Tax Audit Applicability under section 44AB

Tax audit is applicable to certain classes of individuals which are mentioned under section 44AB of the I-T Act. Thus, as per the regulations of section 44AB of the Income Tax Act, 1961, following is the one of the list point which outlines the classes of people who have to compulsorily follow the income tax audit procedures and get their accounts audited:

  • An individual who is engaged in business and the annual turnover of his/her business is Rs 1 crore and above.

DETERMINATION OF TURNOVER IN CASE OF TRADING OF SHARES EITHER ON SPECULATION OR NON SPECULATION BASIS 

1. The broad legal positions are as follows- Dealing in shares whether Investment or Business

Dealing in shares can result either in “Business income” (chargeable as Profits & Gains of Business or Profession chargeable under section 28 of the Income Tax Act, 1961) or “Capital Gains” (chargeable under Sec.45 of the Act). Thus, dealings in shares could either be in the course of business – chargeable as Business Income, OR for the purpose of investment – chargeable as Capital Gains. Classification into Business Income and Capital Gains depends on facts & circumstances of each case. However, as a very broad guideline, as held in many cases, it can be said that – ordinarily, the purchase and sale of shares with the motive of earning a profit, would result in transaction being in the nature of trade, but where the object of investment in shares of a company is to derive income by way of dividend etc., then the profit accruing by sale of shares will yield capital gains and not revenue gains (business income).

2. Explaining Speculation and Non Speculation Business:

Trading in shares can be of two types namely

A) Delivery based trading

B) Non delivery based (also called intraday trading)

2.1. DELIVERY BASED TRADING:

Under this type of trading, the share transaction is said to be complete only when there is actual delivery of shares/securities upon the settlement of transaction i.e. in other words, when shares are purchased/ sold on delivery basis, then those shares will be transferred to/from Demat account of the buyers/sellers. The buyer of the share will have to pay the full value of share and the share will become his asset with that either he can trade in his business or hold for investment.

2.2. NON DELIVERY BASED TRADING (or intraday trading):

Intraday trading by the name itself one can get a view that it refers to the trading system where the traders have to square-off their trade on the same day. Squaring off the trade means that the traders have to do the buy and sell or sell and buy transaction on the same day before the market close. In other words in this trading, shares are not actually transferred to the DEMAT account of the buyer instead they have to square off their position before the market close on same day by selling the same number of shares. The buyer of the shares will not pay the full value of shares instead he will pay only the difference margin arising on account of such buy/sell transaction.

“As per Section 43(5) of the Income Tax Act, 1961, intra-day trading shall be considered as speculation business transactions and the income therefrom would be either speculation gains or speculation losses. Income from speculation gains is taxed at the normal rates.”

However  Income from trading F&O (both intraday and overnight) on all the exchanges is considered as non-speculative business income as it has been specifically defined this way. F&O is also considered as non-speculative as these instruments are used for hedging and also for taking/giving delivery of underlying contract. Even though currently almost all equity, currency, & commodity contracts in India are cash settled, but by definition they give rise to giving/taking delivery (there are a few commodity future contracts like gold and almost all agri-commodity contracts with delivery option to it).Income from shorter term equity delivery based trades (held for between 1 day to 1 year) are also best to be considered as non-speculative business income if frequency of such trades executed by you is high or if investing/trading in the markets is your main source of income.

3. Turnover or gross receipts in respect of transactions in shares,securities and derivatives may be determined in the following manner:

As per  Para 5 of “Guidance Note on Tax Audit under Section 44AB of the Income Tax Act,1961” issued by The Institute of Chartered Accountants of India (ICAI), which provides the guidelines regarding “Turnover or Gross Receipts in respect of transactions in shares..” as follows:

Speculative transaction

“The Turnover is net of all positive and negative income from various transaction and not total of all Sales transaction.So if your Net Income > 1 Crores rs., you are liable to tax audit.”

Derivatives, futures and options (Non-Speculative Transaction)

“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.(i.e suppose in 1st transaction you have incurred loss of rs.65 Lac and after that you entered in profit transaction in which you have earned rs 36 Lac,Then as per this guidance note you are liable to tax audit because total of  of Profit and Loss a/c exceed Rs.1CR)

(ii) Premium received on sale of options is also to be included in turnover.(Call or Put Premium paid/received)

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

Checkout the role of Section 44AD : Presumptive taxation here

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3 responses to “Turnover Calculation for Speculative & Non-Speculative Transaction U/s. 44AB”

  1. CA KALWANI says:

    Dear Vaibhav,
    This is with respect to “Guidance Note on Tax Audit under Section 44AB of the Income Tax Act,1961″ issued by The Institute of Chartered Accountants of India (ICAI), which provides the calculation of turnover for Option trading, even though there is double calculation. This might be because of Sec 44 AB which Specified, Every person,—
    carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds one crore rupees in any previous year. Option premium receipt considering as gross receipt of business.

  2. CA PANKAJ GOEL says:

    In case of Speculative transaction the aggregate of both positive and negative differences is to be considered as the turnover of such
    transactions for determining the liability to audit vide section 44AB…..Hence Netting is not allowed for the purpose of Turnover u/s 44AB

  3. vaibhav says:

    Sir, if u could clear my doubt that while trading in options.
    For e.g. purchased option for Rs10000 and sold it for 15000, then my turnover would be 5000 or 5000 plus premium received on selling option, i.e. total 5000+ 15000= 20000.
    As u have written above.
    Because that way there will be double calculation of 5000.
    Thanks in advance.

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