Dharam Singh Vs ITO (ITAT Delhi)

Background of the Case

The present appeal involves the assessee, Dharam Singh, who was allotted a Mother Dairy milk booth under a self-employment scheme designed for ex-servicemen by the Directorate General Resettlement (DGR). In the assessment year 2017-18, Dharam Singh earned a commission of ₹4.62 lakhs by selling Mother Dairy products. However, the case arose when the Assessing Officer (AO) considered cash deposits made by the assessee, amounting to ₹2.46 crores, as his business turnover. Consequently, the AO levied a penalty of ₹1,23,313 under section 271B of the Income Tax Act for failing to comply with section 44AB, which mandates tax audits for businesses with turnover exceeding ₹1 crore.

Key Issue

The primary issue in this case was whether the cash deposits of ₹2.46 crores should be considered as the assessee’s turnover, thereby attracting a penalty for non-compliance with the tax audit provisions under section 44AB. The assessee argued that his actual turnover was only the commission earned (₹4.62 lakhs) and not the gross sales proceeds.

Assessee’s Argument

The counsel for Dharam Singh argued that the relationship between Mother Dairy and the assessee was that of Principal and Agent, not Principal-to-Principal. Therefore, only the commission earned by the assessee should be considered for the purposes of turnover. The assessee’s counsel also referenced Circular No. 452 [F. No. 201/3/85-IT(A-II)] dated 17-03-1986 issued by the Central Board of Direct Taxes (CBDT). This circular clarifies that in cases where agents (such as kachha arahtias) sell goods on behalf of principals, only the gross commission, and not the total sales, should be considered as the turnover for the purpose of section 44AB.

Department’s Stand

The department, represented by the Assessing Officer, argued that the certificate issued by Mother Dairy mentioned a Principal-to-Principal relationship, meaning that the entire sales proceeds should be treated as the assessee’s turnover. Based on this assumption, the AO imposed the penalty under section 271B.

Tribunal’s Observations and Decision

The ITAT Delhi Bench, after reviewing the facts and circumstances, held in favor of the assessee. The Tribunal noted several key points:

1. Principal-Agent Relationship: The Tribunal observed that, despite the nomenclature used by Mother Dairy, the actual relationship between the assessee and Mother Dairy was one of Principal and Agent. This was evidenced by the fact that all sales proceeds were deposited in a bank account designated by Mother Dairy, and the assessee earned a fixed commission. The assessee did not bear any risk of profit or loss from the sale of Mother Dairy products, which reinforced the nature of the relationship as that of an agent.

2. Turnover Calculation: The Tribunal referred to the CBDT Circular No. 452, which clearly stated that in cases involving agents (such as kachha arahtias), the turnover for tax audit purposes should only include the commission received and not the total sales. The Tribunal applied this logic to the present case and concluded that the assessee’s actual turnover was only ₹4.62 lakhs (the commission), which was well below the threshold of ₹1 crore under section 44AB.

3. Previous Assessment Years: The Tribunal noted that in the previous assessment year, the assessee had declared a similar commission income, and no penalty was imposed under section 271B. This inconsistency in the department’s approach was another reason why the penalty in the current year could not be justified.

Legal Precedents

The Tribunal also referred to similar cases, such as:

• Ved Singh vs. ITO (ITA No. 998/DEL/2023, dated 19-01-2024)
• Mohammad Daud vs. ITO (ITA No. 1691/DEL/2022, dated 22-05-2023)

In both cases, penalties under section 271B were deleted for milk booth agents, as their income was primarily from commission, not sales.

Conclusion and Impact

The Tribunal quashed the penalty imposed by the AO, holding that the provisions of section 44AB did not apply to the assessee’s commission-based business. The AO was directed to delete the penalty of ₹1,23,313 levied under section 271B.

This case reaffirms the principle that the nature of the business relationship (Principal-Agent vs. Principal-to-Principal) is critical in determining turnover for tax audit purposes. It also underscores the importance of adhering to established legal precedents and circulars issued by the CBDT to avoid unnecessary penalties on taxpayers.

