PLATINUM ASSET MANAGEMENT LTD, MUMBAI V. DDIT (IT) RG 4(2), MUMBAI

ITA 1790/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75789 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-02-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 24-09-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 15-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: F V IRANI
• Keywords: Reopening of assessment; Capital asset; Business income; Transactions in derivatives; Permanent establishment; Advance ruling; Tax effect
• Section: 43(5); 147; 148

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNALL BENCH, MUMB AI BEFORE SHRI R.C.SHARMA, AM AND SHRI AMIT SHUKLA, JM ITA NO. 1790/MUM/2012 ASSESSMENT YEAR-2006-07 M/S PLATINUM ASSET MANAGEMENT LTD. DELOITTE HASKINS & SELLS, INDIA BULLS FINANCE CENTRE, TOWER-3, 28 TH FLOOR, ELPHINSTONE MILL COMPOUND, SENAPATI BAPAT MARG, ELPHINSTONE(W), MUMBAI-400013 / VS. DEPUTY DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) RG.4(2), MUMBAI. ./ PAN :AABTP2971L ( / ASSESSEE ) .. ( / REVENUE ) ITA NO.2099/MUM/2012 ASSESSMENT YEAR-2006-07 DEPUTY DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) RG.4(2), MUMBAI. / VS. M/S.PLATINUM ASSET MANAGEMENT LTD. DELOITTE HASKINS & SELLS, INDIA BULLS FINANCE CENTRE, TOWER-3, 28 TH FLOOR, ELPHINSTONE MILL COMPOUND, SENAPATI BAPAT MARG, ELPHINSTONE(W), MUMBAI-400013 ./ PAN : AABTP2971L ( / REVENUE ) .. ( !' / ASSESSEE ) # $ / ASSESSEE BY : SHRI F.V.IRANI # $ / REVENUE BY : SMT. NEERAJA PRADHAN # % / DATE OF HEARING : 20/02/2014 &'( # % / DATE OF PRONOUNCEMENT : 26/02/2014 )* )* )* )* / ORDER +% * , +% * , +% * , +% * ,, ,, , - ) - ) - ) - ) . . . . / PER AMIT SHUKLA, J.M. THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AND R EVENUE AGAINST IMPUGNED ORDER DATED 30/12/2011 PASSED BY L D. CIT(A)-11, MUMBAI, FOR THE QUANTUM OF ASSESSMENT PASSED U/S 14 3(3) READ WITH SECTION 147 FOR THE ASSESSMENT YEAR 2006-07. THE ASSESSEE HAS CHALLENGED THE IMPUGNED ORDER ON FOLLOWING GROU NDS OF APPEAL. 2 ITA NO.1790 AND 2099/MUM/2012 & ORS. M/S PLATINUM ASSET MANAGEMENT LTD. I. ON FACTS AND IN CIRCUMSTANCES OF THE CASE AN IN LAW , THE COMMISSIONER OF INCOME-TAX(APPEALS)-11, MUMBAI, (HE REINAFTER 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 THA T THERE WAS NO INCOME WHICH HAS ESCAPED ASSESSMENT. YOUR APPELLANT SUBMITS THAT THE RE-ASSESSMENT PROCE EDINGS BEING BAD IN LAW SHOULD BE QUASHED. II. ON FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LA W, THE LEARNED COMMISSIONER OF INCOME-TAX(APPEAL)[CIT(A)], MUMBA I, ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER (AO) IN TREATING THE LOSS ARISING FROM INDEX DERIVATIVE TRANSACTIONS AS BUSIN ESS LOSS HAVING FAILED TO APPRECIATE THAT THE DERIVATIVES ARE SECUR ITIES AND SO IN CASE OF YOUR APPELLANT BEING A FOREIGN INSTITUTIONAL INV ESTOR, THE DERIVATIVES ARE CAPITAL ASSET AND NOT BUSINESS/TRAD ING ASSET. YOUR APPELLANT SUBMITS THAT THE LOSS OF RS.66,284,6 86 ARISING FROM INDEX DERIVATIVE TRANSACTIONS ARE SHORT-TERM CAPITA L LOSS AND SO SHOULD BE ALLOWED SET OFF AGAINST SHORT-TERM CAPITA L GAINS ARISING ON TRANSFER OF SHARES AS PER SECTION 70 OF THE ACT AND CARRY