I.T.A.No.7317/M/2008
2
assessable under the head income from business or profession as against the claim
of assessee as capital loss. Ld. CIT(A) also confirmed the findings of the AO. Hence,
assessee who are sub-account of FII M/s Platinum Asset Management Ltd, is in
appeal before the Tribunal taking the following Grounds:
"1. The CIT(A) erred in holding the loss on derivative transactions as
`business loss'
1.1 The appellants submit that the issue in appeal before the CIT(A)
was that AO had erred in treating the loss on derivative transaction as
speculative loss;
1.2 The appellants submit that the CIT(A) having concluded that the
loss was not speculative, he erred in further holding that the derivative
instrument (i.e. forward contract) is not a capital asset;
1.3 The appellants submit that the CIT(A)'s decision that derivative
instrument is not a capital asset, in absence of a ground before him,
amounted to enhancement of assessment;
1.4 The CIT(A) also erred in holding that the loss on transfer of
derivative instrument was a business loss without giving an opportunity
as required under section 251(2) of the Income Tax Act, 1961;
1.5 The CIT(A) erred in enhancing the assessment without due notice
or opportunity to the appellants. The enhancement was bad in law and
therefore the order relating to the enhancement be quashed
2. In the facts and circumstances of the case, the ld. CIT(A) erred in holding
that a derivative is not a capital asset.
3. In the facts and circumstances of the case, the CIT(A) erred in holding
that loss incurred on transfer of a derivative asset is not a capital loss.
4. The ld. CIT(A) erred in holding that the loss incurred from business is not
assessable in India in absence of the appellant having a Permanent
Establishment.
5. The ld. CIT(A) also erred in holding that the business loss cannot be set
off against the income under the head capital gains."
3. The assessee vide its letter dated 2.2.2010 has taken additional ground as
Ground No.3A which reads as under :
"Without prejudice to Ground 1 to 3 above, the ld. CIT(A) erred in thrusting the
provisions of Double Taxation Avoidance Agreement (DTAA) between India and
Australia upon the appellant, overlooking and failing to appreciate the fact that
the appellant was entitled to be given the benefit of either the provisions of
domestic law or DTAA, whichever was more advantageous to the appellant"
I.T.A.No.7317/M/2008
3
4. The assessee vide letter dated 26.4.2013 has made a request to withdraw the
aforesaid additional ground. In view of above, we dismiss the additional Ground No.3A
as withdrawn.
5. The ld. AR of the assessee submitted that Ground Nos.1 (1.1 to 1.5) are
corollary to Ground No.2 and 3 of appeal. Therefore Ground No.1 need not to be
adjudicated upon. Ground Nos. 2 and 3. are covered by the decision of Platinum
Investment Management Ltd., A/c Platinum International Fund V/s DDIT(International
Taxation) in ITA No.3598/Mum/2010 (AY-2007-08)order dated 5.12.2012 in favour of
the assessee. He filed a copy of the said order to substantiate his submissions.
6. On the other hand, ld. DR relied on the order of ld. CIT(A). He further
submitted that the Hon'ble Jurisdictional High Court in the case of CIT vs. Bharat R.
Ruia (HUF) 337 ITR 452 (Bom) has held that the transaction in derivative are entered
into without taking any delivery of stock and shares or commodity and periodically or
ultimately settled. Hence, Transactions in respect of derivative is a speculative
transaction. He submitted that prior to amendment made by Finance Act, 2005 in
section 43(5) trading in derivative was a speculative transaction and after insertion of
clause (d) to sub-section 43(5) by Finance Act, 2005 w.e.f. 1.4.2006, the transaction
in respect of derivative at a recognized Stock Exchange is a business transaction and
cannot be considered as an investment.
7. In rejoinder, the ld. AR submitted that the said case of Hon'ble Bombay High
Court viz Bharat Ruia (supra) is not applicable to the facts and the issue involve as the
assessees are FII duly registered with SEBI. He further submitted that the
assessee is allowed to invest in Indian Capital Market and the income arising from
transfer of security is to be considered as short term capital gain or long term capital
gain as per section 115AD of the Act. He further submitted that assessee, FII is not
allowed to do business in the security market. He further submitted that derivative is
a security as per the clause (ia) to sub-section (h) of section 2 of The Securities
Contracts (Regulation) Act, 1956 with effect from 22.2.2000. The said fact is not
disputed by ld. DR that derivative " is a security" under The Securities Contracts
(Regulation) Act, 1956. The ld. AR submitted that the Co-ordinate Bench of the
Tribunal, has considered this aspect as well vide its earlier order dated 5.12.2012
(supra) in which the earlier decision of co-ordinate Bench in the case of LG Asian Plus
Ltd V/s ADIT (International Taxation) (2011) 46 SOT 159 was also considered.
