At the outset, The Team Tax Talk would like to heartily appreciate the concern and care you carry for the taxpayers of the country.

We equally appreciate your willingness and approach in accepting & responding to the recommendation of the taxpayers. We truly express our deep gratitude for the open mindset carried by you by inviting various organizations & institutions of the taxpayers.

We as a Tax knowledge sharing portal would like to share one small issue which can be resolved without any loss of revenue to the Government Treasury and is sure to benefit lakhs of the taxpayers doing transactions in stock exchange through Future & Option (F & O).

For ease of reference, the issue and the solution is summarized as under:

1.   Income from F & O transactions in the share market is taxable as “Business Income” under the Income Tax Act-1961. It is not considered as Speculative transactions pursuant to amendment in section 43(5) done long back.

2.   Section 44AD of the Income Tax Act-1961 requires a person to get the books of accounts audited if the income from such a transaction is less than 6% of the turnover (8% if transactions is not done in digital mode) in case the total turnover is not exceeding Rs. 2 Cr. In short, section 44AD presumes 6% or 8% as taxable profit. The taxpayers who have suffered the loss or have not earned the 6% or 8% are required to maintain the books of accounts & get them audited as well.

3.   In case of a person doing a transaction in F & O, the turnover as per accounting principle is the total of Profit & Loss. Let us consider a case of Mr. A who has a profit of Rs. 25 Lakh & Loss of Rs. 26 Lakh in F & O transaction. Here, Mr. A has a net loss of Rs. 1 Lakh during the year whereas turnover as per accounting principle is Rs. 51 Lakh. As a result, Mr. A would be required to offer 6% of Rs. 51 Lakh i.e., Rs. 3.06 Lakh as Income while filing the income tax return. If Mr. A wants to offer Rs. 1 Lakh actual Loss in the ITR then he would be required to maintain the books of accounts and go through the time consuming process and expenses of audit from a Chartered Accountant.

4.   It may humbly be noted that the transaction in F & O is routed through stock exchange only and very well backed by documentary evidence without any possibility of manipulation & fabrication. The stock exchanges and the brokers have the required details which are very well available & accessible to all.

5.   Section 44AD was introduced with an aim to provide “ease of business” to the small taxpayers. However, non exclusion of F & O transactions has resulted in the unintended & unnecessary compliance burden on the taxpayers of the country.

6.   Solution:
Section 44AD(6) provides 3 categories of persons who will not be covered by the above presumptive scheme of taxation. Similar exclusion can also be provided in respect of income from F & O transactions.

This can be done by just adding clause (iv) in section 44AD(6) as under:
“(iv) income from derivative transaction”

By just adding just one line, the inconvenience of the lakhs of investors doing F & O transactions can be avoided.

Since, the exclusion would necessarily require amendment in section 44AD, it can be done through Finance Bill 2023. However, the CBDT can issue notification in this respect now which can be ratified in the Finance Act – 2023 as has been done during Covid period.

7.   We understand that the present Government is committed to provide “Ease of Business” to the taxpayers. The present amendment will result in real ease of business without any loss to the Government Treasury.

Hope, you may find all our submissions relevant and useful.

For The Tax Talk Team

www.TheTaxTalk.com

CA Naresh Jakhotia

Email: nareshjakhotia@gmail.com

Cell No. 94228-60300