FORWARD OF UNABSORBED SHORT-TERM CAPITAL LOSS ON DERIVATIVE TR ANSACTIONS AS PER SECTION 74 OF THE ACT. 2. AT THE VERY OUTSET, THE LD. COUNSEL SHRI F.V. IR ANI 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 ASSESSEES OWN CASE IN ITA NO.3598/MUM/2010 FOR THE ASSESSMENT YEAR 2007-08, AND ALSO IN DIFFERENT SETS OF APPEAL OF THE ASSESSEE, THOUGH, FOR DIFFERENT FUNDS, FOR THE A.Y. 2006-07. THE FACTS AND ISSUE INVOLVED IN THIS CASE ALSO ARE EXACTLY THE SA ME. ON THE OTHER HAND, THE LD. DR STRONGLY RELIED UPON THE FINDINGS OF THE LD. CIT(A). 4. THE BRIEF FACTS OF THE CASE ARE THAT THE, ASSES SEE IS A FOREIGN INSTITUTION INVESTOR (FII), WHICH IS OPERATING IN I NDIA WITH THE APPROVAL OF STOCK EXCHANGE BOARD OF INDIA FII REGUL ATIONS, 1995. THE ONLY ACTIVITY IN WHICH THE ASSESSEE IS INVOLVED IS PURCHASE AND SALE OF SECURITIES AND TRADING IN DERIVATIVES IN I NDIA. THE SOURCE OF INCOME EARNED BY THE ASSESSEE ARE ARISING ON TRANSF ER OF SECURITIES AND TRADING OF SHARES WHICH HAS BEEN CLAIMED UNDER THE HEAD 3 ITA NO.1790 AND 2099/MUM/2012 & ORS. M/S PLATINUM ASSET MANAGEMENT LTD. CAPITAL GAINS. IT HAS FILED ITS RETURN OF INCOME D ECLARING NILL INCOME ON 25/07/2006. IN THE SAID RETURN OF INCOME , THE ASSESSEE HAS CLAIMED SHORT TERM CAPITAL LOSS OF RS.1,92,67,3 37/- WHICH WAS CLAIMED TO BE CARRY FORWARD TO THE SUBSEQUENT YEARS THE BREAK UP OF THE SHORT TERM CAPITAL LOSS WAS AS UNDER:- PARTICULARS RS. 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 D ATED 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 BUY ING AND SELLING OF SECURITIES WITHOUT TAKING DELIVERY AS THE SHARES WE RE ACQUIRED BY THE ASSESSEE ON 29/03/2006 AND SOLD ON 30/03/2006. II) THOUGH FIIS ARE ALLOWED TO PARTICIPATE IN INVESTMEN T 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 TAXABLE INCO ME IS WORKED OUT TO BE RS.4,70,72,470/-. 5. IN RESPONSE TO SHOW CAUSE NOTICE, THE ASSESSEE GAVE THE WORKING OF NET LOSS OF RS. 19,267,337/- ON ACCOUNT OF DERIVATIVE TRANSACTIONS IN THE FOLLOWING MANNER. PARTICULARS RS. RS. SHORT TERM CAPITAL GAIN ARISING ON SALE OF EQUITY 47,075,479/- SHORT TERM CAPITAL LOSS ARISING ON SALE OF EQUITY (55,130) NET SHORT TERM CAPITAL GAINS ON EQUITY 47,020,349/ - 4 ITA NO.1790 AND 2099/MUM/2012 & ORS. M/S PLATINUM ASSET MANAGEMENT LTD. SHORT TERM CAPITAL GAIN ARISING FROM TRANSACTIONS IN DERIVATIVES NIL SHORT TERM CAPITAL LOSS ARISING FROM TRANSACTIONS IN DERIVATIVES (66,284,686) NET SHORT TERM CAPITAL GAINS ON DERIVATIVES (66,28 4,686) NET SHORT TERM CAPITAL LOSS ON DERIVATIVES CARRIED FORWARD. (19,267,337) THEREAFTER, THE ASSESSEE SUBMITTED A DETAIL OBJECT ION AND EXPLANATION WHICH HAS BEEN DEALT BY THE AO FROM PAG ES 4 TO 12 OF THE ASSESSMENT ORDER. HOWEVER THE ASSESSING OFFICER HAS REJECTED THE ASSESSEES CONTENTION AND COMPUTED THE ASSESSED INCOME AT RS.4,70,20,349/-, AS SHORT TERM CAPITAL GAIN AND LO SS ARISING OUT OF SALE OF DERIVATIVES OF RS.6,62,84,686/- WAS DISALL OWED AND WAS HELD THAT SAME WOULD NOT ALLOWED TO BE SET OFF AGAINST T HE SHORT TERM CAPITAL GAIN AND FURTHER THE ASSESSEE IS NOT ENTITL ED TO CARRY FORWARD TO SUBSEQUENT YEARS, AS THE ASSESSEE HAS NO PE IN I NDIA. 6. BEFORE THE