When Should You Get Tax Audit Done In Case Of Day Trading of Shares?

I do only day trading. When am I required to get my accounts tax audited ? Renesh Jain

The day trading is definitely speculative in nature. The delivery is never taken or given.Therefore, confusion is created regarding what should be the turnover of day trading transaction .Should the value of purchase or sale or only difference between the purchase and sale be taken for computing turnover for the purpose of tax audit u/s 44AB of the I T Act.

The issue had come up in case of Babulal Enterprise vs ACIT before Mumbai bench of ITAT [IT Appeal No. 6031 (Mum.) of 1996 dated 12-2-1997] wherein it was held that where the actual delivery was not taken and difference in price was settled on the basis of contract note,the turn over can not include those transactions value. Another decision of Mumbai Tribunal expressing similar views was in case of Growmore Exports Ltd vs ACIT [78ITD 95] .

In case of day trading , a person does trade in margin i.e difference in purchase and sale transaction. The meaning thereby that the speculator squares off the trade without ever actual delivery. Therefore, if the difference amount of squared off deals , without taking into account the positive or negative figure ,exceed Rs 40 Lakhs , then tax audit has to be taken. For example , let us say following are the data of transactions of a day trader

Date Difference Amount

1/9/2006 Gain + 5,00,000

20/10/2006 Loss - (25,00,000)

28/10/2006 Loss -5,00,000

1/11/2006 Gain 12,00,000

The turnover for the purpose will be 47 lakhs (5 + 25 + 5 +12). The day traders has to get his accounts audited.

Note that only difference amount was taken and positive or negative sign were ignored.

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How to Compute Turnover In Case Of Future & Options Trades?

I am a working professional and apart from my salary I have some income in Futures and option transactions and shares. I need to know few this.

1. Since Futures and options transactions are under business income. Can we set of gains and losses against income from salary?
2. How is turnover in Futures and options transactions calculated?? If notional value is considered, even 5-10 transactions will exceed 40L turnover and we need go through tedious Tax audit process.
3. What are documents that needs to be submitted while filing returns of income. Apart from Form 16, will a statement of account for futures and options transactions would be enough?

santoshk.sahu@gmail.com

Answer to your first question is Negative. The loss from "Capital Gains " and "Business & professions" can not be set off with income from Salary.

The meaning of turnover for in case of transactions in Futures and Options of shares is not defined under the I T Act.In case of derivative trading-Futures and Option- the difference on which the contract is purchased or sold is important. Although the value of contract is number of contract multiplied with the shares price , yet what is actually given or taken is differential amount in contract. For example if you purchase a future contract for Rs 105 for a share having a lot of 100,you pay nothing at the time of buying a contract, yet at the time of expiry if contract , you are either gainer or loser which is determined whether there is positive or negative difference. So , for the purpose of determining the turnover in case of future and options , for the purpose of 44AB , based on the guidance note of ICAI , following items should be considered to constitute turnover

• The total of positive and negative differences , plus
  
• Premium received on sale of options is also to be included in turnover ,plus
  
• In respect of any reverse trades entered, the difference thereon

But not the total value of contract .

Accounts with Return
Regarding your third question, if you do not fall in case of tax audit or a case that regular books of accounts are maintained , even in that case your return of income should be accompanied by a statement indicating the amounts of turnover or, as the case may be, gross receipts, gross profit, expenses and net profit of the business or profession and the basis on which such amounts have been computed, and also disclosing the amounts of total sundry debtors, sundry creditors, stock-in-trade and cash balance as at the end of the previous year [this is as per explanation section 139(9)]

Tags: Shares, India, income tax, Speculation

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Future Trading Is Business Activity!

Is income from Futures trading is business income or capital gain. If business income whether i have to file tax audit report, if the gross turnover exceeds Rs.40 lacs? rangarajan_s1@....mail.com

The future trading has been classified as business activity from Asst yr 2006-07 by removing the trading in derivative segment from the definition of speculative transactions. Section 43(5) defines Speculation in following words
"(5) 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:"

However , proviso (d) to this subsection , introduced from Asst Year 2006-07 stated

"Provided that for the purposes of this clause

(a) ..................; or

(b) ........ or

(c) .............

(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;
shall not be deemed to be a speculative transaction.

Eligible transaction has also been explained which in simple terms mean that all those derivative transaction-futures and Option -done screen based trading through a broker of recognised stock exchange .

As far as the issue of getting the accounts audited u/s 44Ab is concerned, in my opinion, one should get the accounts audited for two reasons

1. The derivative trading now a business activity, controversy may arise between you and department whether statutory tax audit is required.
2. Your accounts will be free from error.

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Teaching Is Profession!

I work as a freelance teacher for IIT entrace exam coaching institutes. If I take all the classes assigned to me in a given month I get a flat professional fee for my services. In months where I have no work I don't get paid. For the year 2006-07 my total income is Rs.3,60,000. My questions are

• a) Under what head do I have to declare this income? Is it salary or income for business or profession.
• b) I and my wife are both PhD's. Pooling our previous savings and also availing a bank loan I bought a car and use it commute to the place of work. Can I claim depreciation for the car?
• (c)My office is my home. Can I claim rent paid as expense?

santy_5@......com

As you are paid by coaching institute, I presume they also deduct the tax at source.You have not given any details regarding contract signed with the coaching institute, but your earning is certainly in my view is "Income from profession" ,if you are not appointed as an employee by the coaching institute.

