Conditions for Tax Audit

Taxpayers having income from trading in equity intraday, equity F&O, commodity F&O, and currency F&O must report it as business income in the Income Tax Return. Since all the transactions are digital in nature, the limit for turnover to determine Tax Audit as per Section 44AB

Turnover exceeds INR 10 Cr

The limit of turnover as per Section 44AB is INR 10 Cr if at least 95% of the total payments and at least 95% of the total receipts are digital in nature.

If the trading turnover exceeds INR 10 Cr, Tax Audit is applicable as per Section 44AB(a) of the Income Tax Act.

Turnover is between INR 2 Cr and INR 10 Cr

When turnover is between INR 2Cr and INR 10Cr, neither Section 44AB (or any of its subsections) nor Section 44AD (presumptive taxation scheme) is applicable. Therefore, Tax Audit is not applicable irrespective of profit or loss.

Trust us, even experts don’t have any logical explanation for this loophole and clarification is awaited from the CBDT.

Turnover is upto INR 2 Cr

Tax Audit is applicable under Section 44AB(e) if all the below conditions are satisfied:

1.Incurred loss or profit is less than 6% of turnover

2.Total income is more than basic exemption limit

3.Taxpayer has opted out of presumptive taxation scheme in any of the previous 5 financial years

What are the Types of Trading? 

1. Delivery Based Trading: Delivery based trading is the most common form of share trading. In this type of trading the investors have to pay the full price of the stock and the stocks are deposited in their demat account. There is no predefined time limit in case of the delivery based trading for selling the stocks. Turnover in case of delivery based trading shall be the total sale value. For Example If you bought 100 BPCL shares at Rs 400 and sold them at Rs 470, the selling value of Rs 47000 (470 x 100) can be considered as turnover. It is important that the above calculation of turnover for delivery trades applies only when your equity-based delivery trades are announced as a business income.

2. Intraday Trading: When the shares are bought in the opening market and sold in the closing market, such trading is known as Intra Day Trading. Intraday trading shall be considered as speculative income.Aggregate or absolute sum of both positive and negative differences from trades is to be considered as a turnover. For example, if you buy 200 shares of SBI at 414 at time of opening of market and sell at 422 by day closing, you make a profit or positive difference of Rs 1600, this Rs.1600 can be considered as turnover for this trade.

3. Trading in Futures and Options: Trading in Futures and Options shall be considered as Non Speculative Income. Turnover in case of Future Trading shall be determined as follows- The total of favourable and unfavourable differences shall be taken as turnover. In case of any reverse trades entered, the difference thereon should also form part of the turnover. For example, if you buy 1 lot (25 Units) of Nifty futures at 10200 and sell at 10300, And Buy 1 Another lot of Nifty future (25 Units ) at 10350 and sell at 10300 then Rs. 2500 (25 x 100) + 1250 (50 x 25) i.e. 3,750 the negative difference or loss on the trade is turnover.

Turnover in case of Option Trading shall be determined as follows– The total of favourable and unfavourable differences shall be taken as turnover Premium received on sale of options is also to be included in turnover In respect of any reverse trades entered, the difference thereon should also form part of the turnover. For example, if you buy 100 units or 4 lots of Nifty 10200 calls at Rs.50 and sell at Rs.55.The favourable difference or profit of Rs 500 (5 x 100) is the turnover. Also, the premium received on sale also has to be considered turnover, which is Rs 55 x 100 = Rs 5500. So total turnover on this option trade = 500 +5500 = Rs 6000.

When is Tax Audit Required?  Section 44AB-  If a person’s total gross receipt and payment in cash does not exceed 5% of total receipt and payment then the limit of turnover for tax audit is Rs. 5 crores.

Section 44AD- If all the following conditions are satisfied then tax audit would be applicable-

1.turnover is less than Rs. 2 crores 2.the profit is less than 6% of the of the turnover and                    3.the Income exceeds the Exemption Limit

When is a Tax Audit not required? 

In case of Delivery based trading, if the assessee is declaring them as capital gains or investments, then there is no need to calculate turnover on such transactions. Also, where capital gain arises there is no need for an audit if you have only capital gains irrespective of turnover or profitability.