What does Speculative income mean?

Speculative Income doesn’t have a precise meaning among the terms defined by the Income Tax provision but the term derives itself from the phrase ‘speculative transaction’. It can be understood that the income which is derived from speculative transaction is speculative income. To understand speculative income one must delve into an understanding of speculative transaction.


How can one understand speculative transaction?

To define the phrase “speculative transaction”, one can understand that the term implies a transaction in which the contract which includes the purchase or sale of any commodity like stocks and shares is settled periodically or eventually settled otherwise than the actual delivery or transfer of the commodities or scrips.

One of the most common examples would be intra-day trading income. The term ‘intra-day trading’ means the trading of shares within the same day. Considering the case of intra-day trading in shares, one notices that ultimately there is no entry or exit from the trading account on the same date and therefore, there is no entry into the DEMAT account at all. Thereby, no deliveries in case of intra-day trading and therefore, the scenario can be referred to be speculative transaction.


What are the exceptions to a certain transaction to be considered as "Speculative"?

While there are many cases when a transaction can be deemed to be “speculative”, one must have a clear understanding of what cannot be considered as speculative transactions as the following-

  • Hedging contract with respect to raw materials or merchandise – A person might enter into a contract in the course of his manufacturing or merchandise business and in respect of the raw materials and merchandise, in order to guard them against loss which might be feared of due to price fluctuations in future in respects of his contracts for actual delivery of the goods manufactured or merchandise sold by him. Thereby, the procedure of hedging a contract here means saving goods from future loss and this is not speculative transaction.
  • Hedging contract in the aspect of stocks and shares – Just like the above scenario, here the person is in a contract with his stocks and shares entered into by a dealer or investor to protect them against the loss due to future price fluctuations.
  • Forward contract – A forward market is defined as an over-the-counter market place and one of the main tasks here is to set the price of a certain financial instrument or decide an asset for future delivery. A forward contract is one which is entered into by a member of a forward market (or stock exchange) and in the course of any transaction in the nature of jobbing or arbitrage, protect against any loss which might arise in the course of the business. Jobbing means all transactions are squared off during the same day and arbitrage means a purchase of commodity or security in one market and then immediately selling it in another market.
  • Trading in derivatives – An eligible transaction is a transaction carried out electronically on through recognized brokers as defined per relevant statutes, this transaction is supported by a time stamped contract note which indicates a unique client identity number and PAN (Permanent Account Number). This transaction in respect of trading in derivatives are referred to in Securities Contracts (Regulation) Act, 1956 and carried out in recognized stock exchange.
  • Trading in commodity derivatives – An eligible transaction (same as defined above) is carried out in respect of trading commodity derivatives in a recognized association, one which is chargeable to commodities transaction tax mentioned under Chapter VII of the Finance Act, 2013.

How is Speculative business treated to be a distinct variety of business?

One can recognize speculative business to be treated as a distinct business and to be separate from any other business carried on by the same person if the taxpayer is carrying on many businesses along with the respective speculative business. Explanation 2 to Section 28 of the Income Tax Act, 1961 defines this term when the speculative business can be deemed as separate from the other businesses.


What is the treatment of loss from speculative business?

It is important to treat speculative business as a distinct and separate business in order to necessitate calculate loss provisions. The Section 73 of the Income Tax Act states that the losses from speculation business can only be set off against the profits of the speculative business and unlike this is quite unlike that loss from any other business can be set off against the profits of other businesses. One must note that the losses from a speculative business can be carried forward to a subsequent year, can only be set-off against the profit and gains of any speculative business in the respectively subsequent year. Not only is it important to treat speculative business as a separate and distinct business but also the profits and losses as resulted from the respective speculative business must be treated as separate and distinct from other profits and gains as resulted from the business or profession.

One must make the note that loss from the speculative business cannot be carried forward for a period greater than four assessment years beyond that year in which the loss was incurred. Moreover, if there is any expenditure and depreciation in the process of scientific research, it is to be set off first, if the depreciation or capital expenditure is carried forward in the speculative business.


What are some recognized stock exchanges in India?

NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) are among the most recognized stock exchanges in India.


What is a recognized association?

Multi Commodity Exchange (MCX) Stock Exchange Limited and United Stock Exchange of India Limited are some important exchange associations based in India.


How can one understand Eligible Transaction for security derivative?

An "Eligible Transaction" can be defined in the following two ways-

  • A transaction carried out electronically on screen-based through a stock-broker or a sub-broker or any such intermediaries registered under Section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) and done in accordance with all or either of the provisions of following rule and regulations and the bye-laws made of directions issued under those Acts or by banks or mutual funds on any of the recognized stock exchange-
    1. Securities (Regulation) Act, 1956 (42 of 1956)
    2. Securities and Exchange Board of India Act, 1992 (15 of 1992)
    3. Depositories Act, 1996 (22 of 1996)
  • A transaction which is supported by a time stamped contract note as issued by such a stockbroker or sub-broker or such other intermediary to every client indicating in the contract note in the unique client identity number and PAN as allotted under any Act referred to in sub-clause (A).

