ITAT Quashes Section 263 Revision as AO Conducted Detailed Inquiry into Agricultural Income

Kamdar Kiritkumar Chandulal HUF Vs PCIT (ITAT Rajkot)

The ITAT Rajkot allowed the appeal filed by the assessee against the order passed by the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act for Assessment Year 2020-21. The dispute related to the assessee’s claim of agricultural income of ₹41.63 lakh, which had been accepted by the Assessing Officer during scrutiny assessment under section 143(3) read with section 144B of the Act.

The assessee had filed its return declaring nil taxable income and agricultural income of ₹41,63,806. The case was selected for limited scrutiny on the issues of agricultural income risk analysis and large agricultural income per acre compared to average agricultural income for the territory, land ownership type, and land type. During the assessment proceedings, the Assessing Officer issued detailed notices under section 142(1) seeking information regarding land holding, agricultural income, crop details, productivity, agricultural expenses, and supporting evidence.

The assessee submitted various details and documents before the Assessing Officer, including revenue records in Form Nos. 7/12 and 8A, details of agricultural income and expenses, cash flow statements, bank statements, balance sheets for multiple years, certificates from the Talati-cum-Mantri, crop-wise details, sale bills, and cash receipts. The assessee explained that the increase in agricultural income was due to full utilization of land for agricultural activities, improved crop yield, better irrigation facilities, favourable monsoon conditions, and improved farming practices. It was also submitted that the family jointly carried out agricultural activities over more than 41 acres of land.

After considering the documents and conducting verification, including issuing notices under section 133(6) to purchasers, the Assessing Officer accepted the agricultural income declared by the assessee and completed the assessment on 08.08.2022.

Subsequently, the PCIT initiated revision proceedings under section 263 on the ground that the Assessing Officer had not conducted adequate inquiry regarding agricultural income and expenses. According to the PCIT, the assessee had produced sale bills only for part of the agricultural income and had not submitted sufficient documentary evidence for agricultural expenses amounting to ₹5,65,017. The PCIT held that the Assessing Officer failed to verify quantity, quality, manpower, production, sale, and transportation details relating to agricultural produce. On this basis, the PCIT treated the assessment order as erroneous and prejudicial to the interests of the Revenue and directed the Assessing Officer to pass a fresh assessment order after proper inquiry.

Before the Tribunal, the assessee contended that the Assessing Officer had already conducted exhaustive inquiry during assessment proceedings. The assessee relied on copies of notices issued by the Assessing Officer and replies filed along with supporting documents to show that all relevant issues relating to agricultural income, land holding, crop details, productivity, and sales had been examined in detail.

The Tribunal observed that the Assessing Officer had issued elaborate notices under section 142(1), specifically asking for details relating to agricultural income, increase in agricultural receipts, land holding, crop details, productivity per acre, certificates from agricultural authorities, and supporting evidence. The assessee had furnished replies along with documentary evidence, including land records, Talati certificates, bank statements, cash statements, balance sheets, crop details, and sale records.

The Tribunal further noted that the Assessing Officer had independently verified the transactions by issuing notices under section 133(6) to six parties and had accepted the agricultural income only after receiving and verifying the replies. It was also observed that many sale proceeds had been received through banking channels, supporting the genuineness of agricultural receipts.

According to the Tribunal, the details and evidence submitted during assessment proceedings were sufficient to justify the agricultural operations and agricultural income claimed by the assessee. The Tribunal held that the Assessing Officer had carried out proper verification and inquiry and had passed the assessment order after due application of mind.

The Tribunal relied on earlier judicial precedents, including the decision of the Rajkot Bench in Shri Vasantkumar Manji Thacker & Himmat Liladhar and the Karnataka High Court decision in CIT vs. Gokuldas Exports. It reiterated that inadequate inquiry, as perceived by the PCIT, cannot justify revision under section 263 where the Assessing Officer had already conducted inquiry and adopted one of the possible views. The Tribunal held that section 263 does not permit substitution of the PCIT’s judgment for that of the Assessing Officer merely because the PCIT holds a different opinion.

