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September 9, 2022

AO to make disallow 25% as  assessee failed to provide details of expenses incurred to earn agricultural income

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

AO to make disallow 25% as  assessee failed to provide details of expenses incurred to earn agricultural income

Facts and Issue of the Case

The facts of the case is that the assessee is an individual and derives income from salary and income from other sources and agricultural income. The assessee has filed his returned income on admitting total income of Rs.1,98,900/-. The case was selected for scrutiny assessment and notices under section 143(2) and 142(1) were issued from time to time. As there were no reply from the assessee a show cause notice was served on the assessee .

As there was no reply from the assessee, the AO made addition of Rs.37,11,028/- as unexplained income of the assessee and determined total income of Rs.39,09,928/-and also initiated penalty proceedings under section 271(1)(c) of the Act. Aggrieved against the assessee the assessee filed appeal before the ld.CIT(A), wherein the assessee filed written submissions along with application for additional evidence under Rule 46A of the Income Tax Rules, 1962 providing land ownership deals with supporting documents and also agriculture produce as well as certain bills. The ld.CIT(A) called for remand report from the AO.

Aggrieved against the same, the assessee is before us in second appeal. The sole ground raised by the assessee is that the ld.CIT(A) has erred in confirming addition of Rs.37,11,028/- considering the same was unexplained income, such addition is required to be deleted. The ld.counsel for the assessee pleaded that the assessee is an individual and semi-literate persons, and he did not understand the implications of the notice issued by the AO, which resulted in ex parte assessment. However, during the appellate proceedings, the assessee has produced all the details of land ownership with supporting documents, and also agriculture produce and also sales bills by party-wise. Therefore, the AO is not correct in making addition on account of agriculture income of Rs.37,11,028/-, as income from other source, which is not permissible under the law. The ld.AR also further submitted that the ld.CIT(A) has not appreciated the facts properly and notice issued to the agriculture traders has nothing to do with quantification of agriculture crops and thereby the ld.CIT(A) confirmed the addition made by the AO which is required to be deleted. Further, the ld.AR brought to our attention that the assessment year 2015-16, the assessee admitted 10% disallowance in agriculture income, the same was accepted and disallowed by the AO vide order dated 22.12.2017 passed under section 143(3) of the Act.

Per contra, the ld.DR appearing for the Revenue supported the orders of the lower authorities and further held that no proof for payment of labour, seeds and other expenses giving rise to the agriculture income, were produced by the assessee before the appellate authorities also. Therefore, the entire disallowance is to be upheld and thereby dismiss the appeal of the assessee.

Observation by the Court

The court have given our thoughtful consideration and perused the material available on record including paper book filed by the assessee. It is an admitted fact that the assessee filed belated return of income for the Asstt.Year 2013-14 declaring of Rs.1,98,900/- wherein agriculture income of Rs.37,11,028/- was also claimed. During the course of regular assessment proceedings, in spite of various notices, the assessee has not furnished any details thereby the AO treated the expenses as unexplained income and added to the income of the assessee. During the appellate proceedings before the ld.CIT(A), the assessee filed land ownership details with supporting documents and agriculture produce sales bills made to four parties as additional documents before the ld.CIT(A) by invoking Rule 46A of the IT Rules. The ld.CIT(A) has called for remand report from the AO, wherein the AO reported that the additional expenses were only of Rs.4,68,140/- and sale consideration received was Rs.39,80,268/-. Percentage of expenses claimed to be incurred was 11.76% only and the expenses claimed were towards labour for sale only, which has been deducted by the broker from the gross sale consideration.

No details have been received from the traders to whom sale of agriculture produce is stated to be sold. The assessee also not furnished any proof of purchase of seeds, fertilizer payments etc. Bills produced for sales only stated that payment of Rs.4,68,140./- were deducted on account of off-loading and labour charges for goods sold. It is not possible to have agriculture produce without incurring such expenses. So the claim of the assessee is misleading in the absence of any details of procurement of seeds, fertilisers, water facilities, labour charges, and therefore, no agriculture activities can be said to be done. Further, in the form no.7/12, there is no details of farming being done by the assessee and the nature of the crops, and the quantification of the land, has not been mentioned. Hence, the claim of entire agriculture income is required to be treated as income from undisclosed income. In the rejoinder to the remand report, the assessee raised a pertinent question viz. the details of expenditure and quantification of goods cannot be questioned that too from the purchasers/traders of the goods. The purchasers are general merchant and commission agents, and they are not farmers from whom, the AO can expect details as mentioned above. Further, the ld.CIT(A) in his order held that it was quite evident that genuineness of the expenditure incurred for earning agriculture income and receipt from sale of agriculture produce is not established, and proved by the assessee. Therefore, the addition made by the AO on account of unexplained agriculture income is confirmed. We find that both authorities are not correct in holding that entire income as admitted by the assessee for having not proved, details of expenditure incurred to be treated as an unexplained income of the assessee. As pleaded by the ld.AO for assessee’s own case for the Asstt.Year 2015-16 on assessee’s admission, the same agriculture income at 10% was agreed to be disallowed by the assessee against returned agricultural income of Rs.21,68,400/-.

The same was accepted by the AO, and passed assessment under section 143(3) of the Act on 22.12.2017. Taking into consideration various opportunities given to the assessee, and the fact that the assessee had not explained the expenses incurred in earning the agriculture income of Rs.37,11,028/-, it is appropriate to make a disallowance at 25% of the expenses incurred for earning this agriculture income seems to be reasonable and meet the ends of justice. Thus, we direct the AO to make a disallowance to the extent of 25% of the expenditure on account of earning of agriculture income and pass an order accordingly. Accordingly, the appeal of the assessee is allowed partly in the above terms.


The appeal of the assessee is partly allowed by the court.


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