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.
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.
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-
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.
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.
NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) are among the most recognized stock exchanges in India.
Multi Commodity Exchange (MCX) Stock Exchange Limited and United Stock Exchange of India Limited are some important exchange associations based in India.
An "Eligible Transaction" can be defined in the following two ways-
"Eligible Transaction" for commodity derivative can be understood by the following two definitions and types of transactions-
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.
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.
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.
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.
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.
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