2019 (7) TMI 1560 - AT - Income Tax

Foreign exchange gain on underlying Forward Foreign Exchange Contracts - Characterization of income capital gain OR Income from Other sources - whether CIT(A) was right in holding that foreign exchange gain on underlying Forward Foreign Exchange Contracts has to be considered on capital account and hence constitute a capital gain when such a contract is not a capital Asset? - HELD THAT - The assessee is stated to be incorporated in and a tax resident of USA. It is a 100% subsidiary of Citibank N.A. USA. It makes investment in Indian companies through Foreign Direct Investment route. During the year it earned gains of 85.68 Crores on cancellation and rollover of forward foreign exchange contracts which were claimed to be in the nature of capital receipts not chargeable to tax on the logic that contracts were entered into to protect the investment in India from foreign currency fluctuation and there being no cost for entering into these transactions. In the alternative the attention was inter-alia drawn to the fact that in terms of Tribunal s decision for AY 2001-02 the gains were to be assessed as Short-Term Capital Gains. However disregarding the same Ld. AO proceeded to assess the same under the head Income from other sources. As stated earlier the first appellate authority concurred with assessee s stand relying upon its own decision in AY 2012-13 which in turn relied upon Tribunal s order for other years. Since the impugned decision only follows the orders of Tribunal for other years no fault could be found in the same. - Decided against revenue

Summary

Issues:
1. Tax treatment of foreign exchange gain on underlying Forward Foreign Exchange Contracts.
2. Classification of foreign exchange gain under capital gains or Income from Other Sources.

Analysis:

Issue 1: Tax treatment of foreign exchange gain on underlying Forward Foreign Exchange Contracts
The appeal by the revenue contested the order of the Ld. Commissioner of Income-Tax (Appeals) for the Assessment Year 2013-14. The main contention revolved around whether the foreign exchange gain on underlying Forward Foreign Exchange Contracts should be considered on capital account and constitute a capital gain, even if such contracts are not considered capital assets. The revenue argued that the gains should be taxable under the head Income from Other Sources. The assessee, a foreign company incorporated in the USA, earned gains on cancellation and rollover of forward foreign exchange contracts during the year. The assessee claimed these gains to be capital receipts not chargeable to tax, as the contracts were entered into to protect investments in India from foreign currency fluctuations.

Issue 2: Classification of foreign exchange gain under capital gains or Income from Other Sources
The revenue's appeal was based on the argument that the gains should be taxable under Income from Other Sources, while the assessee contended that the gains should be treated as capital gains. The Ld. CIT(A) had deleted the additions by relying on previous decisions in the assessee's own case for different assessment years. The Tribunal noted that the issue was already settled in the assessee's favor in previous years, and the Ld. CIT(A) had followed the same reasoning in this case as well. The Tribunal found that the impugned decision was consistent with previous orders and that there was no change in the factual matrix. Consequently, both the appeal and cross-objection were dismissed, affirming the tax treatment of the foreign exchange gains on Forward Foreign Exchange Contracts as capital gains.

This judgment highlights the importance of consistency in tax treatment based on previous decisions and the significance of factual continuity in determining tax liabilities related to foreign exchange gains on financial contracts.