Per K.C. Singhal, Judicial Member. - The issue arising out of this appeal relates to the addition of Rs. 5,84,113 on account of inflated agricultural income which was further enhanced to Rs. 16,78,905 by the CIT(A).

2. The assessee-company is engaged mainly in the business of providing consultancy in the field of agriculture, forestry plants and the services provided to M/s. Wimco Ltd. under the terms of an agreement dated 1-9-1984. The main object of the assessee-company is to provide research and development facility to Wimco Ltd. However, it is also carrying on agricultural operations in the field of agriculture and derives income therefrom. The gross receipts during the year under consideration aggregated to Rs. 1,27,46,012 which included agricultural receipts of Rs. 16,78,905. Against the agricultural receipts, the assessee had shown direct operational expenditure of Rs. 4,47,187. The balance amount of Rs. 12,31,718 was declared as agricultural income not liable to tax.

3. In the course of assessment proceedings, the Assessing Officer noticed that expenses pertaining to agricultural activity for assessment year 1993-94 were to the extent of Rs. 7,58,273 against agricultural receipts of Rs. 15,58,062 while for assessment year 1994-95, the agricultural expenses were to the extent of Rs. 4,47,187 against total receipts of Rs. 16,78,905. Thus the assessee was asked to explain the reasons for increase in the gross receipts and abnormal decrease in the agricultural expenses. In response to the same, the assessee furnished the details of agricultural land and the expenses incurred in respect of agricultural activity. The Assessing Officer noted that assessee had only shown direct expenses but had not declared any direct expenses in respect of agricultural income. Therefore, the assessee was again asked to show cause as to why not a portion of indirect expenses may be treated on pro rata basis relating to agricultural income. The explanation was furnished by the assessee vide letter dated 24-1-1996 stating therein that company was incorporated primarily for carrying out research and development activity in the field of agriculture. According to the assessee, the agricultural activities were undertaken either as inter-cropping or on the land not currently being used for research and development purposes. Therefore, no indirect expenses were incurred on the agricultural activities. The direct expenses whenever incurred were booked as agricultural expenses. However, the Assessing Officer was not satisfied with the explanation of the assessee. According to him, it was not correct to say that the officials sitting either at Delhi or at branch office were not indirectly involved in the agricultural activities. Accordingly, he estimated the direct and indirect expenses as under :

(Rs.)

Less :Rs.

4. Thus, the expenses of Rs. 75,56,170 is inclusive of direct and indirect agricultural expenses as well as indirect business expenses, hence the net agricultural expenses (direct and indirect) work out as below :

In view of the above calculation, he determined the net agricultural income at Rs. 6,83,605 (Rs. 16,78,905 - Rs. 9,95,300). Since the assessee had shown agricultural income of Rs. 12,31,718 he made the addition of Rs. 5,48,113 towards business income (Rs. 12,31,718 - Rs. 6,83,605) .

5. The matter was carried before the CIT(A). In the course of appellate proceedings, the CIT(A) issued notice of enhancement dated 12-3-1997 for the reasons given therein, the copy of which is reproduced by the CIT(A) in his order at internal pages 5 to 8. The contents of the same need not be repeated since the relevant portion, whenever needed will be referred to. The reply of such notice was given by assessee by its letter dated 26-3-1997, copy of which is enclosed in the paper book on pages 93 to 106. The relevant contents of this letter will also be referred to as and when needed. On the basis of the statement of Chandan Singh, an employee of the assessee and the contents of the letter of the assessee dated 9-10-1996, it was observed by the CIT(A) at internal page 10 of its order as under :

"16.3 From the above it is clear that the land measuring 150 acres is being used for the purposes of developing such inter-cropping. The entire effect and activity of the company is devoted towards such inter-cropping and it is this inter-cropping which results in output of crops such as wheat, sugarcane, etc. This output of crop is a direct result of the efforts put in on the 150 acres land by the entire R&D staff and establishment at Baghwala.

16.4 Since such inter-cropping is directly related to the R&D activity of the company, it is totally intertwined with those activities."

Proceeding further, he noticed in para 16.7 that no evidence was available to the effect that separate accounts were maintained in respect of the expenditure at Chandian Farm. Further, he formed the view that the entire expenditure incurred on Baghwala Farm related to R&D activity as well as agricultural activity. In the absence of separate accounts vis-a-vis different activity, he estimated 50 per cent of the expenses attributable to agricultural activity. Accordingly he determined the sum of Rs. 12,89,389 towards agricultural expenses at Baghwala, being 50 per cent of Rs. 25,78,779.

6. Regarding indirect expenses, it was noticed by him that Delhi Office expenses related to Baghwala and Chandian Farms and, therefore, he estimated 50 per cent of the expenses relating to each farm. Out of the same, he directed 50 per cent towards agricultural expenses in respect of Baghwala Farm. The total expenses of Delhi was noted at Rs. 13,18,965 out of which Rs. 6,90,482 was treated as expenses towards Baghwala Farm. Fifty per cent of this amount was considered towards agricultural activity at Baghwala Farm. Thus indirect expenses towards agricultural activity were taken at Rs. 3,45,241.

7. In view of the above, he deducted the above expenses from agricultural receipts of Rs. 16,78,905. The balance amount was taken at Rs. 44,274 (Rs. 16,78,905 - 12,89,389 - 3,45,241). Since, according to the CIT(A), Chandan Singh was looking after the entire activity of R&D and agriculture, he was of the view that the sum of Rs. 44,274 be also treated towards remuneration vis-a-vis agricultural activity. Hence, he determined the nil income from the agricultural activity.

8. The learned counsel for the assessee Mr. Aggarwal has vehemently assailed the order of the CIT(A) as well as Assessing Officer by raising various submissions. He also took us through the sequence of events which took place in the course of assessment as well as appellate proceedings. He also took considerable time of the Bench in challenging the validity of the remand proceedings under section 250(4) and validity of the statement of Mr. Chauhan, an employee of the assessee, recorded by the ADI in the remand proceedings. Since the CIT(A) has not taken into consideration these factors, it is not necessary for us to refer to the detailed arguments of the learned counsel for the assessee. So we will refer only to those arguments which are necessary for disposal of the appeal.

9. The fist contention of Mr. Aggarwal was that the statement of Mr. Chandan Singh recorded by Assessing Officer cannot be considered as an admissible evidence in view of the Supreme Court judgment in the case of Kishinchand Chaellaram v. CIT [1980] 125 ITR 713 ¹ inasmuch as his statement was recorded at the back of the assessee and the copy of the said statement has never been supplied till today. In this connection, he invited our attention to para 2 of the notice of enhancement wherein it has been observed by the CIT(A) that evidence proposed to be used against a person has to be disclosed to him before it can be used. Further, he says that the copy of the statement shall be supplied to the assessee at the appropriate time. Despite these observations, contends Mr. Aggarwal, copy of the statement of Mr. Chandan Singh has not been supplied to the assessee even though such statement has been used against the assessee as is apparent from para 16.1 of the appellate order. He also invited our attention to the letters of assessee addressed to CIT(A) dated 10-2-1997 and 5-3-1997 appearing at pages 87 and 88 of the paper book to point out that repeated requests were made by the assessee for supply of the copy of the statement. In view of these factual aspects it was contended by him that there was gross violation of principles of natural justice and, therefore, such statement cannot be admitted as an evidence against the assessee in view of the aforesaid Supreme Court judgment.

