TMI Blog2006 (12) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... gross receipts during the year under consideration aggregated to Rs. 1,27,46,012 which included agricultural receipts of Rs. 16,78,905. Against the agricultural receipts, the assessee had shown direct operational expenditure of Rs. 4,47,187. The balance amount of Rs. 12,31,718 was declared as agricultural income not liable to tax. 3 In the course of the assessment proceedings, the Assessing Officer noticed that expenses pertaining to agricultural activity for the assessment year 1993-94 were to the extent of Rs. 7,58,273 against agricultural receipts of Rs. 15,58,062 while for the assessment year 1994-95, the agricultural expenses were to the extent of Rs. 4,47,187 against total receipts of Rs. 16,78,905. Thus the assessee was asked to explain the reasons for increase in the gross receipts and abnormal decrease in the agricultural expenses. In response to the same, the assessee furnished the details of agricultural land and the expenses incurred in respect of agricultural activity. The Assessing Officer noted that the assessee had only shown direct expenses but had not declared any direct expenses in respect of agricultural income. Therefore, the assessee was again asked to sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 6,83,605). 6 The matter was carried before the Commissioner of Income-tax (Appeals). In the course of the appellate proceedings, the Commissioner of Income-tax (Appeals) issued notice of enhancement dated March 12, 1997, for the reasons given therein, the copy of which is reproduced by the Commissioner of Income-tax (Appeals) in his order at internal pages Nos. 5 to 8. The contents of the same need not be repeated since the relevant portion, whenever needed will be referred to. The reply of such notice was given by the assessee by its letter dated March 26, 1997, copy of which is enclosed in the paper book on pages Nos. 93 to 106. The relevant contents of this letter will also be referred to as and when needed. On the basis of the statement of Chandan Singh, an employee of the assessee and the contents of the letter of the assessee dated October 9, 1996, it was observed by the Commissioner of Income-tax (Appeals) at internal page 10 of its order as under : "16.3 From the above it is clear that the land measuring 150 acres is being used for the purposes of developing such inter-cropping. The entire effect and activity of the company is devoted towards such inter-cropping an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sequence of events which took place in the course of the assessment as well as appellate proceedings. He also took considerable time of the Bench in challenging the validity of the remand proceedings under section 250(4) and validity of the statement of Mr. Chauhan, an employee of the assessee, recorded by the ADI in the remand proceedings. Since the Commissioner of Income-tax (Appeals) has not taken into consideration these factors, it is not necessary for us to refer to the detailed arguments of learned counsel for the assessee. So we will refer only to those arguments which are necessary for disposal of the appeal. 11 The first contention of Mr. Aggarwal was that the statement of Mr. Chandan Singh recorded by the Assessing Officer cannot be considered as an admissible evidence in view of the Supreme Court judgment in the case of Kishinchand Chellaram v. CIT [1980 125 ITR 713 inasmuch as his statement was recorded at the back of the assessee and the copy of the said statement has never been supplied till today. In this connection, he invited our attention to paragraph No. 2 of the notice of enhancement wherein it has been observed by the Commissioner of Income-tax (Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further submitted that the entire staff at Delhi was employed for business activity of the assessee and no part of such expenses could be attributed to agricultural activity in the absence of any material on record. To support his contention, he relied on the Supreme Court judgment in the case of State of Orissa v. Maharaja Shri B. P. Singh Deo [1970] 76 ITR 690. 14 Proceeding further, it was also submitted that accounts of the assessee were being maintained in similar fashion right from the inception and the same were being accepted by the Department in the past. According to him, the rule of consistency must be continued to be followed in the absence of any adverse material. If the agricultural receipts could be accepted by the Revenue on the basis of accounts maintained by it then there was no justification for not accepting the expenses relating to agricultural activity. He also pointed out the factual error in the order of the Commissioner of Income-tax (Appeals) by stating that 150 acres farm was of Chandian Farm exclusively carrying on research and development activity and only 15 acres at Baghwala were used for agricultural activity. That is why only 10 per cent. of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven by the Commissioner of Income-tax (Appeals) and the Assessing Officer which have already been referred to by us while narrating the facts of the case and, therefore, need not be repeated. 20 After considering the rival submissions of the parties and the material placed before us, we find sufficient force in the submission of learned counsel for the assessee. According to the well celebrated judgment of the hon'ble Supreme Court in the case of Kishinchand Chellaram [1980] 125 ITR 713, no material in the possession of the Assessing Officer can be considered as an admissible evidence unless it is confronted to the assessee and its copy is supplied to the assessee so that the assessee may rebut such material. Admittedly, in the present case, the assessee had been repeatedly asking for the copy of the statement of Mr. Chandan Singh recorded by the Commissioner of Income-tax (Appeals) on December 19, 1996. It is apparent from the letters dated February 10, 1997, and March 5, 1997, appearing at pages Nos. 87 and 88 of the paper book. At this stage, it would be useful to quote paragraph No. 2 of the notice of enhancement issued by the Commissioner of Income-tax (Appeals) as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord are the books of account and the details furnished by the