The Tribunal concluded that the assessment order was neither erroneous nor prejudicial to the interests of the Revenue. Accordingly, the order passed under section 263 was quashed and the appeal of the assessee was allowed.

FULL TEXT OF THE ORDER OF ITAT RAJKOT

By way of this appeal, the assessee has challenged the correctness of the order dated 27.03.2025 passed by the Learned Principal Commissioner of Income-tax (in short “Ld PCIT”) under section 263 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’), for the assessment year 2020-21.Grievances raised by the assessee, which, being interconnected, will be taken up together, are as follows:

“1. The grounds of appeal mentioned hereunder are without prejudice to one another.

2. That the learned Pr. Commissioner of Income Tax, Rajkot-1 (Pr. CIT) erred in law and on facts in assuming jurisdiction under section 263 of the Income Tax Act, 1961.
3. The Ld. Pr. CIT erred in law and on facts in arriving at a conclusion to the effect that the assessment order passed by the assessing officer was erroneous as well as prejudicial to the interest of the revenue on the ground that the assessing officer has

not applied his mind and has not conducted inquiry in assessment in respect of agriculture income and expense claimed by the appellant, though due inquires were made before finalized assessment. Therefore, the order passed by ld. Pr. CIT requires to be quashed and may kindly be quashed.

4. The learned Pr. CIT erred on facts as also in law in setting aside the assessment order dated 08.08.2022 passed u/s. 143(3) of the Income Tax Act, 1961 and directing the assessing officer to pass a fresh assessment order. The order passed u/s 263 of the Act by the learned Pr. CIT is totally unjustified as it is based on mere change of opinion, which is not permissible under section 263.
5. That the order under section 263 is arbitrary, unjustified, and contrary to the principles of natural justice.
6. Your Honour’s appellant craves leave to add, to amend, alter, or withdraw any or more grounds of appeal on or before the hearing of appeal.”
7. The facts of the case which can be stated quite shortly are as follows: The assessee has filed its return of income for assessment year (A.Y.) 2020-21 on 29.12.2020, declaring total income at Rs. Nil and agriculture income of Rs.41,63,806/-. Subsequently, the assessee’s case was selected for limited scrutiny for the following reasons, Viz: (i) Agricultural income (Risk Analysis) and (ii) Large agriculture income as per acre shown in comparison to average agricultural income for the territory, land ownership type and land type. The assessment was completed u/s 143(3) r.w.s. 144B of the I.T. Act on 08.08.2022, accepting the returned income.
8. Later on, Learned Principal Commissioner of Income-tax (in short “Ld PCIT”), exercised his jurisdiction under section 263 of the Income-tax Act, 1961.On perusal of records, it was observed by ld.PCIT that the assessee has shown gross agriculture income of Rs.47,28,823/- in his income tax return (ITR) filed on 29.12.2020 and incurred expenses of Rs.5,65,017/- and declared net agricultural income of Rs.41,63,806/- which was shown, as exempt income. During the course of assessment proceedings, the assessee has not submitted any supporting documentary evidence regarding agriculture expenses amounting to Rs.5,65,017/-. Out of total gross agriculture income of

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Rs.47,28,823/-, the assessee has submitted sales bills of Rs.26,96,580/-only as supporting documentary evidence. The Assessing Officer was required to call for details about the quantity, quality, manpower, productions of agricultural produce, sale, transportation etc. However, the Assessing Officer has not called for such details. Therefore, the Assessing Officer failed to verify the correctness of income claimed as exempt as agriculture income. Therefore, it was observed by ld.PCIT that the assessment order has been passed without making due inquiry/verification. Therefore, notice u/s 263 of the Income-tax Act, 1961, dated 05.03.2025 was issued and duly served upon the assessee.

