My company has brought forward speculation loss from the Explanation to s.73. This year it made a profit on delivery-based share sales. The AO says the deeming fiction works only on losses. Can I set the brought forward loss against that profit?
Yes. Once the Explanation to s.73 deems a company to be carrying on speculation business, the fiction attaches to the business, not to the result, so profits from that same business - including delivery-based share sales - are profits of a speculation business against which brought forward speculation loss can be set off under s.73(2). The Revenue's argument that the fiction applies to a loss but not to a profit would read a restriction into the Explanation that Parliament did not enact.
Decided by the High Court (Dr. D. Y. Chandrachud J and J. P. Devadhar J) on 2010-02-16, reported as (2010) 322 ITR 43 (Bom); Income Tax Appeal (L) No. 3005 of 2009. It bears on section 73, section 28, section 43(5) of the Income Tax Act 1961, in How Tax Law Is Read and Assessment & Scrutiny matters.
This is the deeming fiction cutting the taxpayer's way, and it is the answer to an AO who wants the fiction only when it produces a disallowance. Two practical points sit alongside it. The judgment sets out, at para 6, the mechanics of s.73(2) and s.73(4) - speculation loss carried forward may be set off only against profits and gains of a speculation business, and may not be carried forward for more than four assessment years immediately succeeding the year in which it was first computed - so it is the natural authority for the four-year limit. And note the limit of the reasoning: it turns on the Explanation, so it helps only a company inside the deeming fiction, and it was itself distinguished in Souvenir Developers on the ground that it considered unamended s.43(5) and never dealt with clause (d).
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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During assessment year 2003-04 the assessee company showed a profit of Rs.28,37,382 on the sale of shares, treated as income of a speculation business, and set it off against a brought forward speculation loss of Rs.27,61,505 from assessment years 1996-97 to 1998-99, leaving speculation income of Rs.75,877. The Assessing Officer rejected the treatment because the shares in question had been settled by physical delivery, and disallowed the set-off of the profit against the earlier speculation losses. The Commissioner (Appeals) upheld that. The Tribunal reversed both, relying on earlier decisions permitting the set-off under the Explanation to s.73. The Revenue appealed under s.260A, arguing that a loss on a delivery-based share transaction is speculation loss by force of the Explanation but that a profit on such a transaction is not a profit of a speculation business for the purposes of s.73(1) and (2).
The Revenue's appeal was dismissed and the questions answered against it. Once a deeming fiction is created by law it must be given full and free effect within the ambit in which it is intended to operate. The Explanation to s.73 defines when a company is deemed to be carrying on a speculation business for the purposes of that section, and whether the deemed speculation business produces a profit or a loss is alien to that definition. The expression 'any speculation business' in s.73(2) means a speculation business of the assessee in respect of which profits and gains for the year in question have arisen, and there is no justification for excluding from it a business involving actual delivery of shares. Once the assessee is carrying on a speculation business and profits have arisen from that business during the year, it is entitled to set off losses carried forward from a speculation business of an earlier year (para 10).
The Court first set out the mechanics of s.73: sub-section (1) permits a speculation loss to be set off only against the profits and gains of another speculation business; sub-section (2) allows the unabsorbed loss to be carried forward to the following assessment year and set off against the profits and gains of a speculation business carried on by the assessee and assessable for that year, and any balance to be carried forward again, but a loss cannot be carried forward for more than four assessment years immediately succeeding the assessment year in which it was first computed (para 6). It then analysed the Explanation as a deeming fiction with two ingredients - the assessee is a company, and any part of its business consists in the purchase and sale of shares of other companies - noting that 'business' postulates a systematic course of activity so that something more than an isolated transaction is required, and that the exception in the Explanation did not arise on these facts (para 7). It set out s.28 Explanation 2 and s.43(5) (para 8) and recorded the Revenue's contention that the s.43(5) definition must be read into s.73 so that a delivery-based transaction cannot be a speculative transaction (para 9). Rejecting that, the Court held that the deeming fiction in the Explanation arises specifically in the context of s.73 and is confined to that purpose, and that to accept the Revenue's submission would introduce into the fiction a restriction Parliament did not contemplate; imposing such a restriction would be a legislative function (para 10).
In other words, once the assessee is carrying on a speculation business and the profits and gains have arisen from that business during the course of the Assessment Year, the assessee is entitled to set off the losses carried forward from a speculation business arising out of a previous Assessment Year.
