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Losses in speculation business by certain companies – Controversies
Speculative business constitutes a separate head of business as provided in Section 28. Section 72(1) provides that losses in speculative business are not to be taken into account while computing total income, except as provided u/s. 70(1)/73(1) to the extent they can be set off against profits from another speculative business.
Section 43(5) provides definition of various speculative transactions and, accordingly, of speculative business. It also provides exceptions as to when a transaction will not be treated as speculative transaction and, therefore, loss occurring in that business will not be treated as speculative loss. Such exceptions are provided in various clauses of the proviso to Section 43(5). If the case falls under any of those exceptions, loss occurring in that business will not be treated as speculation loss and can be set off against other business u/s. 72.
To summarize, eligible transactions (in equity or commodity derivatives) entered into in the notified stock exchanges shall not be treated as ‘speculative transactions’ for the purpose of I.T. Act in view of various saving clauses of section 43(5).
SECTION 73: Losses in speculation Business:
- The loss of speculation business shall be set-off only against the profits of other speculation business.
- Speculation Loss to the extent not set-off shall be C/F to next A.Y. and set-off against the speculation business profits only.
- Specualtion business loss can be C/F for four Asst. Years only.
Explanation to S. 73:
Where any part of the business of a company consists in the purchase and sale of shares of other companies, such company shall, for the purposes of s. 73, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.
This shall not apply to following companies:
- Investment company i.e. company whose gross total income consists mainly of income under the heads, “Income from house property”, “Capital gains” and “Income from other sources”.
- Company whose principal business is of banking or of granting loans and advances.
- Company whose principal business is the business of trading in shares.
Note: The above explanation is not applicable if the company is in the business of sale / purchase of units, debentures.
- Whether Expln. to s. 73 is applicable in cases of investors?
- Explanation to s. 73 is not applicable in cases of investor in shares showing income/Loss under the head “Capital Gain” – [Trade Team P. Ltd., 54 ITD 36 (Bom.), Mysore Rolling Mills P. Ltd., 195 ITR 404 (Kar.), etc.]
- Whether Expln. to s. 73 is to be given effect to before s. 70 to s. 72?
- In case of a company, before applying Expln. to s. 73, effect will be given to s. 70 to s.72 i.e. Gross Total Income should be worked out under the normal provisions of the Act & then applicability of provisions of section 73 need to be checked. Therefore, if after inter/intra head set-off of current year loss from business of purchase & sale of shares, if GTI includes only income which is chargeable under the heads “Income from house property”, “Capital gains” and “Income from other sources”, section 73 shall not apply, & accordingly, loss from business of purchase & sale of shares (delivery based) shall be allowed to be set off as non speculative. [CIT vs. Concord Commercial P. Ltd. (2005) 95 ITD 117 (Mum.-SB), CIT vs. Darshan Securities Pvt. Ltd. (2012) 341 ITR 556 (Bom.); Contrary view: RPG Industries Ltd. Vs. CIT (2011) 338 ITR 313 (Cal.) ]
- Whether trading in derivatives by companies is speculative transaction for the purpose of Expln. to S .73?
- ‘Futures & Options’ (Derivatives) are in themselves the independent tradable items and are not shares & securities. Hence ‘Futures & Options’ are not covered by Expln. to s. 73, because this is specifically excluded by way of clause (d) of section 43(5) w.e.f. 01.04.06. [DCIT vs. Madanlal Ltd. (2012) 51 SOT 188 (Kol.), Asian Financial Services Ltd. CIT  70 taxmann.com 9 (Cal.))]
- Section 73 of the I.T. Act deals with “losses in speculation business”. Explanation to Section 73 categorically states that in the case of a company, business of purchase and sale of shares is deemed to be speculative business. Here, in the instant case, the assessee had suffered loss in trading of derivatives carried through Multi Commodity Stock Exchange. As derivative transactions being separate from trading in shares, provisions of Explanation to Section 73 will not be applicable to such transactions and hence, the loss incurred by the assessee in derivative transactions through recognised stock exchange, being non speculative in view of S. 43(5)(d), has to be set off against other jewellery business income as per provisions of the Act. [CIT vs. Sri Vasavi Gold & Bullion (P.) Ltd.  92 taxmann.com 290 (Madras)]
- Alternate view – In favour of revenue:
Section 43(5), read with section 73, of the Incometax Act, 1961 Speculative transactions [Derivatives] – Definition of ‘speculative transaction’ as indicated in section 43(5) is restricted in its application to working out mandate of sections 28 to 41 only. In terms of Explanation to section 73, in case of certain types or classes of companies business of purchase and sale of shares is deemed to be speculation business. Therefore, where by all accounts derivatives were based on stocks and shares, which fall squarely within Explanation to section 73, loss from sale/purchase of such derivative would be speculative loss. [In favour of revenue] [CIT vs. DLF Commercial developers Ltd. (2013) 35 taxmann.com 280 (Delhi)]
Latest view – in favour of assessee – after considering both the above views:
ITO v. Upkar Retail (P.) Ltd.  94 taxmann.com 450 (Ahmedabad ) – held the view in favour of the assessee and decided in favour of the assessee by applying the Decision of Hon’ble Apex Court in CIT v. Vegetable Products Ltd.  88 ITR 192 (SC).
- Losses suffered on account of book valuation – whether Expln. to S. 73 applicable?
Explanation to section 73 cannot be read to mean only when there is purchase and sale of shares in course of a financial year, but it will cover both, shares which are stock-in- trade and shares which are traded in course of financial year, for purpose of considering loss and profit for that year. Therefore, loss or profit on account of valuation of stock-in-trade of shares would amount to revenue loss (EXPLN. To s .73 applicable)- [Prasad Agents (P.) Ltd. v. ITO  180 Taxman 178 (Bombay)]