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

ITA 2788/MUM/2012

• Counselvise Citation: 278819914 RSA 2012
• Duration Of Justice: 1 year(s) 7 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-12-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 27-11-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 25-04-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NARENDRA KUMAR
• Assessee Lawyers: F V IRANI
• Keywords: Capital asset; Business income; Advance ruling
• Section: 147; 28; 143(3); 43(5)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI BEFORE S/SHRI B.R.MITTAL,(JM) AND N.K.BILLAIYA (AM ) . . , . . , ./I.T.A.NO.2787/M/2012 ( / ASSESSMENT YEAR:200607) PLATINUM ASSET MANAGEMENT LTD, A/C PLATINUM ASIA FUND, C/O DELOITTE HASKINS & SELLS, 264-265, VASWANI CHAMBERS, DR.ANNIE BASANT ROAD, WORLI, MUMBAI-400030 / VS. DY. DIRECTO R OF INCOME TAX (INTERNATIONAL TAXATION) RANGE 4(2), MUMBAI. ./ ./PAN/GIR NO. : AAATP8273E ( ' / APPELLANT) .. ( ( ' / RESPONDENT) ./I.T.A.NO.2788/M/2012 ( / ASSESSMENT YEAR:200607) PLATINUM ASSET MANAGEMENT LTD. A/C PLATINUM INTERNATIONAL BRAND FUND, C/O DELOITTE HASKINS & SELLS, 264-265, VASWANI CHAMBERS, DR.ANNIE BASANT ROAD, WORLI, MUMBAI-400030 / VS. DY. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) RANGE 4(2), ROOM NO.23, 3 RD FLOOR, BWING, MITTAL COURT, NARIMAN POINT. MUMBAI. ./ ./PAN/GIR NO. : AAATP8273E ( ' / APPELLANT) .. ( ( ' / RESPONDENT) ' / APPELLANTS BY : SHRI F.V.IRANI ( ' * /RESPONDENTS BY : SHRI NARENDRA KUMAR * - / DATE OF HEARING : 27.11.2013 * - /DATE OF PRONOUNCEMENT : 04.12.2013 I.T.A.NO.2787/M/2012 I.T.A.NO.2788/M/2012 2 / O R D E R PER B.R.MITTAL, JM THESE APPEALS ARE FILED BY ASSESSEE AGAINST ORDER S OF LD. CIT(A), BOTH DATED 2.1.2012 RELATING TO ASSESSMENT YEAR 200607. 2. THE ASSESSEE IS A SUBACCOUNT OF THE FOREIGN INS TITUTIONAL INVESTOR (IN SHORT FII) REGISTERED IN AUSTRALIA AND OPERATING IN INDIA, REGISTERED WITH SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI). THE ACTIVITY OF AS SESSEE INVOLVED IN PURCHASE AND SALE OF SECURITIES IN INDIA AND TRADING IN DERIVATIVES. BOTH ASSESSEE(S) HAVE FILED RETURN (S) OF INCOME AS UNDER : A) THE ASSESSEE, SUBACCOUNT PLATINUM ASIA FUND (I TA NO.2787/MUM/2012) DECLARING TOTAL INCOME OF RS.NIL AND CLAIMED A REFU ND OF RS.1,45,96,129/. THE SAID ASSESSEE ALSO CLAIMED CARRIED FORWARD SHORT TERM CAPITAL LOSS OF RS.78,91,43,597/. HOWEVER, AO COMPLETED THE ASSESSMENT VIDE ORDER DAT ED 24.12.2010 U/S 143(3) R.W. SECTION 147 OF THE INCOME TAX ACT, 1961 (THE ACT) AT AN INCOME OF RS.93,26,84,307/ AFTER HOLDING THAT THE NET LOSS OF RS.1,72,18,27, 904/ ARISING FROM INDEX DERIVATIVE TRANSACTIONS AS BUSINESS LOSS AND ASSESSABLE UNDE R THE HEAD INCOME FROM BUSINESS OR PROFESSION AS AGAINST THE CLAIM OF ASSESSEE AS CAP ITAL LOSS. LD. CIT(A) ALSO CONFIRMED THE FINDINGS OF THE AO; B) SIMILARLY, IN RESPECT OF SUBACCOUNT PLATINUM INTERNATIONAL BRANDS FUND, (ITA NO.2788/MUM/2012) THE RETURN OF INCOME WAS FILED O N 25.7.2006 DECLARING TOTAL INCOME AT RS.NIL AND