Application of section 44AB to a stock broker.
1.A partnership firm is acting as brokers for purchase/sale of shares and debentures of various companies on delivery as well as forward (clearing) basis.
2.The said firm, on receipt of orders from its customers for purchase/sale of shares/ debentures, passes the same on to its brokers at various stock exchanges in India. On receipt of confirmation of transactions from its brokers, this firm issues contract notes for purchase/sale to its customers. The contract note is issued for total price of share/debenture inclusive of brokerage. Suppose, a purchase is confirmed at Rs. 20/- at a Stock Exchange, this firm will receive a contract note for, say, Rs. 20.25 from its own broker and will issue a contract note for, say, Rs. 20.50 to its customer.
3.When the securities are delivered to the purchasers, this firm raises its own in voice for full value of securities and receives the payment. However, in the books of account only brokerage is accounted for.
4. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(a) Whether only brokerage income which is accounted for in the books of account of this firm should be taken into account for considering the limits of Rs. 40.00 lacs / Rs. 10.00 lacs for the purpose of section 44AB of the Income-tax Act, 1961, or the entire value of purchases/ sales effected by this firm should be considered for the above purpose.
(b) In either case, which limit would apply for the above purpose, i.e., whether Rs. 10.00 lacs or Rs. 40.00 lacs?
Opinion November 23, 1989
1.The Committee notes that para 4.9 of the ‘Guidance Note on Tax Audit under Section 44AB of the Income Tax Act’ (2nd Edition, 1989), issued by the Institute of Chartered Accountants of India, states as follows: “4.9 Question may arise as to whether the sales by a commission agent or by a person on consignment basis should form a part of the sales/ turnover of the commission agent and / or consignee as the case may be. In such cases, it would be necessary to find out whether the property in 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 sales/ turnover. In this context, it would be useful to refer to the CBDT Circular No. 452, dated 17th March, 1986, where the Board has clarified the question of applicability of section 44AB in the cases of Commission Agents, Arhatias etc. The Circular is published in Appendix I.”
2.The Committee also notes Circular No. 452 dated 17.3.1986, issued by Central Board of Direct Taxes which is reproduced in Annexure A. The Committee is of the view that the position of share broker is in many ways similar to that of a Kachha Arhatia as:
- The share broker is an agent of his customer.
- The remuneration of stock broker consists solely of commission and he is not interested in the profits and losses made by his client.
- The share broker does not have any personal interest in the transactions which he enters other than his commission.
- No profit or loss occurs to a share broker because of the transactions entered by him.
3. The Committee notes that only the members of a stock exchange can transact business at the stock exchange. A non-member can purchase or sell shares and other securities only through the members. The share brokers charge commission on the transactions entered by them on behalf of their clients. They charge commission both on sales and purchases. They act as intermediaries between a buyer and a seller. The share broker guarantees payment to a seller upon delivery of shares and charges a commission for this. Similarly, he guarantees delivery of shares upon payment to the buyer and again charges commission for this. The interest of the share broker in the transaction is to the extent of:
(a) Ensuring delivery to the buyer on payment.
(b) Ensuring payment to the seller on delivery of shares.
(c) Commission on above. 4.The Committee also notes that the share brokers, on purchasing the shares/debentures on behalf of their customers, do not get them transferred in their own name but deliver them to the customers who get them transferred in their name. The same is true in case of sales also. Thus, the share broker holds the delivery merely on behalf of his customer. Therefore, in the view of the Committee, the property in goods does not get transferred to the share brokers.
5.The Committee also notes paras 4.11 & 4.12 of the above mentioned Guidance Note, which state, inter alia, as under:
“4.11 The following items would not form part of “gross receipts in business” for purposes of Section 44AB of the said Act: …………
viii) In the case of a travelling agent, the amount received from the clients for payment to the airlines, railway etc., where such amount are received by way of reimbursement of expenses incurred on behalf of the client; and…………….
“4.12 Thus, the principle to be applied is that, if the assessee is merely reimbursed for certain expenses incurred, they will not form part of his gross receipts. But in the case of charges recovered which are not by way of reimbursement of the actual expenses incurred they will form part of his gross receipts.”
The Committee is of the view that the position of a share broker is similar to that of a traveling agent as the share broker receives the amount from his clients as reimbursement of expenses incurred on their behalf.
6.The Committee notes paras 3.1 and 3.2 of the ‘Guidance Note on Tax Audit under Section 44AB of the Income Tax Act’ which state, inter alia:
“3.1 The expression “Profession” involves the idea of an occupation requiring purely intellectual skill or manual skill (works of art or surgery) controlled by the intellectual skill of the operator, as distinguished from an operation which is substantially the production or sale or arrangements for the production or sale, of commodities. Profession is a word of wide import and includes “Vocation” which is only a way of living [CIT v. Ram Kripal Tripathi 125 ITR 408 (Allahabad)]. The word ‘business’ is wide enough to cover profession [Barendra Prasad Ray v. ITO (1981) 129 ITR 295 (SC)].
