ITAT discusses FII’s loss on derivative transactions
13 December, 2013
Is loss on derivative transactions assessable as business loss? This was
the question before the Tribunal in Platinum Asset Management Ltd v.
DDIT. The department treated loss from derivative transactions as business
loss as against the assessee’s claim of the same being capital loss. The
assessee argued that was eligible to set off the same against short-term
capital gains and carry forward unabsorbed loss.
Derivatives are speculative and cannot be securities
The assessee raised a plea that being a Foreign Institutional Investor
(FII), the derivatives were capital assets and not business / trading assets.
As an FII it is not allowed to do business in the security market. The
department’s argument was based on the Bombay High Court decision in CIT v.
Bharat R.Ruia [(HUF) 337 ITR 452 (Bom)], wherein it was held that
derivative transactions are speculative transactions. Further after the
amendment in 2005 transaction in respect of derivative is a business
transaction and cannot be investment.
Income chargeable under capital gains, speculative nature or otherwise
Relying on LG Asian Plus Ltd v. ADIT (International Taxation)
(2011) 46 SOT 159 and order passed by it for different period earlier in
respect of the same appellant, the tribunal, in its order passed on 4th
December, 2013, held that income arising from transfer of securities of FIIs
will be included under Section 115AD(1)(b) of the Income Tax Act, 1961 (the
Act) to be categorized as short-term or long-term capital gain depending upon
the period of holding. Thus, when income is chargeable under the head ‘capital
gains’, it cannot be considered under business income. Also reference to
speculative or non-speculative nature of income is relevant only for business
income as per Section 43 of the Act.