Audit under section 44ab

Firstly you are required to determine whether the agent is a “Kachha Arahita” or is a “Pacca Arahtia” 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. 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.

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• If the property in the goods or all significant risks and rewards of ownership of goods continue to belong to the principal the relevant sale price shall not form part of the sales/turnover of the commission agent and/or the consignee as the case may be. If, however, the property in the goods, significant risks and reward of ownership belongs to the commission agent and/or the consignee, as the case may be, the sale price received/receivable by him shall form part of his sales/turnover.
• In this context, it would be useful to refer to the CBDT Circular No.452 dated 17th March, 1986, where the Board has clarified the question of applicability of section 44AB in the cases of Commission Agents, Arhatias, etc.

Hi Team,

Appreciating knowledge shared by Manish, Sumit and Kaya even i wud conclude that if an Agent is working on Principal to Principal basis then total sales affected by him will be his Gross T.O.

If Agent is dealing on Agent  and Principal basis and whatever Receipts and Payment is shown as reimbursement then his total receipts will be his commission on sales.

I would like to share a practial case with u all.

we had a client dealing as C & F agent

So we shown entries in books as under:

Client A/c(Debtors) ......................Dr

       To Airlines Co.(Creditors) A/c

       To Commission A/c(Income)

This is how Sec. 44AB was not applicable to client..

Happy to Share and Help....

Thnaks and Regards Team..