2024 (11) TMI 240 - AT - Income Tax

Forward Foreign Exchange Contract losses qualify as short-term capital loss under Section 74

ACIT, Mumbai Versus Emerging Markets Ltd.

The ITAT Mumbai held that loss from Forward Foreign Exchange Contracts (FCC) constitutes short-term capital loss. The assessee, a registered Foreign ... Treating the loss arising from Forward Foreign Exchange Contracts (“FCC”) as a short-term capital loss - assessee is registered in India as a Foreign Portfolio Investor and for safeguarding itself from foreign currency fluctuation risk, the assessee entered into FCC with HDFC Bank - HELD THAT:- We find that while considering a similar issue pertaining to the nature of income from settlement of forward cover taken in foreign exchange, the coordinate bench of the Tribunal in Citicorp Investment Bank (Singapore) Ltd [2012 (9) TMI 44 - ITAT MUMBAI] held that profit earned by a Singaporean bank on termination of forward contracts entered into for safeguarding it from foreign exchange fluctuation in respect of debentures purchased in India would be a capital gain exempt under Indo-Singaporean DTAA.' Also see D.B. International (Asia) Ltd. [2013 (7) TMI 1109 - ITAT MUMBAI] held that the gain from forward foreign exchange contract has to be treated as capital gain. As a natural corollary the loss arising from such contract has to be treated as capital loss. Thus, we find no infirmity in the impugned order in considering the loss on rollover/cancellation of FCC to be short-term capital loss eligible for carry forward under the head “capital gains”. Accordingly, grounds raised by the Revenue dismissed. Issues:1. Classification of loss from Forward Foreign Exchange Contracts as short-term capital loss.Analysis:The appellate tribunal heard an appeal filed by the Revenue challenging an order passed by the Commissioner of Income Tax (Appeals) for the assessment year 2020-21. The Revenue raised grounds questioning the treatment of a loss as a short-term capital loss. The primary issue in the appeal was the classification of the loss arising from Forward Foreign Exchange Contracts (FCC) as a short-term capital loss.The assessee, a UK-based subsidiary engaged in investment activities in India, entered into FCC with HDFC Bank Ltd to hedge investments in Indian securities. The assessee incurred a loss from FCC during the year under consideration, which it carried forward as a short-term capital loss. The Assessing Officer disagreed with the assessee's treatment, considering the gains from FCC as income from other sources. However, the Commissioner of Income Tax (Appeals) allowed the appeal, following precedent cases, and classified the loss as a short-term capital loss eligible for carry forward under the head 'capital gains.'The tribunal analyzed the nature of income from FCC settlement, citing decisions where similar transactions were treated as capital gains. The tribunal referred to cases where gains from forward exchange contracts were assessed as capital gains, supporting the assessee's argument. The tribunal emphasized that the mere pendency of appeals against previous decisions does not invalidate the current findings. Therefore, the tribunal upheld the Commissioner's decision, dismissing the Revenue's appeal.In conclusion, the tribunal upheld the classification of the loss from FCC as a short-term capital loss, in line with previous decisions and legal principles. The appeal by the Revenue was dismissed, affirming the treatment of the loss under the head 'capital gains.'