How to Compute turnover for 44AB audit in case of sale of share without delivery : ITAT Clarified

IN THE ITAT MUMBAI BENCH ‘B’

Growmore Exports Ltd.

v.

Assistant Commissioner of Income-tax

PRADEEP PARIKH, ACCOUNTANT MEMBER AND R.P. TOLANI, JUDICIAL MEMBER

IT APPEAL NOS. 5893, 5896 AND 5897 (BOM.) OF 1995 [ASSESSMENT YEAR 1990-91]

JUNE 27, 2000

Vijay B. Mehta and D.D. Shah for the Appellant.

R.G. Sharma for the Respondent.

ORDER

Per Shri Pradeep Parikh, Accountant Member – Three different assessees are involved in these appeals. All the appeals are directed against separate orders of the learned CIT(A), all dated 31-3-1995 in respect of the assessment year 1990-91. Since the issue involved in all the appeals is the same, they are being disposed off together by this consolidated order for the sake of convenience. The facts and circumstances of each case are similar. However, the CIT(A) has passed a speaking order in the case of Harsh Estates (P.) Ltd. [IT Appeal No. 5897 (Bom.) of 1995] and has followed this order in the remaining two cases. Hence, again for the sake of convenience and brevity, we shall be referring to the facts in the case of Harsh Estates (P.) Ltd. (supra). The grounds of appeal, quite contrary to the rules, are narrative and argumentative and run into 18 pages. The assessee has placed on record, the synopsis of grounds of appeal at page 1 of the paper book. For the purposes of disposing off these appeals, we shall keep the synopsis of the grounds in view. The grounds in the synopsis are also eight in number. However, they revolve around a central issue as to whether the assessee is liable to get its accounts audited under section 44AB of the Income-tax Act, 1961 (‘the Act’), and if so, whether the penalty of Rs. 1,00,000 levied by the Assessing Officer under section 271B of the Act is justified or not.

2. The facts in brief are as under : The assessee is a private limited company. For the year under consideration, assessee purchased 53 lakh units of Unit Trust of India, 1964 Scheme. The date of purchase as per the contract note of the broker is 21-8-1989 and the contract note specifies the date of delivery as 30-9-1989. The units were purchased at the rate of Rs. 13.785 per unit which makes the total value at Rs. 7,34,05,000. By way of another contract dated 29-9-1989, assessee sold these units at a price of Rs. 13.850 per unit. For this contract also, the date of delivery is stated to be 30-9-1989. By virtue of this transaction, assessee earned deference which amounted to Rs. 3,44,500 which is duly reflected in profit and loss account. The basic contention of the assessee is that it did not take the delivery of the units purchased on 21-8-1989 and it was never intended also to take delivery thereof. The date of delivery as per the bought note is 30-9-1989 and before that date i.e.before the date of delivery the assessee sold the units on 29-9-1989 and settled the account by receiving the difference amount of Rs. 3,44,500. In effect, according to the assessee, the intention was to speculate and it entered into this speculative transaction and earned the difference and settled the account also by difference. The Assessing Officer, however, had different view on the matter. According to him, Rs. 7,34,05,000 constituted assessee’s turnover which exceeded Rs. 40.00 lakhs and hence the assessee was liable to get its accounts audited under section 44AB. He was of the view that provisions of section 44AB were not based on profit or difference but on purchase and sales and that the assessee had not acted as an agent or broker between the buyer and the seller. In the given situation, the company had acted as a principal and M/s. Harshad S. Mehta has acted as an agent for the company who had purchased 53 lakhs units on behalf of the assessee and had sold the same on behalf of the company. The assessee offered its explanation by referring to the Stock-Exchange rules, its bye-laws and regulations and also by referring to the circular of the Board as well as the decision in the case of Abhay Kumar & Co. v. Union of India [1987]  (Raj.) Assessing Officer rejected the explanation of the assessee by stating the following three reasons :

(a)Since M/s. Harshad S. Mehta acted as a broker for the company and had purchased and sold 53 lakhs units on behalf of the company, the total sales/turnover of the assessee had exceeded Rs. 40.00 lakhs and hence section 44AB was applicable;

(b)Assessee-company had not acted as a broker or agent between the buyer and seller but was the Principal;

(c)The CBDT Circular No. 452, dated 17-3-1986 and the case law relied upon by the assessee, according to the Assessing Officer, were not applicable to the facts of the case as the assessee-company had not acted as an agent as contemplated in the said circular.

