F & O Transactions & Audit requirements while filing ITR forms
- Applicability of Audit in case of derivative (F&O) Transactions:
a) If the turnover of any person exceeds Rs. 10 Crore, taxpayers would be required to get the accounts audited under section 44AB.
b) In case turnover is more than Rs. 2 Cr but not exceeding Rs. 10 Cr but then the tax audit (u/s 44AB r/w section 44AD) would not be required even if the net profit from such transactions is less than 6% of the turnover. There is an exclusion from audit for taxpayers in the turnover bracket of 2 Cr to Rs. 10 Cr if the receipt or payment in cash doesn’t exceed 5% of total receipt/payment.
c) If the turnover is not exceeding Rs. 2 Cr then tax audit (u/s 44AB r/w section 44AD) will be mandatory if the net profit from such transactions is less than 6% of the turnover or if there is a loss.
d) In your case, since there is a loss from derivative trading (i.e., profit offered for taxation is less than 6% of the turnover & probably turnover may not be exceeding Rs. 2 Cr, Tax Audit will be applicable. Only option to avoid audit could be to offer income @ 6% of the turnover for taxation even if there is actual loss in the transaction.
- Computation of Turnover in F & O:
a) In case of F & O transaction, the calculation of turnover is a little irrational & tricky. “Turnover” in such a case is the total of profit and loss i.e., aggregate of the differences, whether positive or negative is considered as “Turnover”. [For example, a person has a profit of Rs. 3 Lakh & loss of Rs. 7 in F & O. Though there is a net loss of Rs. 4 Lakh in F & O Transactions, Turnover will be considered as Rs. 10 Lakh].
b) In case of option, premium received on sale is also to be included in turnover. However, where the premium received is included for determining net profit for transactions, the same should not be separately included.
ICAI “Guidance note on Tax Audit” has been changed in 2022 for computation of turnover in case of option trading.
The relevant parts of the guidance note reads as under:
Derivatives, futures and options:
Such transactions are completed without actual delivery of shares or securities or commodities etc. These are squared up by receipts/payments of differences.
The contract notes are issued for the full value of the underlined shares or securities or commodities etc. purchased or sold but entries in the books of account are made only for the differences.
The transactions may be squared up any time on or before the striking date.
The buyer of the option pays the premia.
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.
(ii) Premium received on sale of options is also to be included in turnover. However, where the premium received is included for determining net profit for transactions, the same should not be separately included.
(iii) In respect of any reverse trades entered, the difference thereon should also form part of the turnover.
In short, if the premium is included for determining net profit for transactions, the same should not be separately included. As a result, in such cases, only profit and loss in option trading will be reckoned as turnover.
