Foreign exchange hedge gain linked to acquisition of capital assets retains capital character and is not income from other sources.

A gain arising on early settlement of a forward foreign exchange contract used to hedge a foreign currency loan for acquisition of debentures was treated as capital in nature. The contract was linked to the purchase of capital assets, so the settlement receipt retained the character of the underlying capital transaction rather than becoming income from other sources. The objection that remittance to Singapore had not been proved was not accepted on the record. The addition made by taxing the hedge settlement gain as income from other sources was deleted.

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Issues: Whether the gain arising on early settlement of a forward foreign exchange contract entered into to hedge the foreign currency loan used for purchase of debentures was assessable as capital gain or as income from other sources.

Analysis: The forward contract was entered into to safeguard the foreign currency loan taken for acquiring debentures, and the debentures were accepted as capital assets. The disputed receipt arose from settlement of the hedge contract linked to that acquisition. Following the reasoning already applied in the assessee's sister concern and the principle that the character of such settlement gain depends on the underlying capital asset, the receipt retained the character of a capital accretion. The objection based on the supposed need to prove remittance of money to Singapore was not entertained because that factual basis was not in dispute on the record.

Conclusion: The gain was held to be capital gain and not income from other sources.

Final Conclusion: The additions made by treating the foreign exchange settlement gain as income from other sources were deleted, and the assessee succeeded on the substantive issue.

Ratio Decidendi: Where a forward foreign exchange contract is entered into as a hedge for acquisition of a capital asset, the gain or loss on settlement of that contract takes the same capital character as the underlying transaction.

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