Article explains how Speculative Business is Distinct Business, What is speculative transaction, What shall not deemed to be speculative transactions, What is Eligible Transaction for security derivative, Recognised stock exchange for Section 43(5), Recognised association for Section 43(5), What are the Eligible Transaction for Commodity derivative, Do Single transaction constitute speculative business, Treatment of Losses in Speculation business and other related Income Tax Provisions.
Article further explains Which one of these are Speculative Transaction- F&O in Shares, F&O in Commodities, Intraday Trading, Normal Trading in Shares / Delivery Base, Forward Contract in Currency, Arbitrage trading and Dabba Trading.
| Speculative Business is Distinct Business | Explanation 2 to Section 28 of the Income-tax Act, 1961 (“Act”) provides – Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as “speculation business”) shall be deemed to be distinct and separate from any other business. |
| Why Distinct Business? | Explanation 2 to section 28 specifically provides that where an assessee carries on speculative business, that business of the assessee must be deemed as distinct and separate from any other business. This becomes necessary because section 73 provides that losses in speculation business unlike other business, cannot be set-off against the profits of any business other than a speculation business. Likewise, a loss in speculation business carried forward to a subsequent year can be set-off only against the profit and gains of any speculative business in the subsequent year. Profits and losses resulting from speculative transaction must, therefore, be treated as separate and distinct from other profits and gains of business and profession. |
| What is speculative transaction | “speculative transaction” means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. Section 43(5) |
| What shall not deemed to be speculative transactions | As per Section 43(5): |
a. a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him
b. a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations
c. a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member
d. an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) – [Security Derivative Transaction] carried out in a recognised stock exchange
a. Carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and
a. carried out electronically on screen-based systems through member or an intermediary, registered under the bye-laws, rules and regulations of the recognised association for trading in commodity derivative in accordance with the provisions of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and the rules, regulations or bye-laws made or directions issued under that Act on a recognised association; and
Moreover, High court of Bombay in the case of Commissioner of Income tax vs. Kamani Tubes Ltd. 207 itr 0298, (1994) 75 Taxman 0055 followed the Supreme Court ruling in the case of Commissioner of Income tax vs. Shantilal P. Ltd. (1983) 144 itr 0057 and held that;
(2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and—
(i) it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.
(3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business.
(4) No loss shall be carried forward under this section for more than four assessment years immediately succeeding the assessment year for which the loss was first computed.
Author is a Chartered Accountant and can be reached at [email protected]
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