The Hon'ble Income Tax Appellate Tribunal, Rajkot Bench in Parag Hashmukhbhai Davda v. Income-tax Officer [IT APPEAL NO. 118 (RJT) OF 2023 dated March 6, 2024] held that since the assessee, a share broker, earned commission income which was not in excess of the limits prescribed under Section 44AB of the Income Tax Act, 1961, the assessee was not required to get its books of account audited. Consequently, the impugned penalty levied under Section 271B for failure to get accounts audited was to be deleted.
Facts:
Mr. Parag Hashmukhbhai Davda (“the Petitioner”), was engaged in the business of sub-brokerage of shares. For the Assessment Year 2016-17, the Petitioner had earned commission income of Rs. 1,55,614/- from the sub-broker activity of shares. The Petitioner had also earned short-term capital gains of Rs. 4,13,202/- from the purchase and sale of shares during the year.
The Petitioner's total income returned to tax comprised of:
(i) Income from business and profession: Rs. 10,758/-
(ii) Short-term capital gains: Rs. 4,13,202/-
(iii) Income from other sources: Rs. 2,056/-
The Assessing Officer noted that the Petitioner's turnover from the sale of shares was Rs. 6,06,87,030/. Considering the turnover from sale of shares exceeded Rs. 1 crore, the Assessing Officer levied a penalty of Rs. 1,50,000/- under Section 271B on the Petitioner for failure to get accounts audited as required under Section 44AB. The Petitioner contended that being a sub-broker, only the commission income earned by it should be considered as turnover for the purposes of Section 44AB, and not the sale consideration of shares on which commission was earned. The Petitioner relied on the ITAT's decision in ACIT v. Hasmukh M. Shah, which held that for brokers, it is only the commission income that constitutes turnover under Section 44AB and not the sale price of commodities transacted. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the penalty levied by the Assessing Officer without considering the Petitioner's submissions.
Aggrieved by the CIT(A)'s order dated December 16, 2022, the Petitioner filed an appeal before the Hon'ble Income Tax Appellate Tribunal, Rajkot Bench.
Issue:
Whether the impugned penalty levied under Section 271B for failure to get accounts audited in terms of the provisions of Section 44AB was justified.
Held:
The Hon'ble Income Tax Appellate Tribunal, Rajkot Bench, in IT APPEAL NO. 118 (RJT) OF 2023 held as under:
· Observed that, the Tribunal referred to its earlier decision in the case of ACIT v. Hasmukh M. Shah [2003] 85 ITD 99/80 TTJ 323 (Ahmedabad - ITAT), wherein it had exhaustively deliberated on what constitutes 'turnover' in the case of persons acting as agents earning only commission or brokerage. In the Hasmukh M. Shah case, the Tribunal had held that the commission earned by a broker is by way of an agent in bringing together the buyer and seller, and it is the charges for the broker's labor in bringing the two parties together. The Tribunal had found that a broker does not have any interest whatsoever in the goods being transacted, and the broker does not sell the goods of its principal as its own. The broker only charges commission for bringing the two parties together for the purpose of sale and purchase.
· Therefore, the Tribunal had held that it is the commission income that constitutes the turnover of such agents and not the sale price of the commodities transacted.
· Noted that, The Tribunal had also taken note of Circular No. 452, dated March 17, 1986, and found that the principle laid down in the said circular relating to 'kachcha addtia' (commission agents) would apply to stock-brokers as well, since even the 'kachcha addtia' works as an agent of its constituent and not as a principal.
· Further observed that the transactions in the account of the constituent (client) are to be considered for the purpose of turnover under Section 44AB, and not the transactions carried out by the broker on behalf of the constituent.
· Found that the Petitioner was admittedly a share broker. Therefore, the decision of the Tribunal in the case of Hasmukh M. Shah would clearly apply.
· Held that the sale consideration of the shares sold by the Petitioner, on which the Petitioner earned commission/brokerage, was not the Petitioner's turnover. It was only the commission income earned by the Petitioner that could be rightly treated as its turnover for the purposes of Section 44AB.
· Since the Petitioner's commission income of Rs. 1,55,614/- fell well below the limit of Rs. 1 crore prescribed under Section 44AB for subjecting the books of accounts to audit, there was no case for the Petitioner to have got its books audited under the said section.
· The Tribunal held that there was no case for the levy of penalty under Section 271B on the Petitioner for not getting its books audited as required under Section 44AB.
· Therefore, the Tribunal found that the penalty of Rs. 1,50,000/- levied by the Assessing Officer and confirmed by the Commissioner of Income Tax (Appeals) was not sustainable and directed its deletion.
Relevant Sections:
Section 44AB of the Income Tax Act, 1961
Section 271B of the Income Tax Act, 1961
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