Hedging loss on shares is not speculative when entered to guard against price fluctuations and may be set off.

A hedging loss arising from a share transaction entered into to protect against price fluctuations falls outside the speculative transaction category under section 43(5)(b) of the Income-tax Act, 1961. The provision applies to contracts in stocks and shares used to guard against loss in holdings and does not require the assessee to be regularly engaged in hedging transactions. It also makes no distinction between shares held as stock-in-trade and shares held as investment. The loss was therefore treated as non-speculative and allowable for deduction or set-off.

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Issues: Whether a loss arising from a hedging transaction in shares entered into by an investor to guard against price fluctuations is excluded from the category of speculative transactions under section 43(5)(b) of the Income-tax Act, 1961 and therefore allowable for set-off.

Analysis: Section 43(5)(b) applies to a contract in respect of stocks and shares entered into by a dealer or investor to guard against loss in holdings through price fluctuations. The provision speaks of such a contract and does not require the assessee to be regularly engaged in hedging transactions. It also draws no distinction between stock-in-trade held by a dealer and shares held as investment. A hedging transaction of this kind is not speculative merely because the assessee is an investor rather than a dealer, and the resulting loss falls outside the speculative transaction category.

Conclusion: The hedging loss was not speculative in nature and was allowable to be taken into account for deduction or set-off; the issue was answered in favour of the assessee.

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