Inaccurate/Non-Disclosure Of Income

The Income Tax department routinely issues assessment scrutiny notices to tax assessees on a random selection basis, and penalties can be levied for inaccurate or non-disclosure of income.

Q 1) I am a salaried individual and file my returns through a person who does this task for many employees in the office. Recently, I received a notice for scrutiny assessment and the Assessing Officer (AO) has added my income from interest on bank deposits, interest on NSCs I had purchased in the past for tax saving purposes, as also income from interest earned by my minor child to my income from salaries. Besides making additions, the AO has issued a show cause notice for levy of penalty u/s 271(1)(c). I was never advised to disclose my other income. Is the AO justified in doing so?

- Ruhi Jaiswal

It may be noted that income tax is payable on the net taxable income, which consists of:

Income from all heads of income [viz. Income from Salaries, Income from House Property, Income from Business, Income from Capital Gains and Income from Other Sources] as reduced by specified deductions (general deductions under Chapter VIA of the Income Tax Act, 1961).

Income from Other Sources includes income from interest and other sources earned by you. It will also include unearned income of minors such as interest, and dividend or rent as required by Section 64 of the said Act relating to clubbing of income. Interest earned on NSCs (invested for tax saving purposes) is also taxable. Hence, the Assessing Officer is justified in making the additions.

Further, under Section 271 (1)(c) of the said Act, a penalty is leviable for non-disclosure of income or for providing inaccurate particulars of your income. Thus, the AO is also justified in initiating a penalty under the said Act.

Q 2) I own a poultry farm and have claimed subsidy from the state government in respect thereof. For practical purposes, my income from poultry is considered as agricultural income and I have always regarded my income as exempt from tax.

However, I was recently told that my income from poultry is not agricultural income as per the Income Tax Act, 1961 and hence it is not exempt. Please clarify.

- Amit Patil

Agricultural income is defined u/s 2(1A) of the Income Tax Act, 1961. The extract is reproduced hereunder for your ready reference:

(a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes;

(b) Any income derived from such land by:

(i) agriculture; or
(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or
(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause;

(c) Any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on

(d) Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.

Thus, income derived from land can be termed as agricultural income if three conditions are satisfied, viz.:

(i) Rent or revenue should be derived from the land

(ii) Such land is situated in India

(iii) The land is used for agricultural purposes

The terms ‘agriculture’ or ‘agricultural purposes’ are not defined in the said Act. Hence, one must consider the terms in the sense in which they are understood in common parlance. The judicial interpretation is laid down in the case of CIT vs Raja Benoy Kumar Sahas Roy as reported in [1957] 32 ITR 488, in which case Hon. Justice P N Bhagwati laid down the following principles to serve as a guide for the interpretation of the terms:

a.) The activity should constitute basic operations of agriculture such as tilling of land, sowing of seeds, planting and similar activities.

b.) It may also include certain subsequent operations such as tending, pruning, cutting, harvesting and rendering the produce fit for the market.

c.) The term ‘agriculture’ would not include only food and grains but also other crops such as tea, coffee, spices, tobacco, cotton, jute, hemp, etc.

d.) Mere connection with land is not sufficient to render the activity as agricultural. Thus, breeding and rearing livestock, dairy farming, poultry farming, etc. would not by themselves be agricultural purposes.

Considering these, income from poultry is not agricultural income as defined in the said Act and is hence not exempt from taxation.