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Speculation Income taxation under Income Tax

First we look at the various provisions relating to Speculative transactions and Income as per Income Tax Act. Section 28 Explanation 2 provides that 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 Income Tax Act provides that (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: 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) 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; or (d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; or (e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognised stock exchange, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013), shall not be deemed to be a speculative transaction: From the plain reading of both the above provisions, it can be inferred that : (1) Any transaction of commodity or shares & securities which is ultimately settled otherwise than by actual delivery will come under the preview of Speculative transaction. (2) However, the transactions such as futures and options etc. in shares or commodities will not be speculative transactions and they will be treated as normal business transactions. (3) Thus the intra-day trading in shares or securities will constitute speculative transactions and if the volume of transaction is more, then it will fall under speculative business as per Section 28 of Income Tax Act. (4) Speculative business is treated as distinct and separate from normal business under Income Tax Act. Difference between Speculation business and Normal business under Income Tax As already discussed above, speculation business is treated as seperate and distinct business from the normal business. So what are the differences between these two : (1) The loss in case of speculation business can not be set-off against any other business during the particular financial year as well as in next financial years. i.e. the loss of speculation business can be set off only against the profit of speculation business for the year and also in case of carry forward of loss. (2) The loss in case of speculation business can be carried forward and set off only for next four years as against the normal business loss which can be set off for next 8 years. How the turnover is calculated in case of Speculation business Since there is no actual delivery in case of Speculation business, the question arises as what will be the turnover in case of this business. The Institute of Chartered Accountants of India in its guidance note has provided that the turnover in case of speculation business will be calculated as : Sum of profit or loss of every transaction carried out i.e. if a person has a profit of Rs.10000/- in one intra-day trading transaction and loss of Rs.5000/- in another intra-day transaction, the turnover will be Rs.15000/- for the purpose of speculation business. Tax Audit Provisions in case of Speculation Business Just like any other business, the tax audit provisions under Section 44AB will be applicable in case of Speculation business also if the turnover crosses the limit of Rs. 1 Cr during a particular financial year. ‌ However, as per the provisions of Section 44AD, a person can declare net profit of 8% (6% in case of digital transactions) upto turnover of Rs.2 cr. and choose not to get its accounts audited.

Applicability of Provisions of Section 44AD in case of Speculative Transactions ‌ In case a person suffers a loss in speculation business, and the turnover is below the limit of Rs. 1 Cr. then net profit of 8% (6% in case of digital transactions) will have to be declared as per the provisions of Section 44AD. Otherwise the books of accounts will have to be audited u/s 44AB and the actual profit/loss can be declared by filing audit report.

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