assessee. There is no dispute that agricultural receipts were only to the extent of Rs. 16,70,903 against the total receipts of Rs. 1,27,46,012. If the accounts of the assessee can be accepted in respect of the receipts, we do not find any reason for not accepting the books with reference to the expenditure. Page No. 24 of the paper book shows that the assessee had been maintaining the record with respect to direct expenses relating to agricultural activity such as fertilizer, irrigation, high speed diesel, repair and maintenance, tractor expenses, wages, transportation etc. According to learned counsel for the assessee, all these expenses are fully vouched and are still available. No specific defect has been found either by the Assessing Officer or by the Commissioner of Income-tax (Appeals) in this regard. It is not the case of the Department that these expenses are not vouched, as contended by the assessee. Therefore, we are unable to uphold the finding of the Commissioner of Income- tax (Appeals) that no separate accounts of expenses were maintained by the assessee. Rather the assessee has been showing such expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... establish association, connection or relation; to have reference; to have some relation; to establish a social or sym pathetic relationship with a person or thing." 27 In view of the above definition, we arc of the view that there must be some association or connection between the expenditure incurred and the activity of income which does not form part of the total income. That means where the expenditure is directly related to an activity whose income is tax-free then such expenditure cannot be allowed as a deduction. But this definition cannot be extended further. Therefore, in our view, the head office expenses which are not directly related to agricultural operations cannot be apportioned between business activity and agricultural activity. It is apparent from the facts of the case that 87 per cent. of the income is derived from business activity. Further the activity of research and development as well as activity of agriculture are part of the same business. The expenditure incurred at head office are primarily for carrying on the business activity and they had to be incurred irrespective of the agricultural operations. The main object of the assessee-company is the resea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the fact whether all the ventures carried on by him constituted one indivisible business or not; if they do the entire expenditure will be a permissible deduction, but if they do not, the principle of apportionment of the expenditure will apply, because there will be no nexus between the expenditure attributable to the venture not forming an integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee." 29 The perusal of above observations clearly shows that the rule of apportionment would apply only where two activities under the same head do not constitute one indivisible business. Since in the present case, both the activities are interconnected, no apportionment can be made except in the circumstances falling under section 14A. 30 The other decision of the Supreme Court is in the case of Consolidated Coffee Ltd. v. State of Karnataka [2001] 248 ITR 432. In that case, the assessment was under the Karnataka Agricultural Income-tax Act, 1957, rule 7 of the Rules made thereunder provided that deduction admissible under the Act shall be the actual amount related to the income derived from agricultural operations an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h finding. On the contrary, the business in the present case is indivisible one. Accordingly, in our view, the ratio of the judgment of the Supreme Court in the case of Consolidated Coffee cannot be applied to the present case. 32 In view of the above discussion, we are unable to uphold the order of the Commissioner of Income-tax (Appeals) on this issue. The order of the Commissioner of Income-tax (Appeals) is, therefore, set aside on this issue and the disallowance made or sustained by him is hereby deleted. 33 In the result, the appeal of the assessee is allowed. 34 R. S. SYAL (Accountant Member). I have meticulously perused the draft order of my learned Brother in which he has allowed the assessee's claim in total by holding that the indirect agricultural expenses do not fall within the ambit of section 14A. I find myself unable to concur with the conclusion regarding the allocation of expenses to agricultural activity vis-a-vis the restricted application of section 14A. Despite the discussion I could not convince him on my line of reasoning. As such I am constrained to write my dissent note. The facts of the case and the arguments have been noted by him in paragra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen the Assessing Officer required the assessee to give necessary information pertaining to the expenditure as desired by the Commissioner of Income-tax (Appeals), the assessee refused to furnish the necessary details by way of letter dated March 12, 1997, placed at page No. 119 of the paper book on the ground that no proceedings were pending before the Assessing Officer for the relevant assessment year and no order under section 250(4) was passed by the Commissioner of Income-tax (Appeals). Later on the Commissioner of Income-tax (Appeals) issued enhancement notice on the assessee stating therein that as the assessee had not furnished the necessary information to the Assessing Officer as desired by him for the disposal of appeal, therefore, he was proceeding to draw adverse inference against the assessee. In response to this notice, the assessee filed reply on March 26, 1997, placed at page Nos. 93 to 106 of the paper book and also furnished details of expenses by way of annexures A, B and C. The assessee conceded before the Commissioner of Income-tax (Appeals) through its letter dated November 7, 1996, placed at pages Nos. 83 to 86 of the paper book that the agricultural operatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion/details were required in connection with the appellate proceeding for the assessment year 1994-95. It is not understandable as to why the assessee did not furnish the necessary information, when the notice was very clear in its content to