Vinayak Sudhakar Malkotagi Vs ITO (ITAT Mumbai)
ITAT Mumbai held that receipt of rental income by giving the land on lease to the LLP and non-utilization of the said land does not preclude the assessee to treat the same as agricultural income. Accordingly, the same is exempt.
Facts- The assessee derived agricultural income in the form of rental income in accordance with the provisions of Section 2(1A)(a) of the Act which is fully exempt from tax u/s. 10(1) of the Act. He is the owner of the three acres of agricultural land which has been given on rent to A.S Agri and Aqua LLP for farming and cultivation of agricultural produce.
During the current A.Y., a promissory note between the assessee and A.S Agri and Aqua LLP was executed wherein it was agreed that the assessee will provide its agricultural land to A.S Agri and Aqua LLP on a monthly remuneration of ₹.8,00,000/-. The assessee will make a refundable deposit worth ₹.1.60 crores in the business of A.S Agri and Aqua LLP in which the assessee will hold a 50% stake.
Show cause notice was issued to the assessee contesting as to why the receipt should not be treated as business income. In absence of any reply, AO completed the assessment by treating the rental income received by the assessee as income from the business. DRP dismissed the objections raised by the assessee. Being aggrieved, the present appeal is filed.
Conclusion- The assessee has received the rent based on agreement by giving the land on lease to the LLP and non-utilization of the above said land does not preclude the assessee to treat the same as agricultural income. It is also important to note that the assessee is an NRI and has no control over the non-performance on non-utilization of land by the LLP. What is relevant is the agreement. The assessee has received the same as per the agreement and the receipt of the above rent was promptly declared by the assessee. The Assessing Officer cannot wear the shoes of the assessee to presume that no activities carried by the LLP and the same cannot be treated as the agricultural income. Only person, who can question the transactions is the Assessing Officer of the LLP.
The receipt of rent based on agreement cannot be rejected particularly there exist agreement to this effect and also the assessee has actually received the rent. Particularly when the other party confirms that they made this payment only for the agriculture purpose. This contractual performance cannot be denied in the hands of the assessee. Even otherwise, Assessing Officer has rejected the claim of the assessee on the basis of impossibility of performance, then he cannot treat the income as “business income”. It should be Nil, just because assessee has declared the same he cannot proceed to change the head to tax the income. When the impossibility of performance exist, it cannot be charged to tax under any head of income. Therefore, we are not inclined to accept the findings of the lower authorities, hence we direct the Assessing Officer to treat the rental income as agricultural income.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. This appeal is filed by assessee against order of the Learned Commissioner of Income Tax (DRP-2), Mumbai – 1 [hereinafter in short “Ld. DRP”] dated 08.12.2022 for the A.Y. 2020-21 passed U/s. 144C(5) of Income-tax Act, 1961 (in short “Act”).
2. Brief facts of the case are, assessee filed his original return of income for A.Y. 2020-21 on 02.01.2021 declaring income of ₹.2,77,560/-. Thereafter, the return was selected for limited scrutiny for the reason of ‘Agricultural Income’. Notices u/s 143(2) and 142(1) of the Act along with questionnaire were issued and served on the assessee through e-portal. In response, assessee filed the details through e-portal.
3. The Assessing Officer observed that assessee derived agricultural income in the form of rental income in accordance with the provisions of section 2(1A)(a) of the Act which is fully exempt from tax u/s. 10(1) of the Act. Further, he observed that assessee is the owner of the three acres of agricultural land situated at Sangli, Maharashtra which has been given on rent to A.S Agri and Aqua LLP for farming and cultivation of agricultural produce. During the current Assessment Year, a promissory note between the assessee and A.S Agri and Aqua LLP was executed wherein it was agreed that the assessee will provide its agricultural land to A.S Agri and Aqua LLP from 01.08.2019 on a monthly remuneration of ₹.8,00,000/-. Further, it was also agreed that the assessee will make a refundable deposit worth ₹.1.60 crores in the business of A.S Agri and Aqua LLP in which the assessee will hold a 50% stake. During assessment proceedings, assessee submitted that assessee should have declared in his return of income of ₹.64,00,000 /- not ₹.41,70,000/- as declared by him due to negligence of the tax return preparer.
4. In response to query, assessee has submitted that assessee has entered into a joint venture for farming and cultivation of agricultural produce with A.S Agri and Aqua LLP whereby the profits will be shared equally. However, it was submitted that till date the said business has not been commenced and thus the details with respect to the same has not been incorporated in the return of Income.
5. The Assessing Officer observed from the submissions made by the assessee that assessee has made a refundable deposit worth ₹.1.60 crores in the business of A.S Agri and Aqua LLP and received rental income. However, he observed that the business of A.S Agri and Aqua LLP has not yet commenced operation which means no cultivation of turmeric has been carried out during the relevant financial year. In the absence of any agricultural activity and the business nature of the transaction, a show-cause notice was issued why the above receipt should not be treated as business income.
6. In response, assessee has not filed any reply till finalization of the Assessment Order. Based on the facts available on record, Assessing Officer completed the assessment by treating the rental income received by the assessee as income from business.
