Comment on Taxation Simplified

C.Arnot commented on 30 Mar 2014, 09:03 PM

Hello,

One of my friend has forwarded me the below.

Please confirm it is helpful.

Enjoy,
CArnot
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Indian Income Tax Act 1961, Section 44AB reads as under:
“Audit of accounts of certain persons carrying on business or
profession” — 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
one crore rupees* in any previous year; or
(b) carrying on profession shall, if his gross receipts in profession
exceed twenty-five 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 44AE or section 44BB or section 44BBB,
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; or
(d) 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 and he has claimed such income to
be lower than the profits and gains so deemed to be the profits
and gains of his business and his income exceeds the
maximum amount which is not chargeable to income-tax 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 of such
audit in the prescribed form duly signed and verified by such
accountant and setting forth such particulars as may be prescribed.

Note – For all practical purposes read “Accountant” as registered chartered accountant

The following have been listed out as professions
(i) Accountancy
(ii) Architectural
(iii) Authorised Representative
(iv) Company Secretary
(v) Engineering
(vi) Film Artists/Actors, Cameraman, Director, Singer, Story-writer, editor,
singer, lyricist, dress designer etc.
(vii) Interior Decoration
(viii) Legal
(ix) Medical
(x) Technical Consultancy
(xi) Information Technology

The following activities have been held to be business :
(i) Advertising agent
(ii) Clearing, forwarding and shipping agents
(iii) Couriers
(iv) Insurance agent
(v) Nursing home
(vi) Stock and share broking and dealing in shares and securities
(vii) Travel agent.

Explanation —

Share brokers, on purchasing securities on behalf of their customers,
do not get them transferred in their names but deliver them to the customers
who get them transferred in their names. The same is true in case of sales
also. The share broker holds the delivery merely on behalf of his customer.
The property in goods does not get transferred to the share brokers. Only
brokerage which is being accounted for in the books of account of share
brokers should be taken into account for considering the limits for the
purpose of section 44AB. However, in case of transactions entered into by
share broker on his personal account, the sale value should also be taken
into account for considering the limit for the purpose of section 44AB. The
case of a sub-broker is not different from that of a share broker.

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.

(b) Derivatives, futures and options:

Such transactions are completed
without the delivery of shares or securities. These are also squared up
by payment of differences. The contract notes are issued for the full
value of the asset purchased or sold but entries in the books of
account are made only for the differences. The transactions may be
squared up any time on or before the striking date. The buyer of the
option pays the premia. The turnover in such types of transactions is
to be determined as follows:
(i) The total of favourable and unfavourable differences shall be
taken as turnover.
(ii) Premium received on sale of options is also to be included in
turnover.
(iii) In respect of any reverse trades entered, the difference thereon,
should also form part of the turnover.

(c) Delivery based transactions:

Where the transaction for the purchase or sale of any commodity including stocks
and shares is delivery based whether intended or by default, the total value of
the sales is to be considered as turnover.

Further, an issue may arise whether such transactions of purchase
or sale of stocks and shares undertaken by the assessee are in the course of
business or as investment. The answer to this issue will depend on the facts
and circumstances of each case taking into consideration the nature of the
transaction, frequency and volume of transactions etc.

In case such transactions are for the purposes of investment and
income/loss arising therefrom is to be computed under the head ‘Capital
Gains’, then the value of such transaction is not to be included in sales or
turnover for deciding the applicability of audit under section 44AB. However,
in case such transactions are in the course of business, then the total of
such sales are to be included in the sale, turnover or gross receipts as the
case may be, of the assessee for determining the applicability of audit under
section 44AB.

Distinction between shares held as stock-in-trade and shares held as
investment – tests for such a distinction
1. The Income-tax Act, 1961 makes a distinction between a “capital
asset” and a “trading asset”.
2. Capital asset is defined in Section 2(14) of the Act. Long-term capital
assets and gains are dealt with under Section 2(29A) and Section 2(29B).
Short-term capital assets and gains are dealt with under Section 2(42A) and
Section 2(42B).
3. Trading asset is dealt with under Section 28 of the Act.
4. The Central Board of Direct Taxes (CBDT) brought to the notice of the assessing
officers that there is a distinction between shares held as investment (capital
asset) and shares held as stock-in-trade (trading asset). In the light of a
number of judicial decisions pronounced after the issue of the above
instructions, it is proposed to update the above instructions for the
information of assessees as well as for guidance of the assessing officers.
5. In one of the case the Supreme Court observed that:
“Whether a particular holding of shares is by way of investment or
forms part of the stock-in-trade is a matter which is within the
knowledge of the assessee who holds the shares and it should, in
normal circumstances, be in a position to produce evidence from its
records as to whether it has maintained any distinction between those
shares which are its stock-in-trade and those which are held by way of
investment.”
6. In another case the Supreme Court observed :
“The High Court, in our opinion, made a mistake in observing whether
transactions of sale and purchase of shares were trading transactions
or whether these were in the nature of investment was a question of
law. This was a mixed question of law and fact.”
7. The principles laid down by the Supreme Court in the above two cases
afford adequate guidance to the assessing officers.
8. The Authority for Advance Rulings (AAR) (288 ITR 641), referring to
the decisions of the Supreme Court in several cases, has culled out the
following principles:
“(i) Where a company purchases and sells shares, it must be shown that
they were held as stock-in-trade and that existence of the power to
purchase and sell shares in the memorandum of association is not
decisive of the nature of transaction;
(ii) the substantial nature of transactions, the manner of maintaining
books of accounts, the magnitude of purchases and sales and the
ratio between purchases and sales and the holding would furnish a
good guide to determine the nature of transactions;
(iii) ordinarily the purchase and sale of shares with the motive of earning a
profit, would result in the transaction being in the nature of
trade/adventure in the nature of trade; but where the object of the
investment in shares of a company is to derive income by way of
dividend etc. then the profits accruing by change in such investment
(by sale of shares) will yield capital gain and not revenue receipt”.
9. Further CBDT emphasises that it is possible for a tax payer to have two
portfolios, i.e., an investment portfolio comprising of securities which are
to be treated as capital assets and a trading portfolio comprising of stock-in-trade
which are to be treated as trading assets. Where an assessee has two portfolios,
the assessee may have income under both heads i.e.,capital gains as well as business income.
10. Assessing officers are advised from CBDT that the above principles should guide
them in determining whether, in a given case, the shares are held by the
assessee as investment (and therefore giving rise to capital gains) or as
stock-in-trade (and therefore giving rise to business profits). The assessing
officers are further advised that no single principle would be decisive and the
total effect of all the principles should be considered to determine whether, in
a given case, the shares are held by the assessee as investment or stock-intrade.
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