SPECULATIVE BUSINESS |
Set off ID – 02 (JBC-013) |
SPECULATIVE BUSINESS IS DISTINCT BUSINESS. EXPL 2 TO SEC. 28
Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as "speculation business") shall be deemed to be distinct and separate from any other business.
Sec.43(5) - meaning of speculative transaction
Is a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts
Provided that for the purposes of this clause – following transactions are to be excluded
A contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or
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 fluctuations; or
A contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member.
An eligible transaction in respect of trading in derivatives carried out in a recognised stock exchange;
“Eligible transaction” means any transaction,
(A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act and
(B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act and permanent account number allotted under this Act;
Scope of the definition - ‘speculative transaction’
In common parlance connotes an intention to speculate, gamble, take a chance or risk. The Act however provides a very simple and objective test for determining whether a transaction is a speculative transaction or not. Under this definition, all that has to be found out is whether the contract was periodically or ultimately settled by actual delivery, transfer or otherwise. If the goods or commodities in respect of which the contracts were entered into were actually taken delivery of pursuant to the contract, it would not be a speculative transaction, even though the commodity or scrip may be a highly speculative one by its very nature and even though at the time when the contracts were entered into the parties might have had no idea of taking delivery at all. On the other hand, if the contract is settled otherwise than by actual delivery, then it will be a speculative transaction notwithstanding that the nature of the commodity was not one lending itself to possibilities of speculation or that the intention of the parties at the time of entering into the contract might have been to take actual delivery but this intention could not be effectuated for one reason or the other - M.R.Dhawan V/s. CIT [1979] 119 ITR 412 (Delhi).
Assessee was a member of an association for speculation in coconut oil. It speculated on its own. It also received orders from its constituents, who were not members of the association, to speculate on their behalf. But as only members could deal with the association, actually no such purchase or sale was made through the association in the name of that party, though there were other purchases or sales in forward transactions by the respondent itself. The dates for settlement as also the rates at which the transactions were entered into were settled. On the relevant date settlement was made, profit being either paid to or received from the party having regard to the rates obtaining on that day. On each such transaction, the respondent also received a commission from the party on whose behalf the transaction was done. The respondent claimed to set off such commission against its speculation losses. Held that the commission received by the respondent could not be set off against the speculation losses, because there was no element of speculation whatever in the commission income received by the respondent. The commission was independent of any fluctuation in the market and no risk was involved in earning it. The commission had to be treated not as a profit from the speculation business but as profit from the business as a broker, and the assessee was not entitled to have the commission receipts assessed under the head "speculation business". [1969] 074 ITR 0754- CIT VS. PANGAL VITTAL NAYAK AND CO. P. LTD. (SC)
There was loss in illegal transactions and the question was whether it can be taken into account in computing profits of same business of the assessee or not. However if the business in which the loss was sustained was the same as the business in which the profit was derived, then the loss had to be taken into account while computing the profits of the business. The assessee was not entitled to a set-off the loss from illegal transaction against its profit in speculative transactions. [1971] 082 ITR 0794- CIT VS. Kothari (s.c) (supreme court of india)
A transaction cannot be described as a "speculative transaction" within the meaning of 43(5), where there is a breach of the contract and a dispute between the parties damages are awarded as compensation by an arbitration award. What is really settled by the award of such damages and their acceptance by the aggrieved party is the dispute between the parties. Section 43(5), however, speaks of a settlement of the contract, and a contract is settled when it is either performed or the promise dispenses with or remits, wholly or in part, the performance of the promise made to him or accepts, instead of it, any satisfaction which he thinks fit. [1983] 144 ITR 0057A CIT VS. SHANTILAL P. LTD. (SUPREME COURT OF INDIA)
Concept of Delivery
Under Sales of Goods Act, delivery can be made either by physical delivery of the commodity directly to the purchaser or to the carrier for him or by transferring the documents of title to the commodity. Thus, actual delivery is not the essence to make a transaction non-speculative. Delivery also takes within its ambit delivery to the carrier or transfer of title deeds to the purchaser.
