TaxTMI 
TaxTMI 
2009 (11) TMI 1005
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..../- made by the Assessing Officer u/s 40A(3) of the Income Tax Act. b) Whether on the facts and in the circumstances of the case, the ld.CIT(A) was correct in deleting the disallowance of Rs. 6,77,01,590/- made by the Assessing Officer u/s 40A(3) by holding that Sec. 40A(3) has no application in case of the assessee as the assessee was also carrying on the business of commission agent as Kachcha Arhatya. c) Whether on the facts and in the circumstances of the case, the ld.CIT(A) was correct in deleting the disallowance of Rs. 6,77,01,590/- made by the Assessing Officer u/s 40A(3) by holding that when income of the business has been computed by rejecting the books of account, sec. 40A(3) has no application. d) Whether on the facts and in the circumstances of the case, the ld.CIT(A) was correct in deleting the disallowance of Rs. 6,77,01,590/- made by the Assessing Officer u/s 40A(3) by holding that the case of the assessee falls within the exception of Rule 6DD and is thus excluded from the purview of sec. 40A(3)." 4. Rival contentions have been heard and record perused. The brief facts of the case are that assessee Shri Amar Chand Gupta is proprietor of....
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....m commission disclosed. (e) The other concerns of the assessee group (M/s Teluram Aarchand) have suo-moto disclosed their activities as trading and commission whereas assessee have chosen to disclose only commission activity and not trading. (f) Disproportionate net profits by all firms irrespective similar activities. (g) Inter company booking of expenses and difference in results that too when all the firms having common business premises and interests and modus operandi. (h) No evidence of payments made to farmers through particulars mentioned in books. (i) Assessee failed to prove him as Kachha Arhatiya. In view of the above discrepancies, the books results declared are rejected u/s 145(3) of the I.T.Act, 1961." 5. The AO after rejecting the results as per assessee's books of account, has applied net profit rate @ 0.05% of the turnover during the year under consideration and the business income of the assessee was computed at Rs. 1,69,359/-. 6. After discussing the nature of the assessee's business, the AO held that assessee is trading concern engaged in trading of agricultural produce and not as Kachcha Arhatya. By ob....
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....arkets at Lawrence Road and Naya Bazar. The goods were procured mainly for its associates, M/s Shree Bankey Behari Exports Ltd. and M/s Deluxe Cold Storage and Food Processors Ltd. The appellant has received from these two companies payments through account payee cheques which were deposited in his bank accounts. The agriculture produce were procured from the agriculturists who brought their goods in tractors and trolleys etc. to the grain markets at Lawrence Road or Naya Bazar. The appellant has made payment after withdrawing the amounts from bank account in cash to these farmers. After procuring the goods, the appellant has raised bills to these two concerns after charging a commission @ Rs. 0.50 per bag/bori and shown net profit of Rs. 90,073/- after debiting the expenses. It may, however, be noted that the appellant has shown commission earned only from two companies M/s Shree Bankey Behari Exports Ltd. and M/s Deluxe Cold Storage and Food Processors Ltd. for whom foodgrains were stated to be procured by the appellant. The appellant is a Kachha Ahritya as discussed in detail hereinafter in ground Nos.4 & 5. However, it is noticed from the field enquiries made by the Inspector a....
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....ts the AO had applied NP rate of 0.05%. However there is wide variation in the rate of commission shown to be received for different years which indicates that results of the commission business are not correct and verifiable. The appellant's argument that commission was received per bag basis does not appear to be logical as in the arhat purchase order received by appellant from two companies, the rate of commission was stated to be negotiable. Moreover as discussed earlier, no commission is shown from the seller of goods i.e. farmers. Therefore correct profit from arhatiya activity has to be estimated on some reasonable basis in view of rejection of books. The AO has applied NP rate but it is more appropriate to apply GP rate rather than NP rate to work out income from arhatiya business. The details of gross commission earned on the procurement of agriculture produce, as furnished by the appellant in the form of a chart showing results for seven years, may be summarized as under: AY Procurement Commission Percentage 2000-01 33,85,07,950 2,09,635 0.06 2001-02 50,06,81,629 3,37,119 0.07 2002-03 37,19,94,763 10,67,279 0.29 2003-04 ....
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....t, in such cases and under such circumstances as may be prescribed having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors." In view of the second proviso to section 40A(3), rule 6DD has been prescribed. Thus, from the above provisions, it is clear that in order to attract provisions of section 40A(3) for making disallowance, following conditions are required to be fulfilled: "(i) That an assessee has incurred/claimed expenditure for his business; (ii) The payment for a sum exceeding Rs. 20,000/- has been made otherwise than by an account payee cheque or account payee bank draft; and (iii) The assessee's case does not fall within the circumstances (exceptions) as prescribed under Rule 6DD of the I.T.Rules 1962." Thus, in order to make disallowance u/s 40A(3), all the above three conditions should be cumulatively fulfilled. 5.4.1 In the instant case, to examine the applicability of section 40A(3), it is to be ascertained whether all the above conditions are present in the case. The first issue involved is whether the appellant is a kachha arhtiya; second issu....
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....achha arhatia brings a privity contract between his constituent and the third party so that each becomes liable to the other. The pacca arhatia, 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 arhatia 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 arhatia, 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 arhatia 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 arhatia. (5) The kachha arhatia, unlike the pacca arhatia, does not have any dominion over the goods. (6) The kachha arhatia has no personal interest of his own when he enters into a transaction and his interest is limited to the commission agent's charges and certain out of pocket expenses whereas a pacca arhatia has a personal interest of his own w....
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....as acting as a kachha arhatia, his turnover was only gross commission charged by him in view of the Board's Circular no.452 dt. 17.03.1986. The turnover of the appellant is only the commission and, therefore, the procurement of agriculture produce is not purchase of the appellant and are not per se expenses of the appellant. Since the appellant has not made any claim of expenses for the procurement of agriculture produce, no disallowance u/s 40A(3) can be made in the case of appellant. The relevant portion of question No.3 and answer thereof of Press Note dated 29.12.1969 clarifying the provisions of section 40A(3), at the cost of repetition, is reproduced as under:- "Question No.3 - Does the requirement apply to payments made by commission agents (arhatiyas) for goods received by them for sale on commission or consignment basis? Answer - No. This is because such a payment is not an expenditure deductible in computing the taxable income of the commission agent (arhatiya). For the same reason, the requirement does not also apply to advance payments made by the commission agent to the party concerned against supply of goods." Thus, in this case being commis....
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....and no payment shall be deemed to be the profits and gains of business or profession under clause (b) of sub-section (3) of section 40A where any payment in a sum exceeding twenty thousand rupees is made otherwise than by an account payee cheque drawn on a bank or account payee bank draft in the cases and circumstances specified hereunder, namely :- (a) .................. : (f) where the payment is made for the purchase of - (i) agricultural or forest produce; or (ii) the produce of animal husbandry (including hides and skins) or dairy or poultry farming; or (iii) fish or fish products; or (iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products;" The above clause (f) of Rules 6DD clearly provides that where the payment was made to the cultivators or growers of agriculture produce otherwise than account payee cheque or account payee draft, the same is specifically excluded from the purview of section 40A(3) of the Income-tax Act. Since, in the case of the appellant, the agriculture produce of wheat and channa was procured by the appellant by making paym....