“speculative transaction”
The decision most relied on for speculative transaction is CIT v. Badridas Gauridu (P) Ltd. (261 ITR 256), cited in 114 judgments on BharatTax.
Leading authorities on speculative transaction
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.
The Supreme Court holds that ICAI Guidance Notes and accounting methods prescribed by the Institute of Chartered Accountants of India (ICAI) can be relied upon for computing "turnover," especially for tax audit purposes under Section 44AB and for transactions involving shares and derivatives.
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).
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.
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.
Hedging contracts related to raw materials for manufacturers are excluded from speculative transactions under Section 43(5) of the Income Tax Act, even if they involve both sales and purchases and are entered into at different times from the delivery of goods.
Interest paid on loans borrowed for the purpose of investment in shares is allowed as part of the cost of acquisition eligible for deduction while computing capital gains under Section 48. The intention of the assessee at the time of acquisition of shares determines the nature of the gain.
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.
