AO Cannot Uniformly Apply 40% Expense Benchmark to Agricultural Revenue

Chaudhari Nanubhai Jeshingbhai (HUF) Vs DCIT (ITAT Ahmedabad)

The case of Chaudhari Nanubhai Jeshingbhai (HUF) vs. DCIT (ITAT Ahmedabad) addresses the issue of arbitrarily applying a standardized expense ratio to agricultural income without considering specific variations in agricultural practices, crop types, and local conditions. The appeal was filed against the order of the Commissioner of Income-Tax (Appeals)-4, Ahmedabad, which was dated 7th December 2018, for the assessment year 2015-16.

Facts and Background:

The sole issue in this appeal was the reduction of agricultural income by Rs. 8,53,873/- on account of the expenditure claimed by the assessee, which the authorities found to be insufficiently substantiated. The assessee had reported an agricultural income of Rs. 29,16,286/- and claimed expenses amounting to Rs. 3,12,641/-, resulting in a net agricultural income of Rs. 26,03,645/-. However, the Assessing Officer (AO) deemed the reported expenses to be too low and asserted that agricultural expenses should reasonably amount to 40% of the gross agricultural receipts. This conclusion was based on a precedent from the ITAT, Ahmedabad Bench in the case of Dhirubhai L. Narula & Others.

Arguments and Findings:

The assessee argued that complete books of accounts, vouchers, and bills were maintained and presented to the AO. The receipts of agricultural income were all by cheques. The assessee also contended that the cited precedent was not applicable to their case due to the specific advantages enjoyed, such as subsidized electricity, efficient land watering systems, and the cultivation of cash crops requiring less labor and maintenance. Despite these arguments, the Revenue authorities rejected the assessee’s books, citing insufficient supporting evidence for the vouchers.

The ITAT Ahmedabad found the Revenue’s approach to estimating agricultural expenses to be arbitrary, ad hoc, and baseless. The entire exercise of the Revenue authorities was critiqued for relying solely on the decision in the case of Dhirubhai Narula, which the ITAT felt was misunderstood and inappropriately applied as a generalized rule. The ITAT emphasized that judicial findings, especially on factual aspects, should not be universally applied without considering specific circumstances. The type of crops grown, the agricultural facilities available, and various other factors can significantly influence the quantum of expenses incurred.

Key Points from ITAT’s Decision:

1. Generalization of Precedents: The ITAT highlighted that judicial findings should not be applied uniformly across all cases without considering specific circumstances. The decision in Dhirubhai Narula, which suggested that agricultural expenses typically constitute 40% of the total agricultural revenue, cannot be a blanket rule applicable to all cases.
2. Specific Conditions and Variations: The ITAT noted that different crops have varying cost structures. The expenses involved in cultivating cash crops are different from those for traditional crops. Furthermore, local benefits such as subsidized electricity and efficient irrigation systems can significantly reduce agricultural costs.
3. Rejection of Books of Accounts: The ITAT found the Revenue’s rejection of the assessee’s books of accounts to be unjustified. The rejection was based on a general statement without considering the specific evidence and explanations provided by the assessee.
4. Need for Detailed Examination: The ITAT stressed the importance of a detailed examination of the facts and circumstances in each case. The authorities should not dismiss substantiated claims without adequate scrutiny and justification.

Conclusion:

The ITAT Ahmedabad concluded that the Revenue’s estimation of agricultural expenses and the resultant reduction in the assessee’s agricultural income were unjustified. They ruled in favor of the assessee, deleting the addition of Rs. 8,53,873/- to the income and allowing the appeal. This decision underscores the necessity for tax authorities to consider specific conditions and evidence presented by taxpayers rather than relying on generalized precedents, thereby ensuring a fair and just assessment process.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

Present appeal has been filed by the assessee against order passed by the ld. Commissioner of Income-Tax(A)-4, Ahmedabad [hereinafter referred to as “ld.CIT(A)”] dated 7.12.2018 under section 250(6) of the Income Tax Act, 1961 (“the Act” for short) pertaining to Asst. Year 2015-16.

2. Sole issue in the present appeal relates to reducing agricultural income returned by the assessee by Rs.8,53,873/- on account of expenditure claimed by the assessee against the said income found to be less to this extent..

3. We have heard both the parties. We have also gone through the orders of the authorities below. We have noted that while the assessee had shown agricultural income of Rs.29,16,286/- and claimed expenditure of Rs.3,12,641/- against the same, returning net agriculture income of Rs.26,03,645/-, the Assessing Officer (AO) held that the expenses claimed by the assessee was very low and ought to have been around 40% of the agriculture income. For this finding and estimation, he relied upon the decision of ITAT, Ahmedabad Bench in the case of Dhirubhai L. Narula & Others, ITA Nos.2190 to 2192/Ahd/2004 dated 17.04.2004 noting that it had categorically stated 40% of gross receipts being reasonable expenditure bound to happen in agricultural activities carried out in Gujarat. The ld.CIT(A), has confirmed this finding of the AO.

4. As emanates from the order of the authorities below, the assessee had stated that he was maintaining complete books of accounts, vouchers and bills with regard to his agriculture activities, and had also produced the same before the AO. He had also pointed out that all his receipts of agricultural income was by way of cheques, and he had also stated that the decision of Dhirubhai Narula (supra) was not applicable in his case for the reason that he was enjoying many benefits and facilities of subsidized electricity power, and having land watering, and that the assessee was also growing cash crops and not traditional crops and required less labour and nourishing and maintenance. He had also pointed out that considering the fact that he was maintaining of books of accounts, the decision of the ITAT Bench cited (supra) would not be applied in his case. The Revenue authorities however rejected the assessee’s books by simply noting that vouchers were not duly supported with evidence.

5. On considering the facts of the case as above, we find that entire exercise of the Revenue in estimating the agricultural expenses incurred by the assessee and thus increasing it by Rs. 8,53,873/- is purely arbitrary, adhoc and without any basis at all. The sole basis of the estimation of agricultural expenses is the decision of the coordinate bench of the ITAT in the case of Dhirubhai Narula (supra). There cannot be any generalized finding of fact by a judicial authority to be applied across board in all situations. It is appalling that all learned Revenue authorities below have understood the judgement rendered by the ITAT holding that agricultural expenses constitute 40% of the total agricultural revenue, to apply across board to all situations and all types of agricultural incomes earned, whether relating to the regular crops or cash crops, and whether the agricultural activities are carried out in different facts and circumstances. There cannot be any such blanket proposition laid down on a factual aspect. It is common sense that quantum of expenses incurred for growing different crops varies with the type of crops grown, the facilities available to the agriculturist from the state and other factors. The assessee having pointed out and explained the circumstances and factors attributable to the low expenses incurred, and having also produced books of accounts to substantiate its claim, and the Revenue rejecting the books by a mere general statement that the vouchers were not supported with evidence., we hold that the rejection of the books of accounts maintained by the assessee and his explanation for claim of expenses is highly unjustified so also the application of a factual proposition laid done by the ITAT, that too without considering the distinction pointed out by the assessee in the facts of his case with that in the case before the ITAT.

6. In view of the above discussion, the reduction of agriculture income to the extent of the impugned expenditure estimated of Rs.8,53,873/- is deleted.

7. In the result, the appeal of the assessee is allowed.

Order pronounced in the Court on 26^TH September, 2022 at Ahmedabad.