Losses in Speculation Business [Section 73] :
(i) The meaning of the expression „speculative transaction‟ as de fined in section 43(5) and the treatment of income from speculation business has already been discussed under the head “Profits and gains of business or profession”.
(ii) Since speculation is deemed to be a business distinct and separate from any other business carried on by the assessee, the losses incurred in speculation can be neither set off in the same year against any other non-speculation income nor be carried forward and set off against other income in the subsequent years.
(iii) Therefore, if the losses sustained by an assessee in a speculation business cannot be set-off in the same year against any other speculation profit, they can be carried forward to subsequent years and set-off only against income from any speculation business carried on by the assessee.
(iv) The loss in speculation business can be carried forward only for a maximum period of 4 years from the end of the relevant assessment year in respect of which the loss was computed. Loss from the activity of trading in derivatives, however, is not to be treated as speculative loss.
(v) The Explanation to this section provides that where any part of the business of a company consists in the purchase and sale of the shares of other companies, such a company shall be deemed to be carrying on speculation business to the extent to which the business consists of the purchase and sale of such shares.
However, this deeming provision does not apply to the following companies –
(1) A company whose gross total income consists of mainly income chargeable under the heads “Interest on securities”, “Income from house property”, “Capital gains” and “Income from other sources”;
(2) A company, the principal business of which is –
(i) the business of trading in shares; or
(ii) the business of banking; or
(iii) the granting of loans and advances.
Thus, these companies would be exempted from the operation of this Explanation. Accordingly, if these companies carry on the business of purchase and sale of shares of other companies, they would not be deemed to be carrying on speculation business.