The Hindu Business Line : F&O need not be speculative

I engage in day-trading in the cash market and also in the futures and options segment. For 2008-09 I have made a loss of Rs 1.70 lakh. Under which head should I show the loss in the return of income? Will this be a short-term capital loss or business loss? What are the criteria that determine the activity as speculative or non-speculative? – Deepak Vats

The loss from dealing in futures and options as well as in the cash market should normally be regarded only as business loss and cannot be treated as a loss under the head capital gains. Section 43(5) provides that where a transaction in goods or commodities, including shares and scrips, is periodically or ultimately settled other than by delivery, the transaction is speculative.

If the dealing is in futures and options the transaction will not be regarded as speculative even if there is no delivery provided the following conditions are satisfied: the transaction is carried on through a registered broker or sub-broker or by banks or mutual funds; the transaction is carried out electronically on by screen-based systems; the transaction is supported by a time stamp contract note which indicates the client identity and the number allotted under the SEBI Act or the SCR Act or the Depositories Act and also the permanent account number of the client.

I wish to know if long-term capital gains from sale of land can be claimed as exemption in the following circumstances: If investment is made in two properties; if a flat in the first floor of a commercial building is purchased though it is used only for residential purposes.

I had claimed exemption in respect of long-term capital gains from sale of a land by investing in a proposed land project. However the construction could not be completed within three years from the date of transfer due to legal dispute with Municipal Corporation on purchase of the land. It may be noted that the long-term capital gains is not invested for the purchase of land. What will be my position in respect of the exemption claimed by me under these circumstances? – Mohit

Section 54F allows an exemption on the transfer of a long-term capital asset not being a residential house and on reinvestment in a residential house.

Exemption is available if the assessee is an individual or HUF; the gain arises from the transfer of a long-term capital asset not being a residential house; the assessee does not within two years purchase or three years construct any residential house other than the new house; the assessee is not the owner of more than one residential house (other than the new asset) on the date of transfer of the original asset.

The quantum exempt will be depend on if the amount invested is more than or equal to the net consideration then the entire capital gain; or if the amount invested is less than the net consideration then the amount invested multiplied by capital gain divided by net consideration.

It can be seen that one of the conditions in the section requires that the assessee should not within two years purchase or three years construct any residential house other than the new asset.

Further, the section seeks to provide an exemption only on reinvestment in one residential house.

Given this, if you make the reinvestment in two residential houses you will not be eligible for the exemption under section 54F.

Section 54F requires the reinvestment in a residential house for the claim of exemption. The fact that the residential house is located on the first floor of a commercial building will not affect the claim of exemption so long as you can demonstrate that the unit purchased by you is a residential house.

In your case as you have claimed exemption originally under section 54F on sale of a land and reinvestment only in land without constructing a house thereon as required by section 54F even within the stipulated period of three years, the exemption earlier granted in the year of transfer of land when you claimed the exemption originally under section 54F would stand withdrawn.

If, however, the land that is now being sold is the land which was the basis on which the exemption was claimed originally under section 54F, only due to the reason that the construction is not permitted on the said land, you may still be eligible for exemption on the original transfer of land on the basis that the reinvestment could not be made due to reasons beyond your control.

In this connection you may place reliance on the decisions in M.A.C. Khaleeli v DCIT [1993] 48 ITD 191 (Mad), Jagan Nath Singh Lodha v ITO [2004] 85 TTJ (Jd) 173.

I purchased a property in Mumbai in 2003 for Rs 11 lakh. I propose to sell this property for Rs 30 lakh, in which case will my capital gains be Rs 19 lakh? What will be my tax liability on the said capital gains? Can I claim any exemption from such capital gains? – Sharad Sali

Your capital gains will not be Rs 19 lakh. You can from the consideration reduce the indexed cost of acquisition and not merely the cost of acquisition as the asset has been held by you for a period exceeding 36 months.

Indexed cost of acquisition is to be computed by increasing the cost of acquisition in the proportion that the cost inflation index of the financial year of transfer bears to the cost inflation index of the financial year in which the asset was first held by the assessee. The cost inflation index is notified by the Government for every financial year beginning from the financial year 1981-82.

Your tax liability on the gain will be 20 per cent (as increased by the appropriate additional surcharge).

Exemption may be claimed by you under sections 54 or 54F and/or 54EC subject to satisfying the conditions in those sections.

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