CLAIMED REFUND OF RS.16,02,8 81/. IT ALSO CLAIMED SHORT TERM CAPITAL LOSS OF RS.5,42,36,870/. HOWEVER, THE AO COMPLETED THE ASSESSMENT VIDE ORDER DATED 24.12.2010 PASSED U/S 143(3) R.W.S.147 OF THE ACT AT AN INCOME OF RS.17,62,78,618 /- BY TREATING NET LOSS OF RS.23,05,15,488/ ARISIN G FROM INDEX DERIVATIVE TRANSACTION AS BUSINESS LOSS ASSESSABLE UNDER THE HEAD BUSINESS OR PROFESSION AS AGAINST CAPITAL LOSS CLAIMED BY ASSE SSEE. THE LD. CIT(A) ALSO CONFIRMED THE ACTION OF AO. HENCE, BOTH ASSESSEES WHO ARE SUBACCOUNT OF FII M/S PLATINUM ASSET MANAGEMENT LTD, ARE IN APPEALS BEFORE THE TRIBUNAL TAKING THE FOLLOWING GROUNDS: I.T.A.NO.2787/M/2012 I.T.A.NO.2788/M/2012 3 3. I.T.A.NO.2787/M/2012 1. ON FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE COMMISSIONER OF INCOMETAX (APPEALS) 11, MUMBAI, ( HEREINAFTER REFERRED TO AS THE CIT(A)) ERRED IN CONFIRMING THE REOPEN ING OF THE CASE UNDER SECTION 147 OF THE INCOME TAX ACT, 1961(THE ACT) BY THE ASSESSING OFFICER HAVING FAILED TO APPRECIATE THAT THERE WAS NO INCOME WHICH HAS ESCAPED ASSESSMENT. YOUR APPELLANT SUBMITS THAT THE REASSESSMENT PROCE EDINGS BEING BAD IN LAW SHOULD BE QUASHED. 2. ON FACTS AND IN CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED CIT (A), MUMBAI, ERRED IN UPHOLDING THE ACTION OF T HE ASSESSING OFFICER (AO) IN TREATING THE NET LOSS OF RS 1,721,827,904/ ARISING FROM INDEX DERIVATIVE TRANSACTIONS AS BUSINESS LOSS AS AGAIN ST CAPITAL LOSS, AND ASSESSABLE UNDER THE HEAD INCOME FROM BUSINESS OR PROFESSION, HAVING FAILED TO APPRECIATE THAT THE DERIVATIVES ARE SECUR ITIES AND SO IN CASE OF YOUR APPELLANT BEING A FOREIGN INSTITUTIONAL INVEST OR, THE DERIVATIVES ARE CAPITAL ASSET AND NOT BUSINESS / TRADING ASSET. THE CIT (A) OUGHT TO HAVE HELD THAT THE LOSS RS. 1, 721,827,904/ ARISING FROM INDEX DERIVATIVE TRANSACTIONS ARE SHORTTERM C APITAL LOSS AND SO SHOULD BE ALLOWED SET OFF AGAINST SHORTTERM CAPITA L GAINS ARISING ON TRANSFER OF SHARES AS PER SECTION 70 OF THE ACT AND CARRY FORWARD UNABSORBED SHORTTERM CAPITAL LOSS ON DERIVATIVE TR ANSACTIONS AS PER SECTION 74 OF THE ACT. 3. WITHOUT PREJUDICE TO THE ABOVE, ON FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN HO LDING THAT IN ABSENCE OF BUSINESS CONNECTION IN INDIA OR IN ABSENCE OF PE RMANENT ESTABLISHMENT IN INDIA AS PER INDIA AUSTRALIA DOUBLE TAXATION AVO IDANCE AGREEMENT, THE BUSINESS LOSS OF RS. 1,721,827,904 ARISING ON TRANSFER OF DERIVATIVES CANNOT BE DETERMINED AND SO THE SAME IS NOT ALLOWAB LE AS SETOFF AGAINST THE CAPITAL GAINS ARISING ON SALE OF SHARES IN INDI A HAVING FAILED TO APPRECIATE THAT THE LOSS IS ARISING THROUGH THE TRA NSFER OF CAPITAL ASSET SITUATED IN INDIA AND / OR THE LOSS IS ARISING THRO UGH OR FROM SOURCE OF INCOME IN INDIA AND SO THE LOSS ARISING ON TRANSFER OF DERIVATIVES IS DETERMINABLE IN INDIA. THE CIT(A) OUGHT TO HAVE HELD THE BUSINESS LOSS OF RS 1,721,827,904 ARISING ON SALE OF DERIVATIVES CAN BE DETERMINED AN D SHOULD BE SET OFF AGAINST SHORTTERM CAPITAL GAINS OF RS. 921,955,751 AND LONGTERM CAPITAL GAINS OF RS 