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Income Tax Appellate Tribunal, DELHI BENCH ‘E’, NEW DELHI
Before: Sh. Aakash Deep JainDr. B. R. R. Kumar
ORDER Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the Assessee against the order of the ld. CIT(A)-24, New Delhi dated 26.12.2018.
2. The Assessee has raised the following relevant grounds of appeal: “5. The Learned Commissioner of Income-tax (appeals) failed to admit that the Assessee has wrongly shown turnover to the Rs. 367,87,13,883/- whereas his turnover is Rs. 61,64,321/- being the commission received.
The Learned Commissioner of Income-tax (Appeals) failed to admit that the Assessee has shown a Net profit of Rs. 10,98,098/- on a turnover of Rs. 367,87,13,883/- whereas his profit is Rs. 10,98,098/- on turnover of Rs. 61,64,321/-.”
3. The assessee is engaged in the business of dealing in fresh meat and the animals are directly procured from shepherds. The shepherds from different states come to Delhi with their stock of animals and the assessee purchases the stock of animals from these shepherds. These animals are then slaughtered by the assessee at MCD Slaughter House situated at Ghazipur, Delhi. Pursuant to slaughtering, the carcass are then washed and then sold to its customer the Allana Group. The Allana Group declares the cost of meat animals on daily basis and the assessee is accordingly required to arrange the animals from the shepherds at the pre-designated price.
4. During the year, the assessee has shown gross turnover of Rs.367 Cr. on declared net profit of Rs.10.98 lacs(0.03%). The AO enquired about the cash purchases to the tune of Rs.249 Cr. The assessee has failed to furnish party ledgers and the details of the persons to whom cash payments were made. Hence, the AO by rejecting the books of accounts, proceeded to determine the profit @ 2% on the total turnover of Rs.367 Cr.
5. Aggrieved the assessee filed appeal before the ld. CIT(A).
6. Before the ld. CIT(A), the assessee submitted that he was acting as an agent of the exporter based in MCD Slaughter and therefore, the turnover ought to be the commission receipt as against the amount of total live stock purchased. The assessee contended that the title in goods was never transferred to the assessee and he acts only as a commission agents to the Allana Group. It was submitted that the turnover was wrongly shown as Rs.367 Cr. whereas his turnover being the commission income was only Rs.61.64 lacs. It was pleaded that the assessee has wrongly shown himself as pacca arahtias wherein the reality he is a kachha arahtias.
Regarding, the grounds of books of accounts, estimation of net profit @ 2%, the ld. CIT(A) held that out of the purchase of Rs.367 Cr., an amount of Rs.8.13 Cr. has been made directly from one supplier namely, Mr. Munna and the remaining amounts through brokers, shepherds, nomads. The ld. CIT(A) has examined the purchase invoice containing tag number and weight of the live stock units and came to the conclusion that the action of the Assessing Officer is legally valid. The ld. CIT(A) held that the assessee is involved in dealing in negotiating with various kinds of people and since no interference is called in the best Judge assessment, confirmed the rejection of books of accounts thereby confirming the estimation of net profit of 2% determined by the AO.
Heard the arguments of both the parties and perused the material available on record.
The moot point revolves around the assessee be treated as kachha arahtias or pacca arahtias and whether the commission income or the total purchases be treated as the turnover of the assessee.
We have gone through the Circular No. 452/1986 of CBDT which is as under:
“SECTION 44AB l AUDIT OF ACCOUNTS OF CERTAIN BUSINESSMEN OR PROFESSIONALS 405-406. Compulsory Audit - Whether the provision is applicable to commission agents, arahtias, etc.
Section 44AB, as inserted by the Finance Act, 1984, casts an obligation on every person carrying on business to get his accounts audited, if his total sales, turnover or gross receipts, as the case may be, exceed Rs. 40 lakhs in any previous year relevant to the assessment year commencing on 1-4-1985 or any subsequent assessment year.
The Board have received representations from various persons, trade associations, etc., to clarify whether in cases where an agent effects sales/turnover on behalf of his principal, such sales/turnover have to be treated as the sales/turnover of the agent for the purpose of section 44AB.
The matter was examined in consultation with the Ministry of Law. There are various trade practices prevalent in the country in regard to agency business and no uniform pattern is followed by the commission agents, consignment agents, brokers, kachha arahtias and pacca arahtias dealing in different commodities in different parts of the country. The primary necessity in each instance is to ascertain with precision what are the express terms of the particular contracts under consideration. Each transaction, therefore, requires to be examined with reference to its terms and conditions and no hard and fast rule can be laid down as to whether the agent is acting only as an agent or also as a principal.
