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| DATE: | December 5, 2013 (Date of publication) |
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| Click here to download the judgement (platinum_derivatives_FII.pdf) |
S. 115AD: High Court verdict in Bharat Ruia 337 ITR 452 (Bom) on taxation of derivatives as speculation income/ loss is not applicable to FIIs
The assessee, a Foreign Institutional Investor (“FII”), suffered a loss of Rs. 172.18 crore on account of derivative transactions which was claimed as a short-term capital loss. The AO held that the said loss constituted a business/ speculation loss and could not be set-off against the short-term capital gains. Though in the assessee’s own case (Platinum Investment Management Ltd vs. DDIT (ITAT Mumbai)) it had been held that all income arising to a FII, including from dealings in derivatives, has to be assessed as capital gains, the department argued that this view was no longer good law in view of CIT vs. Bharat R. Ruia (HUF) 337 ITR 452 (Bom) where it was held that as transactions in derivatives are entered into and settled without taking any delivery of the shares, the same constitutes a speculative transaction. HELD by the Tribunal rejecting the department’s case:
The judgement of the Bombay High Court in Bharat Ruia is not applicable to assessees which are FIIs duly registered with SEBI. FIIs are allowed to only invest in the Capital Market and the income arising from transfer of security is to be considered as short term capital gain or long term capital gain as per s. 115AD of the Act. FIIs are not allowed to do business in the security market. Also, 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 co-ordinate Bench of the Tribunal has considered this aspect as well in the earlier order dated 5.12.2012 in which the earlier decision in LG Asian Plus Ltd v/s ADIT 46 SOT 159 was also considered
Delhi high court in the case of CIT vs DLF Commercial developers Ltd expressed their views that the expression “derivatives” is defined only in section 43(5) and since it excludes such transaction from the odium of speculative transactions, and is has not been excluded from section 73, yet, the Court would be doing violence to parliamentary intendment while deciding the question of law referred in ITA No.1446(Del)/2011 that ” Did the ITAT fall error in not holding that the loss of Rs.4,92,71,000/- on account of derivative transaction was speculative loss and was entitled to the benefit of Section 73, in view of Explanation to section 73 of the Income Tax Act” and held that the tribunal erred in law holding that the assessee was entitled to carry forwarded its losses, the question framed is answered in favour of the revenue and against the assessee.