Manual - Audit of accounts of certain persons [Tax Audit]

Section 44AB - Audit of accounts of certain persons carrying on business or profession

Income-tax Act, 1961

Determination of Turnover of the Business activities from Speculation transaction or Derivatives, futures, and options or Delivery based transactions always remains in the helm of affairs and debatable.

In this article, an attempt is being made by the TMI to analyze the provisions as per the Income Tax Act, 1961 alongwith the Guidance Note issued by the ICAI

Speculation Business

It means a transaction in which a contract for the purchase or sale of any commodity including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. Thus, in a speculative transaction, the contract for sale or purchase which is entered into is not completed by giving or receiving delivery so, as to result in the sale as per value of contract note. In the case of an assessee undertaking speculative transactions there can be both positive and negative differences arising by settlement of various such contracts during the year.

In such transactions though the contract notes are issued for full value of the purchased or sold asset, the entries in the books of account are made only for the differences.

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:

1. The total of favourable and unfavourable differences shall be taken as turnover.
2. 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.
3. In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.

Delivery based transactions:

Where the transaction for the purchase or sale of any commodity including stocks and shares is delivery based whether intended or by default, the total value of the sales is to be considered as turnover.

How to calculate Turnover/Gross Receipts of Shares, Securities & Derivatives;-

Speculative transaction	Derivatives, futures and options
Turnover = Aggregate of Positives & Negatives, the difference amount will be the ‘Turnover’	Turnover = Total of Favorable & Unfavorable differences shall be taken as Absolute Turnover. Premium, if received in case of Options shall also form part of turnover

 

Example 1 - For Speculative Business

Transactions	Qty	Buy	Sell	Realized	Turnover
A	58	9,52,850	9,59,435	6,585	6,585
B	4,205	85,96,345	86,55,295	58,950	58,950
C	3,850	3,59,864	3,51,614	-8,250	-8,250
D	2,605	5,86,934	5,78,365	-8,569	-8,569
E	800	5,98,756	5,98,506	-250	-250
F	7,566	8,05,659	8,09,659	4,000	4,000
G	8,995	50,06,895	50,12,764	5,869	5,869
Total		1,69,07,303	1,69,65,638	58,335	58,335

 

Aggregate of Positive & Negative shall form part of turnover i.e., Turnover = ₹58,335

Example 2 - For Derivatives & Futures

Transactions	Qty	Buy	Sell	Realized	Turnover
A	58	9,52,850	9,59,435	6,585	6,585
B	4,205	85,96,345	86,55,295	58,950	58,950
C	3,850	3,59,864	3,51,614	-8,250	8,250
D	2,605	5,86,934	5,78,365	-8,569	8,569
E	800	5,98,756	5,98,506	-250	250
F	7,566	8,05,659	8,09,659	4,000	4,000
G	8,995	50,06,895	50,12,764	5,869	5,869
Total		1,69,07,303	1,69,65,638	58,335	92,473
Sum of Net Profit			75,404
Sum of Net Loss			17,069
Absolute Profit			92,473

 

Turnover = Absolute profit i.e., Turnover = ₹ 92,473

For Intraday the same example 2 will be applicable.

In case of Option, if premium is there then such premium is to add in Absolute Turnover
For example

Name of Share	Nature of transaction	Lot purchased	Buy Value	Sales Value (Premium received on Sale)	Gain / (Loss)	Turnover as per GN 2022	Turnover as per GN 2014
Sun Limited	Call Option	4*1000 =4,000	60,000	80,000	20,000	20,000	80,000 + 20,000 = 100,000
Star Limited	Put Option	1*1500= 500	30,000	25,000	-5,000	5,000	25,000+ 5,000 = 30,000
Moon Limited	Call Option (Not squared off)	1* 1000 = 1,000	–	70,000	–	70,000	70,000
Total						95,000	2,00,000

An Opinion - Above mentioned example, as per our understand, is being followed by the professionals in the field. Though there’s different practices are there. Due to complications/confusion in point no. 2 - “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” regarding treatment of premium received. - Since the end result as per option (i) and (ii) will remain same. 

 

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Full Text:

Section 44AB - Audit of accounts of certain persons carrying on business or profession

Income-tax Act, 1961

Manual - Audit of accounts of certain persons [Tax Audit]

Manual - Meaning of term "Speculative Transaction"

Manual - Losses in Speculation Business - Section 73

Turnover computation for derivatives and speculation: include absolute differences and option premiums under tax audit rules. Turnover for tax audit purposes differs by transaction type: speculative transactions use the aggregate of realised favourable and unfavourable differences; derivatives, futures and options use the absolute total of favourable and unfavourable differences with option premium included unless already counted in net profit; reverse trade differences are included; delivery based transactions use total sales value as turnover.