Applicability of section 44AB in the cases of
commission agents, arhatias, etc.--In the case of agents whose
position is similar to that of kachha arhatia,the turnover is only the
commission and does not include the sales on behalf of the principals-
-In the case of agents of the type of pacca arhatia, the total
sales/turnover of the business should be taken into consideration for
determining the applicability of the provisions of section 44AB--
Distinction between kachha arhatia and pacca arhatia explained.
1. Section 44AB of the Income-tax Act, 1961, as inserted by the
Finance Act,1984, casts an obligation on every person carrying on
business to get his accounts audited, if his total sales, turnover or
gross receipts, as the case may be. exceed Rs. 60 lakhs in any
previous year relevant to the assessment year commencing on 1-4-2010
or any subsequent assessment year.
2. The Board have received representations from various persons, trade
associations, etc. to clarify whether in cases where an agent effects
sales/turnover on behalf of his principal, such sales/turnover have to
be treated as the sales/turnover of the agent for the purpose of
section 44AB of the Income-tax Act, 1961.
3. The matter was examined in consultation with the Ministry of Law.
There are various trade practices prevalent in the country in regard
to agency business and no uniform pattern is followed by the
commission agents, consignment agents, brokers,kachha arhatias and
pacca arhatias dealing in different commodities in different parts of
the country. The primary necessity in each instance is to ascertain
with precision what are the express terms of the particular contract
under consideration. Each transaction, therefore, requires to be
examined with reference to its terms and conditions and no hard and
fast rule can be laid down as to whether the agent is acting only as
an agent or also as a principal.
4. The board are advised that so far as kachha arhatias are concerned,
the turnover does not include the sales effected on behalf of the
principals and only the gross commission has to be considered for the
purpose of section 44AB. But the position is different with regard to
pacca arhatias. A pacca arhatia is not, in the proper sense of the
word, an agent or even del credre agent. The relation between him and
his constituent is substantially that between the two principals. On
the basis of various court pronouncements, the following principles of
distinction can be laid down between a kachha arhatia and a pacca
arhatia:
(i) 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 a principal as regards his constituent;
(ii) 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;
(iii) 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. 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;
(iv) 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;
(v) The kachha arhatia unlike the pacca arhatia, does not have any
dominion over the goods;
(vi) 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:
(vii) 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.
5. The above distinctions between a kachha arhatia and pacca arhatia,
may also be relevant for determining the applicability of section 44AB
in cases of other type of agents. In the case of agents whose position
is similar to that of kachha arhatia,the turnover is only the
commission and does not include the sales on behalf of the principals.
In the case of agents of the type of pacca arhatia, 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 of the Income-tax Act. 1961.