2019 (2) TMI 898 - AT - Income Tax

Determination of turnover for tax audit u/s 44AB - Computation of turnover in respect of trading of shares/derivatives - Applicability of Section 44AD for deeming provisions of net profit and Audit liability under section 44AB - addition applying profit rate of 8% of deemed income under section 44AD - Held that - it is not in dispute that though the assessee claimed loss in share trading, but assessee did not maintain books of account and did not get the same audited, therefore, provisions of Section 44AD will apply in the case of the assessee. The A.O. in the assessment order has referred to share trading guidance note on tax audit under Section 44AB of the Income Tax Act published by ICAI, but noted that these have not been recognised by the Department, therefore, same are not binding upon the Department. The A.O, however, taken note of the same and applied to some extent for the purpose of computing the turnover of the assessee. The A.O. cannot go in both ways Either A.O. 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 have been shown by the A.O. for computing total turnover of the assessee. The A.O. has also not given any finding based on material and evidence on record if assessee has suffered any loss in the share trading transactions. Therefore, to the extent of computing total turnover of assessee, the matter needs re-investigation at the level of the A.O. Thus set aside the orders of the authorities below and direct the A.O. to reduce ₹ 10 lacs from the total turnover as computed in the assessment order. A.O. shall re-calculate the turnover of assessee based on evidence and material on record. The A.O. shall give reasonable and sufficient opportunity of being heard to the assessee and shall give specific finding on the submissions made by assessee before him. - Decided partly in favour of assessee for statistical purposes.

Summary

Issues:
1. Computation of turnover in respect of trading of shares/derivatives.
2. Applicability of Section 44AD for deeming provisions of net profit and Audit liability under section 44AB of the Income Tax, 1961.

Issue 1: Computation of turnover in respect of trading of shares/derivatives

The assessee, a salaried employee engaged in share trading, did not declare income from derivatives due to incurred losses. The Assessing Officer (A.O.) calculated turnover based on guidance note by ICAI, including margin money in turnover. The A.O. applied Section 44AD, computing profit at 8% and income at ?6,22,605. The assessee challenged this before CIT(A), arguing against the inclusion of margin money and Section 44AD applicability. CIT(A) dismissed the appeal, stating Section 44AD applied due to lack of maintained accounts and audit. The Tribunal found the inclusion of margin money in turnover unjustified and directed the A.O. to re-calculate turnover without it, emphasizing the need for evidence-based assessment.

Issue 2: Applicability of Section 44AD for deeming provisions of net profit and Audit liability under section 44AB of the Income Tax, 1961

The A.O. invoked Section 44AD due to the absence of maintained accounts and audit, despite the assessee claiming losses in share trading. The A.O. referred to ICAI guidance notes but noted their non-binding nature. The Tribunal emphasized the A.O.'s obligation to either independently calculate turnover or follow ICAI guidance consistently. The Tribunal directed the A.O. to re-assess turnover based on evidence, granting the assessee a fair hearing. The Tribunal partially allowed the appeal, emphasizing the importance of evidence-based assessment and fair treatment of the assessee in determining turnover.

This detailed analysis of the judgment highlights the issues of turnover computation in share trading and the applicability of Section 44AD, emphasizing the need for evidence-based assessments and fair treatment of the assessee during tax proceedings.