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Income Tax Appellate Tribunal, JAIPUR BENCHES, JAIPUR
Before: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 826/JP/2018
vkns'k@ ORDER PER: VIKRAM SINGH YADAV, A.M.
This is an appeal filed by the assessee against the order of ld. CIT(A)-3, Jaipur dated 14.05.2018 for A.Y. 2010-11 wherein the assessee has taken following grounds of appeal. “1(a) On the facts and in the circumstances of the case the Authorities below have factually and legally erred in treating the appellant as ‘Pacca Arthatia’ instead of ‘Kachha Arahtia’ as shown and claimed by the appellant, without appreciating the facts of the case in right perspective and also by ignoring the specific and clear instructions of the Board on the subject. 1(b) On the facts and in the circumstances of the case, the Authorities Below have erred in ignoring the ‘past and subsequent history of the case’ wherein the appellant had been regularly and continuously assessed as ‘Kachha Arahtia’ without any exception. During the year under consideration, the appellant had continued to operate and function in the same manner and style. Without pointing any distinction and deviation in the working style of the appellant, the Authorities Below have deviated from the past and subsequent history of the case for no reason. Thus the findings so arrived at are factually and legally incorrect and are devoid of merits to be quashed summarily.”
2. Briefly stated the facts of the case are that the assessee firm is engaged in the business of potato and onion in Muhana Sabji Mandi and has shown commission receipts of Rs 32,27,937 and interest income of Rs 7,20,699 and declared net profit of Rs 12,16,300. The Assessing officer held that the assessee is a pacca arahtia nor a kachacha arahtia as per CBDT Circular No. 452 dated 17.03.1986 and was obliged to show his income from the business as trader instead of a commission agent. Total turnover of the business was Rs. 5,37,98,950/- during the year under consideration and the assessee was obliged by statue (sec. 44AB) to get its accounts audited. The assessee has shown income of Rs. 32,27,937/- on turnover at Rs. 5,37,98,950/- which gives G.P. @ 6%. In absence of any audit or other authenticated records, book results cannot be relied upon fully and a lumpsum addition of Rs. 1,00,000/- was made to the trading account to plug all possible leakages of revenue. The reasoning adopted by the Assessing officer while holding the assessee as pakka arahtia is as under: (i) In a business of kachacha arahtia, the assessee is not concerned about the payment and receipt to & for the supplier/ buyer. In the instant case, the assessee has maintained ledger or each and every part with whom it had transactions during the year under consideration. It shows that it had its interests like a trader has. (ii) The assessee has shown debtors at Rs. 74,28,541/- which is not a phenomena in case of commission agent or a kachcha arahtia. It is a common feature in a business of a trader or pacca arahtia. (iii) The assessee has paid transporters and debited the amount to the account of the supplier. This again shows that the assessee had an interest in the goods beyond a mere commission agent should have. (iv) Further, the assessee has claimed bad debts of Rs. 87,758/- during the year which proves it beyond doubt that it had the ownership of goods sold by it.
3. On appeal, the ld CIT(A) confirmed the finding of the Assessing officer that the assessee firm is a pacca arahtia or a trader. However, he deleted the lumpsum trading addition of Rs. 1,00,000/- made by the Assessing officer holding that he has not given any reason while making such an addition and even the books of accounts were not rejected which is necessary to make trading addition.
4. We find that the only addition made by the Assessing officer has since been deleted by the ld CIT(A) and the Revenue is not in appeal against the said findings of the ld CIT(A). Therefore, the limited issue that arises for consideration is whether the assessee firm through its conduct of its business transactions be referred and classified as kachcha arahtia or a pacca arahtia.
