ITAT Rajkot Quashes Section 68 Addition on Agricultural Income in Absence of Books

Background of the Dispute

The Rajkot Bench of the Income Tax Appellate Tribunal in the case of Chandubhai Ramjibhai Kathiriya Vs CIT (ITAT Rajkot) examined whether Section 68 could be invoked to tax a part of the assessee’s disclosed agricultural income as unexplained cash credit, when the assessee did not maintain any books of account.

The appeal arose from an ex parte order dated 26.08.2021 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi (NFAC), upholding an addition made under Section 68 read with Section 115BBE for Assessment Year (AY) 2017-18.

The assessee, an individual agriculturist, had filed his return declaring:

• Total income: Rs. 340/-
• Agricultural income: Rs. 28,65,563/-

The case was selected for scrutiny primarily due to the high amount of agricultural income reported as exempt.

Assessing Officer’s Findings and Addition

Agricultural Income Declared and Past History

The assessee explained that he was engaged in agricultural activities and held agricultural land measuring 19.12 acres. To substantiate this, he furnished:

• Copies of Form No. 7/12
• Other relevant revenue records

He also pointed out that in earlier years he had consistently disclosed large agricultural income while reporting negligible taxable income:

The assessee contended that since his taxable income never reached the basic exemption threshold, there was no incentive for him to suppress taxable income or inflate agricultural income.

Enquiry Conducted by AO

During the scrutiny proceedings, the Assessing Officer (AO) issued a notice under Section 133(6) to one concern, Radhe Fertilizer, apparently to cross-verify agricultural inputs or related transactions. No reply was received from that party.

Based on this non-response and perceived insufficiency of supporting evidence, the AO formed the view that the entire agricultural income could not be accepted. Instead of rejecting it entirely, the AO took a partial acceptance approach:

• Treated 50% of the agricultural income as genuine
• Treated the remaining 50% (Rs. 14,32,782/-) as unexplained income introduced under the guise of agricultural income

Accordingly, the AO:

• Added Rs. 14,32,782/- as unexplained cash credit under Section 68 read with Section 115BBE
• Initiated penalty proceedings on the same issue

Proceedings Before NFAC (CIT(A))

Assessee’s Submissions Before First Appellate Authority

In appeal before the NFAC, the assessee reiterated that he was an agriculturist cultivating both his own land and lands taken from other farmers on lease (Ganot). He explained that:

• He cultivated about 42.66 vighas of his own land.
• Additionally, he cultivated around 53.85 vighas of land belonging to other farmers in nearby villages such as Tighra, Bhutsad, Italva and Pardi on Ganot basis.
• A significant portion of the agricultural income under dispute was stated to be from cultivation on such leased lands.

The assessee argued that the AO had selectively doubted agricultural income derived from lands of other farmers, estimated by the AO at Rs. 7,65,618/-, and treated that part as non-genuine, while accepting the income from the assessee’s own land. This, according to the assessee, was internally inconsistent.

The assessee also referred to:

• Agreements executed in 2005 with Padmaben R. Ranka (mother) and Anjaliben D. Shah (mother-in-law), whereby the assessee was allowed to cultivate their agricultural lands as they were unable to cultivate themselves due to old age.
• Judicial precedents where similar disputes regarding agricultural income were decided in favour of the assessee.

In support of his stand, reliance was placed on:

• **S. L. Basavaraj Vs.