I.T.A.No.7317/M/2008
4
8. We have carefully considered the submissions of the ld. Representatives of the
parties and the orders of authorities below. We have also considered the earlier orders
of the Tribunal, (supra) relied upon by ld. AR and also the decision of Hon'ble
Jurisdictional High Court in the case of Bharat Ruia(supra). We agree with ld. AR
that the decision relied upon by ld.DR is not relevant to the facts of the fact of the case
before us. Further, the issue is squarely covered by the decision of the Tribunal,
order dated 5.12.2012 which has been decided by considering the earlier order of co-
ordinate Bench in the case of LG Asian Plus Ltd(supra). We consider it prudent to
reproduce paragraph 8 of the said order of the Tribunal dated 5.12.2012 which read
as under :
"8. We have considered the rival submissions of the parties as well as
relevant material on record. As regards the observation of the Assessing Officer
that the derivative were sold on same day, we find that there is a factual error
on this point because the derivative were settled/closed on various dates, either
by subsequent purchases or on the expiry of period within the month. This fact
is clear from the details of page Nos.49 and 65-69 of paper book. On the issue
of capital gain or business income, 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 countrys 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 short-term or long-term
capital gain.
8.12. Thus, on a close scrutiny of the SEBI (FII) Regulations, 1995
together with section 115AD seen in the light of the Memorandum
explaining this provisions of the Finance Bill, 1993, it is visible that a FII
is allowed to invest only in the `securities and further the income from
securities, either from their retention or from their 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
I.T.A.No.7317/M/2008
5
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
income earned by a FII from securities, then that rate of tax is final and
the assessee cannot claim double benefit, firstly by being taxed at lower
rate and secondly by claiming normal deductions etc. against this
income. As sec. 115AD(2)(a) refers to income received in respect of
securities and not from their transfer, the same would have no
application to the instant case. According to clause (b) of sub-sec. (2) of
sec. 115AD, where the gross total income includes any income referred
to in clause (a) or clause (b) of sub-sec. (1) (i.e. income received in
respect of securities by either 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 respect of securities or arising
from the transfer of such securities. It is quite possible that a FII may
deposit its surplus funds in banks resulting into interest income. Such
interest income, which shall not fall under sub-sec. (1) of sec. 115AD,
shall constitute part of the gross total income. It is a simple and plain
interpretation 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
I.T.A.No.7317/M/2008
6
`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 .
8.14. The position has been clarified by way of a Press Note : F No.
5(13)SE/91-FIV dated 24.03.1994 issued by the Ministry of Finance,
Department of Economic Affairs (Investment Division) , New Delhi, the
relevant part of which is as under :
"The taxation of income of Foreign Institutional Investors from securities
or capital gains arising from their transfer, for the present, shall be as
under:-
(i) The income received in respect of securities (other than units of
off-shore funds covered by section 115AB of the Income-tax
Act) is to be taxed at the rate of 20%;
(ii) Income by way long-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 Incometax
Act.
2. The expression "Foreign Institutional Investor" has been defined in
section 115AD of the Income tax 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 discussion, it is out-and-out 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 and not as ,,business income. As the
`derivatives 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
I.T.A.No.7317/M/2008
7
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 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 determination of tax in certain special cases. This Chapter consists
of sections 110 to 115BBC. Each section contains special provisions
dealing with specific types of incomes for which a specified rate of tax is
provided. If a particular item of income is covered in any of these
sections, it shall be strictly governed by the prescription of that relevant
section alone. We are reminded of the legal maxim `Generalia
specialibus non derogant, which means that special provisions override
the general provisions. It is a well settled legal position that specific
provisions override the general provisions. In other words, 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 Honble
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 speculative or non-
speculative.
10. The heading of section 43 is : `Definitions of certain terms relevant to
income from profits and gains of business or profession. The opening part 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)
I.T.A.No.7317/M/2008
8
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 Rs.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."
In view of above order and respectfully following the decision of Co-ordinate Bench of
the Tribunal (supra), we decide Ground Nos.,2 and 3 of the appeal in favour of
assessee. Accordingly, we hold that the income arising from transaction in derivative
by assessee(s), being sub-account FII cannot be treated as business profit or loss.
9. Hence, Ground Nos.2 and 3 are decided in favour of assessee.
10. At the time of hearing, it was submitted that if ground Nos.2, and 3 are
decided in favour of assessee, the ground Nos.4 and 5 become infructuous and no
need to be adjudicated. Since, we have decided the nature of transaction as an
investment and profit and loss has to be considered as capital profit or loss, Ground
Nos. 4 and 5 of the Appeal have become infructuous.
11. In the result, the appeal of assessee is allowed in part.
Order pronounced in the open court on 4 th day of December 2013
4th day of December, 2013
Sd sd
(. . /N.K.BILLAIYA) (.. /B.R.MITTAL)
/ ACCOUNTANT MEMBER / JUDICIAL MEMBER
Mumbai;
Dated 4/12/2013
. ../ SRL , Sr. PS
I.T.A.No.7317/M/2008
9
/Copy of the Order forwarded to :
1. / The Appellant
2. / The Respondent.
3. () / The CIT(A)-
4. / CIT
5. , , / DR, ITAT,
Mumbai
6. / Guard file.
/ BY ORDER,
True copy
(Asstt. Registrar)
, /ITAT, Mumbai
|
