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Computing Turnover for Trading in Derivatives, Futures and Options & audit provisions thereto
It may be noted that Clause (a) of Sec 44AB , for the purpose of Tax Audit provides that audit is mandatory if the Turnover, Sales or gross receipts exceeds Rs.1.00 Cr. The limit of Rs 1 Cr needs to be replaced by Rs.5.00 Cr if cash receipt and cash payment is not exceeding 5%. Further, now if the turnover is up to Rs. 2 Cr for individual/HUF/Firm etc, then such assessee have to offer a minimum of 8% or 6% as profit failing which audit would also be mandatory. This 8% or 6% would be mandatory for assessee up to turnover of eligible assessee even if the entire transactions are well be contract notes executed in a stock exchange.
The question arises in derivative, future & options transactions is how to compute the Sales or Turnover for Tax Audit u/s 44AB? In all such cases, the transactions are settled without delivery for the purpose of Tax Audit u/s 44AB.
It may be noted that “Turnover” is not defined in the Income Tax Act. It is also not clarified or explained in section 44AB.
So, one has to extract it from what is accepted commercially and in General & common Parlance.
In general parlance, the term “Turnover” means the sale proceeds of the Goods Sold.
In case of the Speculative Transactions/ future and options trade, Assessee is not taking the actual delivery and so the ownership is never transferred to the Assessee. Resultantly, the total value of the contract note issued for sale of Derivatives cannot be obviously said to be the “Turnover” of the Assessee for the purpose of Audit u/s 44AB.
In this regard, it is worthwhile to visit the “Guidance Note on Tax Audit u/s 44AB of the IT ACT, 1961” issued by ICAI to explain the meaning of turnover in the case of trading of Derivatives, Futures and Options without taking delivery, Speculative Transactions. While discussing the meaning of “Turnover” for Tax Audit u/s 44AB, it has mentioned that the turnover shall be calculated as under:
- The total of favorable and unfavorable differences shall be taken as Turnover.
- Premium received on sale of options is also included in Turnover,
- In respect of any reverse trades entered the difference there on also form part of turnover.
To illustrate the turnover computation for an assessees who has
a) Purchased Options for Rs.2.00 lakhs and Sold it for Rs.2.50 Lacs wherein the favourable difference is Rs. 50,000/-.
b) Purchased Futures Rs.3.00 lakhs and sold for Rs.2.30 lakhs resulting in a negative difference of Rs. 70,000/- .
In this case, the Turnover as per the ICAI Guidance Note is Rs.1.00 lakhs (Rs.50,000/ + Rs.70,000/-) for the purpose of Tax Audit u/s 44AB.
In short, the amount shown in the contract note against sale of Derivatives, Futures or Options where Delivery was not taken could not be taken as “Turnover” for the purpose of Tax Audit u/s 44AB. In short, the total of favourable as well as unfavorable or negative differences constitutes as Turnover for the purpose of Tax Audit u/s 44AB in the case of Non delivery based Transactions of Derivatives, Futures and options. This is what has been held in the case o fGrow more Exports Ltd vs. ACIT. By Mumbai ITAT as well as in the case of Banwari Sitaram Pasari HUF vs. ACIT by Pune ITAT
This is an exceptional mode of computing turnover and has nothing so happens elsewhere. Even 8% or 6% is mandatory for certain categories of eligible assessee with turnover up to Rs. 2 Cr, even if the transactions is well documented and the transactions are executed in a stock exchange for which contract note exists.