Tax audit Scrip Wise and Trade Wise

Turnover & Tax Audit

In the earlier chapter, we touched upon tax audit and when it is needed for those declaring trading as their business revenue. To understand if an examination is mandatory or not, we must first compute the turnover of your trading activity.

It’s important to note that the need for a turnover calculation is only when trading P&L is considered business income. However, if you only have capital gains income, an audit is not mandatory. Please keep in mind that your turnover doesn’t affect the amount of tax you owe. Instead, it simply serves as a factor in deciding if an audit should be performed.

An audit is required if –

• Rs 5 Crores mark – The turnover for the year has surpassed Rs 5 Crores. This mark will be imposed from the upcoming financial year, i.e 2019-2020 for digital transactions and stock market trading which is completely electronic.

• Section 44AD – Section 44AD applies to individuals or HUFs with a turnover of under 2 crore rupees and profits lower than 6% of the turnover, where the total income is above the fundamental exemption limit. If your turnover is lower than 5 crores but your taxable income other than any trading losses is less than 2.5 lakhs, then no audit will be required. This limit was extended to 5 crores for 2019-20 fiscal year.

The Finance Bill 2020 has introduced a turnover value of 5 crores, starting from the 2019-2020 financial year. Audits will only need to be conducted if the turnover exceeds this threshold.

I am sure the first thing that came to your mind after reading turnover is contract turnover, i.e

• Nifty is at 8000, you buy 100 Nifty

• Buy-side value = 8000 * 100 = Rs.800,000/-

• Nifty goes to 8100, you square off the 100 Nifty

• Sell-side value = 8100 * 100 = Rs,810,000/-

• Turnover = Buy-side value + Sell-side value = 800,000 + 810,000 = 1,610,000/-

But it is not the contract turnover the IT department is interested in; they are interested in your business turnover.

Read below on how business turnover can be calculated –

The method of computing turnover remains a point of contention, with no explicit guidance from the IT department. However, ICAI’s guidance note on tax audit under Section 44AB offers a useful resource; Page 23 and Section 5.12 provide instructions on how to calculate turnover. The article states that…

• Delivery based transactions

When you buy stocks and hold them for a duration exceeding one day before selling, the entire selling price is considered as turnover. Let’s consider an example with different numbers and a different company. If you purchased 200 shares of Tata Motors at Rs. 200 and sold them at Rs. 220, the total turnover would amount to Rs. 44,000 (220 x 200).

Remember, you only need to calculate turnover from your equity delivery based trades if you are declaring them as business income. If these are being declared as capital gains or investments, such calculation is not necessary. An audit also does not need to be conducted if your only source of income is capital gains regardless of turnover or profit.

• Speculative transactions (intraday equity trading)

The aggregate sum of any profits and losses from trades is to be regarded as turnover. For example, if you buy 100 shares of Tata Motors at 800 in the morning and sell them at 820 by afternoon, the positive difference of Rs 2000 would be counted as your turnover for this trade.

• Non-speculative transactions (Futures and options)

The article states that a non-speculative transaction’s turnover can be found out in this way.

• The total of favourable and unfavourable differences shall be taken as turnover

• On Aug 19th 2022, ICAI declared that any premium received for the sale of options must be regarded as part of turnover. Nonetheless, should the premium be taken into account in determining net profit, then it should not be separately added.

• Any reverse trades made should have the difference from them included in the turnover.

So if you buy 25 units or 1 lot of Nifty futures at 8000 and sell at 7900, Rs.2500 (25 x 100) the negative difference or loss on the trade is turnover.

Buying 100 or 4 lots of Nifty 8200 calls at Rs.20 and selling them later at Rs.30 creates a favourable difference of Rs 1000, which is considered the turnover on this option trade.

Having gone through the first three points, we must now address the issue of whether to calculate turnover scrip wise or by trade wise

Scrip-wise calculation of turnover involves collating all trades for a given contract/scrip during the financial year, then computing the average buy and sell values. Using these figures, plus the total profit or loss as well as the difference in average price, one can determine their turnover in accordance with the prescribed rules.

Trade wise assessment involves calculating the turnover by adding up the profits and losses of every transaction undertaken throughout the year, in accordance with the previously mentioned regulations.

Let me clarify using different examples:

On 1st January, you purchased 150 shares of ABC Company at Rs. 100 per share and sold them at Rs. 110 per share. Then, ten days later on 10th January, you acquired another 100 shares of ABC Company at Rs. 120 per share and sold them at Rs. 115 per share. Now, let’s calculate the turnover using different methods.

Using the scrip-wise method:

Average ABC Company buy: 250 shares at Rs. 110

Average ABC Company sell: 250 shares at Rs. 112.50

Total profit/loss = 250 x Rs. 2.50 = Profit of Rs. 625 = Turnover of ABC Company shares

Using the trade-wise method:

Trade 1:

150 ABC Company shares bought at Rs. 100 and sold at Rs. 110, Profit = Rs. 1,500

Trade 2:

100 ABC Company shares bought at Rs. 120 and sold at Rs. 115, Loss = Rs. 500

Turnover of ABC Company shares = Rs. 1,500 + Rs. 500 (absolute sum of the loss) = Rs. 2,000

Now, let’s consider another example with options:

On December 3rd, you bought 200 XYZ Company December 80 calls at Rs. 5 and sold them at Rs. 8. Then, you bought another 150 XYZ Company December 80 calls at Rs. 7 and sold them at Rs. 6. Let’s determine the turnover.

Using the scrip-wise method:

Average XYZ Company December 80 calls buy: 350 calls at Rs. 6

Average XYZ Company December 80 calls sell: 350 calls at Rs. 7

Total profit/loss = 350 x Rs. 1 = Profit of Rs. 350 = Turnover of XYZ Company December 80 calls

Using the trade-wise method:

Trade 1:

200 XYZ Company December 80 calls bought at Rs. 5 and sold at Rs. 8, Profit = Rs. 600

Trade 2:

150 XYZ Company December 80 calls bought at Rs. 7 and sold at Rs. 6, Loss = Rs. 150

Turnover of XYZ Company December 80 calls = Rs. 600 + Rs. 150 = Rs. 750

Both methods have their advantages, but calculating turnover trade-wise is generally considered the more compliant approach for determining turnover.