13 December 2013

ITAT discusses FII’s loss on derivative transactions

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 not relevant

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.


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