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Handle my notice → Ask a CA on WhatsAppYes. Once the Explanation to s.73 deems a company to be carrying on speculation business, the fiction attaches to the business, not to the result, so profits from that same business - including delivery-based share sales - are profits of a speculation business against which brought forward speculation loss can be set off under s.73(2). The Revenue's argument that the fiction applies to a loss but not to a profit would read a restriction into the Explanation that Parliament did not enact. This was decided by the High Court (Dr. D. Y. Chandrachud J and J. P. Devadhar J) and bears on section 73, section 28, section 43(5) of the Income Tax Act 1961. It is reported as (2010) 322 ITR 43 (Bom); Income Tax Appeal (L) No. 3005 of 2009. This is the deeming fiction cutting the taxpayer's way, and it is the answer to an AO who wants the fiction only when it produces a disallowance. Two practical points sit alongside it. The judgment sets out, at para 6, the mechanics of s.73(2) and s.73(4) - speculation loss carried forward may be set off only against profits and gains of a speculation business, and may not be carried forward for more than four assessment years immediately succeeding the year in which it was first computed - so it is the natural authority for the four-year limit. And note the limit of the reasoning: it turns on the Explanation, so it helps only a company inside the deeming fiction, and it was itself distinguished in Souvenir Developers on the ground that it considered unamended s.43(5) and never dealt with clause (d). If it applies to you, the first step is this: Establish that the company is inside the Explanation - it is a company, and part of its business consists in the purchase and sale of shares of other companies amounting to a systematic course of dealing, not an isolated transaction.
During assessment year 2003-04 the assessee company showed a profit of Rs.28,37,382 on the sale of shares, treated as income of a speculation business, and set it off against a brought forward speculation loss of Rs.27,61,505 from assessment years 1996-97 to 1998-99, leaving speculation income of Rs.75,877. The Assessing Officer rejected the treatment because the shares in question had been settled by physical delivery, and disallowed the set-off of the profit against the earlier speculation losses. The Commissioner (Appeals) upheld that. The Tribunal reversed both, relying on earlier decisions permitting the set-off under the Explanation to s.73. The Revenue appealed under s.260A, arguing that a loss on a delivery-based share transaction is speculation loss by force of the Explanation but that a profit on such a transaction is not a profit of a speculation business for the purposes of s.73(1) and (2). The matter was decided on 2010-02-16 by the High Court (Dr. D. Y. Chandrachud J and J. P. Devadhar J). On those facts the High Court held as follows. The Revenue's appeal was dismissed and the questions answered against it. Once a deeming fiction is created by law it must be given full and free effect within the ambit in which it is intended to operate. The Explanation to s.73 defines when a company is deemed to be carrying on a speculation business for the purposes of that section, and whether the deemed speculation business produces a profit or a loss is alien to that definition. The expression 'any speculation business' in s.73(2) means a speculation business of the assessee in respect of which profits and gains for the year in question have arisen, and there is no justification for excluding from it a business involving actual delivery of shares. Once the assessee is carrying on a speculation business and profits have arisen from that business during the year, it is entitled to set off losses carried forward from a speculation business of an earlier year (para 10).
The Court first set out the mechanics of s.73: sub-section (1) permits a speculation loss to be set off only against the profits and gains of another speculation business; sub-section (2) allows the unabsorbed loss to be carried forward to the following assessment year and set off against the profits and gains of a speculation business carried on by the assessee and assessable for that year, and any balance to be carried forward again, but a loss cannot be carried forward for more than four assessment years immediately succeeding the assessment year in which it was first computed (para 6). It then analysed the Explanation as a deeming fiction with two ingredients - the assessee is a company, and any part of its business consists in the purchase and sale of shares of other companies - noting that 'business' postulates a systematic course of activity so that something more than an isolated transaction is required, and that the exception in the Explanation did not arise on these facts (para 7). It set out s.28 Explanation 2 and s.43(5) (para 8) and recorded the Revenue's contention that the s.43(5) definition must be read into s.73 so that a delivery-based transaction cannot be a speculative transaction (para 9). Rejecting that, the Court held that the deeming fiction in the Explanation arises specifically in the context of s.73 and is confined to that purpose, and that to accept the Revenue's submission would introduce into the fiction a restriction Parliament did not contemplate; imposing such a restriction would be a legislative function (para 10). In the words reproduced by the source cited on this page: "In other words, once the assessee is carrying on a speculation business and the profits and gains have arisen from that business during the course of the Assessment Year, the assessee is entitled to set off the losses carried forward from a speculation business arising out of a previous Assessment Year."
