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FII™s securities transactions™ profits cannot be assessed as business profits™

Sub Logo - Case LawsCLR Editorial Note: An appeal was placed with the Tirbunal by the assessee which was directed against an earlier order of the CIT(A) Mumbai for the assessment year 2007-08. The appeal was made 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 treating 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 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.

The assessee in this case, is a Foreign Institutional Investor (FII), which suffered a loss of Rs. 41 crore on account of derivative transactions. The Assessing Officer & CIT(A) relied on the AAR Ruling in the case of Royal Bank of Canada 323 ITR 380 and held that as the said loss arose out speculative transactions, it had to be treated as a business loss and could not be set-off against STCG. The assessee appealed to the Tribunal which allowed the appeal and held:

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


Case files Available for download


Tags: AppealCITIncome taxIndiaMumbaiOrder of AustraliaRoyal Bank of CanadaScotland

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