What is Speculative transaction meaning with example

    SPECULATION BUSINESS

section 28 specifically provides that where an assessee carries on speculative business, that business of the assessee must be deemed as distinct and separate from any other business. This becomes necessary because section 73 provides that losses in speculation business unlike other business, cannot be set-off against the profits of any business other than a speculation business.

 

Likewise, a loss in speculation business carried forward to a subsequent year can be set -off only against the profit and gains of any speculative business in the subsequent year. Profits and losses resulting from speculative transaction must, therefore, be treated as separate and distinct from profits and gains of business and profession from any other business.

 

1.    Meaning of Speculative Transaction

 

Speculative transaction means a transaction in which a contract for the purchase or sales of any commodity including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips [Section 43(5)].

Where any part of the business of a company consists in the purchase and sale of the shares of other companies, such a company shall be deemed to be carrying on speculation business to the extent to which the business consists of the purchase and sale of such shares.

 However, this deeming provision does not apply to the following companies

·    A company whose gross total income consists of mainly income chargeable under the heads Interest on securities, Income from house property, Capital gains and Income from other sources.

·         A company, the principal business of which is :-

(a) the business of trading in shares; or

(b) the business of banking; or

(c) the granting of loans and advances.

 Accordingly, if these companies as mentioned above carry on the business of purchase and sale of shares of other companies, they would not be deemed to be carrying on speculation business.

 2.    Transaction not deemed to be speculative       transaction.

The following forms of transactions shall not be deemed to be speculative transactions:

1.  Hedging contract in respect of raw materials or merchandise: A contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchandising business to guard against loss through future price fluctuations in respect of his contracts for the actual delivery of goods manufactured by him or merchandise sold by him; or

2.  Hedging contract in respect of stocks and shares: A contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuation; or

3.  Forward contract: A contract entered into by a member of a forward market or stock exchange in the course of any transaction like jobbing or arbitrage to guard against any loss that may arise in the ordinary course of his business as a member; or

4. Trading in derivatives: An eligible transaction carried out in respect of trading in derivatives in a recognized stock exchange.

 5. Trading in commodity derivatives: An eligible transaction in respect of trading in commodity derivatives carried out in a recognized stock exchange, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013.