In the course of penalty proceedings, assessee also relied on the decision of the Mumbai Bench of the Tribunal in the case of Royal Cushion Vinyl Products Ltd. [IT Appeal No. 7859 (Bom.) of 1992 dated 8-1-1993] wherein the difference in sale and purchase of shares was not treated as turnover. The Assessing Officer rejected this contention of the assessee also by stating that the department had not accepted this decision of the Tribunal and moreover, it related to section 80HHC where the meaning of turnover is different than the turnover mentioned in section 44AB. Thus, in view of the above facts, penalty of Rs. 1,00,000 was levied in each of the three cases before us.

3. CIT(A) confirmed the penalty on the following grounds :

(a)The main point, according to him, was that the company had acted as the principal and that it had purchased and sold 53 lakhs units valued over Rs. 7.00 crores through its broker.

(b)It was not a speculative transaction as the transaction had been settled by delivery of the units;

(c)According to the CIT(A), the definition of ‘turnover’ under the Sale of Goods Act or for the purposes of interpretation of section 80HHC of the Act was not squarely applicable for determining the meaning of ‘turnover’ in section 44AB.

4. Shri Vijay Mehta, the learned counsel for the assessee, first referred to the contract notes indicating that the date of purchase was 21-8-1989 and delivery thereof was to take place on 30-9-1989. However, before 30-9-1989, contract for sale took place on 29-9-1989 and the account was settled by the broker by crediting assessee’s account by the difference amount. Thus, Mr. Mehta tried to impress upon us that the entire transaction was speculative in nature as the assessee neither obtained the delivery, nor gave the delivery. Except for the difference amount there were no other payments effected by the parties. The intention of the assessee was nothing else but to speculate. It was then contended by Mr. Mehta that since the terms ‘sales’, ‘turnover’ and ‘goods’ were not defined in the Income-tax Act, their meanings had to be ascertained from the definitions given in Sale of Goods Act, 1930. Accordingly, besides the definitions of the relevant terms, other provisions of Sale of Goods Act were referred to by Mr. Mehta. By referring to these provisions, main substance of Mr. Mehta’s argument was that where seller effects a present sale of future goods, the contract is not of sale but is an agreement to sell the goods. It was further contended that no property in the goods is transferred to the buyer unless and until the goods are ascertained. It was submitted that in the instant case not only the goods were unascertained, it was quite possible that 53 lakh units may not be available in the market when the contract was made. Even in common parlance it could not be said that there was sale of Rs. 7 crores as no bank would finance on the plea that assessee’s turnover is Rs. 7 crores. Further, since penal provisions were invoked, the same should be strictly construed and if the term turnover was capable of being interpreted in more ways than one, then the interpretation favourable to the assessee should be adopted. Finally, it was submitted that the Assessing Officer had wrongly mentioned the date of delivery as 30-8-1989 in respect of units purchased. The correct date should have been 30-9-1989 but this error had led the CIT(A) to hold that delivery was taken by the assessee on 30-8-1989, i.e.before the date of sale. Alternatively, it was contended that the assessee was under a bona fide belief that it was not liable for audit and an affidavit to this effect is placed on record.
5. Mr. R.G. Sharma strongly relied on the advice dated 30-9-1989 issued by M/s. Harshad S. Mehta to the assessee. The advice mentioned about having credited assessee’s account by the difference of Rs. 3,44,500. The advice also contained the details of the transaction from which the difference of Rs. 3,44,500 arose. In it, the transaction was described as purchase and sale respectively. Thus, it was contended by Mr. Sharma that the difference had emerged from the purchase and sale of units and not from the sky. Even speculative transaction required audit under section 44AB. There was no escape from it and hence the penalty was rightly confirmed by the CIT(A), more so when even till date the audit was not carried out.
6. In his reply, Mr. Mehta submitted that when the accounts were subjected to statutory audit under the Companies Act, there was no question of running away from another such statutory obligation, if there was any. It was because the assessee held a bona fidebelief that its turnover did not exceed Rs. 40 lakhs, audit under section 44AB was not conducted.
7. We have duly considered the rival contentions and the material on record. Section 44AB of the Act, with which we are concerned in the present appeals, is reproduced below for immediate reference.

