Fire your tax related queries and i would get it solved!!!

[Square]

Square Bhai,If profit is above just 2.5L,you have to undergo audit..chahe fir turnover 2crs ke upar jaaye ya naa jaaye...

Sorry oi, I think I will not agree with your post at the moment, but am reserving my comments for some more time.

I will need to revise my post, there's something more I unearthed which is even more good news for us. I will post entire thing in detail later in the day or tomorrow, once I get confirmation of my analysis from a CA friend. I have already sent him my findings for cross checking and he will revert today.

 

[oi trader boi]

Sorry oi, I think I will not agree with your post at the moment, but am reserving my comments for some more time.

I will need to revise my post, there's something more I unearthed which is even more good news for us. I will post entire thing in detail later in the day or tomorrow, once I get confirmation of my analysis from a CA friend. I have already sent him my findings for cross checking and he will revert today.

Yes,Pls do get confirmed with your CA and let us know.
But I found different CA's holding different views.My reply was based on a detailed note on taxation by CA Nikhil here.Pls have a look-

Well the annual tax return season is just about to start and its the right time for you to evaluate whether you are supposed to anything more than just filing your tax returns.

This posts attempts to cover the issue of applicability of tax audit under various circumstances.

Till a few years ago, applicability of tax audit was a simple issue: If your turnover crosses a particular limit, you were required to get your accounts audited. However, since the introduction of refurbished Section 44AD, the applicability of audit has become a cumbersome issue.

So to make it easier for you all to know whether tax audit is applicable to you or not, I have shared below a few simple examples. (these examples have been shared at an earlier discussion in this forum too)

Case 1.

Turnover : Below Rs 1 cr
Gains/Loss from Business: 240000
Salary Income: No
any other income: Nil

Audit not required as condition of income exceeding maximum exemption limit not fulfilled

Case 2

Turnover: below Rs 1 cr
Gains: Rs 50000 (assumed)
Salary: Rs 250000

Audit required as condition of income exceeding maximum exemption limit and profit less than 8% fulfilled

Case 3

Turnover: Below Rs 1cr:
losses: 5 lakhs (assumed)
Interest Income: Rs 5 lakhs

Audit not required as losses will get set off against Interest income resulting in maximum income not exceeding maximum exempted limit.

In the above case, had the interest income exceeded Rs 7.5 lakhs, the audit would have become applicable.

Case 4

Turnover: Below Rs 1 cr

losses 5 lakhs (assumed)

Interest Income: Rs 2.5 lakhs,

Salary: Rs 3 lakhs

Audit required as only Rs 2.5 lakhs losses are set off against interest and remaining losses are to be carried forward (set off against salary not allowed). So income exceeds exempted limit.

Case 5

Turnover: Below Rs 1 cr

Speculative Losses: 2 lakhs

Interest Income : Rs 2.6 lakhs,

Salary: Ni

Audit required as speculative losses cannot be set off against interest income and both the conditions : income exceeding basic exemption limit and profit less than 8% are satisfied.

Case 6:

Turnover : Above Rs 1 cr. Don't bother. Audit is compulsory.

Kindly note that in the above examples it has been assumed there are no deductions available under section 80C, 80D etc.

Regards

Nikhil Kaushik

 

[Square]

Audit costs 10 k in a year that is less than Rs 1000 pm....for such small amount are we going to stop trading ?It is less than one single stoploss per month..if the trading is not profitable for someone then he can stop trading but audit is no reason to stop trading...and for the years you show profits more than 8% of turnover,there is no audit requirement if turnover is below Rs 2 Cr ( earlier Rs 1 Cr).

Smart_trade

Square Bhai,If profit is above just 2.5L,you have to undergo audit..chahe fir turnover 2crs ke upar jaaye ya naa jaaye...

