03 December 2007
"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 :
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 the contracts for actual delivery of goods manufactured by him or merchandise sold by him; or
(b) 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
(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; shall not be deemed to be a speculative transaction;
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Profit or loss from a speculative business will be taxable as income under the head profits and gains of business or profession. Tax will be charged on such income at the normal rates applicable to an individual. Such income will be charged under the head profits and gains of business or profession whether or not the assessee is carrying on any other business or profession. the assessee needs to file along with the return of income the profit and loss account, which will be a summary of the transactions made by the reader in the previous year but would not be required to furnish the statements given by the broker along with the return of income.
Since this is a business income which is chargeable under the head profits and gains of business or profession an audit will be required under Section 44AB of the Income-Tax Act, 1961 if the turnover exceeds Rs 40 lakh. Turnover for this purpose should be taken as the sale value of the transactions.
A similar view has been expressed by the publication of the Institute of Chartered Accountants of India in its second revised edition of the book Issues on Tax Audit.
It may also be noted that a speculation loss cannot be set off against any other business income or against income from any other head but can be set off only against speculation income in the same year. The balance of loss if any can be carried forward and set off only against speculation income within a period of eight assessment years immediately succeeding the assessment year in which the loss was first computed.
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