10,728,556 AND THE BALANCE LOSS OF RS.7 89,143,597 SHOULD BE ALLOWED TO BE CARRIED FORWARD TO SUBSEQUENT ASSESSM ENT YEARS. I.T.A.NO.2787/M/2012 I.T.A.NO.2788/M/2012 4 4. WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AN D IN THE CIRCUMSTANCES OF THE CASE, THE CIT(A) ERRED IN NOT ALLOWING SET OFF OF BUSINESS LOSS OF RS. 1,721,827,904 ARISING ON DERIV ATIVE TRANSACTIONS AGAINST CAPITAL GAINS ARISING ON SALE OF SHARES UND ER SECTION 71 OF THE ACT AND CARRY FORWARD OF BALANCE UNABSORBED BUSINESS LO SS AS PER SECTION 72 OF THE ACT IN VIEW OF THE PROVISIONS OF SECTION 90( 2) OF THE ACT 5. THE CIT(A) OUGHT TO HAVE HELD THE BUSINESS L OSS OF RS 1,721,827,904 ARISING ON SALE OF DERIVATIVES SHOULD BE SET OFF AGAINST SHORTTERM CAPITAL GAINS OF RS. 921,955,751 AND LON G TERM CAPITAL GAINS OF RS 10,728,556 AND THE BALANCE LOSS OF RS. 789,14 3,597 SHOULD BE ALLOWED TO BE CARRIED FORWARD TO SUBSEQUENT ASSESSM ENT YEARS. YOUR APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OM IT, SUBSTITUTE OR AMEND THE ABOVE GROUNDS OF APPEAL, AT ANY TIME BEFORE OR AT, THE TIME OF HEARING OF THE APPEAL, SO AS TO ENABLE THE HONBLE TRIBUNAL TO DECIDE THIS APPEAL ACCORDING TO LAW. I.T.A.NO.2788/M/2012 1. ON FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE COMMISSIONER OF INCOMETAX (APPEALS) 11, MUMBAI, ( HEREINAFTER REFERRED TO AS THE CIT(A)) ERRED IN CONFIRMING THE REOPEN ING OF THE CASE UNDER SECTION 147 OF THE INCOME TAX ACT, 1961(THE ACT) BY THE ASSESSING OFFICER HAVING FAILED TO APPRECIATE THAT THERE WAS NO INCOME WHICH HAS ESCAPED ASSESSMENT. YOUR APPELLANT SUBMITS THAT THE REASSESSMENT PROCE EDINGS BEING BAD IN LAW SHOULD BE QUASHED. 2. ON FACTS AND IN CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED CIT (A), MUMBAI, ERRED IN UPHOLDING THE ACTION OF T HE ASSESSING OFFICER (AO) IN TREATING THE NET LOSS OF RS 230,515,488/ A RISING FROM INDEX DERIVATIVE TRANSACTIONS AS BUSINESS LOSS AS AGAIN ST CAPITAL LOSS, AND ASSESSABLE UNDER THE HEAD INCOME FROM BUSINESS OR PROFESSION, HAVING FAILED TO APPRECIATE THAT THE DERIVATIVES ARE SECUR ITIES AND SO IN CASE OF YOUR APPELLANT BEING A FOREIGN INSTITUTIONAL INVEST OR, THE DERIVATIVES ARE CAPITAL ASSET AND NOT BUSINESS / TRADING ASSET. THE CIT (A) OUGHT TO HAVE HELD THAT THE LOSS RS.230 ,515,488/ ARISING FROM INDEX DERIVATIVE TRANSACTIONS ARE SHORTTERM C APITAL LOSS AND SO SHOULD BE ALLOWED SET OFF AGAINST SHORTTERM CAPITA L GAINS ARISING ON TRANSFER OF SHARES AS PER SECTION 70 OF THE ACT AND CARRY FORWARD UNABSORBED SHORTTERM CAPITAL LOSS ON DERIVATIVE TR ANSACTIONS AS PER SECTION 74 OF THE ACT. I.T.A.NO.2787/M/2012 I.T.A.NO.2788/M/2012 5 3. WITHOUT PREJUDICE TO THE ABOVE, ON FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN HO LDING THAT IN ABSENCE OF BUSINESS LOSS OF RS. 230,515,488/ ARISING ON TRANSFER OF DERIVATIVES CANNOT BE DETERMINED AND SO THE SAME IS NOT ALLOWAB LE AS SETOFF AGAINST THE CAPITAL GAINS ARISING ON SALE OF SHARES IN INDI A HAVING FAILED TO APPRECIATE THAT THE LOSS IS ARISING THROUGH THE TRA NSFER OF