Derivative turnover calculation error leads to penalty removal

The Tribunal ruled that turnover in derivative transactions should be calculated based on positive and negative outcomes, not total transaction volume. As the AO incorrectly computed turnover, the penalty under section 271A was deemed unjustified. The penalty of Rs. 25,000/- was removed, and the appeal was granted in favor of the assessee.

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Issues Involved:
1. Whether the penalty under section 271A of the IT Act for non-maintenance of books of account was justified.
2. Whether the turnover in respect of derivative transactions was correctly computed by the AO.

Issue-wise Detailed Analysis:

1. Penalty under Section 271A for Non-Maintenance of Books of Account:

The appeal concerns the penalty levied under section 271A of the IT Act for the assessment year 2015-16, which was confirmed by the ld. CIT (A). The assessee contended that the penalty was unjustified as they derived income solely from shares derivative transactions and had provided all necessary documents such as ledger accounts, bank statements, and contract notes from their broker. The AO had assessed the income at the returned figures, indicating acceptance of the provided documents. The assessee argued that there was no failure as described under section 271A, and hence, the penalty should be quashed.

During the assessment proceedings, the AO noted that the assessee had a turnover of Rs. 47.86 crores from share transactions but did not maintain proper books of account. Consequently, the AO initiated proceedings under sections 271A and 271B for non-maintenance and non-auditing of books of account, respectively. The ld. CIT (A) deleted the penalty under section 271B but upheld the penalty under section 271A.

2. Computation of Turnover in Derivative Transactions:

The assessee contended that the AO incorrectly computed the turnover by considering the total amount of transactions instead of the positive and negative outcomes of derivative transactions. The ld. CIT (A) accepted that the turnover of F&O transactions was Rs. 53,54,967/-, and therefore, the assessee was not required to get accounts audited under section 44AB.

The ld. D/R argued that the assessee did not provide specific details during the assessment and penalty proceedings to support the claimed turnover of Rs. 28,20,974/-. The AO noted a turnover of Rs. 47.86 crores, and the evidence presented by the AO was deemed significant.

The Tribunal noted that consistent views have been taken that turnover in derivative transactions should be computed by summing the positive and negative outcomes rather than the total transaction amount. Citing the case of Santosh Kumar vs. ITO, the Tribunal emphasized that the turnover in speculative transactions should be the aggregate of positive and negative differences, as per the ICAI's guidance note on tax audit under section 44AB.

The Tribunal also referenced earlier decisions, including the case of Shri Rajjak Ahmed Khan vs. ITO, which supported this method of turnover computation. The Tribunal concluded that the AO incorrectly considered the turnover, leading to an unjustified penalty under section 271A. Furthermore, the Tribunal noted that when the issue is debatable, the assessee cannot be penalized, invoking section 273B, which provides relief from penalties if the failure was due to a reasonable cause.

Conclusion:

The Tribunal held that the turnover should be computed by considering the positive and negative outcomes of transactions, not the total volume. As the turnover was incorrectly computed by the AO, the penalty under section 271A was unjustified. The penalty of Rs. 25,000/- was deleted, and the appeal was allowed. The order was pronounced in the open court on 07/09/2020.

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