CIT(A), BESIDES RAISING OBJECTIONS ON THE REOPENING OF ASSESSMENT U/S 147, THE ASSESSEE MADE VERY DETAI L SUBMISSION ON MERITS OF THE ISSUE INVOLVED, WHICH HAS BEEN DEA LT BY THE LD. CIT(A) FROM PAGES 22 TO 60 OF THE APPELLATE ORDER. THE LD. CIT(A) AFTER DETAIL REASONING AS APPEARING FROM PARA 3.1.3 TO 3.2.3, HELD THAT THE LOSS COMPUTED BY THE ASSESSEE FROM TRADING IN EXCHANGE TRADED DERIVATIVES OF RS.6,62,84,686/-, IS ASSESSA BLE UNDER THE HEAD INCOME FROM BUSINESS OR PROFESSION AND NOT UND ER THE HEAD CAPITAL GAIN, ACCORDINGLY, THE ASSESSEES GROUND ON THIS SCORE WAS DISMISSED. AS REGARDS, ALTERNATIVE PLEA OF THE ASS ESSEE THAT THE AO HAS ERRED IN DISALLOWING THE BUSINESS LOSS TO BE SE T OFF AND CARRIED FORWARD IN THE ABSENCE OF PE IN INDIA, WITHOUT VERI FYING THAT THE PROVISIONS 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 TH E INCOME-TAX ACT; THE LD. CIT(A) HELD THAT THE LOSS OF RS.6,62,84,686 /- INCURRED FROM 5 ITA NO.1790 AND 2099/MUM/2012 & ORS. M/S PLATINUM ASSET MANAGEMENT LTD. TRADING IN ETD CAN BE SET OFF AGAINST INCOME UNDE R THE HEAD INCOME FROM CAPITAL GAINS AS PER SECTION 71(2) AND FURTHER AS PER SECTION 70(2) UNABSORBED BUSINESS LOSS COULD BE CAR RIED FORWARD TO BE SET OFF AGAINST FUTURE BUSINESS INCOME IN SUBSEQ UENT YEARS. 7. FROM THE PERUSAL OF ORDER OF THE TRIBUNAL IN AS SESSEES OWN CASE, IT IS NOTICED THAT THE SIMILAR GROUND WAS RAI SED BY THE ASSESSEE IN THE AY. 2007-08. WHEREIN, THE TRIBUNAL ALLOWED T HE ASSESSEES GROUND AFTER FOLLOWING THE DECISION OF THE COORDINA TE BENCH IN THE CASE OF LG ASIAN PLUS LTD. VS ADIT(INTERNATIONAL TA XATION) -3(2) REPORTED IN (2011) 46 SOT 159. IT IS FURTHER NOTIC ED THAT IN ASSESSEES OWN CASE ON THE ACCOUNT OF PLATINUM ASIA FUND AND PLATINUM INTERNATIONAL BRAND FUND THE TRIBUNAL IN I TA NO.2787 AND 2788/MUM/2012 FOR THE A.Y. 2006-07 HAS FOLLOWED THIS DECISION AND ALLOWED THE ASSESSEES CONTENTION VIDE ORDER DATED 04/12/2013. THE RELEVANT OBSERVATION AND FINDING O F THE TRIBUNAL IN THE A.Y.2007-08 ARE 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 SUB SEQUENT PURCHASES OR ON THE EXPIRY OF PERIOD WITHIN THE MONTH. THIS FACT IS CLEAR FROM TH E DETAILS OF PAGE NOS.49 AND 65-69 OF PAPER BOOK. ON THE ISSUE OF CAPITAL GAIN OR BUSINES S INCOME, WE NOTE THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE COORDINATE BENCH O F 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 PERSUASIV E VALUE, HOWEVER, WHEN A DIRECT DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL I S ON THE IDENTICAL ISSUE THEN AS PER THE RULE OF UNIFORMITY, THE SAME IS BINDING ON US IN TH E 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 DISC USSION 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 S HALL BE ALLOWED TO INVEST IN THE COUNTRY S CAPITAL MARKET. INCOME IN RESPECT OF SECURITIES A ND INCOME FROM TRANSFER OF SECURITIES HAS BEEN MADE THE SUBJECT MA TTER 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) R EGULATIONS, 1995 TOGETHER WITH SECTION 115AD SEEN IN THE LIGHT OF THE MEMORANDUM E XPLAINING 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 FRO M THEIR RETENTION OR 6 ITA NO.1790 AND 2099/MUM/2012 & ORS. M/S PLATINUM ASSET MANAGEMENT LTD. FROM THEIR TRANSFER, IS TO BE TAXED AS PER THIS SEC TION ALONE. COMING TO INCOME ARISING FROM THE TRANSFER OF SECURITIES, IT HAS BEE N PROVIDED IN SECTION 115AD THAT IT SHALL BE CHARGED AS SHORT-TERM OR LONG-TERM CAPI TAL 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 CONTAI NED IN SECTION 115AD, THE NATURAL COROLLARY WHICH FOLLOWS IS THAT TAX SHOULD BE CHARG ED 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 CLA USES. 