was outweighed by statutory definitions and on-ground findings.Conclusion: The disallowance was rightly deleted by CIT(A) and upheld by the Tribunal.3. SIGNIFICANT HOLDINGSOn agricultural income, the Tribunal held: 'The documentary evidences in the form of ownership of land and 'girdavari' entries showing standing crop and cultivation of land are sufficient evidences of earning agricultural income by a person who owns more than 40 acres of land.' The Tribunal emphasized that demanding detailed expenses was an overreach and that acceptance in subsequent years reinforced genuineness.Regarding sampling expenses, the Tribunal stated: 'Sampling expenses were required for procurement of the orders with regard to different households and furnishing articles manufactured by the assessee. Thus, sampling work is of the nature which is recurring and got done on urgent basis. Therefore, ad hoc disallowance in such circumstances were not justified.'On staff welfare, business promotion, and telephone expenses, the Tribunal confirmed partial disallowance only where specific evidence of non-business use was lacking and rejected ad hoc disallowance without particulars, noting: 'The addition made on estimated basis is not justified.'On the deduction under sections 54 and 54F, the Tribunal held: 'In view of the provisions of Section 2(14)(iii) of the IT Act, the said land is clearly not an agricultural land... the land within the periphery of five kilometers of Sohna falls in the municipal limits and cannot be considered as agricultural land.' The Tribunal took judicial notice of urbanization and accepted remand findings of a dwelling unit.Final determinations on each issue were in favor of the assessee, resulting in dismissal of the Revenue's appeal on all grounds.