Ad-hoc Reduction of Agricultural Income Held Invalid: Key Takeaways from ITAT Bangalore in Kalur Basappa Shivaprakash Vs ITO

Background of the Dispute

In Kalur Basappa Shivaprakash Vs ITO, the assessee, an individual agriculturist, filed his return for A.Y. 2020-21 declaring:

  • Total taxable income of Rs. 2,76,750; and
  • Exempt agricultural income of Rs. 50,00,000.

The case was selected for limited scrutiny focusing on the substantial agricultural income declared. During assessment, the assessee explained that:

  • Gross agricultural receipts were Rs. 73,96,500;
  • Agricultural expenditure was Rs. 23,96,500; and
  • Net agricultural income of Rs. 50,00,000 was earned from around 34.45 acres of land.

To substantiate, the assessee submitted:

  • RTC records for various survey numbers; and
  • A detailed chart showing, survey-wise:
    • Extent of land,
    • Crop grown in different seasons,
    • Gross receipts,
    • Expenses, and
    • Net income.

Assessment Proceedings and AO’s Findings

Alleged Deficiencies Noticed by AO

The Assessing Officer (AO) considered the documentation inadequate and recorded several objections, mainly:

  • Non-production of:
    • Sale bills for agricultural produce;
    • Vouchers for agricultural expenditure;
    • Quantitative yield details.
  • Perceived inconsistencies in land and crop disclosures, such as:
    • Income shown from arecanut and black pepper from Survey Nos. 54 and 61 (4.2 acres and 0.34 acres), even though the AO believed these lands were acquired only in F.Y. 2020-21, i.e., after the relevant year (F.Y. 2019-20).
  • Wide variations in yield for similar areas of land, which, in the AO’s view, suggested inflated income.
  • Excessive jowar production when compared with:
    • Standard yields;
    • Cost benchmarks;
    • Minimum support price data relied on by the AO.
  • Change in stand regarding crops (from jowar to arecanut) without, according to the AO, adequate supporting material.
  • Absence of bank statements or other proof evidencing receipt of sale proceeds.

Estimation by AO and Section 69A Addition

Relying on the above points, the AO concluded that:

  • The agricultural income declared was not fully verifiable;
  • The disclosed figure of Rs. 50,00,000 was “against human probabilities”; and
  • Only part of it could reasonably be accepted.

The AO then:

  1. Estimated net agricultural income at Rs. 1,00,000 per acre for 34.45 acres;
  2. Computed acceptable agricultural income at Rs. 34,45,000;
  3. Treated the difference of Rs. 15,55,000 as unexplained money under Section 69A; and
  4. Characterised the arrangement as a “colourable device” for introducing unaccounted funds as agricultural income.

For this conclusion, the AO invoked the principles laid down by the Hon’ble Supreme Court in:

  • Sumati Dayal (214 ITR 801); and
  • Durga Prasad More (82 ITR 540),

to apply the test of “human probabilities”.

Accordingly, an addition of Rs. 15,55,000 under Section 69A was made to the total income.

First Appeal Before CIT(A) and Reasoning Adopted

The assessee challenged the assessment before the learned CIT(A) at the National Faceless Appeal Centre.

Submissions by the Assessee Before CIT(A)

The core submissions were: