BRIJESH KUMAR GOSWAMI,DELHI vs. ITO WARD-36(2), DELHI

We find that the Learned AO or Learned NFAC had not taken any efforts to make cross verification with the aforesaid main brokers whether the transactions were carried out by the Assessee in the capacity of sub-broker or not. This preliminary enquiry would have resolved the factual dispute. Further the Learned DR was directed by the Bench to produce the quantum assessment order and quantum appellate order of the Assessee for the year under consideration, in order to understand the treatment given by the revenue thereon on the turnover issue. These documents were not furnished by the Learned DR till the date of passing of this order. In the absence of any such enquiry carried out by the revenue and in the absence of primary documents not placed on record by the revenue as directed, the contention of the Assessee cannot be summarily ignored. We find that the Assessee had earned brokerage of Rs 9,70,423/- from all his clients . The Assessee relied on the Circular No. 452 dated 17-3-1986 issued by the Central Board of Direct Taxes (CBDT) which has been issued in connection with Section 44AB of the Act. The Board in this Circular had held that in respect of Kachha Arahtia Brokers, the turnover to be reckoned would only be the brokerage or commission income and not the gross sales figure carried out on behalf of the clients. For the sake of convenience, the relevant paragraph of the said Circular is reproduced below:- 2. 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. Brijesh Kumar Goswami 3. 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. 4. 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 delcredere 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. Brijesh Kumar Goswami 5. 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.

Respectfully following the aforesaid Circular of CBDT, which is binding on the revenue authorities, we hold that the Assessee herein is akin to Kachha Arahtia broker and had not earned brokerage income more than Rs 40 lakhs and hence is not liable for tax audit under section 44AB of the Act. Accordingly, the penalty levied in the sum of Rs 1,50,000 under section 271B of the Act is hereby deleted. 7. In the result, the appeal of the Assessee is allowed.