Every assessee carrying on business shall get its accounts audited if certain conditions are fulfilled and the same is true in the case of stockbroker and/or sub-broker. The principles enumerated below are equally important for considering the account amount of sale in their profit and loss account.
- Rules to consider a transaction as sale in case of stock broker / sub-broker
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 the 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 the case of transactions entered into by the 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 as far as accounting of revenue from broker activities is concerned.
In CIT v. Lallubhai Nagardas & Sons (1993) 204 ITR 93 (Bom) it was held that the transactions of sale purchase of shares done by the assessee as a stockbroker for and on behalf of his constituents were far in excess of the ceiling limit specified in section 44AB. If such transactions are to be considered as sales and turnover of the assessee, the case would be hit by the mischief of section 44AB. The point to be considered is the nature of the function and activities of a broker or an agent who brought the seller and buyer of the equity market together.
The word ‘turnover’ as appearing in section 44AB is not appropriate to the transaction which is done by an agent in the way of bringing together a buyer and a seller for brokerage or commission.
As a share broker, the assessee does not have any interest whatsoever in the goods agreed to be purchased or sold on behalf of his constituents.
In fact, a share broker is subject to the rules and regulations of the stock exchange, whose work is monitored and overseen by the SEBI so as to ensure transparency in the transactions entered into by the share broker on behalf of his principals.
Insofar as a share broker is concerned, he has no authority whatsoever to treat the goods as his own. His only interest in the goods is to receive his brokerage on the transaction from the principals.
The share broker would, therefore, not obviously come within the ambit of section 44AB.
- Analysis of sale (form No 3CD)
It would be useful to refer to the format of Form No. 3CD which contains the particulars required to be furnished by the assessee for the purposes of section 44AB.
Item at Serial No. 32 of the form refers to several accounting ratios like gross profit/turnover, net profit/turnover, and stock-in-trade/turnover. Obviously, the accounting ratio envisages the own turnover of the assessee, i.e., the realization of the sale price by the assessee in his own account which is to be considered for the purposes of arriving at the gross profit margin.
However, if the stockbroker is also engaged in buying and selling shares in his personal account then the sale value of such shares is also to be taken into account and aggregated with the brokerage to determine the limit specified in section 44AB.
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