CAPITAL ASSET SITUATED IN INDIA AND / OR THE LOSS IS ARISING THRO UGH OR FROM SOURCE OF INCOME IN INDIA AND SO THE LOSS ARISING ON TRANSFER OF DERIVATIVES IS DETERMINABLE IN INDIA. THE CIT(A) OUGHT TO HAVE HELD THE BUSINESS LOSS OF RS 230,515,488 ARISING ON SALE OF DERIVATIVES CAN BE DETERMINED AN D SHOULD BE SET OFF AGAINST SHORTTERM CAPITAL GAINS OF RS. 165,781,163 AND LONGTERM CAPITAL GAINS OF RS 10,497,455 AND THE BALANCE LOSS OF RS.5 4,236,870/ SHOULD BE ALLOWED TO BE CARRIED FORWARD TO SUBSEQUENT ASSESSM ENT YEARS. 4. WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AN D IN THE CIRCUMSTANCES OF THE CASE, THE CIT(A) ERRED IN NOT ALLOWING SET OFF OF BUSINESS LOSS OF RS. 230,515,488/ ARISING ON DERIV ATIVE TRANSACTIONS AGAINST CAPITAL GAINS ARISING ON SALE OF SHARES UND ER SECTION 71 OF THE ACT AND CARRY FORWARD OF BALANCE UNABSORBED BUSINESS LO SS AS PER SECTION 72 OF THE ACT IN VIEW OF THE PROVISIONS OF SECTION 90( 2) OF THE ACT THE CIT(A) OUGHT TO HAVE HELD THE BUSINESS LOSS OF RS 230,515,488 ARISING ON SALE OF DERIVATIVES SHOULD BE SET OFF AG AINST SHORTTERM CAPITAL GAINS OF RS. 165,781,163 AND LONG TERM CAPITAL GAI NS OF RS 10,497,455 AND THE BALANCE LOSS OF RS. 54,236,870/ SHOULD BE ALLOWED TO BE CARRIED FORWARD TO SUBSEQUENT ASSESSMENT YEARS. YOUR APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OM IT, SUBSTITUTE OR AMEND THE ABOVE GROUNDS OF APPEAL, AT ANY TIME BEFORE OR AT, THE TIME OF HEARING OF THE APPEAL, SO AS TO ENABLE THE HONBLE TRIBUNAL TO DECIDE THIS APPEAL ACCORDING TO LAW. 3. AT THE TIME OF HEARING, THE LD. AR OF THE ASSESS EE SUBMITTED THAT GROUND NO.1 OF BOTH THE APPEALS IS NOT PRESSED FOR. HENCE, GROUN D NO.1 OF BOTH APPEALS IS REJECTED AS NOT PRESSED. 4 . THE LD. AR OF THE ASSESSEE SUBMITTED THAT GROUND N O.2 IN BOTH THE APPEALS IS COVERED BY THE DECISION OF PLATINUM INVESTMENT MANA GEMENT LTD., A/C PLATINUM INTERNATIONAL FUND V/S DDIT(INTERNATIONAL TAXATION) IN ITA NO.3598/MUM/2010 (AY 200708)ORDER DATED 5.12.2012 IN FAVOUR OF THE ASS ESSEE. HE FILED A COPY OF THE SAID ORDER TO SUBSTANTIATE HIS SUBMISSIONS. I.T.A.NO.2787/M/2012 I.T.A.NO.2788/M/2012 6 5. ON THE OTHER HAND, LD. DR RELIED ON THE O RDER OF LD. CIT(A). HE FURTHER SUBMITTED THAT THE HONBLE JURISDICTIONAL HIGH COU RT 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 SHAR ES OR COMMODITY AND PERIODICALLY OR ULTIMATELY SETTLED. HENCE, TRANSACTIONS IN RESPECT OF DERIVATIVE IS A SPECULATIVE TRANSACTION. HE SUBMITTED THAT PRIOR TO AMENDMEN T MADE BY FINANCE ACT, 2005 IN SECTION 43(5) TRADING IN DERIVATIVE WAS A SPECULAT IVE TRANSACTION AND AFTER INSERTION OF CLAUSE (D) TO SUBSECTION 43(5) BY FINANCE ACT, 20 05 W.E.F. 1.4.2006, THE TRANSACTION IN RESPECT OF DERIVATIVE AT A RECOGNIZED STOCK EX CHANGE IS A BUSINESS TRANSACTION AND CANNOT BE CONSIDERED AS AN INVESTMENT. 