2014 (3) TMI 331 - AT - Income Tax

Loss from derivative transactions - Capital loss or business loss - Held that - The decision in Platinum Asset Management Ltd. Versus Dy. Director of Income Tax (International Taxation) 2013 (12) TMI 478 - ITAT MUMBAI followed - 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 - 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 - Thus, the income arising from the transaction in derivatives by the assessee, being FII, cannot be treated as business profit or loss but the same has to be capital gain or loss - Decided in favour of assessee.

Summary

Issues Involved:
1. Reopening of the case under Section 147 of the Income-tax Act.
2. Treatment of loss arising from index derivative transactions as business loss versus capital loss.
3. Set off and carry forward of short-term capital loss on derivative transactions.

Detailed Analysis:

1. Reopening of the case under Section 147 of the Income-tax Act:

The assessee challenged the reopening of the case under Section 147, arguing that there was no income that had escaped assessment. However, the assessee's counsel did not press this ground, and it was dismissed as not pressed.

2. Treatment of loss arising from index derivative transactions as business loss versus capital loss:

The assessee, a Foreign Institutional Investor (FII), argued that the loss from index derivative transactions should be treated as short-term capital loss, not business loss. The assessee cited its own case from the Assessment Year 2007-08, where the Tribunal ruled in favor of treating such losses as capital losses. The Tribunal noted that the assessee's activities were limited to the purchase and sale of securities and trading in derivatives, with income from these activities claimed under capital gains.

The Assessing Officer (AO) had treated the loss from derivative transactions as business loss, not allowing it to be set off against short-term capital gains. The CIT(A) upheld this view, stating that the loss from "Exchange Traded Derivatives" should be assessed as business income, not capital gains. However, the CIT(A) allowed the set off and carry forward of this business loss under sections 70(2) and 71(2).

The Tribunal reviewed the assessee's case and similar cases, noting that income from derivatives for FIIs should be treated as capital gains, not business income. The Tribunal referenced the decision in the case of LG Asian Plus Ltd. vs ADIT, which concluded that FIIs are allowed to invest in securities, and income from such investments should be treated as capital gains. The Tribunal emphasized that FIIs' income from securities should be taxed under section 115AD as capital gains, not business income, following the principle that special provisions override general provisions.

3. Set off and carry forward of short-term capital loss on derivative transactions:

The Tribunal found that the income from derivative transactions should be treated as capital gains or losses. Consequently, the assessee's claim to set off and carry forward the short-term capital loss on derivative transactions was upheld. The Tribunal dismissed the department's appeal, which argued that without a permanent establishment, business income would not be assessable in India and that losses from derivative transactions without actual delivery should not be set off against other income.

Conclusion:

The Tribunal ruled in favor of the assessee, holding that income from derivative transactions should be treated as capital gains or losses, not business income. The assessee's appeal was allowed, and the department's appeal was dismissed. The Tribunal's decision was based on the principle that FIIs' income from securities should be taxed under section 115AD as capital gains, following the precedent set in similar cases.