Speculative vs Non-Speculative Income, ITR Selection, Section 44AD, and Audit Rules
Statutory Foundation
Section 43(5), Income-tax Act, 1961
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Defines speculative transaction as a transaction settled otherwise than by actual delivery of goods.
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Proviso: Derivative transactions on recognised stock exchanges (F&O) are excluded, making them non-speculative.
Section 44AB – Tax Audit
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Tax audit is mandatory if turnover > ₹1 crore.
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Relaxed limit of ₹10 crore applies where cash receipts and payments ≤ 5% of turnover.
Section 44AD – Presumptive Taxation
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Available only for eligible businesses, excluding commission, brokerage, agency, and speculative transactions.
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Therefore, F&O traders may opt for 44AD, while intraday/speculative traders cannot.
Business Code Selection (CBDT Notified ITR Codes)
| Nature of Activity | CBDT Code | Speculative / Non-Speculative | ITR Form | Sec. 44AD Eligibility | Audit Applicability | Loss Treatment |
|---|---|---|---|---|---|---|
| Intraday Equity Trading | 13018 | Speculative (u/s 43(5)) | ITR-3 | ❌ Not allowed | Mandatory if turnover > ₹1 cr | Carry forward 4 yrs, set off only against speculative profits |
| Equity Delivery (STCG/LTCG) | 13018 | Capital Gains (not business) | ITR-2 | NA | No audit | Set-off per CG rules |
| Equity Delivery (treated as business by assessee) | 13018 | Non-speculative | ITR-3 | ✔ Possible | Audit if turnover > ₹1 cr / ₹10 cr | Normal business loss, 8-year carry forward |
| F&O Trading (Equity, Currency, Commodities) | 13018 | Non-speculative | ITR-3 | ✔ Possible | Audit if turnover > ₹1 cr / ₹10 cr | Non-speculative, set off against any income except salary |
| Commodity Delivery Trading | 13018 | Non-speculative | ITR-3 | ✔ Possible | Same audit limits | Non-speculative |
Judicial Compass
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CIT v. Shree Capital Services Ltd. (2009) 319 ITR 417 (Cal)
→ Derivative transactions are non-speculative. -
CIT v. Lakshmikanth Reddy (2015) 229 Taxman 1 (Kar)
→ F&O trading treated as business income, not speculative. -
CBDT Circular No. 23/2019
→ Clarifies distinction between speculative and non-speculative transactions for derivatives.
Audit & Presumptive Taxation Rules
(A) Section 44AD – Presumptive Taxation
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Only for non-speculative businesses (e.g., F&O, delivery-based trading if opted).
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Presumptive income: ≥ 6% / 8% of turnover (digital / non-digital) must be declared.
(B) Section 44AB – Tax Audit
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Mandatory if:
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Turnover > ₹1 crore (₹10 crore if cash ≤ 5%), or
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Profit < 6% / 8% under 44AD and total income exceeds exemption limit.
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Decision Flow – Quick Compliance Compass
Step 1: Determine Nature of Trading
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Intraday → Speculative → ITR-3 → No 44AD
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F&O / Delivery (business) → Non-speculative → ITR-3 → 44AD possible
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Delivery (investment) → Capital Gains → ITR-2
Step 2: Turnover Threshold
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≤ ₹2 cr → Consider 44AD (non-speculative only)
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₹2–10 cr, digital ≥ 95% → Audit not required if 44AD presumptive profit declared
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₹10 cr → Audit compulsory
Step 3: Loss Treatment
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Speculative loss → Carry forward 4 years, set off only against speculative profits
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Non-speculative loss → Carry forward 8 years, set off against any business income
Common Pitfalls (Red Flags)
❌ Filing ITR-2 instead of ITR-3 when business income exists.
❌ Claiming 44AD for intraday trading.
❌ Miscomputing turnover for audit purposes.
❌ Mixing speculative and non-speculative losses in set-off.
❌ Treating short-term capital gains as business income without consistent treatment.
Compliance Strategy for Traders
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Maintain separate ledgers for speculative vs non-speculative trades.
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Record turnover correctly (ICAI guidance for F&O).
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Evaluate presumptive vs regular taxation before 31st March.
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Plan advance tax instalments to avoid 234C interest.
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Preserve contract notes, broker statements, and audit trail for assessments.
Conclusion – Practical Compass
Correct classification is critical, impacting:
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ITR form selection
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Eligibility for presumptive taxation
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Audit requirement
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Loss treatment and set-off
Judicial clarity (Shree Capital, Lakshmikanth Reddy) and statutory rules (s.43(5), 44AD, 44AB) must guide compliance.
Quick Reference:
| Activity | Classification | ITR Form | 44AD | Audit |
|---|---|---|---|---|
| Intraday | Speculative | ITR-3 | ❌ | Turnover > ₹1 cr |
| F&O | Non-speculative | ITR-3 | ✔ Possible | Turnover > ₹1 cr / 10 cr |
| Delivery (Investment) | Capital Gains | ITR-2 | NA | NA |
| Delivery (Business) | Non-speculative | ITR-3 | ✔ Possible | Turnover > ₹1 cr / 10 cr |
