Speculative Income & Tax Audit Provision

ITR forms have a separate column for offering speculative income/loss. The question arises as to what is speculative transaction or speculative income.

First let us know about it.

A 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 scripts.

 Thus, in a speculative transaction, the contract for sale or purchase which is entered into is not completed by giving or receiving delivery so as to result in the sale as per value of contract note.

In short, the contract is settled otherwise and squared up by paying out the difference which may be positive or negative.

Why speculative transaction need special reporting in ITR:

There are following two key reason for showing speculative transaction separately:

1. Speculative loss is not allowed to be set off against normal or regular profit

2. Speculative loss can be carried forward for 4 years only as against 8 years for other losses.

Turnover in Speculative Transactions:

1. In speculative transactions, the contract is settled otherwise and squared up by paying out the difference which may be positive or negative.

2. In the case of an assessee undertaking speculative transactions there can be both positive and negative differences arising by settlement of various such contracts during the year.

3. Each transaction resulting in to whether a positive or negative difference is an independent transaction.

4. Further, the amount paid on account of negative difference is not related to the amount received on account of positive difference.

5. As such, in such transactions the difference amount is ‘turnover’ i.e., if there is a loss of Rs. 200 and profit of Rs. 300 from speculative transaction, then the turnover of Rs. 500 and not Rs. 100/-.

6. In such transactions though the contract notes are issued for full value of the purchased or sold asset the entries in the books of account are made only for the differences.

7. Accordingly, the aggregate of both positive and negative differences is to be considered as the turnover of such transactions for determining the liability to audit vide section 44AB.

Audit in case of Speculative Transactions:

1. It may be noted that speculative transactions are taxable under the head “Income from Business & profession”. This is covered by section 43(5) of the Income Tax Act-1961.

2. If the profit offered for taxation is less than 8% or 6% of the turnover then the audit u/ s44AD r.w.s. 44AB would also be mandatory.

3. However, if the profit offered for taxation is more than the specified 8% or 6% of the turnover then audit would not at all be mandatory.

4. Further, the minimum percentage of 8% or 6% is applicable only if the turnover of the individual /HUF is not exceeding Rs. 2 Cr.

5. If the if the turnover of the individual /HUF is exceeding Rs. 2 Cr but below Rs. 10 Cr and 95% of the payment / receipt is by way of digital mode only then the audit would not be mandatory even the profit is less than  8% or 6%.