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TMI Blog2014 (3) TMI 331X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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. - ITA No. 1790/Mum/2012, ITA No.2099/Mum/2012 - - - Dated:- 26-2-2014 - Shri R. C. Sharma, AM And Shri Amit Shukla,JJ. For the Petitioner : Shri F. V. Irani For the Respondent : Smt. Neeraja Pradhan ORDER Per Amit Shukla, J.M. These are cross appeals filed by the assessee and revenue against impugned order dated 30/12/2011 passed by ld. CIT(A)-11, Mumbai, for the quantum of assessment passed u/s 143(3) read with section 147 for the assessment year 2006-07. The assessee has challenged the impugned order on following grounds of appeal. i. On facts and in circumstances of the case an in law, the Commissioner of Income-tax(Appeals)-11, Mumbai, (hereinafter referred to as 'the CIT(A) erred in confirming the reopening of the case under Section 147 of the Income-tax Act, 1961, ('the Act') by the Assessing Officer, having failed to appreciate that there was no income which has escaped assessment. Your ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Short term capital gain 47,072,479 Less, Short term Capital loss (66,339,816) Balance Short term capital loss to be carried forward (19,267,337) The return of income was accepted vide intimation dated 11/07/2007 issued u/s 143(1). Thereafter, a notice u/s 148 was issued on 11/02/2010 and the assessment was sought to be reopened on following reasons:- Scrutiny of records revealed that i) The loss adjusted of Rs.6,63,39,816/- is due to buying and selling of securities without taking delivery as the shares were acquired by the assessee on 29/03/2006 and sold on 30/03/2006. ii) Though FIIs are allowed to participate in investment activities are not permitted to carry on trading activities. Further, the loss earned on trading activities is taxable as income from other sources and not as capital gains/capital loss. iii) Therefore, the loss earned on trading activities is not eligible for set off against the STCG. Failure to treat the correct nature of income has resulted in escapement of income involving tax effect of Rs.52,381,530/-. Accordingly, correct ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of treaty would not be applicable to the assessee as it has not sought the benefit under the treaty and such a loss should set off against business income as per section 70 of the Income-tax Act; the ld. CIT(A) held that the loss of Rs.6,62,84,686/- incurred from trading in ETD can be set off against income under the head income from capital gains as per section 71(2) and further as per section 70(2) unabsorbed business loss could be carried forward to be set off against future business income in subsequent years. 7. From the perusal of order of the Tribunal in assessee's own case, it is noticed that the similar ground was raised by the assessee in the AY. 2007-08. wherein, the Tribunal allowed the assessee's ground after following the decision of the coordinate bench in the case of LG Asian Plus ltd. vs ADIT(International Taxation) -3(2) reported in (2011) 46 SOT 159. It is further noticed that in assessee's own case on the account of Platinum Asia Fund and Platinum International Brand Fund the Tribunal in ITA No.2787 and 2788/Mum/2012 for the A.Y. 2006-07 has followed this decision and allowed the assessee's contention vide order dated 04/12/2013. The releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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, otherwise than from their transfer ), then no deduction shall be allowed to it under sections 28 to 44C or section 57 or Chapter VI-A of the Act. It is but natural that when a lower rate of tax has been provided in respect of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -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 FII receives any income in respect of securities or from the transfer of such securities, the same can be considered under sub-sec. (1) alone and sub-sec. (2)(b) cannot be invoked to construe it as `Business income . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and subsection (1) providing for the income from their transfer to be considered as long term or short term capital gain. 8.17. It is noticed that sec. 115AD falls in Chapter XII which deals with the determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ofRs.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. 9. Respectfully following the decision of the coordinate Bench of this Tribunal, we decide this issue in favour of the assessee and against the revenue. Accordingly, we hold that 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. 10. Since we have decided the nature of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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