Lg Asian Plus Ltd, Mumbai vs Assessee

सु ी सुषमा चावला, या यक सद य एवं नरे कुमार ब लै या, लेखा सद य के सम

BEFORE MS. SUSHMA CHOWLA, JUDICIAL MEMBER AND

SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER

आयकर अपील सं/ I.T.A. No. 7921/Mum/2010 ( नधारण वष / Assessment Year : 2007-08 M/s. LG Asian Plus Ltd., बनाम/ The ADIT (International C/o S.R. Batliboi & Co., Taxation), Range-4, Vs. 18 t h Floor, Express Towers, Scindia House, Nariman Point, Ballard Pier, Mumbai-400 021 Mumbai-400 038 आयकर अपील सं/ I.T.A. No. 2089/Mum/2012 ( नधारण वष / Assessment Year : 2008-09 The ADIT (International बनाम/ M/s. LG Asian Plus Ltd., Taxation), Range-4, C/o S.R. Batliboi & Co., Vs. Scindia House, 18 t h Floor, Express Ballard Pier, Towers, Mumbai-400 038 Nariman Point, Mumbai-400 021 आयकर अपील सं/ I.T.A. No. 1908Mum/2012 ( नधारण वष / Assessment Year : 2008-09 M/s. LG Asian Plus Ltd., बनाम/ The ADIT (International C/o S.R. Batliboi & Co., Taxation), Range-4, Vs. 18 t h Floor, Express Towers, Scindia House, Nariman Point, Ballard Pier, Mumbai-400 021 Mumbai-400 038 आयकर अपील सं/ I.T.A. No. 5672/Mum/2012 ( नधारण वष / Assessment Year : 2009-10 M/s. LG Asian Plus Ltd., बनाम/ The ADIT (International C/o S.R. Batliboi & Co., Taxation), Range-4, Vs. 18 t h Floor, Express Towers, Scindia House, Nariman Point, Ballard Pier, 2 M/s. LG Asian Plus Ltd.

Mumbai-400 021 Mumbai-400 038 थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AAACL 8243K (अपीलाथ /Appellant) .. ( यथ / Respondent) अपीलाथ ओर से/ Assessee by: Shri Rajan Vora यथ क ओर से/Department by: Smt. Vandana Sagar

सन ु वाई क तार ख / Date of Hearing :22.07.2015 घोषणा क तार ख /Date of Pronouncement :31.07.2015

आदे श / O R D E R

PER N.K. BILLAIYA, AM:

ITA No. 7921/M/2010 is the appeal by the assessee for A.Y. 2007- 08, ITA No. 2089/M/2012 is the appeal by the Revenue for A.Y. 2008- 09, ITA No. 1908/M/2012 is the cross appeal by the assessee for A.Y. 2008-09 and ITA No. 5672/M/2012 is the appeal by the assessee for A.Y. 2009-10. As common issues are involved, all these appeals were heard together and disposed of by this common order for the sake of convenience.

ITA No. 7921/M/2010 - A.Y. 2007-08 2. This appeal is preferred by the assessee against the order passed by the Addl. Director of Income Tax (International Taxation-4), Mumbai made u/s 143(3) r.w. Sec. 144C(13) of the Act pursuant to the direction received from the Dispute Resolution Panel-II, Mumbai.

3. The grievances of the assessee read as under:

"1. The Learned Assessing Officer erred in adopting the average weighted mean price on the date of conversion of 3 M/s. LG Asian Plus Ltd.

shares underlying Foreign Currency Convertible Bonds instead of adopting the closing price of the shares prevailing on the stock exchange thereby reducing the short-term capital loss by Rs. 2,985,363/-

2. The Ld. AO erred in not allowing the brought forward short-term capital loss of Rs. 479,349,177 arising from exchange traded derivatives to be set-off against the income from exchange traded derivatives earned during the financial year ended 31st March, 2007.

3. The Ld. AO erred in levying interest of Rs. 17,716,427 u/s. 234B of the Act.

4. The Ld. AO erred in initiating penalty proceedings u/s. 271(1)(c) of the Act."

4. Briefly stated the facts of the case are that the assessee company is incorporated in Cayman Island. The assessee is registered with the Securities and Exchange Board of India (SEBI) as a sub-account of M/s. Lloyd George Investment Management (Bermuda) Ltd, a SEBI registered Foreign Institutional Investor (FII). The assessee has been investing in the Indian capital market in accordance with the SEBI Regulations, 1995 and has been offering its income to tax u/s. 115AD of the Act.

