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The Tax Publishers Vikas Ahuja v. ACIT [ITA No. 480/Del/2016, dt. 13-5-2016] : 2016 TaxPub(DT) 2533 (Del-Trib) Turnover for commodity derivatives under section 44AB. Penalty for failure to get accounts audited under section 44AB. *Facts:* Assessee individual had returned an income with salary, other sources, capital loss and trading in commodity transactions for INR 22.15. It was found on facts that the sales consideration on the total commodity derivatives was INR 6.52 crores. Since the assessee had failed to get his accounts audited penalty under section 271B for failure to get accounts audited under section 44AB was imposed at INR 100,000. The said penalty was upheld by Commissioner (Appeals). On further appeal: Held in favour of the assessee that the turnover for the commodity derivatives was the net profit/loss itself as there was no delivery of the commodities and the differences were simply settled net of buy minus sell. This is not turnover or sale or purchase thus no penalty under section 271B is warranted. Banwari Sitaram Pasari HUF v. ACIT, ITA No. 1489 (Pune) of 2011 [Assessment year 2006-07] dtd. 22-11-2012 "6. We have carefully considered the rival submissions. The crux of the controversy revolves around as to whether the assessee was indeed liable to get his accounts audited under section 44AB of the Act on the ground that its turnover from the commodities by booking of sauda with commodity exchange stood at Rs. 1,86,66,488? In this connection, it is noted that the assessee is engaged in the business of on-line trading of commodities and in this speculation activity, there is no physical delivery of commodities given or taken. Whether there was any element of turnover in such activity is the bone of contention between the assessee and the Revenue. In somewhat similar situation, our co-ordinate Bench of Mumbai Tribunal in the case of Growmore Exports Ltd. (supra) has dealt with requirement to get the accounts audited under section 44AB of the Act. In the case before the Mumbai Bench, the assessee was engaged in the speculation transaction of sale and purchase of units without taking delivery and the account was settled by crediting the difference. The Tribunal after considering section 18 of the Sale of Goods Act 1930 observed that no property in the said units passed on to the assessee inasmuch as the assessee never acquired the property in the units as the units contracted to be bought were future unascertained goods. Similarly, it could not pass on the property to the party to whom the units were contracted and therefore, there was no sale or turnover effected by the assessee in the legal sense for the purposes of getting the accounts audited under section 44AB of the Act. The relevant observations of the Tribunal in this regard are as under: "10. However, we may legally also examine the issue. For that we may turn to the meaning of the term goods. The said term is not defined in the Act. But Sale of Goods Act specifically includes stocks and shares in the meaning of the term goods. Therefore, other provisions of Sale of Goods Act automatically would apply. As per section 6(3) of the said Act, where by a contract of sale the seller purports to effect a present sale of future goods, the contract operates as an agreement to sell the goods. In the instant case, the contract through which assessee sought to buy the units was certainly a contract to buy future goods. At this juncture we may clarify that the assessee never took delivery of the units as observed by the Commissioner (Appeals). The contract note clearly specifies the date of delivery as 30-9-1989. Even otherwise there is no evidence to show that assessee in fact obtained delivery thereof. Thus the units contracted to be bought were future goods and were unascertained. As per section 18 of the Sale of Goods Act, no property in the goods is transferred to the buyer unless and until the goods are ascertained. Therefore, when the assessee had contracted to buy the units, no property in the said units had passed to the assessee. As a result, it cannot be said that actual purchase as contemplated under the Sale of Goods Act was ever effected. And if the assessee never acquired property in the units, it could not pass on the property to the party to whom the units were contracted to be sold by the assessee. In the ultimate result, therefore, there was no sale by the assessee and when there was no sale, there was no question of receiving any sale proceeds by the assessee, which in commercial sense would be described as either sales or turnover. Thus, even in legal sense there was no turnover effected by the assessee. 11. The Mumbai Bench of the Tribunal, in the case of Babulal Enterprises [IT Appeal No. 6031 (Mum.) of 1996 dated 12-2-1997] has on similar facts held that the amount of transactions as noted in the contract notes cannot be taken as turnover of the assessee. The Tribunal also relied on the decision of the Tribunal in the case of Royal Cushion Vinyl Products Ltd. (supra) and observed that though the said decision was rendered in the context of section 80HHC, the principle laid down in that case would equally apply to the facts obtaining to the case in hand. 12. In the present case, the transaction of buying and selling the units was a speculative transaction. No delivery has taken place. The account has been settled only by crediting the difference which is duly reflected in the profit and loss account. No other activity has been carried out by the assessee. In view of the foregoing discussion and also respectfully following the decisions of the Tribunal cited supra, we hold that no turnover was effected at all by the assessee and hence was not liable to get the accounts audited under section 44AB of the Act and hence the penalty confirmed by the Commissioner (Appeals) is deleted." Note: In a case where there are put and call options for commodity derivatives then the same needs grossing up to compute section 44AB limit which is also recommended to overcome the impact of the decisions like the one above.