10. The second contention was that observations of the CIT(A) in para 16.7 that no evidence was available regarding maintenance of separate accounts in respect of the expenditure at Chandian Farm is factually wrong. It was strongly submitted by him that account of expenditure relating to agricultural and non-agricultural activities were duly maintained though in the same books of account and all such expenses were duly vouched. It is on this basis that full details of agricultural expenses were supplied before the Assessing Officer and no defect has been pointed out in this respect. He drew our attention to page 24 of the paper book which contains full details of all the direct expenses relating to agricultural activity amounting to Rs. 4,47,187.

11. Proceeding further, it was submitted that there was no justification for the CIT(A) for coming to the conclusion that 50 per cent of the expenses at Baghwala Farm related to agricultural activity and further, there was no basis for holding that 25 per cent of the expenses of Delhi office were attributable to activity of agriculture at Baghwala Farm. According to him, the action of the CIT(A) regarding such estimation was totally arbitrary and based on surmises and conjectures. He further submitted that the entire staff at Delhi was employed for business activity of the assessee and no part of such expenses could be attributed to agricultural activity in the absence of any material on record. To support his contention, he relied on the Supreme Court judgment in the case of State Of Orissa v. Maharaja Shri B.P Singh Deo [1970] 76 ITR 690.

12. Proceeding further, it was also submitted that accounts of the assessee were being maintained in similar fashion right from the inception and the same were being accepted by the department in the past. According to him, the rule of consistency must be continued to be followed in the absence of any adverse material. If the agricultural receipts could be accepted by the revenue on the basis of accounts maintained by it then there was no justification for not accepting the expenses relating to agricultural activity. He also pointed out the factual error in the order of CIT(A) by stating that 150 acres farm was of Chandian Farm exclusively carrying on R&D activity and only 15 acres at Baghwala were used for agricultural activity. That is why only 10 per cent of the total receipts related to agriculture.

13. He also assailed the order of Assessing Officer by submitting that the action of Assessing Officer in estimating the direct business expenditure at Rs. 40 lakhs was arbitrary and without any basis whatsoever. Again he relied on the Supreme Court decision in State Of Orissa v. Maharaja Shri B.P Singh Deo [1970] 76 ITR 690. According to him, the total operation expenditure as per Schedule I of the balance-sheet were Rs. 73,62,689 and if Rs. 40 lakhs related to business expenses then the balance of Rs. 33,62,689 should have been considered by the Assessing Officer as agricultural expenses and allowed the same against agricultural receipts. If so, then why he calculated direct and indirect of expenses relating to agriculture at Rs. 9,95,300 is beyond imagination. According to him the stand of the Assessing Officer was contradictory.

14. It was also contended by him that unless an expenditure is shown directly connected with agricultural activity, no expenditure can be apportioned merely because the assessee carries on the business as well as non-business activities. Reliance was placed on various decisions in CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 (SC), Commissioner Of Income Tax, Madras v. Indian Bank Limited, Madras [1965] 56 ITR 77 (SC), Indian Explosives Ltd. v. CIT [1984] 147 ITR 392 ¹ (Cal.), Punjab State Co-operative Supply & Marketing Federation Ltd. v. CIT [1981] 128 ITR 189 ² (Punj. & Har.), Commissioner Of Income-Tax v. Kanoria Investments (P.) Ltd. [1998] 232 ITR 7 (Cal.) and Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450 ³ (SC).

15. It was also submitted by him that agricultural receipts were of 13.17 per cent of the total receipts as noted by the CIT(A) in his order in para 16.17 and, therefore, even if any apportionment was required, then there was no justification for estimating expenditure attributable to agricultural activity at 50 per cent of the total expenditure.

16. In view of the above submissions, he also stated that the action of CIT(A) was biased one. Finally, he concluded by praying that the addition directed to be made by the CIT(A) be quashed.

17. On the other hand, the ld. DR has strongly relied on the findings and reasonings given by the CIT(A) and the Assessing Officer which have already been referred to by us while narrating the facts of the case and, therefore, need not be repeated.

18. After considering the rival submissions of the parties and the material placed before us, we find sufficient force in the submission of the ld. counsel for the assessee. According to the well accelerated judgment of the Hon’ble Supreme Court in the case of Kishinchand Chellaram (supra), no material in the possession of the Assessing Officer can he considered as an admissible evidence unless it is confronted to the assessee and its copy is supplied to the assessee so that the assessee may rebut such material. Admittedly, in the present case, the assessee had been repeatedly asking for the copy of the statement of Mr. Chandan Singh recorded by the CIT(A) on 19-12-1996. It is apparent from the letters dated 10-2-1997 and 5-3-1997 appearing at pages 87 and 88 of the paper book. At this stage, it would be useful to quote para 2 of the notice of enhancement issued by the CIT(A) as under :

"2. Kindly note that in accordance with principles of natural justice any evidence proposed to be used against a person has to be disclosed to him before it can be so used. However, the time and occasion when such evidence is to be disclosed is not a matter to be decided by such person. A copy of the statement recorded will be given to you at the appropriate time. However, non-furnishing of this statement to you at present does not constitute adequate reasons on your part for not attending the proceedings or for not furnishing any information called for."

The perusal of the above clearly shows that CIT(A) also recognised the principle of natural justice as laid down by the Hon’ble Supreme Court. Further it was specifically stated that copy of the statement shall be provided at the appropriate time. In reply dated 26-3-1997 in response to the notice of enhancement, the assessee again asked for the supply of copy of the statement of Chandan Singh. The relevant portion of the reply at internal page 5 (page 97 of the paper book) is quoted as under :

"Without prejudice to above, now in reply to your notice dated 12-3-1997, the assessee submits that if you are not proceeding to use the statement recorded by you of the deponent Shri Chandan Singh then certainly to the best of appellant’s understanding proceeding were concluded on 19-12-1996. However, without prejudice to the above, it is submitted that since on your record, a statement has come, it is necessary in the best interest of natural justice, the said statement may be made available to the assessee-company."

Despite the above request such statement was never made available to the assessee. Surprisingly enough, such statement has not been brought on record till the hearing of appeal before us. In view of the above facts, we are of the considered view that CIT(A) had grossly violated the principle of natural justice by not supplying the copy of the statement of Mr. Chandan Singh. Accordingly, we further hold that such statement cannot be considered as an admissible evidence in view of the Supreme Court judgment in the case of Kishinchand Chellaram (supra).

