Tax audit

Dear Kingsley,

 In share transaction there is a term called T+ 2 Which means Transaction entered today will be settled on day after tomorrow on which day shares will be entered/reduced in/from your demat account depending upon sale/purchase. In case of Intra day trading transaction are squared up during the day so no actual delivery. When you are putting buy order during the its just an instruction to purchase a specified no. of securities at a specified price and the shares that will enter into your basket is virtual, and when u will sell the same no. of shares then your basket will show Zero no. of Shares. so T +2 concept wont, come into Play.

I hope you would have understand now, but if u still have doubts then I suggest u should ask any of your seniors, who are connected with the Share market.

 Sir,

If that be the case,

step 1 : if i place order today, 

Step 2 : then if i sell tomorrow,

Step 3 : then if delivery happens after 2 days,

then it is still speculative as per your point eventhough it is not intra day. But if that be so, then not only intra day but if u sell next day also it becomes speculative transaction. Am i correct?

T+1, T+2 are meant for registration ie transfer of shares from one person beneficial account to other person beneficial account rather than delivery i guess.

I suppose u want to show ur Knowledge about the share trading activities rather than talking on the issue. The issue is very clear that intra-day trading is a speculative business & for substantiating that I am again reproducing the guidelines of ICAI

I guess if you are still adamant then u better mail to the editorial board of Guidelines on Tax audit under section 44AB or go Straight to them for one on one discussion at their ITO Centre or may be at Noida because i don't know where they sit. And please do give them reference of your practical experience of doing Audit of a Share trader and ask them to amend their guidelines and induct u into their editorial board so that Intelligent people like u should be person for making guidelines (even if u are still not CA as you are FCA (future Chartered Accountant)

hey,

I am not trying to show my knowledge. This is what caclubindia.com is for. To get various views. I am sure about one thing. One of us is wrong. It is either me or you. I wont be ashamed if i m wrong. After all ,i am here to know where i am wrong.I am now asking u to tell me as to whether if i buy today and sell tomorrow, but if settlement is t+2, is it speculative?????? I dont disagree with that definition of speculative transaction you have provided. But please tell me. Is buying of share today & selling tomorrow is speculative if delivery is t+2 basis? Because you say delivery takes place after 2 days only. 

What is the limit beyond which tax audit is compulsory? If the earning is Rs.18 lacs per annum plus reimbursement of actuals account for another Rs.3 lacs, will the provisions of tax audit attract? In respect of reimbursement claims, will TDS apply?

 Good  

I agree we cannot close this topic which has many dimensions > If this goes to a Court , The Hon Judge may say that whether a transaction is speculative or not depends upon the circumstances if the situation is not covered specifically in the act , regulation, guidelines etc. For example , the intra day transaction is for the purpose of normally booking profit or minimise loss through differences . The benefit of intention is given even where the buyer might have purchased with intention to hold but changed circumstances might have forced him to sell same day . This has been the intention of the guidelines , Such a benefit is not given where the buying and selling is carried over beyond intradayeven though time for delivery is available T plus1 2 etc... Whatever it is the shorsell is squired off . So we have to go by common sense and equity if the law has some gaps giving rise to interpretaions . This is where judiciary decides and lawyers and accountants help the clients in distress . 

For Tax purpose the Income tax act distinguishes between Delivery, Intraday trading in cash segment and FnO segments.

Consequently the tax treatment for profit/loss in all three are different.

CASH DELIVERY
Delivery is deemed as investment in an asset. Therefore Capital gains rules apply.
On short term investment

i.e. shares bought in cash segment and sold before completion of 1 year from date of purchasing, you have to pay 15% of profits as STCG Tax (10% for AY 2008-09/FY 2007-08)
On long term investments

i.e. shares sold after 1 year of holding the long term tax applies which currently is NIL.
Any loss is allowed to be carry forward and set off for 8 years

CASH INTRADAY
Intraday trading in Cash segment is deemed as speculation, same as lottery or betting on horse racing.
The tax rate applicable on profits from speculation income is flat 30%.
Any loss is allowed to be carry forward for 4 years, to be set off against future speculation profits.

