SECTION 44AB l AUDIT OF ACCOUNTS OF CERTAIN
BUSINESSMEN OR PROFESSIONALS

410. 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.

judicial analysis

Explained in - In Jeyar Consultant & Investment (P.) Ltd. v. Assistant Commissioner [1993] 46 ITD 71 (Mad.-Trib.), it was observed that it is ex facie clear from the CBDT Circular No. 452 of 17-3-1986 which came to be issued in relation to kacha and pacca arhatias, who are an integral part of the trading sector, that instructions issued by the Board as respects kacha and pacca arhatias could not be applied to the case of the assessee who has arranged finances for other for a fee. The assessee may choose to label the fee as brokerage or even as commission. But the fee—or to use a generic expression ‘receipt’—could not be regarded as turnover proper.

Relied on in - The above circular was relied on in ITO v. Shantilal Chunilal & Co. [1993] 45 ITD 581 (Pune - Trib.), with the following observations :

“. . . Further, reference was made by assessee to pages 52 to 54 which contains Board’s Circular No. 452, dated 17-3-1986 which has been issued in connection with section 44AB of the Income-tax Act, 1961. Reliance was placed on para 4 of the said circular according to which the Board were advised that so far as kachha arahatias were concerned, the turnover did not include sales effected on behalf of the principals and only gross commission has to be considered for the purpose of section 44AB. The submission of the learned counsel for the assessee was that the case of the assessee is one of kachha arahatia and not a pucca arahatia and, therefore, only gross commission has to be considered for the purpose of section 44AB of the Income-tax Act, 1961. . . . The CIT (Appeals) has excluded the adat receipt as well as interest receipt from the purview of turnover for the purpose of section 44AB. Relying on the clarifications given by the Board in its Circular No. 452, dated 17-3-1986, he has categorised the assessee as kachha arahatia and he has charged expenses incurred on such business which resulted in gross profit rate of 1.09 per cent. Therefore, it is very much relevant to clinch the issue whether the assessee is a kachha arahatia or not. Going by the clarification issued by the Board in the aforesaid Circular No. 452, dated 17-3-1986 the case of the assessee fits in with the kachha arahatia vis-a-vis case of pucca arahatia. . . .” (pp. 585-586).

Referred to in - Manish Textiles v. ACIT [1991] 38 ITD 365 (Bom.).

Explained in - The above circular was explained in ACIT v. Hasmukh M. Shah [2003] 85 ITD 99 (Ahd.) with the observation that, “by applying the principles laid down in the said circular, it is clear that a stockbroker, like a kachcha arathia in foodgrains is merely entitled to brokerage and does not have any domain over the goods and is not interested in the profits and losses made by his constituent. Similarly, like a kachcha arathia, a stockbroker acts only as an agent of his constituent and never acts as a principal. So whatever be the modalities of the transactions for the purchase and sale of shares made by the sharebroker for and on behalf of his constituents, the position is undisputed that he does not have any interest whatsoever in the transactions except brokerage for the services rendered by him in bringing the purchaser and seller together.”

411. Compulsory audit - Tax audit in case of companies have accounting year other than financial year

1. The Board have received representations regarding difficulties faced in complying with the provisions of section 44AB of the Income-tax Act in case of companies which follow an accounting period other than financial year.

2. Section 3 of the Income-tax Act, inter alia, provides that with effect from 1st April, 1989, “previous year” for the purposes of that Act means financial year immediately preceding the assessment year. In spite of the introduction of a uniform previous year for purposes of income-tax, some companies may adopt an accounting period other than the financial year, say the calendar year, under the Companies Act for other purposes.

3. In such cases, a question has arisen as to whether, under section 44AB of the Income-tax Act, the tax auditor can audit and certify the accounts for the period for which accounts have been maintained under the Companies Act (i.e., in this case the calendar year) or whether the tax auditor will have to certify the accounts for the relevant financial year which is the uniform accounting year for tax purposes.

4. The Board have considered the matter and are of opinion that as the income of the previous year is chargeable to tax and, for the purpose of Income-tax Act, the previous year is the financial year, the tax auditor would have to carry out the audit under section 44AB in respect of the period covered by the previous year, i.e., the relevant financial year. The proviso to the aforesaid section 44AB, therefore covers only the cases where the accounts are audited under any other law in respect of the financial year. Where the accounting year is different from the financial year, the proviso to section 44AB will not apply. Consequently, the tax auditors would have to carry out the tax audit in respect of the period covered by the relevant financial year and submit his report in Form 3CB as required in rule 6G(1)(b) of the Income-tax Rules.

Circular : No. 561, dated 22-5-1990.

412. Clarification regarding penalty under section 271B for failure to comply with provisions of section 44AB for assessment year 1985-86

1. The Board had vide Circular No. 422, dated 19-6-1985 (see Clarification 2) decided that the penalty proceedings under section 271B of the Income-tax Act, 1961, for failure to comply with the provisions of section 44AB should not be initiated for assessment year 1985-86, in cases where :

  (i)  the Audit Report prescribed under section 44AB read with rule 6G has been obtained by 30th September, 1985; and

(ii)  the self-assessment tax under section 140A of the Act has been paid within the normal period prescribed under section 139(1) of the Act for filing return of income.