In case, you are not employee,you should show the income as follows:

• Income from Business & profession xxxxxxxx

less

• Depreciation on Car xxxxxx
• Fuel expense xxxxxx
• Any other expense related to your coaching xxxxxx
• ----------------
• Gross total Income xxxxxx
• 
  

As far as house rent is concerned, I would not suggest to claim as an expense unless you really do some thing related to your profession from your home. I suggest you should avail deduction u/s 80GG because you are not getting any HRA . To claim the deduction u/s 80G , you should read this

Tags: business income, India, income tax

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Profit of Commodity Future Maybe Business or Speculation Income. Facts Will Decide.

bubna.manish@.........in Asked : I want to know that commodity trading (Futures) profits/ loss comes in which chapter/head in Income tax? whether it is a business profit/ capital gain/ speculation gain?

The trading in commodity futures can happen either with delivery or without delivery. In normal circumstance, when delivery takes place ,the future commodity trading shall be taken as as business income . If the contract is settled without delivery , such future trading of commodity comes within the meaning of Speculation Business .

Explanation 2 under the provision 28 of the I T Act ,describe that if anybody carries out Speculation Business ,it shall be distinct from other business. The exact wording of the I T Act is

"Explanation 2.Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as speculation business) shall be deemed to be distinct and separate from any other business"

Section 43(5) of the I T Act defines 'Speculation Business" . The relevant extract is given as under :

• "5) 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:"

It is also to be noted that the I .T Act provides that there are circumstances in which speculation transactions are not taken as Speculation , but taken as Speculation Business. These circumstances , when business is not speculation ,are

"Provided that for the purposes of this clause

• (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or
  (b) ............................
• (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; "

Tags: India, F.A.Q., Tax, Speculation Business, Future Trading

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Oh!Great News. No Tax Audit Report or P &L Account or Balance Sheet required to be Attached with Return.

As per the CBDT,s circular No. 9/2006, dated 10-10-2006 , along with new Return forms namely -Form 2F ,Form No. 1, Form No. 2, Form No. 3, and Form No. 3B- a taxpayer should not attach

1. any statement showing the computation of income or tax or notes thereto,
2. copies of balance-sheet, profit and loss account or notes thereto,
3. TDS/ TCS certificate,
4. proof of payment of advance tax or self-assessment tax,
5. Tax audit report u/s 44AB,
6. Any other document.

Should the Tax Audit Report be submitted separately?

No, TAx Audit Report need not be furnished separately also before or after the due date. However, you must get the report of audit u/s 44AB before the due date of the furnishing of the return. You may be asked to furnish the audit report in original during the assessment proceedings. No penalty under section 271B shall be initiated or levied for not furnishing the tax audit report on or before the due date. However, if the audit report has not been obtained before the due date, provisions of section 271B shall be attracted.

What about Audit report u/s 92 E?
The report as required under section 92E of the Income-tax Act shall continue to be furnished before the date specified in rule 10E.

No TDS or TCS with Return? How will Govt give credit ?

While processing the return under section 143(1), the credit for Tax deducted at source (TDS)/ Tax collected at sources (TCS) shall be allowed on the basis of details furnished in the relevant schedules of these returns as if the TDS/ TCS certificates have been filed.

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Is written off loan taken for computing turnover of the business?

Someone Asked on this Blog

My query is about clarification about Gross receipt limit as per contained under section 44AB of income tax act, 1956.My Question is hereunder," as per example, if in company, there is loan borrowed and during the year if company write off that loan and credited to profit and loss i.e it becomes income""in regards to above question, whether above written off loan borrowed should be treated as gross receipt or not for the limit of Rs. 40 lacs under section 44AB?

No the Written Off loan shall not be taken for the purpose of computing Turnover to see if Audit is required to be done in your case.

For the purpose of Tax Audit, turnover of business should be above RS 40 Lakh. The turnover of business although not defined by the Act itself , can be understood from "Guidance Note on Terms used for Financial Statements" published by Institute of Chartered accountants of India .This Note has defined Sales Turnover has been defined as " The aggregate amount for which sales are effected or services rendered by an enterprise."

Thus in short answer to your question will be " treatment of written off loan" although is income under the I T Act, yet its not part of Turnover for the purpose of Tax Audit.

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Is share trading by Investment company speculation ?

Some one asked on this blog on 23/10/06

We are an investment company. Our funds are majorly deployed in granting loans and advances(more than 80%). and we are also trading in shares.We have received demand notice from ITO for the A.Y.2002-2003 and A.Y. 2003-2004. The demand has arisen mainly because of non acceptance of our business income and treating the same as speculative income without considering the fact that our business is consisted of shares trading as well as advancing of loans and funds ,investment in loans and advances substantially more than in the business of share trading, which is improper and inconsistent with the facts and circumstances of the case and without any material.Please clarify that explanation to section 73 of the income tax act is applicable to us or not.