The reason I disagreed is that if your profit is say 4L (which is > 2.5L) AND if your turnover is less than 50L, than means that your profit is >8% of your turnover then in this case audit will not be needed. Only if your turnover exceeds 50L then audit will be needed. (Refer smart trade's post)

 

[Square]

My last few days of interactions post me receiving rectification notice u/s 154 and then subsequent findings conclude :

1) Turnover is calculated on the basis of net profit or loss of each trade on FIFO basis, it should not be on the basis of contract expiry like what zerodha is providing.
2) As per my CA friend, tally or anything else is not needed to do FIFO calculations. A simple excel sheet with necessary formula or macros can be used. And it will not be a rocket science to build one. I don't have much experience in excel macros, but if someone can develop this onetime tool in excel and share that will help all. If our broker can develop this and calculate turnover on the basis of each trade then all this tally /excel etc will be redundant.
3) If we are using present broker reports and using turnover on the basis of contract expiry (and not tradewise) then it will be upto us to convince the assessing officer why did we choose to do so.
4) If turnover is greater than 2 crs then audit is needed whether profit/loss. Total income under or over 2.5L. But for all small and mid size traders this wont be any issue.
5) First target is that turnover should always be less than 2 crs, (easily possible for retail trader), my last full year trading the turnover was 32L
6) Second target, profit should be above 8% of turnover, for this to happen, two things are needed, higher profit and lower turnover. So taking lesser trades and focusing of quality and not the quantity should be the motto. We can maintain a note in excel or a book about these two parameter at least at weekly interval or maybe after closing each trade.
7) So if one is "sure" of generating profit in year then trade in own account, even when salary income is over 2.5L, but ensure that trading profit is 8% higher than the turnover.
8) If there is a loss in the year and trading is done in own account (i.e. salary income or other income is over 2.5L) then audit is compulsory. So all the salaried traders (with salary more than 2.5L) trading in the own account will be stuck here as far as auditing is concerned.
9) Hence if there is scope of ending in loss in the year (like in my case observing past 2 years track record) then trading in a family members account who does not have income above 2.5L in a year is the work around and the only option. Here profit or loss in the year will not matter. If profit is less than 2.5L then turnover is irrespective. However if the profit is over 2.5L then it should be over 8% of turnover.
10) This last point is very important. Even after all of the above, for some reason, if audit is not done while it was mandatory to get audit done, then

"…According to section 271B, if any person who is required to comply with section 44AB fails to get his accounts audited in respect of any year or years as required under section 44AB, the Assessing Officer may impose a penalty. The penalty shall be lower of the following amounts:
(a) 0.5% of the total sales, turnover or gross receipts, as the case may be, in business, or of the gross receipts in profession, in such year or years.
(b) Rs. 1,50,000.
However, according to section 273B​, no penalty shall be imposed if reasonable cause for such failure is proved…"

I did have to spend a lot of time researching all this and taking CA's feedback. Unless this is any contradiction by experts, I guess the above holds good. Also experts endorsement will certainly help.

 

[canikhil]

Yes,Pls do get confirmed with your CA and let us know.
But I found different CA's holding different views.My reply was based on a detailed note on taxation by CA Nikhil here.Pls have a look-

My last post is applicable only upto 31 March 2016. With amendment to Finance Act, from FY 2016-17, section 44AD is applicable to turnover upto 2 crore. So the examples shared in my previous post need to be updated. Will do that some time later.

 

[nac]

1) Turnover is calculated on the basis of net profit or loss of each trade on FIFO basis, it should not be on the basis of contract expiry like what zerodha is providing.
2) As per my CA friend, tally or anything else is not needed to do FIFO calculations. A simple excel sheet with necessary formula or macros can be used. And it will not be a rocket science to build one. I don't have much experience in excel macros, but if someone can develop this onetime tool in excel and share that will help all. If our broker can develop this and calculate turnover on the basis of each trade then all this tally /excel etc will be redundant.
4) If turnover is greater than 2 crs then audit is needed whether profit/loss. Total income under or over 2.5L. But for all small and mid size traders this wont be any issue.
5) First target is that turnover should always be less than 2 crs, (easily possible for retail trader), my last full year trading the turnover was 32L
8) If there is a loss in the year and trading is done in own account (i.e. salary income or other income is over 2.5L) then audit is compulsory. So all the salaried traders (with salary more than 2.5L) trading in the own account will be stuck here as far as auditing is concerned.

