Can derivating inome be treated capital gains?

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This query is : Resolved

Rashmi (Querist)

28 August 2013 Hi Experts,

Can anyone throw a pertinent view on the below statement given by a consultant who is claiming sometime derivative transaction can also be treated as capital gains/losses. below is what he says;

"Generally, gains / losses arising on derivative transactions are considered under the head ‘Income from Business and Profession’. Certain tests like scale of activity i.e., number of transactions, intention, objects clause, etc. would also help in determining the head under which such income is assessable.

However, based on certain judicial precedents, a view could be taken that where the derivative transaction is undertaken by an assessee to hedge the risk (against some investments), then, gains / losses made on the derivative transaction could be assessed as ‘Capital Gains’ on the premise that gain / loss on sale of investments is also assessed as ‘Capital Gains’.”

But I believe hedging it self proves such transactions are speculative in nature!! How much realistic is this?

CA PARAS BAFNA

CA PARAS BAFNA (Expert)

28 August 2013 In the absence of any prescribed provision in reference to hedging through derivative, such transactions come in the per-view of Section 43(5)(d) only.
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Discussion on this issue could be interesting but not in the Indian context.
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Even- Section 43(5)(b) treats the income as business income arising out of transactions in stock and shares (which are entered into by a dealer or investor for hedging purpose.) . We can say that the nature of hedging transactions in share is capable of generating "capital gains" but as per the section it is still treated as business transaction.
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I agree with your concluding remarks.
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Message likes : 1 times

Rashmi

Rashmi (Querist)

29 August 2013 Your view have a logic. Thank you very much sir.

CA Siddhartha Bhardwaj

CA Siddhartha Bhardwaj (Expert)

29 August 2013 1. Income from speculative transactions are taxable as business income under the head Income from Business or Profession.

2. Speculative transaction is defined in Section 43(5) to mean a transaction in which a contract is settled OTHERWISE than by way of delivery.

Proviso to Section 43(5) provides, inter alia, that "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" (hedging) will NOT be treated as a speculative transaction.

Accordingly hedging transaction will NOT be taxable as business income.

Hedging transaction is taxable as Capital Gains in view of proviso to Section 43(5).

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