Guidance Note on Tax Audit

on 07 March 2008

Guidance Note on Tax Audit - Issued by ICAI



(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 scripts. 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 doing speculative transactions there can be both positive and negative difference 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 amount 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 transaction for determining the liability to audit vide section 44 AB.

(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 sole 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:

  1. The total of favourable and unfavourable differences shall be taken as turnover.
  2. Premium received on sale of options is also to be included in turnover.
  3. In respect of any reverse trades entered, the difference thereon, should also from 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 sale 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 curse 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. For this attention is invited to the following judgments where this issue has been considered.

  1. CIT v P.K.N. and Co., Ltd (1966) 60 ITR 65 (SC)
  2. Saroj Kumar Mazumdar v CIT (1959) 37 ITR 242 (SC)
  3. CIT v Sutlej Cotton Mills supply Agency (1975) 100 ITR 706 (SC)
  4. G Venkataswamy Naidu(1959) 35 ITR 591 (SC)

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 be included in sales or turnover for deciding the applicability of audit under section 44 AB. 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 44 AB.


Published in Income Tax
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