DERIVATIVES/F&O
Dealing in FnO is treated as Business. Thus normal business taxation rules apply as they would to any other business. The rate of Tax is as per Slab applicable in the respective year. In current year, income upto 150,000 is exempt. Above it the Slab rates come into effect.
Any loss again is allowed to carry forward for 8 years and set off against other heads of income or future income.

The exempt income slab Rs. 150,000 is available to every individual. i.e. If your total income does not exceed rs. 1.5 L you are not liable to any tax, irrespective of the nature of income being Capital gain or Speculation income or Business Income. Above that the tax rates come into effect.

IMP: TAX AUDIT IS ONLY REQD FOR BUSINESS INCOME I.E FOR INCOME FROM DERIVATIVES/FUTURES AND OPTIONS. Not from Income from Capital Assets or Speculation Income. So you may have a income of Rs. 2 Crore from Delivery/Intraday but no need for Tax Audit.
Another point to note is the method by which the limit of 40 Lakh is calculated for audit purpose in case of Derivatives. As the Future lots are upwards of Rs. 2 Lakhs its quite easy to cross the 40 Lakh figure by way of turnover, which is incorrect in principle.
So the total difference between Buy and Sell price of FnO is taken to calculate the 40 Lakh limit, i.e. the profit + loss + premium on options recd + premiums paid.
It may well be that you have net loss from derivatives and still have to go for tax audit. For e.g. Profit 20 L + Loss 25 Lakh = Turnover 45 Lakh Tax Audit Reqd. Net Loss = Rs. -500,000.

Only consolation is that Tax Audit requirement is dependend upon each year's turnover. And most tax clerks are big assholes. They don't go the extra effort to calculate the audit eligibility of each trader, though the penalty for same if you are required and you dont get it done by due date is Rs. 100,000. There are also provisions for prosecution (jail) in worst case scenarios.

Tax audit applies to every person whose total sales, turnover or gross receipts in business exceeds Rs 40 lakh. Intraday trading is considered as speculative business. As per the guidelines issued by the Insititute of Institute of Chartered Accountants of India (ICAI), a speculative contract is settled by paying out the difference, which may be positive or negative. Thus, the aggregate of both positive and negative differences, i.e., profit or loss from transactions is considered as the turnover for determining the liability to audit vide Section 44AB of the Income Tax Act, 1991.

As you are engaged in intra-day trading, the aggregate of profit and loss and not purchase and sale will be considered for determining the liability to audit.

The replies are only in the nature of guidelines. The tax counsellors and the publication are not responsible for any decision taken by readers on the basis of the same. Readers may address their queries on direct taxation to:

The Reply is based on the guidelines it is not written in any act and no court decision is also given on the same ..........................but if you will go through the tax audit mannual then there is also written that speculative transcations are not consider in meaning of turnover for the purpose of tax audit.

Tax audit is required if turnover is excedding Rs 40 L in case of business and 10 L in case of Proffession.

The word income doesnot make any differance because the word used is the word is Turnover not The Earnings .

if your turnover from business is Excedding Rs 40 L and earnings is 50 K than also you are required for tax audit.

MY CLIENT XYZ PARTNERSHIP FIRM IS CARRYING OUT CONSTRUCTION BUSINESS. DURING THE YEAR 09-10 IT HAS PURCHASED PLOT OF LAND CONSTITUTING RS.80 LAKHS. AND THERE ARE NOT ANY OTHER TRANSACTION. THE PLOT IS PURCHASED FOR DEVELOPMENT OF FLATS & SHOPS, WHICH ARE TO BE SOLD.

 PLEASE LET ME KNOW WHETHER ANY TAX AUDIT HAS TO BE CONDUCTED FOR SUCH FIRM

tax audit for soleproprtorship firm

I concur the veiw of trunover from the FO should be count by adding net position i.e profit ot loss of each contract and if sum is execding 40 lacs audit is applicable to the case .

I have another question , assesee regulary for the years dela in shares and show it as investment and taxed under head capital gain . F Y 9-10 he has also traded in shares . number of transaction are increased substantially , purchasing shares and selling in short time i.e 3to 5 days is recurrent aspect . total of sales and purchase are 84 lacs of delivery base transaction .

depending on the intention of the assesee can we consider these trasanction as capital gain or does nature of trasaction suggest that it is adventure in trade . Please note very few trnsaction suggest his intentinon of purchasing and holding for earing dividend and capital appreciation .

Please let me know your views