2013 (12) TMI 478 - AT - Income Tax

Loss from derivative transactions - Capital loss or business loss - Held that - Income arising to a FII from the transfer of securities as specified in Explanation (b) to sec. 115AD can only be considered as short-term or long-term capital gain - It is impermissible to consider such income as falling under the head Profits and gains of business or profession . Such income arising from the transfer of securities shall be charged to tax under the head capital gains alone. Once inclusion of such income from the transfer of securities is held to be falling only under the head Capital gains , it cannot be considered as Business income , whether speculative or non- speculative - 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 - It is a well settled legal position that specific provisions override the general provisions - Decided in favour of assessee.

Summary

Issues Involved:
1. Re-opening of the case under Section 147 of the Income Tax Act, 1961.
2. Classification of net loss from index derivative transactions as business loss versus capital loss.
3. Set-off and carry forward of losses arising from derivative transactions.

Detailed Analysis:

1. Re-opening of the case under Section 147 of the Income Tax Act, 1961:
The appellants challenged the re-opening of their cases under Section 147, asserting that no income had escaped assessment. However, during the hearing, the appellants' representative did not press this ground. Consequently, this ground was rejected as not pressed.

2. Classification of net loss from index derivative transactions as business loss versus capital loss:
The primary issue was whether the net loss from index derivative transactions should be treated as business loss or capital loss. The Assessing Officer (AO) had classified these losses as business losses, which was upheld by the Commissioner of Income-tax (Appeals) [CIT(A)]. The appellants argued that derivatives are securities and, as Foreign Institutional Investors (FIIs), their transactions in derivatives should be treated as capital assets, not business/trading assets.

The Tribunal referred to a previous decision in the case of Platinum Investment Management Ltd., which had ruled in favor of treating such transactions as capital gains. The Tribunal also considered the decision of the Hon'ble Bombay High Court in CIT vs. Bharat R. Ruia (HUF), which classified derivative transactions as speculative transactions. However, the Tribunal found this case not applicable to the present facts, as the appellants were FIIs registered with SEBI, and their transactions in derivatives should be considered investments.

The Tribunal noted that derivatives are classified as securities under the Securities Contracts (Regulation) Act, 1956, and that FIIs are permitted to invest in Indian capital markets, with income from such investments being treated as capital gains under Section 115AD of the Income Tax Act. The Tribunal concluded that the income from derivative transactions for FIIs should be considered as short-term or long-term capital gains, depending on the holding period, and not as business income.

3. Set-off and carry forward of losses arising from derivative transactions:
The appellants sought to set off the losses from derivative transactions against capital gains and carry forward the unabsorbed losses. Since the Tribunal decided that the income from derivative transactions should be treated as capital gains, the grounds related to the set-off and carry forward of business losses became infructuous.

Conclusion:
The Tribunal allowed the appeals in part, ruling that the income from derivative transactions for FIIs should be treated as capital gains, not business income. Consequently, the grounds related to the set-off and carry forward of business losses were deemed unnecessary to adjudicate. The order was pronounced in the open court on December 4, 2013.