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SHRI RAJJAK AHMED KHAN, JAIPUR v. ITO, WARD-4(4), JAIPUR

Income Tax Appellate Tribunal

Jan 13, 2020

Judgment

Subsequent
References

CaseIQ

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Bench Summary — ITA No. 1181/JP/2019 (Shri Rajjak Ahmed Khan, Jaipur)

Factual and Procedural Background

This appeal by the assessee challenges the order dated 22.08.2019 of the learned CIT(A) confirming penalty under section 271B of the Income-tax Act for assessment year 2010-11. The assessee is an individual involved in share trading on the National Stock Exchange, Mumbai. The Assessing Officer (AO) issued a notice under section 148 on 28 March 2017 and completed assessment under sections 147/144 (the penalty order records a completion date of 19 December 2017). During assessment proceedings the AO treated the assessee's turnover in share transactions as Rs. 2,43,62,720/-, held that audit under section 44AB was required, and levied a penalty of Rs. 1,00,000/- by order dated 21/22.06.2018 for failure to get the accounts audited. The assessee contended before the AO and the CIT(A) that the correct turnover (for the purpose of section 44AB) was Rs. 3,15,280.69 because most intraday (non-delivery) transactions were speculative and, per the ICAI Guidance Note, turnover for speculative transactions should be the aggregate of positive and negative differences, not the contract note gross values. The CIT(A) initially confirmed the penalty; the Tribunal heard the appeal and pronounced its order on 13/01/2020.

Legal Issues Presented

Whether the turnover of the assessee for the purpose of section 44AB should include the full contract-note values of intraday non-delivery share transactions (as the AO treated) or only the aggregate of positive and negative differences arising from speculative intraday transactions (as contended by the assessee relying on the ICAI Guidance Note).
Whether, given the correct computation of turnover (per the assessee), the assessee was required to get its accounts audited under section 44AB and hence whether penalty under section 271B was rightly levied.
In the alternative, if the turnover computation is debatable, whether the assessee's explanation is reasonable and bonafide under section 273B so as to preclude the levy of penalty under section 271B.

Arguments of the Parties

Appellant's Arguments

The AO incorrectly treated the total value of intraday non-delivery (speculative) share transactions (Rs. 2,43,62,720/-) as turnover for the purposes of section 44AB.
Most intraday transactions were speculative (non-delivery) and therefore, following the ICAI Guidance Note on audit under section 44AB, turnover for these transactions should be the aggregate of positive and negative differences arising on settlement — not the contract-note gross values.
The assessee produced a segment-wise computation showing intraday positive differences of Rs. 1,09,092.10, intraday negative differences of Rs. 1,52,689.69, and delivery-based sale turnover of Rs. 53,498.90, yielding a total turnover of Rs. 3,15,280.69 — below the threshold for audit under section 44AB.
Consequently, no audit obligation arose and penalty under section 271B was not imposable; alternatively, the explanation was a reasonable, bonafide position under section 273B.

Respondent's Arguments

The Departmental Representative submitted that these were cash-security transactions (non-delivery based) and not derivative F&O contracts, and therefore the total value of the transactions must be considered as turnover for section 44AB purposes. He relied on the orders of the authorities below (AO and CIT(A)).

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Tribunal analyzed the limited dispute: whether section 44AB applied when a taxpayer engaged in intraday non-delivery speculative share trading and whether the measure of turnover is the full value of contracts or the aggregate of positive and negative differences arising from settlement.

The Tribunal noted and accepted the following factual and legal propositions as found in the record and by the CIT(A):

It was not disputed that intraday non-delivery transactions constituted speculative transactions within the meaning of section 43(5) of the Income-tax Act.
The ICAI Guidance Note on Tax Audit under section 44AB (reproduced in the order at para 5.14) explains that in speculative transactions the contract is settled by payment of differences and that "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."

Applying the Guidance Note's approach to the documentary turnover computation produced by the assessee, the Tribunal verified the segment-wise figures supplied by the assessee:

Intraday (positive/favourable) differences: Rs. 1,09,092.10
Intraday (negative/unfavourable) differences: Rs. 1,52,689.69
Delivery-based sale transactions: Rs. 53,498.90
Total computed turnover (aggregate of the above): Rs. 3,15,280.69

On this basis the Tribunal concluded that, when turnover is computed in accordance with the ICAI Guidance Note for speculative (non-delivery) transactions, the assessee's total turnover was below the threshold limit prescribed under section 44AB (the order refers to the statutory threshold of Rs. 40 lakhs). Therefore the assessee was not required to get the accounts audited under section 44AB and the penalty under section 271B was not attracted.

Further, the Tribunal observed that even if the turnover computation were debatable, the assessee's explanation — that turnover computed per the ICAI Guidance Note is only Rs. 3,15,280.69 — constituted a reasonable and bonafide explanation under section 273B, which would preclude imposition of penalty under section 271B. On either basis the penalty could not be sustained.

Holding and Implications

Holding: The appeal is allowed and the penalty levied under section 271B of the Income-tax Act (Rs. 1,00,000/-) is deleted.

