Set Off and Carry Forward of Speculation Losses [Section 73]

Section 73 of the Income Tax Act, 1961, governs the treatment of speculation business losses, imposing strict rules on how such losses can be adjusted and carried forward. Below is a detailed breakdown of the provisions, conditions, and practical implications.

1. What is a Speculation Business?

A speculation business involves transactions where:

• The contract for purchase/sale of commodities, stocks, or derivatives is settled without actual delivery(e.g., intraday equity trading, F&O trading if delivery is not taken).
• The Income Tax Department treats such transactions as speculative, distinguishing them from regular business or investment activities.

Exceptions:

• Hedging transactionsin commodities.
• Trading by banks, financial institutions, or companies whose primary business is share trading(treated as non-speculative).

2. Set-Off Rules for Speculation Losses

A.  Intra-Head Adjustment (Same Year) [Section 70]

• Losses can only be set off against profits from other speculative businessesin the same year.
• Cannot be adjustedagainst non-speculative business income or other heads (e.g., salary, house property).

Example:

• Speculative loss (intraday trading): ₹2,00,000
• Speculative profit (F&O trading): ₹1,50,000
• Net speculative loss: ₹50,000 (carried forward).

B.  Inter-Head Adjustment (Same Year) [Section 71]

• Not allowed. Speculation losses cannotbe set off against income from other heads (e.g., salary, capital gains).

3. Carry Forward of Speculation Losses

Key Conditions

1. Filing Requirement:
   • The return must be filed by the due date(usually July 31) under Section 139(1). Late filing forfeits carry-forward rights.
2. Time Limit:
   • Losses can be carried forward for 4 assessment yearsfrom the year of incurrence.
3. Set-Off in Future Years:
   • Can onlybe adjusted against future speculative profits (not other income).
4. Business Continuity:
   • The speculative business need not continuein future years for set-off.

Example:

• AY 2024-25: Speculative loss = ₹3,00,000 (filed on time).
• AY 2025-26: Speculative profit = ₹1,00,000 → ₹1,00,000 adjusted.
• Remaining loss: ₹2,00,000 (carried forward till AY 2028-29).

4. Exceptions & Special Cases

A.  Companies Engaged in Share Trading

• If a company’s principal business is share trading, its losses are treated as non-speculative(unless proven otherwise).

B.  Unabsorbed Depreciation in Speculative Business

• Depreciation on speculative assets follows general rules(can be carried forward indefinitely) 4.

C.  Order of Set-Off

When both speculative and non-speculative profits exist:

1. First, adjust current-year speculative losses.
2. Then, adjust carried-forward speculative losses.

5. Practical Implications & Tax Planning

• Strict Compliance: Missing the return deadline permanently lapsesspeculation losses.
• Segregation of Income: Maintain clear records to distinguish speculative vs. non-speculative income.
• New Tax Regime Impact: No additional restrictions, but inter-head set-off is already barred.

6. Summary of Key Rules