6. IN REJOINDER, THE LD. AR SUBMITTED THAT TH E SAID CASE OF HONBLE 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 MA RKET AND THE INCOME ARISING FROM TRANSFER OF SECURITY IS TO BE CONSIDERED AS SHORT T ERM CAPITAL GAIN OR LONG TERM CAPITAL GAIN AS PER SECTION 115AD OF THE ACT. HE FURTHE R 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 SUBSECTION (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 COORDINATE 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 COORDINAT E BENCH IN THE CASE OF LG ASIAN PLUS LTD V/S ADIT (INTERNATIONAL TAXATION) (2011) 46 SOT 159 WAS ALSO CONSIDERED. 7. WE HAVE CAREFULLY CONSIDERED THE SUBMISSION S OF THE LD. REPRESENTATIVES OF THE PARTIES AND THE ORDERS OF AUTHORITIES BELOW. WE HA VE ALSO CONSIDERED THE EARLIER ORDERS OF THE TRIBUNAL, (SUPRA) RELIED UPON BY LD. AR AND ALSO THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF BHARAT R UIA(SUPRA). WE AGREE WITH LD. AR THAT THE DECISION RELIED UPON BY LD.DR IS NOT RELEV ANT TO THE FACTS OF THE FACT OF THE CASE I.T.A.NO.2787/M/2012 I.T.A.NO.2788/M/2012 7 BEFORE US. FURTHER, THE ISSUE IS SQUARELY COVERED BY THE DECISION OF THE TRIBUNAL, ORDER DATED 5.12.2012 WHICH HAS BEEN DECIDED BY CO NSIDERING THE EARLIER ORDER OF CO ORDINATE BENCH IN THE CASE OF LG ASIAN PLUS LTD(SU PRA). WE CONSIDER IT PRUDENT TO REPRODUCE PARAGRAPH 8 OF THE SAID ORDER OF THE TRI BUNAL 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 OBSERVA TION 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/C LOSED 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 6569 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 PART Y TO THE DECISION. THOUGH THE RULING OF THE AUTHORITY FOR ADVANCE RULING HAS A PE RSUASIVE VALUE, HOWEVER, WHEN A DIRECT DECISION OF THE COORDINATE BENCH OF T HIS 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 AN D DECIDED THE ISSUE AFTER A DETAIL AND ELABORATE DISCUSSION OF THE RELEVANT PRO VISIONS AND ASPECT RELATING TO THE TRANSACTIONS OF DERIVATIVES BY FII. THE RELEVAN T 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 I N RESPECT OF SECURITIES AND INCOME FROM TRANSFER OF SECURITIES HAS BEEN MAD E THE SUBJECT MATTER OF SEC. 115AD. AS PER THIS PROVISION, THE IN COME ARISING FROM THE TRANSFER OF SUCH SECURITIES IS TO BE CONSIDERED AS SHORTTERM OR LONGTERM 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 TH E MEMORANDUM EXPLAINING THIS PROVISIONS OF THE FINANCE BILL, 199 3, IT IS VISIBLE THAT A FII IS ALLOWED TO INVEST ONLY IN THE `SECURITIES AND F URTHER THE INCOME FROM SECURITIES, EITHER FROM THEIR RETENTION OR FROM THE IR TRANSFER, IS TO BE TAXED AS PER THIS SECTION ALONE. COMING TO INCOME A RISING FROM THE TRANSFER OF SECURITIES, IT HAS BEEN PROVIDED IN SEC TION 115AD THAT IT SHALL BE CHARGED AS SHORTTERM OR LONGTERM 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 `SECURIT IES. 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 W HICH FOLLOWS IS THAT TAX SHOULD BE CHARGED ON INCOME ARISING FROM TRANSF ER OF SUCH SECURITIES AS PER THE PRESCRIPTION OF THIS SECTION ALONE, WHIC H REFERS TO INCOME BY I.T.A.NO.2787/M/2012 I.T.A.NO.2788/M/2012 8 WAY OF SHORT TERM OR LONG TERM CAPITAL GAINS. 