Business of speculative transactions

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: Section 28, Explanation 2 of the Income-Tax Act, 1961, enacts that where speculative transactions carried on by an assessee are of such a nature as to constitute business, it will be deemed to be distinct and separate from any other business. Under section 43(5), a speculative transaction is defined to mean 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. However, the following are not treated as speculative transactions:

(a) A contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchandising 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)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.

Under section 73(1), any loss, computed in respect of a speculation business carried on by the assessee, will not be set off except against profits and gains, if any, of other speculation business.

In the case of CIT v Mangal Chand (255 ITR 329), the Rajasthan High Court held that if the assessee has concluded the transaction by taking delivery of shares and has sold the same by giving delivery along with blank transfer forms, it is immaterial whether the shares were not registered in the name of the assessee or dividend were not paid to the assessee. The court further held that delivery of blank transfer forms along with share certificates results in completing the transaction between the transferee and transferor notwithstanding that the same may not be registered in the register of members. Therefore, such transactions are not speculative transactions within the meaning of section 43(5) and the consequential loss is not a speculative loss.

In CIT v Shantilal P Ltd (144 ITR 57), the apex court held that a transaction cannot be described as a “speculative transaction” within the meaning of section 43(5) of the Act where there is breach of contract and on a dispute between the parties, damages are awarded as compensation by an arbitration award.