Fidelity Northstar Fund, In re.
INCOME TAX ACT, 1961
Capital gains- Chargeability-Purchase and sale of shares by non-resident trust-Business income or capital gain
Assessee was a business trust for implementing scheme of investment fund. It was set up to provide investors a continuous source of managed investments in securities and was registered under the Investment Company Act, 1940 of USA and was treated as a corporation for purposes of taxation in USA. The beneficial interest in the funds was divided into transferable shares of one or more separate and distinct series. The assessee was being managed by a board of trustees, which had the authority and discretion in regard to investment/re-investment of its fund and the power to declare and pay dividends. It makes investment in different parts of the world including India. It was registered with the Securities and Exchange Board of India (SEBI) as a sub-account of Fidelity Management and Research Company (FMR), which was registered as FII under SEBI Regulations. The assessee invested in shares in Indian companies under the Foreign Institutional Investors (FII) regime. To comply with the SEBI Regulations, 1995 the assessee appointed two companies as its global custodian who in turn appointed a bank in Mumbai as its correspondent to act as domestic custodian for it. Both the global custodian and the domestic custodian were acting in the ordinary course of their business and were performing similar custodial services for many other FIIs. The investment manager of the assessee was located outside India and it had no presence in India. The assessee did not have any branch office or place of business in India. It purchased and sold shares/securities in India through brokers and the domestic custodian on behalf of the assessee held the securities. CIT(A) held that the assessee had been engaged in investment activities and not in trading activities. Therefore, the income from those securities by way of interest and dividends would be taxable as Income from other sources and profits from the transfer of such securities were taxable as capital gains.
Held: There was no force in the submission of the assessee that for the purpose of classification of income the terminology or the context used in the FII Regulations could not be used to determine the nature of the transaction as the FII Regulations are drafted in a generic manner and cannot be determinative of the character of income as the Act and the Regulations and other enactments are not pari materia. The classification of income has to be done under the law of the land and once it is classified under any of the heads of income under section 14, the relevant provisions of the Act appropriate to that head of income will apply. It held that the issue whether the transactions of sale and purchase of shares were trading transactions or were in the nature of investment, was a mixed question of law and fact. In the present case, in order to ascertain whether the purchase of the shares was not taken as, or in the course of, a trading transaction, a survey of legal framework and circumstances prevailing at the time when India extended the invitation to financial investors abroad for investments in Indian capital market and the facts of the case was required. In no way, the framework of the provisions of the Guidelines, Acts and Regulations can be so interpreted as to lead to the inference that trading in Indian securities is open to the FIIs. Trading in securities other than exchange traded derivatives is prohibited. It was evident that the whole scheme meant for FIIs is to invest in securities in India to receive income from them so long as they hold the same and realize capital gains on their transfer. The submission of the assessee that trading in securities was not prohibited under any Act or Regulations could not be accepted as the nature of transactions being trading the income therefrom should be treated as profit from illegal business. It had to be verified as to how the shares were valued/held in the books of account, i.e., whether they were valued as stock-in-trade at the end of the financial year for the purpose of arriving at business income or held as investment in capital assets. As the transactions of sales and purchases of shares in Indian companies by the assessee were investment in capital assets leading to realization of capital gains and profits arising from said transactions could not be treated as business income of the assessee.
Income Tax Act, 1961 Section 45 read with section 28(i)
Case Law Analysis:Universities Superannuation Scheme Ltd., In re. [2005] 275 ITR 434 / 145 Taxman 141 (AAR-New Delhi) [Para 4], Morgan Stanley & Co. International Ltd., In re [2005] 272 ITR 416 / 142 Taxman 630 (AAR-New Delhi) [Para 4], Fidelity Advisor Series VIII, USA, In re [2004] 271 ITR 1 /[2005] 142 Taxman 111 (AAR-New Delhi) [Para 4], XYZ/ABC Equity Fund, In re [2001] 250 ITR 194/ 116 Taxman 719 (AAR-New Delhi) [Para 4), CIT v. H. Holck Larsen [1986] 160 ITR 67/ 26 Taxman 305 (SC) [Para 11], Raja Bahadur Visheshwara Singh v. CIT [1961] 41 ITR 685 (SC) [Para 11], Dalhousie Investment Trust Co. Ltd.v. CIT [1968] 68 ITR 486 (SC) [Para 11], CIT v. Sutlej Cotton Mills Supply Agency Ltd. [1975] 100 ITR 706 (SC) [Para 11], A.V. Thomas & Co. Ltd. v. CIT [1963] 48 ITR 67 (SC) [Para 11], CIT v. P.K.N. Co. Ltd. [1966] 60 ITR 65 (SC) [Para 11], CIT v. Associated Industrial Development Co. (P.) Ltd. [1971] 82 ITR 526 (SC) [Para 11], and General Electric Pension Trust, In re [2006] 280 ITR 425 / 150 Taxman 545 (AAR-New Delhi) [Para 23]
Decision: In favour of Assessee.