5. In this regard, the ld AR has submitted that the assessee firm is a “Kachha Arahtia’ doing the business of Potato/Onion in Muhana Sabji Mandi, Jaipur. The firm had been functioning as ‘Kachha Arahtia’ since inception for last ‘forty years’ and during this period, the cases of the appellant firm and its group had been scrutinized u/s 143(3) of the Act for number of times and the modus operandi of the appellant firm and the nature of its business operations etc as ‘Kachha Arahtia’ had been examined and verified by the Department every time but nothing adverse could be noted and pointed out. As such the nature of business operations of the appellant firm had always been taken as ‘Kachha Arahtia’ as evident from copy of some of the assessment orders of this group submitted herewith for your kind perusal and record. At no stage, their functioning as ‘Kachha Arahtia’ had ever been questioned by the Revenue. Even after this assessment year i.e. A.Y. 2010-11 also the nature of business operations of firm had been shown and assessed as ‘Kachha Arahtia’ continuously till date. Thus barring this year, at no stage the nature of the business operations of the appellant had ever been questioned and doubted till now. Thus the appellant had a very clean and settled history on this point.
6. It was submitted that despite such settled and undisputed history of the case, the ld. AO had proceeded to examine this point afresh during this year in the back ground of the applicability of Sec. 44AB of the Act. In the process, he had examined and verified the Books and the ‘Bheejaks’ issued for earning the commission income by the appellant. Despite his best efforts and detailed verification, the ld. AO could not find a single instance of the ‘Purchase’ or ‘Sale’ or any ‘Trading Activity’ undertaken by the appellant firm in its name. This fact has not been denied by the ld. AO as evident from the body of the assessment order. The appellant firm had been strictly functioning as ‘Kachha Arahtia’ as per conditions laid down in the Board’s Circular No. 452 (No.201/3/85/IT/(A-H) dated 17.3.1986. The ld. AO could not point out a single infirmity or violation of the ‘principles’ as laid down in the aforesaid Circular and subscribed by the judicial authorities in number of pronouncements. Briefly, the principles so laid down are summed up as under for the sake of ready reference:
(i) 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 constituent and buy the constituent’s goods on his personal account and thus he acts as regards his constituent. (ii) 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. (iii) 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. (iv) 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. (v) The kachha arahtia, unlike the pacca arahtia, does not have any dominion over the goods.
(vi) 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. (vii) 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.
On reading of the above principles, it is noted that the working of the appellant firm as “Kachha Arahtia’ was fully and squarely covered by these conditions. There is no violation of any of the aforesaid conditions/principles in any manner at any stage. While explaining the working style and modus operandi of the firm, this fact was brought to the kind notice of the ld. AO vide letter dated 23.8.2012 and it was brought out specifically that the appellant firm was a ‘Kachha Arahtia’ only.
Despite such undisputed and un-questionable facts of the case, the ld. AO had arbitrarily turned down such explanation and had proceeded to conclude that the appellant firm was a ‘Pacca arahtia’ as per reasons recorded at page no.6 & 7 of the assessment order stating that the appellant had maintained ledger of each and every party with whom it had transactions during the year, had shown debtors at Rs.1,08,34,607/-, the amount paid to transporters were debited to the account of supplier, and lastly the appellant had debited Rs.87,758/- on account of bad debts.
While arriving at such conclusion, the ld. AO himself was not sure about such findings and had left the matter for the kind consideration of the Appellate Authorities to decide finally as to whether the appellant firm is a ‘Kachha arahtia’ or ‘Pacca Arahtia’. The ld. AO had merely expressed his apprehensions only and did not give any definite finding which are not legally maintainable and the same deserves to be quashed summarily.
