Return of income

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

13 December 2012 One of my friend. who is a practising advocate.she makes her income under legal consultancy services say 2 lakhs per annum. Further since she has good knowledge of capital markets. She intends to trade in F&o (derivities segment). What will happen to P&L account if net profit from f&o trading is around 3 lakhs (the trading she may not do every day)
1. The purchase and sales of securities are shown in P&L and then N.P is calculated?
2 or only net profit is calculated manually and added as income from other source
3 is there any norms prohibiting as per advocates rules of practice not to trade in share
respected members may provide detail emphasis or any related rulings. Thanks to all

Querist : Anonymous

Querist : Anonymous (Querist)

14 December 2012 Open query

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
Follow

22 July 2025 In your friend's situation, there are multiple factors to consider regarding the income from legal consultancy and F&O (futures and options) trading under the Income Tax Act. Let’s address your queries one by one:

1. Accounting for the Profit and Loss of F&O Trading:
When trading in F&O (derivatives segment), the income derived is treated as business income, not as capital gains. This means that all trading-related transactions should be shown in the Profit & Loss (P&L) account under the head of business income.

How to treat the P&L account for F&O trading:
Purchase and Sale of Derivatives (like Futures and Options contracts) should be shown in the P&L account.

The net profit or loss is derived by subtracting the cost of trading (losses) from the income from trading (profits).

If your friend has a net profit of ₹3 lakhs from F&O trading, this would be shown as a separate income in the P&L under "Business Income".

Any expenses related to trading (e.g., brokerage, transaction costs, etc.) would be shown as expenses in the P&L, and only the net profit (or loss) would be reported as business income.

2. Calculation and Reporting of Net Profit in F&O Trading:
If your friend does not maintain separate accounts specifically for trading, she can calculate the net profit manually (after deducting any related trading expenses such as brokerage fees, STT, etc.), and then add this net profit to the business income in her return of income.

In the Income Tax Return (ITR) filing, the net profit from F&O trading will be treated as business income and should be declared accordingly under the "Profit and Loss Account" section of the ITR form (typically ITR-3 for professionals).

The income from F&O trading is taxed as business income and is subject to tax as per the normal tax slab applicable to business income. It is not considered as income from other sources.

3. Norms for Advocates Trading in Shares:
While there is no direct legal prohibition for advocates trading in shares or derivatives, there are certain ethical and professional guidelines they must follow as per the Bar Council of India (BCI).

According to Rule 47 of the BCI Rules, an advocate is not allowed to practice in any other profession that may interfere with their professional duties. For example, being a stock broker or trading regularly in securities may conflict with the ethical requirements of their profession.

However, occasional trading in stocks or F&O for personal investment purposes is generally not prohibited as long as it does not interfere with their legal practice. It’s advisable to avoid day trading or making this a regular business as it may be viewed as a conflict of interest.

Key Points to Consider:
Income from legal consultancy is treated as professional income and taxed under section 44AA and 44ADA (if opting for the presumptive taxation scheme).

Net income from F&O trading is treated as business income and reported under the business head in the P&L account.

The advocate should carefully check the ethical guidelines of their respective Bar Council or local professional body to ensure that their trading activities do not violate any rules of professional conduct.

Suggestions:
Record Keeping: Maintain proper separate books of accounts for the trading activity and the legal consultancy income. This will help in correctly reflecting the income and expenses for both businesses.

Tax Filing: For tax filing, ensure that the F&O income is correctly reported under business income, and applicable tax is paid accordingly. If there is no regular trading activity and it is a one-off, there might be some leeway under the Income Tax Act for it to be treated differently, but it’s best to err on the side of caution and report it under business income.

Conclusion:
The net profit from F&O trading should be shown in the P&L account under business income.

There is no specific restriction for an advocate to trade in F&O, but ethical and professional considerations must be kept in mind.

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now