Turnover meaning for day trading ,and transaction in futures or options is quite different than the meaning of turnover in normal trading of shares , say delivery based or any other goods . Secondly , the understanding how to compute the business turnover is also important for other compliance under Income Tax Act like -tax audit, tax withholding provisions etc or even benefits like section 44AD etc.
Turnover Meaning in Case of Speculative Transactions
Day trading is a trading where you settles the purchase or sell with taking or giving the delivery of shares. Similarly , the futures and options trades are basically trading in contracts which are mostly settled without any delivery of underlying shares (now a days , delivery settlement in case of Futures & Options has been allowed , though) . This post is focussed mainly for non-delivery cases.
In all such cases, the profit or loss arises on the difference of amount of settlements . So , a person may do just one trade involing buying shares or contract worth 3 Crore and next moment may settle it for profit of Rs 10,000 i.e sell it for 3.01 Crore. The net amount which he will get is mere Rs 10,000 . In such case , the question arises whether the Rs 3.1 crore should be business turnover or Rs 10,000 only.
The question is “whether the contractual value is the turnover or the net amount on settlement of the contracts for trade is the turnover ?”
ICAI Guidance Note on Turnover Meaning
The Institute of Chartered Accountants of India (ICAI), in it’s Revised Guidance Note on Tax Audit has clarified turnover meaning for option traders to determine applicability of tax audit u/s 44AB.
Day Trading (Speculative Transactions)
In case of day trading (speculative ) of shares ,the aggregate of both positive and negative differences is to be considered as the turnover of such transactions for determining the liability to audit vide section 44AB.
Derivative transaction (Futures & Options)
In case of derivatives transaction -futures and options- which are completed without actual delivery of shares or securities or commodities , turnover for the purpose section 44AB should be determined as under :
(i) Futures Trades
The total of favourable and unfavourable differences in case of squared off transactions shall be taken as turnover.
(ii) Options Trades
Premium received on sale of options is also to be included in turnover. However, where the premium received is included for determining net profit for transactions, then such net profit should not be separately included.
(iii) Open position as on 31st March
In case of an open position as at the end of the financial year (i.e., trades which are not squared off during the same financial year), the turnover arising from the said transaction should be considered in the financial year when the transaction has been actually squared off.
(iv) Reverse trades
In respect of any reverse trades entered, the difference thereon, should also form part of the turnover
(v) Derivative transactions settled on delivery of shares
In case of delivery based settlement in a derivatives transaction, the difference between the trade price and the settlement price shall be considered as turnover. Further, in the hands of the transferor of underlying asset, the entire sale value shall also be considered as business turnover where the underlying asset is held as stock in trade.
Tribunals View on Turnover in Speculative Transactions
A number of disputes on the issue of section 44AB or availing 44AD or penalty under section 271B reached Tribunals .All these disputes required a determination of “turnover” and Tribunals have held that only the differential amounts better purchase and sale contract value should be regarded as turnover of the business. Following are some , such decisions of Tribunals :
- The issue of turnover in case of speculative transaction had come up in case of Babulal Enterprise vs ACIT before Mumbai bench of ITAT [1999-2000] 31 BCAJ788 (Mum.) wherein it was held that where the actual delivery was not taken and difference in price was settled on the basis of contract note, the turnover cannot include those transactions.
- Another decision of Mumbai Tribunal expressing similar views was in case of Growmore Exports Ltd vs ACIT [78 ITD 95] relied on its decision in Babulal Enterprise and held that in case of contract for sale of shares or units on a future date , no sale actually takes place as per Sales of Goods Act . Therefore, when there is no sale , there can not any question of turnover.
- ITAT , Pune in case of Banwari Sitaram Pasari HUF vs. ACIT Circle-3(1) [2013] 140 ITD 320 (PUNE) vide its order dt 22 Nov 2012 relied on decision of ITAT, Mumbai in Growmore case to hold that where assessee was engaged in online buying and selling of commodities through a commodity exchange, as a speculative activity, wherein no physical delivery was taken or given, total transactions booked with such commodity exchange could not be considered as ‘turnover’ for purposes of considering liability of assessee to get accounts
- In the case of Shri Naresh Gopaldas Bhojwani vs. ITO , ITAT , Pune , based on the its earlier order in Banwari Sitaram Vasari HUF case set aside the order to the file of AO for reconsideration of matter of 271B etc.
Turnover Meaning : An Example
What basically is suggested by ICAI is that in case of speculative transaction, whether the day trading or derivative, it is the net amount of each completed (squared off ) contract what matters. Whether the difference is profit of loss , it does not matter. So , let us take an example . Say Ram , carries on commodity speculative transaction as well as day trading shares. His transactions were as under :
A : Day Trading
Sale of Reliance 10,000 shares at 10.30 AM for Rs. 25,00,000 Purchase of 10,000 shares of RIL at 11 AM for Rs 25,01,000 Difference in Day Trading of RIL (Loss) ( – )10,000
B. Futures
Buying of Futures contracts of RIL Futures valued at Rs 2.05 Crore and squaring off Futures contract in RIL Rs 2.00 Crore . The loss incurred on Futures trade in RIL (-) 5 Lakhs
(C) Commodity Futures
Sale of Five derivative contracts of Copper valued at Rs. 2.05 Crore and squaring off by buying of 5 derivative contracts of Copper valued at 2.10 Crore . Profit in trade 5 Lakhs
Turnover of the person will bt. Rs 10000 + Rs 5 Lakhs + 5 lakhs = 10 lakhs 10 Thousand
Conclusion on the Turnover Meaning
The turnover meaning is simple in case of speculative transactions like day-trading or futures & options-each squared off derivatives or day trading difference is to be computed without assigning any value to positive or negative ( profit or loss) .