4.1. During the year under consideration, the assessee transacted in equity shares, shares underlying Global Depository Receipts (GDR), Foreign Currency Convertible Bonds (FCCBs) and Exchange Traded Derivative contract (ETD and earned capital gains, dividend income and interest u/s. 244A of the Act.

4.2. The return for the year under consideration was filed electronically on 31.10.2007. Subsequently the return of income was revised on 25.3.2009 reporting a total income of Rs. 764,782,994/-. The details of 4 M/s. LG Asian Plus Ltd.

the income earned by the assessee as per the return of income read as under:

Short term capital gains 1,967,068,688 Short term capital losses 730,284,194 Net Short term capital 1,236,784,494 gains Less:Brought forward 479,349,177 short-term capital losses Net short-term capital 757,435,317 gains after set-off Long term capital gains 2,217,501 chargeable to tax Interest under section 5,220,176 244A Total income 764,782,994

4.3. While scrutinizing the return of income, the AO noticed that the assessee has sold shares underlying GDR/FCCB issued by Indian companies in accordance with the issue of Foreign Currency Convertible Bonds and ordinary shares (through Depository Receipt Mechanism) Scheme of 1993 notified by the Government of India. As per the scheme, the cost of acquisition of the underlying shares acquired through the redemption/conversion of GDR/FCCBs has to be reckoned as the price of underlying shares prevailing on the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE) on the date of the advice of redemption by the Overseas depository bank to the domestic custodian bank in the case of GDRs and on the date of conversion in the case of FCCBs as the case may be. In the absence of any specific stipulation in the scheme as to what price sho8uld be taken on the date of redemption/conversion for computing the 'cost of acquisition' of the 5 M/s. LG Asian Plus Ltd.

shares underlying the GDRs/FCCBs, the assessee used the closing price of the shares on the BSE/NSE.

4.4. This method adopted by the assessee did not find favour with the AO who went on to compute the capital gains arising on sale of shares by taking weighted average price prevailing on the date of redemption/conversion of GDR/FCCBs as the cost of acquisition.

5. The assessee is aggrieved by this.

6. Before us, the Ld. Counsel for the assessee fairly conceded that this issue has been decided by the Tribunal, Mumbai Bench against the assessee and in favour of the Revenue in the case of The Master Trust Bank of Japan Ltd in ITSA No. 7793/M/2011. On this concession made by the Ld. Counsel, we have carefully perused the order of the Tribunal (supra). We find that a similar issue was considered by the Tribunal vide ground No. 1 which reads as under:

"The CIT(A) ought to have determined the cost of acquisition of the shares of CIPLA Ltd obtained on conversion of the Global Depository Receipts by taking the closing price prevailing in the Stock Exchange on the date of the advice of redemption. He failed to appreciate that Rule 40C had no application in the matter and erred in taking the average of the opening and closing price prevailing on the stock exchange."

and the Tribunal has decided this issue at para-13 of its order which reads as under:

"We have considered rival submissions of Ld. Representatives of parties and orders of authorities below. We have also considered CBDT Circular 3/1957 as well Rule 40C of Income Tax Rules and Circular No. 9/2007. It is a fact that the term 'prevailing price' used in clause 7(3) of the scheme is not defined specifically in the said scheme 6 M/s. LG Asian Plus Ltd.

nor it is defined in the provisions of Income Tax Act. Reliance placed by Ld A.R. on circular No. 3/1957 to state that the closing price noted in the Stock Exchanges should be considered as the value of the shares on the valuation date but we agree with Ld. DR that the said circular is in the context of considering valuation of shares for the purposes of wealth tax Act. Whereas Rule 40C of Income Tax Rules is in the context of valuing shares for the purpose of Income Tax Act. Rule 40C specifically provides the fair market value of the shares on the date of conversion i.e. to take average of the opening and closing price. We are of the considered view that Ld CIT(A) has rightly held that Rule 40C is cognate to Sec. 17(2)(vi)(d) of the Income Tax Act and also Sec. 48(ii) for the purpose of determination of ' cost of acquisition' of shares. Therefore, the average market price adopted as the " prevailing price" on the date of conversion of GDRs into equity shares as the 'cost of acquisition' is reasonable and justifiable in the absence of any other circular/Rule vis-a-vis Scheme under which GDRs are issued and redeemed into ordinary shares of the company. Hence, on the facts and in the circumstances, we hold that there is no infirmity in the order of Ld. CIT(A). Accordingly, we uphold his order and reject ground No.1 of appeal taken by assessee."

Respectfully following the decision of the Co-ordinate Bench, ground No. 1 is dismissed.

