Agricultural income: ITAT order virtually opens a potential channel to launder unaccounted money

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Updated: May 01, 2017 2:26 PM

Experts say the ruling virtually opens up a potential channel to launder unaccounted money.

Agricultural income, ITAT, agricultural land, Income Tax Appellate Tribunal Experts say the ruling virtually opens up a potential channel to launder unaccounted money. (Source: Reuters)

Even if a part of sale proceeds of agricultural land was not disclosed in the sale deed, the entire consideration could be treated as agriculture income, the Income Tax Appellate Tribunal’s Cochin branch ruled last week. Experts say the ruling could have implications for the government’s tax revenue as it virtually opens up a potential channel to launder unaccounted money. Others, however, pointed out the tribunal hasn’t given a blanket cover for taxpayers with both farm and other incomes. The taxman could go by the merit of each case, they say.

Nonetheless, the ruling, it would appear, hold true regardless of whether the relevant transactions are routed through the banking channel or not. Indeed, the assessee may not even need to establish a link between the land sale proceeds and his books/bank deposits. Following the ruling, taxpayers may be encouraged to show income from other sources as exempt agricultural income in order to mitigate tax liabilities.

Experts note in the Cochin case the evidence supported the assessee’s contention that he had no extra source of income other than the agricultural income from sale of land and otherwise and other items shown in the tax return. The ITAT-Cochin ruling, which relied on a 2009 order by the same tribunal, reiterated that any surplus money arising to an asessee on sale of agricultural land will always assume the nature of agricultural income and therefore will be tax-exempt. Since farm land is not a capital asset, its sale cannot result in capital gains.

Importantly, the tribunal allowed the assesses’s contention that entire sale proceeds were not shown in the deed because the buyer insisted on it to save on stamp duty. The sale value in the deed was as per the circle rate fixed by the Kerala government.

Such “on-money” (the difference between the actual sale value and the value shown in the sale deed) is “an unfortunate practice in most parts of the country,” the tribunal lamented, but granted relief to the assessee.
Taking a liberal view of the Section 68 of the Income Tax Act, the  tribunal said this provision doesn’t make it mandatory for the assessing officer to bring to tax unexplained sums found credited in the previous year’s books of an assessee. “On the other hand, the assessing officer has to apply his mind on facts of each case and decide whether the addition (of income for charging to tax) is warranted,” it said. Tax experts said there have been precedents of tribunals/Commissioner-Appeals (CITs-A) taking a similar view of the Section.

Rahul Garg, leader-direct tax at PwC India said: “It is unlikely that the ITAT-Cochin order can be used as a blanket cover by everyone with income from sale of agricultural land, as both direct and circumstantial evidence will be examined by the adjudicating body before a verdict is announced. In this specific case, the evidence was perhaps supportive of the assessee but the same will be examined in all other cases related to proceeds from sale of agricultural land.”

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The ITAT-Cochin issued the order on April 26 in a case where the assessing officer (AO) sought to tax Rs 39 lakh in the bank account of a Kerala-based assessee as “unexplained deposit” under the head of “Income from other sources.” The assessee had made cash deposits of Rs 80 lakh in his bank account in the assessment year 2013-14. The assesee submitted that the agricultural land, jointly owned by him and his wife, was sold for a consideration of about Rs 70 lakh in cash, but only around Rs 30 lakh was shown in the sale deed. However, the whole sale proceeds were deposited in the bank and shown in the return, as proceeds from sale of farm land. He also showed agriculture income of over Rs 10 lakh and total (taxable) income of Rs 71,000. The AO proceeded to add Rs 39 lakh (the difference between the amount deposited in the bank account and the sum of the consideration shown in the sale deed and agriculture income) to his income, treating it as unaccounted/black money.

On appeal, the assessee contended that the actual amount of sale consideration was not disclosed in the sale deed because of insistence of the buyer to reduce stamp duty liability. The ITAT, upholding the ruling by CIT-A in the case, deleted the Rs 39 lakh added by the AO to the assessee’s income.  The tribunal was convinced that the asssees had no other source of income to generate undisclosed income of Rs 39 lakh.

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