Kerala High Court Grants Income Tax Exemption For Agricultural Land Income Under Section 10(1) Of IT Act

Kerala High Court Grants Income Tax Exemption For Agricultural Land Income Under Section 10(1) Of IT Act

The Kerala High Court has ruled that the land in question was utilized for agricultural activities, generating agricultural income, which consequently qualified for exemption from income tax as per Section 10(1) of the Income Tax Act (IT Act).

Justices A.K. Jayasankaran Nambiar and Syam Kumar V.M. of the Kerala High Court noted that the appellant failed to provide any material indicating that the loan obtained during the relevant assessment year was specifically utilized for acquiring assets beneficial to its asset management business. Instead, evidence presented to the lower authorities strongly suggested that the loan was utilized for purchasing agricultural land valued at Rs. 5,91,52,500 and for generating agricultural income through the sale of tapioca amounting to Rs. 1,93,540.

The appellant/assessee operates within the asset management services sector. During the assessment year 2012–13, they initially declared a total income of Rs. 1,08,22,440. However, their case underwent scrutiny under Section 143(2) of the IT Act, leading to an assessment of a higher total income amounting to Rs. 2,02,75,110/-.

During the assessment process, the assessing officer disallowed a significant sum of Rs. 90,73,279, which represented the interest paid by the appellant on long-term borrowings. This disallowance was grounded on the assertion that the loan funds were utilized by the appellant to acquire agricultural land valued at Rs. 5,91,52,500/-. Additionally, it was highlighted that the said land was utilized for tapioca cultivation.

Consequently, the assessing authority concluded that since the loan, which incurred interest liability, was utilized for the acquisition of agricultural land and for generating agricultural income, the interest expenses related to this loan could not be permitted as an expense under Section 36 of the IT Act. This decision was based on the determination that the loan funds were not employed for business purposes.

In the appeal filed by the appellant before the Commissioner of Income Tax (Appeals), the Appellate Authority determined that the appellant had acquired the land in question for business purposes and had solely utilized it for such purposes. However, it's notable that the order issued by the Appellate Authority lacks specific rationale or evidence to substantiate the conclusion that the appellant had exclusively employed the land for business activities.

The department appealed against the decision of the First Appellate Authority in favor of the appellant by filing an appeal before the Income Tax Appellate Tribunal.

The court held that despite the appellant showing the land in question as a business asset in their balance sheet, there was insufficient evidence to demonstrate that the land was actually utilized for the business activities of the assessee, particularly in providing asset management services. The available evidence indicated that the land was utilized for agricultural purposes, resulting in agricultural income that was exempt from income tax under Section 10(1) of the Income Tax Act.

Since the expenses related to the agricultural land couldn't be considered incurred for business purposes under Section 36(iii) of the IT Act, and in accordance with Section 14A of the IT Act, the court concluded that there was no basis to interfere with the Tribunal's decision.