Query I AM engaged in the buying and selling of shares. I take delivery of the shares purchased and also deliver the shares at the time of sale. In such a case, how is the turnover to be reckoned for the purpose of determining whether a tax audit under Section 44AB is to be done? Is it the aggregate amount of sale that has to be taken as the turnover?
Reply
In the instant case, since the purchase and sale of shares are delivery based, the gross sale value has to be taken as the turnover. Therefore, if the gross sale value exceeds Rs 100 lakh, a chartered accountant must conduct a tax audit under Section 44AB. It is understood that you are a regular trader in shares carrying on the business of buying and selling of shares.
I am engaged in buying and selling of shares. I do not take delivery of the shares and these transactions are speculative in nature. What is to be taken as the turnover for the purpose of determining whether a tax audit is required in such cases? Are short-term and long-term capital gains to be taxed under the same head? Is a speculative business also to be taxed under the head capital gains? Can expenditure, such as depreciation on assets such as computer, air-conditioner, furniture and postage, telephone, conveyance, and so on, be claimed against speculative income? Can a business loss be set off against salary income?
Reply
In this case, since the transactions in shares are non-delivery based, it is only the net of the sales and purchases that is to be treated as turnover. Tax audit under Section 44AB would be required only if the turnover so computed exceeds Rs 100 lakh. You may refer to the decision of the Mumbai Bench of the Tribunal in the Babu Lal Enterprises vs ACIT (ITA NO.6031/MUM/1996) case as also the ruling in the Royal Cushion Vinyl Products Ltd case.
Both short-term and long-term capital gains are to be taxed under the head `capital gains’. Any profits and gains from a speculative transaction is to be taxed under the head `profits and gains of business or profession’. In case of speculative transaction, all expenditure allowable under Sections 30 to 38 can be claimed since the charge arises under the head `profits and gains of business or profession’.
You can claim expenses, such as postage, conveyance and telephone, incurred by you for carrying on the business. You can also claim depreciation on assets used for the business or profession. You may, however, note that a loss, if any, from a speculation business cannot be set off against income from other sources or other heads. It can only be set off against speculation income and the balance, if any, after such set off, can be carried forward and set off against speculation income within four assessment years immediately succeeding the assessment year in which the loss was first computed.
In case of business loss not being a speculative loss, it can be set off against income from other sources or other heads. It cannot, however, be set off against income under the head `salaries’. The balance, if any, can be carried forward and set off against business income within eight assessment years immediately succeeding the assessment year in which the loss was first computed. Unabsorbed depreciation can, however, be set off and carried forward and set off without any restriction either in the manner of set off or the timeframe for such set off.
Query
In case of `options’ and `futures’, is the gain or loss to be treated as speculation loss?
Reply
The gain or loss from dealing in `options’ and `futures’ will not be treated as a speculation loss. This will be so because of the provisions of Section 43(5) of the Act.
Under section 43(5) of the Income Tax Act, 1961 an eligible transaction in respect of trading in derivatives referred to in clause [(ac)] of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange will not be treated as speculative transaction despite not been settled by actual delivery.
1. Eligible transaction in respect of Section 43(5) means any transaction:-
(a) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and
(b) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act;
2. “Recognised stock exchange” means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose;
Query
How is turnover in Futures and options transactions calculated?? If notional value is considered, even 5-10 transactions will exceed 100L turnover and we need go through tedious Tax audit process.
Reply
The meaning of turnover for in case of transactions in Futures and Options of shares is not defined under the I T Act In case of derivative trading-Futures and Option- the difference on which the contract is purchased or sold is important. Although the value of contract is number of contract multiplied with the shares price , yet what is actually given or taken is differential amount in contract. For example if you purchase a future contract for Rs 105 for a share having a lot of 100,you pay nothing at the time of buying a contract, yet at the time of expiry if contract , you are either gainer or loser which is determined whether there is positive or negative difference. So , for the purpose of determining the turnover in case of future and options , for the purpose of 44AB , based on the guidance note of ICAI, following items should be considered to constitute turnover:-
- The total of positive and negative differences
- Premium received on sale of options is also to be included in turnover
- In respect of any reverse trades entered, the difference thereon But not the total value of contract.
(Republished With Amendments)
My client is dealing in sale of currency and his total sale in FY 2018-19 is Rs 37 crore and purchase is Rs 38 crore, whether he is liable for audit u/s 44AB?
