Income from sale of cocoons cannot be regarded as agricultural income

Shri. B. S. Byregowda (HUF) Vs ITO (ITAT Bangalore)

Income from sale of cocoons cannot be regarded as agricultural income in view of the decision of the Hon’ble Apex Court in the case of K. Lakshmanan & Co. Vs. CIT (2000) 108 Taxman 167 (SC); wherein it was held that income derived by the assessee from sale of cocoons raised by it by feeding mulberry leaves to silkworms is not agricultural income. In the case on hand, the AO has considered income from sericulture at Rs.1,92,240/- and 50% thereof viz., Rs.96,120/- as income derived from cultivation of mulberry plants. It has already been held in this order that the AO was not correct in estimating, both the agricultural income as well as the expenditure thereon, when the facts on record establish that the assessee HUF had carried on agricultural operations; including the growing of Mulberry plants and sericulture; during the year under consideration. In the facts and circumstances of the case, as discussed above, on this issue, the income from sericulture as declared by the assessee amounting to Rs.15,42,199/- is to be accepted and 50% thereof, amounting to Rs.7,71,100/- is held to be attributable to the sale of cocoons, which is chargeable to tax.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal by the assessee is directed against the order of CIT(A)-3, Bangalore, dated 01.01.2019 for Assessment Year 2014-15.

2. Briefly stated, the facts of the case are as under:

2.1 The assessee HUF, engaged in agricultural operations, filed its return of income for Assessment Year 2014-15 on 01.08.2014 declaring total income of Rs.6,16,570/- and net agricultural income of Rs.37,50,000/-. The case was taken up for scrutiny for this Assessment Year and the assessment was concluded under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) vide order dated 27.12.2016, wherein the assessee’s income was determined at Rs.35,68,820/-; by treating agricultural income declared, to the extent of Rs.29,52,250/-, as income from other sources. The assessee’s appeal was dismissed by the CIT(A)-3, Bangalore, vide order dated 01.01.2019.

3. Aggrieved by the order of CIT(A)-3, Bangalore, dated 01.01.2019 for Assessment Year 2014-15, the assessee has preferred this appeal wherein it has raised the following grounds:

1. General Ground

1.1. The learned Income Tax Officer, Ward- 1, Ramanagar (`A0′) has erred in passing the assessment order under section 143(3) of the Income Tax Act, 1961 (`the Act’) in the manner passed by her and the Commissioner of Income Tax-(Appeals)-3 (`CIT(A)’) has erred in confirming the said assessment order. The said order being bad in law is liable to be quashed.

2. Re-categorization of agricultural income as non- agricultural income chargeable under the head Income from other Sources – Tax effect — Rs.  8,85,675

2.1 The learned CIT(A) has erred in law and facts by re-characterizing the income amounting to Rs. 37,50,000 claimed to be earned by the assessee from agricultural operations and recomputing the agricultural income of the appellant at Rs. 7,97,750 and treating the balance amount of Rs. 29,52,250 as income from other sources.

2.2. The learned CIT(A) has erred in relying on the RTC and the MA to conclude that no agricultural activity was carried on by the appellant.

2.3. The learned CIT(A) has failed to appreciate that:

i. the RTC is not a conclusive proof of whether the agricultural activities were carried out

ii. the RTC were not updated and the appellants repeated attempts to update the same with the appropriate authorities had failed. The same is a very tedious, cumbersome procedure and fully dependent on the willingness of the concerned officials to update the RTC

iii. the RTC cannot capture the growth of many crops, vegetables whose yields arc hi monthly or tri monthly and just once in a year.

2.4. The learned CIT(A) has erred in not appreciating that the bills and self-made receipts in relation to the crops sold to Hopcoms and open market respectively were produced. Further, the rates at which the produce was sold are reasonable and are at the discretion and as per the prudence of the cultivator. Therefore, the allegation as to the rates being exorbitant and consequently the claim being bogus is false, baseless and without any justification.

2.5. The learned CIT(A) has erred in rejecting the report of the village accountant which contained the survey wise details of crops grown and evidences from the neighboring land owners that the land was under cultivation during the said period.

2.6. The learned CIT(A) has erred in not appreciating that the agricultural income offered is net of the minimum expense incurred.

2.7. The learned CIT(A) has erred in so far as computing the income from growing and sale of banana crop by estimating the expenses that would be incurred in relation to growing attic crop by relying on the letter of the horticulture department.

2.8. The learned CIT(A) has erred in not appreciating that minimum or no expenses are required to maintain the banana trees and the family members being involved in the activities, there is a cost saving in the labour expenses to that extent.

2.9. The learned CIT(A) has erred in concluding that in relation to sericulture activity that since the license is in the name of the Karta of the HUF who represents the entire family, being the eldest male member of the HUF no other person has carried out the sericulture activity.

2.10. The learned CIT(A) has erred in relying on the letter of the sericulture extension officer and concluding that no sericulture activity was carried on land beyond the land area measuring acer and 5 guntas and the appellant would he buying and selling cocoons (trading) in so far as the remaining income is concerned.