4. The relevant portion of said show cause is reproduced by ld.PCIT in his revision order, page number 2. In response to such notice, the assessee has filed his reply on 13.03.2025. The assessee submitted that during the assessment proceedings, the assessee has provided details of the total sales including name, address, PAN, amount and mode of receipt. The said summary was of three pages and in last total sale, that is, Rs. 47,28,823/- is mentioned. It was further submitted that the year under consideration is not the first year in which agricultural activities were carried out and agricultural income was shown in the income tax return. The assessee is an agriculturist and has been showing agricultural income since long. Required details for agricultural income and agricultural expenses were submitted by the assessee in response to the notice under section 142(1) of the Act before the assessing officer, and the assessing officer, after verification of these details and documents framed the assessment order. Therefore, such assessment order is neither erroneous nor prejudicial to the interest of the revenue.
5. However, the Ld. PCIT has rejected the above contention of the assessee and held that the assessment order passed by the A.O. u/s. 143(3) r.w.s. 144B of the Act dated 08.08.2022 is erroneous and prejudicial to the interest of the

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Revenue, Therefore, ld.PCIT has set-aside the order u/ s. 143(3) r.w.s. 144B of the Income-tax Act, 1961 dated 08.08.2022 on the issue(s) discussed above. The ld.PCIT directed the assessing officer to pass a fresh assessment order after proper inquiries and verification.

• Aggrieved by the order of the Ld. PCIT, the assessee is in further appeal before this Tribunal.
• Learned Counsel for the assessee, argued that the assessee has earned agricultural income to the tune of Rs.47,28,823/- and to earn such agricultural income, the assessee has made an expenditure to the tune of Rs.5,65,017/-. The Ld. Counsel submitted that during the assessment proceedings, the assessing officer has conducted enough inquiry, and to demonstrate this the Ld. Counsel took us through Page No.19 of the paper book and stated that the assessing officer has issued an elaborate notice under section 142(1) of the Act, asking the assessee to submit the details of agricultural income and expenses, which is reproduced below:

“You are hereby requested to furnish certain details related to your scrutiny assessment for A.Y 2020-21.

Your case has been selected for scrutiny assessment proceeding following reasons as under:

• Agricultural income (Risk Analysis)
• Large agricultural income per acer shown in comparison to average agricultural income for the territory, land ownership type and land type” under limited category. It is seen from your return of income for A.Y 2020-21 that your gross total income is Rs.1,026/- whereas your agricultural income shown is Rs.41,63,806/- and expenses is Rs. 5,65,017 Compare to A.Y 2019-20 you have shown gross total income chargeable to tax is Rs.6,188/- where as your gross agricultural income is Rs.33,98,684/- and expenses is Rs.1,04,342/- Compare to AY 2018-19 you have shown gross total, income chargeable to tax is Rs.3,242/- whereas your gross agricultural income is Rs.17,88,900 17,88,960/ and expenses is Rs.5,40,000/-.

In these contexts, you are requested to furnish the details/documents as under:

• Please furnish the copy of balance sheet for F.Y 2019-20 related to A.Y 2020-21, and the copy of balance sheet for F.Y 2018-19 related to A.Y 2019-20, and the copy

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of balance sheet for F.Y 2017-18 related to A.Y 2018-19 and agricultural land hold by wife/mother/father or any relative of blood relation, please furnish the balance sheet of the same for three years as above showing the agricultural land holding. Please clarify the total land holding (in acre of land) in your name or wife/mother/father or any relative of blood relation.

(4) Please clarify the huge increase in agricultural income from last A.Y 2019-20 of Rs.33,98,684/- to A.Y 2020-21 of Rs.41,63,806/-.

1. Whether your land holding has increased from last financial year i.e. from F.Y 2018-19 to F.Y 2019-20? or
2. Whether the productivity of land has increased substantially?

