Set-off and carry forward of Speculative Business Loss

What is Speculative Income?

Income Tax Act has not defined the meaning of ‘speculative income’ but has defined ‘speculative transaction’. Thus, it can be said that the income derived from the speculative transaction is a speculative income.

Meaning of speculative transaction

As per provisions contained under section 43(5) of the Income Tax Act, any 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 termed as speculative transaction.

However, there are certain transactions which have been excluded from being treated as speculative transactions. Such specific transactions are:

• Hedging contract of stocks and shares
• Forward contract
• Trading in derivatives
• Trading in commodity derivatives
• Hedging contract of raw materials or merchandise

Set-off and carry forward of Speculative Business Loss (Section 73)

The loss arising from speculation business of any assessment year is allowed to be set off only against the profit of another speculation business in the same assessment year. But, where the loss of speculation business could not be set off from the income of another speculation business in the same assessment year, then the amount of such loss is allowed to be carried forward in the subsequent year, so that can be claimed as set off only against the income of any speculation business. Such speculation business loss is allowed to be carried forward only for 4 assessment years immediately succeeding the relevant assessment year for which the loss was first computed.

However, it may be observed that there is no compulsion that the same speculation business must continue in the assessment year in which the loss is set off.

Explanation to section 73 of the Income Tax is applicable if the following conditions are satisfied—

• The assessee is a company.
• The total income of the company does not consist mainly of income which is chargeable under the heads “Income from house property”, “Interest on securities”, “Income from other sources” and “Capital gains”. In simple words, it is a company whose principal business is other than that of trading in shares or securities, banking, and granting of loans and advances.
• The principal business of the company mainly consists of the purchase and sale of shares of other companies.

If the aforesaid conditions are satisfied, such business shall be considered as speculation business to the extent to which the business consists of purchase/sale of such shares.

However, the explanation to section 73 is not applicable if—

• The shares are purchased as an investment and not as stock-in-trade; or
• The principal business of the company is the business of trading in shares.

Important points in respect of section 73:

The loss from Speculative business can be set off only against Speculative Income 

The loss incurred in speculation business can be carried forward to the subsequent year and set off only against the profits of speculation business.

Loss from Speculative Business can be carried forward for 4 years.

The loss from Speculative Business can be carried forward for 4 assessment years only, immediately succeeding the assessment year for which the loss was first computed.

Continuity of Speculative Business

There is no such requirement that the speculation business (the business in which the loss was incurred) should continue to be carried on in the subsequent year in which the taxpayer wants to set off of the speculative business loss but the assessee should be the same.

Filing of Loss Return within a specified timeframe

The loss of speculative business cannot be carried forward unless the return of income (for the year in which the loss is incurred) is filed within the due date as specified under section 139(1) of the Income Tax Act.

Summary of section 73- Set-off and carry forward of Speculative Business Loss:

• Loss from Speculative Business can be carry forward for 4 assessment years from the assessment year in which the loss was first incurred
• The Speculative Business loss be adjusted only against income from speculative business
• The Speculative Business loss cannot be carried forward if the return of income is not filed within the original due date as specified in section 139(1).
• It is not necessary for the assessee to continue the business at the time of set off in future years
• Loss of banned items incurred in speculative business cannot be carried forward to the next year.
• Where any speculative transaction entered by the agent on behalf of the principal, then any loss arising on such transaction will be the non-speculative loss of agent.
• Where a forward transaction entered into on behalf of constituents, then the income from the forward transaction is not income from a speculative business carried on by the assessee.

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