We are getting enquiries on a regular basis from salaried employees who are also trading in stocks or Futures and Options (F&O) about filing Income tax returns and applicability of Tax audits on such transactions.
In this connection, we have made a modest attempt to address the issue in this article.
Trading in stocks or F&O, can be broadly classified into (a) Speculative business transaction and (b) Non Speculative transaction.
Speculative Transaction:
As per Section 43(5) of the Income Tax Act, 1961, any transactions relating to purchase and sale of commodity, shares and scripts settled without taking delivery (this means the purchase or sale won’t enter Demat account) will be treated as “Speculative transaction”. Thus, intra-day trading in stocks is a speculative transaction.
Non Speculative Transaction: Future and Options (F&O) Transaction
However, trading in derivatives and F&O transaction including commodity derivatives on a recognised stock exchange will not be considered as a speculative transaction (even though the delivery is not taken) and thus, F&O transaction is a Normal business transaction / Non-speculative transaction.
Applicability of audit in case of F&O transaction
Since income from F&O business or derivative trading is considered as normal business income, tax audit under section 44AB is applicable like in any other business transactions.
So, the right classification of Normal profit / speculative profit/loss is important for arriving correct tax liability as well as for carrying forward of losses to be setoff in future. (Note: Speculative loss can be set off only against speculative profits)
When is Tax Audit required for F&O transaction?
- Tax audit is not mandatory in case F&O trading turnover* does not exceed Rs. 1 Crore.
- If turnover exceeds Rs. 1 crore, Tax audit u/s 44AB will be applicable, if the net profit from such transactions is less than 6% of the turnover.
- If turnover exceeds Rs. 2 Crore, Tax Audit u/s 44AB is mandatory irrespective of profit or loss declared
*turnover – There is a weird way of computing the turnover in case of F&O transaction! Turnover would be the total of favourable and unfavourable of each squared transaction in a year and premium received on sale of option would only be added to turnover. For example, profit of Rs.6000 and Loss of Rs.4000, together (means Rs.10000) to be considered as the volume of turnover.
Are books of account required to be maintained?
Maintenance of books of account and Tax audit u/s 44AB of income tax is mandatory in case turnover from F&O transactions exceeds Rs. 2 Crore irrespective of loss or profit.
However, if F&O or derivative turnover is less than Rs. 2 crore, maintenance of books of account is mandatory if there is a loss or declared profit less than 6% of Turnover.
Penalty for not maintaining books of account and not getting tax audit from the chartered accountant:
- The penalty for non-maintenance of accounting records can be levied upto Rs 25,000 under Section 271A.
- Further, a penalty equal to lower of Rs 1.5 lakhs or 0.5% of gross receipts or turnover can be levied under Section 271B for not getting books of account audited under Section 44AB.
Tax benefits on losses in F&O transactions
The loss incurred for F&O transactions can be adjusted against rental or interest income and any unadjusted loss can be carried forward up to 8 years which can be set off against future business profit from any business including profit from F&O transactions.
Why one should compulsorily declare F&O loss in the income tax return
Taxpayers especially those who are salaried but trade in F&O, make the mistake of not reporting these in their tax return. While this may happen due to sheer ignorance; reporting all sources of income is mandatory. Your broker mandatorily reports all security transaction details to income tax department through filing return of Statement of Financial transactions (SFT) every year.
Non-declaration will attract notice from income tax department for non-compliance and liable to be penalised for non-maintenance of books of account and not getting and filing tax audit report along with income tax return.
If you have F&O transactions or Loss from F&O business, we Balakrishna and Co, audit firm in Bangalore help you in the following,
- Arriving correct F&O turnover and profit or loss from F&O and derivative business
- Reporting of F&O transactions and filing of Income-tax return
- Preparing Balance Sheet and Profit and Loss account for all business transactions for the purpose of income tax filing.
- Getting your books of account audited and filing of Tax audit report along with income tax return
Notice u/s 139(9) of income tax Act (Defective return)
When you are required to get books of account audited or when you are required to maintain a balance sheet and profit and loss statement but haven’t filled the same in ITR 3, you will certainly get a notice from CPC u/s 139(9) of Income Tax Act with following remarks
“Assessee has claimed loss under the head profit and gains of business or profession, however, he has to fill Balance Sheet and Profit and Loss account. In case assessee falls under section 44AD/44AE/44ADA. Assessee also has to get his books of account audited if the income offered is less than the prescribed limits as per the provisions of the Income Tax Act “
As discussed earlier audit is not mandatory if turnover is less than 1.00 crore, you have to file return (dully filled with Balance Sheet and Profit and Loss account) u/s 139(9) of Income Tax Act.
Please feel free to write to prakasha@balakrishnaandco.com for any requirement of Tax Audit and filing of the income tax return as well as return u/s 13(9) of the income tax act. We would be happy to be of your assistance.
