02 August 2010
Speculative transaction is one which is settled without actual delivery. As per Section 43(5) of the Income Tax (IT) Act, 1961, there are three basic ingredients of speculative transactions. * The contract is for purchase or sale of stock, share or commodity. * The contract is periodically or ultimately settled. * The settlement is completed without actual delivery or transfer of commodity or scrips.
Hedging contracts and trading in the Futures & Options market are exceptions to this section and are now not considered as speculative transactions.
The derivatives transactions should be carried out on a stock exchange recognised by the Securities and Exchange Board of India. Recognition for derivatives trading has been given only to the National Stock Exchange and the Bombay Stock Exchange.
As the MCX is not a recognised stock exchange, profit/loss in commodity trading will be treated as speculative profit/loss. Under Section 73 of the IT Act, speculative loss can be set off only against speculative gain. The balance can be carried forward till four AYs.
02 August 2010
The trading in commodity futures can happen either with delivery or without delivery. In normal circumstance, when delivery takes place ,the future commodity trading shall be taken as as business income . If the contract is settled without delivery , such future trading of commodity comes within the meaning of Speculation Business . Explanation 2 under the provision 28 of the I T Act ,describe that if anybody carries out Speculation Business ,it shall be distinct from other business. The exact wording of the I T Act is “Explanation 2.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” Section 43(5) of the I T Act defines ‘Speculation Business” . The relevant extract is given as under :
*“5) speculative transaction means 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 scrips:”
It is also to be noted that the I .T Act provides that there are circumstances in which speculation transactions are not taken as Speculation , but taken as Speculation Business. These circumstances , when business is not speculation ,are “Provided that for the purposes of this clause
*(a) 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 (b) ………………………. *(c) 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; “
[(d) an eligible transaction in respect of trading in derivatives referred to in clause 35[(ac)] of section 2 36 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange;]
shall not be deemed to be a speculative transaction.
37[Explanation.—For the purposes of this clause, the expressions—
(i) “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, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; 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 referred to in sub-clause (A) and permanent account number allotted under this Act;
(ii) “recognised stock exchange” means a recognised stock exchange as referred to in clause (f) of section 2 38 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified39 by the Central Government for this purpose;]
Since commodities exchange is not recognised stock exchange in India for Income Tax purpose the income from commodities F & O is speculation income.
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