2019 (2) TMI 703 - AT - Income Tax

Tribunal confirms 'Kachha Arhatia' status, rejects 'Pacca Arhatia' classification, and deletes trading addition

The Tribunal upheld the assessee's classification as a 'Kachha Arhatia' for the assessment year, emphasizing the importance of consistency in tax ... Treating the appellant as ‘Pacca Arthatia’ instead of ‘Kachha Arahtia’ as shown and claimed by the appellant - Income from the business as trader or commission agent - Held that:- 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. 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. 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’. - decided in favour of assessee. Issues Involved:1. Classification of the assessee as 'Pacca Arhatia' or 'Kachha Arhatia'.2. Consistency in the treatment of the assessee's business operations by the tax authorities.3. Validity of the lump-sum trading addition made by the Assessing Officer (AO).Detailed Analysis:1. Classification of the Assessee:The primary issue for consideration was whether the assessee firm should be classified as a 'Kachha Arhatia' or a 'Pacca Arhatia'. The AO treated the assessee as a 'Pacca Arhatia', relying on several observations:- The assessee maintained ledgers for each party, indicating interests similar to a trader.- The presence of debtors amounting to Rs. 74,28,541, which is typical for a trader.- Payments made to transporters were debited to the supplier's account, suggesting an interest beyond that of a mere commission agent.- The claim of bad debts amounting to Rs. 87,758 indicated ownership of the goods sold.However, the assessee argued that it had consistently operated as a 'Kachha Arhatia' for over forty years, with its modus operandi and business operations being regularly scrutinized and accepted by the Department. The assessee emphasized that it did not engage in any trading activities and that its income was solely from commission, as evidenced by the records from the Krishi Upaj Mandi, Jaipur.The assessee further contended that the AO's reasons for classifying it as a 'Pacca Arhatia' were irrelevant and not in line with the principles laid down in CBDT Circular No. 452 dated 17.03.1986, which defines the characteristics of 'Kachha Arhatia' and 'Pacca Arhatia'.2. Consistency in Treatment:The assessee highlighted the importance of consistency in tax assessments, arguing that its classification as a 'Kachha Arhatia' had been accepted in past and subsequent years without any deviation in its business operations. The principle of consistency, as upheld by the Supreme Court in Godrej & Boyce Manufacturing Company Ltd. (394 ITR 449), was invoked to argue that the settled position should not be changed without compelling reasons.The Tribunal agreed with the assessee, noting that the AO had not provided clear findings or evidence to justify departing from the past settled position. The Tribunal emphasized that the nature of the transactions and their documentation should be examined to determine the correct classification. In the absence of such examination, merely relying on the nomenclature of ledger accounts was insufficient to conclude that the assessee was a 'Pacca Arhatia'.3. Validity of Lump-sum Trading Addition:The AO made a lump-sum addition of Rs. 1,00,000 to the trading account, citing the absence of audited records and potential revenue leakages. However, the CIT(A) deleted this addition, stating that the AO had not provided any reasons for the addition and had not rejected the books of accounts, which is a prerequisite for making such an addition.The Tribunal upheld the CIT(A)'s decision, noting that the Revenue had not appealed against the deletion of the lump-sum addition. Therefore, the only issue for consideration was the classification of the assessee, which was resolved in favor of the assessee.Conclusion:The Tribunal concluded that the assessee had been consistently functioning as a 'Kachha Arhatia' for several years, and there was no justifiable basis to change this classification for the assessment year in question. The appeal of the assessee was allowed, and the classification as 'Kachha Arhatia' was upheld.Pronouncement:The judgment was pronounced in the Open Court on 04/02/2019.