1. I don't know if they actually providing one, but I have read that "Zerodha" is providing tradewise turnover report. If you have Zerodha account, check again.
2. I have been trying to find a solution for this for years now, but I haven't found one. Even posted a thread here. I guess it's lot tougher than I/you think. I have been doing this manually till date. It's about few hours work every year.
4. If one is an options scalper, most likely he will hit that 2cr mark easily and if in profit likely that would be less than 8% of t/o.
5. Again, it's not easy for an options scalper.
8. I am not sure about this. Just because salary is more than base limit, we should get our books audited? Doesn't that 8% rule come into play here?
Eg: Salary of 4 lakh and derivative loss of 1 lakh with t/o of 10 lakh.
- 4 lakh (salary alone) is more than 8% of t/o (10 lakh)
- if we club both the income, 3 lakh (4 lakh - 1 lakh) is still more than 8% of turnover (I know we can't set off business loss against salary income, just for the calculation).

@canikhil, Can you clarify this (point #8)? I thought I was clear about this taxation matters, Square nicely confused me here

 

[Smart_trade]

1) Zerodha gives trade wise turnover also if needed in Q with detailed trade wise calculation.I have been seeing it regularly, it is little more than turnover calculated contract wise.

2)Trading on family members name is ok but if the case comes for scrutiny, the clubbing provisions will apply.It will be difficult to prove that the family member understands f and o and traded in it....so it will be considered as your loss or profit.It may even be considered as Benami transaction.

So we have to think how one takes care of 2 above.

Smart_trade

 

[Smart_trade]

1. I don't know if they actually providing one, but I have read that "Zerodha" is providing tradewise turnover report. If you have Zerodha account, check again.
2. I have been trying to find a solution for this for years now, but I haven't found one. Even posted a thread here. I guess it's lot tougher than I/you think. I have been doing this manually till date. It's about few hours work every year.
4. If one is an options scalper, most likely he will hit that 2cr mark easily and if in profit likely that would be less than 8% of t/o.
5. Again, it's not easy for an options scalper.
8. I am not sure about this. Just because salary is more than base limit, we should get our books audited? Doesn't that 8% rule come into play here?
Eg: Salary of 4 lakh and derivative loss of 1 lakh with t/o of 10 lakh.
- 4 lakh (salary alone) is more than 8% of t/o (10 lakh)
- if we club both the income, 3 lakh (4 lakh - 1 lakh) is still more than 8% of turnover (I know we can't set off business loss against salary income, just for the calculation).

@canikhil, Can you clarify this (point #8)? I thought I was clear about this taxation matters, Square nicely confused me here

Inter head clubbing is not allowed .If you have Rs 4lacs of income from any other business then you can club that with a derivative trading loss of 1 lakh so total business income becomes 3 lacs which is more than 8 % of 10 lacs plus other business turnover to be added and considered together.You cannot club salary and business income for purpose of audit eligibility. That is my reading...canikhil can explain further....

Smart_trade

 

[oi trader boi]

Sir,say my turnover is 2 crores 82 lakhs 65 thousand and 75 paisa.And I'm doing audit based on this figure provided by Zerodha and paying a tax on the profit which is say 9 lakhs.
now,what if Income tax dept saying that the turnover is 3.87 crores like something? is it possible??
may be IT dept seeing a different turnover in their database based on my PAN card and I'm mentioning a different turnover.But I'm doing audit.

ty

 

[canikhil]

Sir,say my turnover is 2 crores 82 lakhs 65 thousand and 75 paisa.And I'm doing audit based on this figure provided by Zerodha and paying a tax on the profit which is say 9 lakhs.
now,what if Income tax dept saying that the turnover is 3.87 crores like something? is it possible??
may be IT dept seeing a different turnover in their database based on my PAN card and I'm mentioning a different turnover.But I'm doing audit.

ty

1. what IT department sees is the gross value of contracts sold ie the notional values of options and futures.

2. So while an officer with knowledge of derivatives may understand your workings, a novice sitting in that powerful position will take time to understand how you have computed your turnover and profit.

3. In many cases, the officers without knowledge of derivatives, do make comments like your turnover was 18 cr (one of the recent tax hearings I had for a client)...the key is to have your documents in place.

4. Having said the above, you cannot rule out a not-so-honest officer may use these gross values to extract some cash out on the grounds that you are otherwise liable for penalty for non-submission of audit report or for wrong books of accounts.

5. In your hypothetical case, even if the officer makes such a remark, what you need to demonstrate is that the same contracts that are showing a gross value sold in his system have been included in the profit & loss account and no contract has been left out.

In many cases, specially borderline ones, we actually do the audit only to avoid such potential harassment.