Vinayak Sudhakar Malkotagi Vs ITO [ITA No. 549/MUM/2023]

ITAT Mumbai held that receipt of rental income by giving the land on lease to the LLP and non-utilization of the said land does not preclude the assessee to treat the same as agricultural income. Accordingly, the same is exempt.

Brief facts of the case are, assessee filed his original return of income for A.Y. 2020-21 on 02.01.2021 declaring income of ₹.2,77,560/-. Thereafter, the return was selected for limited scrutiny for the reason of ‘Agricultural Income’. Notices u/s 143(2) and 142(1) of the Act along with questionnaire were issued and served on the assessee through e-portal. In response, assessee filed the details through e-portal.

The Assessing Officer observed that assessee derived agricultural income in the form of rental income in accordance with the provisions of section 2(1A)(a) of the Act which is fully exempt from tax u/s. 10(1) of the Act. Further, he observed that assessee is the owner of the three acres of agricultural land situated at Sangli, Maharashtra which has been given on rent to A.S Agri and Aqua LLP for farming and cultivation of agricultural produce.

During the current Assessment Year, a promissory note between the assessee and A.S Agri and Aqua LLP was executed wherein it was agreed that the assessee will provide its agricultural land to A.S Agri and Aqua LLP from 01.08.2019 on a monthly remuneration of ₹.8,00,000/-. Further, it was also agreed that the assessee will make a refundable deposit worth ₹.1.60 crores in the business of A.S Agri and Aqua LLP in which the assessee will hold a 50% stake.

Show cause notice was issued to the assessee contesting as to why the receipt should not be treated as business income. In absence of any reply, AO completed the assessment by treating the rental income received by the assessee as income from the business. DRP dismissed the objections raised by the assessee. Being aggrieved, the present appeal is filed.

The ITAT held that, by leasing the land to the LLP, the assessee received the rent pursuant to an agreement; the non-utilization of the aforementioned land does not prevent the assessee from treating the rent as agricultural income. It’s also important to remember that the assessee is an NRI and has no control over the LLP’s failure to perform or use the land. The agreement is what matters. The assessee received the money in accordance with the contract, and he or she promptly reported receiving the extra rent.

The Assessing Officer cannot put themselves in the position of the Assessee and assume that the LLP is not engaged in any activities and that its income cannot be classified as agricultural income. The Assessing Officer of the LLP is the only person who has the authority to object to transactions. Since there is an agreement to this effect and the assessee has actually received the rent, the receipt of rent based on the agreement cannot be denied. especially if the recipient of the payment confirms that they made it specifically for agricultural purposes. In the assessee’s hands, this contractual performance cannot be disputed.

Even otherwise, Assessing Officer has rejected the claim of the assessee on the basis of impossibility of performance, then he cannot treat the income as “business income”. It should be Nil, just because assessee has declared the same he cannot proceed to change the head to tax the income. When the impossibility of performance exist, it cannot be charged to tax under any head of income. Therefore, ITAT are not inclined to accept the findings of the lower authorities, hence direct the Assessing Officer to treat the rental income as agricultural income. In the result, appeal filed by the assessee is allowed.

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