How Karnataka Farmer’s F&O Trades 10 Years Ago Led To ₹69 CRORE Tax Nightmare & Frozen Bank Accounts

Summary

Rajesh, a farmer from near Bengaluru, ventured into F&O trading in 2013, unaware of the tax obligations involved. After incurring losses and failing to report his trades, the tax department reopened his case, treating his turnover of Rs. 68 crore as income. This led to an overwhelming tax demand of Rs. 69 crore. Rajesh’s struggle highlights the importance of financial literacy, timely tax reporting, and the consequences of non-disclosure. His case serves as a cautionary tale for F&O traders, underscoring the need to understand tax regulations, even in the face of losses.

Takeaways

• 😀 Rajesh, a farmer from near Bengaluru, got caught in a tax nightmare after a brief venture into FNO trading.
• 😀 In 2013, Rajesh trusted a broker to trade on his behalf, unaware of the tax obligations involved.
• 😀 Despite making a loss of ₹26 lakh in FNO trading, Rajesh didn’t report the trades in his income tax return.
• 😀 In 2021, the tax department reopened Rajesh’s case after noticing high-value FNO transactions totaling ₹68 crore.
• 😀 The broker’s report listed both the purchase and sale amounts, which the tax department treated as income.
• 😀 Rajesh missed tax department notices due to limited access to email, leading to an ex-parte order and a ₹69 crore tax demand.
• 😀 By December 2024, Rajesh’s bank account was frozen with only ₹6,500 left, while the tax demand continued to balloon.
• 😀 Rajesh’s Chartered Accountant argued the tax officer’s calculations were erroneous, but filing an appeal is a long process.
• 😀 Rajesh was required to deposit 20% of the ₹69 crore tax demand (₹13.8 crore) to challenge the demand.
• 😀 A report revealed that 93% of individual FNO traders incurred losses between FY 2022 and FY 2024, and many failed to report their trades.
• 😀 Experts stress that FNO trades, even when loss-making, must be reported as business income to avoid serious tax consequences.

Q & A

Who is Rajesh, and what role does he play in the story?

Rajesh is a farmer from a small town near Bengaluru, and he is the central figure in the story. His venture into Futures and Options (F&O) trading leads him into a significant tax issue, which becomes a cautionary tale about financial oversight and tax compliance.

What was Rajesh's initial involvement in F&O trading?

In 2013, Rajesh trusted a broker to trade on his behalf in Futures and Options. He made a loss of Rs 26 lakh but did not report the trades in his income tax return, assuming no tax obligations since there were no profits.

Why did Rajesh not report his F&O trades to the tax department?

Rajesh did not report the trades because he assumed that since he incurred a loss, there was no requirement to declare them, not realizing that even loss-making F&O trades must be reported as business income.

What led to the tax department reopening Rajesh's case?

The tax department reopened Rajesh's case after noticing high-value F&O transactions linked to his Permanent Account Number (PAN), totaling Rs 68 crore, which had not been reported in his tax filings.

What happened after the tax department noticed the unreported transactions?

The tax department issued notices regarding the unreported transactions. However, Rajesh missed these notices because he had limited access to email. As a result, the department passed an ex parte order treating the entire Rs 68 crore turnover as income, leading to significant penalties and interest.

How did Rajesh’s financial situation worsen due to the tax department's actions?

By December 2024, the tax department's demand, including penalties and interest, ballooned to Rs 69 crore. Rajesh's bank accounts were frozen, leaving him with only Rs 6,500 in his account.

What challenges did Rajesh face when trying to resolve the situation?

Rajesh sought help from Chartered Accountants (CAs) to challenge the tax department's demand. His CA argued that the calculations were erroneous, as the sale and purchase amounts should not both be treated as income. However, filing an appeal with the Income Tax Commissioner required depositing 20% of the outstanding tax, which was beyond Rajesh’s financial capability.

What is the significance of the tax department treating both sale and purchase amounts as income?

The tax department treating both sale and purchase amounts as income effectively inflated the reported turnover, which is a key issue in Rajesh's case. Experts argue that such treatment is incorrect, as only the net income (profit or loss) should be taxed, not the entire turnover.

What larger issue does Rajesh’s story highlight in the context of F&O trading?

Rajesh’s story highlights the widespread issue of individual F&O traders failing to report their trades, often assuming that losses negate tax obligations. A SEBI report revealed that 93% of individual F&O traders incurred losses between FY22 and FY24, yet many did not report these trades, leading to significant legal and financial consequences.

What lesson can traders learn from Rajesh’s experience?

Traders can learn the importance of financial literacy and timely compliance in trading. Even if F&O trades result in losses, they must be reported as business income. Non-disclosure of such trades can lead to severe consequences, as demonstrated by Rajesh's tax nightmare.