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Tax Publishers Santosh Kumar v. ITO [ITA No. 1093/JP/2019, dt. 3-7-2020] : 2020 TaxPub(DT) 2728 (Jp.-Trib.) Reckoning of turnover, how to be applied in case of intra day trade for section 44AB -- Levy of penalty under section 271B thereof *Facts:* Assessee was in the business of speculation business in metals doing both delivery and non-delivery transactions. Assessing officer alleged that the total of the non-delivery speculative transactions exceeded tax audit limits under section 44AB that since no books and audit was obtained penalty was imposed under section 271A and 271B. On higher appeal Commissioner (Appeals) annulled the penalty of section 271A but sustained penalty under section 271B. On higher appeal -- Held in favour of the assessee that the turnover in the case of intra-day trade or speculative transactions is to be taken at net basis as no physical delivery of goods/shares happens in such business. For delivery based business the turnover to be reckoned in a normal business for its money value of risks and rewards transferred. For non-delivery speculative business it is only settlement of the difference which forms the turnover for reckoning limits under section 44AB. Penalty under section 271B was thus quashed. Though the turnover in case of speculative transactions is not defined in the income tax Act for the purpose of section 44AA and 44AB of the Act and however, the guidance note on tax audit under section 44AB of the IT Act issued by the Institute of chartered Accountant of India (ICAI) would be relevant on this point. We find that this Tribunal in case of Shri Rajjak Ahmed Khan v. ITO in ITA No. 1181/JP/2019 vide Order, dated 13-1-2020 : 2020 TaxPub(DT) 1410 (Jp-Trib) has considered the same. Once these transactions are non-delivery based intra-day transactions and classified as speculative transaction as per the provisions of section 43(5) of the Income Tax Act, then the turnover in respect of these transactions has to be determined as per the Guidance Note issued by the Institute of Chartered Accounts of India. For ready reference, we reproduce the relevant part of the Guidance Note in para 5.14 as under :-- "Guidance Note on Tax Audit under section 44AB of the Income Tax Act, 1961. 5.14. The turnover or gross receipts in respect of transactions in shares, securities and derivatives may be determined in the following manner :-- (a) Speculative transaction : A speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. Thus, in a speculative transaction, the contract for sale or purchase which is entered into is not completed by giving or receiving delivery so as to result in the sale as per value of contract note. The contract is settled otherwise and squared up by paying out the difference which may be positive or negative. As such, in such transaction the difference amount is 'turnover'. In the case of an assessee undertaking speculative transactions there can be both positive and negative differences arising by settlement of various such contracts during the year. Each transaction resulting into whether a positive or negative difference is an independent transaction. Further, amount paid on account of negative difference paid is not related to the amount received on account of positive difference. In such transactions though the contract notes are issued for full value of the purchased or sold asset the entries in the books of account are made only for the differences. Accordingly, the aggregate of both positive and negative differences is to be considered as the turnover of such transactions for determining the liability to audit vide section 44AB." The turnover has not been defined in the Income Tax Act and particularly in respect of the speculative transactions in shares and securities. Therefore, the Guidance Note of ICAI is a relevant and proper guidance for determining the turnover in respect of such speculative transactions. As it is clear from the Guidance Note issued by the ICAI that the turnover in respect of non-delivery based speculative transactions including stock and shares has to be determined by taking the aggregate of both positive and negative differences arising from such transactions and as an outcome of settlement of such contracts during the year.

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Santosh Kumar v. ITO [ITA No. 1093/JP/2019, dt. 3-7-2020] : 2020 TaxPub(DT) 2728 (Jp.-Trib.)

Reckoning of turnover, how to be applied in case of intra day trade for section 44AB -- Levy of penalty under section 271B thereof

Facts:

Assessee was in the business of speculation business in metals doing both delivery and non-delivery transactions. Assessing officer alleged that the total of the non-delivery speculative transactions exceeded tax audit limits under section 44AB that since no books and audit was obtained penalty was imposed under section 271A and 271B. On higher appeal Commissioner (Appeals) annulled the penalty of section 271A but sustained penalty under section 271B. On higher appeal --

Held in favour of the assessee that the turnover in the case of intra-day trade or speculative transactions is to be taken at net basis as no physical delivery of goods/shares happens in such business. For delivery based business the turnover to be reckoned in a normal business for its money value of risks and rewards transferred. For non-delivery speculative business it is only settlement of the difference which forms the turnover for reckoning limits under section 44AB. Penalty under section 271B was thus quashed.

Though the turnover in case of speculative transactions is not defined in the income tax Act for the purpose of section 44AA and 44AB of the Act and however, the guidance note on tax audit under section 44AB of the IT Act issued by the Institute of chartered Accountant of India (ICAI) would be relevant on this point. We find that this Tribunal in case of Shri Rajjak Ahmed Khan v. ITO in ITA No. 1181/JP/2019 vide Order, dated 13-1-2020 : 2020 TaxPub(DT) 1410 (Jp-Trib) has considered the same.

Once these transactions are non-delivery based intra-day transactions and classified as speculative transaction as per the provisions of section 43(5) of the Income Tax Act, then the turnover in respect of these transactions has to be determined as per the Guidance Note issued by the Institute of Chartered Accounts of India. For ready reference, we reproduce the relevant part of the Guidance Note in para 5.14 as under :--

"Guidance Note on Tax Audit under section 44AB of the Income Tax Act, 1961.

5.14. The turnover or gross receipts in respect of transactions in shares, securities and derivatives may be determined in the following manner :--

(a) Speculative transaction : A speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. Thus, in a speculative transaction, the contract for sale or purchase which is entered into is not completed by giving or receiving delivery so as to result in the sale as per value of contract note. The contract is settled otherwise and squared up by paying out the difference which may be positive or negative. As such, in such transaction the difference amount is 'turnover'.

In the case of an assessee undertaking speculative transactions there can be both positive and negative differences arising by settlement of various such contracts during the year. Each transaction resulting into whether a positive or negative difference is an independent transaction. Further, amount paid on account of negative difference paid is not related to the amount received on account of positive difference. In such transactions though the contract notes are issued for full value of the purchased or sold asset the entries in the books of account are made only for the differences. Accordingly, the aggregate of both positive and negative differences is to be considered as the turnover of such transactions for determining the liability to audit vide section 44AB."

The turnover has not been defined in the Income Tax Act and particularly in respect of the speculative transactions in shares and securities. Therefore, the Guidance Note of ICAI is a relevant and proper guidance for determining the turnover in respect of such speculative transactions. As it is clear from the Guidance Note issued by the ICAI that the turnover in respect of non-delivery based speculative transactions including stock and shares has to be determined by taking the aggregate of both positive and negative differences arising from such transactions and as an outcome of settlement of such contracts during the year.