Section 43(5)

Section 43(5) — the law in short

What the courts have decided on section 43(5), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Snowtex Investment Ltd v PCIT Supreme CourtHelps department
  Can I set my share trading loss off against my F&O profits?
  No, for years up to AY 2014-15. Where a company's principal business is dealing in shares, the Explanation to s.73 deems that loss to be speculative, while derivatives profits on a recognised exchange are non-speculative under s.43(5)(d) — so the two cannot be set off. The 2014 amendment to the Explanation is prospective and does not help earlier years.
• Davenport & Co P Ltd v CIT Supreme CourtHelps department
  I bought and sold goods by endorsing delivery orders and never handled them. Is my loss a speculation loss even though the sale was perfectly valid?
  Yes. The Supreme Court held that actual delivery in the definition of a speculative transaction means real as opposed to notional delivery. The wider meaning of delivery in the Sale of Goods Act, which takes in constructive or symbolic delivery, has no bearing on it. A transaction that is speculative in the ordinary sense is not caught if the commodity is actually delivered, and a transaction that is not speculative in any ordinary sense is caught if it is not. The definition does not invalidate anything; it only brands such transactions as speculative for income-tax purposes and confines the loss accordingly.
• Souvenir Developers (I) Pvt Ltd v Union of India High CourtHelps taxpayerHigh Courts differ
  My company is not a share dealer at all, but it lost money on exchange-traded F&O. The AO says the Explanation to s.73 makes it speculation loss. Can I set it off against my ordinary business income?
  In the Bombay High Court, yes. Once a derivative transaction falls inside clause (d) of the proviso to s.43(5) it is not a speculative transaction at all, and the Court held that neither s.73(1) nor the Explanation to s.73 applies to the loss, so it is an ordinary business loss set off under s.70 against any other business income. The Court expressly recorded that the Delhi High Court in DLF Commercial Developers has taken the contrary view.
• CIT v DLF Commercial Developers Ltd High CourtHelps department
  My company lost money trading in exchange traded derivatives. Section 43(5)(d) says those are not speculative transactions, so can I set the loss off against ordinary business income?
  No, not if the Explanation to section 73 applies to the company. The Delhi High Court held that the exclusion of eligible derivative transactions from "speculative transaction" in section 43(5)(d) is confined to the provisions for which that definition was enacted, and does not carry into the Explanation to section 73. Derivatives take their value from the underlying stocks and shares, and if the share business itself is deemed speculative under the Explanation, so is the derivative business built on it. The Tribunal's order allowing carry forward of the Rs.4.92 crore loss was set aside and the Revenue's appeal allowed.
• CIT v Darshan Securities Pvt Ltd High CourtHelps taxpayer
  The AO says my company's gross total income does not 'consist mainly' of the four excluded heads because he has left the share loss out of the business head. Is that the right computation?
  No. To decide whether the exception in the Explanation to s.73 applies you compute gross total income under the normal provisions of the Act, taking into account both the income and the loss under the head profits and gains of business or profession, and only then ask whether what results consists mainly of interest on securities, house property, capital gains and other sources. Section 73(1) is applied after the Explanation, not before it, because to apply the bar first in order to decide whether there is a speculation business at all would reverse the order of the statute.
• CIT v Shri Bharat R. Ruia (HUF) High CourtHelps department
  My derivative loss is for a year before assessment year 2006-07. Can I argue that clause (d) of the proviso to s.43(5) is clarificatory and covers it?
  No, in the Bombay High Court. Exchange-traded derivative transactions settled otherwise than by actual delivery are speculative transactions within the main part of s.43(5), and clause (d) of the proviso, inserted by the Finance Act 2005, operates prospectively from 1 April 2006 only. For years up to assessment year 2005-06 the loss is speculation loss.
• CIT v Lokmat Newspapers Pvt Ltd High CourtHelps taxpayerNo later treatment found
  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.
• Banwari Sitaram Pasari HUF v ACIT ITATHelps taxpayerSuperseded by amendment
  The officer has added up my whole commodity contract value as turnover and penalised me under s.271B. Is contract value turnover?
  No. Where the assessee buys and sells commodities on a commodity exchange without delivery being taken or given, the total value of the transactions booked with the exchange cannot be treated as turnover for deciding whether accounts had to be audited under s.44AB. The transactions were speculative, no delivery took place, and the s.271B penalty was deleted.
• Statutory position — section 10(4D): what a specified fund in an IFSC is exempt on, and how much of it survives the non-resident test CBDT Circulars & InstructionsCuts both ways
  Our Category III AIF is registered in GIFT City and some of its unit holders are Indian residents. What exactly is exempt under section 10(4D)?
