Speculative Business

Introduction

Speculative transactions are those transactions which are periodically or ultimately settled otherwise than the actual delivery. If a speculative transaction constitutes a business, it shall be deemed to be a speculative business.

1. About

1.1. Meaning of Speculative Transaction

‘Speculative transaction’ means a transaction in which a contract for the purchase or sale of any commodity including stock and shares is periodically or ultimately settled otherwise than through actual delivery or transfer of the commodity or scrips.

The word ‘ultimately’ refers that the intention of the parties is immaterial. At the outset of the contract the parties might have decided to settle the contract by taking actual delivery but if ultimately the contract is settled by accepting the difference in prices it becomes a speculative transaction.

1.2. Hedging Transactions aren’t speculative

Hedging transactions are not deemed to be speculative transactions. Such transactions are entered into by manufacturers and merchants in the course of business to guard against loss through future price fluctuations. A hedging loss is treated as business loss and is allowed to be set off against business profits. Likewise, hedging profit is treated as business profits.

Example, if a manufacturer enters into a contract for delivery of goods manufactured by him at a future date and he enters into a ‘hedge’ in respect of raw material required for the manufacture, the profit or losses, on such ‘hedge’ are exempted from the category of speculative business though hedge contract is settled without delivery of goods.

Following hedging transactions are not considered as speculative:

1.2-1. Hedging against price fluctuation of inventory

Any hedging contract, in respect of raw material or merchandise, is not treated as speculative transaction. This hedging contract is entered into by a person to guard against loss through future price fluctuations in respect of a contract for actual delivery of goods manufactured by him or merchandise sold by him.

1.2-2. Hedging against price fluctuation of securities

Any hedging contract in respect of stocks and shares is not treated as speculative transaction. This hedging contract is entered into by a dealer or investor to safeguard against loss that may arise due to price fluctuations in his holdings of stocks and shares.

Further, a contract entered into by a member of a forward market or a stock exchange, in the course of any transaction in the nature of jobbing or arbitrage, is not deemed as speculative transaction. This contract is entered into to guard against the loss which may arise in the ordinary course of business of such member.

1.2-3. Transaction in Share Derivatives

In shares and securities derivatives, the transactions are ultimately settled without actual delivery of underlying assets. These derivative transactions are not treated as speculative if transactions are carried in a recognised stock exchange through a stock broker or sub-broker or such other intermediary registered with SEBI. Further, the contract note issued by such broker or intermediary to the client should indicate the unique client identity number and PAN of client and should be time-stamped.

Rule 5 prescribes the process for recognition of a stock exchange and Rule 4 prescribes the conditions a stock exchange is required to fulfil in respect of trading in share derivatives.

1.2-4. Transaction in Commodity Derivatives

In commodities derivatives, the transactions are ultimately settled without actual delivery of underlying assets. These derivative transactions are not treated as speculative if transactions are carried in a recognised stock exchange and it is charged to commodity transaction tax. The condition of payment of commodity transaction tax shall not apply in case of transaction in agriculture commodity derivatives.

The relaxation from treating a commodity derivative as speculative transaction is given if transaction is carried out electronically through member or an intermediary registered with the recognized stock exchange. Further, the contract note issued by such member or intermediary to the client should indicate the unique client identity number, unique trade number and PAN of client and should be time-stamped.

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.