19. Having excluded the statement of Shri Chandan Singh from consideration, the only materials remaining on the record are the books of account and the details furnished by the assessee. There is no dispute that agricultural receipts were only to the extent of Rs. 16,70,903 against the total receipts of Rs. 1,27,46,012. If the accounts of the assessee can be accepted in respect of the receipts, we do not find any reason for not accepting the books with reference to the expenditure. Page 24 of the paper book shows that assessee had been maintaining the record with res-pect to direct expenses relating to agricultural activity such as fertilizer, irrigation, high speed diesel, repair and maintenance, tractor expenses, wages, transportation etc. etc. According to the ld. counsel for the assessee, all these expenses are fully vouched and are still available. No specific defect has been found either by Assessing Officer or by CIT(A) in this regard. It is not the case of the department that these expenses are not vouched, as contended by assessee. Therefore, we are unable to uphold the finding of the CIT(A) that no separate accounts of expenses were maintained by the assessee. Rather the assessee has been showing such expenses in the uniform manner in the last ten years and such accounts were being accepted as such by the Department. Therefore, there is no reason to depart from such system maintained by the assessee. Consequently, the books of account maintained by the assessee are to be accepted. As a result thereof, the direct expenses attributable to agricultural activity as shown by the assessee are hereby accepted.

20. Now the only issue that survives for our consideration is whether there can be any apportionment of indirect expenses incurred by the assessee at the head office. The learned counsel for the assessee has cited various decisions which have already been mentioned by us in the earlier paragraphs for the proposition that, if both the activities are part of the business activity then there cannot be any apportionment, merely on the ground that income from one of the activity is exempt from taxation. However, a new section i.e. section 14A has been inserted by Finance Act, 2001 retrospectively which provides as under :

"Section 14A : For the purpose of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act."

According to the learned DR, this retrospective amendment has nullified the ratio laid down by various Courts including the Apex Court in this regard and, therefore, all the expenses incurred, whether direct or indirect, should be apportioned between business income and non-business income. On the other hand, the ld. counsel for the assessee has strongly opposed such contention of the ld. DR by arguing that according to this retrospective amendment only those expenditure would be disallowed which is in relation to the income which does not form part of the total income. So there must be direct connection or association between expenditure incurred and the income, which is not taxable.

21. Rival submissions of the parties have been considered carefully. We have gone through the retrospective amendment made by the Legislature by inserting section 14A. The words "relation to" used by the Legislature is to vital importance. The word "relation" has been defined in the Webster’s Encyclopaedic Unabridged Dictionary as under :

"To bring into or establish association, connection or relation; to have reference; to have some relation; to establish a social or sympathetic relationship with a person or thing."

In view of the above definition, we are of the view that there must be some association or connection between the expenditure incurred and the activity of income which does not form part of the total income. That means where the expenditure is directly related to an activity whose income is tax free then such expen-diture cannot be allowed as a deduction. But this definition cannot be extended further. Therefore, in our view, the head office expenses which are not directly related to agricultural operations cannot be apportioned between business activity and agricultural activity. It is apparent from the facts of the case that 87 per cent of the income is derived from business activity. Further the activity of research and development as well as activity of agriculture are part of the same business. The expenditure incurred at head office are primarily for carrying on the business activity and they had to be incurred irrespective of the agricultural operations. The main object of the assessee-company is the research and development activity whose income is taxable. The expenses at head office like rent of the premises, electricity and telephone expenses, staff expenses have no direct connection with agricultural operations. The remote connection is not enough for disallowing such expenses. The decision of the Supreme Court in the case of CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 would still be applicable to indirect expenses since section 14A, in our opinion, is restricted to direct expenses attributable to agricultural activity or any other activity whose income does not form part of the total income.

22. In the course of our study, we have also come across two recent decisions of Supreme Court. First is in the case of Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450 ¹. In that case also question was whether in computing the business income, the expenses relating to tax free income could be disallowed. Their Lordships, after considering the earlier decision in the case of Maharashtra Sugar Mills Ltd. (supra) held as under :

"The following principles may be laid down : (i) if the income of an assessee is derived from various heads of income, he is entitled to claim deduction permissible under the respective head, whether or not computation under each head results in taxable income; (ii) if the income of an assessee arises under any of the heads of income but from different items, e.g., different house properties or different securities, etc. and income from one or more items alone is taxable whereas income from the other item is exempt under the Act, the entire permissible expenditure in earning the income from that head is deductible; and (iii) in computing the ‘profits and gains of business or profession’ when an assessee is carrying on business in various ventures and some among them yield taxable income and the other do not, the question of allowability of the expenditure under section 37 of the Income-tax Act, 1961, will depend on : (a) fulfilment of requirements of that provision, namely, that (i) the expenditure should not be in the nature of capital expenditure of personal expenses of the assessee; (ii) it should have been laid out or expended wholly and exclusively for the purposes of the business or profession; and (iii) it should have been expended in the previous year; and (b) on the fact whether all the ventures carried on by him constituted one indivisible business or not; if they do the entire expenditure will be a permissible deduction, but if they do not, the principle of apportionment of the expenditure will apply, because there will be no nexus between the expenditure attributable to the venture not forming an integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee."

The perusal of above observations clearly shows that rule of apportionment would apply only where two activities under the same head do not constitute one indivisible business. Since in the present case, both the activities are inter-connected, no apportionment can be made except in the circumstances falling under section 14A.

23. The other decision of Supreme Court is in the case of Consolidated Coffee Ltd. v. State Of Karnataka [2001] 248 ITR 432. In that case, the assessment was under Karnataka Agricultural Income-tax Act, 1957. Rule 7 of Rules made thereunder provided that deduction admissible under the Act shall be the actual amount related to the income derived from agricultural operations and proved by accounts or other evidence, where no such accounts or evidence is produced, the Assessing Officer shall proceed to assess the income to the best of his judgment. Since books of account were maintained by assessee in the manner that expenses related to agricultural income and non-agricultural income could not be identified, the Assessing Officer proceeded to assess the income on best judgment basis and accordingly apportioned the expenses on pro rata basis. This view of Assessing Officer was upheld by appellate authority as well as High Court and Supreme Court. In our considered view, this judgment is quite distinguishable. Firstly, there is difference in scheme of two Acts. It is because of specific Rule 7 that such apportionment was upheld while under Income-tax Act, 1961, there is no such provision. On the other hand, Supreme Court in two decisions mentioned above have specifically held that under section 37 of 1961 Act and section 10(2)(xv) of 1922 Act, no such apportionment is possible. Secondly, in the High Court judgment in the case of Consolidated Coffee Ltd. (supra) itself (at page 434), the decision of Supreme Court in the case of Maharashtra Sugar Mills Ltd. (supra) has been distinguished in the following manner:

"Shri Sarangan further relied upon the decisions in CIT v. City of Ahmedabad Spg. & Mfg. Co. Ltd. [1981] 129 ITR 507 (Guj.); CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 (SC) and Commissioner Of Income-Tax v. Sabarkantha Zilla Kharid Vechan Sangh Ltd. [1977] 107 ITR 447 (Guj.). In these decisions, the question which fell for consideration where all were cases arising under the Income-tax Act, was as to the modes of bifurcation of the business expenditure in relation to income from different heads and in what manner expenditure had to be apportioned head-wise and not the question with which we are concerned in the present case. Therefore, any principle stated therein will be of no relevance to the present case and those decisions cannot be of any assistance to the petitioner."

