2018 (11) TMI 1735 - AT - Income Tax

Gain on cancellation of forward foreign exchange contracts - Characterization of income capital gain OR Income from Other sources - HELD THAT - As decided in own case 2017 (3) TMI 1797 - ITAT MUMBAI as could be seen from the material on record, the only issue in dispute between the parties is in relation to the status of gain derived from the forward foreign exchange contract, whether to be assessed as capital gain or income from other sources. Undisputedly, this is a recurring dispute between the assessee and the department from earlier assessment years and in assessee s own case for A.Y. 2001-02 2012 (12) TMI 1195 - ITAT MUMBAI has held that income arising from forward foreign exchange contract is assessable under the head Capital gains . Hence we hold that the gains arising from forward foreign exchange contract are assessable under the head Capital gain and not as Income from other sources . Hence, grounds raised by the department on this issue are dismissed.

Summary

Issues:
1. Tax treatment of foreign exchange loss on underlying Forward Foreign Exchange Contracts - capital account or Income from other sources?
2. Taxability of gain on cancellation and rollover of forward foreign exchange contracts under different heads.

Analysis:
1. The appeal and cross objection were against the CIT(A)'s order regarding the tax treatment of foreign exchange loss on Forward Foreign Exchange Contracts for AY 2011-12. The revenue contended that the loss should be considered on capital account, while the assessee argued it should not be taxable under 'Income from other sources.' The assessee, a non-resident company in the financial market, declared income at Nil initially. The assessment included gains on cancellation and rollover of contracts under 'Income from other sources,' contrary to the assessee's claim of capital receipts not taxable under the Act.

2. The CIT(A) ruled in favor of the assessee, considering the gains as taxable under 'capital gains' based on ITAT decisions for previous years. The revenue appealed, but during the hearing, it was acknowledged that the issue was consistently decided in favor of the assessee by ITAT in previous years. The ITAT noted that gains from cancellation/rollover of contracts were to be treated as capital gains, not 'Income from other sources,' citing precedents from the assessee's earlier cases.

3. The ITAT, aligning with previous decisions, upheld that gains from cancellation/rollover of forward foreign exchange contracts should be assessed under 'capital gains,' not 'Income from other sources.' The CIT(A)'s decision was deemed correct, and the appeal by the revenue was dismissed. The assessee's cross objection, asserting that the receipts should be considered capital and not taxable in India, was withdrawn during the hearing and dismissed accordingly.

In conclusion, the ITAT upheld the tax treatment of gains from forward foreign exchange contracts as capital gains, following precedents from earlier years and dismissing the revenue's appeal while also dismissing the assessee's withdrawn cross objection.