Section 44AB l Audit of Accounts of Certain Businessmen or Professionals
Circular No. 452 was issued by the Central Board of Direct Taxes on 17 March 1986. Its subject is Section 44AB l Audit of Accounts of Certain Businessmen or Professionals.
This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.
Decides whose turnover it is when an agent sells for a principal, for the purpose of the compulsory audit under section 44AB, inserted by the Finance Act, 1984, which bites where sales, turnover or gross receipts exceed Rs. 40 lakhs in a previous year relevant to assessment year 1985-86 or later. For a kachha arahtia the turnover is only the gross commission; the sales effected for principals are left out. For a pacca arahtia the whole sales or turnover of the business counts, because he is not truly an agent and his relation with his constituent is substantially that of two principals. The circular sets out seven marks of distinction, among them that a pacca arahtia may substitute his own goods and buy his constituent's goods on his own account, makes himself liable on the contract to both sides, does not disclose the third party to his constituent, is interested in the profit and loss, has dominion over the goods, has a personal interest in the transaction, and does not indemnify his constituent's loss. The same tests are to be applied to other kinds of agents.
Representations came from various persons and trade associations asking whether sales effected by an agent on behalf of his principal are the agent's own turnover for section 44AB; the Board examined the question with the Ministry of Law.
SECTION 44AB l AUDIT OF ACCOUNTS OF CERTAIN BUSINESSMEN OR PROFESSIONALS
405-406. Compulsory Audit - Whether the provision is applicable to commission agents, arahtias, etc.
1. Section 44AB, 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. 40 lakhs in any previous year relevant to the assessment year commencing on 1-4-1985 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.
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 arahtias and pacca arahtias 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 contracts 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 arahtias 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 arahtias. A pacca arahtia is not, in the proper sense of the word, an agent or even del credere agent. The relation between him and his constituent is substantially that between the two principals. On the basis of various Court pronouncements, following principals of distinction can be laid down between a kachha arahtia and a pacca arahtia:
(1) A kachha arahtia acts only as an agent of his constituent and never acts as a principal. A pacca arahtia, 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 arahtia brings a privity contract between his constituent and the third party so that each becomes liable to the other. The pacca arahtia, 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 arahtia 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 arahtia, 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 arahtia 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 arahtia.
(5) The kachha arahtia, unlike the pacca arahtia, does not have any dominion over the goods.
(6) The kachha arahtia has no personal interest of his own when he enters into transaction and his interest is limited to the commission agent’s charges and certain out of pocket expenses whereas a pacca arahtia has a personal interest of his own when he enters into a transaction.
(7) In the event of any loss, the kachha arahtia is entitled to be indemnified by his principal as is not the case with pacca arahtia.
5. The above distinction between a kachha arahtia and pacca arahtia may also be relevant for determining the applicability of section 44AB in cases of other types of agents. In the case of agents whose position is similar to that of kachha arahtia, 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 arahtia, 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.
Circular : No. 452 [F. No. 201/3/85-IT(A-II)], dated 17-3-1986.
In deciding whether an agent crosses the section 44AB threshold, and in a penalty proceeding under section 271B where the agent says only his commission was his turnover.
A commission agent routes Rs. 3 crores of sales for his principals and earns Rs. 12 lakhs of commission. If he answers the description of a kachha arahtia, his turnover for section 44AB is Rs. 12 lakhs and no audit is due on the then threshold of Rs. 40 lakhs. If he is a pacca arahtia, the Rs. 3 crores is his own turnover and the audit is compulsory.
Source: the Income Tax Department’s own published text — its page for this instrument.