S. 115AD: FII’s securities transactions’ profits not assessable as “business profits’

The assessee, a Foreign Institutional Investor (“FII”), suffered a loss of Rs. 41 crore on account of derivative transactions. The AO & CIT(A) relied on the AAR Ruling in Royal Bank of Canada 323 ITR 380 and held that as the said loss arose out speculative transactions, it had to be treated as a business loss and could not be set-off against STCG. On appeal by the assessee to the Tribunal HELD allowing the appeal:

Under the policy of the Central Government and the SEBI (FII) Regulations, 1995 a FII can only “invest” in securities and cannot do “business” in securities. S. 115AD also provides that all income arising to a FII from securities, whether from their retention or from their transfer, is taxable as a capital gain. This is also the view expressed in Press Note F. No. 5(13)SE/91-FIV dated 24.03.1994 issued by the Ministry of Finance. If the Revenue is permitted to make a distinction between the securities held by a FII by classifying them as a capital asset or as stock in trade, s. 115AD will become otiose. The result is that all income arising to a FII, including from dealings in derivatives has to be assessed as capital gains. The contrary view of the AAR in Royal Bank of Canada cannot be followed (LG Asian Plus Ltd 46 SOT 159 followed)