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tax audit for persons having derivative income

29 July 2009

Hi Friends,

Kindly tell me that a person who is having net profit of rs. 180000/- from derivatives i.e. f&o of shares from the purchase and sales of more than rs. 5cr. is required to get tax audit us 44AB as his turnover is more that 40 lakh.

Thank

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2 Replies

SANKAR KIRAN P (Top Edge of CA & CS) (246 Points)
Replied 29 July 2009

Hiii,

Dealing in FnO is treated as Business. Thus normal business taxation rules apply as they would to any other business. The rate of Tax is as per Slab applicable in the respective year. In current year, income upto 150,000 is exempt. Above it the Slab rates come into effect.
Any loss again is allowed to carry forward for 8 years and set off against other heads of income or future income.

The exempt income slab Rs. 150,000 is available to every individual. i.e. If your total income does not exceed rs. 1.5 L you are not liable to any tax, irrespective of the nature of income being Capital gain or Speculation income or Business Income. Above that the tax rates come into effect.

IMP: TAX AUDIT IS ONLY REQD FOR BUSINESS INCOME I.E FOR INCOME FROM DERIVATIVES/FUTURES AND OPTIONS. Not from Income from Capital Assets or Speculation Income. So you may have a income of Rs. 2 Crore from Delivery/Intraday but no need for Tax Audit.
Another point to note is the method by which the limit of 40 Lakh is calculated for audit purpose in case of Derivatives. As the Future lots are upwards of Rs. 2 Lakhs its quite easy to cross the 40 Lakh figure by way of turnover, which is incorrect in principle.
So the total difference between Buy and Sell price of FnO is taken to calculate the 40 Lakh limit, i.e. the profit + loss + premium on options recd + premiums paid.
It may well be that you have net loss from derivatives and still have to go for tax audit. For e.g. Profit 20 L + Loss 25 Lakh = Turnover 45 Lakh Tax Audit Reqd. Net Loss = Rs. -500,000.

So, calculate ur turnover as per the formulae and assess whether u r under the shell of tax audit ....

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Balbeer (CA Office Staff) (32 Points)
Replied 01 August 2009

I would beg to differ on one of the points.

I feel that as per guidance note from ICAI only premium received is to be taken for tax audit calculation purpose in addition to aggregate of profit and loss. The relevant extract is produced below.

(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.

One reason to exclude premium paid making more sense is that this is actually more of an expense and there are no additional receipts if the option contract expires without any gains. It is mentioned that in case of reverse trades, the difference will form part of turnover - this should also apply to options as the trader would pocket the difference in cases where the option contract is 'squared' or the quantity zeroed out with reverse trades.