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. INC OME RECEIVED IN RESPECT OF SECURITIES, OTHERWISE THAN FROM THEIR TRANSFER ), T HEN NO DEDUCTION SHALL BE ALLOWED TO IT UNDER SECTIONS 28 TO 44C OR SECTION 57 OR CHA PTER VI-A OF THE ACT. IT IS BUT NATURAL THAT WHEN A LOWER RATE OF TAX HAS BEEN PROV IDED 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 FR OM THEIR TRANSFER, THE SAME WOULD HAVE NO APPLICATION TO THE INSTANT CASE. ACCO RDING TO CLAUSE (B) OF SUB-SEC. (2) OF SEC. 115AD, WHERE THE GROSS TOTAL INCOME INC LUDES ANY INCOME REFERRED TO IN CLAUSE (A) OR CLAUSE (B) OF SUB-SEC. (1) (I.E. INCO ME RECEIVED IN RESPECT OF SECURITIES BY EITHER RETAINING THEM OR FROM THEIR TRANSFER), T HEN THE GROSS TOTAL INCOME SHALL BE REDUCED BY THE AMOUNT OF SUCH INCOME AND THE DED UCTION UNDER CHAPTER VI-A SHALL BE ALLOWED AS IF THE GROSS TOTAL INCOME SO RE DUCED IS THE GROSS TOTAL INCOME OF THE FII. A PLAIN READING OF SUB-SEC. (2) MAKES I T 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 ARGUM ENT IS THAT A FII MAY HAVE INCOME FROM SECURITIES AS FALLING UNDE R 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 LOO KS 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 F ROM THE HOLDING OR TRANSFER OF SECURITIES, SHOULD FIND ITS PLACE IN THE TOTAL INCO ME 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 TRANSF ER OF SUCH SECURITIES. IT IS QUITE POSSIBLE THAT A FII MAY DEPOSIT ITS SURPLUS FUNDS I N 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 INC OME. 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 WHE THER A FII CAN HAVE ANY BUSINESS INCOME OR NOT. WE ARE CONFINED TO DETERMIN ING WHETHER THE INCOME FROM THE TRANSFER OF SECURITIES WOULD FALL UNDER SUB-SEC TION (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 ACTIVIT Y 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 . 7 ITA NO.1790 AND 2099/MUM/2012 & ORS. M/S PLATINUM ASSET MANAGEMENT LTD. 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 ONL Y UNDER SUB- SECTION (1)(B), IRRESPECTIVE OF THE FACT THAT THE S ECURITIES ARE VIEWED AS `INVESTMENT OR `STOCK IN TRADE . IF THE REVENUE VENTURES TO MAKE A DISTINCTION BETWEEN SUCH SECURITIES AS CONSTITUTING CAPITAL ASS ET OR STOCK IN TRADE, WHICH IS NOT CONTEMPLATED BY THE CENTRAL GOVERNMENT AS IS EVIDEN T 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 R ECEIVES 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 P RESS NOTE : F NO. 5(13)SE/91-FIV DATED 24.03.1994 ISSUED BY THE MINISTRY OF FINANCE, DEPAR TMENT OF ECONOMIC AFFAIRS (INVESTMENT DIVISION) , NEW DELHI, THE RELEVANT PAR T OF WHICH IS AS UNDER : THE TAXATION OF INCOME OF FOREIGN INSTITUTIONAL IN VESTORS FROM SECURITIES OR CAPITAL GAINS ARISING FROM THEIR