“44AB. Every person,—

(a)carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds forty lakh rupees in any previous year; or

(b)carrying on profession shall, if his gross receipts of profession exceed ten lakh rupees in any previous year; or

(c)carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AD or section 44AE or section 44AF, as the case may be, and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, in any previous year,

get his accounts of such previous year audited by an accountant before the specified date and furnish by that date the report or such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed :

Provided that this section shall not apply to the person, who derives income of the nature referred to in section 44AB or section 44BB or section 44BBA or section 44BBB, on and from the 1st day of April, 1985 or, as the case may be, the date on which the relevant section came into force, whichever is later :

Provided further that in a case where such person is required by or under any other law to get his accounts audited, it shall be sufficient compliance with the provisions of this section if such person gets the accounts of such business or profession audited under such law before the specified date and furnishes by that date the report of the audit as required under such other law and a further report in the form prescribed under this section.”

8. Undoubtedly, assessee-company trades in shares and securities and hence clause (a) of section 44AB will apply. The said clause (a) specifies that if sales, turnover or gross receipts, as the case may be, exceeds Rs. 40 lakhs, then section 44AB shall be attracted. In the present case, the Assessing Officer has applied the criterion of turnover only and hence we are required to determine whether assessee’s turnover exceeded Rs. 40 lakhs or not. Neither the term ‘goods’ nor ‘turnover’ are defined in the Act. Of course, we do find the terms ‘export turnover’ and ‘total turnover’ defined in clauses (b) and (ba) respectively of the Explanationto section 80HHC of the Act. Export turnover is defined to mean the sale proceeds of goods exported out of India excluding freight or insurance. Similar is the meaning ascribed to the term ‘total turnover’. Of course, for the present appeals we are not concerned with the exclusions of certain items specified in those clauses from the sale proceeds. In general, turnover is meant to be the sale proceeds of the goods sold. In other words, commercially it would mean the amount of money turned over or drawn in a business, in a given time (page 1923 of The Law Lexicon by P. Ramanatha Aiyar – 1997 edition). Since the term ‘turnover’ is not specifically defined in the Act, nor specially for the purpose of section 44AB, its meaning should be taken as commercially and commonly understood – which we have already discussed above.
9. If this meaning is applied to the facts of the case, it cannot be said that assessee has turned over the money to the extent of Rs. 7 crores as contended by the department. The balance sheet of the company is only worth Rs. 34.50 lakhs and almost all the funds are blocked in fixed assets. Its net current assets are worth only Rs. 52,901. Thus, it had no liquid fund or working capital which could be turned over to the extent of Rs. 7 crores. This is the commercial and factual aspect of the matter and on the facts obtaining in the case, it can be held that there was no turnover at all posted by the company.
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 CIT(A). 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 MumbaiBench 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 CIT(A) is deleted.
13. In the case of Growmore Exports Ltd.[IT Appeal No. 5893 (Mum.) of 1995] and Aatur Holdings (P.) Ltd. [IT Appeal No. 5896 (Mum.) of 1995], the CIT(A) has followed the order in the case of Harsh Estates (P.) Ltd. (supra). Therefore, following our order in the case of Harsh Estates (P.) Ltd. (supra) penalties levied in the other two cases are also cancelled.
14. In the result, all the appeals by the respective assessees are allowed.