As pointed out above, the reasons as assigned by the ld. AO are totally uncalled for and irrelevant having any bearing on the nature of the business operations of the appellant. None of the above conditions is mentioned in the Board’s Circular to define the nature of business as ‘Kachha Arahtia or Pacca Arahtia. In case of ‘Kachha Arahtia’ it is rather essential to maintain ledger of each and every party to monitor the smooth and effective collection of the sale proceeds of the commissioned goods. Similarly, records of the debtors are also essential to pursue the collections of the sale proceeds of the commissioned goods. The freight to the transporters is paid by the appellant on behalf of its constituents and is duly debited and accounted for in the ‘Bheejaks’ of the goods sold on commission as per accounting principles of Kachha Arahtia’. Similarly in the course of such commission business, goods are sold on credit basis resulting in debtors. As the commission agent is responsible for the collection of the sale proceeds of such commissioned goods so the payment of entire sale proceeds is made by the appellant to its constituents as per ‘Bheejaks’ irrespective of the fact that such sale proceeds were collected from the purchasers or not; resulting in bad debts in some of the cases of sales of the commissioned goods. The ld. AO had however failed to appreciate such eventuality in the ‘Commission Business’ and had incorrectly opined that ‘bad debts of Rs.87,758/- during the year proved ownership of the goods by the appellant firm’. Obviously such findings are misplaced and contrary to the principles of Accountancy. It is a matter of common knowledge of accountancy that bad debts may occur due to non-collection of the sale proceeds of the commissioned goods also. The ld. AO had however failed to appreciate such eventuality and had incorrectly arrived at illogical findings. Thus none of the reasons as enumerated by the ld. AO in his findings is having any bearing on the fate of the ‘Nature of Business’ and no adverse view could be taken on the basis of such findings.
In appeal, the appellant had vehemently objected to the above apprehensions (not conclusion) of the ld. AO. Briefly, such findings (apprehensions) were assailed on the following counts:
(i) From the reading of the above facts, your honor would appreciate that the ld. AO had been in two states of mind. He himself was not sure as to whether the appellant firm was a ‘Kachha Arahtia’ or not. In the circumstances, he had sought to salvage his ‘doubtful findings’ by making a feeble attempt of making trading addition of Rs.1 lac in a very cryptic manner and also by making a ‘remedial observation’ to tax bad debts of Rs.87,758/- / in case the firm is taken as ‘Kachha Arahtia’. Plain reading of the assessment order clearly suggests that the ld. AO was himself doubtful about his findings which had resulted in such absurd addition of Rs.1 lac. (ii) As per official records of Krishi Upaj Mandi, Muhana Mandi, Jaipur, the appellant firm was in receipt of ‘Commission’ receipts @ 6% only. Except such commission receipts, the firm had no other income or profit from the trading of the commodities. etc. This fact is evident from the books of the firm and from the official records of the Krishi Upaj Mandi. These being documented evidences could not be negated and ignored in absence of any material brought on record in the form of instances of sale and purchase in the name of the appellant firm. Thus it is an undisputed fact that the appellant firm did not undertake any trading activity and did not book any profit or loss of any sort. (iii) In the assessment order itself, the ld. AO had computed income of the appellant from ‘Commission’ receipts only @ 6% as per official records of the Krishi Upaj Mandi, Jaipur and the books of the firm. Except the commission income, no other receipt or trading profit etc. was assessed. Thus except commission income, no other income was noted and assessed by the ld. AO as evident from the assessment order.
(iv) In the past and in subsequent years, the nature of business of the appellant firm had been continuously and regularly taken as “Kachha Arahtia’ only (barring this assessment year). Even in scrutiny assessments passed after thorough scrutiny u/s 143(3) of the Act, the nature of business as ‘Kachha Arahtia’ only. In support of such contention, copy of some assessment orders passed u/s 143(3) of the Act by the Department were also submitted before the ld. CIT (A). It is also an admitted fact that the appellant firm had continued to operate its business operations in the same manner and style during this year also. The ld. CIT (A) did neither dispute this fact nor bring any material on record to demonstrate any deviation in the working style of the appellant firm. Despite of such admitted fact, the ld. CIT (A) had opted to ignore this vital fact for no reason and had deviated from the past history of the case without assigning any reason or bringing any material on record. The age old past history of the case cannot be disrupted for no reason or material brought on record. (v) All the ‘Traders’ in this line are governed by the Rules and Regulation of Krishi Upaj Mandi Samiti and are functioning in the same manner and style as “Kachha Arahtia’ and are being ‘assessed’ as such by the department without any exception. The case of the appellant is not different in any manner. (vi) As per books of account produced and examined by the ld. AO, not a single instance of the sale or purchase of the goods could be noted or pointed out. All the goods were transacted through ‘Bheejaks’ only. This fact is an admitted and evident fact and had never been questioned by the Revenue at any stage or at any time. (vii) The reasons assigned by the ld. AO to treat the appellant firm as ‘Pacca Arahtia’ are irrelevant, immaterial having no bearing on the working of ‘kachha arahtia’ as discussed above.
