Kerala HC: The Income Tax Exemption Applies to Agricultural Land Yielding Agricultural Income

The Kerala High Court ruled that the land in question was utilized for agricultural purposes, which yielded agricultural income, which in turn was exempt from income tax u/s 10(1) of the IT (Income Tax) Act.

No material produced by the petitioner is there that suggests that the loan amount claimed during the assessment year in question had been utilised for purchasing an asset, which it had used for its business as a provider of asset management services.

The proof that was available before the authorities depicts the acquisition of agricultural land valued at Rs. 5,91,52,500 and the earning of agricultural income through the sale of tapioca to the tune of Rs. 1,93,540, the bench of Justice A.K. Jayasankaran Nambiar and Justice Syam Kumar V.M. noted.

The petitioner is engaged in the business of asset management services. For the AY 2012–13, it shows a total income of Rs. 1,08,22,440/-. Its matter opted for scrutiny u/s 143(2) of the Income Tax Act, and the assessment that followed evaluated a total income of Rs. 2,02,75,110.

Coming on the total income, the assessing officer disallowed a sum of Rs. 90,73,279 as the interest that was filed via the petitioner on long-term borrowings. The assessing authority’s disallowance was on the foundation that the loan amount in question was utilized via the petitioner purchasing land worth Rs. 5,91,52,500/-, which was agricultural land on which the petitioner had cultivated tapioca.

The assessing authority discovered that, since the loan on which interest liability had originated was utilized to buy the agricultural products and earn agricultural income, the interest expense made on the loan amount claimed cannot be permitted as an expense u/s 36 of the Income Tax Act as the same was not utilized for business objectives.

In the petitioner’s appeal before the Commissioner of Income Tax (Appeals), the Appellate Authority encountered that the petitioner had acquired the land in question for business and had solely utilized it for business intents. In the Appellate Authorities order, there is no distinct reason or material to keep the finding that the petitioner utilized the land just for business objectives.

A petition is filed by the department before the income tax appellate tribunal against the first appellate authorities’ orders that were in favour of the petitioner. The tribunal ruled that a direct nexus between the interest-bearing loans that the taxpayer has taken and the investment made in agricultural land is there.

The income made via this land acquired via borrowings is exempted from tax u/s 10(1) of the Act. On these borrowings, the taxpayer made the expenditure and hence does not qualify for the interest deduction under section 36(1)(iii) of the Act, which was disallowed via the Assessing Officer.

The court, given Section 14A of the IT Act, the expenses cannot have been observed as incurred for the business for Section 36(iii) of the Income Tax Act.