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Issues: (i) Whether gains arising on cancellation of foreign exchange forward contracts entered into to hedge investment exposure were to be assessed as capital gains or as income from other sources. (ii) Whether levy of interest under section 234B of the Income-tax Act, 1961 survived after the principal addition was deleted.
Issue (i): Whether gains arising on cancellation of foreign exchange forward contracts entered into to hedge investment exposure were to be assessed as capital gains or as income from other sources.
Analysis: The contracts were entered into in connection with the assessee's investment activity and to hedge foreign exchange exposure arising from such investments. The earlier Tribunal view, following the principle that where the dominant purpose of the forward contract is linked to investments, the resulting gain or loss belongs to the capital field, was applied. The treatment under section 115AD did not alter the character of the receipt. The contrary view treating the amount as income from other sources was held to be inapplicable.
Conclusion: The gains were held to be capital gains and not income from other sources, in favour of the assessee.
Issue (ii): Whether levy of interest under section 234B of the Income-tax Act, 1961 survived after the principal addition was deleted.
Analysis: The interest issue was treated as consequential to the fate of the substantive addition. Once the addition on account of cancellation gains was deleted, the interest computation required recomputation on the revised income.
Conclusion: The levy of interest under section 234B was consequential and was directed to be recomputed, in favour of the assessee to that extent.
Final Conclusion: The appeal succeeded on the main characterization issue and was allowed only to the extent that the interest component was left to be recomputed consequentially, resulting in partial relief to the assessee.
Ratio Decidendi: Gains from cancellation of foreign exchange forward contracts entered into as a hedge for investment exposure are capital in nature where the contracts have a direct nexus with the assessee's investments.
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