It was decided by the High Court on 2010-02-16 and is reported as (2010) 322 ITR 43 (Bom); Income Tax Appeal (L) No. 3005 of 2009. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 73, section 28, section 43(5), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Revenue's appeal was dismissed and the questions answered against it. Once a deeming fiction is created by law it must be given full and free effect within the ambit in which it is intended to operate. The Explanation to s.73 defines when a company is deemed to be carrying on a speculation business for the purposes of that section, and whether the deemed speculation business produces a profit or a loss is alien to that definition. The expression 'any speculation business' in s.73(2) means a speculation business of the assessee in respect of which profits and gains for the year in question have arisen, and there is no justification for excluding from it a business involving actual delivery of shares. Once the assessee is carrying on a speculation business and profits have arisen from that business during the year, it is entitled to set off losses carried forward from a speculation business of an earlier year (para 10). It arises in How Tax Law Is Read and Assessment & Scrutiny matters, on section 73, section 28, section 43(5) of the Income Tax Act 1961, and was decided by Dr. D. Y. Chandrachud J and J. P. Devadhar J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Show that the current year profit arises from the same deemed speculation business, and claim the set-off under s.73(2) against the brought forward loss; the actual delivery of the shares does not take the profit outside the fiction. Count the four years under s.73(4) from the assessment year in which the loss was first computed, and put the year-wise table on record before the AO rather than leaving it to be reconstructed. Do not carry this reasoning across to an exchange-traded derivative loss without checking your High Court: Souvenir Developers distinguished this decision precisely because it did not consider s.43(5)(d).
Searched for later treatment; none was found. That is not the same as a source affirming it. A citedby search returns 33 later decisions; only three are High Court judgments, and not one of them applies this judgment. Its own Court has since confined it: in Souvenir Developers (I) Pvt Ltd v Union of India (Bombay High Court, 6 May 2022) the Revenue relied on it and the Bench refused, holding at paras 40-41 that 'This court in the said judgment had not considered the clause (d) inserted' in s.43(5) and that 'The said judgment in our view is clearly distinguishable on the facts and thus would not advance the case of the revenue' - so Lokmat does not carry over to derivative transactions. The Allahabad High Court in CIT, Kanpur v Narain Properties Ltd (30 May 2012) quoted it and held 'The aforesaid judgment does not help the revenue in facts of the present case'. The Madras High Court in Rajapalayam Mills Ltd v DCIT (29 January 2016) cites it in a bracket for the general proposition about the deeming fiction, without discussion. No later decision was found adopting its reasoning as a ground of decision, so the entry stays short of 'good law'; equally nothing overrules or doubts it, and the Tribunal continues to apply it in Mumbai. A practitioner should cite it for delivery-based share trading only and expect Souvenir Developers to be raised against any wider use. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The transcription of paragraphs 1 to 5 abbreviates the recital of the facts and reproduces the statutory text of s.73 only by reference; paragraphs 4 and 6 to 11 I have verbatim. The brought forward loss is described as arising from assessment years 1996-97 to 1998-99 and the set-off was claimed in assessment year 2003-04, which is more than four years apart on its face; the four-year limit under s.73(4) was not in issue before the Court and it made no finding on it, so nothing in the judgment should be read as approving that span. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeal was dismissed and the questions answered against it. Once a deeming fiction is created by law it must be given full and free effect within the ambit in which it is intended to operate. The Explanation to s.73 defines when a company is deemed to be carrying on a speculation business for the purposes of that section, and whether the deemed speculation business produces a profit or a loss is alien to that definition. The expression 'any speculation business' in s.73(2) means a speculation business of the assessee in respect of which profits and gains for the year in question have arisen, and there is no justification for excluding from it a business involving actual delivery of shares. Once the assessee is carrying on a speculation business and profits have arisen from that business during the year, it is entitled to set off losses carried forward from a speculation business of an earlier year (para 10).
TaxSphere, “CIT v Lokmat Newspapers Pvt Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-lokmat-newspapers-brought-forward-speculation-loss-against-delivery-based-profit/ (validity last checked 2026-09-07)
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