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Derivatives transactions

05 July 2020

my client is engaged in derivatives transaction viz. futures & options regularly on National stock exchange.

I understand it will be treated as business income and the total profit /loss made will be added together and will be treated as turnover.

now in case of my client,

total profit transaction Rs. 8 lakhs.

loss transactions 3 lakhs.

so turnover 11 lakhs.

so can he declare income of 66000 under presumptive and get away by it , when in fact he has made a profit of 8 lakhs in the year.

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9 Replies

CA Raj Doshi (Practising CA) (8735 Points)
Replied 05 July 2020

Yes. That's sad but true.

Other issues -
1. What about opening balances in case there is audit next year ?
2. Will the Income Tax Dept agree to such lower profit in case there is a scrutiny ?
3. Will a CA be able to prepare and certify financials for the year in which 44AD was opted ? Will a bank agree for sanctioning loan where profit declared in ITR is less than Actual Profit ?
4. What are the chances of a CA qualifying the tax audit report stating opening balances are unaudited figures as certified by assessee.

Please deliberate on this before making the decision.

SUSHANT BIDAYE (578 Points)
Replied 05 July 2020

Thanks Mr. Raj,

my question is answered. I will go ahead and declare 66000 as income.

banks and tax officers can't question, as I will show them the law.

as a neutral person,I think this is the loophole in law that needs to be corrected.

CA Raj Doshi (Practising CA) (8735 Points)
Replied 05 July 2020

Most Welcome Sushant ji... Another point if you are able to solve then let me know... The Turnover for derivatives which is Sum of positive and negatives in absolute terms is only for the purpose of evaluating the threshold for tax audit. I dont think that's the turnover for the purpose of 44AD.

SUSHANT BIDAYE (578 Points)
Replied 05 July 2020

Then how do you calculate turnover , ?

prima facie you can't have 2 separate methods for computing, one for presumptive & another for tax audit.

but you have opened an interesting thought.

is there any clarification.

what your clients are declaring turnover for such transactions.

let's share the information.

CA Raj Doshi (Practising CA) (8735 Points)
Replied 05 July 2020

I am still discovering. Shall update you if I conclude something. You can refer Guidance note on Tax audit.

SUSHANT BIDAYE (578 Points)
Replied 05 July 2020

Yes thanks Mr. Raj,

you have really given me sone food for thought.

in my clients case or else if I take actual sales of derivatives, it would cross 10 crores. so obviously his profit is less than 6 %.

so does it mean he has to audit from back door, it would be a stupidity.

but thanks a lot for very interesting duscussions

CA Raj Doshi (Practising CA) (8735 Points)
Replied 05 July 2020

Try to make a actual profit / loss statement and you would have questions like
1. Whether to present sales turnover at gross positives and purchase turnover at gross negatives.
2. Generally,the turnover for 44AD traders like wholesellers etc would be the same which comes from the credit side of P/L ,... if you look that way , then for 44AD the turnover should be 8 lakhs in your case.

Thanks for the Appreciation and Most Welcome !

happyvalley blooms (58 Points)
Replied 05 July 2020

1) what is the threshhold for tax audit ? 1 crore or 2 crores ?

2) Brokerage gives FY2019-20 tax p& L report with turn over & gross/net profit (after brkerage/stt,stamp duty & other taxes)

3) what if the dept asks for brokerage's P& L report ?

4) if file under presumprion for low taxes , what if the IT asks for th brokerages's tax P&L report which includes headline loss/profit/ turn over figures & details of all trades?(with real profit made )

5) iam reserching this issue because I was fling ITR1 for many years with only FD interest as source of income.(around 5 lakhs ) This march 2020 3rd week I opened brokerage account & traded cash equity (less than 1 lakhs turn over + nifty options (turn over 2-3 lakhs) . profit is not much. but still I can not file ITR1 .Iam not under audit threshold for FY29019-20 .for fy2020-21 sutre i ned to tax audit as my daily turn over is 5 lakhs average since april.

CA Raj Doshi (Practising CA) (8735 Points)
Replied 06 July 2020

1. One Crore... however in case of eligible business with turnover upto 2 crores and showing income as per 44AD, then audit limit shall be 2 crores.

2. Brokerage generally gives Tax P/L precisely.

3. The Brokerage's P/L report is based on commercial point of view and not tax point of view.

4. It is a concern if the Profit shown @ 6% or 8% as per 44AD But actual Profit is higher than that. In that case, we will have to submit that we are not maintaining books of accounts and enclose turnvoer working and bank summary.

5. It is very much advisable to take a conservative approach and get the audit done. In this way, proper books of account shall be prepared and you are at the lowest possible risk because taxes are paid accordingly.