Personal Finance

Tax Query: Is tax audit needed for claiming loss from F&O trading?

Sanjiv Chaudhary | Updated on November 20, 2021

Please let me know whether tax audit u/s. 44AB read with section 44AD is applicable for A.Y. 2021-22, for claiming loss from futures & options (derivatives) business of ₹1 lakh on turnover of ₹5 lakh and interest income of ₹7 lakh? Also, how to carry forward unabsorbed loss under 'income from house property (self occupied)' where interest on home loan exceeds ₹2 lakh as the system ignores excess interest while uploading ITR-3?

Tina B

For the purpose of analysing the applicability of tax audit requirement u/s 44AB of the Income-tax Act, 1961 (‘the Act’), the turnover is required to be determined. As per the guidance note on tax audit issued by the Institute of Chartered Accountant of India, turnover in case of dealing in futures and options shall include the following:

a) Total of favourable and unfavourable differences

b) Premium received on sale of options

c) In respect of any reverse trades entered, the difference thereon

As per the provisions of Section 44AB every person, carrying on business shall be required to get his accounts audited for such financial year by a Chartered Accountant before the specified date, if total sales, turnover or gross receipts (as applicable), in business exceed ₹1 crore in any previous year. The said limit of ₹1 crore is substituted with ₹10 crore in case the cash receipts do not exceed 5 per cent of the total sale/ turnover/ gross receipts and the cash expenditure does not exceed 5 per cent of the total payments.

As per the provisions of Section 44AD , in the case of an eligible assessee engaged in an eligible business (turnover not exceeding ₹2 crore and not into the business of plying, hiring or leasing goods carriages), a sum equal to 8 per cent (6 per cent in respect of amount received by way of A/c payee cheque/ A/c payee bank draft/ electronic clearing system) or a sum higher than the aforesaid sum shall be deemed to be the profits and gains of such business chargeable to tax under the head "profits and gains of business or profession".

As per the guidance available on portal of income tax department, a person can declare income at lower rate (i.e. at less than 6 per cent or 8 per cent), however, if he does so and his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited as per section 44AB. In the instant case, since the income (being loss) from Future & Options is less than 8 per cent / 6 per cent and the total income chargeable to tax is exceeding the maximum amount not chargeable to tax, you would be required to be audited u/s 44AB of the Act .

Carry forward of unabsorbed loss on account of interest on housing loan: As per the provisions of Section 24(b), deduction on account of interest on housing loan in case of a self-occupied property is restricted to ₹2 lakh and hence loss under house property for a self- occupied property cannot exceed ₹2 lakh. Accordingly, any interest paid in excess of ₹2 lakh is neither eligible to be set-off against other heads of income nor allowed to be carried forward for future assessment years. Hence in the instant case, interest paid in excess of ₹2 lakh, shall not be allowed to be carried forward to the future assessment years.

The writer is a practising chartered accountant

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Published on November 20, 2021

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