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
Note: On the issue that a FII cannot have business
profits contrary views have been taken in
ABC Equity
Fund 250 ITR 194,
Fidelity Advisor Series VII 271
ITR 1,
General Electric Pension Trust 280 ITR 425,
Fidelity Northstar Fund 288 ITR 641
and
Royal Bank of Canada 323 ITR 380
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