(5) In the context of increasing in agricultural income you are requested to furnish the details as under:

• Please furnish the total area of land in acre along with deeds of land showing the total area of land for F.Y 2019-20 and F.Y 2018-19.
• Please furnish the details of food crops grown in the area i.e. name of the food crop grown and the total quantity of food crop grown in the area for F.Y 2019-20 and F.Y 2018-19.
• Please furnish the productivity of your land per acre area of land for F.Y 2019­20 and F.Y 2018-19.
• Please furnish the details of productivity per acre of land as confirmed by Agricultural Office of your locality for FY 2019-20 and F.Y 2018-19. Please furnish the documents or evidence or certificate of Agricultural Office of your locality for F.Y 2019-20 and F.Y 2018-19.”

8. The assessing officer also issued further notice which is at Page 22 of the paper book and made the thorough inquiry from the assessee. In response to these notices, the assessee submitted its reply before assessing officer with documentary evidences, which is reproduced below:

“03. We hereby furnish the required details as under seriatim:

• Land Holding Details:

Agricultural land holding is about 41 acres and 37 gunthas at village Kanpur, Ta:

Sayla, Dist.: Surendranagar (Gujarat, India) PIN: 363430.

• Increase in agricultural revenues:

Agricultural income in F.Y. 2019-20 is Rs.4163806 and in F. Y. 2018-19 is Rs.3398684, increase of Rs.765122 only. There was no Increase in land holding from last financial year. The increase in agricultural Income is due various reasons which are stated as under:

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• Earlier, entire land was not under cultivation and there were some portion of land which was not used for agricultural activities. Since the land used in F.Y. 2019-20 Is entirely for agricultural activities, the agricultural revenues also shown a reasonable growth.
• Land used for agricultural activities since years and have now given yields for long-season crops, like mangos which ultimately contributed to the increase in agricultural revenues
• There were improvements in agricultural operations due to availability of some skilled persons/guide that led to Increase in crops yields. Thus increase in agricultural incomes.
• Monsoon during the year was quite good, which helped crops to grow suitably and in better conditions. We have sufficient and self-reliant irrigation facilities for the crop’s cultivation from time to time for the entire year. So qualitative yields/crops were obtained which helped increase in revenues.
• Our land is situated In quite good area and fertility of the soil is also good for which are taking special endeavour for better use of the land and to get better and qualitative crops. In this direction, we have also digging out the possibilities of organic farming for better life living.

All these factors, Including the grace of the Lord through a better rainfall helped us get better crops and increase in agricultural income.

Since the Increase In agricultural income is quite moderate looking the size of the land, the same should be accepted as true and correct.

However, if you need any further details/explanation please feel free to tell us.

(3)(A) Details of crops grown in F.Y. 19-20 & F.Y. 18-19:
Details of food crops etc. are attached herewith.

(3)(B) Productivity of land:

Our land is very fertile and we have been carrying on agricultural activities since long. As the there are various crops taken from time to time and from season-to-season details of productivity of land becomes technical. Moreover, the crops were harvested on various parts of land from time to time and from season to season. Thus, the productivity of land is quite good to give various kinds of agricultural produce from time to time.

(3)(C) Productivity of land as per Agriculture Office:

Coples of certificates from area Talati-cum-Mantri who is in charge of agricultural

land records office are attached herewith for Fir. 2019-20 and F.Y. 2018-19

(4) Details of Cash Book

Statements of Cash receipts and payments are attached herewith for both years.

9. In addition to this, Ld. Counsel for the assessee also submitted the land holding’s proof and stated that assessee is doing the business with help of the family members and all the lands were hold by the family members, which is more than 41 bigha. The assessee also submitted the crop-wise details before the assessing officer, which is mentioned as Page 42 of the

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paper book. The assessee also submitted the bank statements and expenses, vouchers etc, and the bills of sale of agricultural production. The Ld. Counsel further submitted that production of agricultural items in the previous year was at Rs.33,00,000/- and currently agricultural income was Rs.42,00,000/-, hence, there is no substantial increase in the agricultural income. The agricultural activities are being done by all the family members, therefore, they did not much dependent on the labour. The Ld. Counsel submitted the expenses details and the Talati Certificate, showing the fact that assessee has been doing agricultural activities on the said land since a long.