TRANSFER, FOR THE PRESENT, SHALL BE AS UNDER:- (I) THE INCOME RECEIVED IN RESPECT OF SECURITIES (O THER 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 ARI SING 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 APPL Y ON THE GROSS INCOME SPECIFIED ABOVE WITHOUT ALLOWING FOR ANY DEDUCTION UNDER SECT IONS 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 INV ESTORS AS THE CENTRAL GOVERNMENT MAY, BY NOTIFICATION IN THE OFFICIAL GAZ ETTE, SPECIFY IN THIS BEHALF. THE FIIS AS ARE REGISTERED WITH THE SECURIT IES 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). SEC ONDLY, 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-AN D-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 INCOME FROM TRANSFER OF SHARES OR DEBENTURES E TC. SHOULD BE CONSIDERED AS SHORT-TERM OR LONG-TERM CAPITAL GAIN (AS HAS BEE N ACCEPTED BY THE AO IN THE INSTANT CASE) BUT THAT FROM DERIVATIVES SHOULD BE C ONSIDERED AS `BUSINESS 8 ITA NO.1790 AND 2099/MUM/2012 & ORS. M/S PLATINUM ASSET MANAGEMENT LTD. INCOME (SPECULATION BUSINESS), THEN IT WOULD MEAN CONSIDE RING SHARES AND DEBENTURE ETC. AS DISTINCT FROM DERIVATIVES. MOREOV ER THERE IS NOTHING ON RECORD TO DEMONSTRATE THAT THE ASSESSEE WAS VISITED WITH ANY CONSEQUENCES AS PER REGULATION 7A FOR VIOLATION OF REGULATIONS 15 O R 16. IT SHOWS THAT THE REGULATIONS HAVE BEEN CONSCIENTIOUSLY FOLLOWED BY T HE 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 A LSO DIFFER IN THE CASE OF NON- FIIS, BUT SUCH DISTINCTION IS OBLITERATED IN THE CO NTEXT 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 TH E 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 CHAPT ER XII WHICH DEALS WITH THE DETERMINATION OF TAX IN CERTAIN SPECIAL CASES. THIS CHAPTER CONSISTS OF SECTIONS 110 TO 115BBC. EACH SECTION CONTAINS SPECIAL PROVIS IONS 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 PROVI SIONS. 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 SP ECIAL PROVISION SHALL STAND EXCLUDED FROM THE SCOPE OF THE GENERAL PROVISION. T HE HON BLE SUPREME COURT IN THE CASE OF BRITANNIA INDUSTRIES LTD. VS. CIT (2 005) 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. 3 7(4) BECAUSE THIS IS A SPECIAL PROVISION OVERRIDING THE GENERAL PROVISION. 9. COMING BACK TO OUR CONTEXT, IT IS SEEN THAT INC OME ARISING FROM THE TRANSFER OF SECURITIES OF THE FIIS HAS BEEN INCLUDE D 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 IMPER MISSIBLE 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 INCLUSIO N OF SUCH INCOME FROM THE TRANSFER OF SECURITIES IS HELD TO BE FALLING ONLY U NDER 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 PROFES SION . THE OPENING PART OF THIS SECTION IS : IN SECTIONS 28 TO 41 AND IN THIS SECTION, UNLESS THE CONTEXT OTHERWISE REQUIRES-. THEREAFTER, SIX SUBSECTIONS H AVE 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 BUSINES S 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 9 ITA NO.1790 AND 2099/MUM/2012 & ORS. M/S PLATINUM ASSET MANAGEMENT LTD. SECURITIES AS DEFINED IN EXPLANATION TO SEC. 115AD, INCOME FR OM WHOSE TRANSFER IS CONSIDERED AS SHORT TERM OR LONG TERM C APITAL GAINS. 