  Section 10(4D) exempts income of a specified fund of four described kinds — income from the transfer of a capital asset referred to in section 47(viiab) on a recognised stock exchange located in an IFSC where the consideration is paid or payable in convertible foreign exchange; income from the transfer of securities other than shares in a company resident in India; income from securities issued by a non-resident, not being a permanent establishment of a non-resident in India, where that income does not otherwise accrue or arise in India; and income from a securitisation trust chargeable under the head 'Profits and gains of business or profession'. The exemption runs only 'to the extent such income accrued or arisen to, or is received, is attributable to units held by non-resident (not being the permanent establishment of a non-resident in India) or is attributable to the investment division of offshore banking unit', computed in the prescribed manner.
• Statutory position — section 47(viiab): a non-resident's trade on a recognised exchange in an IFSC is not a transfer at all CBDT Circulars & InstructionsCuts both ways
  A non-resident client sold derivatives on the exchange in GIFT City and was paid in dollars. Is there any capital gains charge in India?
  No, if the transaction is within section 47(viiab). That clause provides that any transfer of a capital asset being a bond or Global Depository Receipt referred to in section 115AC(1), or a rupee denominated bond of an Indian company, or a derivative, or such other securities as may be notified by the Central Government, made by a NON-RESIDENT on a recognised stock exchange located in any International Financial Services Centre, and where the consideration for the transaction is paid or payable in foreign currency, is not regarded as a transfer for the purposes of section 45. Nothing being regarded as a transfer, no capital gain arises to be computed.
• Statutory position — section 111A: short-term gains where STT is paid, and what happens where it is not CBDT Circulars & InstructionsCuts both ways
  My client's short-term gains on shares are partly from on-market STT-paid sales and partly from an off-market transfer. Does the concessional rate cover both, and what is the rate now?
  Section 111A covers only a short-term capital asset that is an equity share, a unit of an equity oriented fund or a unit of a business trust where the sale transaction is chargeable to securities transaction tax. Where STT is not chargeable — an off-market sale, unlisted shares, a transfer outside the exchange — section 111A simply does not apply and the short-term gain goes into total income at the assessee's ordinary rate. The concessional rate itself is fifteen per cent for a transfer before 23 July 2024 and twenty per cent for a transfer on or after that date.
• Statutory position — s.43(5): what a speculative transaction is, and the five clauses of the proviso that take a transaction out of it — raw-material hedging, stocks-and-shares hedging, jobbing and arbitrage by a member, eligible derivative transactions on a recognised stock exchange, and commodity derivatives — with the effective date of each CBDT Circulars & InstructionsCuts both ways
  The Assessing Officer says our loss is a speculation loss under s.43(5) and cannot be set off. We settled the contracts without taking delivery, but they were hedges against our own raw-material purchases — and separately we trade exchange derivatives. Which of the proviso clauses do I get, and from which year?
  Settlement without delivery is what makes a transaction speculative, and the proviso then takes five described kinds of transaction back out. The definition, as printed on the departmental Year 2021 edition, is that "speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. The proviso then provides that, for the purposes of the clause, (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; or (d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; or (e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognised stock exchange, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013), shall not be deemed to be a speculative transaction. DATES, from the footnotes. Clauses (a), (b) and (c) are the original limbs and are printed on the departmental Year 1985 edition. Clause (d) was inserted by the Finance Act, 2005 with effect from 1 April 2006, with "(ac)" substituted for "(aa)" by the Finance Act, 2006 with effect from 1 April 2006. Clause (e) was inserted by the Finance Act, 2013 with effect from 1 April 2014, and originally read "carried out in a recognised association"; the words "recognised stock exchange" were substituted for "recognised association" by Act No. 12 of 2020 with effect from 1 April 2020. A second proviso now provides that for the purposes of clause (e) of the first proviso, in respect of trading in agricultural commodity derivatives, the requirement of chargeability of commodity transaction tax under Chapter VII of the Finance Act, 2013 shall not apply; it is absent from the Year 2014 edition and present on the Year 2021 edition, and the departmental copy of the Finance Bill, 2018 carries it at clause 12 to take effect from 1 April 2019 — I did NOT read the Finance Act, 2018 as enacted and say so.
• Statutory position — section 55(2)(ac): the 31 January 2018 grandfathered cost, limb by limb CBDT Circulars & InstructionsCuts both ways
  My client bought listed shares in 2012 and sold them last year. How exactly do I work out the cost of acquisition under the grandfathering rule, and does the 31 January 2018 price simply replace the cost?
  No — the 31 January 2018 price does not replace the cost, and it is not a straight 'higher of cost or market' either. The cost is the HIGHER of (i) the actual cost of acquisition and (ii) the LOWER of (A) the fair market value and (B) the full value of consideration; fair market value for a share listed on 31 January 2018 is the highest price quoted on a recognised stock exchange on that date.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.