I have done intra-day trading. My sales-purchase volume exceeds Rs 40 lakh.

Will the
aggregate of profit and loss constitute turnover (as in futures and options transaction)
or aggregate of sales and purchase taken as turnover for tax audit?

— Sandeep Jain, e-mail

Tax audit applies to every person whose total sales, turnover or gross receipts in business
exceeds Rs 40 lakh. Intraday trading is considered as speculative business. As per the
guidelines issued by the Insititute of Institute of Chartered Accountants of India (ICAI), a
speculative contract is settled by paying out the difference, which may be positive or negative.
Thus, the aggregate of both positive and negative differences, i.e., profit or loss from
transactions is considered as the turnover for determining the liability to audit vide Section
44AB of the Income Tax Act, 1991.

As you are engaged in intra-day trading, the aggregate of profit and loss and not purchase
and sale will be considered for determining the liability to audit.

Shares purchased on a particular day and sold the next day is not speculative business but
taxed as short-term capital gain or loss

Is day trading in shares a speculative business or normal business leading to

capital gain or loss for a salaried employee?

— Ganesh Soni, e-mail

For a person earning income from any head of income, intra-day trading in shares is always
treated as speculative business. Section 43(5) of the Income Tax Act, 1961, deals with
speculative transaction. It states that a transaction of purchase or sale of a commodity
including stocks and shares settled otherwise than by actual delivery or transfer of the
commodity or scrip is a speculative transaction.

In intra-day trading in shares, there is no actual delivery as the shares enter and exit from the
trading account on the same date and it does not enter the demat account at all.

However, if shares are purchased on a particular day and are sold the next day, it is not
treated as a speculative business. The profit or loss on sale of such shares is taxed as short-
term capital gain or loss or business income. Hence, intra-day trading in shares for a salaried
employee will be treated as speculative business. Also, Section 73 mentions that loss from
speculative business can only be set off against profit from such kind of business.

Can losses in the Nifty futures be set off against profit from delivery-based trading? I
understand Section 43(5) of the Income Tax Act, 1961, is the governing section. Can
the loss be carried forward to be set off next year?

— Malav e-mail

From assessment year (AY) 2006-07 (accounting year 2005-06), Section 43(5) of the Income
Tax Act, 1961, was amended to exclude an eligible transaction of futures and options (F&O)
from the purview of speculation business if such a transaction is within the definition of
Section 2(aa) of the Securities Contract Regulation Act, 1956, and is carried out
electronically, with a proper broker's note, and undertaken at a recognised stock exchange.
Such an F&O transaction will be treated as non-speculative business transaction.
Set-off and carryforward of losses are governed by Sections 71 to 73, which state that non-
speculative business loss can be set off against non-speculative business income or
speculative business income. But loss from speculative business can only be set off against
income from speculative business.

Thus, (non-speculative) loss in Nifty F&O can be set off against profit from delivery-based
share trading. But such non-speculative business loss is to be first set off against any
business profit (if any). If business profit is not sufficient to absorb the loss, then it can be set
off against any other income (other than salary). If it still cannot be set off fully, then the
balance loss can be carried forward for set-off next year. It can be set-off only against any
business income next year. Carryforward of loss is permitted up to eight years.

I learn if the turnover of trading in the future and options (F&O) market is above Rs 40
lakh, the accounts must be audited. Should the profit or loss indicated in the financial
ledger of the demat account on a day-to-day basis be considered or only the buy and
sell difference of the F&O contracts be considered for auditing? Also, what does
auditing mean?

— P Sreedhar Karwar, e-mail

Derivatives [futures and options (F&O)] transactions are completed without delivery of shares
or securities. These are squared up by payment of differences. The contract notes are issued
for the full value of the asset purchased or sold but entries in the books of accounts are made
only for the difference. Turnover in such types of transactions is to be determined as follows:

* The total favourable and unfavourable difference, i.e., profit or loss, is to be taken as
turnover.

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

* For any reverse trades entered, the difference also forms part of turnover.

Can You Deduct STT As Expense From Share Sale

Income ?
The income from share transaction can occur in following forms
1. Share trading
2. Speculative trade
3. F & O transactions
4. Capital Gains
Allowance of STT for First three types (1, 2 & 3)
From Assessment Year Asst Year 2009-10 (FY 2008-09 ) , Securities Transaction Tax
(STT) is defined as an expense u/s 36(xv) of the I T Act
(xv) an amount equal to the securities transaction tax paid by the assessee in respect
of the taxable securities transactions entered into in the course of his business during
the previous year, if the income arising from such taxable securities transactions is
included in the income computed under the head Profits and gains of business or
profession.
Therefore , for share trading income, or speculative income, or Futures & Options
trades , STT is an expense and deductible.
Can You Deduct STT from Capital Gains?
However , if you are selling the shares as investments , the STT can not be deducted
as cost of acquisition . This is provided under the proviso to section 48 which is
regarding cost of acquisition
Proviso to section 48
Provided also that no deduction shall be allowed in computing the income chargeable
under the head Capital gains in respect of any sum paid on account of securities
transaction tax under Chapter VII of the Finance (No. 2) Act, 2004
Thumb rule is that STT is cost for all kinds of transactions except
capital gains.

Read more: Can You Deduct STT As Expense From Share Sale Income ?
http://www.taxworry.com/2009/12/can-you-deduct-stt-as-expense-
from.html#ixzz0aR0hGZJz
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How to Compute Turnover In Case Of Future &
Options Trades?
I am a working professional and apart from my salary I have some income
in Futures and option transactions and shares. I need to know few this.

1. Since Futures and options transactions are under business income.

Can we set of gains and losses against income from salary?
2. How is turnover in Futures and options transactions calculated?? If
notional value is considered, even 5-10 transactions will exceed
40L turnover and we need go through tedious Tax audit process.
3. What are documents that needs to be submitted while filing
returns of income. Apart from Form 16, will a statement of
account for futures and options transactions would be enough?

santoshk.sahu@gmail.com
Answer to your first question is Negative. The loss from "Capital Gains " and
"Business & professions" can not be set off with income from Salary.

The meaning of turnover for in case of transactions in Futures and Options

of shares is not defined under the I T Act.In case of derivative trading-
Futures and Option- the difference on which the contract is purchased or
sold is important. Although the value of contract is number of contract
multiplied with the shares price , yet what is actually given or taken is
differential amount in contract. For example if you purchase a future
contract for Rs 105 for a share having a lot of 100,you pay nothing at the
time of buying a contract, yet at the time of expiry if contract , you are
either gainer or loser which is determined whether there is positive or
negative difference. So , for the purpose of determining the turnover in
case of future and options , for the purpose of 44AB , based on the guidance
note of ICAI , following items should be considered to constitute turnover

• The total of positive and negative differences , plus

• Premium received on sale of options is also to be included in turnover
,plus
• In respect of any reverse trades entered, the difference thereon

But not the total value of contract .

Accounts with Return

Regarding your third question, if you do not fall in case of tax audit or a
case that regular books of accounts are maintained , even in that case your
return of income should be accompanied by a statement indicating the
amounts of turnover or, as the case may be, gross receipts, gross profit,
expenses and net profit of the business or profession and the basis on which
such amounts have been computed, and also disclosing the amounts of total
sundry debtors, sundry creditors, stock-in-trade and cash balance as at the
end of the previous year [this is as per explanation section 139(9)]