Speculative business By CA Ankita Bothra

Definition and Basic concepts

Explanation 2 of Sec 28 of income tax act, 1961 says that a contract for purchase or sale of any commodity, stocks or shares is periodically or ultimately settled, otherwise than by actual delivery covers under speculative business. One of the best example for speculative business is intra day transaction.

Exceptions for speculative business

• Hedging Contracts: Sec 43(5) exclude hedging contracts from speculative transaction; however there is no actual delivery happen but such contract is executed for any underlying asset which loss can be settled due to price changes of such underlying asset. Like you have forward contract to buy particular stock at particular rate at particular date and but there is chances to price of such stock can be fell so hedge or minimize your size you can sell such stock at particular rate at particular date.
  The burden of proof the assessee to show that transactions are merely hedging transactions, There is number of case study regarding this point so its purely depend upon case to case

Exceptions for speculative business

• Derivative transactions: trading in derivative is not treated as speculative business subject to few conditions to be fulfilled
  Like: trading through recognised stock exchange, it include security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or any other form of security, there is any underlying security based on that price or index price can be changed, transaction through demat account or accordance the provision of SEBI Act,1992 or SCRA act 1956 or by bank or mutual funds, any unique client identity and PAN no can be mentioned, maintance of documents by stock markets etc.

Exceptions for speculative business

• Trading in Commodity derivative: an eligible transaction through recognized stock exchange and which Commodity Transaction Tax(CTT) can be levy than such transaction is not treated as speculative transaction subject to few conditions
  Like:through recognized stock exchange, electronic based system under forward contract regulation act and transaction is supported by a time stamped contract note issued by such broker and there is unique identification number and PAN number is also displayed.
  Agriculture Commodity derivative where CTT is not levy so treated as speculative business but under budget 2018 amendment for encourage this such Agriculture Commodity derivative also treated as non speculative transaction although no CTT can be levy under this.

Important Points

• The definition of sec 43(5) which include exception for speculative transaction is not applicable for sec 73. Section 73 any loss computed in respect of a speculation business shall not be set off against expect any other profit or gain from another speculative business.
  So these 3 exception i.e. loss from derivatives, loss from hedging, loss from commodity derivative even though treated as non speculative business but u/s 73 set off against only another speculative income shall be available.