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COMMODITY FUTURES TAXABILITY

GAURAV CHAUDHARY (Chartered Accountant) (40 Points)

13 February 2010

HELLO.....I WANT 2 KNOW THE TAXABILITY OF PROFITS DERIVED FROM TRADING IN COMMODITIES FUTURES.......UNDER WHICH HEAD AND WHY.....PLEASE HELP

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13 Replies

Amir (Learner) (4016 Points)
Replied 13 February 2010

Dear Gaurav,

Income from Trading in Commodity Futures is taxable as PGBP -

1) For Contracts settled with Delivery - Non Speculative Business

2) For Contracts settled without Delivery - Non Speculative if carried on Recognized Stock exchange (MCX) otherwie speculative Business

Reason -

Look, Question of Heads like Salary, House Property & Other Sources doesnot arise..

Now For contracts settled without delivery we have specific Sec 43(5) covering this kind of transactions therefore no option but to tax it as Business Income. Since delivery is not involved therefore it cannot be said as "Transfer of a Capital Asset"

For Contracts settled with delivery the question would be whether u r trader or investor,

If Trader the we cannot compute Capital Gain because "Stock in Trade" is excluded from the definition of Capital asset..Therefore Income has to be computed under PGBP..

If Investor then yes Capital Gain can be computed but there is very rare chance that any AO would accept this fact depending upon the volumes of transactions..Further the definition of Personal effects may also cause trouble in claiming "Commodity" as Capital Asset

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GAURAV CHAUDHARY (Chartered Accountant) (40 Points)
Replied 13 February 2010

TANX 4 UR PROMPT REPLY, SIR....BT THIS IS AN EXCEPTION TO THE SECTION 43(5), AS IT IS A CASE OF TRADING IN DERIVATIVES....WHICH IS PROVISO '"d" TO SECTION 43(5)...

Amir (Learner) (4016 Points)
Replied 13 February 2010

Dear Gaurav,

Only transactions carried out on Recognized Stock Exchange are covered.

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GAURAV CHAUDHARY (Chartered Accountant) (40 Points)
Replied 13 February 2010

THANK U VERY MUCH, SIR......I THINK NOW I HAVE SATISFACTORILY RSOLVED MY QUERY

Amir (Learner) (4016 Points)
Replied 13 February 2010

Dear Gaueav,

U R Welcome............

Aditya Maheshwari (CA in Practice) (35867 Points)
Replied 13 February 2010

Can derivatives in commodities not means a contract for differences as per defination of derivatives in section 2(ac)?

Amir (Learner) (4016 Points)
Replied 13 February 2010

Dear Gaurav & Aditya Sir,

The concerns raised by Gaurav were correct that Futures of commodity traded on recognized exchange will not be speculative & I should suitably amend the above post..

Beacuse MCX Exchange has been notified u/s Sec 43(5)

GAURAV CHAUDHARY (Chartered Accountant) (40 Points)
Replied 13 February 2010

SIR, WHERE HAVE U FOUND THIS CLAUSE THAT MCX IS NOTIFIED U/S. 43(5)

Amir (Learner) (4016 Points)
Replied 13 February 2010

Dear Gaurav,

See this -

In exercise of the powers conferred by clause (ii) in the Explanation to clause (d) of the proviso to sub-section (5) of section 43 of the Income-tax Act, 1961 (43 of 1961), read with rule 6DDB of the Income-tax Rules, 1962, the Central Government hereby notifies MCX Stock Exchange Ltd. as a recognized stock exchange for the purpose of the said clause with effect from the date of publication of this notification in the Official Gazette.

2. MCX Stock Exchange Ltd. shall separately maintain data regarding all transactions registered in the system in which client codes have been allowed to be changed for periodical inspection by the Director-General of Income-tax (Investigation) having jurisdiction over such exchange and provide copies of the relevant information as and when required.

3. The Central Government may withdraw the recognition granted to MCX Stock Exchange Ltd. if any of the conditions specified in rule 6DDA of the Income-tax Rules, 1962, subject to which the recognition is granted, is violated.

4. This notification shall remain in force until the approval granted by the Securities and Exchange Board of India is withdrawn or expires, or this notification is rescinded by the Central Government as provided in sub-rule (5) of rule 6DDB of the Income-tax Rules, 1962. - Notification No. SO 1327(E), dated 22-5-2009.

GAURAV CHAUDHARY (Chartered Accountant) (40 Points)
Replied 13 February 2010

DEAR SIR,

CAN I KNOW THE NAME OF ANY BOOK CONTAINING THIS NOTIFICATION...AS I COULD NOT FIND THIS IN TAXMANN'S I.T. BARE ACT

Aditya Maheshwari (CA in Practice) (35867 Points)
Replied 13 February 2010

This is a notification and is not there any where in the act. Section 43(5) states a recognised stock exchange and MCX is a recognised stock exchange as per Notification No. SO 1327(E), dated 22-5-2009 as mentioned by Amir.

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GAURAV CHAUDHARY (Chartered Accountant) (40 Points)
Replied 13 February 2010

OH....THANK U FOR UR REPLY

CA Madhu Soodan Tapuriah (Practising Chartered Accountant) (156 Points)
Replied 19 February 2010

Dear Sir

However we shall have to read the circular very carefully and in between the lines.Please note that here are two exchanges in India

One is Multi Commodity Exchange of India Ltd where only commodity transactions are being entered.Please note that this exchange has not been notified by the Govt u/s 43 (5) of the Act.

Another exchange is MCX Stock Exchange Ltd where only currency derivative transactions are executed.This Exchange has been notified u/s 43 (5) .

Thus it is ample clear that loss sustained in transactions through Multi Commodity Exchange in commodity transactions are purely speculative transactions loss.

Also please note that one of the basic conditions laid down in Sec 43 (5) is trading has to be in derivatives. The term "Derivative" indicates that it has no independent value, i.e. its value is entirely "derived" from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other words, Derivative means a forward, future, option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities.But transactions entered at Multi Commodity Exchange related to commodities which are just like any other object e.g. shares.These can not be tremed Derivatives.

I hope we are now clear on this topic.

Thanks

CA M S Tapuriah

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