8.13. THE LD. D.R. HAS RELIED ON SUBSECTION (2) OF SEC. 115AD FOR CONTENDING THAT THE EXISTENCE OF `BUSINESS INCOME FROM DEALING IN SECURITIES IS ALSO ENVISAGED. WE FIND THAT SUBSEC. (2) OF SEC. 115AD HAS TWO CLAUSES. CLAUSE (A) PROVIDES THAT WHERE THE GRO SS TOTAL INCOME OF A FII CONSISTS ONLY OF INCOME IN RESPECT OF SECURITY REFERRED TO IN CLAUSE (A) OF SUBSEC. (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 VIA 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 R ATE OF TAX IS FINAL AND THE ASSESSEE CANNOT CLAIM DOUBLE BENEFIT, FIRSTLY B Y BEING TAXED AT LOWER RATE AND SECONDLY BY CLAIMING NORMAL DEDUCTIONS ETC . AGAINST THIS INCOME. AS SEC. 115AD(2)(A) REFERS TO INCOME RECEIV ED IN RESPECT OF SECURITIES AND NOT FROM THEIR TRANSFER, THE SAME WO ULD HAVE NO APPLICATION TO THE INSTANT CASE. ACCORDING TO CLAUS E (B) OF SUBSEC. (2) OF SEC. 115AD, WHERE THE GROSS TOTAL INCOME INCLUDES A NY INCOME REFERRED TO IN CLAUSE (A) OR CLAUSE (B) OF SUBSEC. (1) (I.E . INCOME RECEIVED IN RESPECT OF SECURITIES BY EITHER RETAINING THEM OR F ROM THEIR TRANSFER), THEN THE GROSS TOTAL INCOME SHALL BE REDUCED BY THE AMOUNT OF SUCH INCOME AND THE DEDUCTION UNDER CHAPTER VIA SHALL B E ALLOWED AS IF THE GROSS TOTAL INCOME SO REDUCED IS THE GROSS TOTAL IN COME OF THE FII. A PLAIN READING OF SUBSEC. (2) MAKES IT MANIFEST THA T THE GROSS TOTAL INCOME OF A FII MAY INCLUDE INCOME OTHER THAN THAT RECEIVED IN RESPECT OF SECURITIES OR FROM THE TRANSFER OF SUCH SECURITI ES. THE EMPHASIS OF THE LD. DR IS ON THIS PART OF THE PROVISION TO BRING HO ME THE POINT THAT A FII MAY ALSO HAVE `BUSINESS INCOME ARISING FROM THE TR ANSFER OF SECURITIES. THE ARGUMENT IS THAT A FII MAY HAVE INCOME FROM SEC URITIES AS FALLING UNDER THE HEAD `CAPITAL GAINS, WHICH IS COVERED UN DER 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 BEH IND 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 VIA 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 P OSSIBLE THAT A FII MAY DEPOSIT ITS SURPLUS FUNDS IN BANKS RESULTING INTO I NTEREST INCOME. SUCH INTEREST INCOME, WHICH SHALL NOT FALL UNDER SUBSEC . (1) OF SEC. 115AD, SHALL CONSTITUTE PART OF THE GROSS TOTAL INCOME. IT IS A SIMPLE AND PLAIN INTERPRETATION OF SUBSECTIONS (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 CON FINED TO DETERMINING WHETHER THE INCOME FROM THE TRANSFER OF SECURITIES WOULD FALL UNDER SUBSECTION (1) OR (2). IF IT IS PRESUME D AS A HYPOTHETICAL CASE THAT A FII MAY ALSO HAVE ANY BUSINESS ACTIVITY, WHE THER LEGAL OR ILLEGAL, THEN THE INCOME FROM SUCH ACTIVITY SHALL BE CONSIDE RED AS `BUSINESS I.T.A.NO.2787/M/2012 I.T.A.NO.2788/M/2012 9 INCOME COVERED UNDER SUBSECTION (2)(B). THE ONLY EMBARGO AGAINST THE ABOVE PRESUMPTION IS THAT THE BUSINESS SHOULD NOT B E THAT OF DEALING IN `SECURITIES. ONCE THERE IS A SPECIAL PROVISION SLI CING AWAY THE INCOME TO A FII FROM THE TRANSFER OF `SECURITIES FROM THE OT HER INCOME, IT HAS TO FIND ITS HOME ONLY UNDER SUBSECTION (1)(B), IRRESP ECTIVE 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. 