10. On the other hand, Ld. CIT-DR for the revenue submitted written submission before the Bench and stated that assessee has failed to submit the details of expenses. The assessee has also failed to submit the entire detail of sale of agricultural produce. However, the assessee has submitted full details relating to agricultural income and expenses, before the assessing officer, which is not sufficient. Therefore, Ld. PCIT has rightly exercised his jurisdiction u/s 263 of the Act. The Ld. CIT-DR further submitted that HUF cannot be the owner of agricultural land in Gujarat and only Individual person can hold the agricultural land.
11. In rejoinder, the Ld. Counsel for the assessee submitted that assessee is doing agricultural activities by way of joint family concerns, i.e., all brothers and sisters are residing in one house and they are doing the agricultural activities, therefore, it is not purely HUF, but composition of all family members. That is, all the family members are doing agricultural activities in a joint family.
12. We have heard, both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents

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furnished and the case laws relied upon and perused the facts of the case including the findings of the Ld. PCIT and other material brought on record. We note that during the assessment proceedings, the assessing officer conducted enough inquiry by issuing notice u/s 142(1) of the Act dated 09.11.2021 and in fact the assessing officer had issued second notice u/s 142(1) of the Act, and the assessee submitted its reply before the assessing officer with documentary evidences. Apart from this, the assessee submitted the following documents and evidences before the assessing officer, which is reproduced below:

• Copies of revenue records in Form no.7/12 & 8A in respect of agriculture lands held at Village Kapur, Dist – Surendranagar,
• Details of agriculture income and expenses in desired format of the assessing officer.
• Cash flow statement for the period from 01.04.2018 to 31.03.2020.
• Copy of bank statement of account no.0001100100000570 held with the Co-operative Bank of Rajkot Ltd, for the period from 01.04.2018 to 31.03.2020.
• Copies of balance sheet for FY 2017-18 to FY 2019-20.
• Certificate of Talati Mantri for FY 2018-19 & 2019-20.

13. From the above details and documents, which were submitted by the assessee before the assessing officer clearly demonstrates that assessing officer called enough documents and evidences from the assessee to verify the agricultural income and agricultural expenses. Therefore, we note that the assessing officer, while framing the original assessment, had made thorough inquiry on the impugned issues and reached the conclusion. Copy of notice issued is submitted as Annexure-1 by the assessee, from which, it can be verified that the assessing officer has asked all the necessary and relevant questions during the assessment proceeding and called for the

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documents. During the assessment proceedings, the assessing officer had meticulously checked all the documents and supporting evidence and after getting the required satisfaction, assessment order was passed as per the provisions of the Act. Thus, the assessing officer had made thorough and exhaustive inquiry during the assessment proceeding and the assessment order was passed after due verification of reply of the assessee and in accordance with the legal provisions.

14. We also note that assessing officer has already called for details related to land, area of land, productivity, sales, documentary proof from the area in charge etc. All these details are directly related to quantity, quality, productions, sales etc. It is reiterated that the assessing officer has carried proper verification and after due verification, he has passed order which in no manner can be considered as erroneous. Further, the assessing officer in his order mentioned at page 6 that, “documents furnished by the assessee during the course of assessment proceeding have been duly verified and notice u/s 133(6) have been issued in six (6) cases. Reply received from the seller tallied with the assessee’s submission and same has been considered and accepted. Hence, the assessing officer has not just relied on the details submitted by the assessee but also made independent inquiry by issuing notice u/s 133(6) and only after receipt of reply, the assessing officer has passed the order. This clearly shows that the assessing officer was thorough and meticulous in his approach and has carried out the assessment in accordance with the words and spirits of the law and after following the due procedure. Moreover, in many cases, purchasers have made payment of consideration to the assessee through banking channel. Therefore, there is no question of doubting sales of agricultural production. During the assessment proceeding, the assessee has also furnished the following details to prove the genuineness of sale of mangoes and other agricultural produce:

