What Is The Basis For Determining Turnover In Case Of Speculation?

If a person is engaged in share trading and turnover of delivery based buying & selling is less than 40 lacs but speculation business in share trading where intra-day sale purchase is effected but delivery is not taken exceeds 40 lacs, is tax audit applicable ? surendra.gandhi@......in

This issue was subject to controversial interpretation by assessee and income tax department.The issue had come up in case of Babulal Enterprise vs ACIT before Mumbai bench of ITAT [1999-2000] wherein it was held that where the actual delivery was not taken and difference in price was settled on the basis of contract note,the turn over can not include those transactions. Another decision of Mumbai Tribunal expressing similar views was in case of Growmore Exports Ltd vs ACIT [78 ITD 95] . Therefore , if you are involved in Day Trading, i.e you are squaring off of the share deal same day, the contract value is not taken for the purpose of turnover, but the differential shall be taken for the purpose of turnover.

Remember , however since the F & O trades have been declared as business trade and not speculative , the department shall read the law literally.So, in case of Future & option trade , get your accounts audited u/s 44AB of the I T Act.

Therefore, if you are only doing day tarding ,and intra day sale exceeds Rs 40 lac contract note vale of share sale , you will not fall for tax audit u/s 44AB of the I T Act

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Hedging Loss is Buisness Loss , not Speculation Loss!

Can a loss from hedging of commodities be set off against normal profit of a related commodity merchant? agrawalneeraj@sify.com

Yes, there is express provision under the I T Act ,by which loss from hedging of commodities are allowed to be taken not as Speculation Loss and thus on characterized as Business Loss , is allowed to be adjusted with Business Income.

Speculation is defined u/s 43(5) of the I T Act . Clause (a) of sub section 5 of section 43 is given as under :

" (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.....................

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shall not be deemed to be a speculative transaction;"

As is clear from the aforesaid provision, if a contract in commodity is entered for hedging the loss in commodity, same shall not fall under the definition of Speculation meaning thereby same will be Business Loss.

Tags: India, Hedging, Speculation

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Is share trading by Investment company speculation ?

Some one asked on this blog on 23/10/06

We are an investment company. Our funds are majorly deployed in granting loans and advances(more than 80%). and we are also trading in shares.We have received demand notice from ITO for the A.Y.2002-2003 and A.Y. 2003-2004. The demand has arisen mainly because of non acceptance of our business income and treating the same as speculative income without considering the fact that our business is consisted of shares trading as well as advancing of loans and funds ,investment in loans and advances substantially more than in the business of share trading, which is improper and inconsistent with the facts and circumstances of the case and without any material.Please clarify that explanation to section 73 of the income tax act is applicable to us or not.

Explanation to Section 73 of the Income Tax Act, 1961 states “ Where any part of the business of a company other than 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" or a company the principal business of which is the business of banking or the granting of loans and advances consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, 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"

Thus plain reading of the aforesaid provison shows that the Explanation is not applicable :

1. in case of a company whose gross total income consists mainly of income chargeable under one or more of the following heads:

1. Income from House Property,

2. Capital Gains,

3. Income from Other Sources, (including interest on securities) and

2. in case of a company whose principal business is that of banking or granting of loans and advances, the Explanation shall not apply.

Explanation mention the word" consist mainly of .." which has been interpreted by diffrent judicial fora in different ways .

The Bombay Tribunal in Rajan Enterprises Pvt. Ltd. v. I.T.O. 41 ITD 469 has held that in the absence of any specific provision in the Explanation, the gross total income will have to be considered without taking into consideration the impact of the Explanation, i.e., no separate treatment is to be given to the loss on sale of shares.

Another judgement ,that of the Calcutta High Court in the case of Eastern Aviation and Industries Ltd. (208 ITR 1023) wherein the High Court observed that while judging the relative composition of gross total income, one has to consider the absolute quantum of loss against other positive income. In the view of the court, the term income includes "loss" and what one needs to consider and compare are the relative figures of loss and income.

You should also note that the Explanation exempts a company whose principal business is that of grant of loans and advance. This term "principal business" has not been defined in the Act.Here also different courts have interpretated in different manners.

In the case of I.T.O vs. Raghav Commercial Ltd. [16 TT] 335 (Cal.); income composition test was applied for determining principal business of the company. In case of Offshore India Ltd. vs. I.T.O. [15 ITD 549] (Cal.). the assessee’s contention of being in business of grant of loans as principal business was rejected as the value of investment was more than value of loans and advances.

Complete facts of the case has not been given by you .It is also not stated under what section the A.O passed the order .That is important for building up the case gaainst the the order of A.O from a different angle.

Therefore ,I presume that what you have stated in the query is absolute true.That the principal business of your compnay is that of loans and advances and that gross total income also consists of Mainly income from other sources or capital gains or income from house property. My opinion is that you should fight the case in diffrent judicial forum i.e CIT-Appeal, CIT u/s 264, or Tribunal or even High Court .In my view , you will win the case .

Tags: Speculation

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