11 5AD, THEN THIS PROVISION WILL BECOME OTIOSE. IN OUR CONSIDERED OPINION IF A FII RECEIVES ANY INCOME IN RESPECT OF SECURITIES OR FROM THE TRANSFE R OF SUCH SECURITIES, THE SAME CAN BE CONSIDERED UNDER SUBSEC. (1) ALONE AND SUBSEC. (2)(B) CANNOT BE INVOKED TO CONSTRUE IT AS `BUSINES S INCOME . 8.14. THE POSITION HAS BEEN CLARIFIED BY WAY OF A P RESS NOTE : F NO. 5(13)SE/91FIV DATED 24.03.1994 ISSUED BY THE MINIS TRY 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 IN VESTORS FROM SECURITIES OR CAPITAL GAINS ARISING FROM THEIR TRANSFER, FOR T HE PRESENT, SHALL BE AS UNDER: (I) THE INCOME RECEIVED IN RESPECT OF SECURITIES (OTHER THAN UNITS OF OFFSHORE FUNDS COVERED BY SECTION 115AB OF THE INC OMETAX ACT) IS TO BE TAXED AT THE RATE OF 20%; (II) INCOME BY WAY LONGTERM CAPITAL GAINS ARISING FROM THE TRANSFER OF THE SAID SECURITIES IS TO BE TAXED AT THE RATE O F 10%; (III) INCOME BY WAY OF SHORTTERM CAPITAL GAINS ARISING F ROM THE TRANSFER OF THE SAID SECURITIES IS TO BE TAXED AT T HE RATE OF 30%; (IV) THE RATES OF INCOMETAX AS AFORESAID WILL APPLY ON THE GROSS INCOME SPECIFIED ABOVE WITHOUT ALLOWING FOR ANY DED UCTION UNDER SECTIONS 28 TO 44C, 57 AND CHAPTER VIA OF TH E INCOMETAX ACT. 2. THE EXPRESSION FOREIGN INSTITUTIONAL INVESTOR HAS BEEN DEFINED IN SECTION 115AD OF THE INCOME TAX ACT TO MEAN SUCH IN VESTORS AS THE CENTRAL GOVERNMENT MAY, BY NOTIFICATION IN THE OFFI CIAL GAZETTE, SPECIFY IN THIS BEHALF. THE FIIS AS ARE REGISTERED WITH THE SECURITIES AND EXCHANGE BOARD OF INDIA WILL BE AUTOMATICALLY NOTIF IED BY THE CENTRAL GOVERNMENT FOR THE PURPOSE OF SECTION 115AD. 8.15. FROM THE ABOVE PRESS NOTE, IT IS ABUNDANTLY CLEAR THAT FIIS HAVE B EEN CONSIDERED AS INVESTORS (AND NOT AS TRADERS). SECONDLY, INCOME FROM TRANSFER OF SECURITIES HAS BEEN VIEWED AS CHARGEABLE TO TAX UND ER THE HEAD `CAPITAL GAINS AS LONGTERM OR SHORTTERM CAPITAL GAIN DEPE NDING UPON THE PERIOD FOR WHICH SUCH SECURITIES ARE HELD. I.T.A.NO.2787/M/2012 I.T.A.NO.2788/M/2012 10 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 CONSIDERE D AS SHORTTERM OR LONGTERM 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 DERIVATIV ES SHALL ALSO BE CONSIDERED AS SHORTTERM OR LONGTERM CAPITAL GAIN DEPENDING UPON THE PERIOD OF HOLDING. IF THE VIEWPOINT OF THE DEPARTME NT, TO THE EFFECT THAT INCOME FROM TRANSFER OF SHARES OR DEBENTURES ETC. S HOULD BE CONSIDERED AS SHORTTERM OR LONGTERM CAPITAL GAIN (AS HAS BEE N ACCEPTED BY THE AO IN THE INSTANT CASE) BUT THAT FROM DERIVATIVES SHOU LD BE CONSIDERED AS `BUSINESS INCOME (SPECULATION BUSINESS), THEN IT W OULD MEAN CONSIDERING SHARES AND DEBENTURE ETC. AS DISTINCT F ROM 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 WHI CH IT SIMPLY MADE ONLY INVESTMENT IN SECURITIES AND THERE IS NOTHING OF THE SORT OF TRADING. ALTHOUGH IN COMMON PARLANCE, THE SHARES OR DEBENTUR ES ETC. ARE DISTINCT FROM DERIVATIVES, AND THEIR TAXATION MAY ALSO DIFFE R 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 SEC URITIES FOR THE PURPOSE OF SEC. 115AD AND SUBSECTION (1) PROVIDING FOR THE INCOME FROM THEIR TRANSFER TO BE CONSIDERED AS LONG TERM OR