The ld. CIT (A) had summarily dismissed the appeal on this point without addressing the above contentions and objections of the appellant. For the purpose, the ld. CIT (A) had merely repeated the same reasons as mentioned by the ld. AO in the assessment order. The ld. CIT (A) had failed to spell out as to how the appellant firm was not a ‘kachca arahtia but a pacca arahtia or a trader as per guidelines of Circular No.452 dated 17.03.1986, without pointing out any infirmity in the working of the appellant firm within the frame-work of above Board’s Circular. In absence of any specific violation of any of the condition or principle laid down in the circular, the Authorities below were not justified to treat the appellant as ‘Pacca Arahtia’ without any basis. Thus to this extent, the appeal order is not a ‘well reasoned’ order and same deserved to be quashed summarily. The above findings are further assailed on the following counts:
(a) The Authorities Below have ‘incorrectly’ observed that the appellant firm was not concerned about the payment and receipts of the sale proceeds of commissioned goods. As per Accounting Principles of the Commission Agent the ‘Kachha Arahtia’, it is ‘solely’ responsible to ensure proper and effective collection of the sale proceeds of the commissioned goods sold through them. For such effective and smooth collection of the sale proceeds, it is rather essential to maintain proper and accurate account of the sale proceeds through ledgers only. Thus the Authorities Below have misconstrued the working of the ‘Kachha Arahtia’.
(b) Again the authorities below have ‘misunderstood’ the meaning of the debtors of Rs. 74,28,541/- shown in the books of the appellant firm. In fact such debts represented the ‘sale proceeds’ of the commissioned goods affected through the appellant to various buyers on commission basis only. These were not the goods owned by the appellant firm. This fact is quite clear from the ‘Bheejaks’ (not sale Bills) issued for the purpose. However the Authorities below had failed to appreciate the nature of the ‘Bheejaks’ and the ‘Sale Bills’. Bheejaks are issued in respect of the ‘commissioned goods’ whereas the ‘Sale Bills’ are issued in respect of the self owned goods. In this case, the debtors of Rs.74,28,541/- as shown were on account of the sale proceeds of the commissioned goods made through such bheejaks only. The Authorities Below had however misconstrued this fact and had treated such debtors as a result of the sale of the goods owned by the appellant. Obviously such findings being factually incorrect deserve to be quashed summarily. It is also worth mentioning that during the year, not a single sale bill was issued as evident from the Mandi Records and the Books of the appellant, so the question of sale of own goods did not arise. (c) Again the Authorities Below had failed to appreciate the ‘modus operandi’ of the appellant firm and the Accounting Pattern of the ‘Kachha Arahtia’. The freight to the transporters is paid by the appellant on behalf of its constituents and is duly debited and accounted for in their account through ‘Bheejaks’ of the goods sold on commission as per accounting principles of Kachha Arahtia’. The Authorities Below have incorrectly observed that payment of freight to the transporters by the appellant shows that the appellant had interest in the goods sold through it. Obviously such findings are illogical, irrational and ridiculous. As the payment of freight is fully accounted for and debited to the sellers and the appellant had not incurred or expended any expenditure on this account in any manner so how it could be imagined that the appellant had interest in such goods sold. The Authorities Below had failed to bring this point home with logical reasoning. Thus such findings are not legally and factually maintainable. (d) As regards bad debts of Rs.87,758/- as pointed out in the last reason, it is pertinent to point out that in the course of such commission business, goods are sold on credit basis resulting in debtors. As the commission agent is responsible for the collection of the sale proceeds of such commissioned goods so the payment of the entire sale proceeds is made by the appellant to its constituents as per ‘Bheejaks’ irrespective of the fact that such sale proceeds were collected from the purchasers or not; resulting in bad debts in some of cases of sales of the commissioned goods. The ld. AO had however failed to appreciate such eventuality in the ‘Commission Business’ and had incorrectly opined that ‘bad debts of Rs.87,758/- during the year proved ownership of the goods by the appellant firm’
