Income Tax Appellate Tribunal - Ahmedabad
Assistant Commissioner Of Income Tax vs Hasmukh M. Shah on 22 March, 2002
Equivalent citations: [2003]85ITD99(AHD), (2003)80TTJ(AHD)323
ORDER
T.N. Chopra, A.M.
1. This appeal, is filed by the Revenue against the deletion of the penalty levied under Section 271B amounting to Rs. 1 lakh for asst. yr. 1991-92.
2. The assessee is a registered share broker of Ahmedabad Stock Exchange. For asst. yr. 1991-92 the assessee filed return of income declaring an income of Rs. 3,76,200 for asst. yr. 1991-92 and appears to have been assessed at the same figure. Looking to the details furnished by the assessee the AO noted that the assessee has received total brokerage from the sale purchase of shares amounting to Rs. 5,64,757. The assessee also maintained vepar account which contains speculation business done by the assessee on his own account. This account shows total turnover of Rs. 20,24,855 and net profit of Rs. 13,768 in the speculation sale and purchase of shares in the own account. Apart from this the assessee maintained separate account for the client's, business and the turnover in this client's business account shown during the year aggregated to Rs. 2,63,98,538. The assessee had not got his accounts audited under the provisions of Section 44AB on the ground that his total turnover did not exceed Rs. 40 lakhs. The AO, on the other hand, took the view that for the purposes of Section 44AB the entire turnover in the dalali business including, inter alia, transactions in the account of his constituents carried out through the assessee would be aggregated and on this basis the assessee was liable to get his accounts audited under Section 44AB. The AO, therefore, initiated penalty proceedings under Section 271B and proceeded to levy penalty of Rs. 1 lakh. The main points adopted by the AO in support of the impugned penalty may be briefly summarised as under:
1. The word turnover' as used in Section 44AB connotes total volume of transactions carried on by a person irrespective of fact whether the transactions are carried out as a broker or in the own account of the assessee.
2. With regard to the share broker the AO referred to CBDT Circular No. 452, dt. 17th March, 1986, and held that the position of the stock broker is similar to that of a pakka adatia. The AO further referred to the report of the Expert Committee appointed by SEBI which defined the word "turnover" meaning the aggregate of purchases and sales effected by the stock broker on his own account as well as for his clients. The AO referred to the opinion of the Expert Advisory Committee formed by the Institute of Chartered Accountants which has stated in its report that in the case of transactions entered by a share broker on his personal account, the purchase/sale value shown during the year would be considered for the purposes of Section 44AB.
3. Aggrieved the assessee carried the matter in appeal before the CIT(A). The CIT(A) referred to his decision in the case of Shri Jitendra Balabhai Shah for asst. yr. 1991-92 and held that the position of the stock broker is similar to that of a kachcha addtia and in respect of transactions carried on by the stock broker for and on behalf of his clients these would not form part of total turnover for the purposes of Section 44AB. The CIT(A) accordingly deleted the impugned penalty. The Revenue is aggrieved and hence the appeal.
4. During the course of hearing the learned Departmental Representative invited our attention to the various grounds adopted by the AO in support of the conclusion that transactions of sale and purchase of shares done by a stock broker on behalf of his clients are liable to be considered as "total turnover" for the purposes of Section 44AB. The learned Departmental Representative, therefore, argued that the impugned penalty cancelled by the CIT(A) deserves to be restored.
5. We have carefully considered the arguments of the learned Departmental Representative and gone through the orders of the tax authorities. The entire controversy arising in the present appeal centers round the connotation of the expression used in Clause (a) of Section 44AB which reads :
"If his total sales, turnover or gross receipts, as the case may be in business exceed or exceeds 40 lakh rupees in any previous year."
In the instant case the transactions of sale and purchase of shares done by the assessee as a stock broker for and on behalf of his constituents are far in excess of the ceiling limit of Rs. 40 lakhs. If such transactions are to be considered as sales and turnover of the assessee, the case would be hit by the mischief of Section 44AB. The point to be considered is the nature of function and activities of a broker or an agent who brought the seller and buyer of equity market together. In our considered opinion the word turnover, as appearing in Section 44AB is not appropriate to the transaction which is done by an agent in the way of bringing together a buyer and a seller for brokerage or commission. The commission is the charges for his labour of bringing together the two parties to the transactions of sale and purchase of shares and the transaction cannot amount to his "sale, turnover or receipts". As a share broker, the assessee does not have any interest whatsoever in the goods agreed to be purchased or sold on behalf of his constituents. In fact a share broker is subject to rules and regulations of the stock exchange, whose working is monitored and overseen by the SEBI so as to ensure transparency in the transactions entered into by the share broker on behalf of his principals. There is no dispute that the share broker does not sell the goods of his principal as his own and only charges commission for bringing the two parties together for the purpose of sale and purchase. The share broker would, therefore, not obviously come within the ambit of Section 44AB. At this stage we may usefully refer to the decision of Rajasthan High Court in the case of Abhay Kumar & Co. v. Union of India (1987) 164 ITR 148 (Raj) wherein their Lordships observed at p. 150:
"Section 44AB is, therefore, valid. In the case of a commission agent, if the commission agent does not sell the goods of his principal as his own and only charges commission for bringing together two persons for the purpose of effecting a sale, he will not come within the ambit of Section 44AB if his professional receipts do not exceed Rs. 10 lakhs. However, if there is evidence to show that the goods have remained with him and it is he who has sold the goods to perspective buyers, then it will amount to sale or turnover and if it exceeds the limits prescribed in Section 44AB, i.e., Rs. 40 lakhs, the provision will apply. No hard and fast rule can be laid down. The determination of the question whether the commission agent has sold goods for brokerage or as seller would depend on the facts of each case."
