Kachha Arhatia explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Circular No. 452 holds that for a kachha arhatia the section 44AB turnover is only the gross commission, while for a pacca arhatia the total sales of the business are taken.
From the ICAI Guidance Note on Tax Audit (Revised 2026), Appendix IV, cited at paragraph 5.9. The circular construes section 44AB of the Income-tax Act, 1961; for tax years under the Income-tax Act, 2025 the same agency analysis must be applied to that Act's audit trigger, with the report in Form No. 26 under rule 47 of the Income-tax Rules, 2026.
The question
Paragraph 1 recites the obligation as originally enacted by the Finance Act, 1984 — audit where total sales, turnover or gross receipts exceed Rs 40 lakhs — with the Guidance Note's own bracketed update: "substituted by Rs. 1 crore by Finance Act, 2012 w.e.f. A.Y. 2013-14, the limit was further extended from Rs. 5 Crores to Rs. 10 Crore where 95% business transactions of receipts and payments are done in digital mode".
Paragraph 2: the Board received representations to clarify whether, in cases where an agent effects sales or turnover on behalf of his principal, such sales or turnover have to be treated as the sales or turnover of the agent for section 44AB.
Paragraph 3 records the caution with which the answer was framed. 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 must be examined on its terms, and no hard and fast rule can be laid down as to whether an agent is acting only as an agent or also as a principal.
The answer
| Agent | Turnover for section 44AB |
|---|---|
| Kachha arhatia | Does not include the sales effected on behalf of the principals; only the gross commission is considered |
| Pacca arhatia | The total sales or turnover of the business is taken into consideration |
The reason is given in paragraph 4: "A pacca arhatia 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."
A commission agent turning over Rs 60 crore of principals' goods for Rs 45 lakh of commission is outside section 44AB entirely if he is a kachha arhatia, and well inside it if he is a pacca arhatia. Nothing in the ledger settles it — the answer sits in the express terms of the contract, which is why paragraph 3 puts contract analysis before everything else.
The seven tests
Paragraph 4 lays down the principles of distinction drawn from various court pronouncements:
- A kachha arhatia acts only as an agent of his constituent and never acts as a principal. A pacca arhatia is entitled to substitute his own goods towards the contract made for the constituent, and to buy the constituent's goods on his personal account, and thus acts as a principal as regards his constituent.
- A kachha arhatia brings a privity of contract between his constituent and the third party, so that each becomes liable to the other. The pacca arhatia makes himself liable upon the contract not only to the third party but also to his constituent.
- 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 — he is an agent for an unnamed principal. The pacca arhatia does not inform his constituent as to the third party with whom he has contracted.
- 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.
- The kachha arhatia, unlike the pacca arhatia, does not have any dominion over the goods.
- The kachha arhatia has no personal interest of his own when he enters into a transaction — 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.
- In the event of any loss, the kachha arhatia is entitled to be indemnified by his principal, as is not the case with a pacca arhatia.
Extension to other agents
Paragraph 5: the distinction "may also be relevant for determining the applicability of Section 44AB in cases of other type of agents". Where an agent's position is similar to that of a 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 or turnover of the business should be taken.
So the circular is not confined to commodity trade. Consignment agents, clearing agents and other intermediaries are tested against the same seven characteristics.
How the courts have used it
| Case | Holding |
|---|---|
| Jeyar Consultant & Investment (P.) Ltd. v. Assistant Commissioner [1993] 46 ITD 71 (Mad. Trib.) — explained in | The instructions issued in relation to kacha and pacca arhatias, "who are an integral part of the trading sector", could not be applied to an assessee who has arranged finances for others 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." |
| ITO v. Shantilal Chunilal & Co. [1993] 45 ITD 581 (Pune Trib.) — relied on in | The CIT (Appeals) excluded the adat receipt as well as interest receipt from the purview of turnover for section 44AB, categorised the assessee as a kachha arhatia on the strength of the circular, and charged the expenses incurred on that business, resulting in a gross profit rate of 1.09 per cent. The Tribunal held it "very much relevant to clinch the issue whether the assessee is a kachha arahatia or not", and found the case fitted the kachha arahatia description |
| Manish Textiles v. ACIT [1991] 38 ITD 365 (Bom.) — referred to in | Cited in the judicial analysis appended to the circular |
The 1.09 per cent gross profit rate in Shantilal Chunilal is characteristic of a kachha arhatia — an agent whose only return is commission cannot show a trading margin. But paragraph 3 still governs: the margin corroborates the contract analysis; it does not replace it. The auditor who reasons from the margin alone has skipped the step the Board said comes first.
Worked example
| Facts | Turnover for section 44AB |
|---|---|
| Agent sells Rs 52 crore of principals' produce; earns Rs 39 lakh commission; never takes title; names the buyer to the principal; is indemnified for losses | Rs 39 lakh — a kachha arhatia |
| Same volumes, but the agent substitutes his own goods, keeps the buyer's identity from the constituent and bears price risk | Rs 52 crore — a pacca arhatia |
| Consignment agent holding stock, invoicing in his own name, sharing in profit | Tested on the seven characteristics, not on the label in the agreement |
| Finance arranger receiving a fee described as brokerage | Not turnover proper — Jeyar Consultant |
| Broker with a mixed book — some transactions on principal account | Each transaction examined with reference to its own terms |
Audit checklist
- Read the agency contract before computing turnover — the label is not decisive.
- Apply the seven tests: principal capacity, privity, disclosure of the third party, commission-only remuneration, dominion over goods, personal interest, and indemnity.
- For a kachha arhatia, take gross commission only into the section 44AB computation.
- For a pacca arhatia, take the total sales.
- Examine a mixed book transaction by transaction.
- Do not extend the circular to fee-earning intermediaries outside the trading sector.
- Keep the contract analysis and the conclusion in the working papers, since the section 271B exposure turns on it.
- Ensure the conclusion is consistent with clause 10(a) and with the clause 40 ratios.
Common mistakes
- Including principals' sales in a kachha arhatia's turnover and forcing an unnecessary audit.
- Excluding sales for a pacca arhatia because the agreement calls him an agent.
- Reasoning only from the gross margin without the contract.
- Applying one conclusion across a mixed book.
- Extending the circular to a finance or service intermediary.