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Tax Audit of Assessee in Share Trading Business

CA Sunil Kumar 
on 29 September 2018

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Understanding is much deeper than knowledge. There are many people who know us, but very few who understand us.

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Calculation of Turnover for Tax Audit u/s 44 AB of Income Tax Act, 1961:

(i) For Assessee in share trading business to give them clear understanding whether they are liable to get their accounts audited for tax audit u/s 44AB of the Income Tax Audit. So, let's check what law dictates about it.

Tax Audit Applicability under section 44AB:

(i) An individual who is engaged in business and the annual turnover of his/her business is Rs 1 crore and above.

(ii) Determination of turnover u/s 44ab of income tax act,1961, in case of trading of shares either on speculation or non speculation basis

(iii) “As per Section 43(5) of the Income Tax Act, 1961, INTRA-DAY TRADING shall be considered as SPECULATIVE BUSINESS TRANSACTIONS and the income therefrom would be either speculation gains or speculation losses. Income from speculation gains is taxed at the normal rates.”

(iv) However, Income from trading F&O (both intraday and overnight) on all the exchanges is considered as NON-SPECULATIVE BUSINESS TRANSACTIONS as it has been specifically defined this way.

(v) Income from shorter-term equity delivery based trades (held for between 1 day to 1 year) are also best to be considered as non-speculative business income if frequency of such trades executed by you is high or if investing/trading in the markets is your main source of income.

Turnover or gross receipts in respect of transactions in shares, securities and derivatives may be determined in the following manner:

(i) As per Para 5 of “Guidance Note on Tax Audit under Section 44AB of the Income Tax Act,1961″ issued by The Institute of Chartered Accountants of India (ICAI):

(a) For Speculative Transactions:

“The Turnover is net of all positive and negative income from various transaction and not total of all Sales transaction.So if your Net Income > 1 Crores rs., you are liable to tax audit.”

(b) Derivatives, Futures And Options (Non- Speculative Transactions)

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

(i) The total of favourable and unfavourable differences shall be taken as turnover.(i.e suppose in 1st transaction you have incurred loss of Rs 65 Lacs and after that you entered in profit transaction in which you have earned Rs 36 lacs, Then as per this guidance note you are liable to tax audit because total of Profit and Loss a/c exceed Rs 1 Crore)

(ii) Premium received on sale of options is also to be included in turnover. (Call or Put Premium paid/received)

(iii) In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.”


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