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• Revenue records of agricultural lands in Form No.7, 12, 8/A showing various crop details on the agricultural land situated at Village Kanpur, Tal. Sayla, Dist. Surendranagar.
• Cash statement showing cash receipts against sale of agricultural produce;
• Bank statement reflecting amount received from customers through banking channel;
• Certificate of Talati (revenue officer) of Kanpur Village Gram Panchayat certifying the crops taken during the year on the impugned land owned by the assessee.

15. Therefore, details called for and submitted during the assessment proceeding is more than sufficient to justify the agricultural operations and hence, issue raised in the impugned notice by ld.PCIT under section 263 of the Act, is completely uncalled for. Therefore, we find that the assessing officer has carried out a thorough investigation and he has checked in detail not only the agricultural receipts but also the supporting evidences during the course of assessment proceedings. Also, it is clear from the text of the notices that assessing officer has checked each and every thing which he was supposed to and there was nothing lacking on his part. In view of the above, the assessment order passed by the assessing officer is neither erroneous nor is prejudicial to the interest of revenue.
16. On the identical and similar facts, ITAT, Rajkot Bench in the case of Shri Vasantkumar Manji Thacker & Himmat Liladhar in ITA No133/RJT/2022 held as follows:

10.1 An inquiry made by the Assessing Officer, considered inadequate by the Commissioner of Income Tax, cannot make the order of the Assessing Officer erroneous. In our view, the order can be erroneous if the Assessing Officer fails to apply the law rightly on the facts of the case. As far as adequacy of inquiry is

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considered, there is no law which provides the extent of inquiries to be made by the Assessing Officer. It is Assessing Officer’s prerogative to make inquiry to the extent he feels proper. The Commissioner of Income Tax by invoking revisionary powers under section 263 of the Act cannot impose his own understanding of the extent of inquiry. There were a number of judgments by various Hon’ble High Courts in this regard.

15. Thus, even the Commissioner conceded the position that the Assessing Officer made the inquiries, elicited replies and thereafter passed the assessment order. The grievance of the Commissioner was that the Assessing Officer should have made further inquiries rather than accepting the explanation. Therefore, it cannot be said that it is a case of ‘lack of inquiry.”
16. Hon’ble High Court of Karnataka in the case of CIT vs. Gokuldas Exports [2012] 333 ITR 214 (Kar.) has held that:

“Every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to interests of revenue. If in given facts and circumstances of a case, two views are possible and one view has been adopted by Assessing Officer, then that view alone would not be sufficient to exercise powers under section 263 by Commissioner.”

17. Therefore, we note that the assessing officer had put a specific question before the assessee during the course of assessment and taken his reply on record. Further the assessing Officer had also discussed this aspect as part of assessment order. So, in our view, this is not a case where no enquiry has been made by the assessee officer during the course of assessment proceedings. It is also not the case of the Pr. CIT that the assessing officer failed to apply his mind to the issues on hand or he had omitted to make enquiries altogether or had taken a view which was not legally plausible in the instant facts. As held by various Courts, Principal CIT cannot in 263 proceedings set aside an assessment order merely because he has a different opinion in the matter. In our view, section 263 of the Act does not visualise a case of substitution of the judgment of the Principal CIT for that of the Assessing Officer who passed the order unless the decision is held to be wholly erroneous. We thus find no error in the order of assessing officer so as to justify initiation of 263 proceedings by the Ld. Pr. CIT. Hence, we

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quash the order of learned PCIT under section 263 of the Act and allow the appeal of the assessee.

18. In the result, appeal filed by the assessee, is allowed. Order is pronounced in the open court on 30/03/2026.