Speculative loss of earlier years can be set off against profit earned on delivery-based share trading or deemed speculative business profit

Speculative loss incurred in earlier years by a company can be set off against profit earned on delivery-based share trading transactions. The HC held that since the business of delivery-based share trading transactions is deemed to be a speculative business for a company, such set off is permissible.

Background and facts of the case:- Under the Indian Tax Law (ITL), a speculative transaction is defined to mean a contract for purchase or sale of any commodity, including stocks and shares, which is settled otherwise than by actual delivery or transfer of commodity or scrips. The characterisation of a transaction as a speculative one is relevant since, in terms of the set off provisions of Section 73 (Section) of the ITL, speculative business loss can be set off only against speculative business profit.

Further, under the Explanation to the Section (Explanation), where any part of the business of a company consists of purchase and sale of shares of other companies, such a business is deemed to be a speculative business (Refer Note- 1).

The Taxpayer, a company, had incurred speculative loss in the years prior to tax year 2002- 03. During tax year 2002- 03, it earned profit from delivery-based purchase and sale of shares. The Taxpayer set off the speculative loss of the earlier years against the delivery- based share profit of the tax year 2002- 03.

The Tax Authority denied the set off on the ground that the delivery- based share profit did not constitute speculative business profit. The first appellate authority confirmed the Tax Authority’s action.

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