Explanation No. 2 of section 28 says that where speculative transactions carried on by an assessee are of such nature as to constitute a business, such business shall be deemed to be distinct and separate from any other business.
Section 43(5) has explained a speculative transaction as “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.
TRADING IN DERIVATIVES NOT TO BE SPECULATIVE TRANSACTIONS [Section 43(5) Proviso]
An eligible transaction in respect of trading in derivatives referred to in section 2(aa) of the Securities Contracts (Regulation) Act, 1956 carried out in a recognised stock exchange shall not be called as speculative transaction.
(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 in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 or the Securities and Exchange Board of India Act, 1992 or the Depositories Act, 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(t) of section 2 of the Securities Contracts (Regulation) Act, 1956 and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose.
It is clear from this that where actual delivery of goods or transfer of scrips (shares) takes place such transactions are not speculative, however highly speculative they may be in fact. Hedging business considered to be a non-speculative and such transactions are made by business to set off the effect of future price fluctuations.
The point to be noted in this connection is as to how ultimately the transaction is settled. If the difference is paid—it will be speculative and if actual delivery of the product is made then it will not be speculative.
Speculative transactions in different commodities and in different markets are to be treated as one business, distinct and separate from any other business.
The net result of speculative business is calculated. It means the loss in the speculative transaction is set off against the profits of another speculative transaction in the same previous year.
Speculation loss which remains unadjusted can be carried forward to succeeding previous years to be set off only from speculation gain. Till Assessment year 2005-06 it could be carried forward for 8 succeeding previous years but with effect from the 1st day of April, 2006. [AJY 2006-07] speculation loss shall be carried forward for 4 succeeding previous years instead of 8 succeeding previous years.