Calculating Turnover in the Share Market Transactions: Intra-Day, Deliver based, Future and Options

One of the important element of taxation while doing share market transaction is “computing turnover. Though calculating is easy in delivery based transaction, it is not so easy for Intra-Day, Deliver based, Future and Options. Let us know about this aspects in this article:

Derivatives (FUTURE & OPTIONS)

Derivative are the instrument the value of which derives its value from the underlying assets/securities. Future & Option are two kinds of derivatives available for trading in stock market. As Section 43(5) of the Income Tax Act states that any transactions that take place during Futures and Options trading through recognized stock exchange are deemed to be non-speculative transactions and accordingly any profits/loss from such trading would be treated in the same manner as profits/loss from any other business.

Calculating Turnover from Share Market if the shares income is taxable as Business Income?

It may be noted that calculation of “Turnover” is of prime importance if the shares income is taxable as Business Income. Question arises as to how to compute turnover for determining the applicability of tax audit under section 44AB of the Act in case of intraday trading in shares, Future and options, deliver based transactions?

INTRA DAY TRANSACTIONS:

1. In the intra-day trading, the contracts are squared up by paying out the difference which may be positive or negative.

2. As such, in such transaction, the difference amount is ‘turnover’.

3. Accordingly, the aggregate of both positive and negative differences is to be considered as the turnover of intraday transactions.

4. Let us understand this with example in the case of Intra- Day transactions:

Shares (I)	Quantity (II)	Purchase Rate (III)	Sale Price (IV)	Total Sale Amount  (V= II*IV)	Total Purchase Cost (VI = II * III)	Profit / Loss   (VII= V-VI)	TURNOVER FOR THE PUROSE OF INCOME TAX ACT (VIII)
ITC	1000	210	230	2,30,000	2,10,000/-	20,000	20,000
PNB	10000	35	40	4,00,000	3,50,000/-	50,000	50,000
Amar Raja Battery	1000	800	700	7,00,000	8,00,000/-	-1,00,000	1,00,000
						-30,000	1,70,500

Ignore the negative sign for computing the turnover.

Whether income from futures and options transactions has to be offered to tax as business income or it can be offered as capital gains income?

1. Whether Speculative?
   In futures and options, the contract is settled otherwise than by actual delivery. The contract is squared up by paying or recovering the difference on settlement. However, Section 43(5) of the Income Tax Act, 1961 which defines the ‘speculative transaction’. In this section, an exception and has specifically excluded futures and options trading from the speculative transaction.  Therefore, income from futures and options trading is non – speculative business income.

2. It is normally a business income or loss.

3. Only in case where the F & O is used as a tool to hedge the capital assets of the taxpayers, it may be termed as capital gain income.

4. Even in situation where it is used as a hedge against capital assets, I would suggest to offer the income as business income to avoid litigation and disputes.

How to compute turnover for tax audit purpose in respect of futures and options transactions?

This is an interesting issue and taxpayer need to understand this part very carefully.

In the Guidance Note on Tax Audit issued by the ICAI, the turnover in case of futures and options is computed in following manner:

a) The total of favorable and unfavorable differences shall be taken as turnover.

b) Premium received on sale of options is also included in turnover.

c) In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.

In short,

a) in case of Future Transactions, i.e., total of favorable and unfavorable differences shall be reckoned as turnover.

b) In case of Put & Call Options, premium received on sale of options is also included in turnover.

c) In respect of any reverse trades, the difference thereon, should also form part of the turnover.

 

Let me try to explain the case with examples:

Calculation of Turnover of futures:

Script Name (I)	Units (II)	Buying Rate  (III)	Selling Rate  (IV)	Total Purchase Value (V= ii*iii)	Total Sell Vale (VI= IV*II)	Turnover for the purpose of Income Tax Act (VII=VI-V)
NMDC	1 lot [6700 Shares]	140	150	938000	1005000	67,000/-
Mahanagar Telecom Ltd	1 lot [600 Shares]	1100	1100	6,60,000/-	6,60,000/-	0
ITC	1 lot [3200 Shares]	235	215	7,52,000	6,88,000/-	-64,000/-*
Turnover						1,31,000/-

 Ignore the negative sign for computing the turnover.

Turnover in the case of options: 

Options Script (I)	Units (II)	Buying Rate (III)	Selling Rate (IV)	Difference    V=[(IV-III)xII]	Premium received   (VI=IV*II)	Turnover    VII=(F+E)
Infosys PE	1 Lot (600 Shares)	30	10	-12,000/-	6,000/-	12000/- [Note 1]
NMDC PE	1 Lot [6700 Shares]	10	2	-53,600/-	13,400/-	13,400 [Note 2]
ITC CE	1 lot [3200 Shares]	15	20	16,000/-	64,000/-	16,000 [Note 3]
SBI PE	1 Lot (1500 Shares)	20	30	15,000/-	45,000/-	15,000/- [Note 4]
Turnover						56,400/-

 Ignore the negative sign for computing the turnover.

Notes:

1. Even if in the Put Option, there is loss of Rs. 12,000/-, it will be the turnover from income tax perspective. Some authors are of the view that the turnover will be of Rs. 18,000/- which may not be correct in my view. Ideally, the value of the premium will be turnover it becomes zero on the strike date. If the options is exercised before the strike date then either the favorable / unfavorable difference only would be turnover. Considering both the premium at the time of sale and favorable / unfavorable difference may not be the correct interpretation of the guidance note.

2. Even if in the Put Option, there is loss of Rs. 53,600/-, it will be the turnover from income tax perspective. Some authors are of the view that the turnover will be of Rs. 66,800/- which may not be correct in my view. Ideally, the value of the premium will be turnover it becomes zero on the strike date. If the options is exercised before the strike date then either the favorable / unfavorable difference only would be turnover. Considering both the premium at the time of sale and favorable / unfavorable difference may not be the correct interpretation of the guidance note.

3. In call Option, there is a profit of Rs. 16,000/-, it will be the turnover from income tax perspective. Some authors are of the view that the turnover will be of Rs. 80,000/- which may not be correct in my view. Ideally, the value of the premium will be turnover it becomes zero on the strike date. If the options is exercised before the strike date then either the favorable / unfavorable difference only would be turnover. Considering both the premium at the time of sale and favorable / unfavorable difference may not be the correct interpretation of the guidance note.

4. In put Option, there is a profit of Rs. 15,000/-, it will be the turnover from income tax perspective. Some authors are of the view that the turnover will be of Rs. 60,000/- which may not be correct in my view. Ideally, the value of the premium will be turnover it becomes zero on the strike date. If the options is exercised before the strike date then either the favorable / unfavorable difference only would be turnover. Considering both the premium at the time of sale and favorable / unfavorable difference may not be the correct interpretation of the guidance note.