“speculation loss”
The decision most relied on for speculation loss is CIT v. Badridas Gauridu (P) Ltd. (261 ITR 256), cited in 114 judgments on BharatTax.
Leading authorities on speculation loss
Losses incurred from foreign exchange forward contracts or derivatives, entered into to hedge currency fluctuations in the course of regular business like exports, are treated as business losses and not as speculative transactions under Section 43(5). Such contracts, when incidental to business and cover exchange rate risks, constitute a business activity.
Losses from foreign exchange forward contracts, when incidental to an assessee's regular business and undertaken to safeguard business interests, are treated as business losses and not speculative losses under section 43(5).
Loss incurred by certain types of companies in trading derivatives is considered speculative loss under the Explanation to Section 73, as the value of stock derivatives depends on shares. Such speculative losses are ineligible for set-off or carry forward against business income.
The aggregate of business profits and losses from derivative transactions must be worked out before applying the Explanation to Section 73 of the Income-tax Act, 1961. This means that trading of shares and derivative transactions are not considered speculative transactions under Section 43(5) for the purposes of Sections 28 to 41.
Penalty under Section 271(1)(c) is not automatically warranted merely because the Assessing Officer reclassifies a business loss as a speculative loss, especially if the assessee did not conceal income or furnish inaccurate particulars. The AO's change in treatment alone does not infer concealment.
A company involved in the purchase and sale of shares is deemed to be carrying on a speculative business to the extent of such transactions, unless it falls under an exception to Section 73 of the Income Tax Act.
A forward contract entered into to protect against foreign currency fluctuations on consideration receivable for exports is not a speculative transaction, and provisions for losses on such derivative contracts are allowable expenditures.
Losses on foreign exchange forward contracts are not speculative if they are entered into to cover variations in foreign exchange rates impacting import/export business. Such losses are considered business losses and not notional.
