Income tax provision provides for taxing any kind of income earned by taxpayers under five major heads such as income from salary, income from house property, profits or gains of business/profession, income from capital gains and income from other sources. Right classification of income plays an important role due to varied method of computation, deductions and incentives, tax rates etc prescribed for different kinds of income.
There has always been a confusion/controversy with respect to classification of income between business/profession income and income from capital gains in case of commodities including stocks and shares. There are various decisions which have held that classification between these two categories of income would depend on the intention of investment and frequency of the transaction. Further, if a transaction is classified to be of a business, it calls for further classification of the income being speculative or non-speculative. This article revolves around understanding what speculative income is.
1. What is Speculative Income
Income tax provision has not defined speculative income but has defined ‘speculative transaction’. Therefore, it can be said that income that is derived from speculative transaction is speculative income.
2. Meaning of speculative transaction
Speculative transaction is 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 (Section 43(5) of the Income-tax Act)
Example – In case of intra-day trading in shares, there is no actual delivery as the shares enter and exit from the trading account on the same date and it does not enter the DEMAT account at all. Intra-day trading is the trading of shares within the same day. Generally, delivery is not taken in case of intra-day trading, and thus, these are said to be speculative transactions.
Therefore, based on the definition it can be inferred that intra-day trading income is speculative income.
Following are certain transactions which have been specifically excluded from being treated as Speculative transactions.
- Hedging contract in respect of raw materials or merchandise
Any contract entered into by a person in the course of his manufacturing or merchandising business in respect of raw materials or merchandise to guard against loss which may occur due to future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him. These are basically futures contract to cover business losses w.r.t raw materials or merchandise through actual delivery.
- Hedging contract in respect of stocks and shares
Similar to the above, this is with respect to stocks and shares. Any contract in respect of stocks and shares entered into by a dealer or investor to guard against loss in his holdings of stocks and shares through price fluctuations;
- Forward contract
Any 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 (all transactions are squared off during the same day) or arbitrage (purchase of commodity or security in one market for immediate sale in another market) to guard against loss which may arise in the ordinary course of his business as such member. A forward market is an over-the-counter market place that sets the price of a financial instrument or asset for future delivery.
- Trading in derivatives
An eligible transaction (carried out electronically on screen-based systems through recognized broker as per relevant statutes and which is supported by a time stamped contract note indicating unique client identity number and PAN) in respect of trading in derivatives referred to in Securities Contracts (Regulation) Act, 1956 and carried out in a recognised stock exchange.
- Trading in commodity derivatives
An eligible transaction (carried out electronically on screen-based systems through registered member or intermediary as per relevant statutes and which is supported by a time stamped contract note indicating unique client identity number, unique trade number and PAN) in respect of trading in commodity derivatives carried out in a recognised association , which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013.
4. How is Speculative business and Loss from Speculative Business treated
- Speculative business to be treated as distinct business
If a taxpayer is carrying on many business along with speculative business, such speculative business of a taxpayer must be deemed as distinct and separate from any other business carried on by the same taxpayer.
- Treatment of loss from speculative business
Treatment of speculative business as a distinct and separate business is necessary for the purpose of set off of loss provisions. As per Section 73, losses from speculation business can be set off only against profit from speculative business unlike loss from other business which can be set-off against the profits of any business. Further, loss from a 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. Along with treating speculative business as separate and distinct business, profits and losses resulting from speculative transaction must also be treated as separate and distinct from other profits and gains of business and profession.
Loss from speculative business cannot be carried forward for more than 4 assessment years succeeding the year in which loss is incurred. Further, if depreciation and capital expenditure on scientific research if any incurred in speculative business is being carried forward, such depreciation / capital expenditure shall be set off first.