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2011 (5) TMI 371 - AT - Income TaxDTAA between India and Cayman Island - Business income or capital gain - assessee is a company incorporated in Cayman Islands and a tax resident of Cayman Islands - It was also argued that the assessee was governed by the special provision contained in section 115AD and as such the resultant income from the derivatives could be taxed only under the head Capital gains . - it is manifest that the income earned by a FII either by way of retention or by way of transfer of securities (including derivates) is subject matter of sub-section (1) of section 115AD - on a close scrutiny of the SEBI (FII) Regulations 1995 together with section 115AD seen in the light of the Memorandum explaining this provisions of the Finance Bill 1993 it is visible that a FII is allowed to invest only in the securities and further the income from securities either from their retention or from their transfer is to be taxed as per this section alone - it is seen that income arising from the transfer of securities of the FIIs has been included under section 115AD(1)(b) to be categorized as short-term or long-term capital gain depending upon the period of holding - Held that 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 non-speculative - Decided in favor of the assessee
Issues Involved:
1. Classification of losses from futures and options transactions. 2. Applicability of Section 43(5) concerning speculative transactions. 3. Application of Section 115AD to Foreign Institutional Investors (FIIs) and their income from derivatives. Issue-wise Detailed Analysis: I. Classification of Losses from Futures and Options Transactions: The primary issue is whether the losses incurred by the assessee from futures and options transactions should be classified as business losses or speculative losses. The revenue contended that the losses should be treated as speculative, while the assessee argued for classification under business losses. II. Applicability of Section 43(5) Concerning Speculative Transactions: Section 43(5) defines a speculative transaction as one settled otherwise than by actual delivery of the commodity or scrips. The Assessing Officer held that derivative transactions were speculative since they did not involve actual delivery. However, the Finance Act, 2005, inserted clause (d) to Section 43(5), excluding eligible transactions in derivatives carried out in recognized stock exchanges from being deemed speculative, but this clause was applicable prospectively from the assessment year 2006-07. The Tribunal noted that according to the Special Bench in Shree Capital Services Ltd. v. Asstt. CIT and the jurisdictional High Court in CIT v. Shri Bharat R. Ruia (HUF), transactions in derivatives were speculative for the assessment year 2004-05. The Tribunal disagreed with the CIT(A)'s bifurcation of derivative transactions into index-based (business transactions) and non-index-based (speculative transactions), holding that all derivative transactions, regardless of the underlying asset, should be considered speculative under Section 43(5). III. Application of Section 115AD to Foreign Institutional Investors (FIIs) and Their Income from Derivatives: Section 115AD deals with the taxation of income of FIIs from securities or capital gains arising from their transfer. The assessee argued that income from derivatives should be taxed as capital gains under Section 115AD, not as business income. The Tribunal examined the SEBI (Foreign Institutional Investors) Regulations, 1995, which restrict FIIs to making investments in specified securities, including derivatives, and prohibit trading. The Tribunal concluded that income from the transfer of securities by FIIs, including derivatives, should be taxed as capital gains under Section 115AD. The Tribunal emphasized that Section 43(5) applies to speculative transactions within the context of business income and does not affect the classification of income from securities under Section 115AD. Therefore, the Tribunal held that the loss from derivative transactions should be treated as short-term capital loss, eligible for adjustment against short-term capital gains from the sale of shares. Conclusion: The Tribunal allowed the appeal of the assessee, classifying the loss from derivative transactions as short-term capital loss and dismissing the revenue's appeal, which sought to classify the loss as speculative business loss. The Tribunal's decision underscores the special provisions of Section 115AD for FIIs, overriding the general provisions of Section 43(5) concerning speculative transactions.
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