Rs 21.6 lakh speculative trading loss in stock market triggers Income Tax notice for no tax audit; Trader wins case at ITAT Cuttack

When Mr Kumar from Jaunliapatty decided to invest in the stock market, he incurred a loss of Rs 21.6 lakh from speculative trades. H owever he had earned about Rs 11.19 lakh but did not conduct an income tax audit. Consequently, when he filed his ITR, the Income Tax Department issued a tax notice on October 15, 2019, mentioning that Kumar had claimed nil income in his ITR, despite substantial speculative trading losses, STCG and income from other sources.

The Income Tax Department also pointed out that losses from speculative trading cannot be set off against STCG income and income from other sources under Section 70/71 of the Income Tax Act, 1961. So the tax d epartment imposed a penalty on Kumar under Section 271B for not conducting a tax audit. Unhappy with this decision, Kumar filed an appeal with the CIT (A), NFAC Delhi.

On February 20, 2026, the CIT (A) confirmed the penalty. Still unhappy, Kumar sought help from Prasanta Kumar Mohanty and P.K.Jesthi to file an appeal with ITAT Cuttack.


On October 5, 2026, Kumar won the case in ITAT Cuttack.

Also read: Husband trades through wife’s demat account, incurs Rs 1.95 crore loss; tax dept sends notice over clubbing of income, ITAT Lucknow grants him relief

Why did Kumar win the case?

Hitesh Jain, Partner, Direct Tax, NA Shah Associates, said to ET Wealth Online that the Cuttack Bench of the Income Tax Appellate Tribunal cancelled the penalty imposed on him for not getting his accounts audited.

The reason Kumar won the case in ITAT Cuttack is because the Income Tax D1epartment’s own records described him as a person with no business. The Tribunal said the department could not then take the opposite position and treat his share transactions as a business to justify the audit penalty.

The decision was based on the facts of his case. It does not mean that everyone who trades in shares or suffers a loss can avoid a tax audit.

Do stock market traders have to conduct tax audit?

You should understand that a loss or low profit does not automatically make an income tax audit necessary. A tax audit is a check of business accounts by a chartered accountant. Whether one is needed depends first on whether the shares are held as investments or traded as a business. Buying and selling shares does not automatically make an audit necessary. Jain explains the turnover limits for tax audit:

• A person trading as a business generally needs a tax audit if annual business turnover is more than Rs 1 crore.
• The limit rises to Rs 10 crore if cash received is no more than 5% of total receipts and cash paid is no more than 5% of total payments.
• Cheques and bank drafts not marked “account payee” count as cash for this test. Trading online does not, by itself, prove that both conditions are met.

Turnover measures business activity; it is not the same as the final profit or loss. Jain explains the special rules that apply to futures and options trading:

• Broadly, profits and losses on completed trades are added without cancelling one against the other, with further adjustments where needed.
• The full value of the contracts is not used.

Jain says that traders who have used the simplified tax scheme called “presumptive taxation” may face a separate audit requirement. Under the Income Tax Act, 1961, leaving presumptive taxation scheme in certain circumstances can require an tax audit if income is above the basic tax-free limit.

Prasanta Kumar Mohanty and P.K.Jesthi representing Kumar argued that Kumar is an individual who made investments in shares and engaged in speculation, resulting in losses.

Mohanty and Jesthi also argued that Kumar did not have any business income and his speculation in the stock market had led to short term capital loss and this was not a business activity. So, he was not required to have his accounts audited under Section 44AD.

The ITAT Cuttack heard the arguments and observed that the Income Tax Department itself recognised the fact that Kumar did not have any business activity and so obviously, could not be expected to have his accounts audited.

The ITAT Cuttack said that when the Income Tax Department accepted that Kumar did not have any business activity, then at the same time, they could not treat his share transactions as business activity for the purpose of a tax audit. So, for this reason, the penalty imposed on Kumar was cancelled.

ITAT Cuttack said: “It no more lies in the hands of the Income Tax Department to turn around and then treat the activity of the assessee in the share transaction as the business activity of the assessee. This being so, as the assessee is not having any business activity, the penalty levied u/s.271B stands deleted.”