Speculative share transactions can form speculation business if they reflect trading adventure and are settled without delivery.

A speculative transaction settled otherwise than by actual delivery is treated as speculation under section 43(5) if the underlying activity amounts to business under section 2(13). Explanation 2 to section 28 does not require repeated dealings for speculation business, and even a single transaction may qualify where it has the character of a trading adventure. On the facts, the share dealings were found to be a business venture carried on without delivery, and the asserted loss was not proved to be genuine damages for breach of contract. The resulting loss was therefore characterised as speculative rather than an ordinary business loss.

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Issues: (i) Whether a speculative transaction, if isolated, can still constitute speculation business within the meaning of Explanation 2 to section 28 of the Income-tax Act, 1961; (ii) Whether the loss arising from the share transactions was a speculative loss or damages for breach of contract.

Issue (i): Whether a speculative transaction, if isolated, can still constitute speculation business within the meaning of Explanation 2 to section 28 of the Income-tax Act, 1961

Analysis: Explanation 2 to section 28 distinguishes speculative transactions from speculation business, but does not create a rule that only repeated transactions can amount to speculation business. The governing test remains whether the activity answers the statutory concept of business under section 2(13). A single transaction may amount to business if it bears the indicia of a trading adventure. Where such a transaction is settled otherwise than by actual delivery, it is speculative business. On the facts found, the assessee had undertaken multiple share transactions without delivery and the chain of dealings showed a business venture rather than a mere isolated act.

Conclusion: Yes. Even a solitary speculative transaction can amount to speculation business if it constitutes business or an adventure in the nature of trade.

Issue (ii): Whether the loss arising from the share transactions was a speculative loss or damages for breach of contract.

Analysis: A transaction falls outside section 43(5) only where the contract itself is not settled but is replaced by a genuine claim for damages after breach. The materials did not establish any breach-based damages claim or any settlement of such claim. The assessee failed to show why delivery was not given or how the payment of difference represented damages. The transactions were therefore treated as contracts settled without delivery, bearing the characteristics of speculation.

Conclusion: The loss was speculative and not damages for breach of contract.

Final Conclusion: The reference was answered against the assessee on all substantive questions, and the share transactions were held to be speculative business with the resulting loss not allowable as an ordinary business loss.

Ratio Decidendi: A transaction settled otherwise than by actual delivery is speculative; if the underlying activity amounts to business under section 2(13), even an isolated transaction can constitute speculation business under Explanation 2 to section 28, unless the payment is shown to be genuine damages for breach of contract rather than contract settlement.

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