Key Takeaways for Tax Professionals

1. Understand the Business Model: It is essential to carefully analyze the business model, especially when commission income is involved. Only the income that constitutes actual turnover should be considered for tax audit purposes.

2. Circulars and Precedents: The CBDT circulars and existing legal precedents play a significant role in cases like this. Tax professionals must ensure they are well-versed with such circulars to effectively represent their clients in disputes involving tax audits and penalties.

3. Assessing Officer’s Approach: This case highlights how officers often tend to overlook the practical aspects of business operations, relying on a pro-revenue stance driven by targets. It is the responsibility of professionals to challenge these procedural oversights and ensure that the correct interpretation of the law is followed.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal by the assessee is preferred against the order of the NFAC, Delhi dated 16.01.2024 pertaining to A.Y 2017-18.

2. The grievances of the assessee read as under:

“1. In the circumstances and facts of the case that the learned A. O’s order as well as the Learned CIT (A) NFAC erred on facts and in law upholding penalty of Rs. 1,23,313/- under section 271B.

2. The Ld. CIT(A) NFAC has failed to appreciate the arrangement of the Mother Dairy with the Appellant as per terms & conditions of the agreement, according to which the relationship between them is that of Principal & Agent and, therefore, there is no requirement of tax audit. The humble appellant was also not liable to have Tax Audit in view of Circular No. 452 F.No.201/3/85-IT(A-II) dated 17/03/1986.

3. Without prejudice to above ground, the Ld. CIT(A) NFAC has failed to appreciate the Appellant an ex-serviceman who was allotted Mother dairy milk booth as commission agent under Self-employment scheme of Directorate General Resettlement (DGR).

4. The appellant craves leave to add to or modify the above grounds of appeal at or before the hearing of the appeal.”

3. Representatives of both the sides were heard at length. Case records carefully perused. Relevant documentary evidence brought on record duly considered in light of Rule 18(6) of the ITAT Rules.

4. Brief facts of the case are that the assessee is a resident individual who was allotted Mother Dairy Milk Booth as per entitlement of ex-servicemen Self-Employment Schemes of Directorate General Resettlement (DGR).

5. During the preceding A.Y 2016-17, the Assessing Officer/NFAC duly accepted the returned income of Rs. 3,73,330/- vide regular assessment u/s 143(3) dated 28.11.2019. The Assessing Officer/NFAC, however, considered the cash deposits with SBI of Rs. 2,46,62,500/- as turnover of the assessee. Accordingly, the AO was of the view that section 44AB of the Act gets attracted in the case under consideration and levied a penalty u/s 271Bof Rs 1,23,313/-.

6. Aggrieved, the assessee went in appeal before the ld. CIT(A)/ NFAC who upheld the order of Ld. AO/NFAC.

7. Aggrieved by the order of the ld. CIT(A), the assessee is before us. The ld counsel of the assessee vehemently stated that the assessee being ex-Serviceman officer operating Milk Booth of Mother Dairy on commission basis is not covered u/s 44AB as real turnover is much below to the prescribed limit. It was the say of the ld AR that the assessee receives uniform and fixed margin/commission which constitutes his taxable income rather than total sales. During the Previous Year 2016-17, the assessee received/accrued gross commission of Rs. 4,62,000 which was duly accepted by the Assessing Officer/NFAC in regular assessment.

8. Further, the ld. counsel for the assessee drew our attention towards the salient Features of Self Employment Schemes of Directorate General Resettlement (DGR) for allotment of Mother Dairy Milk Booths to eligible ex-servicemen. As per said Scheme, in the case of Milk Booths, the ex-servicemen will get higher of the assured income of Rs 11000.00 or commission of 30-35 paisa per one litre sale of milk (revised from time to time) and 5 percent for other dairy products. The ld AR argued that the DGR itself has used word Commission which is a substantial proof of the fact that there exists Principal (Mother Dairy) to agent (Assessee) relationship instead of Principal-to-Principal relationship. A copy of extract from website of Directorate General Resettlement Department of Ex-Servicemen Welfare (Ministry of Defence) was produced before us.

