Loss in F & O: Whether Audit is compulsory?

Query]

I am a salaried taxpayer & have done few transactions in F & O in the last year (FY 2022-23) wherein there is a loss of Rs. 2.35 Lakh. I have a profit from Delivery based share transactions. I have following queries:

Whether audit would be compulsory as I have suffered the loss in F & O? If yes, can I avoid it?
How the turnover under option trade would be calculated? Is it speculative income? Can’t it be treated as Income from other source or income from Capital gain?
Can I set off loss from F & O with my other income?
Whether the due date of filing income tax return will be 31^st July or 30^th October?
Which form I need to use for filing income tax return?Opinion:

“About 89% of the individual traders in equity F&O segment incurred losses, with an average loss of Rs. 1.1 lakh during FY 21-22, whereas, 90% of the active traders incurred average losses of Rs. 1.25 lakh during the same period.” – SEBI in a study of profit and loss of individual traders dealing in the equity F&O segment.

No matter what, the number of players in the F & O segment has witnessed significant rise. The question arises as to its taxation while filing Income Tax Returns (ITR). It has become all the more relevant now as the due date of filing is nearer.

There is no specific provision for its taxation & so it has to be computed in accordance with the regular taxation provision. With above brief background, the reply on all the issues raised by you is summarized hereunder in detail for the benefit of all the readers:

Income from Future & Options (Derivative) Transactions:
a) Income from F & O transaction is no more considered as a speculative transaction under the Income Tax law if the transaction is carried out (i) on a recognized stock exchange (ii) the securities transaction tax is paid and (iii) trade is supported by contract note.
b) It is considered as a normal business transaction and will result in business profit or loss. It cannot be, in normal course, considered as Income from Other Source or income from Capital gain due to its very basic nature as it involves the buying and selling of derivative contracts with the intention of making a profit from short-term price movements. So, it has to be considered as “Income from Business” only.
b] No special tax rate (like 15% or 10%) is applicable for taxing profit from derivatives transactions & tax rate shall be at normal rates applicable to an Individual.
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.
Deduction towards Expenses:
While arriving at the taxable profit, all the expenses incurred for earning income like telephone, mobile, conveyance, depreciation on assets used for the purpose of business etc would be admissible as deduction. .
ITR Form and the Due Date:
Since income from F & O trading is to be treated as business income, individuals have to file return in ITR 3 [or ITR -4 if declare profits @ 6% of the total turnover on presumptive taxation scheme]. Filing of the return within the due date is mandatory if the taxpayer intends to carry forward such loss for set off against its income in subsequent years. The due date shall be 31^st July for individuals not covered by tax audit provision & 31^st October if covered by tax audit provision.
Set off loss from F & O with Other income:
Loss from F & O transactions can be set off against capital gain income as well as business income. It cannot be set off against salary income.

Conclusions:
Audit by taxpayers doing few transactions in F & O is admittedly awkward. Considering the increased number of taxpayers now doing F & O transactions, it would be better if specific provision is enacted in the Income Tax Law for its taxation. Further, the Finance Ministry may consider excluding the F & O transactions from the purview of audit and presumptive scheme of taxation as it is very well backed by strong documentary evidence.