Dear TAXGURU,
You have MISQUOTED the income tax law: by adding the word “PLUS” between (i) and (ii).
Check it for yourself. Thank you.
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 sold 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:
(i) The total of favourable and unfavourable differences shall be taken as turnover.
(ii) Premium received on sale of options is also to be included in turnover.
(iii) In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.
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You have MISQUOTED the income tax law: by adding the word “PLUS” between (i) and (ii).
Thank you !
Dear sir,
I am engaged in buying / selling in option segment , i just want to know is there any turnover limit above which I have to go for audit ?
Kindly Provide your guidance.
Regards.
What if the difference (ie.net gain or loss) in futures and options is negative, then whether tax audit is applicable as the difference is less than 100 lakh?
Pl guide me on how to calculate the turnover in case of Options trading carried out by me during the financial year 2017-18. I have incurred a loss of around 1.20 lakhs in options trading. Whether tax audit is required to be done as per IT laws?
Can i simplify the turnover issue as per my understanding. Download end-of day of end of year statement from the broker’s page in Excel, then in profit and loss column delete all “-” characters, and sum-up the column. What you get as result is the turn-up. Can i understand my F&O trading turnover this way? Or if i add all exchange sent end of day settlement value on both buy and sell side then that is a HUGE AMOUNT… beyond my imagination.
Hi,
My buy value (9300000) & sell value (9350000) this includes intraday & short term delivery which is below 360 days. So will my turn over be sum of buy & sell or the one which is higher? If it is the sum of buy and sell then do I require a Audit for taxation?
Respected Experts,
Please review my calculation of turnover from option trades for the purpose of applying provisions of sections 44AB and 44AD. All the trades assume quantity traded as one.
1. Short Sell option contract1 for value Rs 100. The option expired worthless (hence effective buy price = 0). Turnover = ABSOLUTE (100 – 0) = 100
2. Buy option contract2 for value Rs 50. The option expired worthless (hence effective sell price = 0). Turnover = ABSOLUTE(0 – 50) = 50
3. Short Sell option contract3 for value Rs 100. Five days later, Buy it back for Rs 10. Turnover = ABSOLUTE(100 – 10) = 90
Total Turnover = 100 + 50 + 90 = 240 Please provide the correct calculation if I am making a mistake
Because the guidelines as per IT act for all non-speculative transactions say that turnover to be determined as follows:
The total of favorable and unfavorable differences shall be taken as turnover
Premium received on sale of options is also to be included in turnover
In respect of any reverse trades entered, the difference thereon should also form part of the turnover.
Some are saying the Turnover should be calculated as follows:
4. Buy option contract4 for value Rs 50. Five days later, Sell it back for Rs 70. Firstly, the favorable/unfavorable difference or profit/loss ABSOLUTE(70 – 50) = 20 is the turnover. But premium received on sale also has to be considered turnover, which is Rs 70. So total turnover on this option trade = 20 +70 = Rs 90.
5. Short Sell option contract5 for value Rs 100. Five days later, Buy it back for Rs 10. Turnover = Firstly, the favorable/unfavorable difference or profit/loss ABSOLUTE(100 – 10) = 90 is the turnover. But premium received on sale also has to be considered turnover, which is Rs 90. So total turnover on this option trade = 90 +90 = Rs 180.
I think for derivatives trading the turnover is defined as Settlement profits or losses (in case of futures and in case of option again same) unless you write the option and receive premium then premium amount is turnover where the 2nd clause of the guidelines comes into effect “Premium received on sale of options is also to be included in turnover”.
Please let me know if Examples 1,2,3 are correct or Examples 4, 5 are correct for calculation of Turnover ?
Appreciate your quick response on this query!
The examples 1 to 5 are excellent to make the experts spell out clearly the correct method for calculation of Turnover in Options. There is no need to confuse and terrorize the retail traders.
Sir,
merged ledger for equities and future options from HDFC AND sharekhan does not give total turn over to decide for Audit. Futur and options money completely lost and equity were also lost first time `My bank statements indicate this. On top of that turn over audit is to be done. we never invested including shares more than 30 laks and we lost every thing. Not able to get clear information how to calaculate turn over.when ther is no profit and we have no intention of loss carrying forward , this additional expensive punishment of audit to be carried out. our bank balance almost nil and our trading are through bank only.
tata sarma
Speculation Income should come under Business Income. You need to file return in ITR 4.
This query regarding turnover calculations in case one buys and sells ‘OUT OF MONEY’ options.
