2025 (5) TMI 1177 - AT - Income Tax

Denial of deduction u/s 80JJA - return of income was not filed within the due date as stipulated u/s 139(1) - assessment was completed u/s 143(3) - HELD THAT - The assessee had submitted before the AO that it was unaware of the introduction of this new provision introduced from this year. Considering the fact that this was only a procedural requirement and the change in the statute was effected from this year only the AO is directed to take a lenient view in the matter and allow the deduction if otherwise admissible. The deduction u/s 80JJA of the Act is admissible for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the business commences. It is not evident from the return of income that the claim of deduction under section 80JJA of the Act for this year was within the prescribed period of five years from the date of commencement of bio-fertilizer business of the assessee. In the Tax Audit Report also this detail is not available. Nothing has been brought on record by the assessee in this regard in the course of this appeal proceeding as well. Under the circumstances we deem it proper to set aside the matter to the file of the AO with a direction to examine the fulfilment of this condition and thereafter re-decide the matter. The ground taken by the assessee is allowed for statistical purpose. Addition u/s 14A - excess expenses claimed against exempt income - allocation of expenses between agricultural and non-agricultural activities - HELD THAT - Basis of allocating the direct and indirect expense incurred in respect of agricultural operation has not been explained by the assessee. Further no separate account in respect of agricultural operation was produced before the Assessing Officer or the CIT(A); nor such account has been brought on record before us. In the Tax Audit Report the Auditor had certified inadmissible expense under section 14A in respect of agricultural operation at Rs. 50, 53, 608/- without mentioning any break-up or the basis thereof. In the absence of any explanation for the basis of the agricultural expenses as disclosed by the assessee the Assessing Officer had no option but to allocate the indirect expense on proportionate basis. The Assessing Officer had allocated the expenses under four heads proportionately Employee Benefit Expenses - Total expenditure in respect of employee benefit expenses debited to Profit Loss Account was Rs. 2, 58, 39, 481/- which pertained to salary wages bonus gratuity provision and staff welfare. According to the assessee only 8 employees were deployed towards agricultural activities whereas 81 employees were working in bio-division. The root was taken out after two and half months from the agricultural land which was sold as bio-fertilizer. Further that the entire agricultural activity was specialised one wherein skilled and qualified persons were engaged for growing/inspection/maintenance etc. From the nature of agricultural activity as explained by the assessee it is apparent that the process was not only specialized but also labour intensive as the upper growth of each plant had to be cut off and that such activity couldn t have been carried out with manpower of only 8 employees over an area of 18512 sq. mt. (4.57 acre). With such specialised and labour-intensive deployment of manpower the salary expenses and daily wages as allocated to agricultural activity is found to be too low considering the total employee benefit expense incurred by the assessee. Therefore the allocation of employee benefit expense on proportionate basis as done by the Assessing Officer is upheld. Finance Costs - AO has not brought any evidence on record that the borrowed funds were utilised for agricultural operations. Considering the fact that the assessee had its own surplus funds the allocation of finance cost towards agricultural activity was not called for. Accordingly the allocation of finance cost towards agricultural operation as done by the AO is deleted. Depreciation and Amortisation Expenses - Assessee has contended that it had already disallowed depreciation of Rs. 6, 23, 991/- in respect of the agricultural activities. However the details of assets deployed for agricultural activities are nowhere appearing in Schedule-3 of audited annual account. The matter is therefore set aside to the jurisdictional AO to verify the assets deployed for agricultural operation and thereafter disallow the depreciation on the assets which were actually utilised for agricultural activities. The assessee is also directed to produce the details of assets deployed for agricultural activities before the AO. Other Expenses - assessee has contended that selling and distribution expenses legal and professional expenses rent insurance packing material expense freight and forwarding expense Directors renumeration etc. were not at all incurred for agricultural activities and therefore the AO was not correct in allocating them proportionately towards agricultural expenses - The agricultural activity was a more remunerative operation for the company and the involvement of Director s in the decision-making process was imperative. The Director s mayn t have technical knowledge of manufacturing process as well. Therefore the technical knowledge is not the deciding factor and the action of AO in allocating the Directors remuneration towards agricultural operation can t be faulted. At the same time legal and professional expense rent insurance and other expenses which were not at all related to agricultural activities were not required to be allocated towards agricultural operation. This matter is therefore set aside to the file of the jurisdictional Assessing Officer with a direction to verify the expenses which had a connection with the agricultural operation and thereafter allocate only those expenses which had a bearing on agricultural operation of the assessee and also considering our findings as recorded earlier. Appeal of the assessee is partly allowed for statistical purpose.

Summary

The core legal questions considered in this appeal pertain primarily to the allocation of expenses between agricultural and non-agricultural activities and the consequent addition of excess expenses claimed against exempt agricultural income. Additionally, the validity of disallowance of deduction under section 80JJA of the Income Tax Act on the ground of late filing of return was examined. Specifically, the issues were:

1. Whether the allocation of common and indirect expenses by the Assessing Officer (AO) on a proportionate basis to agricultural income was justified, given the assessee's claim of separate accounting and allocation.

2. Whether the addition of Rs. 66,55,696/- as excess expenses claimed against exempt agricultural income was legally sustainable.

3. Whether the disallowance of deduction under section 80JJA for late filing of return under section 139(1) was justified, considering the procedural nature of the requirement and the statutory amendments effective from the relevant assessment year.

Issue-wise Detailed Analysis

Allocation of Agricultural Expenses and Addition of Excess Expenses

The legal framework involves the principles governing allocation of expenses between exempt and taxable income, specifically under the Income Tax Act, and the requirement of rational and justifiable basis for such allocation. Precedents emphasize that when an assessee carries on multiple activities, expenses must be allocated on a reasonable basis, failing which the AO is entitled to make a fair allocation.