Thirdly, there was finding in that case that expenditure incurred by assessee at head office were essential one and were actually laid out and incurred to derive both types of income - agricultural and non-agricultural, whereas in the present case there is no such finding. On the contrary, the business in the present case is indivisible one. Accordingly, in our view, the ratio of judgment of Supreme Court in the case of Consolidated Coffee Ltd. (supra) cannot be applied to the present case.

24. In view of above discussion, we are unable to uphold the order of CIT(A) on this issue. The order of the CIT(A) is, therefore, set aside on this issue and the disallowance made or sustained by him is hereby deleted.

25. In the result, appeal of the assessee is allowed.

Per R.S. Syal, Accountant Member. - I have meticulously perused the draft order of my learned brother in which he has allowed assessee’s claim in total by holding that the indirect agricultural expenses do not fall within the ambit of section 14A. I find myself unable to concur with the conclusion regarding the allocation of expenses to agricultural activity vis-a-vis the res-tricted application of section 14A. Despite the discussion I could not convince him on my line of reasoning. As such I am cons-trained to write my dissent note. Facts of the case and the arguments have been noted by him in paras 1 to 17 of his order, which need not be repeated. However the necessary facts and submissions which have not been considered would be discussed at the relevant page.

2. Very briefly the facts of the case are that the assessee owned 165 acres of land; 150 acres at Chandian Farm and 15 acres at Baghwala. 15 acres at Baghwala were being used exclusively for Research and Development purposes, Administrative wing and Guest house etc. Field trials of nursery plantations for research purposes were carried out at Chandian Farm in around 20 acres of land by growing full-fledged trees in order to develop plants. It was done in such a way that inter-cropping was possible and the remaining area of 130 acres was put under agriculture. The nursery was not at any fixed place in Chandian Farm but was shifted in rotation to maintain the fertility of the soil. It is undisputed that the income in respect of nursery and R&D activity was subjected to tax whereas the income from agricultural activity was claimed to be exempt. The claim of the assessee for agricultural income was also admitted by the revenue authorities but the dispute centres only on the quantification of expenses for earning agricultural income. Whereas the assessee deducted agricultural expenses to the tune of Rs. 4,47,187, detail placed at page 24 of the Paper Book from gross agricultural receipts of Rs. 16,78,905, the Assessing Officer was not satisfied with the manner in which the net agricultural income was determined by the assessee. The Assessing Officer enhanced the quantum of agricultural expenses to Rs. 9,95,300 on the ground that the assessee had not included indirect expenses of agriculture in the details furnished by it. This course was adopted by the Assessing Officer because the assessee had not furnished the necessary bifurcation of the expenses as is pointed out in page 4 of the assessment order. On appeal by the CIT(A) called for a remand report from Assessing Officer on the following points:—

1.Expenditure on nursery and R&D activity which is identifiable as exclusively pertaining to such activity.

2.Expenditure debited to R&D and other heads (other than agricultural) but which is clearly identifiable as pertaining to the agricultural operations.

3. When the Assessing Officer required the assessee to give necessary information pertaining to the expenditure as desired by the CIT(A), the assessee refused to furnish the necessary details by way of letter dated 12-3-1997 placed at page 119 of the paper book on the ground that no proceedings were pending before the Assessing Officer for the relevant assessment year and no order under section 250(4) was passed by the CIT(A). Later on the CIT(A) issued enhancement notice on the assessee stating therein that as the assessee had not furnished the necessary information to the Assessing Officer as desired by him for the disposal of appeal, therefore, he was proceeding to draw adverse inference against the assessee. In response to this notice, the assessee filed reply on 26-3-1997 placed at pages 93 to 106 of the paper book and also furnished details of expenses by way of Annexures A, B and C. The assessee conceded before the CIT(A) through its letter dated 7-11-1996 placed at pages 83 to 86 of the paper book that the agricultural operations were being looked after by one Supervisor named Shri Chandan Singh to whom total salary paid was to the tune of Rs. 41,091 and such salary was not included in the agricultural expenses shown by it. A further letter dated 26-3-1997, relevant portion at page 105 of the paper book is an admission that the amount of salary paid to Shri Chandan Singh may also be included in the agricultural expenses. The learned CIT(A), taking into consideration various factors enhanced the quantum of agricultural expenses equal to the amount of gross agricultural receipts.

4. The controversy in the present appeal relates to determining the quantum of expenses relatable to agricultural operations which would be deducted from gross agricultural receipts for determining net agricultural income. It was contended by the learned counsel for the assessee that all the expenses were duly vouched and complete books of account were maintained by the assessee and further as the Assessing Officer had accepted the gross income from agriculture, he was under obligation to accept the expenses of agriculture as well.

5. It is seen from the order of the Assessing Officer that he had not disputed the deductibility or genuineness of the expenses which had been claimed by the assessee. Rather the attempt of the Assessing Officer was to determine the share of expenses in relation to agricultural activities out of common expenses so as to determine the correct amount of net agricultural income. This was refused assessable because the assessee had not itself shown all agricultural direct and indirect expenses separately and the necessary information as called for by the Assessing Officer during the course of assessment proceedings was not furnished by the assessee. Similarly when the Assessing Officer, for the purpose of sending remand report to the CIT(A) required the assessee to furnish necessary details of expenses, the assessee refused to submit such information on the ground that no proceedings were pending before him for relevant assessment year and also no order under section 250(4) was passed by the CIT(A). In contrast it is obvious from the notice of the Assessing Officer dated 7-2-1997 placed at page 115 of the paper book calling for the required information, that the information/details were required in connection with the appellate proceeding for assessment year 1994-95. It is not understandable as to why the assessee did not furnish the necessary information, when the notice was very clear in its content to the effect that the information was required in connection with the appellate proceeding for the relevant assessment year. The sequence of the events shows that the assessee had not at any stage allowed the Assessing Officer to examine the details of expenses so as to determine the total expenses relatable to the agricultural activity. At the same time it is also palpable that the detail of agricultural expenses submitted by the assessee was not correct inasmuch as some expenses directly relatable to agriclutural operations were not finding place in such detail as is evident from assessee’s admission Officer. The CIT(A) to the effect that salary to Shri Chandan Singh was not included in detail of agricultural expense and the further fact that no indirect expenses were included by the assessee in agricultural expenses. It was under these circumstances that the revenue authorities proceeded to determine net agricultural income by estimating the amount of agricultural expenses included in the total expenses.

6. The claim of the assessee is that the higher research officers of the company were not engaged in the agricultural operations in any manner and it was left for the labourers to decide as to which crop should be grown in a particular season. It is clear from the facts that the nursery was in the area of 20 acres of land at Chandian Farm which was shifted in rotation from one place to another but within the same farm and the remaining area of 130 acres was put under agriculture.

