# Speculation Business [Explanation 2 to Sec 28; Sec 43(5)]

A speculation business must be kept separate and distinct from other businesses because of the set-off and carry-forward restrictions under Sections 70, 71 and 73 (speculation losses can only be set off against speculation profits).

## Meaning of Speculative Transaction [Sec 43(5)]

A contract for purchase or sale of commodities (including stocks and shares) settled WITHOUT actual delivery or transfer.
A company whose activity involves buying and selling shares of other companies is deemed to be carrying on a speculation business.

## Companies NOT Deemed Speculation Business

(a) Companies whose gross total income mainly comprises:

Interest on securities
Income from house property
Capital gains
Income from other sources

(b) Companies principally engaged in:

Trading in shares
Banking business
Granting loans and advances

## Transactions NOT Deemed Speculative (Provisos to Sec 43(5))

1. Hedging contracts for raw materials/merchandise — to guard against price fluctuations in a manufacturing/merchandising business (actual delivery intended).

2. Hedging contracts for stocks and shares — to protect a dealer's/investor's holdings against price drops.

3. Forward contracts — by members of a market/stock exchange to guard against loss in jobbing or arbitrage.

4. Trading in derivatives — on a recognized stock exchange through SEBI-registered brokers.

5. Trading in commodity derivatives — eligible electronic transactions on a recognized exchange, subject to Commodity Transaction Tax (CTT).

> Note: The CTT requirement does not apply to agricultural commodity derivatives.

Worked example

### Example 1

Example (Settled without delivery): A trader enters a contract to buy 1,000 shares but settles only the price difference in cash, taking no delivery.

This is a speculative transaction under Sec 43(5).
Any loss can only be set off against speculation profits, and is carried forward under Sec 73 separately.

### Example 2

Example (Exchange-traded derivatives): Ms. T trades equity index futures on the NSE through a SEBI-registered broker.

Under the proviso to Sec 43(5), this is NOT a speculative transaction, even though no physical delivery occurs — it is treated as a normal (non-speculative) business.

⚠️ Common exam mistakes

Setting off speculation losses against normal business profits — they can only be set off against speculation income.
Treating exchange-traded derivative transactions as speculative — they are specifically excluded under the provisos to Sec 43(5).
Forgetting that a company dealing in shares of other companies is deemed a speculation business unless it falls within the listed exceptions.
Applying the Commodity Transaction Tax condition to agricultural commodity derivatives — CTT does not apply to them.

Reference: Section 43(5) and Explanation 2 to Section 28 — Income-tax Act, 1961

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