The AO observed that the assessee declared agricultural income of Rs. 4,18,84,350/- with total agricultural expenses of only Rs. 50,53,607/-, representing merely 12.06% of agricultural revenue, whereas the overall expense to revenue ratio was 92.06%. The AO found the assessee's allocation of common expenses to agricultural activities lacking any rational basis and thus reallocated expenses under four major heads-employee benefits, finance costs, depreciation/amortization, and other expenses-on the basis of the ratio of agricultural revenue to total revenue.

The assessee contended that it maintained separate books for agricultural activities, which were neither disputed nor rejected by the AO, and that the allocation of expenses was based on actual deployment and usage. It argued that only eight employees were engaged in agricultural activities (out of 89 total employees), no additional finance was raised for agriculture, depreciation claimed for agriculture was already disallowed, and many other expenses such as packing, freight, and selling related solely to non-agricultural manufactured products.

The Revenue argued that no separate accounts or detailed basis for allocation were produced, and the assessee failed to allocate all direct expenses incurred for agricultural activities. In absence of any basis, the AO's proportional allocation was justified.

The Tribunal's reasoning recognized the assessee's claim of separate accounting but noted the absence of any explanation or evidence explaining the basis of allocation of direct and indirect expenses to agricultural activities. The Tax Audit Report certified inadmissible expenses under section 14A relating to agriculture but without breakup or basis. The Tribunal found the allocation of employee benefit expenses by the assessee (only to eight employees) to be unrealistically low given the labour-intensive nature of the specialized agricultural activity over a sizable area. Therefore, the AO's proportional allocation of employee benefits expenses was upheld.

Regarding finance costs, the Tribunal observed the assessee had sufficient surplus funds and no evidence was produced to show borrowed funds were used for agriculture. Hence, the AO's allocation of finance costs to agriculture was deleted.

On depreciation, the Tribunal noted that details of assets used for agriculture were not disclosed and remanded the matter to the AO to verify assets deployed and disallow depreciation accordingly.

For other expenses, the Tribunal found the assessee's claim that many expenses such as packing, freight, selling and distribution were unrelated to agriculture to be contradicted by the fact that agricultural products were sold externally, necessitating such expenses. The Tribunal also rejected the contention that Directors' remuneration should not be allocated to agriculture due to lack of technical knowledge, emphasizing the importance of Directors' involvement in decision-making for the profitable agricultural operation. However, expenses such as legal and professional fees, rent, and insurance which had no connection to agricultural activities were to be excluded. The matter was remanded to the AO to verify and allocate only those expenses connected with agriculture.

The Tribunal thus partially allowed the grounds, directing a more detailed and rational allocation of expenses on remand, while upholding the AO's proportional allocation of employee benefit expenses and deleting finance cost allocation.

Disallowance of Deduction under Section 80JJA

Section 80JJA provides deduction for profits and gains from certain businesses, subject to conditions including timely filing of return under section 139(1) as per section 80AC effective from AY 2018-19. The assessee claimed deduction of Rs. 12,30,554/- under section 80JJA, which was disallowed by the AO on the ground of late filing of return (filed under section 139(4) after due date).

The assessee argued that this was a procedural condition and the disallowance was incorrect. The Revenue supported the AO's order.

The Tribunal noted that the assessee had not raised this ground before the CIT(A). It recognized that section 80AC mandates filing return within due date for claiming deductions under Chapter VIA from AY 2018-19 onwards. The assessee admittedly failed this condition. However, considering the procedural nature of the requirement and that the provision was newly introduced, the Tribunal directed the AO to take a lenient view and allow the deduction if otherwise admissible.

Further, the Tribunal observed the deduction under section 80JJA is available for five consecutive years from commencement of the eligible business, but the assessee had not furnished evidence to establish compliance with this condition. The Tax Audit Report was silent on this aspect and no evidence was produced during appeal proceedings. Accordingly, the matter was remanded to the AO to verify the period of eligibility and decide accordingly.

Significant Holdings

The Tribunal held that in absence of a rational and supported basis for allocation of expenses to agricultural activities, the AO is justified in proportionately allocating common expenses based on the ratio of agricultural revenue to total revenue, except where specific evidence negates such allocation (as in finance costs). It stated:

"With such specialised and labour-intensive deployment of manpower, the salary expenses and daily wages as allocated to agricultural activity is found to be too low... Therefore, the allocation of employee benefit expense on proportionate basis, as done by the Assessing Officer, is upheld."

On finance costs, the Tribunal concluded:

"Considering the fact that the assessee had its own surplus funds, the allocation of finance cost towards agricultural activity was not called for. Accordingly, the allocation of finance cost towards agricultural operation, as done by the AO, is deleted."

Regarding Directors' remuneration, the Tribunal rejected the technical knowledge argument, noting:

"The agricultural activity was a more remunerative operation for the company and the involvement of Director's in the decision-making process was imperative... Therefore, the technical knowledge is not the deciding factor and the action of AO in allocating the Directors remuneration towards agricultural operation can't be faulted."

On deduction under section 80JJA, the Tribunal emphasized compliance with procedural requirements under section 80AC but directed leniency due to the novelty of the provision and procedural nature of the condition, stating:

"Considering the fact that this was only a procedural requirement and the change in the statute was effected from this year only, the AO is directed to take a lenient view in the matter and allow the deduction, if otherwise admissible."

However, it also mandated verification of the five-year eligibility period for the deduction.

In conclusion, the Tribunal partly allowed the appeal for statistical purposes, remanding matters relating to depreciation and other expenses to the AO for verification and rational allocation, deleting the finance cost allocation, and directing leniency with respect to section 80JJA deduction subject to eligibility verification.