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2009 (11) TMI 1005

..... PER BENCH : These are the appeals filed by the Revenue against the order of CIT(A) for the AY 2000-01, 01-02, 02-03, 04-05, 05-06 & 2006-07. 2. As similar grounds have been raised in all the years, all the appeals were heard together and are being decided by this consolidated order. 3. Relevant grounds taken during the AY 2000-01 read as under:- 1. The order of the ld.CIT(Appeals) is not correct in law and facts. 2. Whether on the facts and in the circumstances of the case, the ld.CIT(A) was correct in holding that the assessee was also carrying on the business of commission agent as Kachcha Arhatya. 3. a) Whether on the facts and in the circumstances of the case, the ld.CIT(A) was correct in deleting the disallowance of ₹ 6,77,01,590/- 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 ₹ 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 .....

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..... atiya. The AO stated mainly the following reasons for rejecting the books of account u/s 145 of the Income-tax Act: Keeping in view matters stated above, books results as declared by the assessee cannot be accepted for following reasons namely, (a) The said procurement was being made to facilitate the manufacturing business of group companies under same management. (b) The tax audited accounts of companies utilizing procured agricultural goods relied upon by the assessee even signed by the proprietor of supplies firms acting kachha arhatiyas as directors. (c) Principal and agent being same persons. (d) Expenses claimed by each of the group firm carrying similar business are disproportionate to income from 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 e .....

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..... covers cash in the books, deposited in bank accounts and introduced as capital as reflected in kachha arhatiyas firm, and accounts of other assessees/members of the group. For which due credit is sought by the assessee. 9. Aggrieved by the above order, the assessee was in further appeal before the CIT(A) who upheld the rejection of books of account by the AO but deleted the addition made u/s 40(A)(3) after having the following observation:- I have carefully considered the submissions of the appellant and facts of the case. The appellant is engaged in the business of procuring of agriculture products such as wheat and channa in the grain markets 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 .....

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..... ores already made. Thus, keeping in view the facts and circumstances of the case, it is clear that books of account maintained by the appellant were not correct and complete and the AO was justified in rejecting the results shown in the books of account by invoking the provisions of section 145 of the Income-tax Act. Therefore, the action of the AO regarding rejection of books of account is upheld. 4.5 According to results declared the assessee has shown commission of ₹ 2,09,635/- from arhat business. After debiting total expenses of ₹ 1,19,562/- a business profit of ₹ 90,073/- is worked out. After rejecting the books of accounts 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. Ther .....

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..... ified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding twenty thousand rupees otherwise than by an account payee cheque drawn on a bank or account payee bank draft, twenty per cent of such expenditure shall not be allowed as a deduction: Provided that ………….. Provided further that no disallowance under this sub-section shall be made 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 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 ₹ 20,000/- has been made otherwise than by an account payee .....

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..... , 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. (1) A kachha arhatia acts only as an agent of his constituent and never acts as a principal. A pacca arhatia, 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 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 i .....

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..... ified that they make sale of their agriculture produce through dalals in the market who charges ₹ 2 to 4 per quintal. Thus, these facts also substantiate the fact that the appellant was engaged in the business of kachha arhatia. It may also be noted that in tax audit report u/s 44AB furnished with the original return u/s 139, the nature of business was stated as Commission Agent . Since the appellant was 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 b .....

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..... Lawrence Road was brought by farmers for sale. The relevant Rule 6DD provides as under: 6DD. Cases and circumstances in which payment in a sum exceeding twenty thousand rupees may be made otherwise than by an account payee cheque drawn on a bank or account payee bank draft.- No disallowance under clause (a) of sub-section (3) of section 40A shall be made 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 .....

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