40. A person has sustained a loss of Rs. 1 lakh in his speculative business. He wants to claim set-off of this loss from his income of Rs.30,000 received under the head income from house property. Will he be allowed to do so under the law? Decide with reasons.

1. Facts of the Case

A taxpayer has incurred a loss of ₹1,00,000 from a speculative business during the financial year. Simultaneously, he has earned an income of ₹30,000 under the head “Income from House Property”. The assessee wishes to set off the speculative business loss against the income from house property in the same assessment year.

2. Issues in the Case [Questions]

1. Can a speculative business loss be set off against income from other heads, such as house property?
2. What are the restrictions or conditions under the Income Tax Act, 1961 regarding such set-off?
3. What is the correct treatment of speculative loss under the law?

3. Legal Principles Covered

A. Section 70 and Section 71 – Set-off of Losses

• Section 70 of the Income Tax Act, 1961: Allows intra-head adjustment—i.e., losses from one source of income can be set off against income from another source under the same head.
• Section 71: Deals with inter-head adjustment—i.e., losses under one head (e.g., business) can be set off against income under another head (e.g., house property).

B. Section 73 – Treatment of Speculative Business Loss

• A speculative transaction is defined in Section 43(5).
• As per Section 73(1), any loss from a speculative business can only be set off against income from another speculative business.
• It cannot be set off against any other income, whether under business income or any other head like house property, salary, capital gains, etc.

C. Relevant Judicial Pronouncements

• Courts have consistently held that speculative losses are ring-fenced, i.e., their set-off is strictly limited to profits from speculative business only.
• Non-speculative income (including income from house property) cannot absorb speculative business losses.

4. Possible Judgement

In the given case:

• The speculative loss of ₹1,00,000 arises from a business that falls under the definition of speculative transactions as per Section 43(5).
• The income of ₹30,000 from house property is under a different head of income and is not related to any speculative activity.
• According to Section 73, speculative business losses cannot be adjusted against any other head of income, including house property.