SHORT TER M CAPITAL GAIN. 8.17. IT IS NOTICED THAT SEC. 115AD FALLS IN CHAPTE R XII WHICH DEALS WITH THE DETERMINATION OF TAX IN CERTAIN SPECIAL CASES. THIS CHAPTER CONSISTS OF SECTIONS 110 TO 115BBC. EACH SECTION CONTAINS SP ECIAL 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 PRES CRIPTION 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 OTHE R WORDS, IF THERE ARE TWO CONFLICTING PROVISIONS IN AN ENACTMENT, THE SPE CIAL PROVISIONS WILL PREVAIL AND THE SUBJECT MATTER COVERED IN SUCH A SP ECIAL PROVISION SHALL STAND EXCLUDED FROM THE SCOPE OF THE GENERAL PROVIS ION. THE HONBLE SUPREME COURT IN THE CASE OF BRITANNIA INDUSTRIES L TD. 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 PRO VISION 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 INCLUDE D UNDER SEC. 115AD(1)(B) TO BE CATEGORIZED AS SHORTTERM OR LONGTERM CAPITAL G AIN DEPENDING UPON THE I.T.A.NO.2787/M/2012 I.T.A.NO.2788/M/2012 11 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 BUSINESS OR PR OFESSION. 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 W HOSE 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 NONINDEX BASED DERIVATI VES BE TREATED AS BUSINESS INCOME, WHETHER SPECULATIVE OR NONSPECUL ATIVE. THE IMPUGNED ORDER IS, THEREFORE, SET ASIDE BY HOLDING THAT INCOME FRO M DERIVATIVE TRANSACTION RESULTING INTO LOSS OF RS.11.27 CRORES IS TO BE CON SIDERED AS SHORTTERM CAPITAL LOSS ON THE SALE OF SECURITIES WHICH IS ELIGIBLE FO R ADJUSTMENT AGAINST SHORTTERM CAPITAL GAINS ARISING FROM THE SALE OF SHARES. IN VIEW OF ABOVE ORDER AND RESPECTFULLY FOLLOWING T HE DECISION OF COORDINATE BENCH OF THE TRIBUN AL (SUPRA), WE DECIDE GROUND NO.2 OF THE APPEAL IN FAVOUR OF ASSESSEE. ACCORDINGLY, WE HOLD THAT THE INCOME ARISING FROM T RANSACTION IN DERIVATIVE BY ASSESSEE(S), BEING SUBACCOUNT FII CANNOT BE TREAT ED AS BUSINESS PROFIT OR LOSS. 8. HENCE, GROUND NO.2 IS DECIDED IN FAVOUR OF ASSESSEE IN BOTH THE APPEALS. 9. AT THE TIME OF HEARING, IT WAS SUBMITT ED THAT IF GROUND NO.2 IS DECIDED IN FAVOUR OF ASSESSEE, THE GROUND NOS.3 TO 5 IN APPEA L NO.2787/MUM/2012 AND GROUND NOS.3 AND 4 IN APPEAL NO.2788/MUM/2012 BECOME INFR UCTUOUS AND NO NEED TO BE ADJUDICATED. SINCE, WE HAVE DECIDED THE NATURE O F TRANSACTION A S AN INVESTMENT AND PROFIT AND LOSS HAS TO BE CONSIDERED AS CAPITA L PROFIT OR LOSS, GROUND NOS 3 TO 5 OF APPEAL NO.2787/MUM/2012 AND GROUND NOS. 3 AND 4 IN APPEAL NO.2788/MUM/2012 I.T.A.NO.2787/M/2012 I.T.A.NO.2788/M/2012 12 HAVE BECOME INFRUCTUOUS. 10. IN THE RESULT, BOTH THE APPEALS OF ASSESSEE ARE ALLOWED IN PART. ORDER PRONOUNCED IN THE OPEN COURT ON 4TH DAY OF DECEMBER 2013 * 1 2 4TH DAY OF DECEMBER, 2013 * SD SD ( . . /N.K.BILLAIYA ) ( . . /B.R.MITTAL) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; 2 DATED 04/12/2013 . . ./ SRL , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. ' / THE APPELLANT 2. ( ' / THE RESPONDENT. 3. > ( ) / THE CIT(A) 4. > / CIT 5. ? (A , - A , / DR, ITAT, MUMBAI 6. / GUARD FILE. / BY ORDER, TRUE COPY (ASSTT. REGISTRAR) - A , /ITAT, MUMBAI