TAX TREATMENT ON LOSS FROM SPECULATIVE AND NON- SPECULATIVE BUSINESS
Meaning of Speculative Business (Section 43(5) of Income Tax Act, 1961)
A business is categorized as speculative or non-speculative.
1. Speculative business income: Income from intraday equity trading is considered as speculative.
2. Non-speculative business income: Income from trading Futures & Options (both intraday and carry forward) on is considered as non-speculative business. F&O is also considered as non-speculative as these instruments are used for hedging and also for taking/giving delivery of underlying contract.
Losses in speculation business (Section 73)
1. Loss from speculative business cannot be set off against any income other than income from speculative business.
2. If loss of any speculative business cannot be fully adjusted in the year in which it is incurred, then the unadjusted loss can be carried forward for making adjustment in the next year. In the subsequent year(s) such loss can be adjusted only against income from speculative business (may be same or any other speculative business).
3. Loss from speculative business can be carried forward only if the return of income/loss of the year in which loss is incurred is furnished on or before the due date of furnishing the return, as prescribed under section 139(1).
4. Such loss can be carried forward for four years immediately succeeding the year in which the loss is incurred.
Losses in non- speculation business (Section 72)
1. Any loss, computed in respect of a non- speculation business carried on by the assessee, shall be set off against income from any other source (except salary income).
2. If loss of any business/profession (other than speculative business) cannot be fully adjusted in the year in which it is incurred, then the unadjusted loss can be carried forward for making adjustment in the next year.
3. In the subsequent year(s) such loss can be adjusted only against income charged to tax under the head “Profits and gains of business or profession” [As amended by Finance Act, 2018]
4. Loss under the head “Profits and gains of business or profession” can be carried forward only if the return of income/loss of the year in which loss is incurred is furnished on or before the due date of furnishing the return, as prescribed under section 139(1).
5. Such loss can be carried forward for eight years immediately succeeding the year in which the loss is incurred.
Audit for Income from Speculative and non-Speculative Transactions
As per Section 44 AD of Income Tax Act, 1961:-
1. The presumptive taxation scheme of section 44AD is designed to give relief to small taxpayers engaged in any eligible business (except the business of plying, hiring or leasing of goods carriages referred to in section 44AE).
2. The presumptive taxation scheme of section 44AD can be adopted by following persons
a) Resident Individual
b) Resident Hindu Undivided Family
c) Resident Partnership Firm (not Limited Liability Partnership Firm)
3. In case of a person adopting the provisions of section 44AD,
a) If the total turnover or gross receipts from the business do not exceed INR 2,00,00,000
b) Income is computed on presumptive basis at the rate of 8% of the turnover or gross receipts of the eligible business for the year.
Eligible assessee” means, —
a) an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009); and
b) who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading “C. — Deductions in respect of certain incomes” in the relevant assessment year;
“Eligible business” means, —
a) any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and
b) Whose total turnover or gross receipts in the previous year does not exceed an amount of [two crore rupees].
In order to promote digital transactions and to encourage small unorganized business to accept digital payments, section 44AD is amended with effect from the assessment year 2017–18 to provide that income shall be computed at the rate of 6% instead of 8% if turnover/gross receipt is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the due date of filing of return under section 139(1).
Calculation of Turnover
In case of speculation business, shares trading and futures/options, turnover is determined in the following manner.
1. Speculation Business — The aggregate of both positive and negative differences is to be considered as the turnover.
2. Intraday trading of shares — The aggregate of both positive and negative differences is to be considered as the turnover.
3. Delivery based trading of shares — Sale value or purchase value whichever is high is considered as turnover.
4. Futures — The aggregate of both positive and negative differences is to be considered as the turnover.
5. Options — Premium received on sale of options is also to be included in turnover.
Which ITR to file?
Any income or loss that arises from the trading of Derivatives is to be treated and considered as business income or business loss. As such, the ITR-4 tax form would be required by the taxpayer to file returns.
Information in this blog is intended to provide only a general outline of the subjects covered It should not be regarded as comprehensive or sufficient for making decisions, nor should it be used in place of professional advice.
Nitin Jogad & Associates| Chartered Accountants accept no responsibility for loss arising from any action taken or not taken by anyone using this blog.
