Income Tax 2025

Appearance

Set off and carry forward of losses from speculation business. ​

113(1) ​

Any loss computed from a speculation business carried on by the assessee, during any tax year, shall be set off only against profits and gains, if any, of another speculation business for the said tax year.

113(2) ​

The unabsorbed speculation business loss for any tax year shall be carried forward to the subsequent tax year and shall be set off only against the profits and gains of speculation business, if any, computed for such subsequent tax year, and so on.

113(3) ​

The unabsorbed speculation business loss referred to in sub-section (2) shall not be carried forward for more than four tax years immediately succeeding the tax year in which such loss was first computed.

113(4) ​

The unabsorbed speculation business loss referred to in sub-section (2) shall first be allowed to be set off before allowing set off of any carried forward allowance under section 33(11) or 45(7).

113(5) ​

In this section,––

  • (a) where any part of the business of the assessee (being a company) consist of purchase and sale of shares of other companies, then the assessee shall be deemed to be carrying on a speculation business, to the extent to which its business consists of purchase and sale of such shares;
  • (b) “unabsorbed speculation business loss” means any loss computed in respect of a speculation business carried on by the assessee during the tax year, which has not been, or is not wholly, set off against profits and gains, if any, of another speculation business under sub-section (1) for the said tax year.

113(6) ​

The provisions of sub-section (5)(a) shall not apply to an assessee, being a company, if—

  • (a) its gross total income consists mainly of income which is chargeable under the heads “Income from house property”, “Capital gains” or “Income from other sources”; or
  • (b) its principal business is of trading in shares or banking or the granting of loans and advances.
Explanation

Section Summary: ​

This section governs how losses from a speculation business are treated under the new income tax law. It specifies that losses from speculation activities can only be set off against profits from other speculation businesses. Additionally, any unabsorbed speculation losses can be carried forward for up to four years but must be used before other carried-forward allowances. The section also clarifies what constitutes a speculation business, particularly for companies involved in share trading.

Key Changes: ​

  1. Set-off Restriction: Losses from speculation businesses can only be set off against profits from other speculation businesses, not against other types of income (e.g., salary, capital gains, or non-speculation business income).
  2. Carry Forward Limit: Unabsorbed speculation losses can now be carried forward for a maximum of four years, after which they lapse.
  3. Priority of Set-off: Unabsorbed speculation losses must be set off before other carried-forward allowances under sections 33(11) or 45(7).
  4. Definition of Speculation Business: For companies, the purchase and sale of shares of other companies are deemed to be speculation business unless specific exceptions apply.

Practical Implications: ​

  1. For Taxpayers with Speculation Losses: If you incur losses from speculation activities, you can only offset them against profits from other speculation activities in the same year. Any remaining losses can be carried forward for up to four years but must be used before other carried-forward allowances.
  2. For Companies Trading Shares: Companies involved in share trading must carefully determine whether their activities qualify as speculation business. If they do, the losses will be subject to the restrictions outlined in this section.
  3. Compliance Burden: Taxpayers must maintain detailed records of speculation business profits and losses to ensure proper set-off and carry-forward calculations.

Critical Concepts: ​

  1. Speculation Business: A business where transactions are settled without the actual delivery of goods or securities. For companies, buying and selling shares of other companies is deemed speculation unless exceptions apply.
  2. Unabsorbed Speculation Business Loss: A loss from speculation business that couldn’t be fully set off against profits from other speculation businesses in the same year.
  3. Set-off Order: Unabsorbed speculation losses must be used before other carried-forward allowances, such as depreciation or capital gains losses.

Compliance Steps: ​

  1. Identify Speculation Business Activities: Clearly distinguish speculation business activities from other business activities.
  2. Maintain Separate Records: Keep detailed records of profits and losses from speculation businesses.
  3. Calculate Set-off and Carry Forward:
    • Set off speculation losses against speculation profits in the same year.
    • Carry forward any unabsorbed losses to subsequent years, ensuring they are used within four years.
  4. File Accurate Returns: Report speculation business profits and losses accurately in your income tax return, adhering to the set-off and carry-forward rules.

Examples: ​

  1. Example 1: Mr. A runs a speculation business and incurs a loss of ₹2 lakh in FY 2023-24. He also earns a profit of ₹1 lakh from another speculation business in the same year. He can set off ₹1 lakh of the loss against the profit, leaving an unabsorbed loss of ₹1 lakh. This ₹1 lakh can be carried forward to the next four years but can only be set off against future speculation business profits.

  2. Example 2: Company X, which primarily trades in shares, incurs a loss of ₹5 lakh in FY 2023-24. Since its principal business is share trading, the loss is treated as a speculation business loss. The company can only set off this loss against profits from other speculation activities and carry it forward for up to four years.

This section ensures that speculation losses are treated distinctly and prevents their misuse to offset other types of income, maintaining the integrity of the tax system.