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1. Speculation business is deemed to be distinct and separate from other business

If an assessee carries on a speculative transaction 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. (Explanation 2 To Section 28)

2. Speculation business comprises speculative transaction but every speculative transaction may not be a speculation business

2.1 Definition of a speculative transaction

“speculative transaction” means a transaction in which contracts 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: (sub-Section (5) of Section 43)

2.1.1 Speculative transactions, basic ingredients of. The ‘basic ingredients of speculative transactions’ are :- (i) that the contracts are to be periodically or ultimately settled; and (ii) the settlement would be otherwise than by actual delivery or transfer of commodity or scrips. CIT V. Ram Chandra Gupta & Co., (1968) 69 ITR 254, 259-260 (Cal.)

2.2 Exclusions from a speculative transaction

(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; or

(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; or

(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) carried out in a recognized stock exchange

Explanation.- For the purpose of this clause, the expressions –

(i) “eligible transaction” means any transaction, –

(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 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 recognized stock exchange; and

(B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act;

(ii) “recognized stock exchange” means a recognized stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfills such conditions as may be prescribed and notified by the Central Government for this purpose;

Section 2(ac) of the Securities Contracts (Regulation) Act, 1956 – “derivative” includes –

(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;

(B) a contract which derives its value from the prices, or index of prices, of underlying securities;

Section 2(f) of the Securities Contracts (Regulation) Act, 1956 – “recognized stock exchange” means a stock exchange which is for the time being recognized by the Central Government under section 4;

2.2 Speculative Business in special cases

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 or other companies, such company shall for the purpose 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. (Explanation to Section 77)

3. How if the profit / loss from Speculative Business determined? Are provisions of Accounts and Audit applicable in case of Speculative Business?

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. (Section 73(3)).

4. Loss from Speculative business can be set off against profits and gains from speculative business only

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. (Section 73(1))

Where for any assessment year any loss computed in respect of 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. (Section 73(2)).

5. Loss from any other business / profession or under any other head of income may be set off against gains from Speculative business