2009 (11) TMI 1005 - AT - Income Tax

Summary

Issues Involved:
1. Correctness of the CIT(A)'s order in law and facts.
2. Determination of the nature of the assessee's business as a commission agent (Kachcha Arhatya).
3. Deletion of disallowance of Rs. 6,77,01,590 under Section 40A(3) of the Income Tax Act by the CIT(A).

Issue-wise Detailed Analysis:

1. Correctness of the CIT(A)'s Order in Law and Facts:
The Revenue challenged the correctness of the CIT(A)'s order, arguing that the CIT(A) erred in law and facts by holding that the assessee was carrying on the business of a commission agent (Kachcha Arhatya) and by deleting the disallowance made under Section 40A(3). The Tribunal upheld the CIT(A)'s order, finding no infirmity in it.

2. Determination of the Nature of the Assessee's Business:
The assessee claimed to be a commission agent (Kachcha Arhatya) engaged in procuring agricultural commodities for mill owners without adding value or profit to the cost of goods. The Assessing Officer (AO) rejected this claim, treating the assessee as a trading concern. The CIT(A) and the Tribunal, however, found that the assessee's activities aligned with the characteristics of a Kachcha Arhatya as outlined in Circular No. 452 dated 17.03.1986. The assessee did not have dominion over the goods and earned only commission without interest in profits or losses from the transactions, thus qualifying as a Kachcha Arhatya.

3. Deletion of Disallowance under Section 40A(3):
The AO disallowed Rs. 6,77,01,590 under Section 40A(3), arguing that the payments made by the assessee were not covered by the exceptions in Rule 6DD and were not in accordance with the provisions of the Income Tax Act. The CIT(A) deleted this disallowance, reasoning that:
- The assessee's turnover was only the commission earned, not including sales on behalf of principals, aligning with the nature of a Kachcha Arhatya.
- The payments made by the assessee for procuring agricultural produce were not considered as expenses deductible in computing taxable income, thus not attracting Section 40A(3).
- Even if the assessee was considered a Pacca Arhatya, the payments made to cultivators for agricultural produce fell under the exceptions provided in Rule 6DD(f), excluding them from the purview of Section 40A(3).

The Tribunal agreed with the CIT(A)'s findings, noting that the assessee's activities were consistent with the characteristics of a Kachcha Arhatya, and the payments made for procuring agricultural produce from farmers were covered under the exceptions in Rule 6DD. Consequently, the disallowance under Section 40A(3) was not applicable.

Conclusion:
The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s order that correctly identified the assessee as a Kachcha Arhatya and appropriately deleted the disallowance under Section 40A(3). The decision was pronounced in the open Court on 27th November 2009.