Page 259 - DCOM301_INCOME_TAX_LAWS_I

Income Tax Laws – I

Notes price fluctuations in respect of his contracts for actual delivery of goods manufactured by
him or merchandise sold by him; or
2. 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
3. A contract entered into by a member of a forward market or a stock exchange in the course
of any transaction which is in the nature of jobbing or arbitrage to guard against any loss
which may arise in the ordinary course of his business as such member.
4. An eligible transaction in respect of trading in derivatives referred to in Clause (aa) of
Section 2 of the Securities Contracts (Regulation) Act, 1956 carried out in a recognized
stock exchange.

Therefore, in all cases where actual delivery or transfer of the commodity takes place, the
transaction would not be a speculative transaction, however highly speculative its nature may
be. The above-mentioned four items constitute exceptions provided by the Act whereby
transactions such as hedging contracts entered into by manufacturer and merchants in the course
of their business to guard against the losses through price fluctuations are excluded from the
definition of speculative transactions.

Task Discuss whether the transactions such as hedging contracts entered into by
manufacturer and merchants in the course of their business to guard against the losses
through price fluctuations are included in speculative transactions.

Self Assessment

State whether the following statements are true or false:
9. The term ‘speculation’ has not been exhaustively defined in the income-tax Act.
10. Section 43(5) defines the expression “speculative transaction”.

11. A transaction in which a contract for the purchase or sale of any commodity excluding
stocks and shares is periodically or ultimately settled otherwise than by the actual delivery
or transfer of the commodity or scrips is defined as speculative transaction.
12. Where a company deals in shares of other companies, the income from such business is
not treated as income from speculative business.

9.4 Computation of Profits of Business or Profession

The profits and gains of business or profession are computed in accordance with the provisions
contained in Sections 30 to 43D. Sections 30 to 37 contain those deductions which are expressly
allowed while computing profits of business or profession.
Section 40 provides those expenses which are allowed on the basis of general commercial
principles while computing profits of business or profession. It is necessary to know those
principles before studying the deductions expressly allowed while computing profits of business
or profession.

The general commercial principles are as under:
1. Profits should be computed according to the method of accounting regularly employed
by the assessee, provided that actual profit can be ascertained by this method, whether on
receipt basis or accrual basis.

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