Section 73 of ITA, 1961 : Section 73: Losses In Speculation Business

Explanation using Example

Imagine a trader, Mr. A, who engages in speculative trading in the stock market. In the financial year 2022-2023, Mr. A incurs a loss of INR 100,000 from his speculative trading activities, which is considered a speculation business under the Income-tax Act, 1961. He also has a separate textile business that made a profit of INR 200,000 in the same year.

Under Section 73(1) of the Income-tax Act, Mr. A cannot set off his speculative loss of INR 100,000 against the profit of INR 200,000 from his textile business because the loss is from a speculation business and can only be set off against profits of another speculation business.

Since Mr. A does not have any other speculation business, according to Section 73(2), he is allowed to carry forward the loss of INR 100,000 to the next assessment year. If in the following year, 2023-2024, Mr. A makes a profit of INR 150,000 from speculative trading, he can set off this year's profit with the previous year's carried forward speculative loss. After the set-off, his taxable speculative income for the year 2023-2024 would be INR 50,000 (INR 150,000 profit - INR 100,000 carried forward loss).

However, if Mr. A cannot set off the entire loss in the next year, he can continue to carry forward the unadjusted loss for a maximum of four assessment years, as per Section 73(4).

The explanation provided in the act clarifies that if a company's business includes buying and selling shares, it will be treated as carrying on a speculation business to the extent of that activity, unless it is mainly earning income from other specified sources or is primarily engaged in banking, trading in shares, or providing loans and advances.