Implications:

Direct effect on the parties: The Tribunal set aside the penalty imposed by the AO and confirmed by the CIT(A); the assessee's appeal succeeds and no penalty under section 271B is payable for AY 2010-11.
Reasoning basis: The Tribunal's decision rests on applying the ICAI Guidance Note's method of computing turnover for speculative (non-delivery) share transactions (aggregate of positive and negative differences) and, alternatively, on treating the assessee's position as a reasonable and bona fide explanation under section 273B.
No broader law-making or new precedent is articulated in the order; the decision resolves the dispute between the parties on the facts and the application of the Guidance Note and statutory provisions to those facts.

Disposition: Appeal allowed. Order pronounced in open court on 13/01/2020. Bench signatures appear in the record (Vikram Singh Yadav — Accountant Member; Vijay Pal Rao — Judicial Member). Copies of the order were directed to the appellant, the ITO Ward 4(4) Jaipur, the CIT, the CIT(A) and DR ITAT Jaipur.

Show all summary ...

PER VIJAY PAL RAO, J.M. This appeal by the assessee is directed against the order dated 22.08.2019 of ld. CIT (A) arising from penalty order passed under section 271B of the I.T. Act for the assessment year 2010-11. The assessee has raised the following grounds of appeal :-

1. That the ld. CIT (A) has erred in law and on facts in dismissing the appeal of the appellant in limine by passing a non speaking order.

2. That the observation made by the ld. CIT (A) in the appellate order is incorrect and legally untenable. She has failed to consider the meaning of Turnover as per the guidance notes issued by ICAI. 2 ITA No. 1181/JP/2019 Shri Rajjak Ahmed Khan, Jaipur.

3. That ld. CIT (A) failed to observe that assessee was not required to maintain books of account and in case of non maintenance of books of accounts assessee cannot be penalized for failure to get accounts audited and therefore penalty u/s 271B was not imposable.

4. That the ld. CIT (A) failed to appreciate that the business was not covered u/s 44AD and was thus not subject to audit u/s 44AB r.w.s. 44AD as held by the AO. (for AY 2010-11, Sec. 44AD was applicable only for business of civil construction or supply of labour for civil construction)

5. That the appellant reserves his right to add, amend/modify the grounds of appeal.

2. The assessee is an Individual and doing share trading transactions in the National Stock Exchange, Mumbai. The AO issued a notice under section 148 on 28th March, 2017 to assess the income arising from the activity of share trading carried out by the assessee. The assessment was completed under section 147 /144 of the IT Act vide undated assessment order, though the AO has stated in the penalty order passed under section 271B that the assessment was completed on 19th December, 2017. In the course of assessment proceedings it was found that the assessees turnover in share transactions is Rs. 2,43,62,720/- and, therefore, the assessee was required to get its accounts audited under section 44AB of the IT Act. The AO finally assessed the income of the assessee being loss of Rs. 1,09,427/-. Subsequently, the AO initiated the proceedings for levy of penalty under section 271B of the Act for not getting the books of account audited and levied the penalty of Rs. 1,00,000/- vide order dated 21/22.06.2018. The assessee challenged the action of the AO before the ld. CIT (A) and contended that the turnover of the assessee is only Rs. 3,15,280/- and, therefore, it does not require accounts of the 3 ITA No. 1181/JP/2019 Shri Rajjak Ahmed Khan, Jaipur. assessee to be audited under section 44AB of the Act. The ld. CIT (A) was not impressed with the contention of the assessee and confirmed the levy of penalty under section 271B of the IT Act.

3. Before us, the ld. A/R of the assessee has submitted that the AO has taken the turnover of the assessee at Rs. 2,43,62,720/- in share transactions. However, the majority of these transactions are speculative transactions being intraday trading in the shares without actual delivery and, therefore, the value of these transactions cannot be taken as turnover when there was no actual delivery of the shares but these are only speculative transactions carried out by the assessee in the category of intraday trading. Thus the turnover for the purpose of section 44AB in respect of speculative transactions is only the aggregate of both positive and negative differences arising from these transactions. In support of his contention, he has strongly placed reliance on the Guidance Note on Audit under section 44AB of the

I.T. Act issued by the Institute of Chartered Accountants of India (ICAI) and submitted that as per the said Guidance Note, the turnover or gross receipts in respect of speculative transactions of shares and securities has to be determined in the manner prescribed therein. Thus the ld. A/R has submitted that in case of speculative transactions in the shares only the aggregate of both positive and negative differences arising by settlement of various such contracts during the year has to be taken as turnover for the purpose of audit under section 44AB of the Act. The ld. A/R has referred to the details of the turnover in three segments of share trading carried out by the assessee during the year under consideration. He has submitted that as far as the intraday non-delivery based transactions are concerned, 4 ITA No. 1181/JP/2019 Shri Rajjak Ahmed Khan, Jaipur. there is a positive difference of Rs. 1,09,092.10 and negative difference of Rs. 1,52,689.69 whereas the turnover in respect of delivery based sale transactions of share is only Rs. 53,498.90. The total turnover comes to Rs. 3,15,280.69. Thus the turnover of the assessee is less than Rs. 40 lacs which is the threshold limit for application of the provisions of section 44AB fastening the liability on the assessee for getting the accounts audited. Once the turnover of the assessee is less than the limit provided under section 44AB, then there is no violation by the assessee and consequently no penalty can be levied under section 271B of the IT Act. The ld. A/R has submitted that the AO has taken the total value of the transactions carried out by the assessee in the intraday speculative segment whereas only the aggregate of positive and negative differences is to be taken as turnover.