3.2 Whether a particular activity can be classified as ‘business’ or ‘profession’ will depend on the facts and circumstances of each case…….”
In the view of the Committee, the activity of a share broker does not represent any intellectual skill or any manual skill. The sharebroker only sells and purchases the securities. The Committee is, therefore, of the view that the sharebroker shall be considered to be carrying on business and, therefore, the limit of Rs. 40.00 lakhs shall apply to the firm of share brokers.
7.On the basis of the above, the opinion of the Committee on the issues raised by the querist is as below:
(a) Only brokerage which is being accounted for in the books of account of the firm of share brokers should be taken into account for considering the limits for the purpose of section 44AB of the Income-tax Act, 1961. However, in case of transactions entered into by sharebroker on his personal account, the purchase/sale value should also be taken into account for considering the limit for the purpose of section 44AB.
(b) The firm of share brokers should be considered to be carrying on business and, therefore, the limit of Rs. 40 lakhs would apply.
Annexure ‘A’
CIRCULAR NO. 452, DATED 17.3.1986
Subject: Section 44AB of the Income-tax Act, 1961- Applicability in the cases of Commission Agents, etc.- Clarification Regarding.
1.Section 44AB of the Income-tax Act, 1961, as inserted by the Finance Act, 1984, casts an obligation on every person carrying on business to get his accounts audited, if his total sales, turnover or gross receipts as the case may be, exceed Rs. 40 lakhs in any pervious year relevant to the assessment year commencing on 1.4.1985 or any subsequent assessment year.
2.The Board have received representations from various persons, trade associations, etc., to clarify whether in cases where an agent effects sales/turnover on behalf of his principal, such sales/turnover have to be treated as the sales/turnover of the agent for the purpose of Section 44AB of the Income-tax Act, 1961.
3.The matter was examined in consultation with the Ministry of Law. There are various trade practices prevalent in the country in regard to agency business and no uniform pattern is followed by the commission agents, consignment agents, brokers, kachha arahtias and pacca arahtias dealing in different commodities in different parts of the country. The primary necessity in each instance is to ascertain with precision what are the express terms of the particular contract under consideration. Each transaction, therefore, requires to be examined with reference to its terms and conditions and no hard and fast rule can be laid down as to whether agent is acting only as an agent or also as a principal.
4.Board are advised that so far as kachha arahtias are concerned, the turnover does not include the sales effected on behalf of the principals and only the gross commission has to be considered for the purpose of Section 44AB. But the position is different with regard to pacca arahtias. A pacca arahtia is not, in the proper sense of the word, an agent or even del credre agent. The relation between him and his constituent is substantially that between the two principals. On the basis of various Court pronouncements, following principles of distinction can be laid down between a kachha arahtia and a pacca arahtia: -
(i) A kachha arahtia acts only as an agent of his constituent and never acts as a principal. A pacca arahtia, on the other hand, is entitled to substitute his own goods towards the contract made for the constituent and buy the constituent’s goods on his personal account and thus he acts as a principal as regards his constituent.
(ii) A kachha arahtia brings a privity of contract between his constituent and the third party so that each becomes liable to the other. The pacca arahtia, on the other hand, makes himself liable upon the contract not only to the third party but also to his constituent.
(iii) Though the kachha arahtia does not communicate the name of his constituent to the third party, he does communicate the name of the third party to the constituent. In other words, he is an agent for an unnamed principal. The pacca arahtia, on the other hand, does not inform his constituent as to the third party with whom he has entered into a contract on his behalf.
(iv) The remuneration of kachha arahtia consists solely of commission and he is not interested in the profits and losses made by his constituent as is not the case with the pacca arahtia.
(v) The kachha arahtia, unlike the pacca arahtia does not have any dominion over the goods.
(vi) The kachha arahtia has no personal interest of his own when he enters into a transaction and his interest is limited to the commission agent’s charges and certain out of pocket expenses whereas a pacca arahtia has a personal interest of his own when he enters into a transaction.
(vii) In the event of any loss, the kachha arahtia is entitled to be indemnified by his principal as is not the case with pacca arahtia.
5.The above distinction between a kachha arahtia and pacca arahtia may also be relevant for determining the applicability of Section 44AB in case of other type of agents. In the case of agents whose position is similar to that of kachha arahtia, the turnover is only the commission and does not include the sales on behalf of the principals. In the case of agents of the type of pacca arahtia, on the other hand, the total sales/turnover of the business should be taken into consideration for determining the applicability of the provisions of Section 44AB of the Income-tax Act.
6.These instructions may please be brought to the notice of all officers under your charge.
7. Hindi version will follow shortly.
Sd/-(Girish Dave) Under Secretary to the Government of India
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