Section 73 of the Income Tax Act- carry forward/ adjustment of speculative losses

Section 73 of the Income Tax ActSection 73 of the Income Tax Act contains the provisions relating to carry forward and set off of losses arising from speculation business.

The explanation of the section states that if some specified conditions are fulfilled, sale and purchase of shares are considered as speculation activities. The said explanation is very important at present.

The explanation states that when any part of the business of a company is connected with the sale and purchase of shares, the company shall be considered to be carrying on speculation business to that extent of which the business is connected with sale and purchase of shares.

Applicability of the provision:

The explanation of section 73 is applicable only in cases where the assessee is a company. It is not applicable to individuals. The explanation does attract other kinds of assessees.

Conditions to be fulfilled by the company:

The gross total income of the said company should not include the following –

  1. Income from the heads like “capital gains”, “income from other sources”, “income from house property”, etc.
  2. Income from business of banking, granting loans and / or advances.

In other words if any company fulfills the aforesaid two conditions, it will be exempted from the purview of the aforesaid explanation of section 73.

Object behind the explanation of the section:

The object behind the introduction of this explanation is to put a check upon the business houses which control group of companies for reducing the tax liability of the companies which are within their control.

Transactions not considered as speculative transactions:

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1. Contracts in connection with raw materials or merchandise by any person while manufacturing or merchanting business to check against loss due to future price changes regarding his contracts for actual physical delivery.

In case of hedging in raw materials, the Tax officials have to be flexible about the quantities and timing till the transactions constitute genuine hedging.

2. Contracts regarding stocks and shares done by a dealer or investor in stocks and shares to check the loss in his holdings due to price changes.

3. Contracts by members of forward markets and stock exchanges during their transactions in the jobbing or arbitrate to check losses arising in the normal course of their businesses.

Circular dated 12-9-1960:

It was stated in the circular dated 12-9-1960 that if speculation losses for the earlier years are carried forward and if an assessee earns a speculation profit, such speculation profit for the year in question has to be adjusted against the carried forward speculation loss of the previous year before allowing any other loss to be adjusted against those profits. Speculative transactions regarding different commodities and in different markets cannot be considered as the same.

The circular expresses the intention of the Legislature to deal the profit and loss arising from speculation business separately since the speculation business is separate.