Can a loss from hedging of commodities be set off against normal profit of a related commodity merchant?
Yes, there is express provision under the IT Act ,by which loss from hedging of commodities are allowed to be taken not as Speculation Loss and thus on characterized as Business Loss, is allowed to be adjusted with Business Income.
Speculation is defined u/s 43(5) of the IT Act . Clause (a) of subsection 5 of section 43 is given as under :
" (5) speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips:
Provided that for the purposes of this clause
(a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or.....................
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shall not be deemed to be a speculative transaction;"
As is clear from the aforesaid provision, if a contract in commodity is entered for hedging the loss in commodity, same shall not fall under the definition of Speculation meaning thereby same will be Business Loss.
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