2012 (12) TMI 1195 - AT - Income Tax

Dispute regarding nature of income from the settlement of forward contract? - Hedging - Activity from outside India to be treated as Business activity or investment activity - HELD THAT - Gains arising from early settlement of forward foreign exchange contract has to be treated as capital gain. The orders of the CIT(A) were set aside and appeals were allowed. The Assessee s contention of purchase and sale of foreign currency to be treated as Business income and not chargeable to tax as having no permanent establishment in India was rejected on the ground that the assessee being a Non-Resident Company invested in equity shares of Citicorp Finance India Ltd. by bringing capital in foreign currency and to protect its investments from the attraction of FEMA 1999 where overseas investors were hedging their capital investment and thus assessee entered into Forward Contract rolled over periodically. Since no contrary decision has been brought to the department s notice it has followed the ratio laid down by the aforesaid decisions which has been consistently followed by the Tribunal Mumbai Benches and held that the income arising from forward exchange contract is assessable as capital gain. Consequently the grounds raised by the Assessee are treated as partly allowed. Decision in the case of CITICORP INVESTMENT BANK (SINGAPORE) LTD. VERSUS DEPUTY DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) -1(2) MUMBAI 2012 (9) TMI 44 - ITAT MUMBAI followed. In the result Assessee s appeal is partly allowed.

Summary

Issues:
1. Taxability of net profit made on purchase and sale of currency pursuant to underlying forex contracts.
2. Classification of income as business income or capital gain.
3. Treatment of income from forward exchange contract as capital receipt.

Analysis:
1. The appeal was against the assessment order taxing the net profit of Rs. 2,93,47,992 made on actual purchase and sale of currency as 'income from other sources.' The assessee argued that the income should be considered as business income due to hedge contracts protecting investments from foreign currency fluctuations. The Commissioner (Appeals) upheld the taxability of the income as per the DTAA between India and U.S.A.

2. The assessee, a subsidiary of Citibank N.A., had receipts from the sale of shares and net profit from currency transactions. The Assessing Officer treated the currency profit as 'Income From Other Sources' despite the assessee's contentions of it being business income or capital gain. The Commissioner (Appeals) rejected the arguments and upheld the tax treatment under the DTAA.

3. The assessee's main argument was that the income from forward contracts should be treated as capital receipt not chargeable to tax. The Tribunal considered previous decisions where similar transactions were treated as capital gains due to their direct nexus with investments. Relying on consistent views, the Tribunal held that the income from forward exchange contracts should be assessed as capital gain, following the decisions of various Mumbai Benches.

In conclusion, the Tribunal partly allowed the appeal, treating the income arising from forward exchange contracts as capital gain. The decision was based on the direct nexus of the transactions with the assessee's investments, following the precedent set by previous decisions.