If premium that is received is added to turnover the turnover becomes very large. I presume that the sale price in case of out of money option is equal to premium received.
As per your link positive and negative result of trade plus premium received is turnover.
Example
option sold 105 bt 55 profit 55 Positive figure
option bt 105 sd 50 loss 55 Negative figure
As per my calculations,
Turn over is 55+55+105+50=265
TURNOVER IS RS 265
Deemed profit/income is 8% of turnover ie 21.2.
I want to know if my turnover calculations of rs 265 is correct
Thanks,
GOPAL
Please check ICAI guidance on tax audit for F & O turnover purpose.
resource.cdn.icai.org/30357dtc19988.pdf
Kindly go through the link and find the related stuff on page no. 24
If the differnece of the F&O of contracts below 1 crore and there is a net loss with salary income of rs400000.then 44AB section should apply or not?.If 44AB apply then how to prepare P&L account(sales and purchase amounts which mount to be taken)
THE PROFIT OR LOSS ON F&O TRANSCATION OR TOTAL TRANSATION IS TREATED AS BUSINESS INCOME. IN YOUR CASE THOUGH YOUR TURNOVER IS LESS THAN 100 LACS BUT THERE BEING A LOSS THE SECTION 44AD WILL APPLY AND YOU HAVE TO GET YOUR ACCOUNTS AUDITED SINCE 8 % OR 6% PROFIT IS NOT DECLARED. ACCORDING TO ME 44AD APPLIES.
I’m a salaried employee and have income from salary and some savings account interest.
In addition, I’ve done some investment in shares and my statement shows 2 sections (a) Short term capital gain & (b) Speculation Income.
STT is paid for both of these.
Question: Which ITR should I file (ITR-2 or ITR-4)? If ITR-2, then does Speculation income go under income from other sources and taxed as per my tax slab or since STT is paid, does it qualify under STCG?
I’ve no study done yet on ITR-4 as to which sections I’ll have to file these incomes, if ITR-4 is the appropriate form?
Thanks and regards,
Mr. Joshi
Sir I am trading in future and options. My profit is in lakhs but the turnover in in crores. Do i need to get my account audited and if not how should I calculate the turnover. In an urgent need for the sollution.
Thankyou
i have got loss in futre and option in assesment year2009-10 rs 552152.00 .in against of this i get business profit 1420511.00 in same year. so i deduct the f&o loss from business income. did i done right ? i am writing you with figure in rs so please clear me.as per IT LAW i have done right or wrong ? PLZ LET ME KNOW .
1. Can I claim genuine salary expense paid to friend for helping in trading shares and also maintaining the records.
2. If using a combination of delivery based trading, day trading and F&O, then how to maintain the accounts / turnover.
lost in f&o arount 2 lacs but turover is 40 lacs how to compute 8%
Sir, If the loss in the F&O is claimed against other source of Income, an audit of the account is mandatory? Thanks.
Sir, I have a loss in F&O. In ITR4 what is the Purchase & Sale value to be disclosed? Is it Loss amount as Purchase and Profit amount as Sales? Kindly reply.
To calculate turnover you have stated that difference has to be considered, my query is whether there is any circular or any other reference to support your above contention.
Secondly, what is the purchase & sale value to be disclosed in ITR4 (Loss amount as purchase & profit as sale OR total of all sales contract as sales & purchase contract as purchase).
I am highly grateful for the information provided in the answers to the questions with regard to calculation of turnover in so far as the transactions in derivatives is concerned. You are indebted to heartiest thanks once again. Would like to keep myself informed about such topics, pl suggest your website, if any.
With warm regards,
Dear sir, please send me some information on tax audit of cases related to derivative tradings u/s 43(5)(d) of income tax act.
My client is trading in futures. Even though the margin is in lakhs, the turnover is in crores. pls let me know the turnover to be shown as per companies act.1956. If there any standard/reference, kindly provide.
Thanks in advance
Dear Sir,
i always like to read your articles & answers.
In the above subject i have one query. Is sec 44AD covers F&O business? and if yes then how to calculate 8% of receipts ? Please reply
whoah this weblog is magnificent i love studying your articles.
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information, you could aid them greatly.
whether loss in futures and options which is non speculative trading can be adjusted agains short term capital gains or other sources of income
WHETHER PENALTY U/S 271B CAN BE LEVIED IF THE A.O TREATS SHORT TERM CAPITAL GAIN AS BUSINESS INCOME.