Not on gross contract value. Where a transaction is settled otherwise than by delivery, what changes hands is the difference, and the Tribunal has held that the total value booked with the exchange is not turnover for s.44AB. For derivatives the ICAI's guidance computes turnover as the absolute total of favourable and unfavourable differences, plus premium received on options sold and differences on reverse trades.
Section 44AB fixes the audit obligation by reference to 'total sales, turnover or gross receipts'. None of those three words is defined in the Act for this purpose, which is why the question keeps coming back. The starting point is that they describe consideration for sales actually made, and in a business settled by differences there is no sale of the underlying at all.
That is the reasoning the Pune Tribunal applied in Banwari Sitaram Pasari (HUF) — held in this library — to commodity transactions on an exchange where no delivery was taken or given: the total transactions booked with the exchange could not be considered turnover for the purpose of the audit liability, and the s.271B penalty went. Earlier orders had put the same point in terms of the Sale of Goods Act — no sale takes place, so there is no turnover. The Mumbai Tribunal reached the same conclusion for an exchange member trading commodities online without delivery. The practical consequence is that an officer who has added up buy value and sell value from the contract notes has computed the wrong number, and the answer to his notice is a recomputation, not an argument about reasonable cause.
For exchange-traded derivatives the profession works from the ICAI's Guidance Note on Tax Audit under section 44AB. As restated on practitioner pages, the revised 2023 edition provides that the aggregate of all favourable and unfavourable differences arising from squared-off derivative transactions is turnover; that premium received on the sale of options is also included, avoiding double counting where the premium is already in the net profit computation; and that differences on reverse trades form part of turnover as well. Open positions do not enter turnover until they are squared off. Contract value is not turnover. In shorthand, turnover is absolute profit plus absolute loss, plus option sale premium, plus reverse-trade differences.
It is worth keeping two questions apart, because they are decided by different provisions. Whether a transaction is speculative is answered by s.43(5), which turns on settlement without delivery and which carves out exchange-traded derivatives by proviso (d) — see the library note on speculation and F&O. How turnover is measured for s.44AB is a separate question, answered by the reasoning above. A derivative transaction can be non-speculative business under s.43(5) and still produce a turnover figure computed on differences rather than on contract value.
The same instinct — that turnover means the consideration for what you actually sold — governs the ordinary cases too. A commission agent's turnover is his commission, not the value of the goods he moved for his principal. Where an assessee both trades on delivery and trades on differences, the two have to be computed on their own footing and then added.
One caution about the ICAI position. It is professional guidance, not law, and the Guidance Note has changed its method between editions — the treatment of option premium in particular. Record in the working papers which edition you applied and for which year, because an officer comparing your figure with an older method will get a different answer.
The audit threshold, the s.271B penalty and often the carry-forward of a business loss all turn on a single number. If that number is computed on contract value, a trader with modest losses is suddenly a crore-turnover business who should have been audited.
I bought and sold goods by endorsing delivery orders and never handled them. Is my loss a speculation loss even though the sale was perfectly valid?
You forgot to add back something your own audit report flagged. Is that concealment?
The AO ordered a special audit of my books without hearing me first. Is that direction valid?
Can I set my share trading loss off against my F&O profits?
I am a registered income-tax practitioner under s.288(2). Can I sign a tax audit report?
My 148A notice says I never filed a return, but I did. Is that enough to get it quashed?
Our audit report was late because the statutory auditor was late. Can the officer still levy the s.271B penalty?
The AO says my company's gross total income does not 'consist mainly' of the four excluded heads because he has left the share loss out of the business head. Is that the right computation?
Every page in this library links to what it was written from, so you can check it rather than take our word for it.