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2009 (11) TMI 1005

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..... 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 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 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 ₹ 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 M/s Telu Ram Amar Chand & Co. The nature of business of the assessee is earning of commission as arhatiyas by procuring agricultural commoditi .....

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..... sessee 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 ₹ 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 observing that books of account failed to show the activities carried out by the assessee in true and correct manner, the AO found that the payment made by the assessee for purchases was not covered by the exception of Rule 6DD, .....

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..... ments 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 @ ₹ 0.50 per bag/bori and shown net profit of ₹ 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 as well as AO of other concerns i.e. (i) Shri Shankar Lal Prop. M/s Vinayak Traders; (ii) Shri Sanjay Kansal Prop. M/s Sai Kripa Trading Co.; (iii) Shri Krishan Kumar Prop. M/s Keshav Trading Co.; who were also engaged in the .....

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..... e 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 32,39,743 54,371 1.68 2004-05 20,06,58,223 96,108 0.05 2005-06 49,65,57,222 1,30,215 0.03 2006-07 26,79,02,632 4,99,726 0.19 From the above chart, it is found that rate of commission to procurement in arhat business varies from 0.03% in AY 05-06 to 0.29% in AY 02-03. The rate of 1 .....

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..... 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 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 issue is that even if the appellant is pacca arhtiya, whether the appellant s case was covered under exceptions provided in Rule 6DD and third is whether the AO can make disallowance u/s 40A(3) where he rejects the books of account and determine income on net profit basis. 5.5 First, as stated earlier, the appellant is engaged in the business of procurement of a .....

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..... e 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 when he enters into a transaction. (7) In the event of any loss, the kachha arhatia is entitled to be indemnified by his principal as is not the case with pacca arhatia. If the appellant s case is examined in the light of the above circular, it is noticed that the appellant s nature of business falls under the ambit of kachha arhatia. The appellant has not procured the agriculture produce for earning profit by making sale of g .....

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..... 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 commission agent, provisions of section 40A(3) are not applicable on payments made for procurement of food grains and hence, no disallowance u/s 40A(3) can be made. 5.6 Second, even if for the sake of argument, it is assumed that appellant is a pucca arhtiya and engaged in the business of purchase and sale of agriculture produce for earning profit and not on purely commission agent basis, even then no disallowance u/s 40A(3) can be made in the case of the appellant, because the appellant has made the .....

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..... 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 payment to the cultivators/growers of the agriculture produce, the appellant falls within the exception of Rule 6DD and is, thus, excluded from the purview of section 40A(3). Hence, no disallowance u/s 40A(3) can be made in the case of the appellant. 11. We have considered the rival contentions, gone through the orders of the authorities below and the relevant provisions of Section 40A(3) of the IT Act. Under Section 40A(3), no disallowance is required to be made if the payment has been made in cash within the circumstances prescribed under Rule 6DD of the .....

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