ITR Filing: Do you have to get your account audited if you have loss in F&O?

Advance Tax Guide

Many first-time F&O traders are confused about whether they need a tax audit when they report losses. Here’s an expert clarification on how Section 44AD and audit rules actually apply in such cases.

Moneycontrol’s Ask Wallet Wise initiative offers expert advice on matters of personal finance and money. You can email your queries to askwalletwise@nw18.com, and we will try and get a top financial expert to address your queries.

I have salary and equity Long-Term Capital Gains (LTCG) income exceeding Rs 5 lakh for the financial year 2024–25. I also did F&O trading this year with a turnover of  Rs 6 lakh and incurred a loss of Rs 2.5 lakh. This is my first year in F&O. ChatGPT suggests that a tax audit under Section 44AB is mandatory because I am eligible for 44AD but do not intend to declare 6%+ profit, and my total income exceeds the basic exemption limit. I am confused and would really appreciate your confirmation before I proceed with ITR filing. In the past five years, I have never availed the presumptive scheme under Section 44AD.

Expert Advice: First of all, let me caution you against relying solely on AI tools like ChatGPT for interpreting legal provisions. These tools provide results based on online information, which may reflect widely held but incorrect interpretations.

Let us now come to the provisions of Section 44AD. These provisions apply to a resident assessee who is an individual, HUF, or partnership. It provides that a sum equal to 8% of turnover, or a higher sum claimed by the taxpayer, shall be deemed income from such business if total turnover does not exceed  Rs 1 crore.

If the cash component of turnover does not exceed 5%, a lower 6% of the turnover (or a higher sum, if claimed) shall be presumed as profits from the business. In this case, the threshold for eligibility to opt for the presumptive scheme under Section 44AD increases to Rs 2 crore.

A person who opts for Section 44AD must continue with the scheme for the next five years. If they opt out before completion of five years, they cannot opt for it again for the next five years. If an assessee who has opted for 44AD wishes to opt out within five years, claiming profits are lower than the prescribed percentage, they must maintain books of accounts and obtain and submit an audit report if their total income exceeds the basic exemption limit.

Though you have incurred a loss and do not wish to opt for 44AD by offering 6% of turnover as income, and your taxable income exceeds the basic exemption, you are not required to maintain books of accounts or obtain and submit an auditor’s report, as you have not opted for the 44AD scheme in the past.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.