4. On the other hand, the ld. D/R has submitted that it is not a derivative transaction in the F & O segment but the transactions are cash security though non- delivery based, therefore, the total value of the transactions has to be considered as turnover for the purpose of section 44AB of the Act. He has relied upon the orders of the authorities below.

5. We have considered the rival submissions as well as the relevant material on record. The limited dispute in the case in hand is whether the provisions of section 44AB are applicable in the case of the assessee when the assessee has done the share trading in intraday segment and some of the transactions are delivery based transactions to the extent of Rs. 53,498/-. There is no dispute regarding the turnover in respect of the transactions of the shares which are delivery based. However, the dispute is regarding the turnover in respect of the intraday 5 ITA No. 1181/JP/2019 Shri Rajjak Ahmed Khan, Jaipur. transactions carried out by the assessee. The AO has taken the total value of the transactions at Rs. 2,43,62,720/- in the intraday non-delivery based trading segment. There is no quarrel that the transactions carried out by the assessee in intraday non-delivery based segment are speculative transactions as per section 43(5) of the Act. This fact is also accepted by the ld. CIT (A) in his finding in para 2.3 as under :- Ground No. 01 and 02 are being taken up together which are interrelated. I have perused the facts of the case, the penalty order and the submissions of the appellant. It is seen that the Assessing Officer imposed penalty under section 271B for not getting the accounts audited. There is no dispute as to the fact that the turnover of the assessee is more than the limit prescribed under section 44AB and the assessee has not got his accounts audited. Assessee has taken plea that these transactions of stock related to intraday activities/non- delivery based transactions. Therefore, the same did not require audit under section 44AB. Assessee claimed that the transactions are non delivery based and daily difference (by ignoring the signs) be taken as turnover. This plea cannot be accepted as it is applicable for transaction of derivatives whereas assessee transacted in cash securities where non delivery based transactions are classified as speculative transactions as per section 43(5) of the I.T. Act, 1961. Accordingly assessee is liable to get his accounts audited. Looking to these facts, penalty under section 271B imposed by the Assessing Officer is confirmed. These grounds of appeal are dismissed. Once these transactions are non-delivery based intraday transactions and classified as speculative transaction as per the provisions of section 43(5) of the IT Act, then 6 ITA No. 1181/JP/2019 Shri Rajjak Ahmed Khan, Jaipur. 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 IT 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 7 ITA No. 1181/JP/2019 Shri Rajjak Ahmed Khan, Jaipur. 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 out-come of settlement of such contracts during the year. We find that the assessee has produced the details of the speculative transactions as well as delivery based transactions and also given the computation of the turnover as under :- Intraday Positive or favorable differences (sheet enclosed for this) 109092.10 Intraday Negative or unfavorable differences (sheet enclosed for this) 152689.69 Sale of delivery based transactions 53498.9 315280.69 There is no dispute regarding the delivery based transactions of shares to the tune of Rs. 53,498.90. We have verified the computation of the turnover in respect of intraday non-delivery based transactions and the positive and negative differences of these speculative transactions given in the above table. Therefore, by taking the aggregate of the positive and negative differences as well as the turnover of the delivery based transactions, the total turnover of the assessee comes to Rs. 3,15,280.69. Hence, when the turnover of the assessee is less than the threshold limit provided under section 44AB, then the assessee is not required to get its books of account audited in terms of section 44AB of the IT Act and consequently the penalty provision of section 271B of the IT Act is not attracted. Even otherwise, when this issue of turnover is a debatable issue and the assessee has claimed this turnover as Rs. 3,15,280.69 if computed in terms of the Guidance Note of ICAI, then the said explanation of the assessee would be regarded as reasonable and 8 ITA No. 1181/JP/2019 Shri Rajjak Ahmed Khan, Jaipur. bonafide as per the provisions of section 273B of the IT Act and consequently no penalty under section 271B is leviable. Accordingly, the penalty levied under section 271B is deleted.

6. In the result, appeal of the assessee is allowed. Order pronounced in the open court on 13/01/2020. Sd/- Sd/- foe flag ;kno fot; iky jkWo (Vikram Singh Yadav) (VIJAY PAL RAO) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member Tk;iqj@Jaipur fnukad@Dated:- 13/01/2020. das/ vkns'k dh izfrfyfi vxzsfkr@Copy of the order forwarded to:

1. vihykFkhZ@The Appellant-Shri Rajjak Ahmed Khan, Jaipur.

2. izR;FkhZ@ The Respondent-the ITO Ward 4(4), Jaipur.

3. vk;dj vk;qDr@ CIT

4. vk;dj vk;qDr@ CIT(A)

5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur