Problem Regarding ITr-4, Speculative Income, Business Income

speculative losses can neither be carried forward nor allow to set off any income, except "speculation income" or "income from business and profession 'dealing in securities'"

 

speculative losses only can be sett off with speculative income.

Originally posted by : U S Sharma
	speculative losses can neither be carried forward nor allow to set off any income, except "speculation income" or "income from business and profession 'dealing in securities'"

For a person earning income from any head of income, intra-day trading in shares is always treated as speculative business. Section 43(5) of the Income Tax Act, 1961, deals with speculative transaction. It states that a transaction of purchase or sale of a commodity including stocks and shares settled otherwise than by actual delivery or transfer of the commodity or scrip is a speculative transaction.

As per as I know these losses can be carried forward for 4 financial years. Please clarify

Originally posted by : pankaj
	speculative losses only can be sett off with speculative income.

From assessment year (AY) 2006-07 (accounting year 2005-06), Section 43(5) of the Income Tax Act, 1961, was amended to exclude an eligible transaction of futures and options (F&O) from the purview of speculation business if such a transaction is within the definition of Section 2(aa) of the Securities Contract Regulation Act, 1956, and is carried out electronically, with a proper broker's note, and undertaken at a recognised stock exchange. Such an F&O transaction will be treated as non-speculative business transaction. Set-off and carryforward of losses are governed by Sections 71 to 73, which state that non-speculative business loss can be set off against non-speculative business income or speculative business income. But loss from speculative business can only be set off against income from speculative business. Thus, (non-speculative) loss in Nifty F&O can be set off against profit from delivery-based share trading. But such non-speculative business loss is to be first set off against any business profit (if any). If business profit is not sufficient to absorb the loss, then it can be set off against any other income (other than salary). If it still cannot be set off fully, then the balance loss can be carried forward for set-off next year. It can be set-off only against any business income next year. Carryforward of loss is permitted up to eight years.

 

Speculative transaction

Speculative transaction

n For income-tax purposes speculative transaction means what the definition of that expression in section 43(5) of the Act says. Whether a transaction is speculative in the general sense or under the Contract Act is not relevant for the purpose of this Explanation. The definition of ‘delivery’ in section 2(2) of the Sale of Goods Act which has been held to include both actual and constructive or symbolical delivery has no bearing on the definition of speculative transaction in the Act. A transaction which is otherwise speculative would not be a speculative transaction within the meaning of the definition  if actual delivery of the commodity or the scrips has taken place ; on the other hand, a transaction which is not otherwise speculative in nature may yet be speculative according to  the definition if there is no actual delivery of the commodity or the scrips. The definition does not invalidate speculative transactions which are otherwise legal but gives a special meaning to that expression for purposes of income-tax only - Davenport & Co. (P.) Ltd. v.CIT [1975] 100 ITR 715 (SC).

n A transaction cannot be described as a ‘speculative transaction’ within the meaning of clause (5) of section 43, where there is a breach of the contract and on a dispute between the parties damages are awarded as compensation by an arbitration award - CIT v.Shantilal (P.) Ltd. [1983] 144 ITR 57 (SC).

n For income-tax purposes speculative transaction means what the definition of that expression contained in section 43(5) says and whether a transaction is speculative in the general sense or under the Indian Contract Act is not relevant for the purpose of section 43(5) and the words ‘actual delivery’ in section 43(5) mean real as opposed to notional delivery - CIT v. Dina Lal Gupta [1987] 33 Taxman 129 (Raj.).

Contract  Settled

n A contract can be said to be settled if instead of effecting the delivery or transfer of the commodity envisaged by the contract the promisee in terms of section 63 of the Contract Act, accepts, instead of it, any satisfaction which he thinks fit. It is quite another matter where instead of such acceptance the parties raise a dispute and no agreement can be reached for a discharge of the contract. There is a breach of the contract and by virtue of section 73 of the Contract Act the party suffering by such breach becomes entitled to receive from the party who broke the contract compensation for any loss or damage caused to him thereby. There is no reason why the sense conveyed by the law relating to contracts could not be imported into the definition of ‘speculative transaction’ - CIT v.Shantilal (P.) Ltd. [1983] 144 ITR 57 (SC).

n According to the Shorter Oxford Dictionary, Vol. II, p. 1856, ‘settled’ means to come to terms or agreement with a person. Oxford Dictionary, Vol. VIII, part II, p. 559, says ‘to arrange matters in dispute’; to come to terms or agreement with a person’. The expression ‘a contract is periodically or ultimately settled’ must be construed as ‘the contract is periodically or ultimately determined or concluded or disposed of’. The words ‘contract settled’ used in the definition of ‘speculative transaction’ should not be construed in the narrow sense so as to take in only such cases of settlement before the expiry of the due date for the performance of the contract. Therefore, it is not possible to give a narrow meaning or interpretation of the word ‘settled’ in the aforesaid definition - Thakurlal Shivprakash Poddar v. CIT [1979] 116 ITR 190 (MP).

Settled

n The emphasis in section 43(5) of the Act is on the words ‘periodically or ultimately settled otherwise than by actual delivery’. The word ‘settled’ is used in this part of the section without any restriction as to whether it was before breach or after breach. Whether the settlement was before or after breach of the contract is immaterial if actual delivery of the goods is absent. In fact, even in cases where the contract is highly speculative and amounts to a wagering contract, if it was settled by actual delivery, for the purpose of section 43(5), it is not a speculative transaction. Thus the section dispenses with all other formalities except that there must be actual delivery or transfer of the commodity when the contract is settled - R. Chinnaswami Chettiar v.  CIT [1974] 96 ITR 353 (Mad.).

n The proper meaning to be given to the words “contract settled” in the definition clause would be “a contract determined or concluded or disposed of”. By the use of the expression “settled”, what is intended to be dealt with is a case of performance of contract and not non-performance - CIT v. Hans Macho & Co. [2000] 113 Taxman 427 (Delhi).

Actual

n The word ‘actual’ means ‘real’ as opposed to ‘theoretical or probable’ - D.M. Wadhwana  v. CIT [1966] 61 ITR 154 (Cal).

Actual Delivery

n The words ‘actual  delivery’ mean real as opposed to notional delivery - Davenport & Co. (P.) Ltd. v. CIT [1975] 100 ITR 715 (SC).

n Delivery may be actual or constructive. Delivery is constructive when it is effected without any change in the actual possession of the thing delivered, as in the case of delivery by attornment or symbolic delivery. Delivery by attornment may take place in three classes of cases : first, the seller may be in possession of the goods, but, after sale, he may attorn to the buyer, and continue to hold the goods as his bailee; secondly, the goods may be in the possession of the buyer before sale, but, after sale, he may hold them on his own account; thirdly, the goods may be in the possession of a third person as bailee for the seller and, after sale, such third person may attorn to the buyer and continue to hold  them as his bailee [Chalmers, ‘Sale of Goods Act, 1893, 15th edition, page 195]. From this point of view when ‘actual’ delivery of goods is intended, delivery by pucca delivery orders appears to be constructive or symbolic delivery as opposed to ‘actual’ delivery - Budge Budge Investment Co. Ltd. v. CIT [1969] 73 ITR 772 (Cal.).

The words ‘actual delivery’ are not restricted to the delivery to the assessee. It can be to his agent - CIT v. Aditya Mills Ltd. [1994] 209 ITR 933/74 Taxman 50 (Raj.).

Hedging Contracts

n Hedging contracts, in order to be out of speculative transactions, must be in respect of only raw materials so far as the manufacturer is concerned though these contracts may be both with regard to sales and purchases. Hedging contracts need not succeed the contracts for sale and actual delivery of goods manufactured, but the latter may be subsequently entered into, provided they are within the reasonable time not exceeding generally the assessment year. In order to be genuine and valid hedging contracts of sales, the total of such transactions should not exceed the total stocks of the raw materials or the merchandise on hand which would include existing stocks as well as the stocks acquired under the firm contracts of purchases - Pankaj Oil Mills  v. CIT [1978] 115 ITR 824 (Guj.)(FB).

n ‘The hedge contract’ is so called because it enables the person dealing with the actual commodity to hedge themselves, i.e., to  insure themselves against adverse price fluctuations. A dealer or a merchant enters into a hedge contract when he sells or purchases a commodity in the forward market for delivery at a future date. His transaction in the forward market may correspond to a previous purchase or sale in the ready market or he may propose to cover it later by a corresponding transaction in the ready market, or he may offset it by a reverse transaction on the forward market itself - CIT v. Gourepore Co. Ltd. [1982] 135 ITR 606 (Cal.).

Section 28, Explanation 2 of the Income-Tax Act, 1961, enacts that where speculative transactions carried on by an assessee are of such a nature as to constitute business, it will be deemed to be distinct and separate from any other business. Under section 43(5), a speculative transaction is defined to mean 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. However, the following are not treated as speculative transactions:

 

(a) A contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchandising 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; or

(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.

Under section 73(1), any loss, computed in respect of a speculation business carried on by the assessee, will not be set off except against profits and gains, if any, of other speculation business.

speculative income is business income for "traders in securities" and these trades can be set off or carried forward by them as per business income / loss treatment, but they are barred from STCG/LTCG as their holdings at end of finance year is taken as stock in trade, and not capital asset.

Originally posted by : U S Sharma
	speculative income is business income for "traders in securities" and these trades can be set off or carried forward by them as per business income / loss treatment, but they are barred from STCG/LTCG as their holdings at end of finance year is taken as stock in trade, and not capital asset.

Thanks for the reply.Please understand there are two queries

 

A) Loss from Speculative Business ( Intraday Trading) is carried forward -  This is not adjusted but IT Dept should allow this to be carried forward for next 4 years to be adjusted against future speculative gains

 

B) Loss from Non Speculative Business ( F&O Trading) is adjusted against STCG and Other Income - As this is non speculative so this can be adjusted against other gains and other income
. The IT dept has also not recognized this

 

Can you please help me understand the IT Dept's action for rejecting these two cases A and B

Thanks once again.

 

A) Loss from Speculative Business ( Intraday Trading) is carried forward -  This is not adjusted but IT Dept should allow this to be carried forward for next 4 years to be adjusted against future speculative gains

 

- only capital loss ( STCG / LTCG) is allowed to carried forward, not the speculative losses. 

 

 

B) Loss from Non Speculative Business ( F&O Trading) is adjusted against STCG and Other Income - As this is non speculative so this can be adjusted against other gains and other income

 

- F&O trading is also speculation unless it is exercised in delivery mode. 

 

Section 73 of Income Tax Act : Link

I have highlighted the relevant portions

73. Losses in speculation business.

(1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.

(2) Where for any assessment year any loss computed in respecct 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 eight assessment years immediately succeeding the assessment year for which the loss was first computed.

Explanation.-Where any part of the business of a company other than a company whose gross total income consists mainly of income which is chargeable under the heads " Interest on securities ", " Income from house property ", " Capital gains " and " Income from other sources", or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.

Originally posted by : Rudra S Chowdhury
	Section 73 of Income Tax Act : Link I have highlighted the relevant portions 73. Losses in speculation business. (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business. (2) Where for any assessment year any loss computed in respecct 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 eight assessment years immediately succeeding the assessment year for which the loss was first computed. Explanation.-Where any part of the business of a company other than a company whose gross total income consists mainly of income which is chargeable under the heads " Interest on securities ", " Income from house property ", " Capital gains " and " Income from other sources", or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.

thanks for the page, now u can read the red bold words, and if anyone is present in your tax computation, then speculation is not your business income, 

 

yes speculation loss can be carried forward ..........but not for all......its available for only those assesses whose main business is trading in securities and they dont claim short term or long term capital gain, viz their share holding is "stock in trade" and at close of year they are computed at closing price of market. 

 

There is a loss in F&O ( Short Term ) Current year. There is gain in Intra Day. Can I set off the loss against the income?

Share Trading with any Brokers In India By recognized Stock Exchanges Like Nse, Bse, Mcx & Ncdex ( Daily intraday / Delivery of  Equity Shares & Derivative Shares / Option / Future Commodities) was not speculative bussiness it is undercome Capital Gain Head From 2006 section 43(5) d ii ( Short Term Gain/Loss & Long Term Term Gain/Loss) This Loss can be setoff  Next 8 YEARS

Capital Gain Setoff Formula

STCG = STCG

LTCG = LTCL+STCL

STCL  = STCG+LTCG ( NEXT 8 yEARS )

LTCL  = LTCG ( NEXT 8 YEARS )

 

 

explanation to recent notification on

speculative transection

 

 

CBDT has issued a notification – No.46/2009, dated 22-05-09. The notification specifies

MCX Stock Exchange Ltd. as a recognized stock exchange for the purpose of Sec.

43(5)(d)(ii) of the Income Tax Act.

 

Summary of Sec. 43(5):

 

Sec. 43(5) defines the 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.

 

 

However, there is a specific exemption provided in provision (d) of the section.

 

 

Provision (d) to Sec. 43(5)

 

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) carried out in a

 

recognised stock exchange; shall not be deemed to be a speculative transaction;

 

 

Thus, if the transaction in derivatives carried out in recognized stock exchange can not be

 

treated as speculative transaction eventhough settled otherwise than by delivery.

 

 

“Recognised stock exchange” for the above provision is elaborated in explanation (ii) of

 

the above provision.

 

 

Explanation (ii):

 

“Recognised stock exchange” means a stock exchange as referred to in clause (f) of

 

section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which

 

fulfils such conditions as may be prescribed and notified by the Central Government for

 

this purpose.

 

 

Situation before notification:

 

Before the issuance of the above notification only two exchanges were notified for the

 

above purpose vide Notification No- SO 89(E), dated 25-01-06:

 

 (1) National Stock Exchange of India Limited, Mumbai

 

(2) Bombay Stock Exchange Limited, Mumbai

 

 

Effect after notification:

 

 

After issuance of the above notification; From now onwards even MCX Exchange will be

 

eligible for the above exception as per provision (d) of Sec. 43(5). So contract carried out

 

in MCX for the purchase or sale of any commodity will not be treated as speculative

 

transaction eventhough it  is periodically or ultimately settled otherwise than by the

 

actual delivery or transfer of the commodity.

 

 

STT  :

 

Security Transaction Tax is levied on all the trades executed except on commodity.

 

However, CTT – commodity transaction tax is yet not notified. Thus, transaction carried

 

out in MCX for commodity does not attract CTT and also not consider as speculative

 

transaction.