Case Law Details
Eknath Ramkrisnanrao Salve Vs ITO (ITAT Pune)
The case of Eknath Ramkrisnanrao Salve Vs. Income Tax Officer (ITAT Pune) revolves around three primary issues: the taxability of subsidy received, disallowance of interest on interest-free advances, and disallowance of agricultural income on an estimated basis. Let’s delve into each of these issues.
Taxability of Subsidy Received: Mr. Salve received a subsidy of Rs. 13,19,670 from the Agricultural Department, Government of Maharashtra, for installing drip irrigation systems. The Assessing Officer treated this subsidy as taxable revenue receipt, while Mr. Salve argued that it should be considered a capital receipt. He provided a letter from the Agricultural Department specifying the subsidy amount for him and his family members. However, the CIT(A) upheld the Assessing Officer’s decision, holding that the subsidy was indeed a revenue receipt.
The ITAT Pune, upon reviewing the case, found that the CIT(A) failed to adequately justify why the subsidy should be considered a revenue receipt. They noted that subsidies can be either capital or revenue depending on the terms and conditions of the scheme. Therefore, they remanded the case back to the CIT(A) for further adjudication, instructing them to determine whether the subsidy should be treated as capital or revenue. The ITAT emphasized the need for a detailed explanation from the CIT(A) regarding this classification.
Disallowance of Interest on Interest-Free Advances: Mr. Salve had given an interest-free advance of Rs. 20,00,000 to Shri T.A. Khan. The Assessing Officer disallowed the proportionate interest expense related to this advance, estimating it at 12%. However, Mr. Salve argued that this disallowance should be deleted based on the principle of presumption regarding interest-free funds, citing relevant court judgments.
The ITAT Pune agreed with Mr. Salve, stating that there was no dispute regarding the availability of interest-free funds or the advance given to Shri T.A. Khan. They referred to judgments from the Bombay High Court that supported Mr. Salve’s position. Therefore, the ITAT deleted the disallowance made by the Assessing Officer.
Disallowance of Agricultural Income on an Estimated Basis: The Assessing Officer disallowed a portion of Mr. Salve’s agricultural income, suspecting that the expenditure claimed was understated. They made an estimated addition of Rs. 6,07,114 to the income. However, the CIT(A) partially allowed Mr. Salve’s appeal, reducing the disallowance to Rs. 3,23,139 based on a 40:60 ratio of expenditure to net agricultural income.
The ITAT Pune found the CIT(A)’s decision reasonable and fair, in line with precedent. They dismissed Mr. Salve’s appeal on this issue.
In conclusion, the ITAT Pune partly allowed Mr. Salve’s appeal for statistical purposes. The case highlights the importance of properly categorizing subsidies and considering the principle of presumption regarding interest-free funds.
FULL TEXT OF THE ORDER OF ITAT PUNE
This appeal is filed by the assessee against the order of CIT(A)-1, Aurangabad dated 21.06.2018 for the Assessment Year 2011-12.
2. The grounds raised by the assessee are as under :-
“1. On the facts and in the circumstances of the case and in the law the Lower authorities have erred in making addition of Rs. 13,19,670/- by treating the amount of Rs.13,19,670/- being subsidy received on behalf of the farmers as income of the assessee.
2. On the facts and in the circumstances of the case and in the law the Lower authorities have erred in making addition of Rs. 1,49,830/- on account of disallowance of interest on interest free advances.
3. On the facts and in the circumstances of the case and in the law the Lower authorities have erred in making addition on estimated basis by making an addition of Rs. 6,07,114/- by disallowing the agricultural income earned by the assessee on estimated percentage basis.
The appellant craves for to leave, add, alter, modify, delete above ground of appeal before or at the time hearing, in the interest of natural justice.”