7. It is important to bear in mind that the company was mainly brought into existence, inter alia, for the development of few trees species etc. and not for doing agricultural activity. Even though the earning of agricultural income is one of the main object of the company, but in reality it is only subservient to the main object of development of poplar trees. It is evident from the object clause of the memorandum of association and the facts of the case that the company was doing inter-cropping. Inter-cropping has been defined in The New Sporter Oxford Dictionary to mean ‘Raise a crop among plants of different kind’. As the company was basically engaged in developing varieties of poplar trees and its simultaneous growing of wheat etc. in the same field was meant at determining/studying the impact of different crops on the growth of poplar trees. Both the activities, viz., development of different kind of trees and crops were intertwined in such a way that one could not be separated from the other. Senior staff, being the researchers of the company were obviously planning the nature and the pattern of crops to be grown and its timing so as to study its influence on the growth of poplar trees and hence were partly involved in the agricultural operations directly. The lower staff being the labourers were implementing the plans of the senior officers by ploughing, sowing and cutting etc. Although the wages of labourers etc. had been included by the assessee in the agricultural expenses, but the share of senior staff’s salary relatable to agricultural activity was not so included.

8. In addition to the direct agricultural expenses the incurring of indirect expenses is also involved. These may include administrative expenses. A simple case for such expenses is the recording of transactions of agriculture in the common account books. For this purpose stationery and books of account are required. Similarly the services of accountant are also needed. The assessee has not included the share of agriculture in indirect expenses in total agricultural expenses shown at Rs. 4,47,187.

9. It is an admitted position that no separate books of account in relation to agricultural activities were maintained by the assessee. Rather a common set of books was kept in which both transactions relating to the agriculture and taxable business were recorded. From the above discussion it is clear that the share of agriculture in common expenses was not adequately reflected by the assessee in its list of agricultural expenses. Under these circumstances it is necessary to make a bifurcation of the total expenses and determine the amount of direct and indirect expenses relatable to the agricultural activity.

10. Although my learned brother agrees in principle that direct agricultural expenses are deductible to compute the net agricultural income but he has proceeded to allow assessee’s claim in total by allowing deduction of only such expenses as have been declared by the assessee at Rs. 4.47 lakhs from the gross agricultural receipts. Assessee’s admission before the CIT(A) as regards non-inclusion of certain direct agricultural expenses in the expenses shown by it and also the share of agriculture expenses in common direct expenses, which have been claimed as deduction from taxable income in entirety have not been found to be deductable by him. Now the question arises as regards the deductibility of indirect agricultural expenses from gross agricultural receipts. My senior colleague while relying on the mean- ing of the word "relation" in the context of section 14A has held that this section is restricted to direct expenses attributable to agricultural activity and not indirect expenses.

11. There is no dearth of case law on the point that when assessee is carrying on an indivisible business, one part of which is producing exempt income and other taxable part of the expenses relatable to exempt source of income are deductible from the taxable source of income. The Hon’ble Supreme Court in the case of CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 held that the entire managing agency commission was laid out for the purpose of business carried on by the assessee and was allowable and the further effect that income from a part of the business was not exigible to tax under the Act was not a relevant circumstance. Similarly in Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450¹ (SC) it has been held as under:—

"If the exempted income and the taxable income are earned from one and indivisible business then the apportionment of the expenditure cannot be sustained. A plain reading of the question itself shows that it embodies ‘the business of the assessee being one and indivisible’. This being the position, it is not open to the revenue to contend that the business is not one and indivisible. In view of the fact that a perusal of the question itself discloses that income from various ventures is earned in the course of one and indivisible business, the impugned order upholding the apportionment of the expenditure and allowing deduction of only that proportion of it which is referable to taxable income; is unsustainable."

12. It is with a view to nullify the effect of such judgments that the Finance Act, 2001 has introduced a new section 14A with retrospective effect from 1-4-1962, which has been reproduced by my learned brother in his proposed order. However, I consider it expedient to note down the rationale behind the insertion of this section, which has been explained in the Memorandum explaining the provisions in the Finance Bill at [2001] 248 ITR 195 (St.) as under:—

"Certain incomes are not includible while computing the total income as these are exempt under various provisions of the Act. There have been cases where deduction have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce, allow the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. It is proposed to insert a new section 14A so as to clarify the intention of the Legislature since the inception of the Income-tax Act, 1961, that no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income-tax Act." [Emphasis supplied]

13. A bare perusal of it reveals that only those expenses can be claimed as deduction from taxable income which are incurred in relation to earning taxable income. The use of the expression "only to the extent" in the memorandum is clear indicator that only that part of expenses can be allowed as deduction which is related to the earning of taxable income and no deduction can be allowed for the "extent" which is ralatable to exempt source of income. The purpose behind the insertion of section 14A, as gathered from the Memorandum, in my opinion is that when the income is exempt and does not form part of the total income, no expenditure whether direct or indirect in relation to that income can be claimed as deduction while computing the total income of the assessee, as only this interpretation would satisfy the intent of section 14A as explained in the Memorandum that "expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income". To put it differently the expenses which are directly related to the taxable sources of income are to be allowed as deduction but the expenses which are directly related to exempt sources of income are not deductible. As far as indirect expenses are concerned, such expenses are deductible one to the ‘extent’, to which they have link or relation with taxable sources of income.

14. The next question is the determination of total expenses relatable to exempt source of income. Insofar as separate expenses in relation to both taxable and exempt sources are concerned, there is no difficulty in the allocation. Problem may arise with reference to the common expenses spent in as indivisible business whose income from one source is exempt and the other is taxable. In order to comply with the provisions of section 14A, it is necessary to bifurcate such common expenses in two parts, viz., relatable to exempt and taxable source of income. The deduction from total income is to be allowed insofar as the expenses relating to only taxable sources are concerned. There may be different yardsticks for bifurcating these common expenses. One method of distribution may be the ratio of net profit from both the sources, the other method may be apportionment on the basis of total direct costs of both the sources and still another method may be the apportionment on the basis of gross receipts from both the sources. The method of distribution of common expenses would vary depending upon the facts of each case. Recently the Apex Court in the case of Consolidated Coffee Ltd. v. State Of Karnataka [2001] 248 ITR 432, in the context of agricultural income, tax has approved the method of apportionment of expenses on the basis of gross receipts of agricultural and non-agricultural activities where the account books did not clearly supply bifurcation of such expenses. This judgment, though not rendered in the context of section 14A of the IT Act, 1961, but has approved the method of apportionment of common expenses between the exempt and taxable sources of income on the basis of gross receipts of these two sources. In my opinion this judgment gives guidance for the adoption of a method for apportioning common expenses.

