Speculative transactions are transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. Further, if these non-delivery transactions are undertaken through recognised stock exchange, then these would not be considered as deemed speculative transaction and would be normal business transactions.

We get lot of queries in relation to transactions made in futures & options and other non-delivery based transactions. In the absence of clear instruction from IT department, common tax payers are not sure of issues, like determination of the turnover for audit purposes, taxability of the same.  We have tried to address these queries by way of this write-up:

Determination of Turnover in non-delivery based transactions

The contract notes are issued for the full value of the underlying assets purchased or sold, but entries in the books of account are made only for the differences.  The institute of Chartered Accountants of India had issued the guidelines for accounting treatment of these transactions with the view to determine the turnover of the same for the purpose of section 44AB, in the following manner:

• The total of positive and negative, or favourable and unfavourable differences shall be taken as turnover;
• Premium received on sale of options is to be included in turnover;
• In respect of any reverse trades entered, the difference thereon shall also form part of the turnover.

Let us try to understand this by way of an illustration:

(a)    Mr. X offered to purchase 5000 shares of Reliance Ltd at a cost of Rs. 1000 each and also offered to sell 5000 shares of Reliance Ltd. at a cost of Rs. 1100 each.

(b)   He also offered to purchase 1000 shares of L&T at a cost of Rs. 3000 each and also offered to sell 1000 shares of L&T at a cost of Rs. 2800 each.

Thus, the turnover of Mr. X will be calculated as under:

(i)     Turnover in (a) above, Rs. 5500000- 5000000 = Rs. 500000

(ii)    Turnover in (b) above, Rs. 2800000- 3000000 = Rs. (200000)

Thus, the net turnover of Mr X. would be (i) + (ii) = Rs. 700,000

It is pertinent to note here that it is immaterial, whether the difference is negative or positive, and are aggregated and turnover is calculated.

The above method is used for determination of turnover for tax audit purpose under section 44AB. However, it is interesting to note that one school of thought advocates that, as per the sale of Goods Act, 1930, the delivery of goods are must to constitute sale and since delivery did not take place, the transaction cannot be regarded as sales or turnover.

Provision of section 44AD to have impact on loss from non-delivery transactions such as F&O and derivatives

Here it is important to refer to a new section 44AD, which has been incorporated to provide for special provisions for computing business profit on presumptive basis from the assessment year 2011-12 (FY 2010-11). The provision of this new section mandates disclosure of at least 8 per cent of net profit on the gross turnover.

Further, in case the assessee does not discloses the same (less than 8 per cent or loss) , the assessee will be required to maintain books of accounts and is required to get tax audit under provisions of section 44AA and 44AB.  Thus, pursuant to this change, income from any business can not be below 8 per cent of the gross turnover in any circumstances.

Thus, in view of above, if the assesses wants to disclose an income which is less than 8 per cent of gross turnover or has incurred losses, then it is required to maintain books of accounts and get these books of accounts audited, irrespective of amount of gross turnover.

Taxmantra.com provides complete online taxation solutions for individuals ( Tax Returns + Tax Support + Tax Planning ) – please see this – Services Offered.

Taxmantra.com- Providing Complete Online Tax Solutions for Individuals, Not Just Returns .