3. Briefly stated the relevant facts include that the assessee is an individual and derives income from the business of maintaining of the Petrol Pump. The assessee filed the return of income declaring total income of Rs.11,10,040/-. During the assessment proceedings, Assessing Officer noted that the assessee installed drip irrigation systems and received subsidy of Rs.13,19,670/- i.e. 50% of the investment. The same was subjected to tax by the Assessing Officer holding it as a ‘revenue receipt’. Further, the Assessing Officer made another addition of Rs.1,49,830/- on account of disallowance of “proportionate interest” expenditure relatable to the interest-free advances given to Shri T.A. Khan. Assessee gave advance of Rs.20 lakhs to Mr. Khan. Otherwise, the assessee took interest bearing loans from the bank and paid interest thereon. Therefore, the Assessing Officer disallowed the interest on proportionate basis. Third addition made by the Assessing Officer includes a sum of Rs.6,07,114/-. Related facts of this addition include that the assessee received agricultural gross receipts amounting to Rs.45,20,718/- and the related expenditure is claimed is Rs.14,84,958/- i.e. @ 33%. The assessee justified the earning of such huge agricultural receipt by applying modern high income yielding materials or methods in his lands. The agricultural field and did agricultural activities adopting latest and modern techniques of agricultural and other advance technology in farming yielded high values of agricultural income. The assessee also justified the less agricultural expenditure. However, the Assessing Officer suspected such huge agricultural income with lesser agricultural expenditure is not possible. The Assessing Officer disallowed 20% of the net income of Rs.30,35,760/- (i.e. Rs.45,20,718/- minus Rs.14,84,958/-). Rs.6,07,114/- is the product of the same. The CIT(A) partly allowed the appeal of the assessee. While partly confirming the said additions on account of the agricultural income related addition, the CIT(A) held that the agricultural expenses at the rate of 40% of the gross receipt should be reasonable. In effect, the assessee got relief of Rs.2,83,975/-against the disallowance of Rs.6,07,114/-.
4. Aggrieved with the above confirming of additions on account of subsidy and proportionate disallowance of interest, the assessee is in appeal before me.
5. Ground no.1 relates to the taxability of subsidy receipts given by the Agricultural Department, Government of Maharashtra. The assessee offered the same as a capital receipts and Revenue held it as taxable revenue receipts. The background facts of this issue include that the assessee and his family members holds 90 acres of land (17 different Gut Numbers belonging to 7 family members). The assessee being technocrat holding B.Sc. Degree in the agriculture. He adopted drip irrigation systems and spent Rs.26,39,340/- on this account. On submission of a subsidy proposal to the Government of Maharashtra to the entire family members, the State Government granted 50% of the investment as subsidy amounting to Rs.13,19,670/-. In support, the assessee furnished a letter dated 07.10.2017 issued by the Agricultural Department, Government of Maharashtra before the Assessing Officer. The said letter contains the details of the subsidy amount for installing the drip irrigation systems for the assessee and his family members. Without appreciating the above facts, the Assessing Officer, for want of credible evidence, treated the said subsidy as a taxable receipt. Assessing Officer did not have the benefit of the said letter from the Government. However, the assessee improved his case by furnishing the said letter issued by the Maharashtra Government. The assessee argued that the said subsidy receipts constitute a capital receipt and the same cannot be treated as revenue receipt.
6. During the first appellate proceedings, the CIT(A) held against the assessee holding that the same is revenue receipt as per discussion given in para 5 of his order. The CIT(A) detailed the ownership of each of the Gut Numbers where the drip irrigation systems is installed. Eventually, the CIT(A) held against the assessee as per discussion given in para 5 of his order. For the sake of completeness, the relevant portion of the said para 5 of CIT(A)’s order is extracted hereunder :-
“5. …………..
Reverting back to the present case, I fully agree with the A.O. that the appellant was not cultivating lands of his family members at Amdapur and Ithalapur. In respect of land at Gut No.109, Singhnapur, the appellant in his individual capacity owned only 3.25 hectares of land. The other family members of the appellant vide agreement dated 13.03.2009 had given their lands to him for cultivation. Thus about 22 acres of land at Singhnapur had been received by the appellant on 13.03.2009. However the lands at Amdapur and Ithalapur were never cultivated by appellant. On the other hand, the certificate issued by the Agricultural Officer of the Government of Maharashtra dated 07.10.2017 showed that subsidy of Rs.3,08,000/- had been received by Shri Ramkishan Limbajirao Salve in respect of drip irrigation systems installed in his lands at Amdapur. Similarly Smt. Kantabai Balasaheb Salve had received the subsidy of Rs.6,85,000/- in respect of drip irrigation systems installed in her lands at Ithalapur and Singhnapur. Further Shri Sundar Balasaheb Salve had received the subsidy of Rs.6,76,400/- in respect of drip irrigation systems installed in his lands at Ithalapur and Singhnapur. From the certificate issued by the Agricultural Officer of the Government of Maharashtra dated 07.10.2017, it is clear that the appellant had received subsidy of Rs.3,10,500/- for the drip irrigation system installed in his lands at Gut No.109, Singhnapur. However it is not understood as to who had made investment of Rs.26,39,340/- in the purchase of drip irrigation systems which were alleged to be installed in the agricultural lands. At least, the same is not borne out from the records. The appellant had made investment of Rs.3,10,500/- in the purchase/installation of drip irrigation system in his agricultural lands admeasuring 3.25 hectares at Gut No.109, Singhnapur. However the details of remaining investment are not available on record. Further there is no corroborative evidence that such drip irrigation systems were actually installed in the agricultural lands of the family members. Therefore subsidy to that extent is liable to be taxed in the hands of the appellant. I accordingly hold that the appellant could not have credited subsidy of Rs.11,64,420/- (Rs.13,19,670/- less .1,55,250/-) to his capital account which belonged to his family members. Therefore the addition to the extent of Rs.11,64,420/- on account of subsidy made by the AO is sustained and this ground of appeal is accordingly dismissed.”
