2012 (12) TMI 1057 - AT - Income Tax

Summary

Issues Involved:
1. Classification of net loss from derivative transactions as business loss or capital loss.
2. Application of the Treaty between India and Australia by the Assessing Officer.
3. Set-off of net business loss from derivative transactions against capital gains from the sale of shares u/s 71 of the Income Tax Act.

Summary:

Issue 1: Classification of Net Loss from Derivative Transactions
The primary issue was whether the net loss of Rs. 41,42,03,363/- from derivative transactions should be treated as business loss or capital loss. The assessee, a sub-account of an FII, argued that the loss should be considered as capital loss since the transactions were investments. The Assessing Officer (AO) treated the loss as business loss, which was upheld by the CIT(A). The Tribunal, referencing the decision in LG Asian Plus Ltd. Vs ADIT, concluded that income from derivative transactions for FIIs should be treated as capital gains or losses, not business income or losses. Thus, the Tribunal decided in favor of the assessee, holding that the income from derivative transactions should be classified as capital gains or losses.

Issue 2: Application of the Treaty Between India and Australia
The assessee contended that the AO wrongly applied the provisions of the Treaty between India and Australia, which put the assessee at a disadvantage. The Tribunal, having decided the primary issue in favor of the assessee, did not delve into this alternative plea.

Issue 3: Set-off of Net Business Loss from Derivative Transactions
The assessee argued that if the loss from derivative transactions were treated as business loss, it should be set off against capital gains from the sale of shares u/s 71 of the Income Tax Act. The CIT(A) had treated both the profit and loss from derivative transactions as business profit and loss, respectively, and allowed the set-off. However, since the Tribunal decided that the loss should be treated as capital loss, this issue became redundant.

Conclusion:
The appeal filed by the assessee was allowed, with the Tribunal holding that the income from derivative transactions should be treated as capital gains or losses, not business income or losses. The Tribunal did not address the alternative plea regarding the application of the Treaty due to the primary issue being resolved in favor of the assessee.