2023 (10) TMI 254 - AT - Income Tax

Determine the nature of loss arising on forward contracts cancelled by the assessee prior to the date of settlement - HELD THAT - It could be seen that the assessee has entered into forward contract to safeguard against the foreign exchange fluctuation on its revenue receipts from foreign parties. These transactions, being in the nature of hedging transactions, would fall under exempted category of speculative transactions u/s 43(5)(a). Another finding is that the quantum of hedging was reasonable having regard to the export turnover of the assessee. It is actual loss which had arisen on account of cancellation of the forward contracts entered into with the banks to safeguard realization of export proceeds. CIT(A) has relied on the binding decision of Celebrity Fashions Ltd. 2020 (9) TMI 1022 - MADRAS HIGH COURT wherein such loss was allowed as a business loss. It could thus be seen that the adjudication of CIT(A) is in line with the correct position of law and backed by binding judicial precedents. No contrary decision has been shown to us. Therefore, the adjudication rendered in the impugned order could not be faulted with. In the result, the revenue s appeal stands dismissed. Nature of income - Forfeiture of security deposit - termination of certain lease agreement - income from house property or 'income from other sources' - HELD THAT - The amount waived by one party would be the income of the other party. The amount waived should only be considered as income from other sources . It is not correct on the part of the assessee that there is extinguishment of right to rent. Right to rent is not transferred to anyone. Right to rent had not extinguished also as the assessee can very well rent the property to any other person as it wishes immediately after the forfeiture of the deposit also. The right to rent the property was very much with the assessee even after the forfeiture and hence, it could not be treated as transfer. Therefore, assessee's claim that there was extinguishment of right could not be accepted. There was no transfer of any right which would justify assessment of receipt as capital gains. The deposit was in the nature of revenue only as rent gets adjusted in it. Hence, it could not be treated as capital receipt in the hands of the assessee. It could also not be assessed as advance rent as canvassed by the assessee as the property was not continuing on rent with the same person. Since it was revenue in nature and the same could not be taxed under income from house property , the same was liable to be taxed as u/s. 56(2). Accordingly, the action of ld. AO was upheld which is the grievance of the assessee. We find that this issue has rightly been clinched by learned first appellate authority. It is quite clear that from assessee s point of view, there is no extinguishment of any right. The impugned amount was received as security deposit and a part of the same has been forfeited by the assessee. The security deposit has changed its character upon forfeiture and the same is clearly an income of the assessee. As rightly held, right to rent is not transferred by the assessee to anyone. Neither this right has been extinguished in any manner. Therefore, the aforesaid retained amount could not be assessed as capital gains. The same is also not in the nature of advance rent. Therefore, the same would be assessable under the head income from house property only. We order so. The impugned order does not require any interference on our part.

Summary

Issues Involved:
1. Nature of loss arising on forward contracts cancelled by the assessee.
2. Nature of amount received by the assessee on termination of certain lease agreement.

Summary:

Issue 1: Nature of Loss on Forward Contracts
The Revenue's appeal questioned whether the loss on forward contracts of Rs. 10.83 Crores should be considered as speculative loss under Sec. 43(5) of the Income Tax Act. The Assessing Officer (AO) had disallowed the loss, classifying it as speculative since the contracts were settled otherwise than by actual delivery. However, the Commissioner of Income Tax (Appeals) [CIT(A)] allowed the loss as business loss, citing that the forward contracts were hedging transactions aimed at safeguarding against foreign exchange fluctuations and were thus exempt under Sec. 43(5)(a). The CIT(A) relied on the jurisdictional Madras High Court decision in CIT Vs. Celebrity Fashions Ltd., which treated similar losses as business losses. The Tribunal upheld the CIT(A)'s decision, finding it consistent with binding judicial precedents and dismissing the Revenue's appeal.

Issue 2: Nature of Amount Received on Lease Termination
The Assessee's appeal contested the treatment of Rs. 3,57,41,297/- received on the termination of a lease agreement as 'income from other sources' instead of 'long term capital gains' or 'income from house property'. The AO had treated the forfeited lease deposit as 'income from other sources', arguing that there was no extinguishment of any right justifying it as capital gains. The CIT(A) upheld the AO's decision, noting that the amount waived by the lessee was revenue in nature and did not constitute a transfer of any right. The Tribunal agreed with the CIT(A), concluding that the retained amount was revenue in nature and correctly assessed under 'income from other sources', thereby dismissing the Assessee's appeal.

Conclusion:
Both appeals were dismissed, affirming the CIT(A)'s decisions on the respective issues. The Tribunal found no reason to interfere with the impugned orders.

Order pronounced on 09th August, 2023.