15. Coming back to the facts of the present case it is noted that in the absence of necessary details furnished before the Assessing Officer, he determined total agricultural expenses by holding a sum of Rs. 40 lakhs out of total direct operational cost at Rs. 73.62 lakhs as exclusively relatable to the taxable income and then computed the share of agriculture in common expenses on the basis of gross receipts of both the sources. On the other hand the CIT(A) determined the net agricultural income at Nil. The action of the assessee in not furnishing the necessary details of total agricultural expenses, both direct and indirect to the reve-nue authorities resulted into miscarriage of justice. I am therefore, of the considered opinion that the order of the CIT(A) deserves to be set aside and fresh adjudication is required at the Assessing Officer’s end. I order accordingly and direct the Assessing Officer to examine the books of account and other necessary material to determine net agricultural income afresh. After giving a reasonable opportunity of being heard to the assessee, by deducting the following expenses from the gross agricultural receipts shown by the assesse :

(i)Agricultural expenses shown by the assessee at Rs. 4.47 lakhs.

(ii)Other exclusive direct agricultural expenses, if any, not included in (i) above.

(iii)Share of agriculture in common indirect expenses in the proportion of gross receipts of agricultural and taxable business.

(iv)Share of agriculture in common direct expenses in the proportion of gross receipts of agricultural and taxable business.

16. It is, however, made clear that the exclusive direct and indirect expenses which are relatable to taxable business income would be altogether excluded and the apportionment of only those common expenses would be made which have link both with agriculture and taxable income. My view is in consonance with the order of the Delhi Bench of Tribunal in the case of Doon Valley Distillers v. Dy. CIT [IT Appeal No. 4154 (Delhi) of 2000 passed on 13-11-2001], wherein one of the issues was on similar point. No contrary decision has been brought to the notice of the Bench.

17. I, therefore, allow the appeal for statistical purposes.

REFERENCE UNDER section 255(4) of the Income-tax Act, 1961

Since there is difference of opinion between the Members in the captioned appeal, the following question is referred to the Hon’ble President of the Tribunal under section 255(4) of the Income-tax Act, 1961:

"Whether on facts and in law, the Head Office expenses or any other common indirect expenses can be apportioned vis-a-vis the business activity and the agricultural activity carried on by the assessee."

THIRD MEMBER ORDER

Per R.V. Easwar, Vice President. - This case has come up before me on difference of opinion between learned Members and the following point of difference, as refrained by the Members on 30-1-2003, has been referred to me under section 255(4) of the Income-tax Act, 1961:

"Whether on the facts and in law, any expenditure (other than the expenditure apportioned by the assessee itself against agricultural receipts) incurred by the assessee could be apportioned against agricultural receipts? If yes, to what extent?"

2. The brief facts as can be gathered from the orders passed by the learned Members are as follows :

2.1 The assessee is a company engaged in the business of providing consultancy services in the field of agricultural forestry plants. The services were provided to M/s. Wimco Limited in terms of an agreement dated 1-9-1984. The assessee owned 150 acres of land at Chandian Farm and 15 acres at Baghwala. The land at Baghwala was being exclusively used for research and development activities, administrative functions and also housed the guest house. Field trials of nursery plants for research purposes were carried out at Chandian Farm in about 20 acres by growing trees in order to develop plants. It was done in such a way that inter-cropping was possible. The remaining 130 acres of land in Chandian was used for agricultural activity. The nursery plantation carried out in the 20 acres of land in Chandian were not carried out at a fixed place but were shifted in rotation to maintain the fertility of the soil.

2.2 The income from nursery and research and development activities was subjected to income-tax, whereas the income from agricultural activity was claimed to be exempt. In the year under consideration, the gross receipts of the assessee amounted to Rs. 1,27,46,012 including agricultural receipts of Rs. 16,78,905. Against the agricultural receipts, the assessee claimed direct expenditure of Rs. 4,47,187 and the balance of Rs. 12,31,718 was claimed to be agricultural income exempt from tax.

2.3 In the assessment proceedings, the Assessing Officer noticed that in the assessment year 1993-94, the assessee had derived agricultural receipts of Rs. 15,58,062 and claimed agricultural expenses of Rs. 7,58,273 and in the light of this, he considered the claim for agricultural expenses of Rs. 4,47,187 against agricultural receipts of Rs. 16,78,905 to be quite low. He, therefore, called upon the assessee to explain the abnormal decrease in the agricultural expenditure. The assessee furnished the details from which the Assessing Officer noted that the assessee had only claimed direct expenses against the agricultural receipts and had not claimed any indirect expenses. He, therefore, asked the assessee to explain why a part of the indirect expenses cannot be deducted against the agricultural receipts. The assessee submitted that no indirect expenses can be attributed to the earning of the agricultural receipts and that the agricultural activities were undertaken either as inter-cropping or on land not used for research and development purposes. The Assessing Officer was not convinced by the assessee’s explanation. He was of the view that the officials sitting either at Delhi (head office) or at the branch office were indirectly involved in the agricultural activities and the expenditure incurred on them will have to be treated as indirect or common expenditure, a part of which has to be apportioned to the agricultural activity (receipts). He accordingly reworked the expenses, both direct and indirect, relating to agricultural activities at Rs. 9,95,300 and after setting of the same against the agricultural receipts of Rs. 16,78,905 determined the net agricultural income at Rs. 6,83,605. How this figure has been arrived at has been explained in paragraphs 3 and 4 of the order of the ld. JM. As the assessee had shown net agricultural income of Rs. 12,31,718, this resulted in an addition of Rs. 5,48,113 to the business income of the assessee, the figure being the difference between the net agricultural income of Rs. 12,31,718 shown by the assessee and Rs. 6,83,605 determined by the Assessing Officer.

2.4 The assessee carried the matter in appeal before the CIT (Appeals) who issued a notice of enhancement proposing to enhance the addition by reducing the agricultural expenses to be adjusted against the agricultural receipts. The basis of the enhancement notice issued by the CIT (Appeals) was the view taken by him that the entire research and development staff and establishment at Baghwala did put in efforts in relation to the inter-cropping carried out in 150 acres in Baghwala and, therefore, a part of the expenditure on the staff of the R&D and establishment has to be adjusted against the agricultural receipts. He further found that there was no evidence to the effect that separate accounts were maintained in respect of the expenditure at Chandian Farm and that the entire expenditure incurred at the Baghwala Farm related both to R&D as well as the agricultural activity. In the absence of separate accounts, he estimated 50 per cent of the expenses to be attributable to the agricultural activity. The expenses incurred at Baghwala were Rs. 25,78,779 and 50 per cent thereof amounting to Rs. 12,89,389 was estimated to be expenses attributable to the agricultural receipts. This was with regard to the direct expenses. With regard to the indirect expenses, he adopted the following procedure. He noticed that the Delhi office expenses related both to Chandian and Baghwala. He estimated 50 per cent of the expenses to each farm. Out of this, he directed 50 per cent as attributable to the agricultural expenses in Baghwala Farm, or in other words, 25 per cent of the aggregate of the expenses incurred in Chandian and Baghwala. This amounted to Rs. 3,45,241. The CIT (Appeals), therefore, reworked the net agricultural income as follows :

The CIT (Appeals) also held that one Chandan Singh was looking after the R&D activity relating to the agriculture and, therefore, the aforesaid amount of Rs. 44,274 may be treated at remuneration to him for looking after the agricultural activity. The CIT (Appeals) ultimately held that the net agricultural income was Rs. nil. Thus, the CIT (Appeals) held that the agricultural expenses, both direct and indirect, off set the entire agricultural receipts.