J contracted to purchase a tanker of groundnut oil. The seller dispatched the oil by Railway and sent the invoice along with Railway Receipt (RR). After obtaining the RR, J sold the consignment to R by endorsing the RR. The sale to R was concluded at a lesser rate than the rate of purchase. Thus, J suffered loss and claimed its set off against other business profits. The ITO disallowed the set off treating the loss as speculative because J did not settle the transaction by actual delivery. Held that the transaction is not speculative because the expression "otherwise by actual delivery or transfer of commodity" in Sec. 43(5) take within its ambit these two modes of delivery, that is, delivery to the carrier or transferring the documents of title to the commodity. Accordingly, the transaction is not of speculative nature. The loss is business loss, allowed to be set off [CIT v. Lakshminaravan Trading Co. (1996) 219 1TR 90 (AP)].
Mangal Chand (Raj) The actual delivery of share certificates along with the blank transfer form, but without the same having been registered in the name of the assessee would not bring it within the purview of section 43(5).
Speculative transaction – shares in brokers account
Physical delivery of shares is a condition for avoiding the inference of speculation. Where a transaction is put through a broker and had become the subject matter of transactions through the stock exchange, delivery is bound to have taken place, except in badla transaction, where permitted. But where the transaction is between a client and the broker on principal to principal basis, physical delivery cannot be presumed as for stock exchange transactions. It is such a transaction on principal to principal basis, settled by payment of difference, without physical delivery, that was characterised as a speculative transaction within the meaning of section 43(5) of the Act. In coming to the conclusion, the High Court in Bhikamchand Betala and Sons v. ITO [2007] 294 ITR 10 (Gauhati) followed the decision in CIT v. Maya Ram Jia Lal [1986] 162 ITR 520 (P&H).
During the course of assessment proceedings for the assessment year 1995-96, the assessee, an Hindu undivided family, claimed the loss in share business amounting to Rs. 3,99,860. The Assessing Officer disallowed the claim on the ground that the transaction in shares could not be treated as genuine and added the amount to the income of the assessee. The Commissioner (Appeals) held that the disallowance of the loss in share business was based on a wrong perception of the facts and directed the Assessing Officer to allow the loss as claimed by the assessee. The Tribunal observed that the assessee had purchased the shares on principal to principal basis and resold the shares without taking physical delivery of the shares and also paid only the difference amount of purchase and sale value. The Tribunal took the view that the loss of Rs. 3,99,860 was speculation loss and modified the appellate order. On appeal : Held, dismissing the appeal, that on facts the contention that the assessee had no initial intention to settle the contract by payment of the difference but was only forced by subsequent circumstances to do so and hence the transaction was not speculative in nature could not be accepted. The loss in share business was speculation loss and not deductible. CIT v. Maya Ram Jia Lal [1986] 162 ITR 520 (P & H) followed.
Commodities Hedging not to be Treated Speculative Transactions.
Hedging transactions are not deemed to be speculative transactions. Such transactions are entered into by manufacturers and merchants in the course of business to guard against loss through future price fluctuations. A hedging loss is treated as business loss and is allowed to be set off against business profits. Likewise, hedging profit is treated as business profits.
R, an exporter of castor oil contracted to supply 100 tonnes of caster oil to J of Japan @ Rs 1,650 per tonne. The delivery was to be effected after 2 months. To guard against the loss on account of price fluctuations in the market, R concluded a deal in the forward market to purchase about 4000 tonnes of castor seeds which is roughly equivalent to 100 tonnes of castor oil. The course of prices in the forward market generally follows the same trend as in the ready market. If the prices of castor oil in the ready market goes up bv the time of actual delivery, R would suffer a loss because he would buy at a higher rate and supplv at lower rate as contracted 2 months before. But the prices of castor seeds would also go up in the forward market. He would realise a corresponding profit in his dealings in the forward market. The transaction in the forward market would be settled by realising the difference of prices. It would not be treated as speculative transaction because it was entered to hedge/insure the possible future loss on account of price fluctuation. Thus, R would set off the loss in export business against the profit of hedging business.
MCX transactions – Not speculative
IN THE ITAT AHMEDABAD BENCH 'A', Vimal Oil & Foods Ltd. An eligible transaction carried out in a recognized Stock Exchange would not be treated as speculative transaction, then simply because procedural mechanism had taken a long-time to recognize stock exchange, it would not lead to an inference that same would be applicable from date when said stock exchange had been recognized. Transaction carried out by assessee after 1-4-2006 through MCX Stock Exchange which was recognised by Notification No. S.O.1327(E), dated 22-5-2009 would not be speculative transactions within meaning 43(5)(d)
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