Computation of turnover for share/derivatives trading and applicability of Section 44AD. AO to either follow ICAI guidance note on tax audit or compute turnover based upon evidence on record – ITAT
ABCAUS Case Law Citation:
ABCAUS 2791 (2019) (02) ITAT
According to the Guidance Note of ICAI on Tax Audit under Section 44AB of the Income-tax Act, 1961 “Sales”, “Turnover” and “Gross receipts” being commercial terms, should be construed in accordance with the method of accounting regularly employed by the assessee. As per the said Guidance Note, the method of accounting followed by the assessee is relevant for the determination of sales, turnover or gross receipts.
The said Guidance Note also prescribes the manner of determining turnover or gross receipts in respect of transactions in shares, securities and derivatives.
With regard to speculative transactions, (i.e. 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 ) the Guidance note states that 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 instant judgment of the Tribunal deals with the following two issues:
(a) The computation of turnover in respect of trading of shares/derivatives
(b) Applicability of Section 44AD for deeming provisions of net profit and Audit liability under section 44AB of the Income Tax, 1961.
In the instant case, the assessee had challenged the order of the CIT(A) in upholding the order of the Assessing Officer (AO) in computing the turnover and making addition by applying profit rate of 8% of deemed income under section 44AD of the Income Tax Act, 1961 (the Act).
The assessee was a salaried employee and was also engaged in share trading. However, the income from the share trading had not been declared by assessee in his return.
The A.O. asked the assessee to furnish details of shares and derivative transactions made in equity shares. The assessee furnished details of trading equity share and derivative transactions made.
The assessee was further asked to explain why income from derivatives has not been shown in the return of income, to which, the assessee explained that since it was a case of loss, to which assessee did not intend to brought forward for set-off in the forthcoming years, therefore, loss was not declared in the return of income.
The AO noticed that the assessee had not got his accounts audited and neither he declared his business income at the rate of 8% of the gross receipts.
The assessee claimed that Section 44AD would not apply and that assessee earned loss.
The AO noted that in the case of share trading, the ICAI guidance note on tax audit under Section 44AB of the Income Tax Act is not adopted or recognised by the Income Tax Department, thus, it had no binding effect. However, the AO took the notice of the same and applied it to some extent.
The AO noted that the term “gross receipts” for the purpose of turnover has not been defined in the Act. The AO was of the view that normally, sales is an integral part of turnover. Sales in general mean purchase plus loss/profit. In the case of share trading, the assessee did the business just applying small amount against large scale purchases just applying margin money.
The AO noted that the assessee made total gross transactions (including both sale and purchase) of about Rs.11.67 crores, against which, assessee had invested fresh capital in purchase Rs. 10 lacs plus loss of Rs. 67,82,571/-. The A.O. then determined the turnover of assessee partly in the light of guidance note of ICAI and computed the total turnover of assessee at Rs.77,82,571/-.
The AO then referred to Section 44AD of the Act and held that these provisions were applicable to the assessee. Therefore, he computed a deeming profit by applying profit rate of 8%.
The CIT(A) dismissed the appeal of assessee holding that Section 44AD was applicable to the case as the assessee did not maintain the books of accounts and did not get the accounts audited.
The Tribunal opined that the margin money could never be the turnover of assessee and therefore, addition to that to the turnover was wholly unjustified.
The Tribunal further observed that the AO in the assessment order had referred to guidance note on tax audit under Section 44AB of the Act published by ICAI, but noted that it had not been recognised by the Department, therefore, same were not binding upon the Department. The AO, however, taken note of the same and applied to some extent for the purpose of computing the turnover of the assessee.
The Tribunal opined that the AO could not have gone in both ways. Either AO should do his own calculation based upon evidence and material on record to calculate the turnover of assessee for the purpose of making the addition or he should follow guidance note on tax audit published by the ICAI. No other basis had been shown by the AO for computing total turnover of the assessee.
The Tribunal opined that the AO had also not given any finding based on material and evidence on record if assessee had suffered loss in the share trading transactions. Therefore, to the extent of computing total turnover of assessee, the matter needed re-investigation.
Accordingly, the Tribunal set aside the orders of the authorities below and directed the AO to reduce Rs.10 lacs from the total turnover as computed in the assessment order. The AO was further directed to re-calculate the turnover of assessee based on evidence and material on record and give specific finding on the submissions made by assessee before him.