7. From the above, it is evident that the CIT(A) gave benefit to the extent of Rs.1,55,250/- before the balance sum of Rs.11,64,420/- is held to be revenue receipt in the hands of the assessee. CIT(A) observed that the said subsidy belongs to the family members too.
8. Aggrieved with the same, the assessee is in appeal before the Tribunal.
9. Before me, ld. Counsel for the assessee narrated the above facts and submitted that the assessee has taken loan of agricultural land holding of the family members and invested sum of Rs.26,39,340/-. Assessee proposed to the State Government for grant of subsidy which was allowed to the extent of 50% of the expenditure. There is no evidence on the sources of the funds of Rs.26,39,340/-. Further, he submitted that the entire para 5 and its sub-paragraphs of the order of the CIT(A), there is no whisper about why such amount is treated as revenue receipt against the assessee claim of capital nature. The CIT(A) should be aware that subsidy are of different types and they can be capital or revenue depending on the terms and conditions of the scheme. To that extent, the order of the CIT(A) on this issue is not sustainable since there is no discussion about why it is of the revenue in nature.
10. On the other hand, ld. DR for the Revenue heavily relied on the orders of the Assessing Officer and the CIT(A).
11. Heard both the sides on this issue relating to the nature of capital subsidy of Rs.13,19,670/-. The CIT(A) granted relief to the extent of Rs.1,55,250/- i.e. 50% of Rs.3,10,500/- which pertains to the assessee’s share of investment in the drip irrigation systems per se relating to the drip irrigation systems (DIS) installed in Gut No.109, Singhnapur. On perusal of the facts relating to the Gut Numbers, drip irrigation systems installations and expenditure incurred by the assessee on the said drip irrigation systems, absence of any agreement between the assessee and the family members for allowing him to exploit the loans for agricultural technological inputs etc and the said para 5 of the order of the CIT(A), I find the CIT(A) failed to adjudicate how such subsidy receipt constitutes a revenue receipt against the assessee claim of capital nature. In my view, there is need for CIT(A) to pass a speaking order determining the issue of capital or revenue. The CIT(A) shall adjudicate how the entire amount is taxable in the hands of the assessee when the subsidy is received by the assessee and his family members. The CIT(A) shall appreciate the fact that the subsidy was granted to the all the family members of the assessee and not to the assessee per se. With these directions, I remand the ground no.1 to the file of the CIT(A) for fresh adjudication in the matter. Needless to say, the CIT(A) shall grant reasonable opportunity of being heard to the assessee in accordance with set principles natural justice. Thus, the ground no.1 is allowed for statistical purposes.
12. Ground no.2 relates to the disallowance of interest free advance of Rs.20,00,000/- given to Shri TA Khan on 21.10.2010. This is a claim of the assessee that the assessee received interest free funds amounting to Rs.65,77,899/-. The payment of Rs.20,00,000/- as advance to Shri T.A. Khan should be presumed to have been given out of the said interest free funds in which the case of Hon’ble Bombay High Court’s judgement in the case of CIT vs. Sharda Erectors Pvt. Ltd., 76 taxmann.com 107 (Bom) helps the assessee. Without invigoration of the said ratio, the Assessing Officer, based on the ad-hoc rate of 12%, estimated the profit and disallowed the proportionate interest debited to the Profit and Loss Account. The Hon’ble Bombay High Court’s judgement in the case of CIT vs. Reliance Utilities and Power Ltd., 313 ITR 340 (Bom) also helps the assessee and in favour of the principle of presumption with reference to the interest free funds. In my view, the said decision is directly applicable to the facts of the present case. There is no dispute on the fact on the availability of interest free funds amounting to Rs.65,77,899/-.Further, there is no dispute about 20,00,000/- as advance given to Shri T.A. Khan too. Therefore, I am of the considered opinion that the claim of the assessee should be allowed in this regard. Therefore, the disallowance made by the Assessing Officer amounting to Rs.1,49,830/- has to be deleted. Thus, the ground no.2 is allowed.
