Trading in derivatives — Derivatives are not a contract for purchase and sale — Consequently, trading in derivatives not speculative in terms of section 43(5) — Set-off of loss of derivative trading against gains of share trading permissible.

The assessee was a member of
the NSE and was engaged in purchase and sale of shares on his own account as
well as on behalf of constituents. The assessee filed a return claiming a set
off of the loss suffered on derivative transactions against profit from sale of
shares. The assessing officer was of the view that trading in derivatives was a
speculative transaction and therefore the loss suffered being in the nature of a
speculative loss could not be set off against other business income and was to
be carried forward.

A speculative transaction in
terms of section 43(5) is that transaction in which the contract for purchase or
sale is ultimately settled otherwise than by delivery. A derivative can be
traded on the exchange. But it is not a trade in share or stock. A derivative is
not a contract for purchase or sale of share, stock or commodity. A derivative
can be traded on the value of the underlying share or stock but is not a trade
in any actual share or stock. The definition of derivative in section 2(ac) of
the Securities Contract (Regulation) Act can also be referred to. The
transactions in derivatives are therefore not speculative transactions within
the meaning of section 43(5). The loss from these transactions had to be set off
against other income.