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TMI Blog2009 (11) TMI 1005X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... archand) 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 ₹ 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 man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 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 @ ₹ 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) S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wise 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 cheque or account payee bank draft; and (iii) The assessee s case does not fall within the circumstances (exceptions) as prescribed under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability 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 is not interested in the profits and losses made by his constituent as is not the case with the pacca arhati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rket 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 by them for sale on commission or consignment basis? Answer No. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 cultivators or growers of agriculture produce otherwise than accoun ..... 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