Well, I am not a stock broker or seasoned investor. Still a student trying to get the nitty gritty of the share market. Investor since 1980, made quite a few bucks but lost quite a good chunk of it too in trying to learn derivatives trading. Have since quit the F&O platform and am concentrating on investments both long and short term. The Sun is shining again.

A retired Finance Professional, am in it more as a hobby than as a person making a living out of it.

Taxation is my passion.



The following is taken from the Business Line dated 23rd December 2007 Investment World, Taxation column written by Mr. T. Banusekar. This may clear the doubts on taxation of derivatives transactions arising in the minds of many a F&O trader. May these persons benefit from these views.





Question:

I am a resident individual and my income structure comprises salary, long-term capital gains on shares, short-term capital gains from shares and profits from dealing in futures and options apart from income from other sources. I have income exceeding Rs 2,50,000 and, therefore, am already in the 30 per cent tax slab. I would like to know whether the profit from dealing in futures and options will be treated as speculative income or business income. I would also like to know what will be the rate of tax either way. Also clarify how the turnover is to be reckoned for the purpose of determining whether a tax audit is required. Can I set off the loss from futures and options against salary income or short-term capital gains? — Subramanya



Answer by Mr. T. Banusekar.



Section 43(5) deems a transaction to be speculative in nature if the transaction of buying and selling of goods or commodities including shares and scrips is without delivery. The provision provides for certain exceptions. It can be seen that this provision creates a deeming fiction whereby if there is no delivery, the transaction is treated as speculative in nature. The trading in futures and options will normally be considered as a business and be taxed under the head profits and gains of business or profession. Futures and options are transactions done without actual delivery and therefore by virtue of Section 43(5) would be treated as a speculative business.

An exception is, however, created by this section whereby if the transaction is carried on through a registered broker or sub-broker or by banks or mutual funds and where the transaction is carried out electronically on screen-based systems and which is supported by a time stamp contract note which indicates the client identity and the number allotted under the SEBI Act, the SCR Act or the Depositories Act and also gives the permanent account number of the client, the transaction is not treated as speculative in nature and will not constitute speculative income.

In either case, whether the loss is treated as regular business loss or loss from speculative business the same cannot be set off against the income under the head salary due to an express prohibition in Section 71 in this regard. If it is treated as a business loss and not as arising out of a speculative business it can be set off against short term capital gains. If it is treated as arising from a speculative business it cannot be set off against short-term capital gains.

It may be noted that a business loss which cannot be set off against other incomes in the same year can be carried forward and set off against business income within a period of eight assessment years immediately succeeding the assessment year in which the loss was first computed. It may also be noted that a speculative business loss which cannot be set off against income from speculative business in the same year can be carried forward and set off against speculative business income within a period of four assessment years immediately succeeding the assessment year in which the speculative loss was first computed.

The rate of tax in either case would be the same and will be charged at the normal rates of tax applicable to you. You may further note that it is only the net of the selling and buying transactions which should be taken as turnover in case of transactions in futures and options which is done without delivery.

This view is supported by the decision of the Mumbai Bench of the Tribunal in ACIT vs Saumil J. Trivedi (ITA No. 3266 Bom 1995).