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TMI Blog2012 (12) TMI 1057X X X X Extracts X X X X X X X X Extracts X X X X ..... tu applying the provisions of the Treaty between India and Australia to put the Appellant into a disadvantageous position as compared to the provisions of the Act having failed to appreciate that the provisions of the treaty are applicable only to the extent that they are more beneficial than the provisions of the Act as per Section 90(2) of the Act. 3. Without prejudice to (1) above, net business loss from derivative transaction be set off against capital gains arising on sale of shares as per section 71 of the Act. 2. The assessee is a sub-account of the Foreign Institutional Investor (in short FII ) M/s Platinum Investment Management Ltd. registered under the Securities and Exchange Board of India (FII) Regulations, 1995. The only activity in which the assessee is involved is purchase and sale of securities in India and trading in derivatives. The assessee has filed its return of income for the assessment year under consideration on 23-7-2007 declaring nil income and claimed refund. The assessee has shown short term capital gain arising on sale of shares, short term capital gain arising from transactions in derivatives and short term capital loss from transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) has treated both as business profit and loss respectively but concurred with the view of the Assessing Officer with respect to the application of the provisions of the treaty for ignoring the loss arising from the transactions in derivatives amounting to ₹ 14,01,66,940/-. 5. Before us, learned AR of the assessee has advanced two fold arguments. The first leg of argument of the learned AR is regarding the categorization of the income arising on sale of shares and arising from transactions in derivatives. Learned AR has submitted that treating the capital loss arising from derivative transactions as business loss by the Assessing Officer is based on wrong facts as the Assessing Officer has considered as if the derivatives sold in one day whereas the actual fact is that the derivatives were sold on or before the various dates during the month and the same were closed out on the various dates by the subsequent purchase or closed out within the month. Learned AR has referred the details of the transactions of derivatives giving rise to the loss in question at page No.49 and further details as per the statement at page 65 to 69 of the Paper Book and submitted that the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred to the various clauses of the constitution of the Platinum Trust consolidated and submitted that the assessee is allowed for short sale and, therefore, by doing the derivative transactions as hedging against the investment cannot be treated as investment but the very nature of the transaction is speculative and, therefore, the Assessing Officer has rightly treated the same as business and the loss arising from the transaction is to be treated as business loss and not the capital loss. He has relied upon the Ruling of the Authority for Advance Rulings (Income Tax) in the case of Royal Bank of Canada, dated 22nd March, 2010 and submitted that an identical issue has been decided by the AAR by holding that the income arising from the derivatives would be in the nature of business profit and not capital gain. 7. In rebuttal, learned AR has submitted that as far as the aspect of short selling is concerned, the CIT(A) had dealt with the issue in para 2.51 and 2.54 of the impugned order and held that the transactions carried out by the assessee are not in the nature of short selling, therefore, there is no issue arising from the finding of the CIT(A) on this aspect. As regards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer, is to be taxed as per this section alone. Coming to income arising from the transfer of securities, it has been provided in section 115AD that it shall be charged as short-term or long-term capital gain, which depends upon the 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. inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpretation of sub-sections (1) and (2) of sec. 115AD. We want to make it clear that the question before us is not to determine whether a FII can have any business income or not. We are confined to determining whether the income from the transfer of securities would fall under sub-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) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ves‟ have been included in the definition of securities‟ for the purposes of this section, the income from derivatives shall also be considered as short-term or long-term capital gain depending upon the period of holding. If the viewpoint of the Department, to the effect that income from transfer of shares or debentures etc. should be considered as 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this section is : In sections 28 to 41 and in this section, unless the context otherwise requires- . Thereafter, six subsections have been given, of which sub-sec. (5) defines speculative transaction . It is, therefore, clear that sec. 43(5) defining speculative transaction‟ is relevant only in the context of income under the head `Profits and gains of business or profession‟. It rules out 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 of ₹ 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 ..... 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