Land Used For Agricultural Purposes Yielding Agricultural Income Is Exempted From Income Tax: Kerala High Court

The Kerala High Court has held that the land in question was used for agricultural purposes, which yielded agricultural income, which in turn was exempt from income tax under Section 10(1) of the Income Tax Act.

The bench of Justice A.K. Jayasankaran Nambiar and Justice Syam Kumar V.M. has observed that there is no material produced by the appellant that would clearly suggest that the loan amount availed by it during the assessment year in question had been used for purchasing an asset, which it had used for the purposes of its business as a provider of asset management services. The evidence that was available before the authorities below clearly pointed to 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 appellant/assessee is in the business of asset management services. For the assessment year 2012–13, it declared a total income of Rs. 1,08,22,440/-. Its case was selected for scrutiny under Section 143(2) of the Income Tax Act, and the assessment that followed assessed a total income of Rs. 2,02,75,110. In arriving at the total income, the assessing officer disallowed a sum of Rs. 90,73,279 as the interest that was paid by the appellant on long-term borrowings. The disallowance by the assessing authority was on the ground that the loan amount in question was used by the appellant for purchasing land worth Rs. 5,91,52,500/-, which was agricultural land and on which the appellant had cultivated tapioca.

The assessing authority found that, inasmuch as the loan on which interest liability had arisen was used for purchasing agricultural products and earning agricultural income, the interest expense incurred on the loan amount availed could not be allowed as an expense under Section 36 of the Income Tax Act since it was not used for business purposes.

In the appeal preferred by the appellant before the Commissioner of Income Tax (Appeals), the Appellate Authority found that the appellant had acquired the land in question for the purposes of business and had exclusively used the same for business purposes. In the order of the Appellate Authority, there is no specific reason or material to support the finding that the appellant used the land exclusively for business purposes.

The department preferred an appeal before the Income Tax Appellate Tribunal against the order of the First Appellate Authority that was in favor of the appellant. The tribunal held that there is a direct nexus between the interest-bearing loans taken by the assessee and the investment made in agricultural land. The income generated from such land acquired by way of borrowings is exempt from tax under Section 10(1) of the Act. The assessee incurred expenditure on such borrowings and therefore is not entitled to deduction of interest under § 36(1)(iii) of the Act, which was rightly disallowed by the Assessing Officer.

The court held that, in view of Section 14A of the Income Tax Act, the expenses could not have been seen as incurred for the purposes of the business for the purposes of Section 36(iii) of the Income Tax Act.

Counsel For Appellant: Mohan Pulikkal

Counsel For Respondent: P.K.Ravindranatha Menon

Citation: 2024 LiveLaw (Ker) 230

Case Title: Mini Muthoottu Credit India (P) Ltd. Versus Commissioner Of Income Tax

Case No.: ITA NO. 76 OF 2019

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