Subsequently, on receipt of representations, the matter was reconsidered and Circular No. 582 was issued on 23-10-1990 clarifying that no penalty would be imposed for the assessment year 1985-86 under section 271B in cases where the audit report prescribed under section 44AB read with rule 6G had been obtained by 30th September, 1985.

2. The matter has been reconsidered by the Board in consultation with the Ministry of Law and it has been decided to withdraw the Circular No. 582, dated 23-10-1990. [Clarification 1].

Circular : No. 628, dated 6-3-1992.

CLARIFICATION 1

1. Vide Circular No. 422, dated 19th June, 1985 (Clarification 2), the Board had directed that the penalty proceedings under section 271B of the Income-tax Act, leviable for non-compliance of the provisions of section 44AB of the Act, should not be initiated for the assessment year 1985-86 in cases where :

  (i)  the audit report prescribed under section 44AB, read with rule 6G has been obtained by 30th September, 1985; and—

(ii)  the self-assessment tax under section 140A of the Act has been paid within the normal period prescribed under section 139(1) of the Act for filing return of income.

2. Representations were subsequently received requesting the Board to clarify whether the conditions mentioned at (i) & (ii) above were cumulative or independent. The Revenue Audit has also raised objections that penalty under section 271B should have been levied in cases where self-assessment tax was not paid within the normal period prescribed under section 139(1) of the Act, but was paid within the extended period, i.e., 30th September, 1985.

3. Penalty under section 271 B of the Act is leviable only for non-compliance with the provisions of section 44AB of the Act and not for delay in payment of self-assessment tax. Therefore, there seems to be an obvious anomaly in the said Circular No. 422 insofar as it linked imposition of penalty under section 271B with the payment of self-assessment tax.

4. It is, therefore, clarified that no penalty will be imposed for the assessment year 1985-86 under section 271B in cases where the audit report prescribed under section 44AB, read with rule 6G, has been obtained by 30th September, 1985. This clarification applies only to assessment year 1985-86, being the first year of operation of section 44AB of the Act.

Circular : No. 582, dated 23-10-1990.

JUDICIAL ANALYSIS

Explained in - In Auto Square v. ITO [1992] 43 ITD 259 (Pat.-Trib.), it was observed as under :

“The circular obviously shows that the revenue itself has delinked the payment of self-assessment tax, a natural consequence of filing return under section 139(1), from purview of audit report under section 44AB (sic). I have emphasised the word only in the Circular of the CBDT, which manifests the view of the CBDT in these matters. In my view as the assessee had obtained the audit report before the prescribed date of section 44AB and had filed it with the return, which was accepted, no penalty under section 271B should be levied.

clarification 2

1. Section 44AB lays down that every person carrying on business, whose sales, turnover or gross receipts exceed rupees forty lakhs or carrying on a profession, whose gross receipts exceed rupees ten lakhs, shall get his accounts of such previous year audited before the specified date and obtain before that date the report of such audit in the prescribed form.

2. Under Explanation of this section, “specified date” means the date of the expiry of four months from the end of the previous year, or where there are more than one previous year, from the end of the previous year which expired last before the commencement of the assessment year or 30th day of June of the assessment year, whichever is later.

3. Rule 6G of the Income-tax Rules, 1962 inserted by the Income-tax (Amendment) Rules, 1985 with effect from 1-4-1985, prescribes the manner and Forms in which the audit report required under section 44AB is to be submitted. These rules were notified on 31-1-1985.

4. A number of representations have been received from assessees and various trade associations expressing their difficulties in getting the accounts audited by the “specified date” this year. The matter has accordingly been considered by the Board. This being the first year of the operation of the section and considering that the relevant rule was notified only on 31-1-1985, the Board has decided that the penalty proceedings under section 271B for failure to comply with the provisions of section 44AB should not be initiated for the assessment year 1985-86, in cases where :

  (i)  the audit report prescribed under section 44AB read with rule 6G has been obtained by 30-9-1985; and

  (ii)  the self-assessment tax under section 140A has been paid within the normal period prescribed under section 139(1) for filing return of income.

Circular : No. 422 [F. No. 201/156/85-IT(A-II)], dated 19-6-1985.

Note : The above circular was referred to in ITO v. Arun Kumar Bhuwalka [1992] 40 ITD 373 (Cal.) 377.

413. Extension of time-limit by two months for obtaining tax audit reports and for filing returns of income in respect of assessees situated in the Districts of Latur and Osmanabad in Maharashtra

Due to the recent earthquake, the Central Board of Direct Taxes has extended the time-limit by two months from October 31, 1993, to December 31, l993, for obtaining tax audit reports under the Income-tax Act, 1961, and for filing returns of income in respect of those assessees whose principal place of business is situated in the revenue Districts of Latur and Osmanabad in the State of Maharashtra.

Press Note : Dated 26th October, 1993.