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(5.4) The decision of the Authority for Advanced Ruling (AAR) in 288 ITR 641 also advances the appellant's claim. In that case the applications were filed for advance 1139/K/2009 Narayan Prasad Dalmia , AY:2008-09, 2007-08 & 2006-07 rulings by number of foreign institutional investors (FII) who had invested in shares and securities in large number of Indian companies. The investments were made after obtaining permissions from Reserve Bank of India under FEMA and it was in conformity with SEBI regulations. On scrutiny of applications filed by various applicants the Authority noted that non-resident entities from the jurisdiction where capital gains was exempt from taxes, claimed the gains from transaction of sale and purchase of securities on Indian Stock market as capital gains. While in respect of identical transactions some other institutions treated the income arising from such transaction as business profit. These entities further claimed that they did not have permanent establishment in India. Referring to the volume and frequency of transactions; systematic and organized activities carried out in shares, it was argued that these institutional investors were carrying on business of share dealing and trading and therefore income was assessable as business income. Since these entities did not have permanent establishment in India the business profits were claimed to be not liable to tax in India. The Authority then examined the facts relating to Investments made by these FIIs; AAR went through the Articles of Trust Deeds of these entities; considered the SEBI regulations and then held that from various transactions in securities in India carried out by the appellants it was seen that they were in the habit of keeping the holdings in various Indian companies from a few month to a few years which clearly indicated that the motive and intention of the applicants was to earn return in the form of capital gains rather than earn business profits. The AAR held that in the case of trading, the securities which were purchased and sold, would be termed in the books of the person acquiring it as stock in trade and not Investments. The intention of the foreign institution, as was evident at the time of purchase of securities, was a relevant factor and often the conclusive factor in determining whether the transaction was in the nature of trade or in the nature of investment. The authority then at Page 649 observed that the germane question in all these application was whether securities which were subject matter of purchase and sale by the applicants were held by them was of stock in trade so as to give rise to business income or investment in capital assets so as to yield capital gain. While deciding the germane question the authority considered the submissions of the applicants wherein it was argued that the use of the term investment in SEBI regulations or applications made was not determinative of nature of income arising from the transaction and it was to be determined on the basis of intention and circumstances. For the purpose of income tax, the term investment or investments was to be taken in the business sense of laying out money for profit: and nature of income had to be considered as per income tax statue and not in the context of FII regulation and not with reference to the terminology employed. It was contended that the applicants devoted their entire resources to the earning of income by way of trading in securities and it was so done after the study and research in a business like manner and merely because some securities were held by the applicants for relatively longer periods, the income from transactions in securities could not be considered as capital gains. The AR considered these submissions of the FIIs but ultimately held that the FIIs had made purchase and sale of securities of Indian companies as per SEBI regulation for investment purposes. AAR held that as per the scheme of the Govt. FIIs had acquired shares and securities as investments and not as stock in trade. The authority noted that the books of accounts of the applicants were not produced and examination of entries in books of account of the applicant was relevant in considering whether the securities were held as stock in trade or investments. The Authority particularly observed that they had no clue about the maintenance of the accounts of the applicant and if these were produced; then from the accounts Authority would have been in a position to ascertain whether the shares were entered in the books of account as stock in trade or capital assets. The Authority observed that under the principles of accounting stock in trade had to be valued at end of each year in the case of share trading, to arrive at profit of business whereas in the case of investments in capital assets, gains would be determined only on sale of such assets. In absence of books the AAR presumed that shares & securities were held as investments, as 1139/K/2009 Narayan Prasad Dalmia , AY:2008-09, 2007-08 & 2006-07 per SEBI regulation and therefore the AAR held that profit arising to FIIs applicants from sale of securities in India could not be treated as business income.

(5.5) From careful reading of the decision of the AAR to which the A.O. referred, I find that the said decision advances the appellants case. In this judgment the AAR has referred to the historic background under which the capital markets in India were opened to institutional investors from abroad. Prior to 1992 the foreign entities were not allowed free access to Indian capital markets The FIIs brought in huge foreign capital and they acquired substantial holdings in the shares of Indian companies. The investments by the foreign institutional investors were several times more than the institutional investment by India companies. The volume of business undertaken by FIIs is several times than investments made by Indian companies and institutions. According to the AAR the question whether the acquisition of securities is for business purpose or by way of investment; can be decided with reference to the intention of the purchaser at the time of acquisition of security itself. For this purpose the authority held that the entries made in the books of the purchaser are relevant because in case of purchase of securities for business purposes; they are shown by way of stock in trade whereas in the case of investment; shares are disclosed in the accounts as investments. If in case of foreign institutional investors who regularly carried on the transactions of purchase and sale of shares at regular intervals and in large volume, the said activity is considered as Investment activity then by the same measure the same activity carried on by an Indian entity cannot be considered as business activity. In my opinion the judicial principle applicable to Foreign Institutional Investors are equally applicable to the Indian entities as well. In both cases the tax entities regularly carry on Investments transactions in Indian securities. There is regularity of transaction and the volumes are large in both the cases. In particular in the appellant's case the evidence on record established that clear distinction was always maintained between the trading stock, if any and investment. In the circumstances, applying the ratio laid by AAR in 228 ITR 641 I hold that the gains derived on transfer of investments was assessable as capital gains and not as business profit.