Loss from F & O can be set off against other Income

Query 1]

1. Whether loss in F & O transactions is considered as speculative income? Can it be considered as capital gain income or business income?
2. Whether loss in F & O transactions can be adjusted against
   i. My intraday profit?
   ii. My income from other Business?
   iii. My income from capital gain?
   iv. My interest income?
3. Whether audit would be compulsory even if I don’t want to show the loss in the transaction and don’t wish to adjust the same against my other income? [kish*********@gmail.com]

Opinion:

1. Income from F & O transactions is no longer 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 (STT) is paid and (iii) trade is supported by contract note.
   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.
2. Since the loss in F & O is now considered as a normal business loss, it can be very well set off against all other income of the taxpayers (except salary income). More particularly, it can be set off against your intraday profit, your income from other Businesses, capital gain income and as well as against income from other sources.
3. First of all, let me elaborate about the audit provision in general under the Income Tax Act:
   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 Rs. 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, 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) the tax Audit would be mandatory in nature if you are not offering minimum of 6% of the turnover as your income. The audit would be mandatory despite the fact that you are willing to forego the benefit of the adjustment against your other income or even if you are willing to forego the benefit of carry forward of the loss. The only way to avoid audit is to offer a minimum of 6% of turnover as income.

Query 2]

I am a retired banker and am trading in futures of stocks & commodities. I had incurred a loss in both (stock as well as commodities) in the FY 2022-23. My queries are,

1. Whether it is compulsory to show it in the ITR despite the fact that I am not a trader but an investor & so my profit/loss cannot be shown as business income?
2. In case I earn profit through trading this year (FY 2023-24), will it be exempted from paying taxes or can it be adjusted against the loss not shown in the ITR of earlier year for the reason that there was a loss and no income was liable for taxation? Please guide. [us******@gmail.com]

Opinion:

1. As discussed above, the income from F & O is normally taxable as “Business Income”. The computation mechanism provides that the individual taxpayers whose turnover is less than Rs. 2 Cr has to compulsorily offer a minimum of 6% (85 in case transaction is not done in digital mode) of the turnover as income. If there is a loss or if the income is less than 6% then the taxpayers would be required to get the books of account audited.
2. In your case, since there is an F & O transaction and there is a loss, you have to either offer a minimum of 6% as your income. Alternatively, you may offer the loss in the ITR by getting your books of account audited
3. The benefit of carry forward of the loss for set off against subsequent years income would be available only if you have filed the return of loss (with figure of loss disclosure) within the due date of filing it and not otherwise.  The due date for filing audit reports & income tax return for taxpayers covered by audit provision is 30^thSeptember & 31^st October respectively.

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