In view of the above discussions, it was submitted that the authorities below were not justified in treating the appellant firm as Pacca Arahtia. The appellant firm had been ‘Kachha Arahtia’ throughout its existence i.e. prior and subsequent to this assessment year . During this year, there is no deviation of any sort in its working, nor could the department had brought any material on record to demonstrate any deviation in the working manner and style of the appellant so the Revenue has no valid reason to deviate from such settled past history to treat the appellant firm as ‘Pacca Arahtia’. The appellant firm is a ‘Kachha Arahtia’ and may kindly be treated as such.
The ld. DR is heard who has taken us through the findings of the lower authorities and relied on their findings which we have noted above.
We have heard the rival contentions and perused the material available on record. The primary contention of the ld AR is that the firm had been functioning as ‘Kachha Arahtia’ since inception for last ‘forty years’ and during this period, the modus operandi of the appellant firm and the nature of its business operations as ‘Kachha Arahtia’ had been examined and accepted by the Department. It was further submitted that even after the impunged assessment year, the nature of business operations of firm had been shown and assessed as ‘Kachha Arahtia’.
It was accordingly submitted that there are no changes in the facts and circumstances of the case and the Rule of consistency should apply and there is no basis to depart from the settled position for the impunged assessment year. It is true that the doctrine of res judicata does not apply to the income tax proceedings since each assessment year is independent of the other, but where issue has been decided consistency in a broad manner for earlier assessment years, for the sake of consistency, the same view should continue in the subsequent years unless there is material changes in the facts. In the instant case, we find that the assessee has been functioning as ‘Kachha Arahtia’ for last number of years and during this period, the modus operandi of the assessee and the nature of its business operations as ‘Kachha Arahtia’ had been examined and accepted by the Department, we therefore donot find a justifiable basis to depart from the settled position. Further, we find that there are no clear findings which have been recorded by the Assessing officer to depart from the settled position to hold that the assessee firm is not a ‘Kachha Arahtia’ but a ‘Pacca Arahtia’. What is relevant to examine is whether the assessee was carrying out the transactions of purchase and sale on its own behalf or on behalf of a third party. The privity of contract and underlying transaction documentation are thus critical for the purposes of present analysis. Once the transaction documents are examined, thereafter, their treatment and reflection in the books of accounts to be examined. However, in absence of transaction documents, merely looking at the nomeclature of certain ledger accounts, it cannot be held conclusively in terms of nature of transaction individually or hold conclusively that the assessee is acting as a ‘Pacca Arahtia’ and not as ‘Kachha Arahtia’. In view of the same, in absence of any clear findings so recorded by the lower authorities, we are unable to accede to the position so adopted by the Revenue where it proceeded to depart from the past settled position wherein the assessee has been held as ‘Kachha Arahtia’. In this regard, we draw support from the decision of the Hon’ble Supreme Court in case of Godrej & Boyce Manufacturing Company Ltd. (394 ITR 449) wherein it was held as under: “38. ……..While it is true that the principle of res judicata would not apply to assessment proceedings under the Act, the need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt out which conspicuously is absent in the present case. In this regard we may remind ourselves of what has been observed by this Court in Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC). "We are aware of the fact that strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year."
In the result, the appeal of the assessee is allowed.