How can one understand Eligible Transaction for Commodity derivative?

"Eligible Transaction" for commodity derivative can be understood by the following two definitions and types of transactions-

  • A transaction carried out electronically on screen-based systems through a member or an intermediary, as per registered under the bye-laws, rules and regulations of the recognized associations for trading in commodity derivative as per the provisions of Forward Contracts (Regulation) Act, 1952 (74 of 1952) and the rules, regulations or bye-laws made or directions issued under the Act on a recognized association.
  • A transaction supported by a time stamped contract note which is issued by a member or intermediary to every client indicating among other things in the contract note, the unique client identity number as allotted under the Act rules, regulations and bye-laws as referred in sub-clause(A), unique trade number and permanent account number allotted under the Act.

Why cannot a single transaction constitute speculative business?

As per explanation 2 to Section 28, one understands that speculation business should be separate and distinct while Section 43(5) defines what the term speculative transaction means. A juxtaposition of these facts indicates that Section 73 only applied when Speculative transactions constitute a business. Thereby, the provisions cannot be applied unless the loss pertains to speculative business. In almost every section (especially explanation 2 of Section 28) there is a pluralised reference to speculative “transactions” which indicates that if the speculative business is to be taken ahead within the parameters of the given explanation, a single transaction is insufficient unless there is a systematic or organised course of activity or conduct on the part of the assessee, it is clear that a single transaction is not possible. A single transaction done instead of actual delivery is not sufficient to stand by the explanation 2 of section 28 of the Income Tax Act, 1961 and there should be a plural set of speculative transactions.


What is the treatment of losses in speculation business as per Section 73 of the Act?

  • The loss as computed in respect of the speculation business as carried on by the assessee is not to be set off except against the profits and gains, of another speculation business.
  • The case when for any assessment year any loss calculated in respect of speculation business has not been entirely set-off under sub-section (1), and much of the loss is not set off where the assessee had no income from other speculative business and thereby, is subject to other provisions of the chapter, thereby carried forward to the following assessment year-
    1. It shall be put against the profits if any by the speculation business which is carried on by him and is assessable for that assessment year.
    2. If the loss made cannot be wholly set off, then the amount of loss shall be carried forward to the next assessment year.
  • In the respect of allowance on the count of depreciation and capital expenditure which is made on account of scientific research, the provisions as per sub-section (2) of Section 72 is applied to speculation business as is done in any other business.
  • No loss to be carried ahead beyond four assessment years which is immediately succeeding the year in which the loss was incurred.

One must consider that any part of the business or company which consists in purchase and sale of shares of other companies shall be deemed to be carrying on a speculation business to the extent to which the business consists of purchase and sale of such shares.


How should one consider F&O in shares and commodities as a speculative business?

F&O in shares or commodities is not a speculative business if it is an eligible transaction, as discussed in the above sections and carried out in a Recognized Stock exchange or association respectively.


Is Dabba Trading a speculative transaction?

The business of Dabba trading which is disrepute for the vicious cycles it puts the underprivileged into is considered to be a speculative transaction. However, it is illegal and prohibited by SEBI.


Conclusion

One can understand that speculative income is a complex deal and at times can be quite risky. The taxpayer has to take care of several transactions and their actual credibility as speculative or normal business. It is important to determine whether speculative transaction can really work up to good profits within the affirmed legalities. There are several transactions which are misinterpreted or misunderstood as speculative transaction depending on the non-delivery of shares and merchandise and also based on the “intention” of the business. One should be through with all the clauses in order to determine which transaction is speculative and accordingly file their taxation and other official purposes.

Frequently Asked Questions

Q- How do you calculate turnover for speculative business?

Ans: In case of speculation business, the aggregate of both positive and negative differences is to be considered as the turnover.


Q- What is speculative loss?

Ans: A business transaction (i.e purchase and sale) of goods is done where delivery of goods is not affected, it is known as speculative transaction. The loss in a speculative business transaction is termed as speculative loss.


Q- How is speculative income taxed?

Ans: As per Section 43(5) of the Income Tax Act, 1961, intra-day trading shall be considered as speculation business transactions and the income therefrom would be either speculation gains or speculation losses. Income from speculation gains is taxed at the normal rates.


Q- What is non speculative business?

Ans: A 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 a speculative transaction. The business which consists of speculative transactions is called as speculative business. A business other than speculative business is called non speculative business.


Q- What is speculative trading?

Ans: Speculation is the act of trading in an asset or conducting a financial transaction that has a significant risk of losing most or all of the initial outlay with the expectation of a substantial gain. It involves trading a financial instrument involving high risk, in expectation of significant returns. The motive is to take maximum advantage from fluctuations in the market.


Q- What are some of the exceptions to the speculative income?

Ans: There are certain transactions which may appear to be of speculative nature but have been specifically excluded from the definition of speculative transactions are : Hedging contract in respect of raw materials or merchandise, Hedging contracts in respect of stocks and shares, forward contract and trading in derivatives and commodity derivatives.


CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.