7. Ground No. 2 relates to declining of the set off against income from exchange traded derivatives (ETD).

7.1. At the very outset, the Ld. Counsel for the assessee brought to our notice that this issue has been decided by the Tribunal in assessee's own case for A.Y. 2004-05 which has been followed for A.Y. 2003-04, 2005- 06 and 2006-07. It is the say of the Ld. Counsel that in assessee's own case the Tribunal vide order dated 27.5.2011 in ITA Nos. 2645 & 2691/M/08 has upheld the assessee's contention that gains/losses earned 7 M/s. LG Asian Plus Ltd.

by the assessee from transaction in ETD are to be assessed under the head "capital gains".

8. We have carefully perused the order of the Tribunal (supra). We find force in the contention of the Ld. Counsel. The Tribunal has upheld the contention of the assessee that it is an investor in securities and any gains/losses arising from the transaction in securities have to be assessed under the head 'capital gain'. Respectfully following the decision of the Co-ordinate Bench, we direct the AO to allow the brought forward Short Term Capital loss arising from ETD to be set of against the income from ETD earned during the year under consideration. Ground No. 2 is accordingly allowed.

9. Ground No. 3 relates to the levy of interest u/s. 234B of the Act. Although, the levy of interest is mandatory but consequential in this case, the AO is therefore directed to levy the interest as per the provisions of the law.

10. Ground No. 4 relates to the initiation of penalty proceedings u/s. 271(1)(c) of the Act. This ground is premature and accordingly dismissed.

11. In the result, the appeal filed by the assessee is partly allowed.

ITA No. 1908/M/12 - A.Y. 2008-09 - Assessee's appeal 12. The grievances of the assessee read as under:

"1. Erred in confirming the addition of Rs. 1,03,44,445 to the total income of the appellant.

8 M/s. LG Asian Plus Ltd.

2. Erred in confirming the action of the AO in treating the net short term capital losses from transactions in exchange traded derivatives (ETDs) amounting to Rs. 1,03,44,445 as business loss.

3. Failed to appreciate that for Foreign Institutional Investor (FII) there is special provision contained in section 115AD of the Act, according to which the appellant had offered the losses as short term capital loss.

4. Erred in exceeding his jurisdiction by not following the decision of the Hon'ble Income Tax Appellate Tribunal (ITAT), Mumbai in the appellant's own case for the A.Yrs 2003,04, 2004,05, 2005-01 and 2006-07 wherein the Hon'ble ITAT, on identical facts had held that gains/loss arising to a FII from transactions in ETDs are to be assessed under the head 'capital gains'.

5. Failed to appreciate that on the same set of facts, AO has been taking different positions in different years, depending on whether there is gain or loss from transactions in ETDs. Hence, the CIT(A) was not justified in confirming the order".

13. The crux of the matter is whether the assessee is a trader in securities or an investor in securities so as to decide whether any gains arising from the transaction in securities would give rise to business income or capital gain. Before going into the merits of the case all that we have to see is what are the factors to be given weight while examining whether the tax payer is a dealer in share or having regard to the nature of investment, it is to be construed that the income bears the character of sale of a capital asset so as to attract capital gains tax?.

13.1. The Hon'ble Supreme Court in the case of CIT Vs madan Gopal Radhe Lal 73 ITR 652 dealt with the issue and discussed the question.

"A trader may acquire a commodity in which he is dealing for his own purposes, and hold it apart from the stock in 9 M/s. LG Asian Plus Ltd.

trade of his business. There is no presumption that every acquisition by a dealer in a particular commodity is acquisition for the purpose of his business, in each case the question is one of intention to be gathered from the evidence of conduct and dealings by the acquirer with the commodity."

13.2. In the case of P.M. Mohammed Meerakhan Vs CIT 73 ITR 735 Hon'ble Supreme Court reiterated that it was not possible to evolve any single test or formula which can be applied in determining whether a transaction was an adventure in the trade or not. The answer to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and circumstances proved therein and which determine the character of the transaction".

14. The Hon'ble High Court of Bombay in the case of CIT Vs Gopal Purohit 228 CTR 582 has held as under:

(a) it was open to an assessee to maintain two separate portfolios, one relating to investment and another relating to business of dealing in shares.

(b) that a finding of fact had been arrived at by the Tribunal as regards the two distinct types of transactions namely, those by way of investment and those for the purposes of business.

(c) that there should be uniformity in treatment and consistency when facts and circumstances are identical particularly in the case of the assessee and

(d) that entries in books of account alone are not conclusive in determining the nature of income through they have a bearing.