13. Ground no.3 relates to disallowance in connection with the claim of agricultural income/expenses. The relevant facts of this issue include that the assessee claim agricultural receipts of Rs.45,20,718/- and for earning the same, the assessee claimed spending of Rs.14,84,958/-. Justifying the said lesser agricultural expenditure and questioning the earning of net agricultural income of Rs.30,35,570/-, without disturbing the expenditure of Rs.14,84,958/-, the Assessing Officer disallowed 20% of the net agricultural income. The Assessing Officer made addition of Rs.6,07,114/-and the same was treated as income from other sources.
14. During the first appellate proceedings, after considering the assessee’s submissions, the CIT(A) invoked 40:60 ratio (expenditure : net agricultural income) and directed the Assessing Officer to restrict the disallowance to Rs.3,23,139/- in place of Rs.6,07,114/-. The assessee was given part relief to the tune of Rs.2,83,975/-. In the process, the CIT(A) relied on the decision of Ahmedabad Bench of the Tribunal in the case of Dhirubhai L. Narula & Others vide ITA Nos.2190 to 2192/Ahd/2004 dated 17.04.2004. The said decision is relevant for the proposition that the expenditure to the extent of 40% of the gross receipt should be reasonable expenditure to carry out the agricultural activities. Para 9 of the order of the CIT(A) is relevant in this regard and the same is extracted hereunder :-
“9. I have duly considered the submissions of the appellant. It is seen that the appellant has shown gross agricultural receipts of Rs.45,20,718/- during the year under reference. He has also incurred agricultural expenses to the extent of Rs.14,84,948/- and there by net agricultural income of Rs.30,35,570/- was disclosed in the return of income. No doubt the appellant has maintained details of agricultural income and expenses thereof. However vouchers in respect of agricultural expenses have not been produced during the course of appellate proceedings. It is not in dispute that the agricultural income can’t be earned without incurring expenditure like purchase of seeds, manures, water charges, labour, transportation, etc. For earning Rs.100/- as agricultural income, at least an expenditure of Rs.40/- is required. For this proposition, reliance is placed on the decision of the ITAT Ahmedabad in the case of Dhirubhai L Narala & others in ITA Nos.2190 to 2192/Ahd/2004 dated 17-04-2004, wherein it was held that expenditure to the extent of 40% of the gross receipts should be reasonable expenditure bound to happen to carry out the agricultural activity. Going by the above yardstick, to earn agricultural income of Rs.45,20,718/-, expenditure of Rs.18,08,287/- would be required resulting in net agricultural income of Rs.27,12,431/-. As against this, the appellant had shown the net agricultural income at Rs.30,35,570/-. Considering the decision of Hon’ble Ahmedabad ITAT in the case of Dhirubhai L Narula & others (supra) and facts of the present case, I hold that expenses @40% of gross receipts would be necessary to earn the agricultural income. Applying the same ratio, I accordingly direct the AO to restrict the addition on this account to Rs.3,23,139/- instead of Rs.6,07,114/- made by him. The appellant gets relief of Rs.2,83,975/-. This ground of appeal is accordingly partly allowed.”
15. While the Assessing Officer attempted to disturb the net agricultural income of the assessee, the CIT(A) analyzed the agricultural expenses and observed that the same are understated. CIT(A) held in favour of applying the precedent on the matter and in favour of 40% of the agricultural income should be the agricultural expenditure.
16. From the above, it is evident that the decision taken by the CIT(A) is in tune with the decision of the Co-ordinate Bench of the Tribunal (supra). Considering the precedent relied on by the CIT(A), I am of the opinion that the order of the CIT(A) is fair and reasonable on this issue and it does not call for any interference. Accordingly, ground no.3 raised by the assessee is dismissed.
17. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced on this 19th day of December, 2019.
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