11. WE, THEREFORE, HOLD THAT THE LD. CIT(A) WAS NOT JUSTIFI ED IN HOLDING THAT INCOME FROM INDEX BASED OR NON-INDEX BASED DERIVATIVES BE TREATED AS BUSINESS INCOME , WHETHER SPECULATIVE OR NONSPECULATIVE. THE IMPUGN ED ORDER IS, THEREFORE, SET ASIDE BY HOLDING THAT INCOME FROM DE RIVATIVE TRANSACTION RESULTING INTO LOSS OFRS.11.27 CRORES IS TO BE CONS IDERED AS SHORT-TERM CAPITAL LOSS ON THE SALE OF SECURITIES WHICH IS ELIGIBLE FO R ADJUSTMENT AGAINST SHORT- TERM CAPITAL GAINS ARISING FROM THE SALE OF SHARES. 9 . RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINA TE BENCH OF THIS TRIBUNAL, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE AND AGA INST THE REVENUE. ACCORDINGLY, WE HOLD THAT THE INCOME ARISING FROM THE TRANSACTION IN DER IVATIVES BY THE ASSESSEE, BEING FII, CANNOT BE TREATED AS BUSINESS PROFIT OR LOSS BUT TH E SAME HAS TO BE CAPITAL GAIN OR LOSS. 10 . SINCE WE HAVE DECIDED THE NATURE OF TRANSACTION AND TREATMENT OF THE SAME AS CAPITAL GAIN OR LOSS IN FAVOUR OF THE ASSESSEE, THE N WE DO NOT PROPOSE TO GO INTO THE ALTERNATIVE PLEA OF THE ASSESSEE REGARDING THRUSTING UPON THE PROVISIONS OF THE TREATY AND PUTTING THE ASSESSEE IN DISADVANTAGEOUS POSITIO N. 8. THUS, RESPECTFULLY FOLLOWING THE JUDICIAL PRECEDENC E IN ASSESSEES OWN CASE, WE HOLD THAT THE INCOME ARISIN G FROM THE TRANSACTIONS OF DERIVATIVES TO THE ASSESSEE, WHO IS A FII, CANNOT BE TREATED AS BUSINESS PROFIT OR BUSINESS LOSS, BUT SA ME HAS TO BE ASSESSED UNDER THE HEAD CAPITAL GAIN OR CAPITAL LOS S. THUS THE GROUND NO. 2 AS RAISED BY THE ASSESSEE IS TREATED A S ALLOWED. 9. IN THE DEPARTMENTS APPEAL FOLLOWING GROUNDS HAV E BEEN RAISED. I. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN ALW, THE LD. CIT(A) ERRED IN ALLOWING THE SET OFF OF LOSS IGNORI NG THE FACT THAT WITHOUT THE EXISTENCE OF PERMANENT ESTABLISHMENT, THE BUSIN ESS INCOME WOULD NOT BE ASSESSABLE IN INDIA. II. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LD. CIT(A) ERRED IN ALLOWING THE SET OFF OF LOSS IGNORI NG THE FACT THAT THE DERIVATIVES RELATED TRANSACTION ARE ROUTED THROUGH STOCK EXCHANGE WITHOUT ANY ACTUAL DELIVERY AND THUS ANY LOSS ARISI NG 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 ARI SING FROM TRANSACTIONS IN DERIVATIVES IS TO BE ASSESSED UNDER THE HEAD CAPITAL 10 ITA NO.1790 AND 2099/MUM/2012 & ORS. M/S PLATINUM ASSET MANAGEMENT LTD. GAIN OR CAPITAL LOSS AND NOT AS BUSINESS PROFIT LOS S, THEN THE GROUND RAISED BY THE DEPARTMENT BECOMES INFRUCTUOUS, THER EFORE, THE GROUNDS OF APPEAL RAISED BY THE DEPARTMENT IS TREAT ED AS DISMISSED. 11. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D WHEREAS THE DEPARTMENTS APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 2 6 /02/2014 . )* # &'( / 0) 26/02/2014 , ' # 1 2 SD/- SD/- R.C.SHARMA AMIT SHUKLA (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) MUMBAI , 0) 0) 0) 0) DATED: 26/02/2014 F{X~{T? P.S. )* # !-%+3 43(% / COPY OF THE ORDER FORWARDED TO : (1) - 56% / THE ASSESSEE; (2) / THE REVENUE; (3) 7() / THE CIT(A); (4) 7 / THE CIT, MUMBAI CITY CONCERNED; (5) 3 :1 !-%- , , / THE DR, ITAT, MUMBAI; (6) 1;5 < / GUARD FILE. '3% !-% / TRUE COPY )* / BY ORDER = / > / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI