PLATINUM INVESTMENT MANAGEMENT LTD A/C PLATINUM INTERNATIONAL LTD, MUMBAI V. DDIT (IT) 4(2), MUMBAI

ITA 3598/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9462 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-12-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 20-11-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 06-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: F V IRANI
• Keywords: Capital asset; Business income; Transfer pricing; Double taxation relief; International transaction; Transactions in derivatives; Advance ruling
• Section: 43(5); 28; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL L , BENCH MUMBAI BEFORE SHRI B.RAMAKOTAIAH , A M & SHRI VIJAYPAL RAO , J M ITA NO. 3598 / MUM/ 20 1 0 ( ASSESSMENT YEAR : 200 7 - 20 0 8 ) PLATINUM INVESTMENT MANAGEMENT LTD., A/C PLATINUM INTERNATIONAL FUND, C/O. S.B.MILL IMORIA & CO., 264 - 265, VASWANI CHAMBERS, DR. ANNIE BESANT ROAD, WORLI, MUMBAI - 400 018. VS. DDIT(INTERNATIONAL TAXATION) - 4(2), MUMBAI PAN NO. : AA BTP 2973 J ( APPELLANT ) .. ( RESPONDENT ) ASSESSEE BY : MR. F.V.IRANI REVENUE BY : MR. MAHESH KU MAR DATE OF HEARING : 20 TH NOV. , 2012 DATE OF PRONOUNCEMENT : 5 TH DEC .,2012 O R D E R PER VIJAYPAL RAO (JM) : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 29 - 3 - 2010 OF CIT(A) - 11, MUMBAI FOR THE ASSESSMENT YEAR 2007 - 08 ON THE FOLLOWING GROUNDS : - 1. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED COMMISSIONER OF INCOME - TAX (APPEAL) [CIT(A)] ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER (AO) IN TREATIN G THE NET LOSS ARISING ON DERIVATIVE TRANSACTION OF RS.41,42,03,363/ - AS BUSINESS LOSS AS AGAINST CAPITAL LOSS CLAIMED BY YOUR APPELLANT HAVING FAILED TO APPRECIATE THAT YOUR APPELLANT HAVE INVESTED IN DERIVATIVE TRANSACTIONS AND SO THE INCOME ARISING FROM DERIVATIVE TRANSACTION IS CAPITAL GAINS/LOSS AND NOT BUSINESS INCOME/LOSS. 2. WITHOUT PREJUDICE TO GROUND OF APPEAL NO.1 ABOVE, THE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE AO IN IGNORING THE BUSINESS LOSS, BY SUO MOTU 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 ITA NO. 3598 /20 1 0 2 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 PURCHA SE 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 AR ISING ON SALE OF SHARES, SHORT TERM CAPITAL GAIN ARISING FROM TRANSACTIONS IN DERIVATIVES AND SHORT TERM CAPITAL LOSS FROM TRANSACTIONS IN DERIVATIVES. THE DETAILS OF THE SAME ARE AS UNDER : - PARTICULARS RS. SHORT TERM CAPITAL GAIN ARISING ON SALE OF LIST ED SHARES 274,036,423 SHORT TERM CAPITAL GAIN ARISING FROM TRANSACTIONS IN DERIVATIVES 1,290,480,258 SHORT TERM CAPITAL LOSS ARISING FROM TRANSACTIONS IN DERIVATIVES (1,704,683,620) NET SHORT TERM CAPITAL LOSS (140,166,940) 3 . T HE ASSESSING OFFICER TREATED THE DERIVATIVES LOSS AS BUSINESS LOSS INSTEAD OF CAPITAL LOSS CLAIMED BY THE ASSESSEE. THUS , THE CAPITAL GAIN ON SALE OF SHARES AND CAPITAL GAIN ARISING FROM TRANSACTIONS IN DERIVATIVES HAVE BEEN ACCEPTED AS CAPITAL GAIN BUT THE LOSS ON DERIVATIVES TRANSACTIONS WAS TREATED AS BUSINESS LOSS AND ACCORDINGLY ITA NO. 3598 /20 1 0 3 BY APPLYING THE PROVISIONS OF DTA A , THE ASSESSING OFFICER HELD THAT SINCE THE ASSESSEE HAD NO PE IN INDIA, THE LOSS ARISING FROM BUSINESS IS NOT TAKEN INTO CONSIDERATION FOR DETERMINING THE TOTAL I NCOME OF THE ASSESSEE. 4 . THE ASSESSEE CHALLENGED THE ACTION OF THE ASSESSING OFFICER BEFORE THE CIT(A) AND CONTENDED THAT THE ASSESSEE IS PERMITTED ONLY TO INVEST IN THE SHARES AND DERIVATIVES BEING AN FII AS PER THE SEBI FII REGULATIONS, 1995 AND, THER EFORE, THE LOSS ARISING FROM TRANSACTION IN DERIVATIVES CANNOT BE TREATED AS BUSINESS LOSS. ALTERNATIVELY, THE ASSESSEE CONTENDED THAT THE ASSESSING OFFICER, SUO MOTU , CANNOT APPLY THE PROVISIONS OF TREATY TO PUT THE ASSESSEE INTO DISADVANTAGEOUS POSITION WHEN THE ASSESSEE HAD NOT CLAIMED THE BENEFIT UNDER THE TREATY. THEREFORE, THE ASSESSEE CONTENDED BEFORE THE CIT(A) THAT EVEN IF THE LOSS ARISING FROM TRANSACTIONS IN DERIVATIVES IS TREATED AS BUSINESS LOSS, THE SAME IS LIABLE TO BE SET OFF AGAINST THE BU SINESS INCOME FROM DERIVATIVE TRANSACTIONS AND BALANCE AGAINST THE SHORT TERM CAPITAL GAIN ARISING FROM SALE OF SHARES UNDER THE PROVISIONS OF SECTION 7 ( 1 ) OF THE INCOME TAX ACT. AS FAR AS THE PROFIT AND LOSS ARISING FROM DERIVATIVE TRANSACTIONS, THE CIT(A ) HAS HELD THAT BOTH SHOULD BE TREATED AS BUSINESS PROFIT AND LOSS AND THE LOSS OF DERIVATIVE TRANSACTION SHOULD BE SET OFF AGAINST BUSINESS PROFIT OF THE DERIVATIVE TRANSACTION. THEREFORE, ON THE ISSUE OF TREATING THE CAPITAL GAIN AND LOSS ARISING FROM DE RIVATIVE TRANSACTIONS, THE CIT(A) H AS TREATED BOTH AS BUSINESS PROFIT AND LOSS RESPECTIVELY BUT CONCURRED WITH THE VIEW OF THE ITA NO. 3598 /20 1 0 4 ASSESSING OFFICER WITH RESPECT TO THE APPLICATION OF THE PROVISIONS OF THE TREATY FOR IGNORING THE LOSS ARISING FROM THE TRANSACT IONS IN DERIVATIVES AMOUNTING TO RS. 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 F ROM 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 SO LD 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 WITHI N 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 ASSESSING OFFICER WRONGLY TAKEN THE HOLDING PERIOD AS NIL AND TREATED THAT THE DERIVATIVES WERE SOLD ON THE NEXT DATE WHEREAS THE DERIVATIVES ARE SETTLED/CLOSED ON THE PREDETERMINED DATES IN THE MONTH ITSELF. LEARNED AR OF THE ASSESSEE HAS SUBMITTED THAT AS FAR AS THE ISSUE OF TREATING THE DERIVATIVE TRANSACTION AS BUSINESS THE SAME IS COVERED BY THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF LG ASIAN PLUS LTD. VS ADIT(INTERNATIONAL TRANSACTION) - 3(2), REPORTED IN (2011) 46 SOT 159 AND CONTENDED THAT WHEN THE ISSUE IS COVERED ITA NO. 3598 /20 1 0 5 BY THE DECISION OF T HE COORDINATE BENCH OF THE TRIBUNAL THEN THE ORDER OF THE CIT(A) ON THIS ISSUE IS NOT SUSTAINABLE. ALTERNATIVELY, THE LEARNED AR OF THE ASSESSEE SUBMITTED THAT WHEN THE ASSESSEE HAS NOT CLAIMED THE BENEFIT UNDER THE DTAA (TREATY) THEN THE REVENUE AUTHORITI ES CANNOT THRUST UPON THE PROVISIONS OF THE TREATY TO PUT THE ASSESSEE INTO A DISADVANTAGEOUS POSITION AS COMPARED WITH THE PROVISIONS OF THE ACT WHICH IS IN VIOLATION OF THE PROVISIONS OF SECTION 90(2) OF THE ACT. LEARNED AR HAS REFERRED THE DETAILS OF TH E INCOME OF THE VARIOUS YEARS AS PER THE CHART PLACED AT PAGE 306 OF THE PAPER BOOK AND SUBMITTED THAT IN THE EARLIER Y EAR S I.E. ASSESSMENT YEAR 2006 - 07, THOUGH THERE IS NO SCRUTINY ASSESSMENT BUT THE ASSESSING OFFICER HAS ACCEPTED THE LOSS FROM THE TRANSA CTIONS OF DERIVATIVES AS CAPITAL LOSS. SIMILARLY, FOR THE ASSESSMENT YEAR 2008 - 09, THE ASSESSING OFFICER HAS ACCEPTED THE PROFITS FROM DERIVATIVES TRANSACTION AS CAPITAL GAIN AND ALLOWED THE SET TING OFF OF THE DERIVATIVE LOSS BROUGHT FORWARD FROM THE ASSES SMENT YEAR 2007 - 08. FOR THE ASSESSMENT YEAR 2009 - 10, THE ASSESSING OFFICER TREATED THE PROFIT ON DERIVATIVE TRANSACTION AS CAPITAL GAIN THOUGH THE ASSESSEE MADE AN ALTERNATIVE CLAIM AS BUSINESS PROFIT. SIMILARLY, FOR THE ASSESSMENT YEAR 2011 - 12 AND 2012 - 13 , THE PROFIT AS WELL AS LOSS FROM DERIVATIVE TRANSACTION ARE TREATED AS CAPITAL GAIN AND LOSS RESPECTIVELY, THOUGH THERE IS NO SCRUTINY ASSESSMENT. THUS, THE LEARNED AR HAS SUBMITTED THAT ON THE FACTS OF THE CASE, THE PROFIT OR LOSS ARISING FROM DERIVATIVE TRANSACTIONS CANNOT BE TREATED AS BUSINESS PROFIT OR LOSS BUT THE SAME IS TO BE TREATED AS CAPITAL GAIN OR LOSS. ITA NO. 3598 /20 1 0 6 6 . ON THE OTHER HAND, LEARNED DR HAS SUBMITTED THAT THE FII IS PERMITTED TO INVEST IN THE SHARES IN THE RECOGNIZED STOCK EXCHANGE BUT NOT IN T HE DERIVATIVE TRANSACTIONS. HE HAS REFERRED 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 H EDGING 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 22 ND MARCH, 2010 AND SUBMITTED THAT AN IDENTICAL ISSUE HAS BEEN DECIDED BY THE AAR BY HOLDING THAT THE INCOME A RISING 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 SELL ING IS CONCERNED, THE CIT(A) HAD DEALT WITH THE ISSUE IN PARA 2.51 AND 2.54 O F 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, THE RULING OF THE AAR IN CASE OF ROYAL BANK OF CANADA (SUPRA) , LEARNED AR OF THE ASSESSEE HAS SUBMITTED THAT THE SAID RULING IS IN THE CASE OF THE BANK WHEREAS THE ASSESSEE IS A N FII ITA NO. 3598 /20 1 0 7 AND, THEREFORE, THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IS BINDING AND NOT THE RULING OF THE AAR. 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 TH E DERIVATIVE WERE SETTLED/CLOSED ON VARIOUS DATES, EITHER BY SUBSEQUENT PURCHASE S 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 TH E ISSUE OF CAPITAL GAIN OR BUSINESS INCOME , WE N OTE 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 PERSUASI VE 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 CONCL UDING PART OF THE ORDER FROM PARA 8.12 TO 11 IS AS UNDER : - 8.1 1 . 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. ITA NO. 3598 /20 1 0 8 8.1 2 . THUS, ON A CLOSE SCRUTINY O F 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 FR OM 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 F ROM 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 SECTI ON ALONE, WHICH REFERS TO INCOME BY WAY OF SHORT TERM OR LONG TERM CAPITAL GAINS. 8.1 3 . 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 FR OM 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 RESPE CT 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 TO TAL 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 SECURITI ES. 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 RECEI VED ITA NO. 3598 /20 1 0 9 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 INCO ME 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 AW AY 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 . 8.1 4 . 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 W HICH 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 - S HORE 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 GAIN S ARISING FROM THE TRANSFER OF THE SAID SECURITIES IS TO BE TAXED AT THE RATE OF 10%; (III) INCOME BY WAY OF SHORT - TE RM 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 INCOMETAX 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 ITA NO. 3598 /20 1 0 10 AND EXCHANGE BOARD OF INDIA WILL BE AUTOMATICALLY NOTIFIED BY THE CENTRAL GOVERNMENT FOR THE PURPOSE OF SECTION 115AD. 8.1 5 . FROM THE ABOVE PRESS NOTE, IT IS ABUNDANTLY CLEAR THAT FIIS HAVE BEE N 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 NO T 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 H OLDING. 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 CONSEQUENCE S 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. ALTHOUG H 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 N OTICED 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 PRO VISIONS 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. ITA NO. 3598 /20 1 0 11 9. COMING BACK TO OUR CONTEXT, IT IS SEEN THAT INC OME 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 INC OME 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 GAI NS 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) 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 T HAT 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 DER IVATIVE 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. 9 . RESPECTFULLY FOLLOW ING THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. ACCORDINGLY, WE HOLD THAT THE INCOME ARISING FROM THE TRANSACTION IN DERIVATIVES BY THE ASSESSEE, BEING FII, CANNOT BE TREATE D AS BUSINESS PROFIT OR LOSS BUT THE SAME HAS TO BE CAPITAL GAIN OR LOSS. 10 . S INCE WE HAVE DECIDED THE NATURE OF TRANSACTION AND TREATMENT OF TH E SAME AS CAPITAL GAIN OR LOSS IN FAVOUR OF THE ASSESSEE , THEN WE DO NOT PROPOSE TO GO INTO THE ALTERNATIVE PLE A OF THE ASSESSEE REGARDING ITA NO. 3598 /20 1 0 12 TH RUSTING UPON THE PROVISIONS OF THE TREATY AND PUTTING THE ASSESSEE IN DISADVANTAGEOUS POSITION. 11 . RESULTANTLY , APPEAL FILED BY THE ASSESSEE IS ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 5 TH D AY OF DECEMBER , 2012. SD/ - SD/ - ( B.RAMAKOTAIAH ) ( VIJAYPAL RAO ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI ; DATED : 5 TH DECEMBER, 2012. /PKM , PS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - X, MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY// BY ORDER, ( DY./ASSTT. REGISTRAR) ITAT, MUMBAI