9. The ld AR further argued that the assessee was of the bonafide belief that provisions of section 44AB were not attracted in his case and to substantiate the belief of the assessee inter-alia reliance was placed on CBDT circular No. 452 [F. No. 201/3/85-IT(A-II)], dated 17-3­1986 issued by CBDT.

10. The ld AR relied on the following case laws wherein commission was accepted as turnover and penalty u/s 271B of the Act was adjudicated and deleted in case of following Milk booth agents:

1) ITA No. 122/Del/2023 Sh. Naresh Kumar vs. ITO, Charkhi Dadri, Haryana, dated 14th Aug., 2024;

ii) ITA No. 998/Del/2023 Ved Singh vs. ITO, Charkhi Dadri, Haryana, dated 19th Jan. 2024;

iii) ITA No. 5508/Del/2019 date 30th June 2022 Sh. Nikki Tyagi Vs. Income Tax Officer.

iv) ITA No. 1691/Del/2022 Mohammad Daud vs. ITO, Ward 58(1), Delhi, dated 22nd May 2023.

v) ITA 916/Del/2022 dt. 3rd March 2023 Mohd Javed Vs Income Tax Officer

11. Per contra, the ld DR argued that there is principal to principal relationship between the Mother Dairy and the assessee, which is apparent from the certificate issued by the mother Dairy. Hence, it is argued that the sales proceeds of the assessee should be considered as the turnover of the assessee.

12. Having heard the rival submissions, we have perused the materials on record. We are inclined to agree with the AR that the DGR has used word Commission which shows that the relationship between the Mother Dairy is that of Principal (Mother Dairy) to agent (Assessee). Even though the Mother Dairy has given nomenclature of Principal-to-Principal in its certificate, the nature of activity undertaken by the assessee shows the actual relationship between the Mother Dairy and assessee is that of Principal to Agent. We say so because the Milk booth was allotted on the following terms: –

i) All the proceeds from the sale of milk and other allied products to be deposited immediately or latest by next day in the designated SBI bank account hypothecated in favour of Mother Dairy.

ii) Assessee receives uniform and fixed margin/commission which constitutes his taxable income rather than total sales as turnover.

iii) Expenses like electricity, water, telephone, repair & maintenance expenses related to machinery installed at booth etc. are paid by the Mother Dairy itself.

13. Based on facts as stated above, we are of the opinion that the sales proceeds belonged to Mother Dairy and the assessee turnover was only commission of 4,62,000/- from the sales of Dairy and milk products. The ld DR has not controverted the fact that in earlier years, no penalty was levied u/s 271B on this issue.

14. As the value of gross commission received from the aforesaid business as turnover is much below than the prescribed limit of Rs. 1 Crore u/s 44AB of the Act, we hold that the provisions of section 44AB of the Act were not attracted in his case. The CBDT Circular No. 452 [F. No. 201/3/85-IT(A- II)], dated 17-3-1986 also supports our view which in cases of kachha arahati has advised that 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 relevant extract of which is re-produced as follows:

“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.”

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 pucca arahtia.

15. In the instant case, we are of the opinion that the assessee is similarly placed to that of the kachha arahtia, who gets remuneration which consists solely of commission and he is neither interested into nor entitled to the profit and losses made by his principal (ie., Mother Dairy in given case).

16. We also find that the co-ordinate Bench in the case of Ved Singh ITA No. 998/DEL/2023 order dated 19.01.2024 and the decision in the case of Mohammad Daud ITA No. 1691/DEL/2022 order dated 22^nd May 2023 wherein under similar circumstances, have vacated the impugned penalty. In view of the above facts and circumstances and legal position, penalty levied u/s 271B upheld by the ld. CIT(A) CIT/NFAC is quashed and we direct the Assessing Officer to delete the penalty of Rs. 1,23,313/- so levied.

17. In the result, the appeal of the assessee in ITA No. 472/DEL/2024 is allowed.

The order is pronounced in the open court on 11.09.2024.

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