Turnover Calculation for Speculation Business

What is Speculative Business in Income Tax?

Speculative business is considered as a separate business in the Income Tax Act. However, the act does not provide a manner to calculate the income or turnover of the speculative business. But the provisions regarding the treatment of losses incurred in such business are specifically stated in the act.  In this article, we discuss the meaning of speculative business, calculation of turnover and applicability of audit and set off and carried forward of losses.

Speculative Business meaning:

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.

Explanation 2 to Section 28 of the Income Tax Act, 1961 defines this term when the speculative business should be deemed as a separate business from the other businesses.

Intraday Trading :

‘Intra-day trading’ means the trading of buying and selling of shares within the same day without delivery of shares. It will be always treated as a speculative business irrespective of the fact whether carried on a recognised stock exchange or off-market.

Transactions not considered as speculative transactions:

Section 43(5) of income tax states the definition of speculative transaction and exceptions of this transaction are also stated there which are as follows:

• Hedging contract with respect to raw materials or merchandise
• Hedging contract in the aspect of stocks and shares
• Forward contract
• Trading in derivatives
• Trading in commodity derivatives

A single transaction cannot constitute speculative business

Explanation 2 to Section 28 clearly defines 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.”

Within the meaning of section 43(5) ‘Single transaction of settlement of a contract otherwise than by actual delivery of the goods amount to “speculative transaction” but to constitute a business there must be something more to show that the nature of the transactions was such as, it can be termed as “speculation business” which has been treated as distinct and separate from other business.

(Refer case of Commissioner of Income tax vs. Kamani Tubes Ltd. 207 ITR 0298, (1994) Bombay High Court).

Calculation of Turnover of Speculative Business:

As per the “Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961” published by ICAI.
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 the value of the contract note. The contract is settled otherwise and squared up by paying out the difference which may be positive or negative. As such, in such a transaction, the difference amount is 'turnover'.
In the case of an assessee undertaking speculative transactions, there can be both positive and negative differences arising from the settlement of various such contracts during the year. Each transaction resulting into, whether a positive or negative difference is an independent transaction.

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

The above can be understood by the following table:

Applicability of Audit section 44AB:

The threshold limit is not specifically mentioned for speculative business. So general provision i.e. provisions of section 44AB applies to such business.

Also, the provision for excluding the turnover of speculative business activity is not specifically provided under the law. The definition of speculative transactions is provided under section 43(5) and income from these transactions is considered as speculative business income.

In case a assessee is engaged in a normal business and a Speculative business then while calculating the threshold limit of ₹ 1 cr or 10 Cr (as the case may be) for the tax audit the turnover from all businesses will be aggregated to check the eligibility for the audit.

Hence in case the assessee is engaged in a normal business and a Speculative business then turnover from all the businesses will be aggregated while calculating the threshold limit of ₹ 1 cr. or 10 cr. as the case may be for tax audit purposes.

1. Ram is engaged in 2 businesses and turnover from Business A is ₹ 60 lakhs, and B Speculative business is ₹ 50 lakhs. In this case, the aggregate turnover from both business activities is ₹ 110 lakhs (60+50) which exceeds the limit ₹ 1Cr. The assessee is required to get his accounts audited of both businesses. (Assuming limit of 10Cr. not applicable)
2. Radhe is engaged in 2 businesses and turnover from Business A is ₹ 50 lakhs, B Speculative business is ₹ 44 lakhs. In this case, the aggregate turnover from both business activities is ₹ 94 lakhs (30+44) which does not exceeds the limit ₹ 1Cr. The assessee is not required to get his accounts audited in this case. (Assuming limit of 10Cr. not applicable)

Set off and carried forward of losses:

Section 73 of the Income Tax Act  states the provisions regarding set off and carried forward of losses from speculative business, which are as follows:

1. Loss from the speculation business can only be set off from any other speculation business income.
2. Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off then so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, shall, be carried forward to the following assessment year, and—
3. The carried forward loss shall be set off only against the profits and gains of any speculation business for that assessment year.
4. If the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.
5. Loss can be carried forward only for four assessment years immediately succeeding the assessment year in which the loss was first computed.

Conclusion:

Speculation business is a distinct business for the taxpayer and separate provisions are stated for set off and carried forward of losses arising from such business. Under the income tax manner of calculation of turnover is not provided however the ICAI has provided the guidance regarding the same. This is very helpful for compliance with the law. It is suggested to take professional help for tailored solution in particular case.

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