Section 73 of the Income Tax Act, 1961
Tax Act, 1961 includes the provisions for taxation of any kind of income earned
by an individual. Major heads for the categories of income for tax assessing
from house property
& Gains from business or profession
from capital gains
from other sources.
classification of income under different heads plays a vital role in assessing
the tax liability as different methods are used for computation of tax, the
deductions claimed. The tax rates are also different depending upon the class
One such method for assessing the income also depends upon the nature of the transaction, i.e., whether it is speculative & non-speculative. Section 73 of the Income Tax Act, 1961 deals with speculative income, which is discussed henceforth.
Section 73 of the Income Tax Act, 1961
forward and set off losses from speculation transactions are dealt with under
Section 73 of Income Tax Act, 1961. Speculative transactions are the purchase
or sale of any goods & commodity where the commodity is not transferred or
delivered; rather, they are just settled otherwise.
For example, an individual (farmer) agrees to sell rice to another person in two months’ time at a price of INR.100/kg. The farmer speculates that the prices of rice will fall after two months as per his observations. Now, after two months, the price of the rice actually falls to INR 80/kg. The farmer, therefore, makes a profit of INR 20/kg. This would be his speculative income.
Exempted Entities Under Section 73
Section 73 of the Income Tax Act, 1961 does not apply to the following:
assesses who is any entity other than a company.
companies whose gross total income comes from the following heads:
- Interest on securities
- Income from house
- Income from capital
- Income from other
business activity of an entity is:
- Granting of loans &
- The business of banking.
Exempted Transactions Under Section 73
transactions are excluded from the definition of speculation transactions:
- Hedging Contracts for raw materials: These are the
contracts mostly entered into by manufacturers or merchandise to hedge against
any loss. Such loss may occur if the price at which the contract is entered
into between the parties fluctuates in the future on the date of actual
delivery. These are the contracts to cover the losses of the price of raw
materials or merchandise at the time of actual delivery.
- Hedging contracts for stock & shares:
These are the contract similar to that of above with the only difference of
being shares. Here the contracts are entered into for covering the losses
against price fluctuations in cases of holding of stocks & shares.
- Forward Contract: These are the contracts entered into between
parties in which parties agreed to trade for the commodity at the set price in
future date irrespective of the actual price prevailing during the actual transaction
in a future date.
- Derivative trading: Derivatives are the securities whose value is
derived from underlying assets such as bonds, stocks, etc. Thus investment is
made under derivative trading in equity and currency to get the exposure of
higher returns & investments.
Treatment of loss from Speculative Business
per section 73 of the Income Tax Act, 1961 losses from Speculative Business are
treated as follows:
accruing from the speculation business carried on by assesses can be set off
only against the profit of another speculation business. Assesses cannot adjust
the loss from speculation business against any other income.
any assessment year, loss from the speculation business is not wholly set off,
such non-set off a loss or in the case where there is no income from any other
speculation business such whole loss can be carried forward to the next
in the next assessment year, it shall be set off against the profit from
speculation business occurring during that year and in case of no income in
that year also, they are carried forward again for the next assessment year and
Carry forward of loss of Speculative
from the speculative business can be carried forward for up to the next four
forward losses can be set off only against speculation income and no other
income. If there is no income in such subsequent year also, they are carried forward
for the next year and so on.
losses cannot be carried forward by an assesses if he has not filed his Income
Tax Return for the Financial Year within the due date.
is no compulsion to carry on the business in future dates at the time of set
Contrary View of Section 73 with Case Laws
73 applies to the companies whose part business consists of purchase & sale
of shares are included as speculative business. Part means some portion of the
business, it may include 90% of the business, but the whole 100% is not
considered as a part business. However, in the case of Arvind Investment Ltd.
The high court of Calcutta has decided in contrary view that section 73 applies
in cases where part business as well whole business consists of the activity of
purchase & sale of shares.
total income shall be the total of Income, Profit & Loss. Loss is a negative
income that should be considered as a part of income decided by the high court
in the case of Aryasthan Corporation Ltd.
purchase of shares and apply the shares are the entirely two different concepts
under section 73. The purchase of the shares is covered under speculative
business. But if any company applies for the share of another company and
shares are allotted to such a company who later sale such allotted share
doesn’t come under section 73. The same has been decided in the case of Ginni
Finance Pvt Ltd by the “C” bench of Calcutta ITAT that the loss incurred by the
assesses by selling the shares of one company whose shares have been acquired
by the assesses. Such loss doesn’t cover under section 73, and it can’t be said
as a loss against the purchase & sale of shares of other companies.