The Tax Publishers

Vikas Ahuja v. ACIT [ITA No. 480/Del/2016, dt. 13-5-2016] : 2016 TaxPub(DT) 2533 (Del-Trib)

Turnover for commodity derivatives under section 44AB. Penalty for failure to get accounts audited under section 44AB.

Facts:

Assessee individual had returned an income with salary, other sources, capital loss and trading in commodity transactions for INR 22.15. It was found on facts that the sales consideration on the total commodity derivatives was INR 6.52 crores. Since the assessee had failed to get his accounts audited penalty under section 271B for failure to get accounts audited under section 44AB was imposed at INR 100,000. The said penalty was upheld by Commissioner (Appeals). On further appeal:

Held in favour of the assessee that the turnover for the commodity derivatives was the net profit/loss itself as there was no delivery of the commodities and the differences were simply settled net of buy minus sell. This is not turnover or sale or purchase thus no penalty under section 271B is warranted.

Banwari Sitaram Pasari HUF v. ACIT, ITA No. 1489 (Pune) of 2011 [Assessment year 2006-07] dtd. 22-11-2012

"6. We have carefully considered the rival submissions. The crux of the controversy revolves around as to whether the assessee was indeed liable to get his accounts audited under section 44AB of the Act on the ground that its turnover from the commodities by booking of sauda with commodity exchange stood at Rs. 1,86,66,488? In this connection, it is noted that the assessee is engaged in the business of on-line trading of commodities and in this speculation activity, there is no physical delivery of commodities given or taken. Whether there was any element of turnover in such activity is the bone of contention between the assessee and the Revenue. In somewhat similar situation, our co-ordinate Bench of Mumbai Tribunal in the case of Growmore Exports Ltd. (supra) has dealt with requirement to get the accounts audited under section 44AB of the Act. In the case before the Mumbai Bench, the assessee was engaged in the speculation transaction of sale and purchase of units without taking delivery and the account was settled by crediting the difference. The Tribunal after considering section 18 of the Sale of Goods Act 1930 observed that no property in the said units passed on to the assessee inasmuch as the assessee never acquired the property in the units as the units contracted to be bought were future unascertained goods. Similarly, it could not pass on the property to the party to whom the units were contracted and therefore, there was no sale or turnover effected by the assessee in the legal sense for the purposes of getting the accounts audited under section 44AB of the Act.

The relevant observations of the Tribunal in this regard are as under:

"10. However, we may legally also examine the issue. For that we may turn to the meaning of the term goods. The said term is not defined in the Act. But Sale of Goods Act specifically includes stocks and shares in the meaning of the term goods. Therefore, other provisions of Sale of Goods Act automatically would apply. As per section 6(3) of the said Act, where by a contract of sale the seller purports to effect a present sale of future goods, the contract operates as an agreement to sell the goods. In the instant case, the contract through which assessee sought to buy the units was certainly a contract to buy future goods. At this juncture we may clarify that the assessee never took delivery of the units as observed by the Commissioner (Appeals). The contract note clearly specifies the date of delivery as 30-9-1989. Even otherwise there is no evidence to show that assessee in fact obtained delivery thereof. Thus the units contracted to be bought were future goods and were unascertained. As per section 18 of the Sale of Goods Act, no property in the goods is transferred to the buyer unless and until the goods are ascertained. Therefore, when the assessee had contracted to buy the units, no property in the said units had passed to the assessee. As a result, it cannot be said that actual purchase as contemplated under the Sale of Goods Act was ever effected. And if the assessee never acquired property in the units, it could not pass on the property to the party to whom the units were contracted to be sold by the assessee. In the ultimate result, therefore, there was no sale by the assessee and when there was no sale, there was no question of receiving any sale proceeds by the assessee, which in commercial sense would be described as either sales or turnover. Thus, even in legal sense there was no turnover effected by the assessee.

11. The Mumbai Bench of the Tribunal, in the case of Babulal Enterprises [IT Appeal No. 6031 (Mum.) of 1996 dated 12-2-1997] has on similar facts held that the amount of transactions as noted in the contract notes cannot be taken as turnover of the assessee. The Tribunal also relied on the decision of the Tribunal in the case of Royal Cushion Vinyl Products Ltd. (supra) and observed that though the said decision was rendered in the context of section 80HHC, the principle laid down in that case would equally apply to the facts obtaining to the case in hand.

12. In the present case, the transaction of buying and selling the units was a speculative transaction. No delivery has taken place. The account has been settled only by crediting the difference which is duly reflected in the profit and loss account. No other activity has been carried out by the assessee. In view of the foregoing discussion and also respectfully following the decisions of the Tribunal cited supra, we hold that no turnover was effected at all by the assessee and hence was not liable to get the accounts audited under section 44AB of the Act and hence the penalty confirmed by the Commissioner (Appeals) is deleted."

Note: In a case where there are put and call options for commodity derivatives then the same needs grossing up to compute section 44AB limit which is also recommended to overcome the impact of the decisions like the one above.