Deep doubts on taxation of income from derivatives & options

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  1. sane

    sane New Member

    The basics are clear - One is aware that income from derivatives and options are classified as non speculative business income with a further requirement of tax audit for turnover above 1 crore.The queries arising are specific and as under :
    1. Which specific official tax law/rule/notification mentions that turnover from derivatives is the summation of the absolutes of contract wise profits and losses ? I have seen the CA institute guidance note but is there official sanction for such a view ? Is this view not entirely illogical for a derivative options business where such calculation of "turnover" has no basis at all to indicate the "effort" involved to obtain the income ? In my view the turnover must be the net profits obtained since this business has HUGE draw downs - so to get a profit of 1 lac the turnover might be 10 lacs if calculated under the method of aggregating losses and profits !
    2. Can ITR 4S be used to declare profits under derivative income for turnover below 1 crore ? What is the "ideal " or industry standard for showing the profits on turnover if one opts for the ITR 4S route instead of the ITR 4 route ? Yes understood that minimum has to be 8% profit on sales but the question is is there any industry benchmark which is accepted by the department on a no que asked basis
    3. In last budget Finance minister categorised FII Income from derivatives and options earned in india as capital gains to be taxed at 15% and not as business income at slab rates .While the motive is understandable (since earlier when it was classified as business income FIIs were still paying zero tax since their business is registered under DTAA friendly nations ) the point is that small traders in india who make small money in futures and options are mandated to pay tax at applicable slab rates whereas big foreign traders are officially allowed to pay only 15% even which they are not paying by using the DTAA route . So the que is does any one know if this has been legally challenged on grounds of equity and fairness in taxation in any court or IT tribunal ?
     
  2. gaurav_kumar

    gaurav_kumar Well-Known Member

    I think the manner of computation of turnover is justified as the speculators who play in Derivatives market have a very small margin.

    A normal trader easily does a transaction of a few crores in a week. Therefore, in my opinion - the mechanism of computing the turnover in such a case is justified.
     
  3. sane

    sane New Member

    It does not help at all when replies are posted without reading the question in depth - Please re-read my 3 specific questions - never has "justfication" been the issue - "justified" as per whom ? issue is whether there is legal / official sanctity for turnover calculation (this is que 1) .
     
  4. sane

    sane New Member

  5. gaurav_kumar

    gaurav_kumar Well-Known Member

    You may refer to the decision of the Mumbai Bench of the Tribunal in the Babu Lal Enterprises vs ACIT (ITA NO.6031/MUM/1996) case as also the ruling in the Royal Cushion Vinyl Products Ltd case.
     
  6. kirit sanghvi

    kirit sanghvi New Member

    The author is right about raising doubts about the validity of the method of computation of turnover in day trade and in F&O business. The method of aggregating negative and positive numbers ignoring plus and minus sign and to treat the sum as turnover is absurd and has no sanction in law. ICAI's pronouncements bind CAs, but not that they have legal sanction. The absurdity of the aggregation will be apparent when this concept of ascertaining turnover in day trade or F&O business is applied to s 44AD where 8% of the turnover or gross receipts is deemed to be the income of the assessee. If the negative and positive numbers are aggregated, it means 8% thereof as income is derived partly from positive numbers, which is acceptable and possible also in terms of accounting, and partly from negative numbers, which is offending the accounting sense in that the numbers that themselves represent losses are deemed to generate income. No sane person can accept the proposition that negative numbers can result in profit which itself is a positive number for s 44AD. In fact, the very concept of turnover as applied to day trade or F&O business is inappropriate. Turnover means turning over something, which happens in trade and manufacture where things are bought, consumed, sold or resold and thus turned over. In day trade and F&O business there are payments made or received; there is nothing to be turned over. For both ss 44AB and 44AD 'gross receipts' for day trade and F&O business should be used.
     
    Last edited: Mar 25, 2016
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