TMI Blog2013 (12) TMI 478X X X X Extracts X X X X X X X X Extracts X X X X ..... -12-2013 - Shri B. R. Mittal,(JM) And N. K. Billaiya (AM),JJ. For the Appellants : Shri F. V. Irani For the Respondents : Shri Narendra Kumar ORDER Per B. R. Mittal, JM These appeals are filed by assessee against orders of ld. CIT(A), both dated 2.1.2012 relating to assessment year 2006-07. 2. The assessee is a sub-account of the Foreign Institutional Investor (in short 'FII') registered in Australia and operating in India, Registered with Securities and Exchange Board of India (SEBI). The activity of assessee involved in purchase and sale of securities in India and trading in derivatives. Both assessee(s) have filed return (s) of income as under : a) the assessee, sub-account Platinum Asia Fund (ITA No.2787/Mum/2012) declaring total income of Rs.NIL and claimed a refund of Rs.1,45,96,129/-. The said assessee also claimed carried forward short term capital loss of Rs.78,91,43,597/-. However, AO completed the assessment vide order dated 24.12.2010 u/s 143(3) r.w. section 147 of the Income Tax Act, 1961 (the Act) at an income of Rs.93,26,84,307/- after holding that the net loss of Rs.1,72,18,27,904/- arising from index derivative transactions as business loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithout prejudice to the above, on facts and in circumstances of the case and in law, the learned CIT(A) erred in holding that in absence of business connection in India or in absence of permanent establishment in India as per India Australia Double Taxation Avoidance Agreement, the business loss of Rs. 1,721,827,904 arising on transfer of derivatives cannot be determined and so the same is not allowable as set-off against the capital gains arising on sale of shares in India having failed to appreciate that the loss is arising through the transfer of capital asset situated in India and / or the loss is arising through or from source of income in India and so the loss arising on transfer of derivatives is determinable in India. The CIT(A) ought to have held the business loss of Rs 1,721,827,904 arising on sale of derivatives can be determined and should be set off against short-term capital gains of Rs. 921,955,751 and long-term capital gains of Rs 10,728,556 and the balance loss of Rs.789,143,597 should be allowed to be carried forward to subsequent assessment years. 4. Without prejudice to the above, on the facts and in the circumstances of the case, the CIT(A) erred in not all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in holding that in absence of business loss of Rs. 230,515,488/- arising on transfer of derivatives cannot be determined and so the same is not allowable as set-off against the capital gains arising on sale of shares in India having failed to appreciate that the loss is arising through the transfer of capital asset situated in India and / or the loss is arising through or from source of income in India and so the loss arising on transfer of derivatives is determinable in India. The CIT(A) ought to have held the business loss of Rs 230,515,488 arising on sale of derivatives can be determined and should be set off against short-term capital gains of Rs. 165,781,163 and long-term capital gains of Rs 10,497,455 and the balance loss of Rs.54,236,870/- should be allowed to be carried forward to subsequent assessment years. 4. Without prejudice to the above, on the facts and in the circumstances of the case, the CIT(A) erred in not allowing set off of business loss of Rs. 230,515,488/- arising on derivative transactions against capital gains arising on sale of shares under section 71 of the Act and carry forward of balance unabsorbed business loss as per section 72 of the Act in view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 115AD of the Act. He further submitted that assessee, FII is not allowed to do business in the security market. He further submitted that derivative is a security as per the clause (ia) to sub-section (h) of section 2 of The Securities Contracts (Regulation) Act, 1956 with effect from 22.2.2000. The said fact is not disputed by ld. DR that derivative " is a security" under The Securities Contracts (Regulation) Act, 1956. The ld. AR submitted that the Co-ordinate Bench of the Tribunal, has considered this aspect as well vide its earlier order dated 5.12.2012 (supra) in which the earlier decision of co-ordinate Bench in the case of LG Asian Plus Ltd V/s ADIT (International Taxation) (2011) 46 SOT 159 was also considered. 