2016 (7) TMI 456 - AT - Income Tax

Set off of loss from settlement of forward contracts for foreign currency against income from other sources - Held that - As relying on assessee s own case for assessment years 1998-99 and 2005-06 find no error in the orders of the authorities below, in the year under consideration, in holding that the loss arising from settlement of forward contract taken by the assessee to safeguard the foreign exchange loan taken for acquisition of shares/debentures is capital loss as returned by the assessee. There is no requirement for us to issue directions to the AO as urged by the assessee, since the AO is bound to follow the directions of the Hon ble High Court when the appeals before their Lordships is decided. Finding no merit in this ground raised and in the light of the decision of the Coordinate Bench (supra) upholding the assessee s claim in the matter, we dismiss ground No. 1 raised by the assessee. Application of section 79 - denial of carry forward of long term capital losses incurred in financial year - Held that - In the year under consideration, neither has there been a change in the shareholding pattern of the assessee nor has there been any claim for set off of carried forward of losses of the year s prior to A.Y. 2005-06. Hence, in our view, and as contended by the learned A.R. for the assessee the conditions precedent for invoking and bringing into play the provisions of section 79 of the Act are absent and have been wrongly applied by the AO to disallow the aforesaid losses, the set off of which were never claimed in this year. We, therefore, delete the order of the AO on this issue as the same matter is to be examined in the year in which such claim is preferred. - Decided in favour of assessee

Summary

Issues Involved:
1. Set off of loss from settlement of forward contracts for foreign currency.
2. Disallowance of carry forward of long-term capital gains (LTCG) under section 79 of the Income Tax Act.
3. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Set off of loss from settlement of forward contracts for foreign currency:

The assessee contended that the authorities erred in not setting off the loss of ?6,84,34,804/- from early settlement of forward contracts for foreign currency against income from other sources, treating it instead as a capital loss. The assessee argued that the Department had previously treated similar gains as income from other sources in earlier years (A.Y. 1998-99 and 2005-06). The Tribunal noted that a Coordinate Bench had already decided in favor of the assessee in those years, holding that the capital gain/loss from early settlement of forward contracts should be treated as capital gain/loss since the underlying securities were held on capital account. The Tribunal found no error in the authorities' orders for the year under consideration and dismissed the ground raised by the assessee, stating there was no need to issue directions to the AO as the AO is bound to follow the High Court's directions when the appeals are decided.

2. Disallowance of carry forward of long-term capital gains under section 79:

The assessee argued that the authorities erred in applying section 79 of the Act and denying the carry forward of LTCG incurred in A.Y. 2003-04 and A.Y. 2004-05 due to a change in shareholding pattern in April 2004, despite not claiming set-off of losses during the year under consideration. The Tribunal found that the change in shareholding occurred in A.Y. 2005-06 and no set-off was claimed in A.Y. 2007-08. The Tribunal held that section 79 applies only if there is a change in shareholding in the year the set-off is claimed. Since no such change occurred in A.Y. 2007-08 and no set-off was claimed, the provisions of section 79 were wrongly applied. The Tribunal allowed the assessee's appeal on this ground, stating the matter should be examined in the year the set-off is claimed.

3. Initiation of penalty proceedings under section 271(1)(c):

The assessee challenged the initiation of penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income. The Tribunal found this ground to be premature and not maintainable since no penalty had been levied in the impugned order. Therefore, the Tribunal dismissed this ground as premature and not maintainable.

Conclusion:

The appeal was partly allowed. The Tribunal upheld the authorities' treatment of the loss from early settlement of forward contracts as capital loss but allowed the carry forward of LTCG, stating section 79 was wrongly applied. The challenge to penalty proceedings was dismissed as premature. The order was pronounced on 22nd June 2016.