The Board are advised that so far as kachha arahtias are concerned, the turnover does not include the sales effected on behalf of the principals and only the gross commission has to be considered for the purpose of section 44AB. But the position is different with regard to pacca arahtias. A pacca arahtia is not, in the proper sense of the word, an agent or even del credere agent. The relation between him and his constituent is substantially that between the two principals. On the basis of various Court pronouncements, following principals of distinction can be laid down between a kachha arahtia and a pacca arahtia: (1) A kachha arahtia acts only as an agent of his constituent and never acts as a principal. A pacca arahtia, on the other hand, is entitled to substitute his own goods towards the contract made for the constituent and buy the constituent’s goods on his personal account and thus he acts as regards his constituent.
(2) A kachha arahtia brings a privity contract between his constituent and the third party so that each becomes liable to the other. The pacca arahtia, on the other hand, makes himself liable upon the contract not only to the third party but also to his constituent.
(3) Though the kachha arahtia does not communicate the name of his constituent to the third party, he does communicate the name of the third party to the constituent. In other words, he is an agent for an unnamed principal. The pacca arahtia, on the other hand, does not inform his constituent as to the third party with whom he has entered into a contract on his behalf.
(4) The remuneration of a kachha arahtia consists solely of commission and he is not interested in the profits and losses made by his constituent as is not the case with the pacca arahtia.
(5) The kachha arahtia, unlike the pacca arahtia, does not have any dominion over the goods.
(6) The kachha arahtia has no personal interest of his own when he enters into transaction and his interest is limited to the commission agent’s charges and certain out of pocket expenses whereas a pacca arahtia has a personal interest of his own when he enters into a transaction. (7) In the event of any loss, the kachha arahtia is entitled to be indemnified by his principal as is not the case with pacca arahtia.
The above distinction between a kachha arahtia and pacca arahtia may also be relevant for determining the applicability of section 44AB in cases of other types of agents. In the case of agents whose position is similar to that of kachha arahtia, the turnover is only the commission and does not include the sales on behalf of the principals. In the case of agents of the type of pacca arahtia, on the other hand, the total sales/turnover of the business should be taken into consideration for determining the applicability of the provisions of section 44AB.
Circular : No. 452 [F. No. 201/3/85-IT(A-II)], dated 17-3-1986.
JUDICIAL ANALYSIS EXPLAINED IN - In Jeyar Consultant & Investment (P.) Ltd. v. Assistant Commissioner [1993] 46 ITD 71 (Mad.-Trib.), it was observed that it is ex facie clear from the CBDT Circular No. 452 of 17-3-1986 which came to be issued in relation to kacha and pacca arhatias, who are an integral part of the trading sector, that instructions issued by the Board as respects kacha and pacca arhatias could not be applied to the case of the assessee who has arranged finances for other for a fee. The assessee may choose to label the fee as brokerage or even as commission. But the fee—or to use a generic expression ‘receipt’— could not be regarded as turnover proper.
RELIED ON IN - The above circular was relied on in ITO v. Shantilal Chunilal & Co. [1993] 45 ITD 581 (Pune - Trib.), with the following observations :
. . . Further, reference was made by assessee to pages 52 to 54 which contains Board’s Circular No. 452, dated 17-3-1986 which has been issued in connection with section 44AB of the Income-tax Act, 1961. Reliance was placed on para 4 of the said circular according to which the Board were advised that so far as kachha arahatias were concerned, the turnover did not include sales effected on behalf of the principals and only gross commission has to be considered for the purpose of section 44AB. The submission of the learned counsel for the assessee was that the case of the assessee is one of kachha arahatia and not a pacca arahatia and, therefore, only gross commission has to be considered for the purpose of section 44AB of the Income-tax Act, 1961. . . . The CIT (Appeals) has excluded the adat receipt as well as interest receipt from the purview of turnover for the purpose of section 44AB. Relying on the clarifications given by the Board in its Circular No. 452, dated 17-3-1986, he has categorized the assessee as kachha arahatia and he has charged expenses incurred on such business which resulted in gross profit rate of 1.09 per cent. Therefore, it is very much relevant to clinch the issue whether the assessee is a kachha arahatia or not. Going by the clarification issued by the Board in the aforesaid Circular No. 452, dated 17-3-1986 the case of the assessee fits in with the kachha arahatia vis-a-vis case of pacca arahatia. . . .
Since, it is a primary question to determine the taxability of commission income or otherwise, it needs to be established what is the relation between the Allana Group and the assessee, it needs to be examined what is the margin allowed by the Allana Group to the assessee, the leverage the assessee has in payment made to the shepherds, the nature of relationship of the principle-agent between the assessee and the Allana Group, how the monies have been transferred from the Allana Group to the assessee such as withdrawals of cash of cash receipts and also the cash payments in relation to provisions of Section 44AB and 40A(3).
Hence, in the interest of justice to both the parties to deem it fit to remand the matter back to the file of the AO to examine and determine the real turnover of the assessee. Needless to say that the AO shall afford an opportunity being heard to the assessee and the assessee shall abide by the requirements and the details called for by the revenue authorities.
In the result, the appeal of the assessee is allowed for statistical purposes. Order Pronounced in the Open Court on 30/06/2022.