Tax Audit Applicability in case of loss in Futures & Options

Nowadays it is very common for salaried individuals to have Futures & Options [Hereafter referred to as F&O] in their Income Tax Return [ITR]. This article discusses all about ITR Filing in such cases. Also, it is many times said that Tax Audit is applicable u/s 44AB(e) in case you have a loss in F&O. This Article deals to clear that myth.

Income Tax Return [ITR] to be Filed

Futures and Option are considered as Business income, so in their case, ITR-3 is filed. Alternatively, if you are opting for a Presumptive Taxation Scheme, ITR-4 will be filed. Please note that you can opt for the Presumptive Taxation Scheme, only up to T/O of Rs. 2Cr.

Tax Audit Requirement in case of F&O

To understand Tax Audit Requirements in the case of F&O, especially in case of Loss, or if your income is less than 6% we need to understand the Applicability of Section 44AB(e) [Here, I am taking a rate of 6% as F&O generally are on completely Digital Platform].

Section 44AB(e) in present below for your reference:

“Section 44AB Every person,…….

(e) carrying on the business shall, if the provisions of sub-section (4) of section 44AD are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year,

get his accounts of such previous year audited by an accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed:”

Section 44AD(4) in present below for your reference:

“Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1).”

Conclusion

• As per my understanding of Section 44AB(e) read with Section 44AD(4), Tax Audit u/s Section 44AB(e) is applicable only if you have opted for Section 44AD in one of the Assessment Years and Later Opt-out in any of the five assessment years relevant to the previous year succeeding such previous year.
• For Example for AY 2022-23, if you opt for Presumptive Taxation Scheme u/s Section 44AD, Tax Audit will only be Applicable to you if you opt-out of that scheme in the next 5 AY, i.e. once you opt-in, then you need to carry on with that scheme for 5 years, else Tax Audit will be applicable.
• It will simply be not applicable on you if you show the loss or have a Profit of less than 6%/8% as the case may be.
• Please also note that Tax Audit will be applicable on you u/s 44AB(a) if you coss the Threshold, which is Rs. 10Cr for AY 2022-23, assuming you have all digital transactions.

Computing the T/O Threshold for Tax Audit in case of F&O

Since F&O are not delivery based transactions, The turnover in such types of transactions is to be determined as follows:

(i) The total of favorable and unfavorable differences shall be taken as turnover.
(ii) Premium received on sale of options is also to be included in turnover.
(iii) In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.

This can be explained from below mentioned Example:

• On 21st Jan 2021, you did an F&O Transaction with a Loss of Rs. 10000
• On 1st Feb 2021, you did an F&O Transaction with a Gain of Rs. 20000

Your Turnover Threshold for Tax Audit Purpose will be Rs. 30000.

Maintaining Books

If you are filing ITR -3 and No Tax Audit is applicable to you, you need to file your proper Balance Sheet & Profit and Loss in your Tax Return.

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information.In no event shall I shall be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information. Please refer your consultant before relying on the provisions of this article.