TaxTMI 
TaxTMI 
2026 (7) TMI 1580
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....der section 153 of the Act; and is accordingly illegal and liable to be quashed. 2. On the facts and circumstances of the case and in law, the Ld. AO/ Ld. DRP has grossly erred in taxing the impugned income under the provisions of the Act read with provisions of the Agreement between the Government of the Republic of India and the Government of the Republic of Singapore for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. 3. On facts and circumstances of the case and in law, the Ld. AO / Ld. DRP erred in denying / rejecting the Appellant's claim that income from settlement of forward foreign exchange contract is to be assessed under the head *"Capital Gain"* vis-a-vis under the head *"Income from Other Sources"*, under the Act. 4. On the facts and circumstances of the case and in law, the Ld. AO erred in levying consequential interest, under the relevant provisions of the Act, while computing income and tax thereon in the computation sheet forming part of the final assessment order. 5. On the facts and in the circumstances of the case and in law, the Ld. AO erred in raising erroneous deman....
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....nal in assessee's own case for earlier years. 2.2. The Ld.AO, however, did not accept the explanation furnished by the assessee. According to the Ld.AO, the assessee failed to establish that the forward foreign exchange contracts were inextricably linked with the underlying debt investments and, therefore, the gain arising therefrom could not be treated as capital gains. The Ld.AO, accordingly, in the draft assessment order passed under section 144C(1) of the Act, held that the gain of Rs. 11,94,99,597/- arising on cancellation of forward foreign exchange contracts was taxable under the head "Income from Other Sources" and proposed to assess the total income of the assessee at Rs. 11,96,10,047/- as against the returned income of Rs. 1,10,450/-. Aggrieved by the draft assessment order, the assessee filed objections before the Ld.DRP. 3. Before the Ld.DRP, the assessee reiterated that the forward contracts were entered into only for hedging purposes in relation to the underlying debt securities and were not independent transactions. In support of the same, the assessee furnished additional evidences, inter alia, comprising the list of debt securities purchased/sold during th....
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....f the underlying debt securities and deal slips issued at the time of booking / cancellation of the forward contracts. 4.3. Referring to the additional evidence filed before the Ld.DRP, the Ld.AR submitted that the gains arising on early cancellation of forward contracts were duly reconciled with the amount disclosed in the return of income and the material on record clearly established that the forward contracts were entered into only to safeguard the assessee against the risk arising from fluctuations in foreign exchange rates in relation to the underlying debt securities. 4.4. The Ld.AR submitted that the forward contracts for foreign currency constitute capital assets within the meaning of section 2(14) of the Act. In this regard, it was contended that the expression "capital asset" includes property of any kind and, in the case of an FPI, specifically includes securities held in accordance with the SEBI regulations. The Ld.AR submitted that the expression "securities" under section 2(h) of the Securities Contracts (Regulation) Act, 1956 includes "derivatives" and the definition of derivative is wide enough to include instruments derived from debt instruments and risk ins....
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.... submitted that the assessee failed to establish that the gains arising from cancellation of forward foreign exchange contracts were directly linked with the underlying debt investments and, therefore, the Ld.AO was justified in treating the same as taxable under the head "Income from Other Sources." 4.8. The Ld. DR submitted that the assessee had not demonstrated that it traded in foreign exchange as a capital asset linked to its investment portfolio and not as an independent asset class. It was further submitted that the DRP rightly sustained the action of the Ld.AO to keep the issue alive in the interest of the Revenue. The Ld. DR, thus, supported the impugned order and prayed that the action of the Ld.AO . We have perused the submissions advanced by both sides in light of the record placed before us. 5. Ground No.1, challenging the validity of the final assessment order on the ground of limitation, was not pressed by the assessee at the time of hearing by way of the letter dated 29/04/2026, scanned and reproduced as under: "Citicorp Investment Bank (Singapore) Limited 5 Changi Business Park Crescent, Level 5 Singapore, 29 April, 2026....
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....red under the SEBI (Foreign Portfolio Investors) Regulations, 2019 and is engaged in making investments in debt securities in India. It is also not in dispute that the forward foreign exchange contracts in question were entered into by the assessee in the course of such investment activity. The consistent stand of the assessee before the authorities below as well as before this Tribunal is that these forward contracts were booked only for hedging the foreign exchange exposure arising from the underlying debt securities held by it and were not independent speculative or standalone transactions. In support of the said stand, the assessee placed reliance on additional evidences that were filed before the DRP including the list of debt securities purchased / sold during the year, the list of forward contracts entered into for hedging purposes, deal confirmations evidencing purchase / sale of the underlying debt securities and deal slips issued at the time of booking/cancellation of the forward contracts. 6.2. On a perusal of the material placed before us, we find considerable force in the submissions advanced by the Ld.AR that the forward contracts in question were inextricably link....
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....he expression "securities" under the Securities Contracts (Regulation) Act includes derivatives, and a forward foreign exchange contract, being an instrument whose value is derived from exchange rate movements, would fall within the broad ambit of such derivative / risk instrument. Further, on cancellation / early settlement of the forward contract, the bundle of rights and obligations embedded in the contract stands extinguished and, therefore, the same answers the description of transfer within the meaning of section 2(47) of the Act. 6.5. Apart from the above, we find that the issue is squarely covered in favour of the assessee by the decisions of the co-ordinate Bench in assessee's own case for earlier years. The litigation history placed before us shows that in AY 1998-99, the Tribunal in assessee's own case (supra), held that gains arising from early settlement of forward foreign exchange contracts were liable to be treated as capital gains. Similar view has been taken by this Tribunal in assessee's own case in subsequent assessment years as well. It is also seen from the litigation history placed before us that in certain years where losses arose on early cancellation of ....