This farmer lost money on F&O trading and now faces a ₹69 crore tax demand

The protagonist, a farmer from a small town near Bengaluru, is now facing a staggering ₹69 crore tax demand. The man did not wish to be identified, so we will refer to him as AN for ease of narration.

What began as a brief stint in futures and options (F&O) trading a decade ago has turned into a financial nightmare, with frozen bank accounts and mounting tax penalties. Here’s how it all unfolded.

AN did not report the F&O and share trading done in the financial year 2014 in his income tax return (ITR) as he thought it was not required since did not make profits. “I incurred a loss of about ₹26 lakh,” he toldMint.

In December 2024, AN’s UPI payments started failing for three consecutive days. He visited his bank and learned that his savings account was frozen and a lien of ₹69 crore marked on it by the tax department. “I was totally clueless as to where the ₹69 crore lien could come from,” he said.

AN approached a Bengaluru-based chartered accountant (CA), Mahesh. “The IT department took this dire step after not getting response from AN on notices and tax demands sent to him in relation with F&O and share trades he did in FY13-14,” Mahesh, who insisted on using only his first name, told Mint.

In FY14, AN traded in F&O through a broker friend. Since online trading was not as advanced as it is today, AN had authorised the broker friend to trade on his behalf. Since there were no profits from F&O and shares to declare, he did not report it in his ITR for that financial year. The tax department reopened his case for assessment in 2021 after noticing high-value transactions against his PAN.

“Brokers update the F&O and share transactions on the basis of the PAN number of the trader or investors and both purchases and sales amounts, and not just profit or loss, get reported to the tax department. This was the case with AN too, with his sale and purchase amount totalling roughly ₹68 crore,” Mahesh said.

The tax department sent the first notice in 2021, seeking an explanation for the huge turnover on his PAN via an email. AN missed the notice due to his limited access to email. The department treated the entire ₹68 crore turnover as income after there was no response from him and passed an ex-parte order against him.

Now, he has three pending tax demands – ₹47.19 crore, ₹47.19 crore and ₹10,000.

Prakash Hegde, a Bengaluru-based CA, who is now assisting AN and Mahesh in filing an appeal against the order, explained the nature of these tax demands:

• The ₹47 crore demand includes the tax calculated on the ₹68 crore income and the interest levied on the outstanding tax from FY14 till 2023, when the order was passed.
• The next order of about ₹21 crore is the penalty slapped for non-disclosure of income. The IT department has levied the penalty at 100% of the tax amount.
• The ₹10,000 penalty is levied for not responding to the notice issued by the tax department.

Mint has seen the three demand orders to verify the claims made in the story.

Mahesh pointed out that this tax demand is as of May 2023. With 1% monthly interest rate added to it, the demand would have ballooned to about ₹82.8 crore in the past 20 months.

Also Read: Drowning in debt at 32, confessions of a failed options trader

What lies ahead

The tax demands and penalty orders were issued in May 2023 and February 2024, respectively, which went unnoticed as well. As a next step, the IT department froze his bank account. “I had just ₹6,500 in my bank account,” he said.

AN is in the process of filing an appeal to the Commissioner of Income Tax Appeals (CIT(A)) to dispose of the appeal as soon as possible. His CA said they will submit to the commissioner that it’s a prima facie case of error done by the tax officer as the income cannot be both sale and purchase value of the F&O and shares. “We will request for an expedited disposal of the tax demand as the taxpayer is facing a huge challenge because of his bank account attached,” Hegde said.

Legal challenge

At the first appellate level, commissioners can take anywhere between 1-12 months to send the notice of the first hearing. Hence, the taxpayer usually goes for a stay on the tax demand so that the IT department doesn’t attach other assets of the assessee to recover the outstanding tax in the interim, while the case is pending. However, the condition to apply for a stay is that the assessee has to deposit 20% of the outstanding tax. In AN’s case, 20% deposit would be ₹13.8 crore, which is impossible for him to pay. For this reason, AN cannot apply for a stay.

While his case is pending with the CIT(A), he runs a small risk of his other assets being attached by the IT department, Hegde said.

Also Read: Sebi margin rule on option sellers more bite than bark

Mayank Mohanka, founder, TaxAaram India and partner at S.M. Mohanka & Associates said the affected person could consider filing a stay application before his jurisdictional assessment officer (AO) and Principal Commissioner of Income Tax (PCIT) citing precedents, holding that in case of high pitched assessments like his, the usual rule of deposition of 20% demand is not applicable. “If the AO/CIT declines, he may consider filing a writ petition before his jurisdictional high court under Article 226 of the Constitution of India, for getting the stay.”

The lesson to learn

A Sebi report released in September 2024 revealed that 93% of the total individual traders incurred losses in F&O between FY22 and FY24. CAs point out that it is common for F&O traders to not report the trades in their ITR when they incur losses in the false belief that it is not required as there is no income to show.

However, trading income, including F&O, is mandatory to be reported irrespective of whether a loss or profit is made. “The IT department would not know whether you have made a loss or profit. They can just see high-value payments which are required to be disclosed in ITR,” said Karan Batra, founder, Chartered Club.

F&O turnover is treated as business income and has to be reported accordingly. Profits are taxed at slab rates.

“F&O traders also usually become averse to reporting such transactions as both sales and purchases are considered as turnover that determines the threshold limit for tax audit requirement, which is an added compliance cost. However, cases such as AN’s highlight the adverse consequences of non-compliance,“ said Mohanka.

It should be noted that awareness around F&O related reporting compliance was abysmally low around 2013-14 when AN had traded, however that’s not the case now. So, even if the turnover is low and goes unreported, the assessee will still get a notice.

Turnover in the case of F&O is inflated as it is the sum of both the profit and loss. Until 2022, the sale premium of options was also included along with profit and loss to calculate the turnover, which would inflate the turnover, often pushing most traders over the mandatory audit threshold of ₹2 crore.

The Institute of Chartered Accountants of India (ICAI) is of the view that options sale premium could be removed to calculate turnover to ease the audit hardship faced by small traders. ICAI said if the sale amount is already considered to calculate net profit, it is not to be added in the turnover.

However, Hegde said the new way of calculating F&O turnover is ICAI’s view and may not always be considered by the tax officer.

Also Read: F&O action: Can new Sebi rules tame wild bulls of the derivatives market?