Tax Audit Report Clause 32(e) - Deemed Speculation Business
Clause 32(e) - Understanding the Deemed Speculation Business under Explanation to Section 73:
Clause 32(e) of the tax audit report pertains to companies and specifically addresses whether a company is deemed to be carrying on a speculation business as outlined in the Explanation to Section 73 of the Income Tax Act. This clause requires careful examination of the company's business activities and understanding of the relevant provisions.
Explanation to Section 73 - Deemed Speculation Business:
The Explanation to Section 73 of the Income Tax Act provides insights into what constitutes a deemed speculation business for a company. It outlines that if any part of a company's business involves the purchase and sale of shares of other companies, that company will be considered to be carrying on a speculation business to the extent of the purchase and sale of such shares.
Understanding the Provisions:
Scope of Applicability: The provision applies to companies engaged in trading shares of other companies. However, there are exceptions for companies whose gross total income mainly comprises interest on securities, income from house property, capital gains, or income from other sources. Additionally, companies predominantly engaged in trading shares, banking, or granting loans and advances are excluded.
Deemed Speculation Business: The concept of a "deemed speculation business" is introduced through this Explanation. This means that even if a company's primary business is not speculation, it will be treated as such to the extent of its share trading activities.
Purpose: The purpose of this provision is to prevent companies from using speculative transactions to offset non-speculative business profits and consequently reduce their tax liability.
Role of the Auditor:
Understanding the Business Activities: The auditor's role is to comprehensively understand the nature of the company's business activities, particularly those related to the purchase and sale of shares. They need to determine if the company's activities fall within the scope of the deemed speculation business as per the Explanation.
Verification: The auditor is responsible for verifying the information provided by the company in terms of its business activities. This involves examining the company's books of accounts, income tax returns of previous years, and other relevant documents to ascertain the extent to which the company's business involves share trading.
Classification: Based on their understanding and verification, the auditor must determine whether the company is indeed deemed to be carrying on a speculation business under the Explanation to Section 73.
Accurate Reporting: The auditor's findings need to be accurately reported in the tax audit report. If the company is deemed to be carrying on a speculation business, this information must be disclosed in the report.
Conclusion:
Clause 32(e) and the Explanation to Section 73 highlight the intricacies of determining whether a company is engaged in a deemed speculation business due to its share trading activities. The provision aims to prevent tax manipulation through speculative transactions. The auditor's role is pivotal in accurately assessing the company's business activities, verifying the information, and appropriately reporting it in the tax audit report. This ensures compliance with tax laws and contributes to transparency in financial reporting.