10 M/s. LG Asian Plus Ltd.

15. The Hon'ble Supreme Court vide order dated 15.11.2010 has dismissed Department's Special Leave Petition against this judgement of the Hon'ble Bombay High Court.

16. The only peculiar fact that has to be kept in mind while deciding assessee's appeal is that the assessee is a foreign institutional investor registered with SEBI and has been invested in the Indian capital market in accordance with the SEBI Regulation and therefore offering its income to tax u/s. 115AD of the Act, since there is a special provision for FII.

17. Coming to the merits of the case, at the very outset, the Ld. Counsel for the assessee stated that the issues are no more res integra as they have been decided in favour of the assessee and against the Revenue by the order of the Tribunal in ITA No. 2645 & 2691/M/08 for A.Y. 2004-05 which was followed by the Tribunal in ITA Nos. 3281 & 2899/M/09 for A.Y. 2003-04, ITA Nos 6485 & 6320/M/08 for A.Y. 2005-06 and ITA No. 2505/M/05 for A.Y 2006-07.

18. The Ld. Departmental Representative objected to this. It is the say of the Ld. DR that the Tribunal in earlier occasion while deciding the appeal has not considered the decision of the Authority for Advance Ruling in the case of Royal Bank of Canada and also rely upon the decision of the Hon'ble High Court of Kerala in the case of Kalpetta Estates Ltd 211 ITR 0635. It is the say of the Ld. DR that principles of res judicata do not apply to income-tax matters. Further supporting the arguments, the Ld. DR also relied upon the decision of the Tribunal in the case of NPR Drugs 98 ITD 285 and pointed out that the Tribunal in that case has held that the decision of a Bench of the Tribunal even in the case of the same assessee in a particular assessment year does not constitute a 11 M/s. LG Asian Plus Ltd.

binding precedent on subsequent Co-ordinate Bench of the Tribunal. The issues raised by the Ld. DR have been answered by the Tribunal in ITA Nos. 152 to 156/Viz/2011 in the case of Cargo Handling Pvt. Workers Pool Vs DCIT wherein the Tribunal has held as under:

"Next we shall dwell upon the judicial rulings about the binding nature of orders passed by the Income Tax Appellate Tribunal. The Hon'ble MP High Court in the case Agarwal Warehousing and Leasing Ltd. Vs CIT (257 ITR 235) has held that the orders passed by the Tribunal are binding on all the tax authorities functioning under the jurisdiction of the Tribunal. While so holding, it followed the decision of the Hon'ble Supreme Court in the case of UOI Vs Kamlakshi Finance Corpn. Ltd (AIR 1992 Supreme Court 711,712) 55 ELT 433 (SC) which has ruled as under:

"It cannot be too vehemently emphasized that it is of utmost importance that, in disposing of the quasi-judicial issues before them, revenue officers are bound by the decisions of appellate authorities. The order of the Appellate collector is binding on the Assistant Collectors working within his jurisdiction and the order of the Tribunal is binding upon the Assistant Collectors and the Appellate Collectors who function under the jurisdiction of the Tribunal. The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not 'acceptable' to the Department - in itself an objectionable phrase - and is the subject matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result will only be undue harassment to the assessees and chaos in administration of tax laws."

The Hon'ble M.P. High Court further observed in clear terms as under:

12 M/s. LG Asian Plus Ltd.

"Obviously, the Commissioner of Income Tax (Appeals) not only committed judicial impropriety but also erred in law in refusing to follow the order of the Appellate Tribunal. Even where he may have some reservations about the correctness of the decision of the Tribunal, he had to follow the order. He could and should have left it to the Department to take the matter in further appeal to the Tribunal and get the mistake, if any, rectified".

18.1. Having answered to the objections raised by the Ld. DR, we have carefully perused the order of the Tribunal in assessee's own case referred to hereinabove. We find that at para-7, the Tribunal has elaborately discussed the transactions in derivatives qua Sec. 43(5) of the Act and at para-8.3, the Tribunal has considered the provisions of Sec. 115AD qua FII and after considering the definition of certain terms under the heading of Sec. 43 at para-10 of its order at at para-11 the Tribunal finally held as under:

" We, therefore, hold that the Ld. CIT(A) was not justified in holding that income from index based or non-index based derivatives be treated as 'business income', whether speculative or non speculative. The impugned order is, therefore, set aside by holding that income from derivative transaction resulting into loss of Rs. 11.27 crores is to be considered as short-term capital loss on the sale of securities which is eligible for adjustment against short-term capital gains arising from the sale of shares.

