Hedging gains on forward exchange contracts linked to capital investment were treated as capital receipts, not business income.

Foreign exchange forward contracts entered into to hedge a capital investment were treated as having the same character as the underlying investment where the contracts had a direct nexus with acquisition or protection of the capital asset. On that basis, the gain arising on settlement of the hedging contracts was held to be capital in nature and not assessable as business income or income from other sources. The receipts were therefore taxable, if at all, only under the capital gains head, giving relief to the assessee.

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Issues: Whether the gain arising from purchase and sale of foreign currency under forward exchange contracts entered into to hedge the assessee's investment was taxable as business income or income from other sources, or whether it was a capital receipt assessable only as capital gains.

Analysis: The assessee, a non-resident investor, entered into forward exchange contracts to protect its capital investment from foreign exchange fluctuation. The Tribunal followed its earlier decisions holding that where the forward contract has a direct nexus with the acquisition or protection of a capital asset, the gain or loss arising on its settlement partakes the character of the underlying investment. On that reasoning, the receipts from the hedging contracts were treated as capital in nature and not as income from other sources.

Conclusion: The gain from the forward exchange contracts was held to be assessable as capital gains and not as business income or income from other sources, resulting in relief to the assessee.

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