FAQ on tax audit in case of derivative transaction
Question: How to file income tax return in case of profit/loss from F&O trading? Do we get our accounts audited in case of loss from F&O Trading?
I will try to answer all questions relating to F&O Trading through this article so that it can be of help to people in filing income tax returns.
Ques: What is the treatment of profit/loss from F&O Trading in the income Tax Return?
Ans: For the answer to the above question, We have to refer to Section 43(5) of the Income Tax Act’1961,the relevant extract of which is reproduced below:
“speculative transaction” means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips:
Provided that for the purposes of this clause—
(d) 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; 76[or]
[(e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognised association [, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013),]]
shall not be deemed to be a speculative transaction.
[Explanation 1].—For the purposes of [clause (d)], the expressions—
(i) “eligible transaction” 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;
(ii) “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;
[Explanation 2.—For the purposes of clause (e), the expressions—
(i) “commodity derivative” shall have the meaning as assigned to it in Chapter VII of the Finance Act, 2013;
From the reading of the above it is clear that trading in derivatives including commodity derivatives on a recognised stock exchange will not be considered as a speculative transaction and hence not treated as speculative business.
Therefore since these are not considered as speculative business, therefore income from such transactions will be considered as normal business income and loss from such transactions will be considered as normal business loss.
Applicability of Tax Audit in case of derivative (F&O) Trading
Since income from derivative trading is considered as normal business income, therefore normal rules as applicable to tax audit as stated in section 44AB will be applicable in case of F&O trading also.
Therefore, the applicability of tax audit will be as follows in case of F&O Trading:
1) In case of Profit from transactions of F&O trading
- In the case of profit from derivative transactions, tax audit will be applicable if the turnover from such trading exceeds Rs. 1 crore.
- Tax audit u/s 44AB r/w section 44AD will also be applicable, if the net profit from such transactions is less than 8% of the turnover from such transactions.
2) In case of Loss from F&O Trading
In case of Loss from derivative trading, since profit (Loss in this case) is less than 8% of the turnover, therefore Tax Audit will be applicable u/s 44AB read with section 44AD.
Calculation of turnover in case of F&O Trading
Determination of turnover in case of F&O is one of the important factors for every individual for the income tax purpose. Turnover must be firstly calculated, in the manner explained below:
- The total of positive and negative or favorable and unfavorable differences shall be taken as turnover.
- Premium received on sale of options is to be included in turnover.
- In respect of any reverse trades entered, the difference thereon shall also form part of the turnover.
Here, it makes no difference, whether the difference is positive or negative. All the differences, whether positive or negative are aggregated and the turnover is calculated.
Expenses
Expenses such as postage, conveyance and telephone, incurred for carrying on the business can be claimed as business expenses. You can also claim depreciation on assets used for the business or profession.
Maintenance of Books of Accounts in case of F&O Trading
Since income from F&O Trading is considered as normal business income, therefore normal rules for the maintenance of Books of accounts as stated in section 44AA of the Income Tax Act’1961 are applicable. These rules can be summarised as follows:
1) If there is loss in F&O trading or the Net profit is less than 8% of the turnover or the turnover exceeds Rs. 1 crore, then provisions of Tax Audit are applicable and in order to get tax audit done, maintenance of books of account are mandatory.
2) if there is a profit in F&O and the profit is 8% or more of total turnover , then only the income has to be declared as business income and accordingly ITR has to be filed. There will be no need to maintain books of accounts.
Provisions relating to filing of Income Tax Return
Since income from F&O trading is to be treated as business income, therefore an individual filing return with F&O trading income has to file ITR in form ITR 4.
Depending on the requirement to get the accounts audited as per section 44AB & 44AD, the due date for filing the return of income will be as follows:
If Tax Audit is applicable: Due date will be 30th September of the Assessment Year (30.09.2016 for AY 2016-17).
If Tax Audit is not applicable: Due date will be 31st July of the Assessment Year (5th August for the current assessment year i.e 05.08.2016 for AY 2016-17).
Carry forward & and set off of Loss
The set-off and carry forward of loss from F&O transactions is also one of the most important questions asked by people. The provisions relating to set-off and carry forward of F&O Loss are as follows:
If there is a loss in F&O and you are claiming the same in the Income Tax return then:
You should file it before due date to carry forward the loss and set off from income in future.
However, there are case laws which prohibit the carry forward and set-off of loss from F&O transactions stating share derivative transactions carry the character of speculative transactions for section 73 and any loss arising therefrom will be characterised as loss from speculative business and same cannot be set-off against normal business income
As per court section 43(5) defining speculative transaction is only for the purpose defining terms used in section 28 to 41.Section 43(5) has no application over section 73. (CIT v/s DLF Commercial Developers Ltd.)