2.11. The learned CIT(A) has erred in law and facts to the extent of concluding that the income from sericulture activity as partially agricultural in so far as being related to cultivation of mulberry leaves on an ad hoc basis.

2.12.The learned CIT(A) has erred in concluding that expenses upto 40 percent to 50 percent are incurred in earning income from sericulture activities, without any basis and further concluding that no such income can be earned without the help of labour.

2.13. The learned CIT(A) has erred in not appreciating that income from sale of coconuts did not entail any expenses as a result of the contract for the removal, sale, upkeep and transportation of the coconuts being given to outside parties. Therefore, the income received is offered as such.

2.14. The learned CIT(A) has erred in concluding that the appellant has other sources of income merely on presumptions, surmises and conjunctures and that the same has been falsely claimed as agricultural income.

2.15. The learned CIT(A) has erred in levying interest under section 23413 and 234C of the Act. On facts and circumstances of the case and law applicable, interest under section 23413 and 234C is not leviable.

2.16. Prayer:- In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed under section 143(3) be quashed and that agricultural income as claimed in the return of income be accepted. The Appellant prays accordingly.

4. Ground Nos.1 and 2.16 (supra),being general in nature, no adjudication is called for thereon.

5. Ground No.2.15 – Charging of Interest under section 234B and 234C of the Act

5.1 In this ground (supra), the assessee denies himself liable to be charged interest u/s 234B and 234C of the Act. The charging of interest is consequential and mandatory and the AO has no discretion in the matter. This proposition has been upheld by the Hon’ble Apex Court in the case of Anjum H. Ghaswala (252 ITR 1) (SC) and I, therefore, uphold the action of the AO in charging the assessee the aforesaid interest u/s 234B and 234C of the Act. The AO is, however, directed to re-compute the interest chargeable u/s 234B and 234C of the Act, if any, while giving effect of this order.

6. Ground No.2 (2.1 to 2.14) – Recategorization of Agricultural income as Non-Agricultural income under the head ‘Income from Other Sources”

6.1.1 The learned AR for the assessee was heard in support of the grounds raised (supra). According to the learned AR, the assessee is a HUF comprising of 13 members from agricultural backgrounds owning agricultural lands of approx. 28 acres; with 17 acres being ancestral lands and approx. 11 acres of agricultural lands purchased by the HUF over a period of time. It is submitted that the fact that agricultural operations were carried out by the assessee in the year under consideration is not in dispute and it is only the quantum of agricultural income that is the issue in dispute. The learned AR submits that, compared to the agricultural income of earlier years; i.e., Assessment Year 2012-13 amounting to Rs.32 lakhs and for Assessment Year 2013-14 of Rs.36 lakhs, which has been accepted by the Assessing Officer (AO) in scrutiny orders of assessment passed under section 143(3) of the Act for these years, the agricultural income of the year under consideration is Rs.37,50,000/-; i.e., only a marginal increase of Rs.1.5 lakhs. The learned AR placed reliance on the decision of the Hon’ble Karnataka High Court in the case of S. L. Basavaraj Vs. ACIT (2015) 61 www.taxguru.in 67 (Karn) to contend that the agricultural income declared by the assessee cannot be rejected if there is only a marginal increase in the said income during the relevant year as compared to earlier years. Reliance was also placed on the decision of the Hon’ble Allahabad High Court in the case of CIT Vs. Landmark Innovation (P) Ltd., (2013) 38 217 (Allahabad) to contend that where agricultural activities on land was accepted for earlier years, same could not be doubted in the subsequent year in the absence of cogent evidence.

6.1.2 The learned AR, referring to the details filed by the assessee in Paper Book (pages 1 to 170), submitted that the AO conducted enquiries with the Village Accountant by issuing notice under section 133(6) of the Act dated 07.12.2016 calling for details of crops grown by the assessee, as there was no crop information mentioned in the RTC’s i.e., the land records. In reply thereto, report dated 12.12.2016 was submitted by the Revenue Inspector, Village Accountant; including the Mahazar report by the Village Accountant in the presence of the Revenue Inspector and the villagers / neighbouring cultivators, which gave out the complete survey wise cultivation details. According to the learned AR, these enquiries carried out by the AO and reports filed by the aforesaid authorities are evidence to the fact that the assessee derived / earned agricultural income during the year under consideration.

6.1.3 It was submitted that the AO erred in reducing the quantum of agricultural income from bananas and sericulture on the basis of enquiries conducted with the Senior Assistant Director, Horticulture Department and Sericulture Extension Officer without providing the assessee opportunity to rebut the statements given by them. The learned AR challenged the basis of the additions made by the AO and contended that the impugned additions are bad in law and liable to be deleted. Without prejudice, it was submitted that the AO has treated 50% of the income from sericulture as agricultural income attributable to growing of Mulberry leaves in view of the decision of the Hon’ble Apex Court in the case of K. Lakshmanan & Co. Vs. CIT (1999) 239 ITR 597 (SC); where it was held that income derived by the assessee from sale of cocoons raised by it by growing and feeding mulberry leaves to silk worms is not agricultural income. The learned AR contended that in these circumstances, the income from sericulture during the year under consideration being Rs.15,42,199/-, then 50% of the same amounting to Rs.7,71,100/- should be considered as agricultural income and the balance amount of Rs.7,71,100/- may be held chargeable to tax.

