Tribunal allows appeal on capital loss treatment, dismisses penalty challenge. Order pronounced on 22nd June 2016.

The Tribunal partly allowed the appeal. It upheld the treatment of the loss from settlement of forward contracts as a capital loss but allowed the carry forward of long-term capital gains, stating that section 79 was wrongly applied. The challenge to penalty proceedings was dismissed as premature. The order was pronounced on 22nd June 2016.

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Issues Involved:
1. Set off of loss from settlement of forward contracts for foreign currency.
2. Disallowance of carry forward of long-term capital gains (LTCG) under section 79 of the Income Tax Act.
3. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Set off of loss from settlement of forward contracts for foreign currency:

The assessee contended that the authorities erred in not setting off the loss of Rs. 6,84,34,804/- from early settlement of forward contracts for foreign currency against income from other sources, treating it instead as a capital loss. The assessee argued that the Department had previously treated similar gains as income from other sources in earlier years (A.Y. 1998-99 and 2005-06). The Tribunal noted that a Coordinate Bench had already decided in favor of the assessee in those years, holding that the capital gain/loss from early settlement of forward contracts should be treated as capital gain/loss since the underlying securities were held on capital account. The Tribunal found no error in the authorities' orders for the year under consideration and dismissed the ground raised by the assessee, stating there was no need to issue directions to the AO as the AO is bound to follow the High Court's directions when the appeals are decided.

2. Disallowance of carry forward of long-term capital gains under section 79:

The assessee argued that the authorities erred in applying section 79 of the Act and denying the carry forward of LTCG incurred in A.Y. 2003-04 and A.Y. 2004-05 due to a change in shareholding pattern in April 2004, despite not claiming set-off of losses during the year under consideration. The Tribunal found that the change in shareholding occurred in A.Y. 2005-06 and no set-off was claimed in A.Y. 2007-08. The Tribunal held that section 79 applies only if there is a change in shareholding in the year the set-off is claimed. Since no such change occurred in A.Y. 2007-08 and no set-off was claimed, the provisions of section 79 were wrongly applied. The Tribunal allowed the assessee's appeal on this ground, stating the matter should be examined in the year the set-off is claimed.

3. Initiation of penalty proceedings under section 271(1)(c):

The assessee challenged the initiation of penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income. The Tribunal found this ground to be premature and not maintainable since no penalty had been levied in the impugned order. Therefore, the Tribunal dismissed this ground as premature and not maintainable.

Conclusion:

The appeal was partly allowed. The Tribunal upheld the authorities' treatment of the loss from early settlement of forward contracts as capital loss but allowed the carry forward of LTCG, stating section 79 was wrongly applied. The challenge to penalty proceedings was dismissed as premature. The order was pronounced on 22nd June 2016.

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