The Hindu Business Line : Shedding of a stigma

ANY SPECULATIVE transaction is viewed differently by the Income-tax Act, 1961. Enough safeguards have been built into the legislation to prevent traders from indulging in such transactions.

The law has been designed in such a manner that any loss to speculative business can be set off against speculative profits and, similarly, carried forward and set off only against future speculative profits.

In other words, the distinct identity of a speculative transaction is maintained intact in the tax laws. The Supreme Court, in Apollo Tyres Ltd vs CIT (2002 255 ITR 273), held that trading in units will not fall in the category of shares, nor get hit by the restrictive covenants for speculative transaction.

Similarly, it has also been opined that dealing in derivatives is not in the nature of a speculative transaction.

Relook at speculation

The report of the Kelkar Task Force has dealt with speculation in detail. The report has traced the economic reforms and the changes in the capital market in qualitative and quantitative terms. It deals with the issue of speculation thus:

"Speculation enhances liquidity, encourages price discovery and reduces transaction costs, it has a positive impact on the economic efficiency of the capital market. However, speculation also encourages rigging, manipulation and fraud, thereby undermining economic efficiency. The net effect depends upon the relative strength of the two. Due to the absence of any audit trial in the functioning of stock markets, it was extremely easy to shift the incidence of tax by indulging in fictitious transactions. The unscrupulous taxpayers often sought to establish the genuineness of such transactions by procuring bogus documents from equally unscrupulous brokers."

The report also raises two conceptual issues:

Whether there is a need to retain a distinctive concept of `speculative transaction' as provided in the Act?

If not, what should be the anti-evasion mechanism to minimise the fall-outs of rigging, manipulation and fraud that may arise out of unbridled speculation as understood in the commercial sense?

It is felt that the stock markets have achieved a fair degree of transparency which alone can inhibit the malpractices of generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. Further, systemic and technological changes have brought about a qualitative shift in the trading systems.

Recommendation

The Task Force report recommends that the distinction between speculative and non-speculative transactions should be dispensed with insofar as they relate to shares and securities. In doing so, the report recommends safeguards and controls to be built into the system by which various participants fulfil the following obligations:

Every investor to obtain a unique client ID linked with Permanent Account No.

Trading to be done electronically on screen-based systems.

Every client to obtain a stamped contract note indicating the client ID.

Similarly, every intermediary or broker should cater to the following requirements:

i) be an active member of recognised stock exchange;

ii) shall issue to every client a unique ID on the basis of PAN;

iii) any sub-broker carrying on trading on behalf of client must get the client duly registered with the main broker.

iv) shall comply with all the rules and regulations of the stock exchange.

Controversies on what is a speculative transaction and how is actual delivery established have occupied the precious time of the courts. The recommendation to overhaul the system and the approach towards speculative transaction comes as a breadth of fresh air. Checks and balances no doubt have to be built in to take care of the unscrupulous.

As late Nani Palkhivala often said: "We cannot legislate keeping in mind only the tax evaders." After all, no system can guarantee 100 per cent compliance in any country, least of all in India.

(The author is a Chennai-based chartered accountant.)