2.5 In the further appeal taken by the assessee before the Tribunal, the learned JM referred to section 14A of the Income-tax Act and held that having regard to the language employed therein, there must be some association or connection between the expenditure incurred and the income earning activity and that if there is any direct expenditure incurred to earn tax free income then such expenditure cannot be allowed as a deduction, but the scope of the section cannot be extended to hold that head office expenses which are not directly related to agricultural operations can be apportioned between the agricultural activity and business activity. He noted that the activities of agriculture and research and development are part of the same business and that the expenditure incurred at the head office was primarily for carrying on the business and had to be incurred irrespective of the agricultural operations. He noted that the expenses at head office, such as, rent of the premises, electricity and telephone, staff expenses etc. are not connected with the agricultural operations and for the purpose of section 14A any remote or indirect connection with the tax free income is not sufficient to bring it under the section. The learned JM took the view that section 14A is restricted to direct expenses attributable to agricultural activity or any other activity giving rise to tax free income. After referring to the judgments of the Supreme Court in the cases of CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452, Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450¹ and Consolidated Coffee Ltd. v. State Of Karnataka [2001] 248 ITR 432, the learned JM took the view that the rule of apportionment would apply only where the activities under the same head do not constitute one indivisible business and since the business in the present case is indivisible, no apportionment of the expenses can be made between agricultural and non-agricultural activities. In this view of the matter, the learned JM set aside the order of the CIT (Appeals) and allowed the assessee’s appeal.

2.6 On the other hand, the learned AM, who did not dispute the factual position adverted to by the learned JM, took the view that the proposition that where the assessee is carrying on several activities which amounted to a single indivisible business the expenditure incurred by him cannot be apportioned against the different activities as held by the judgments cited above has been nullified by the insertion of section 14A by the Finance Act, 2001, with retrospective effect from 1-4-1962. He referred to the Memorandum explaining the provisions of the Finance Bill (248 ITR St. 195) and observed that the Memorandum made it clear that only that part of the expenses can be allowed as deduction which is related to the earning of taxable income and no deduction can be allowed to the extent the expenditure is related to an exempt income. He concluded that when the income is exempt, no expenditure whether direct or indirect, in relation to that income can be allowed as a deduction and only such an interpretation would satisfy the purpose of section 14A as explained in the Memorandum. He summed up the position by saying that direct expenditure relating to exempt sources of income cannot be allowed as deduction and so far as indirect expenses are concerned they were deductible only to the extent to which they have linked or relation with taxable sources of income. Recognising the difficulty in apportioning the common expenses incurred in an indivisible business which is partly taxable and partly tax free, the learned AM observed that in the light of section 14A, it is necessary to bifurcate such common expenses on the basis of some yardstick. He referred to a few of such yardsticks or methods, such as, the ratio of net profit from both the sources or the ratio of direct costs or expenses of both the sources or the basis of gross receipts from both the sources. He referred to the judgment in the case of Consolidated Coffee Ltd. (supra) in which the apportionment of common expenses on the basis of gross receipts of agricultural and non-agricultural activities was applied. Having thus approved in principle the stand of the departmental authorities, the learned AM found that the necessary details were absent. He, therefore, set aside the order of the CIT (Appeals) for fresh adjudication by the Assessing Officer, directing the Assessing Officer to examine the books of account and other necessary material to determine the net agricultural income afresh after giving reasonable opportunity of being heard to the assessee. He gave certain guidelines to the Assessing Officer and allowed the appeal of the assessee for statistical purposes.

3. It is in the above background that the point of difference has been referred to me for decision.

4. I have heard the rival submissions. There was some preliminary discussion as to the framing of the point of difference. The apprehension was that the question closes the option of sending back the case to the Assessing Officer which was the course adopted by the learned AM. The learned counsel for the assessee, however, submitted that it is not necessary to reframe the question and given the limited jurisdiction of the Third Member, he can only agree with one of the two differing Members and having regard to this broad framework, the option of sending the matter back to the Assessing Officer, as was done by the learned AM is still available to the Third Member if he agrees with the learned AM. On a consideration of the matter, I am of the opinion that the learned counsel for the assessee is right in his submission and even though the language in which the question is couched seems to justify the possible apprehension still having regard to the jurisdiction of the Third Member, the option of sending back the case to the Assessing Officer as has been done by the learned AM is still available if the Third Member agrees with the learned AM. I, therefore, do not see any need to reframe the question.

5. So far the merits of the decision are concerned, there is no dispute regarding the facts found by the learned Members who heard the matter. While the learned counsel for the assessee has put forth his submissions before me on the basis of the decision of the learned JM, the learned CIT-DR has strongly commanded for acceptance the order of the learned AM. He has further contended that the learned JM was wrong in saying that indirect expenses cannot be disallowed under section 14A.

6. In my view, the order of the learned JM is to be preferred. On the construction of section 14A, I am inclined to agree with the learned JM that only expenditure which has been proved to have been incurred in relation to the earning of tax free income, can be disallowed and the section cannot be extended to disallow even expenditure which is assumed to have been incurred for the purpose of earning the tax free income. The word ‘incurred’ refers to the factual spending of the expenditure in relation to the exempt income and does not refer to a deemed spending or assumed spending for the purpose. The learned AM has referred to the Memorandum explaining the Finance Bill, 2001. His conclusion is that the section has been introduced to nullify certain decisions of the Supreme Court (cited supra). The proposition laid down in those decisions is that where there is both activity which brings in taxable income and activity which brings in tax free income and both activities constitute an indivisible business, then the expenditure incurred by the assessee for the purposes of the indivisible business cannot be artificially broken up to identify and disallow expenditure which is supposed to have been incurred for the purpose of earning the exempted income. It was this proposition that is sought to be nullified by section 14A as rightly held by the learned AM. However, while applying the section there is no authority conferred by the section upon the Assessing Officer to deem or assume certain expenditure to have been incurred in relation to the tax free income. Common expenditure incurred at the head office cannot be broken up artificially to attribute or apportion a part thereof to the earning of the tax free income on the assumption that such part of the common expenditure was incurred in relation to the tax free income. Not only the incurring of the expenditure but also its relationship to the exempted income must be clear and must be capable of being ascertained on the face of it without involving any further mental exercise. The burden would seem to be on the Assessing Officer to not only show that some expenditure was factually incurred but also to show its relationship with the income exempt from tax. The section may have nullified the judgments of the Supreme Court cited above but only to the extent that even in an indivisible business consisting partly of taxable activities and partly of tax free activities, it is open to the Assessing Officer to identify expenditure, if any, incurred in relation to the earning of non-taxable income and disallow the same. But the section cannot be taken beyond that and every item of expenditure which has no apparent connection or nexus with the earning of the tax free income cannot be in part be attributed on some yardstick, whatever may be the sanctity behind such yardstick, to the earning of the tax free income. For such assumption or deeming, there is no authority given in the section as it stood for the year under appeal. The conclusion of the learned JM, with which I respectfully agree, seems fortified by the amendment made to section 14A by the Finance Act, 2006, with effect from 1-4-2007 by introducing the following sub-sections :

"(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.

