2017 (3) TMI 1797 - AT - Income Tax

ITAT Mumbai: Forward FX contracts gains as capital gains, allows set off of capital losses

The ITAT Mumbai ruled in favor of the assessee, holding that gains from forward foreign exchange contracts are to be treated as capital gains and not as ... Gain on cancellation of forward foreign exchange contracts - Characterization of income capital gain OR Income from Other sources - HELD THAT:- As could be seen from the material on record, the only issue in dispute between the parties is in relation to the status of gain derived from the forward foreign exchange contract, whether to be assessed as capital gain or income from other sources. Undisputedly, this is a recurring dispute between the assessee and the department from earlier assessment years and in assessee’s own case for A.Y. 2001-02 [2012 (12) TMI 1195 - ITAT MUMBAI] has held that income arising from forward foreign exchange contract is assessable under the head “Capital gains”. Hence we hold that the gains arising from forward foreign exchange contract are assessable under the head “Capital gain” and not as “Income from other sources”. Hence, grounds raised by the department on this issue are dismissed. Issues:1. Treatment of gain on cancellation of forward foreign exchange contracts as capital gain.2. Allowance of set off of brought forward capital loss against gains from forward foreign exchange contract.Issue 1: Treatment of gain on cancellation of forward foreign exchange contracts as capital gainThe appeal and cross-objection were against the common order of the CIT(A) for the A.Y. 2009-10. The departmental appeal focused on the decision of the CIT(A) regarding the treatment of gain on cancellation of forward foreign exchange contracts as capital gain. The assessee, a non-resident company, had not offered the gains on cancellation of contracts to tax, claiming them as capital receipts. The AO disagreed and treated the gains as income from other sources. The CIT(A) referred to previous ITAT decisions in the assessee's favor for A.Y. 2001-02, 2006-07, and 2007-08, holding that such gains are to be treated as capital gains. The ITAT, following the precedent, held that gains from forward foreign exchange contracts are assessable under the head 'Capital gain' and not as 'Income from other sources.' The department's appeal on this issue was dismissed.Issue 2: Allowance of set off of brought forward capital loss against gains from forward foreign exchange contractThe cross-objection raised by the assessee included a claim for the set off of brought forward capital loss against gains from forward foreign exchange contracts. The ITAT noted that since the gains were treated as capital gains, the assessee was entitled to set off such gains against the brought forward capital loss as per statutory provisions. The CIT(A) had dismissed the claim without adjudicating on its merits. The ITAT directed the AO to verify the claim and allow consequential relief to the assessee. Consequently, the assessee's cross-objection was partly allowed for statistical purposes.In conclusion, the ITAT Mumbai ruled in favor of the assessee, holding that gains from forward foreign exchange contracts are to be treated as capital gains and not as income from other sources. The ITAT also directed the AO to allow the set off of brought forward capital loss against the gains from such contracts, providing relief to the assessee.