How to calculate turnover in case of intra day and future and option trading for Income Tax purpose?

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In the recent times many people have started trading in intra day and future & options and the volume of transactions are huge when compared to actual earning as they mainly trade on margins and in most cases people earn very less amount of in many cases they even incur a loss.

Now because of this many people have the query that how we calculate turnover to check if we are liable to get our accounts audited because in most cases people have traded i.e. their total sales in books of broker is over ₹2 crore but in actual they would have invested only ₹10-20 lakh, and as per income tax act one can only show trading in future and options as non speculative business and intra day trading as speculative business and not as an investment income as per section 43(5) of the Income Tax Act (unless they have done only 2-3 transactions).

So now let’s discuss how to calculate turnover in case of Future and Options trading:

The method of calculation of turnover in case of Future and options trading and intra day trading has been explained in the Guidance note on Tax audit under section 44AB of the Income Tax Act, 1961. (Revised 2014 edition).

As per the above Guidance note turnover in case of Future and option means:

“The turnover in such types of transactions is to be determined as follows:

        (i) The total of favorable and unfavorable 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.”

The above definition makes it clear that turnover in case of future and option transaction is not actual sale value but the sum of favorable and unfavorable difference and premium on sale plus difference in case of reverse trade.

Let’s take a look at the definition of turnover in case of intra day trading i.e. Speculative transaction:

As per the guidance note turnover in case of speculative transaction means:

“In the case of an assessee undertaking speculative transactions there can be both positive and negative differences arising by settlement of various such contracts during the year. Each transaction resulting into whether a positive or negative difference is an independent transaction. Further, amount paid on account of negative difference paid is not related to the amount received on account of positive difference. In such transactions though the contract notes are issued for full value of the purchased or sold asset the entries in the books of account are made only for the differences. Accordingly, 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”

If the total of above figure exceeds Rs. 2 crore then you need to get your accounts audited or else you can file income under section 44AD of the Income Tax Act or normally by showing income above 8% of total turnover.

Special note:

Many people might have received notice from Income Tax Department that you were liable to audit u/s 44AB of the income tax act as your total turnover exceeded Rs. 1 crore and since you haven’t got your accounts audited following action would be taken against you.

At that time you must not panic and reply to such notice quoting the above definition of turnover and replying that as per the above definition your turnover was below limit and therefore you were not required to maintain books or get your accounts audited.

Link to download the Guidance Note: //resource.cdn.icai.org/34728gn-taxaudit-dtcicai.pdf. You can check the definition at page no. 25 of the guidance note.

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