2018 (6) TMI 1111 - AT - Income Tax

Income from early settlement of forward foreign exchange contract - to be assessed under the head Capital Gain OR Income from Other Sources - assessee is a tax resident of Singapore - Held that - The Tribunal in assessee s own case for assessment year 2005 06 and 2006 07 2012 (10) TMI 1179 - ITAT MUMBAI has held that the gain from forward foreign exchange contract has to be treated as capital gain. As a natural corollary the loss arising from such contract has to be treated as capital loss. Capital gain - sale of shares, debt instruments and derivatives - taxability in view of Article 13 of the India Singapore Tax Treaty - Held that - Article 13(4) in clear and unambiguous terms expresses itself as not an exemption provision but it speaks of taxability of particular income in a particular State by virtue of residence of the assessee. That being the case, the provisions of Article 24 of India Singapore Tax Treaty does not have much relevance insofar as it relates to applicability of Article 13(4) to income derived from capital gain. The expression exempt with reference to the capital gain derived by the assessee, in our view, has been loosely used. On the contrary, the overriding nature of Article 13(4) of the Tax Treaty makes the capital gain taxable only in the country of residence of the assessee. - decided against revenue

Summary

Issues:
1. Assessment of income from early settlement of forward foreign exchange contract under the head "Capital Gain" or "Income from Other Sources".
2. Taxability of capital gain derived by the assessee under the India-Singapore Tax Treaty.

Issue 1: Assessment of Income from Forward Foreign Exchange Contract:
The dispute arose when the Assessing Officer treated the loss incurred on the cancellation of a forward foreign exchange contract as income from other sources, contrary to the assessee's claim that it should be assessed under the head "Capital Gain." The DRP directed the Assessing Officer to delete the addition based on previous Tribunal decisions in favor of the assessee. The Tribunal upheld the DRP's decision, emphasizing that the gain or loss from such contracts should be treated as capital in nature, following consistent rulings in the assessee's previous cases. The ground raised by the Revenue was dismissed.

Issue 2: Taxability of Capital Gain under India-Singapore Tax Treaty:
The Assessing Officer challenged the DRP's decision that the capital gain derived by the assessee was not taxable in India under Article 13 of the India-Singapore Tax Treaty. The Assessing Officer contended that the exemption under Article 13(4) would only apply to the extent of income repatriated to Singapore. However, the DRP disagreed, holding that Singapore had exclusive rights to tax the income, and restrictions under Article 24 did not apply. The Tribunal supported the DRP's decision, clarifying that Article 13(4) of the Tax Treaty mandates that the gain derived by a resident of a contracting state shall be taxable only in that state. Therefore, the capital gain from the sale of Indian securities was only taxable in Singapore, and the provisions of Article 24 were not applicable in this context. The Tribunal dismissed the Revenue's appeal, upholding the DRP's directions.

In conclusion, the Tribunal upheld the DRP's decision in both issues, emphasizing the tax treatment of gains or losses from forward foreign exchange contracts as capital in nature and clarifying the taxability of capital gains under the India-Singapore Tax Treaty. The Revenue's appeal was dismissed, affirming the assessee's position in both matters.