Income Tax

A brief note on “Speculative Transactions” under Income Tax Act

As per Section 43 (5) of the Income Tax Act, Speculative transaction is a transaction where a contract for the purchase or the sale of any commodity, including stocks and shares is periodically or is ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrip.  In this article, we shall discuss Speculative transactions in brief.

Example of Speculative Transactions

In case of intra-day trading in shares, there is no actual delivery since the shares enter to and exit from the trading account on the same date, and it doesn’t enter the DEMAT account at all. Intra-day trading refers to the trading of shares within the same day. Usually, the delivery is not taken in the case of intra-day trading. Therefore they are called Speculative Transactions.

Consequence of Speculative Transaction with reference to Section 28, explanation 2, Section 73 and explanation to section 73

In the above mentioned definition of Speculative transaction, the important thing to note is “periodically or is ultimately settled otherwise than by actual delivery.” This means physical delivery is not made.

Section 28, explanation 2, states that business of the assessee should be deemed as distinct and separate from any other business where such assessee carries on speculative business.

The above mentioned point is critical as Section 73 states that losses in the speculation business, unlike any other business, can’t be set off against the income of any business other than a speculation business. 

A loss in speculation business that is carried forward to a succeeding year can only be set off against the profit and gains of any speculative business in the subsequent year. No loss can be carried forward under this section to beyond four assessment years period immediately succeeding an assessment year for which the loss was computed.

In case any portion of the business of the company consists in the purchase and sale of the shares of other companies, the company will be deemed to be carrying on a speculation business to an extent to which the business has sale and purchase of such shares.

The provision mentioned above doesn’t apply to the companies as mentioned below:

• A company whose gross total income comprises of income chargeable under the following heads- Interest on securities, Income from the house property, Capital gains, and income from other sources.
• A company having a principal business of the business of trading in shares, the banking business, or the business of granting of loans and advances.

What shall not be deemed as Speculative transactions?

The following shall not be deemed as Speculative transactions:

• A contract in respect of the raw material or merchandise entered by a person in the course of his manufacturing or merchanting business with a view to guard against losses due to fluctuations in future price in respect of  his contracts for actual delivery of goods manufactured or merchandise sold by him.
• A contract in respect of shares and stocks entered by a dealer or investor to guard against the loss in his holdings of stocks and shares through fluctuations in price.
• A contract entered into by the member of a forward market or by a stock exchange in the course of a transaction in the nature of jobbing or arbitrage with a view to guard against losses which may come in the ordinary course of his business as such member.
• An eligible transaction in respect of trading in derivatives referred in clause (ac) of Section 2 of the Securities Contract (Regulation) Act, 1956.
• An eligible transaction in respect of trading in the commodity derivatives that is carried out in a recognized association, and that is chargeable to commodities transaction tax under the Finance Act, 2013^[1].

Types of Speculative Transactions in Stock Exchanges

Few types of these transactions and how they are conducted in stock exchanges are mentioned below:

• Option dealings

It refers to the right to buy or sell a security within a prescribed time at a prescribed price. The right to purchase securities is called the call option, and right to sell securities is called the put option.

• Margin trading

In this shares are bought from money borrowed from the brokers. The client opens an account with the broker. He then deposits cash or securities into the account and agrees to maintain the margin at a level. When the broker buys securities, the clients’ account is debited with the amount of such securities.

• Arbitrage

It refers to benefiting from the difference in the price of a security prevailing in two exchanges. The arbitrager buys the security at which it’s cheaper and sells it in the market where it is costlier. 

• Wash sales

This refers to a transaction where a speculator sells a security from one broker and buys the same security through another broker but at a higher price.

• Cornering

It means a situation where an individual or a group acquires a significant portion of company’s shares.

• Blank transfers

The transfer deed has details of only the seller. The buyer details are not mentioned. It is now banned as it encourages tax evasion.

Conclusion

In case of Speculative transactions, there is no receiving or giving delivery of shares/goods or stocks. The contract is settled by paying the differences in selling and purchase price, which can be positive or negative.

Read our article: How to save Income Tax through Tax Planning in India?