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Speculation Business [Explanation 2 to Section 28]

If a contract for purchase or sale of any commodity, stocks or shares is periodically (or ultimately) settled, otherwise than by the actual delivery, it is known as a speculative transaction. To put it differently, a contract for purchase or sale of any other article (not being shares, stocks or commodities) can never be a speculative transaction.

If a contract for purchase/sale of share, stock or commodity is ultimately settled otherwise than by actual delivery or transfer of commodity, it would be a speculative transaction even if at the time of entering into the contract there was no intention to gamble.

On the other hand, if actual delivery of commodity takes place, the transaction would be a non-speculative transaction even if it is highly speculative otherwise.

Hedging Contracts are Excluded -

The following hedging contracts, entered into by merchants in the course of business to guard against future business losses through price fluctuations are not speculative transactions—

  1. A contract in respect of raw material 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 contract for actual delivery of goods, manufactured by him, or merchandise sold by him.

  2. A contract in respect of stock and shares entered into by a dealer or investor therein to guard against loss in the holdings of stocks and shares through price fluctuations.

  3. 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 or arbitrage to guard against loss which may arise in the ordinary course of his business as such member.

The burden of proof is upon the assessee to show that transactions are merely hedging transactions.

Speculative Business in the case of a Company [Expln. to Section 73] -

This provision is applicable if the following conditions are satisfied—

  1. Taxpayer is a company.

  2. It is not a company whose gross total income consists mainly of income which is chargeable under the heads “Interest on securities”, “Income from house property”, “Capital gains” and “Income from other sources”. Alternatively, it is a company whose principal business is other than that of trading in shares or banking or the granting of loans and advances.

  3. The business of the company consists of the purchase and sale of shares of other companies.

    If the above conditions are satisfied, such company shall be deemed to be carrying on a speculation business to the extent to which the business consists of purchase/sale of such shares. This rule is applicable even if there is no avoidance of tax by the assessee.


Topics...on ‘Profits and Gains of Business or Profession’

Define … ‘Profits and Gains of Business or Profession’ and its Computation (Section 28)
Method of Accounting for Computing Business Income (Section 145)
Principles for Allowing Business Deductions / Allowances from Profits and Gains of Business or Profession.
Expenses Allowed as Deductions against Profits and Gains of Business or Profession [Section-30-37]
[Section 37(1)] : General Or Allowable Deductions under Business or Professions
Business Losses Deductible under the head  'Profits and Gains of Business or Profession'.
Expenses Not Deductible under the head 'Profits and Gains of Business or Profession (Section 40, 40A, 43B)
DEEMED PROFITS Chargeable to Tax as Business Income Under Profits and Gains of Business or Professions [Section 41]
Taxation of Undisclosed Business Income/Investments from Undisclosed Sources
Deduction in respect of Expenditure incurred on setting up of a Specified Business [Section-35AD] :
When Maintenance of Books of Accounts becomes Compulsory (Section 44AA)
Compulsory Audit of Books of Accounts by Chartered Accountant (Section 44AB)
Computation of Income On Estimated Basis Under Sections 44AD, 44ADA and 44AE

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