Explanation to Section 73 of the Income Tax Act, 1961 states “ Where any part of the business of a company other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on Securities", " Income from House Property", "Capital Gains" and "Income from Other Sources" or a company the principal business of which is the business of banking or the granting of loans and advances consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares"

Thus plain reading of the aforesaid provison shows that the Explanation is not applicable :

1. in case of a company whose gross total income consists mainly of income chargeable under one or more of the following heads:

1. Income from House Property,

2. Capital Gains,

3. Income from Other Sources, (including interest on securities) and

2. in case of a company whose principal business is that of banking or granting of loans and advances, the Explanation shall not apply.

Explanation mention the word" consist mainly of .." which has been interpreted by diffrent judicial fora in different ways .

The Bombay Tribunal in Rajan Enterprises Pvt. Ltd. v. I.T.O. 41 ITD 469 has held that in the absence of any specific provision in the Explanation, the gross total income will have to be considered without taking into consideration the impact of the Explanation, i.e., no separate treatment is to be given to the loss on sale of shares.

Another judgement ,that of the Calcutta High Court in the case of Eastern Aviation and Industries Ltd. (208 ITR 1023) wherein the High Court observed that while judging the relative composition of gross total income, one has to consider the absolute quantum of loss against other positive income. In the view of the court, the term income includes "loss" and what one needs to consider and compare are the relative figures of loss and income.

You should also note that the Explanation exempts a company whose principal business is that of grant of loans and advance. This term "principal business" has not been defined in the Act.Here also different courts have interpretated in different manners.

In the case of I.T.O vs. Raghav Commercial Ltd. [16 TT] 335 (Cal.); income composition test was applied for determining principal business of the company. In case of Offshore India Ltd. vs. I.T.O. [15 ITD 549] (Cal.). the assessee’s contention of being in business of grant of loans as principal business was rejected as the value of investment was more than value of loans and advances.

Complete facts of the case has not been given by you .It is also not stated under what section the A.O passed the order .That is important for building up the case gaainst the the order of A.O from a different angle.

Therefore ,I presume that what you have stated in the query is absolute true.That the principal business of your compnay is that of loans and advances and that gross total income also consists of Mainly income from other sources or capital gains or income from house property. My opinion is that you should fight the case in diffrent judicial forum i.e CIT-Appeal, CIT u/s 264, or Tribunal or even High Court .In my view , you will win the case .

Tags: Speculation

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Sir, I am regular speculator in NSE & BSE . I want to know how to calculate the derivatives gains/loss for Income Tax purpose .Is it business income ?

Someone Asked on This blog

Yes its business income from FY 2005-06 as per Section 43(5) of the I T Act.The computation of P & L is same as that of any business .Deduct all expense related to the derivative transaction from the gains or loss on derivative trades. As far as STT is concerned , you will get Rebate u/s 88E to the extent there is profit from such derivative transactions. Read further in this blog .Click here
If a housewife can do it,then how much profit she exempted ?.
There is no change except a benefit of tax rate. The total income of a woman below the age of 65 years exempt from tax is Rs 1,35,000 whereas in case of male below 65 years, is Rs 1,00,000

Whether it clubs to short or long term capital gain/loss ?
Derivative trading is business income now , so its treatment for computing total income is same as that of any other business.Capital gains are added for tax rate purpose.
If derivatives turnover is 700 lakhs per year then is the audit necessary ?
Previously , speculative transactions were not forming part of total Turnover for the purpose of section 44AB which makes it mandatory for tax audit.This issue had come up in case of Babulal Enterprise vs ACIT before Mumbai bench of ITAT [1999-2000] wherein it was held wher the actual delivery was not taken and difference in price was settled on the basis of contract note,the turn over can not include those transactions. Another decision of Mumbai Tribunal expressing similar views was in case of Growmore Exports Ltd vs ACIT [78ITD 95] .

However, in my view, its better , in view of the amendment in Section 43(5) of the I T Act by which derivative trading has been made Business Income, You should get your accounts audited, It will not only make your accounts clear of any doubt and discrepancies, controversy shall also not arise thus lead to less problems.

What are various the penalties for e.g if A.O found 1000 rs. discrepancy in set off ?.
If you mean penalty u/s 271(1)(c) for concealment, formula prescribed in 100 % to 300 % of the Tax Evaded . Thus , if A.O found Rs 1000 of discrepancies , and you come with 30 % tax bracket , then approximately @100 % Rs 300 will be penalty. But most important thing about penalty ,you must know are :

1. Not every discrepancies found by A.O can bring penal provision in action.
The discrepancies which are routine or technical errors can not make you liable to penalty u/s 271(1)(c) .
2. The A.o can not impose penalty without giving you an opportunity of being heard.

Tags: Tax Audit, STT, TurnOver, 88E

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I carries two business , the combined turnover is above Rs 40lacs. Should I get the accounds audited ?

Yes, you are required to get your accounts audited along with a tax audit. It is better way to maintain your accounts anyway.

Tags: Tax Audit

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