Insofar as a share broker is concerned he has no authority whatsoever to treat the goods as his own. His only interest in the goods is to receive his brokerage on the transaction from the principals.
6. Regarding the Circular No. 452, dt. 17th March, 1986, referred by the AO we may point out that by applying the principles laid down in the said circular it is evidently clear that a stock broker, like a kachcha adatia in foodgrains is merely entitled to brokerage and does not have any domain over the goods. The remuneration of a share broker, like a kachcha adatia consists solely of brokerage and he is not interested in the profits and losses made by his constituents. Similarly, like a kachcha adatia, a stock broker acts only as an agent of his constituent and never acts as a principal. So whatever be the modalities of the transactions for the purchase and sale of shares made by the share broker for and on behalf of his constituents, the position is undisputed that a share broker does not have any interest whatsoever in the transactions except brokerage for the services rendered by him in bringing the purchaser and seller together. Thus, the Board's circular cited by the AO rather supports the case of the assessee that the transactions in the accounts of the constituents are not to be considered for the purposes of turnover under Section 44AB.
7. Regarding the interpretation of the word "turnover" as made by the Institute of Chartered Accountants in the context of Section 44AB we may, refer to para 3.7 at p. 6 of the publication "Guidance Note on Tax Audit under Section 44AB of the IT Act" published by the Institute of Chartered Accountants of India which reads as under :
"Questions may also arise as to whether the sales by a commission agent or by a person, on consignment basis should form part of the sale/turnover of the commission agent and/or consignee, as the case may be. In such case, it would be necessary to find out whether the property in the goods belongs to the commission agent or the consignee immediately before the transfer by him to third person. If the property in the goods continues to belong to the principal, the relevant sale price should not form part of the sales/turnover of the commission agent and/or the consignee, as the case may be. If, however, the property in the: goods belongs to the commission agent and/or the consignee, as the case may be, the sale price received/receivable by him shall form part, of his sales/turnover."
Applying the aforesaid principles it will be clear that the shares purchased/sold by the share broker for and on behalf of his constituent do not belong to the broker and, therefore, the transactions cannot be considered as his transactions for the purposes of Section 44AB.
8. Regarding the reference made by the AO to the registration fee levied by SEBI on the basis of total transactions entered into by the share broker including the clients account, we may point out that this would not per se govern the connotation of the expression 'turnover' for the purposes of Section 44AB. The object and purpose of introducing Section 44AB in the IT Act is not to collect Revenue from the assessees unlike in the case of SEBI when it levies registration fee on the share brokers.
9. It would be useful to refer to the format of Form No. 3CD which contains the particulars required to be furnished by the assessee for the purposes of Section 44AB. Item at Serial No. 32 of the prescribed form refers to several accounting ratios like gross profit/turnover, net profit/turnover, and stock-in-trade/turnover. Obviously the accounting ratio envisages own turnover of the assessee i.e., the realisation of sale price by the assessee in his own account which is to be considered for the purposes of arriving at the gross profit margin. These accounting ratios evidently visualise total sales of the assessee or gross receipts or turnover of assessee's own business. In case of transactions carried on behalf of the principals and charging of the brokerage thereon would not have any relevance or significance with regard to such accounting ratios as provided in the Form No. 3CD.
10. Having regard to the aforesaid discussion we have no hesitation in holding that the transactions reflected in the books of the assessee broker in the constituents account would not be considered for the purposes'of Section 44AB and, therefore, in the instant case the assessee is not liable to get his accounts audited as per the provisions of Section 44AB since his total turnover does not exceed Rs. 40 lakhs.
11. Apart from applicability of the provisions of Section 44AB we may consider the issue of levy of penalty from another angle also. Penalty under Section 271B is not automatically leviable in the case of non-compliance with the provisions of Section 44AB. The case of the assessee would have to be considered under the provisions of Section 273B whether there is a reasonable cause for not getting the accounts audited. We find that the assessee. deserves to succeed on this alternative ground also. A tag fide belief if held by the assessee that provisions of Section 44AB did not apply in his case would absolve the assessee from the default under Section 273B. The expression "reasonable cause" would have to be considered by applying the test of preponderance of probabilities and the assessee is not required to prove its case beyond reasonable doubt. Now in the instant case there have been decisions by the Tribunal regarding non-application of Section 44AB in respect of transactions in the accounts- of the constituents in the books of a share broker. In this connection the assessee has referred before the AO to the decision of the Bombay Tribunal in the case of Royal Cushion Vinyl Products Ltd. We may further point out that the CBDT has issued more than one circulars on the issue of applicability of the provisions of Section 44AB to adatias/commission agents. In the first circular issued on 15th Jan., 1985, (F. No. 201/3/85-IT(A-II)) it was stated that adaO'as cannot be excluded from the provisions of Section 44AB of the IT Act. 1961. Subsequently however a clarification taking a contrary view was issued by the Board vide Circular No. 452, dt. 17th March, 1986, after the matter was examined in consultation with the Ministry of Law. In the context of the aforesaid position reflected in the various Board's circulars as well as decisions of the Tribunal we feel that the levy of penalty in the instant case is liable to be cancelled even on the ground of reasonable cause, as provided for under Section 273B. For the aforesaid reasons the impugned order of the CIT(A) cancelling the penalty is confirmed and the appeal of the Revenue is dismissed.