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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 ..... circumstances of the case and in law, the learned Commissioner of Income-tax(Appeal)['CIT(A)'], Mumbai, erred in upholding the action of the Assessing Officer (AO) in treating the loss arising from index derivative transactions as business loss having failed to appreciate that the derivatives are securities and so in case of your Appellant being a Foreign Institutional Investor, the derivatives are capital asset and not business/trading asset. Your Appellant submits that the loss of Rs.66,284,686 arising from index derivative transactions are short-term capital loss and so should be allowed set off against short-term capital gains arising on transfer of shares as per Section 70 of the Act and carry forward of unabsorbed short-term capital loss on derivative transactions as per Section 74 of the Act. 2. At the very outset, the ld. Counsel Shri F.V. Irani submitted that ground no.1 is not pressed and accordingly the same is dismissed as not pressed. 3. Regarding ground no.2, the ld. Counsel submitted that similar issue has been decided in favour of the assessee by the Tribunal in assessee's own case in ITA No.3598/Mum/2010 for the Assessment Year 2007-08, and also in d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 47,075,479/- Short term Capital loss arising on sale of equity (55,130) Net short term capital gains on equity 47,020,349/- Short term capital gain arising from Nil transactions in derivatives Short term capital loss arising from transactions in derivatives (66,284,686) Net short term capital gains on derivatives (66,284,686) Net short term capital loss on derivatives carried forward. (19,267,337) Thereafter, the assessee submitted a detail objection and explanation which has been dealt by the AO from pages 4 to 12 of the assessment order. However the Assessing Officer has rejected the assessee's contention and computed the assessed income at Rs.4,70,20,349/-, as short term capital gain and loss arising out of sale of derivatives of Rs.6,62,84,686/- was disallowed and was held that same would not allowed to be set off against the short term capital gain and further the assessee is not entitled to carry forward to subsequent years, as the assessee has no PE in India. 6. Before the CIT(A), besides raising objections on the reopening of assessment u/s 147, the assessee made very detail submission on merits of the issue involved, which has been dealt by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , we note that an identical issue has been considered by the coordinate Bench of this Tribunal in the case of LG Asian Plus Ltd. (supra), one of us the Judicial Member is party to the decision. Though the Ruling of the Authority for Advance Ruling has a persuasive value, however, when a direct decision of the coordinate Bench of this Tribunal is on the identical issue then as per the rule of uniformity, the same is binding on us in the absence of any contrary decision of Tribunal or the High Court. The coordinate Bench of this Tribunal has considered and decided the issue after a detail and elaborate discussion of the relevant provisions and aspect relating to the transactions of derivatives by FII. The relevant concluding part of the order from para 8.12 to 11 is as under :- 8.11. From the Memorandum explaining the provisions of the Finance Bill, it is palpable that the foreign institutional investors shall be allowed to invest in the country"s capital market. Income in respect of securities and income from transfer of securities has been made the subject matter of sec. 115AD. As per this provision, the income arising from the transfer of such securities is to be considered as sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... retaining them or from their transfer), then the gross total income shall be reduced by the amount of such income and the deduction under Chapter VI-A shall be allowed as if the gross total income so reduced is the gross total income of the FII. A plain reading of sub-sec. (2) makes it manifest that the gross total income of a FII may include income other than that received in respect of securities or from the transfer of such securities. The emphasis of the ld. DR is on this part of the provision to bring home the point that a FII may also have `Business income" arising from the transfer of securities. The argument is that a FII may have income from securities as falling under the head `Capital gains", which is covered under section 115AD(1)(b) and also business income, as comes out from sec. 115AD(2)(b). This argument though looks attractive at first flush, but does not stand scrutiny in depth. The rationale behind section 115AD(2)(b) is that the income of a FII, other than that arising from the holding or transfer of securities, should find its place in the total income and the deductions under Chapter VI-A be allowed by considering gross total income net of income received in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -term capital gains arising from the transfer of the said securities is to be taxed at the rate of 10%; (iii) Income by way of short-term capital gains arising from the transfer of the said securities is to be taxed at the rate of 30%; (iv) The rates of income-tax as aforesaid will apply on the gross income specified above without allowing for any deduction under sections 28 to 44C, 57 and Chapter VI-A of the Income tax Act. 2. The expression "Foreign Institutional Investor" has been defined in section 115AD of the Incometax Act to mean such investors as the Central Government may, by notification in the Official Gazette, specify in this behalf. The FIIs as are registered with the Securities and Exchange Board of India will be automatically notified by the Central Government for the purpose of section 115AD." 8.15. From the above Press Note, it is abundantly clear that FIIs have been considered as "investors" (and not as traders). Secondly, income from transfer of securities has been viewed as chargeable to tax under the head `capital gains" as long-term or short-term capital gain depending upon the period for which such securities are held. 8.16. In view of the above discussi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ords, if there are two conflicting provisions in an enactment, the special provisions will prevail and the subject matter covered in such a special provision shall stand excluded from the scope of the general provision. The Hon"ble Supreme Court in the case of Britannia Industries Ltd. vs. CIT (2005) 278 ITR 546 (SC) has held that expenditure towards rent, repairs, maintenance of guest house used in connection with business is to be disallowed u/s. 37(4) because this is a special provision overriding the general provision. 9. Coming back to our context, it is seen that income arising from the transfer of securities of the FIIs has been included under sec. 115AD(1)(b) to be categorized as short-term or long-term capital gain depending upon the period of holding. In such a situation, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee is treated as allowed.
9. In the department's appeal following grounds have been raised.
i. "On the facts and in the circumstances of the case and in alw, the Ld. CIT(A) erred in allowing the set off of loss ignoring the fact that without the existence of permanent establishment, the business income would not be assessable in India.
ii. On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in allowing the set off of loss ignoring the fact that the derivatives related transaction are routed through stock exchange without any actual delivery and thus any loss arising out of such transaction would be ineligible for set off against any other head of income".
10. Since, we have already held that the income arising from transactions in derivatives is to be assessed under the head capital gain or capital loss and not as business profit loss, then the ground raised by the department becomes infructuous, therefore, the grounds of appeal raised by the department is treated as dismissed.
11. In the result, appeal of the assessee is allowed whereas the department's appeal is dismissed.
Order pronounced in the open court on 26 /02/2014. X X X X Extracts X X X X X X X X Extracts X X X X
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