7. We have carefully considered the submissions of the ld. Representatives of the parties and the orders of authorities below. We have also considered the earlier orders of the Tribunal, (supra) relied upon by ld. AR and also the decision of Hon'ble Jurisdictional High Court in the case of Bharat Ruia(supra). We agree with ld. AR that the decision relied upon by ld.DR is not relevant to the facts of the fact of the case before us. Further, the issue is squarely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to be taxed as per this section alone. Coming to income arising from the transfer of securities, it has been provided in section 115AD that it shall be charged as short-term or long-term capital gain, which depends upon the period of holding of such securities. A FII is not allowed by the Central Government to do `business in the `securities . Once it is noticed that a FII can only `invest in `securities and tax on the income from the transfer of such securities is covered by a special provision contained in section 115AD, the natural corollary which follows is that tax should be charged on income arising from transfer of such securities as per the prescription of this section alone, which refers to income by way of short term or long term capital gains. 8.13. The ld. D.R. has relied on sub-section (2) of sec. 115AD for contending that the existence of `Business income from dealing in securities is also envisaged. We find that sub-sec. (2) of sec. 115AD has two clauses. Clause (a) provides that where the gross total income of a FII consists only of income in respect of security referred to in clause (a) of sub-sec. (1) (i.e. income received in respect of securities, otherw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... want to make it clear that the question before us is not to determine whether a FII can have any business income or not. We are confined to determining whether the income from the transfer of securities would fall under sub-section (1) or (2). If it is presumed as a hypothetical case that a FII may also have any business activity, whether legal or illegal, then the income from such activity shall be considered as `Business income covered under subsection (2)(b). The only embargo against the above presumption is that the business should not be that of dealing in `securities . Once there is a special provision slicing away the income to a FII from the transfer of `securities from the other income, it has to find its home only under sub-section (1)(b), irrespective of the fact that the securities are viewed as `Investment or `Stock in trade . If the Revenue ventures to make a distinction between such securities as constituting capital asset or stock in trade, which is not contemplated by the Central Government as is evident from SEBI(FII) Regulations and the definition of FII in Explanation (a) to sec. 115AD, then this provision will become otiose. In our considered opinion if a F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered as short-term or long-term capital gain depending upon the period of holding. If the viewpoint of the Department, to the effect that income from transfer of shares or debentures etc. should be considered as short-term or long-term capital gain (as has been accepted by the AO in the instant case) but that from derivatives should be considered as `Business income (speculation business), then it would mean considering shares and debenture etc. as distinct from derivatives. Moreover there is nothing on record to demonstrate that the assessee was visited with any consequences as per Regulation 7A for violation of Regulations 15 or 16. It shows that the regulations have been conscientiously followed by the assessee as per which it simply made only Investment in securities and there is nothing of the sort of trading. Although in common parlance, the shares or debentures etc. are distinct from derivatives, and their taxation may also differ in the case of non- FIIs, but such distinction is obliterated in the context of FIIs due to the inclusion of both shares and debentures etc. on one hand and derivatives on the other, in the definition of "securities" for the purpose of sec. 115AD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive transaction". It is, therefore, clear that sec. 43(5) defining speculative transaction is relevant only in the context of income under the head `Profits and gains of business or profession . It rules out its application to income under any other head. If that be the position, the picture is clear that sec. 43(5) has no application to FIIs in respect of securities as defined in Explanation to sec. 115AD, income from whose transfer is considered as short term or long term capital gains. 11. We, therefore, hold that the ld. CIT(A) was not justified in holding that income from Index based or non-Index based derivatives be treated as business income , whether speculative or nonspeculative. The impugned order is, therefore, set aside by holding that income from derivative transaction resulting into loss of Rs.11.27 crores is to be considered as short-term capital loss on the sale of securities which is eligible for adjustment against short-term capital gains arising from the sale of shares." In view of above order and respectfully following the decision of Co-ordinate Bench of the Tribunal (supra), we decide Ground No.2 of the appeal in favour of assessee. Accordingly, we h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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