(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part the total income under this Act."

It is by the above sub-sections which come into force from the assessment year 2007-08 onwards that authority is given to the Assessing Officer to determine, on the basis prescribed, the amount of expenditure incurred in relation to income which is exempt from income-tax. Even here the Assessing Officer has to first record a finding that he is not satisfied with the correctness of the assessee’s claim regarding such expenditure. Sub-section (3) clinches the position by saying that the Assessing Officer can determine the amount of expenditure incurred in relation to exempted income on the prescribed basis even where the assessee claims that no such expenditure was incurred by him as a matter of fact.

7. In the light of the above position, which is also the view taken by the learned JM albeit without reference to sub-sections (2) and (3) of section 14A inserted with effect from 1-4-2007, I will now proceed to examine the facts of the present case. At page 24 of the paper book, the assessee has placed the details of the total agricultural expenses. A reference to this is found in paragraph 10 of the order of the learned JM. The total expenses on the agricultural activities carried out in Chandian Farm has already been noticed to be Rs. 4,47,187. Details of this figure are available in page 24 of the paper book. It is not clear, in the light of the above details furnished by the assessee, as to how the learned AM says that the necessary details were not furnished before the Assessing Officer (para 15 of his order). The entire case appears to have proceeded on the basis of the view taken by the income-tax authorities that the indirect or common expenses have to be apportioned to the activity of earning income exempt from tax. In paragraph 17 of the order of the JM, he has held that the statement of Chandan Singh cannot be admitted in evidence since it was not put to the assessee for rebuttal. The statement of Chandan Singh assumes importance since it has been relied on by the income-tax authorities for the purpose of holding that since he was looking after the entire R&D and agriculture, his salary must be treated as expenditure incurred in relation to agricultural income. A statement was recorded by the Assessing Officer from Chandan Singh in which he is alleged to have said that he was looking after the agricultural activities in Chandian Farm. The statement has been relied on by the CIT(Appeals) to apportion Chandan Singh’s salary against the agricultural receipts. The assessee has been asking for the copy of the statement of Chandan Singh but it was never given. The learned JM has recorded a finding in paragraph 17 of his order that neither the Assessing Officer nor the CIT (Appeals) gave a copy of the statement to the assessee. He has also observed that even though the CIT (Appeals) issued a notice of enhancement he did not deem it fit to give a copy of the statement to the assessee despite the assessee’s request. The learned JM also expressed surprise that the statement was not brought on record till the hearing of the appeal. He has, therefore, excluded the statement from the evidence relying on the judgment of the Supreme Court in the case of Kishinchand Chellaram v. CIT [1980] 125 ITR 713 ¹. In this case, it was held that where the statement of a person which is relied upon for making an addition is not supplied to the assessee despite request, the statement cannot be admitted in evidence. In the present case, the learned JM has, applying the aforesaid judgment, excluded the statement of Chandan Singh from consideration. In the absence of any material to show that the statement was put to the assessee, the conclusion of the learned JM must be upheld and I do so.

8. The learned CIT DR submitted that page 24 of the paper book in which details of the agricultural expenditure have been given before the Assessing Officer is not sacrosanct and pointed out that Chandan Singh’s salary which is claimed to be exclusively for agricultural activities does not find a place there. I think there is some confusion here. It is the view of the CIT (Appeals) that Chandan Singh was looking after the entire R&D and agriculture activity and, therefore, his remuneration should be deducted from the agricultural receipts. This view is based on the assessee’s claim before the CIT (Appeals), made for the first time, that the agricultural operations were being supervised and managed by Chandan Singh. However, since the statement of Chandan Singh is not to be admitted in evidence, the view taken by the CIT (Appeals), even though based on the claim made by the assessee that Chandan Singh was directly looking after the agricultural activity and his remuneration should be adjusted against agricultural receipt cannot be upheld as has been decided by the learned JM.

9. It now remains for me to consider whether there is any other evidence to show that the assessee incurred any expenditure in relation to the earning of exempted income. The assessee has produced all the details of the expenses before the Assessing Officer and I am unable to uphold the finding of the learned AM that the assessee did not furnish the necessary details of total agricultural expenses both direct and indirect to the revenue authorities. The entire evidence which is submitted before the Assessing Officer has been compiled at pages 4 to 72 of the paper book. The further finding that the details of agricultural expenses filed by the assessee were not correct because the salary of Chandan Singh did not find a place, there cannot also be upheld because the details of agricultural expenses themselves did not include the salary paid to Chandan Singh. Therefore, what has been contended by the assessee for the first time before the CIT (Appeals) is contrary to the position exhibited by the accounts. In this light also, the CIT (Appeals) is not justified in basing his finding merely on the claim of the assessee, unsupported by the accounts, that the salary paid to Chandan Singh was related to the agricultural operations. The statement allegedly made by Chandan Singh to the contrary has been rightly excluded from the evidence on the ground of violation of the rules of natural justice. The result is that there is no evidence, either in the accounts or by way of the statement made by Chandan Singh, to show that his salary was directly related to the agricultural activities.

10. Since all the details and evidence relevant to the controversy have already been produced before and examined by the Assessing Officer as well as the CIT (Appeals), no useful purpose will be served by restoring the matter to the Assessing Officer merely for the purpose of finding out whether any part of the indirect or common expenses can be apportioned against the agricultural receipts on some basis - on the basis of gross receipts or ratio of direct expenditure or ratio of net profit. In fact, since I have agreed with the conclusion and decision of the learned JM, both in law and on facts, the question of restoring the matter with such directions as have been issued by the learned AM does not arise.

11. My answer to the point of difference referred to me is that no expenditure, other than the expenditure apportioned by the assessee itself against agricultural receipts, incurred by the assessee could be apportioned against agricultural receipts. Since my answer is in the negative, there is no need to answer the further question as to what extent can such apportionment be made.

12. The case will now go before the Bench which heard the appeal for passing orders in conformity with the majority.

ORDER

Per Deepak R. Shah, Accountant Member. - On a difference of opinion amongst the Members, who originally heard this appeal filed by the assessee, the President, Income-tax Appellate Tribunal, referred the following question for the opinion of Third Member :

"Whether on the facts and in law, any expenditure (other than the expenditure apportioned by the assessee itself against agricultural receipts) incurred by the assessee could be apportioned against agricultural receipts? If yes, to what extent?"

2. Hon’ble Vice President sitting as a Third Member has concurred with the view expressed by the Judicial Member. In consonance with the majority view, the appeal of assessee is allowed.

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