the effect that the information was required in connection with the appellate proceeding for the relevant assessment year. The sequence of the events shows that the assessee had not at any stage allowed the Assessing Officer to examine the details of expenses so as to determine the total expenses relatable to the agricultural activity. At the same time it is also palpable that the detail of agricultural expenses submitted by the assessee was not correct inasmuch as some expenses directly relatable to agricultural operations were not finding place in such detail as is evident from the assessee's admission itself. The Commissioner of Income-tax (Appeals) to the effect that salary to Shri Chandan Singh was not included in detail of agricultural expense and the further fact that no indirect expenses were included by the assessee in agricultural expenses. It was under these circumstances that the revenue authorities proceeded to determine net agric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions of agriculture in the common account books. For this purpose stationery and books of account are required. Similarly the services of accountant are also needed. The assessee has not included the share of agriculture in indirect expenses in the total agricultural expenses shown at Rs. 4,47,187. 42 It is an admitted position that no separate books of account in relation to agricultural activities were maintained by the assessee. Rather a common set of books was kept in which both transactions relating to the agriculture and taxable business were recorded. From the above discussion it is clear that the share of agriculture in common expenses was not adequately reflected by the assessee in its list of agricultural expenses. Under these circumstances it is necessary to make a bifurcation of the total expenses and determine the amount of direct and indirect expenses relatable to the agricultural activity. 43 Although my learned brother agrees in principle that direct agricultural expenses are deductible to compute the net agricultural income but he has proceeded to allow the assessee's claim in total by allowing deduction of only such expenses as have been declared ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ospective effect from April 1, 1962, which has been reproduced by my learned brother in his proposed order. However, I consider it expedient to note down the rationale behind the insertion of this section, which has been explained in the memorandum explaining the provisions in the Finance Bill at [2001 248 ITR (St.) 195 as under : "Certain incomes are not includible while computing the total income as these are exempt under various provisions of the Act. There have been cases where deduction have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. It is proposed to insert a new section 14A so as to clarify the intention of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod of distribution may be the ratio of net profit from both the sources, the other method may be apportionment on the basis of total direct costs of both the sources and still another method may be the apportionment on the basis of gross receipts from both the sources. The method of distribution of common expenses would vary depending upon the facts of each case. Recently the apex court in the case of Consolidated Coffee Ltd. v. State of Karnataka [2001] 248 ITR 432 (SC), in the context of agricultural income-tax has approved the method of apportionment of expenses on the basis of gross receipts of agricultural and non-agricultural activities where the account books did not clearly supply bifurcation of such expenses. This judgment, though not rendered in the context of section 14A of the Income-tax Act, 1961, but has approved the method of apportionment of common expenses between the exempt and taxable sources of income on the basis of gross receipts of these two sources. In my opinion this judgment gives guidance for the adoption of a method for apportioning common expenses. 48 Coming back to the facts of the present case it is noted that in the absence of necessary de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ident of the Tribunal under section 255(4) of the Income-tax Act, 1961 : "Whether on facts and in law, the head office expenses or any other common indirect expenses can be apportioned vis-a-vis the business activity and the agricultural activity carried on by the assessee." ORDER OF THIRD MEMBER 52 R. V. EASWAR ( Vice-President ).----- This case has come up before me on difference of opinion between the learned Members and the following point of difference, as refrained by the Members on January 30, 2003, has been referred to me under section 255(4) of the Income-tax Act, 1961 "Whether on the facts and in law, any expenditure (other than the expenditure apportioned by the assessee itself against agricultural receipts) incurred by the assessee could be apportioned against agricultural receipts ? If yes, to what extent ?" 53 The brief facts as can be gathered from the orders passed by the learned Members are as follows 54 The assessee is a company engaged in the business of providing consultancy services in the field of agricultural forestry plants. The services were provided to M/s. Wimco Limited in terms of an agreement dated September 1, 1984. The assessee owne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h office were indirectly involved in the agricultural activities and the expenditure incurred on them will have to be treated as indirect or common expenditure, a part of which has to be apportioned to the agricultural activity (receipts). He accordingly reworked the expenses, both direct and indirect, relating to agricultural activities at Rs. 9,95,300 and after setting of the same against the agricultural receipts of Rs. 16,78,905 determined the net agricultural income at Rs. 6,83,605. How this figure has been arrived at has been explained in paragraphs Nos. 3 and 4 (pages 220 and 221) of the order of the learned Judicial Member. As the assessee had shown net agricultural income of Rs. 12,31,718, this resulted in an addition of Rs. 5,48,113 to the business income of the assessee, the figure being the difference between the net agricultural income of Rs. 12,31,718 shown by the assessee and Rs. 6,83,605 determined by the Assessing Officer. 