Respectfully following the decision of the Tribunal (supra), we direct the AO to follow the binding decision of the Tribunal given in earlier assessment year and accordingly we decide all the grounds in favour of the assessee and against the Revenue.

19. Before parting, one issue remains to be highlighted. As mentioned elsewhere, one of the objections of the Ld. DR was that the decision of the Authority for Advance Ruling in the case of Royal Bank of Canada 13 M/s. LG Asian Plus Ltd.

has not been considered by the Tribunal. We find that in the case of Platinum Investment Management Ltd Vs DDIT in ITA No. 3598/M/2010, the Tribunal has considered the decision given in the case of the present appellant at para-5 of its order and at para-6, it has elaborately discussed the decision of the Authority for Advance Ruling in the case of Royal Bank of Canada. Therefore, the objection raised by the Ld. DR does not hold any water.

20. In the result, the appeal filed by the assessee is allowed.

ITA No. 2089/M/2012 - A.Y. 2008-09 - Revenue's appeal 21. The grievances of the Revenue read as under:

"1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the set off of loss ignoring the fact that without the existence of Permanent Establishment, the business income would not be assessable in India.

2. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the set off of loss ignoring the fact that the derivatives related transactions are routed through the Stock Exchange without any actual delivery and thus any loss arising out of such transactions would be ineligible for set off against any other head of income."

22. Following the order of the Tribunal in assessee's own case for A.Yrs 2004-05, 2003-04, 2005-06 and 2006-07 in ITA Nos. 1908/M/2012, we have upheld the findings of the Co-ordinate Bench that the assessee is an investor in securities and any gains/losses arising out of the transactions in securities would give rise to capital gains, therefore, this appeal by the Revenue become otiose.

23. In the result, the appeal filed by the Revenue is dismissed. \ 14 M/s. LG Asian Plus Ltd.

ITA No. 5672/M/2012 -A.Y. 2009-10- Assessee's appeal 24. The grievances of the assessee read as under:

1. In confirming the action of the AO in treating the income earned from transactions in exchange traded derivatives contract (ETDs) amounting to Rs. 19,951,329 as being chargeable to tax under the head 'profits and gains of business or profession'.

2. In failing to appreciate that the Act contains a special provision in section 115AD for Foreign Institutional Investors (FII) in accordance with which the appellant had offered the income from transactions in ETDs amounting to Rs. 19,951,329 to tax as short term capital gains

3. In exceeding his jurisdiction by not following the decision of the Hon'ble Income Tax Appellate Tribunal (ITAT), Mumbai in the appellant's own case for the A.Yrs 2003,04, 2004,05, 2005-01 and 2006-07 wherein the Hon'ble ITAT, on identical facts had held that income arising to the appellant from transactions in ETDs are to be assessed under the head 'capital gains'.

4. In failing to consider the submissions of the appellant that decision of the Hon'ble ITAT cannot be ignored as the same was not rendered in ignorance of/without considering the regulations/guidelines issued by the Securities and Exchange Board of India/Reserve Bank of India, governing the investment by FIIS in ETDs."

25. Following the order of the Tribunal in assessee's own case for A.Yrs 2004-05, 2003-04, 2005-06 and 2006-07 in ITA Nos. 1908/M/2012, we have upheld the findings of the Co-ordinate Bench that the assessee is an investor in securities and any gains/losses arising out of the transactions in securities would give rise to capital gains, therefore, this appeal by the assessee is allowed.

15 M/s. LG Asian Plus Ltd.

26. In the result, the appeal filed by the assessee in ITA No. 7921/M/10 for A.Y. 2007-08 is partly allowed, ITA Nos. 1908/M/12 & 5672/M/12 for A.Yrs 2008-09 & 2009-10 are allowed and the Revenue's appeal in ITA NO. 2089/M/2012 is dismissed.

Order pronounced in the open court on 31st July, 2015

Sd/- Sd/-

(SUSHMA CHOWLA ) (N.K. BILLAIYA) या यक सद य/JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER मंब ु ई Mumbai; दनांक Dated :31 July , 2015 st

व. न.स./ RJ , Sr. PS

आदे श क त ल प अ े षत/Copy of the Order forwarded to :

1. अपीलाथ / The Appellant

2. यथ / The Respondent.

3. आयकर आयु त(अपील) / The CIT(A)-

4. आयकर आयु त / CIT

5. वभागीय त न ध, आयकर अपील य अ धकरण, मंब ु ई / DR, ITAT, Mumbai

6. गाड फाईल / Guard file.

आदे शानस ु ार/ BY ORDER, स या पत त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मंब ु ई / ITAT, Mumbai