6.2 Per contra, the learned DR for Revenue vehemently supported the orders of the AO/CIT(A); which he submits; has been passed after considering all the facts and therefore the additions made by the AO and upheld by the CIT(A) are to be upheld.

6.3.1 I have considered the rival contentions / submissions put forth and have perused the material on record; including the judicial pronouncements cited. It is not in dispute that the assessee HUF owned agricultural lands in the year under consideration. The AO was of the view that the assessee had entered into a joint development agreement (JDA) and converted for non-agricultural purposes, the CIT(A) at para 4.8 of his order was of the view that the entire analysis of the AO is based on the evidence produced by the assessee regarding the carrying out of agricultural activities and sale of agricultural produce. The CIT(A) was also of the view that the AO has not based his / her conclusions on the fact that any agricultural operations carried out on such land, could not be considered agricultural activity. This finding of the CIT(A) has not been disputed by Revenue. Therefore, the fact that the JDA was entered into and the agricultural lands were converted for non-agricultural purposes has no relevance in the case on hand.

6.4 The next issue for consideration is whether the assessee HUF carried out agricultural operations during the year. In this regard, it is seen that the AO, in the course of assessment proceedings, conducted enquiries with the village accountant by issue of notice under section 133(6) of the Act dated 07.12.2016 calling for details of crops grown in each survey number of agricultural land. In response thereto, the Village Accountant and Revenue Inspector have submitted their reports dated 12.12.2016 giving survey number wise details of cultivation carried out / crops grown; including other details along with statements of neighbouring cultivators to the effect that the assessee’s lands in question were under cultivation in the year under consideration. The notice issued by the AO, copy of reports given by the Village Accountant, Revenue Inspector and translated copies thereof are placed at pages 75 to 99 of Paper Book. From an appraisal thereof, in the period relevant to Assessment Year 2014-15, the assessee HUF was growing various crops and fruits like ragi, mangoes, bananas, vegetables, coconut, etc., and thereby derived agricultural income. In these factual circumstances, the very basis of the AO to hold that the assessee HUF did not carry on agricultural operations during the year is factually incorrect; being contrary to the facts on record.

7.1 In respect of agricultural income from cultivation / sale of bananas and sericulture, the AO has estimated the income, expenditure, etc., on the basis of enquiries made with Senior Assistant Director, Horticulture Department and Sericulture Extension Officer. However, it is an undisputed fact, as per the material on record, that the assessee was carrying on agricultural operations during the year under consideration as per the reports of the Village Accountant and Revenue Inspector submitted in response to information called for by the AO under section 133(6) of the Act. Further, as per details submitted by the learned AR, it is seen that the agricultural income declared by the assessee during the year was only Rs.1.5 lakhs more than the agricultural income declared by the assessee and accepted by the AO in the scrutiny orders of assessment passed under section 143(3) of the Act for earlier Assessment Years 2012-13 and 2013-14. In this factual matrix, as discussed above, the AO was not correct in estimating the agricultural income and expenditure incurred to earn the same; to make the impugned additions.

7.2 However, as fairly conceded by the learned AR, income from sale of cocoons cannot be regarded as agricultural income in view of the decision of the Hon’ble Apex Court in the case of K. Lakshmanan & Co. Vs. CIT (2000) 108 Taxman 167 (SC); wherein it was held that income derived by the assessee from sale of cocoons raised by it by feeding mulberry leaves to silkworms is not agricultural income. In the case on hand, the AO has considered income from sericulture at Rs.1,92,240/- and 50% thereof viz., Rs.96,120/- as income derived from cultivation of mulberry plants. It has already been held in this order that the AO was not correct in estimating, both the agricultural income as well as the expenditure thereon, when the facts on record establish that the assessee HUF had carried on agricultural operations; including the growing of Mulberry plants and sericulture; during the year under consideration. In the facts and circumstances of the case, as discussed above, on this issue, the income from sericulture as declared by the assessee amounting to Rs.15,42,199/- is to be accepted and 50% thereof, amounting to Rs.7,71,100/- is held to be attributable to the sale of cocoons, which is chargeable to tax.

7.3 Thus, out of the total addition of Rs.29,52,250/- made by the AO, the addition is sustained to the extent of Rs.7,71,100/- and the balance addition of Rs.21,81,150/-. The OA is accordingly directed.

8. In the result, assessee’s appeal for Assessment Year 2014-15 is partly allowed.

Pronounced in the open court on 17^th May, 2019.