2012 (9) TMI 44 - AT - Income Tax

Capital gain - nature of income arising from early settlement of forward foreign exchange contract - forward contract had been entered into by the assessee to safeguard the foreign exchange loan taken for purchase of debentures Held that - Debentures are capital assets - gains arising from early settlement of forward foreign exchange contract has to be treated as capital gain - appeals of the assessee are allowed.

Summary

Issues:
Nature of income from settlement of forward cover taken in foreign exchange.

Analysis:
The appeals by the assessee were directed against the orders of CIT(A) for the Assessment Years 2005-06 and 1998-99 regarding the nature of income from settlement of forward cover in foreign exchange. The assessee, an investment bank and tax resident of Singapore, derived income from various sources, including capital gains. The dispute centered around the treatment of income from early settlement of foreign exchange contracts as capital gains. The Assessing Officer considered the gains as income from other sources, stating that the forward contract transaction was speculative and not linked to any underlying asset. The CIT(A) upheld this view, emphasizing that the forward cover was optional for non-residents and treated the income as income from other sources. The assessee contended that the gains should be treated as capital gains, citing various Tribunal decisions and arguing that the forward contract was linked to the purchase and sale of capital assets.

The CIT(A) referred to exchange control regulations, highlighting that forward cover for non-residents was optional and viewed the forward cover transaction as independent from the debt instruments transaction. The CIT(A) concluded that the gains from the settlement of forward contracts could not be considered as capital gains since the foreign exchange was settled by price difference and not held as a capital asset. The CIT(A) agreed with the Assessing Officer that the transaction was speculative and upheld the treatment of income as income from other sources. The assessee, however, argued that similar issues had been decided in favor of the assessee in a related case and requested that the gains be treated as income from capital gains.

The Tribunal considered the nature of income arising from the settlement of forward foreign exchange contracts, noting that the forward contracts were taken to safeguard foreign exchange loans used to purchase debentures, which were capital assets. Citing a previous Tribunal decision, the Tribunal held that income arising from the settlement of forward contracts taken to safeguard foreign exchange loans for capital asset acquisitions should be treated as capital in nature. The Tribunal found the facts in the present case identical to the previous decision and ruled in favor of the assessee, setting aside the orders of the CIT(A) and allowing the appeals filed by the assessee. The Tribunal also addressed a dispute regarding the levy of interest under section 234B, stating that it was consequential and should be recomputed by the Assessing Officer.

In conclusion, the Tribunal held that gains from the early settlement of forward foreign exchange contracts, taken to safeguard foreign exchange loans for capital asset acquisitions, should be treated as capital gains. The appeals of the assessee were allowed.