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A very important change has been made by ICAI in the methodology of determining ‘turnover’ for Future & Option (F & O) transactions.

ICAI’s 2014  Guidance note on Tax Audit had prescribed methodology for  F & O  turnover 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.

ii. In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.

The revised Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 AY 2022-23 is now prescribing (para 5.14 clasue (b), page 17)  that :

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. However, where premium received is included for determining net profit for transactions, the same should not be separately included.

iii. In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.

In the earlier methodology, premium received in case of sale of options was getting included twice, first as part of “favourable and unfavourable differences” in clause (i) and then again for the purposes of clause (ii).

Now in the revised methodology, clause (ii) has been amended and the requirement of considering  the premium received on sale of option as part of the turnover has been done away with,  if the same has been considered for determining net profit for transaction.

Thus after this change, the premium received on sale of option is to be included in the turnover only at one place i.e. either under clause (i) -as part of  favourable and unfavourable differences or separately under clause (ii).

As the Guidance note 2022 is applicable for all tax audits related with AY 2022-23 onwards, this new methodology would be applicable for all F & O transactions of FY 2021-22 and subsequent years.

It is interesting to note that despite F & O transactions notching up huge volumes in the country, Income tax Act is stubbornly  silent on the meaning  of “turnover” for the same and one has to resort to Guidance  Note of ICAI on this very important aspect.

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