By Geeta Jani, Dhishat B. Mehta, Chartered Accountants
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Section 115AD of the Act – loss arising to a FII from index derivative transactions, is a capital loss and can be set-off against capital gains from sale of shares.
Facts:
The taxpayer was a Foreign Institutional Investor (“FII”). In respect of its two sub-accounts, the taxpayer had furnished the return of income declaring short-term capital loss. The loss had arisen from index derivative transactions. Hence, the AO concluded that it was a business loss assessable under the head ‘income from business and profession’ and not short-term capital loss as claimed by the taxpayer. The set off was denied as the taxpayer had no PE in India. In appeal, CIT(A) confirmed the order.
The issues before the Tribunal were:
• Whether the loss arising from index derivative transactions was business loss or capital loss? Whether the loss arising from index derivative transaction can be set-off against capital gains arising from sale of shares?
Held:
In terms of section 115AD of the Act, a FII is an ‘investor’ and further, income from transfer of securities is chargeable under the head ‘capital gains’ (long-term or short-term) and not business loss, and eligible for set off against capital gains.
SEBI (FII) Regulations and section 115 AD of the Act show that in case of FIIs the government has not contemplated that the tax authority should distinguish between the securities as those constituting capital asset or shock-in-trade. If a FII receives income in respect of securities or from transfer of securities, such income should be considered only u/s. 115AD(1).
Though in common parlance, shares and debentures are distinct from derivatives, such distinction is obliterated by mentioning the term ‘securities’ as defined in section 2(h) of Securities Contract (Regulation) Act, 19561 .
