PLATINUM ASSET MANAGEMENT LTD, MUMBAI V. DDIT (IT) 2(1),

ITA 7317/MUM/2008

• Counselvise Citation: 731719914 RSA 2008
• Duration Of Justice: 4 year(s) 11 month(s) 6 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: 24-07-2013
• Assessment Year: 2004-2005
• Appeal Filed On: 29-12-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Double taxation relief; Permanent establishment; Advance ruling; Speculation loss
• Section: 28; 43(5)

Judgement Text

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 CONFIR MED 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 G ROUNDS: 1. THE CIT(A) ERRED IN HOLDING THE LOSS ON DER IVATIVE 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 DERIV ATIVE TRANSACTION AS SPECULATIVE LOSS; 1.2 THE APPELLANTS SUBMIT THAT THE CIT(A) HAVING CO NCLUDED THAT THE LOSS WAS NOT SPECULATIVE, HE ERRED IN FURTHER HOLDI NG THAT THE DERIVATIVE INSTRUMENT (I.E. FORWARD CONTRACT) IS NOT A CAPITAL ASSET; 1.3 THE APPELLANTS SUBMIT THAT THE CIT(A)S DECISIO N 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 G IVING AN OPPORTUNITY AS REQUIRED UNDER SECTION 251(2) OF THE INCOME TA X ACT, 1961; 1.5 THE CIT(A) ERRED IN ENHANCING THE ASSESSMENT WI THOUT 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 ASSE T IS NOT A CAPITAL LOSS. 4. THE LD. CIT(A) ERRED IN HOLDING THAT THE LOSS I NCURRED FROM BUSINESS IS NOT ASSESSABLE IN INDIA IN ABSENCE OF THE APPELLANT HA VING A PERMANENT ESTABLISHMENT. 5. THE LD. CIT(A) ALSO ERRED IN HOLDING THAT THE BU SINESS 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 FAILI NG 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 ADVANTAGEO US TO THE APPELLANT I.T.A.NO.7317/M/2008 3 4. THE ASSESSEE VIDE LETTER DATED 26.4.2013 HAS MAD E A REQUEST TO WITHDRAW THE AFORESAID ADDITIONAL GROUND. IN VIEW OF ABOVE, WE D ISMISS THE ADDITIONAL GROUND NO.3A AS WITHDRAWN. 5 . THE LD. AR OF THE ASSESSEE SUBMITTED THAT GROUND N O S . 1 (1.1 TO 1.5) ARE COROLLARY TO GROUND NO.2 AND 3 OF APPEAL. THERE FORE GROUND NO.1 NEED NOT TO BE ADJUDICATED UPON. GROUND NOS. 2 AND 3. ARE COVERE D BY THE DECISION OF PLATINUM INVESTMENT MANAGEMENT LTD., A/C PLATINUM INTERNATIO NAL FUND V/S DDIT(INTERNATIONAL TAXATION) IN ITA NO.3598/MUM/2010 (AY)2007)08)ORDE R DATED 5.12.2012 IN FAVOUR OF THE ASSESSEE. HE FILED A COPY OF THE SAID ORDER T O SUBSTANTIATE HIS SUBMISSIONS. 6. 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 SUB)SECTION 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. 7. 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 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)ORDINAT E 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 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 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 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 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 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 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 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 `SECURIT IES. 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 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 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 GRO SS 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 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 SUB)SEC. (2) OF SEC. 115AD, WHERE THE GROSS TOTAL INCOME INCLUDES A NY 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 F ROM THEIR TRANSFER), THEN THE GROSS TOTAL INCOME SHALL BE REDUCED BY THE AMOUNT OF SUCH INCOME AND THE DEDUCTION UNDER CHAPTER VI)A 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 SUB)SEC. (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 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 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 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 CON FINED TO DETERMINING WHETHER THE INCOME FROM THE TRANSFER OF SECURITIES WOULD FALL UNDER SUB)SECTION (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 INCOME COVERED UNDER SUBSECTION (2)(B). THE ONLY E MBARGO AGAINST THE ABOVE PRESUMPTION IS THAT THE BUSINESS SHOULD NOT B E THAT OF DEALING IN I.T.A.NO.7317/M/2008 6 `SECURITIES . ONCE THERE IS A SPECIAL PROVISION SLICING AWAY T HE INCOME TO A FII FROM THE TRANSFER OF `SECURITIES FROM THE OT HER INCOME, IT HAS TO FIND ITS HOME ONLY UNDER SUB)SECTION (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 SUB)SEC. (1) ALONE AND SUB)SEC. (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/91)FIV 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 OFF)SHORE FUNDS COVERED BY SECTION 115AB OF THE INC OME)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 O F 10%; (III) INCOME BY WAY OF SHORT)TERM 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 INCOME)TAX AS AFORESAID WILL APPLY ON THE GROSS INCOME SPECIFIED ABOVE WITHOUT ALLOWING FOR ANY DED UCTION UNDER SECTIONS 28 TO 44C, 57 AND CHAPTER VI)A 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 LONG)TERM OR SHORT)TERM CAPITAL GAIN DEPE NDING 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 CONSIDERE D 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 DERIVATIV ES SHALL ALSO BE CONSIDERED AS SHORT)TERM OR LONG)TERM CAPITAL GAIN DEPENDING UPON THE PERIOD OF HOLDING. IF THE VIEWPOINT OF THE DEPARTME NT, TO THE EFFECT THAT I.T.A.NO.7317/M/2008 7 INC OME FROM TRANSFER OF SHARES OR DEBENTURES ETC. SHOU LD 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 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 SHORT)TERM OR LONG)TERM CAPITAL G AIN 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) 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 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 NON)INDEX 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 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. IN VIEW OF ABOVE ORDER AND RESPECTFULLY FOLLOWING T HE 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 AR ISING FROM TRAN SACTION IN DERIVATIVE BY ASSESSEE(S), BEING SUB)ACCOUNT FII CANNOT BE TR EATED AS BUSINESS PROFIT OR LOSS. 9. HENCE, GROUND NOS.2 AND 3 ARE DECIDED IN F AVOUR OF ASSESSEE. 10. AT THE TIME OF HEARING, IT WAS SUBMIT TED THAT IF GROUND NOS.2, AND 3 ARE DECIDED IN FAVOUR OF ASSESSEE, THE GROUND NOS.4 AN D 5 BECOME INFRUCTUOUS AND NO NEED TO BE ADJUDICATED. SINCE, WE HAVE DECIDED T HE NATURE OF TRANSACTION A S AN INVESTMENT AND PROFIT AND LOSS HAS TO BE CONSIDERE D 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 ALLO WED 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. 3 / THE APPELLANT 2. 4*3 / THE RESPONDENT. 3. 5 ( ) / THE CIT(A)) 4. 5 / CIT 5. 6 4..8 , : 8 , / DR, ITAT, MUMBAI 6. < / GUARD FILE. / BY ORDER, TRUE COPY (ASSTT. REGISTRAR) : 8 , /ITAT, MUMBAI