Commodity derivative loss - set off against business income

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Sriram (Querist)
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25 November 2011 Hello Experts,

One client, who is a manufacture & retailer of gold & gold jewelry is also trading in commodity derivatives to guard against future price fluctuations. He is trading in MCX stock exchange.

He dealt in copper in commodity derivative market & incurred huge loss & that is set-off against his business income as per provision of sec 43(5)(d)

Now the A.O. puts forward following 2 points on which he disallowes such loss to be set off.
1)MCX is not recognized stock exchange till Feb 2009, so can not claim loss earlier to that date to be ste off u/s 43(5)(d)
2)Even though assesse requires small amount of copper for preparing gold jewelry his major item is gold. As he dealt in copper in commodities market, he can not claim entire derivative loss against business income.

Q: 1) Can the loss be claimed to be set off u/s 43(5)(a) if not u/s 43(5)(d).
2)Please clarify the meaning of the word 'underlying asset'given u/s 43(5)(a).

Please quote sections & case laws wherever you know one.

Aditya Maheshwari

Aditya Maheshwari (Expert)
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25 November 2011 First of all MCX trading in commodities is not a recognised stock exchange as per section 43(5). The recognised stocke exchange is for currency futures trading only.

If you could prove that the entire trading in commodities is hedging then only you could set off against non speculation business profit otherwise it would be termed as speculation loss which is most likely looking into the facts of the case.

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Sriram

Sriram (Querist)
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25 November 2011 @Aditya Maheshwari : ok sir, then the possibility of getting set off will only be under sec 43(5)(a), where I have to prove the entire transaction as hedging... Thank you

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