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For income tax purposes the income earned by the taxpayers is categorised under five major heads such as income from salary, income from house property, profits or gains of business/profession(PGBP), income from capital gains, and income from other sources.
Right classification of income plays an important role as the method of computation, deductions, incentives, and tax rates prescribed vary for different heads of income. Let’s quickly test you on this. Would you classify your income from share trading and investment as PGBP income or income from capital gains? The answer seems simple right -Capital Gains!
Well, not entirely correct. There has always been confusion/litigation regarding the classification of income between PGBP income or income from capital gains in the case of commodities including stocks and shares.
There are various decisions which have held that the classification between these two categories of income must depend on the intention of investment and frequency of transactions. Further, if a transaction is classified to be business, it calls for further classification of the income being speculative or non-speculative. This article revolves around understanding what speculative income is.
The income tax provision has not defined speculative income but has defined a ‘speculative transaction’. Therefore, it can be concluded that the income derived from a speculative transaction is speculative income.
A 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 the 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. Therefore, actual delivery does not take place. Hence, they are called 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.
A person may incur loss in case of future price fluctuations in respect of contracts entered into by him for the delivery of goods manufactured or merchandise sold. To guard himself against such a loss and reduce the risk exposure, he may enter into a hedge contract. Such contracts are not speculative in nature.
To guard against loss due to price fluctuations in stocks and shares a hedge contract entered into by a dealer or investor is not considered as speculative.
This is a contract entered into by a member of a forward market or 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 marketplace that sets the price of a financial instrument or asset for future delivery.
An eligible transaction (carried out electronically on screen-based systems through a 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 is known as trading in derivatives.
It is 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.
If a taxpayer is carrying out many businesses along with a speculative business, such speculative business of a taxpayer must be deemed as distinct and separate from any other business carried out by him.
Losses from speculative business can be set off only against profits from speculative business. If the loss could not be set-off during in that year, it can be carried forward to the next 4 assessment years and set-off only against the speculative income. Further, if depreciation and capital expenditure incurred on scientific research, if any, relates to speculative business then such depreciation/capital expenditure shall be set-off first.