57 The assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals) who issued a notice of enhancement proposing to enhance the addition by reducing the agricultural expenses to be adjusted against the agricultural re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and indirect, off set the entire agricultural receipts. 59 In the further appeal taken by the assessee before the Tribunal, the learned Judicial Member referred to section 14A of the Income-tax Act and held that having regard to the language employed therein, there must be some association or connection between the expenditure incurred and the income earning activity and that if there is any direct expenditure incurred to earn tax-free income then such expenditure cannot be allowed as a deduction, but the scope of the section cannot be extended to hold that the head office expenses which are not directly related to agricultural operations can be apportioned between the agricultural activity and business activity. He noted that the activities of agriculture and research and development are part of the same business and that the expenditure incurred at the head office was primarily for carrying on the business and had to be incurred irrespective of the agricultural operations. He noted that the expenses at head office, such as, rent of the premises, electricity and telephone, staff expenses etc. are not connected with the agricultural operations and for the purpose of section 14A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r relation with taxable sources of income. Recognising the difficulty in apportioning the common expenses incurred in an indivisible business which is partly taxable and partly tax free, the learned Accountant Member observed that in the light of section 14A, it is necessary to bifurcate such common expenses on the basis of some yardstick. He referred to a few of such yardsticks or methods, such as, the ratio of net profit from both the sources or the ratio of direct costs or expenses of both the sources or the basis of gross receipts from both the sources. He referred to the judgment in the case of Consolidated Coffee Ltd. [2001] 248 ITR 432 (SC) in which the apportionment of common expenses on the basis of gross receipts of agricultural and non agricultural activities was applied. Having thus approved in principle the stand of the departmental authorities, the learned Accountant Member found that the necessary details were absent. He, therefore, set aside the order of the Commissioner of Income-tax (Appeals) for fresh adjudication by the Assessing Officer, directing the Assessing Officer to examine the books of account and other necessary material to determine the net agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved to have been incurred in relation to the earning of tax-free income, can be disallowed and the section cannot be extended to disallow even expenditure which is assumed to have been incurred for the purpose of earning the tax- free income. The word "incurred" refers to the factual spending of the expenditure in relation to the exempt income and does not refer to a deemed spending or assumed spending for the purpose. The learned Accountant Member has referred to the memorandum explaining the Finance Bill, 2001. His conclusion is that the section has been introduced to nullify certain decisions of the Supreme Court (cited supra). The proposition laid down in those decisions is that where there is both activity which brings in taxable income and activity which brings in tax-free income and both activities constitute an indivisible business, then the expenditure incurred by the assessee for the purposes of the indivisible business cannot be artificially broken up to identify and disallow expenditure which is supposed to have been incurred for the purpose of earning the exempted income. It was this proposition that is sought to be nuffified by section 14A as rightly held by the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act." 65 It is by the above sub-sections which come into force from the assessment year 2007-08 onwards that the authority is given to the Assessing Officer to determine, on the basis prescribed, the amount of expenditure incurred in relation to income which is exempt from income-tax. Even here the Assessing Officer has to first record a finding that he is not satisfied with the correctness of the assessee's claim regarding such expenditure. Sub-section (3) clinches the position by saying that the Assessing Officer can determine the amount of expenditure incurred in relation to exempted income on the prescribed basis even where the assessee claims that no such expenditure was incurred by him as a matter of fact. 66 In the light of the above position, which is also the view taken by the learned Judicial Member albeit without reference to sub-sections (2) and (3) of section 14A inserted with effect from April 1, 2007, I will now proceed to examine the facts of the present case. At ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Supreme Court in the case of Kishinchand Chellaram [1980] 125 ITR 713. In this case, it was held that where the statement of a person which is relied upon for making an addition is not supplied to the assessee despite request, the statement cannot be admitted in evidence. In the present case, the learned Judicial Member has, applying the aforesaid judgment, excluded the statement of Chandan Singh from consideration. In the absence of any material to show that the statement was put to the assessee, the conclusion of the learned Judicial Member must be upheld and I do so. 67 The learned Commissioner of Income-tax submitted that page No. 24 of the paper book in which details of the agricultural expenditure have been given before the Assessing Officer is not sacrosanct and pointed out that Chandan Singh's salary which is claimed to be exclusively for agricultural activities does not find a place there. I think there is some con fusion here. It is the view of the Commissioner of Income-tax (Appeals) that Chandan Singh was looking after the entire research and development and agriculture activity and, therefore, his remuneration should be deducted from the agricultural rec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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