A transaction in which a contract for the purchase/sale of any commodity (including shares) is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity. However, the following shall not be treated as speculative transaction:

1)      A contract for raw material/merchandise entered into by a manufacturer/trader to guard against loss through future price fluctuations in respect of his contracts for actual delivery of manufactured goods or merchandis or

2)      A contract for stock or shares entered into by a dealer/investor to guard against loss through price fluctuations in his share and stock holding.

3)      Jobbing or arbitrage contracts entered into by a member of forward market or a stock exchange.

4)      An eligible transaction in respect of trading in derivatives carried out in a recognized stock exchange.

The Supreme Court in the case of Apollo Tyres Ltd v CIT has held that the deeming provision in section 32(3) of the UTI Act should be confined only to deeming UTI as company and the income from units as dividend. In the absence of any specific provision deeming units to be share, it would be erroneous to treat the units of the UTI as shares. The buying and selling of the UTI units was not a speculative business was a business loss.

A tax analysis of speculative business and recent notification

Analysis

Contract for purchase of raw material

This exception is based on the underlying assumption of the intention of the assessee. Where a future or a forward contract was cancelled for reason beyond assesses control, the loss or the gain arising shall not be treated as speculative even though there was no physical delivery of the goods involved. However assesse has to establish his intention of taking and making delivery but for reasons beyond assesse control.

Recently a new notification has come regarding this which is as follows:-

NOTIFICATION NO. 90/2013 [F.NO. 142/31/2013-TPL(PT.-II)], DATED 27-11-2013

In exercise of the powers conferred by clause (iii) of the Explanation 2 of clause (e) of the proviso to clause (5) of section 43 of the Income-tax Act, 1961 (43 of 1961) read with sub-rule (4) of rule 6DDD of the Income-tax Rules, 1962, the Central Government hereby notifies the National Commodity and Derivatives Exchange Limited, Mumbai as a recognised association for the purposes of clause (e) of the proviso to clause (5) of the said section, with effect from the date of publication of this notification in the Official Gazette.

The Central Government may withdraw the recognition of National Commodity and Derivatives Exchange Limited, Mumbai if any of the conditions specified in rule 6DDC of the Income -tax Rules, 1962, is violated.

This notification shall remain in force until the approval granted by the Forward Markets Commission is withdrawn or expires, or the notification is rescinded by the Central Government under sub-rule (5) of rule 6DDD of the Income-tax Rules, 1962.

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