7. Aggrieved with the above order, assessee filed objections before Ld.DRP and filed detailed submissions, for the sake of clarity it is reproduced below: –
“Objection No. 1
1. The Ld. Assessing Officer has failed to appreciate the fact that the monthly rental/remuneration of Rs 8,00,000 is derived from land which is situated in the district of Sangli, Maharashtra, India and is used for agricultural purposes is agricultural income within the meaning of section 2(1A)(a) of the Income Tax Act, 1961 which is exempt from tax under the provisions of section 10(1) of Income Tax Act, 1961
Statement of Fact
1. Vinayak Sudhakar Malkotagi, hereinafter referred to as “assessee” has executed a promissory note with AS Agri and Aqua LLP wherein it has been mutually agreed that the assessee will provide its land to AS Agri and Aqua LLP on rental basis at a monthly remuneration of Rs. 8,00,000 commencing from 01st August 2019 to carry out the following businesses on its land
1. Turmeric cultivation through vertical farming
2. Bioflock fisheries
3. Seafood aquaculture
Objection No.2
1. The Ld. Assessing Officer has erred by misinterpreting the promissory note executed between both the parties and the responses filed by the assessee thereby proposing to tax the agricultural income exempt from tax u/s 10(1) of Income Tax Act, 1961 as business income chargeable to tax.
Statement of Fact
1. On page no.3 of the promissory note executed between both the parties it has been stated that the second party being the assessee has agreed to provide a refundable deposit of Rs. 1.60,00,000 for a period of 6 years to first party being AS Agri and Aqua LLP for enabling them to carry out the business of Turmeric cultivation through vertical farming and Bioflock Aqua Culture on the land provided by the assessee for which the assessee is deriving monthly remuneration of Rs. 8.00.000 which is agricultural income within the meaning of section 2(1A)(a) of Income Tax Act, 1961
2. On page no.3/point no.5 of the promissory note executed between both the parties it has been stated that the profits in the business of sea food aquaculture by using the existing pond shall be shared with the assessee in the ratio of 50:50.
3. It has no where been stated that the assessee has a 50% stake in the entire business of AS Agri and Aqua LLP as alleged by the Ld. Assessing Officer.
Objection No.3
1. The Ld. Assessing Officer has failed to provide the assessee with reasonable opportunity of being heard thereby violating the principles of natural justice.
Statement of Fact
1. The assessee had filed a letter on 23-01-2022 against notice issued under section 142(1) dated 16-01-2022 On 10-03-2022, the Ld. Assessing Officer issued a show cause notice asking the assessee to furnish on or before 14-03-2022 an explanation against the proposed receipt of Rs. 64,00,000 to be considered as business income.
2. The assessee in order to get the other relevant details such as 7/12 letter representing the said land as agricultural land and the signed confirmation from AS Agri and Aqua LLP that the payment of monthly rental is against the land provided to AS Agri and Aqua LLP for carrying out the business of turmeric cultivation through vertical farming, bioflock fisheries and seafood aquaculture and the fact as regards that the business of seafood aquaculture in which assessee holds a 50% stake, sought a week’s time through an adjournment as it was practically not possible for the assessee to arrange the details and the signed confirmation within such a short period of time of 2-3 days as the assessee is currently residing in Dubai since last 10 years and communicates regarding arranging all the relevant documentary evidences through his paternal uncle in India who happens to be a senior citizen. As the assessee’s paternal uncle was not keeping well on account of health complications, this was sole reason as to why the assessee requested for an adjournment for a week to gather the other relevant evidences.
3. The assessee did manage to gather the other relevant evidences by 16th March, 2022 which were supposed to be submitted along with the reply to be filed against the show cause notice. Assessee’s request was ignored by the Ld. Assessing Officer who closed the e- proceeding tab on 15th March, 2022 thereby depriving the assessee to file the relevant evidences as mentioned above.”
8. Based on the additional evidences submitted by the assessee, remand report was called from the Assessing Officer. For the sake of clarity, the details of remand report is reproduced below: –
9. In response, assessee also filed its reply dated 17.11.2022, for the sake of clarity it is reproduced below: –
“1. Before answering para-wise to the remand report filed by the Respondent ITO-IT 3(2)(1), Mumbai (hereinafter referred to as ‘Respondent), Vinayak Sudhakar Malkotagi (hereinafter referred to as ‘Appellant Assessee’) craves leave to refer to the following facts which are relevant for the proper appreciation of the matter in issue:-
a. The Appellant Assessee has executed a promissory note with AS Agri and Aqua LLP wherein it has been mutually agreed that the Appellant Assessee will provide its land to AS Agri and Acqua LLP on rental basis at a monthly remuneration of Rs. 8,00,000 per month from August 2019, wherein AS Agri and Aqua LLP will carry out the following businesses on the land:
– Turmeric cultivation through vertical farming
-Bio-flock Fisheries – Seafood Aquaculture
b. On page no.3 of the promissory note executed between both the parties it has been stated that the second party being the Appellant Assessee has agreed to provide a refundable deposit of Rs. 1,60,00,000 for a period of 6 years to first party being AS Agri and Aqua LLP for enabling them to carry out the business of Turmeric cultivation through vertical farming, Bio-flock Fisheries and Seafood Aquaculture on the land provided by the Appellant Assessee for which the Appellant Assessee is deriving monthly remuneration of Rs. 8,00,000.
c. On page no.3/point no.5 of the promissory note executed between both the parties it has been stated that it is only in the business of seafood aquaculture by using the existing pond of the Appellant Assessee that the profits and losses shall be shared in the ratio of 50:50.
The details of promissory note submitted before Your Honour is as follows:
