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.

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.

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.

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.

The ITAT held that, by leasing the land to the LLP, the assessee received the rent pursuant to an agreement; the non-utilization of the aforementioned land does not prevent the assessee from treating the rent as agricultural income. It’s also important to remember that the assessee is an NRI and has no control over the LLP’s failure to perform or use the land. The agreement is what matters. The assessee received the money in accordance with the contract, and he or she promptly reported receiving the extra rent.

The Assessing Officer cannot put themselves in the position of the Assessee and assume that the LLP is not engaged in any activities and that its income cannot be classified as agricultural income. The Assessing Officer of the LLP is the only person who has the authority to object to transactions. Since there is an agreement to this effect and the assessee has actually received the rent, the receipt of rent based on the agreement cannot be denied. especially if the recipient of the payment confirms that they made it specifically for agricultural purposes. In the assessee’s hands, this contractual performance cannot be disputed.

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, ITAT are not inclined to accept the findings of the lower authorities, hence direct the Assessing Officer to treat the rental income as agricultural income. In the result, appeal filed by the assessee is allowed.

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A notable example of how the burden of proof can change to the Income Tax Department when affidavits are presented to verify the source of cash deposits is the case of Sh. Kuldeep Kumar v. ITO, which was decided by the Income Tax Appellate Tribunal (ITAT) in Jodhpur. We will delve into the specifics of this case in this article, including the facts, the appeal’s arguments, and a thorough evaluation of the ITAT Jodhpur’s ruling.

Background of the Case: The appellant, Sh. Kuldeep Kumar, filed an appeal against the order of the Commissioner of Income Tax (Appeals) (NFAC) under section 250 of the Income Tax Act, 1961. This order was dated 24.05.2023 and stemmed from the assessment order passed under section 147 r.w.s. 143(3) of the Act, dated 21.11.2017. The appellant raised several grounds of appeal, contesting the legality of the order passed by the Income Tax Officer.

The appellant contended that the order passed by the Income Tax Officer and sustained by the Commissioner of Income Tax (Appeals) was illegal, lacked legal basis, and displayed a lack of proper scrutiny, hence should be quashed. The appellant argued that the Commissioner of Income Tax (Appeals) failed to cross-examine the contents of the affidavit submitted during the appeal, thus rendering the addition of income illegal.

The appellant claimed that the Commissioner of Income Tax (Appeals) failed to appreciate the evidence and additional evidence submitted, making the addition unlawful due to an unreasoned and non-speaking order. The appellant argued that the Commissioner of Income Tax (Appeals) should have considered the double entry of 5 Lacs and should have accepted the bank certificate of Rs. 5 Lacs as a valid explanation.

The appellant insisted that the deposit in the bank should be declared as explained, as it had been accepted as such by the Assessing Officer. The appellant contested the legality of reopening the assessment under section 147/148 and charging interest, claiming both actions were illegal and against the law.

Case Facts: The assessee made cash deposits into his bank account, which were the central focus of the case. After documenting the circumstances and receiving permission from the Principal Commissioner of Income Tax, the Assessing Officer issued a notice in accordance with section 148. In the course of the assessment proceedings, the assessee claimed that his father had made the deposits and that his income as an agriculturalist was limited. The assessee had deposited cash in his State Bank of India account totaling Rs. 10,00,500. He also mentioned that over the course of the year, his father had sold some land. The Assessing Officer added an additional Rs. 5,00,000 as unreported income despite these justifications. Assessee appealed to the Commissioner of Income Tax (Appeals) and submitted affidavits and additional evidence. Ld. CIT(A) Decision.

The addition was supported by the Commissioner of Income Tax (Appeals), though. The Commissioner pointed out that the grandmother’s affidavit, in which she claimed to have given the appellant a gift of Rs. 5,00,000, was devoid of supporting documents like the sale deed for the relevant property. This affidavit was dismissed by the Commissioner as unreliable and an afterthought. The Commissioner came to the conclusion that the appellant had not provided sufficient evidence to support the origin of the Rs. 5,00,000 deposit and confirmed the addition.

The appellant argued that once affidavits were filed to demonstrate the source of cash deposits, the burden shifted to the Income-tax department. The appellant also criticized the Commissioner of Income Tax (Appeals) for summarily rejecting the affidavits without proper justification.

The ITAT Jodhpur analyzed the case carefully and referenced several legal precedents. Notably, it cited the decision of the Hon’ble Supreme Court in Sreelekha Banerjee Vs. CIT, emphasizing that the department cannot unreasonably reject a good explanation. It also cited Parimisetti Seetharamamma vs. CIT, emphasizing that the burden lies on the department to prove that a receipt is taxable. In the case under consideration, the ITAT observed that the affidavits filed by the appellant had shifted the onus to the Income-tax department.

The department failed to provide any evidence to dispute the facts presented in the affidavits. Consequently, the ITAT held that the appellant had adequately explained the source of the cash deposits, leading to the deletion of the addition.

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The assessee company is in the business of general trading of materials and equipment needed for industrial projects; commission agent acting as a middleman between buyers and sellers who want to import, export or engaged in off-shore or domestic trading activities; and provides services, i.e. information about the Indian market generally and for specific sectors which fall under the different verticals of the Mitsui group. The case was selected for scrutiny assessment.

As the assessment process progressed, the assessing authority became aware of some overseas transactions the assessee company had engaged in. These transactions were sent to the transfer pricing officer (or “TPO”) for the purpose of transfer price adjustment. The TPO issued a ruling on October 23, 2017, in which it said that no unfavourable conclusions had been reached regarding international transactions. When drafting the assessment, the AO saw that the assessee had not used suo moto disallowance under section 14A of the Act to exempt revenue as it had done the year prior.

AO by invoking the provision of Rule 8D(ii) of the Income tax Rules, 1962 made disallowance amounting to INR 1,45,94,554/-. Further, the AO made disallowance on adhoc basis amounting to INR 63,11,221/- out of staff welfare expenses. The AO also made addition of INR 5,12,23,226/- in respect of remuneration paid to Mitsui & Co. India Pvt. Ltd. on the basis that the assessee could not substantiate rendition of any service for which remuneration was paid.

The AO further made disallowance by invoking the provision of section 40(a)(i) of the Act on the ground that the assessee was liable to deduct tax of INR 12,60,84,939/- at the payment made to Mitsui Japan of INR 51,27,74,699/-. Thus, he assessed the income of the assessee company at INR 89,14,27,020/- against the disclosed income at INR 30,65,23,320/-. CIT(A) partly allowed the appeal. CIT(A) confirmed the addition in part out of staff welfare expenses. Rest of the additions were deleted. Being aggrieved, both revenue and assessee has preferred the present appeal.

The ITAT after hearing the Ld. Authorized Representatives of the parties and perused the material available on record and gone through the orders of the authorities below. The issue relates to adhoc disallowance out of staff welfare expenses. Ld.CIT(A) has partly allowed relief to the assessee and the same has been confirmed by us in Revenue’s appeal. The assessee has challenged confirmation of part disallowance of expenses. The submissions of the Ld. Counsel for the assessee in this regard are that the lower authorities have made and confirmed the addition purely on adhoc basis. Such approach of the lower authorities is contrary to the settled legal position.

It is contended that the bills and invoices of staff welfare expenses were duly submitted to lower authorities. The AO has not pointed out any defect or discrepancy in respect of the expenditure claimed for staff welfare. The expenditure is otherwise, 1% of total Revenue which is not excessive. The expenditure is related to staff welfare measures to and instill of feeling of team work.

CIT(A) merely affirmed the action of AO without pointing out as to how the remaining expenses are not for business purpose. It is well settled that the AO should not resort to adhoc disallowance. If the expenditure is not incurred for business purpose, there has to be a specific finding in this regard unless expenditure for personal use and business purpose are mixed and cannot be segregated. In the case in hand, this is not the case, we therefore, direct the AO to delete the impugned addition.

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