Why is tax audit compulsory for declaring FnO loss?

Taxation
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From my research I found out below info regarding tax audit -

Info from income tax website - “ As per section 44AB, following persons are compulsorily required to get their accounts audited :

• A person carrying on business, if his total sales, turnover or gross receipts (as the case may be) in business for the year exceed or exceeds Rs. 1 crore. This provision is​ not applicable to the person, who opts for presumptive taxation scheme under section 44AD​ and his total sales or turnover doesn’t exceeds Rs. 2 crores.

Note: w.e.f. Assessment Year 2020-21, the threshold limit, for a person carrying on business, is increased from Rs. 1 Crore to Rs. 5 crore in case when cash receipt and payment made during the year does not exceed 5% of total receipt or payment, as the case may be. In other words, more than 95% of the business transactions should be done through banking channels.“

No where is it mentioned that you need to get an audit if your turn over is less than 1 Crore and if your income from salary is more than 2.5 lakhs.

Now this is what Quicko says - “ * If the taxpayer has incurred loss or the profit is less than 6% or 8% of Turnover / Sales, and the Total Income is more than Basic Exemption Limit, Audit as per Sec 44AB(e) is applicable. The taxpayer should file ITR 3.”

This is what Section 44AB(e) states - “Each Person carrying on the business shall, if the provisions of sub-section (4) of section 44AD are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year,
get his accounts of such previous year audited by an accountant before the specified date.”

Section 44AD sub section 4 - “ Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1).”

But 44AD is all about presumptive taxation. So if this is the first time I am filing taxes for FnO category, I would have never used 44AD section at all. So, no need to get audited.

I think all of the new FnO traders are getting played.

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This article explain all this in more detail.

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@Quicko please have a look.

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I had also drawn a similar conclusion from the reading of the provisions of Sections 44AB and 44AD.

What most people are stating currently, was the position prior to FY 2017-18. Finance Act, 2016 brought in amendments to 44AB and 44AD (effective date 1-April-2017) to make it clear that Tax Audit would not be applicable, even if your profits/gains do not exceed 6% / 8% of the turnover, provided the other criteria specified u/s 44AB for audit of accounts, are not applicable.

Prior to these amendments, the inference was such that, even though Section 44AD was a presumptive scheme, it was in effect a deeming provision (meaning, it used to be mandatory, when it was supposed to be optional).

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6

Exactly.

Previously, the wording used to be different. They modified that wording a while ago. This tells me that a lot of people (including CAs) are not even looking at tax rule changes regularly. They just go by conventional wisdom. It’s mind boggling. No wonder why tax compliance is an issue.

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What is surprising is that, 44AD was introduced as an optional/presumptive scheme to bring relief to small scale businessmen from the hassles of maintaining books of accounts and other compliance. The intention was, as long as such people pay a certain % (6% / 8%) of the sales they make, the Income Tax Department would not question them. To make such provisions mandatory to even those maintaining proper books of accounts, was not sensible.

Moreover, even now, much of the ambiguity arises from sub-section 1 of 44AD. It uses the phrases “eligible assessee engaged in an eligible business” and “deemed to be the profits and gains from the business” in the same paragraph, which totally contradict each other. This might be a reason, as to why certain CAs advise people to go for an audit.

So yeah, it is not like all CAs do not keep track of changes in the Tax Law. Sometimes, they advise the most conservative option to their clients to avoid unnecessary disputes with the taxman down the line.

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Well, I agree with what you are saying. But, you have to give factual information and let the assessee make that decision. Being conservative is one thing. But, when the rule says something and you interpret in a different way altogether is something else. I have read multiple CAs giving differing opinions with respect to this rule.

If you ask a CA about 44AD, they will tell you it is not mandatory and it is optional. Then, it becomes pretty straight forward.

The more your repeat something, the more it will be true. This is what happened in this case.

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When Section 44AB and Section 44AD are read together, tax audit is applicable in the following situation - when the trading turnover is up to INR 1 Cr, there are losses or profits are less than 6% of turnover, total income is more than basic exemption limit and the taxpayer has opted out of presumptive taxation scheme by not following the five year rule as per Section 44AD(4).Tax Audit is recommended for such taxpayers for the following reasons:

  1. It is difficult to check whether the taxpayer had opted out of presumptive taxation scheme in any of the previous five assessment years.
  2. There are taxpayers who have received a tax notice for claiming losses without going for Tax Audit.

Based on our practical experience, the taxpayer should claim and carry forward trading loss by opting for tax audit so as to avoid chances of receiving a notice from the tax department. Further, we always advise with a clearer answer once we look at the income situation and trading statements.

We would be glad to explain and resolve your questions if you can share your contact details on [email protected]

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Does Quicko provide audit services ??

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Quicko is an online tax filing platform. However, when our customers have audit requirements, we connect them with Chartered Accountants who could conduct tax audit if you want.

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Can you please tell me about cost of auditing.

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Hey, you can forward your Income Tax filing requirements to [email protected] so our team can get in touch with you :slight_smile:

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I didn’t understand the audit part.

Is having turnover more than 5 crore in F and O, and equity and profit or loss needs to be audited?

For loss, the procedure is to carry forward the loss to the next financial year?

For profit, one needs to just report the profit?

Why there is so much scrutiny on turnover?

Final query, is the tax audit process for F and O + equity turnover, and profit and loss a simple process (when done with the help of a CA?) ?

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Another query-- what happens if one misses the audit? Is it only notice or penalty? Can anyone elucidate?

Thanks

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@Quicko

If my FnO loss is suppose around 20k, and my overall income is less than 2.5 lakh, do I still need to get the audit done?

Can I just file ITR 3 without audit in this case?

I know that filing ITR is not mandatory if income is below 2.5 lakh but I still want to file ITR.

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Hi @Praksy,

Great, it is always a good practice to file your ITR, even if your income is below the basic exemption limit. It reduces the chances of getting a notice from the ITD, especially after the SEBI & CBDT Data partnership.

F&O trading is treated as non-speculative business income and should be reported under the head business income when filing ITR.
In case your total income is below the basic exemption limit and turnover is below INR 1cr, you do not need to get tax audit done.
You can use this tool to check if tax audit is applicable to you.

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Tax audit is applicable when:

  • Losses from Business/Profession
  • Profit is less than prescribed limits
  • Turnover is more than the threshold
    You can use this tool to determine if tax audit is applicable to you.

tax-audit-applicability-table-02-838x1024 (1)

If you miss submitting a tax audit report when a tax audit is applicable to you, there are chances of receiving a notice from the ITD. In such a case, you need to get your books of accounts audited and file a revised ITR with the tax audit report prepared by a practicing CA.

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That is OK.
But . I need not will have to bear any interest or penalty . Correct?

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@RLM

Penalty will be lower of the following:

A] 0.5% of the turnover
B] Rs 1.5Lacs

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@Quicko a little different query , my relative had a loss of 4 lakh in AY18-19 and in AY19-20 he made profit of same amount. So will his 18-19 loss should be set off with AY19-20 profits or not , however he did not want to set off this loss since his income is already below exemption limit so can he carry forward loss to subsequent years as well without offsetting it in this year.
Hope you got what i am trying to ask.

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