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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K PRADHAN
Aforesaid appeal of the assessee is directed against order dated 25th January 2017, passed under section 144C(13) r/w section 143(3) of the Income Tax Act, 1961 (for short “the Act”), in pursuance to the directions of the Dispute Resolution Panel (DRP–1), Mumbai, for the assessment year 2012–13
2 Credit Susse Singapore Ltd.
The core issue arising for consideration in the present appeal is, whether the gain derived from cancellation of foreign exchange forward contracts is to be treated as income from capital gain or income from other sources?
Brief facts are, the assessee a tax resident of Singapore is registered as a Foreign Institutional Investor (FII) with Securities Exchange Board of India (SEBI) and conducts portfolio investment in Indian securities. For the assessment year under dispute, the assessee filed its return of income on 28th September 2012, declaring total income of ` 22,51,83,686. During the assessment proceedings, the Assessing Officer while examining the return of income and the computation of income filed by the assessee noticed that in the notes attached to the computation of income, the assessee has claimed that gain of ` 6,24,70,089 on cancellation of foreign exchange contract is on capital account, hence, not chargeable to tax in India. Without prejudice to the aforesaid claim, the assessee also claimed that even if the income is treated as capital gain, it is not taxable in India as per Article–13(4) of the India–Singapore Double Taxation Avoidance Agreement (DTAA). When the Assessing Officer called upon the assessee to justify the aforesaid claim, the assessee submitted that it has entered into foreign exchange forward contract to hedge its 3 Credit Susse Singapore Ltd.
exposures in respect of its Indian investments being shares / exchange traded derivative contracts. However, the Assessing Officer did not accept the claim of the assessee and concluded that gain of ` 6,24,70,089, derived from cancellation of foreign exchange forward contract is to be treated as income from other sources, hence, taxable under Article–23 of the India–Singapore DTAA. Being aggrieved of the aforesaid addition made in the draft assessment order, the assessee raised objections before the DRP.
Before the DRP, though, the assessee submitted that the issue is covered by the decision of the Tribunal in assessee’s own case for the assessment year 2007–08, however, the DRP declining to follow the order of the Tribunal proceeded to sustain the order of the Assessing Officer. Accordingly, the Assessing Officer passed the impugned order following the directions of the DRP.
The learned Authorised Representative reiterating the stand taken before the DRP, submitted that the issue is covered by the decision of the Tribunal in assessee’s own case for the assessment year 2007–08. In this regard, he submitted a copy of the decision of the Tribunal in Credit Suisse (Singapore) Ltd. v/s ADIT, [2012] 24 taxmann.com 66.
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The learned Departmental Representative, though, agreed that the issue was decided by the Tribunal in favour of the assessee in assessment year 2007–08, however, he strongly relied upon the observations of the DRP.
We have considered rival submissions and perused materials on record. The dispute in the present appeal is confined to the issue whether the gain derived from cancellation of foreign exchange forward contract is a capital receipt and is to be treated as capital gain as claimed by the assessed or it is to be treated as income from other sources as held by the Assessing Officer and the DRP. We find that while deciding identical nature of dispute in assessee’s own case for assessment year 2007–08, in the decision referred to above, the Tribunal has held as under:– ”7. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute. The only issue before us is that the gains of Rs. 304,847,277/- on cancellation of foreign exchange forwarding contracts is a capital receipt liable to capital gain or to be assessed under the head 'income from other sources'.
8. In Citicorp Investment Bank (Singapore) Ltd. (supra) the Tribunal after considering the decision of the Special Bench of the Tribunal in the case of Apollo Tyres Ltd. (supra) relied on by the ld. D.R. and the decision of Citicorp Banking Corpn., (supra) has held vide para 4.4 of the order as under:- The dispute raised before us is only with regard to the nature of income from early settlement of forward foreign exchange contract taken to safeguard the foreign exchange loan which had been availed by the assessee for purchase of debentures. The income from sale of debenture has been assessed as capital gain.
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Therefore, respectfully following the decision of the Tribunal in the case of sister concern Citicorp Bank Corporation, Bahrain (supra) we hold that gains arising from early settlement of forward foreign exchange contract has to be treated as capital gain. We accordingly set aside the orders of the CIT(A) and allow the appeals filed by the assessee."
9. In Citicorp Banking Corpn., Behrain (supra), the Tribunal after following the decision of the Special Bench of the Tribunal in Apollo Tyres Ltd. (supra) and Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) has held vide penultimate para of the order as under:- "So far as the facts before us are concerned, nowhere it is controverted by both the authorities below that the dominant purpose for entering into foreign exchange forward contract by the assessee was for clearly to hedge against the depreciation of the foreign currency and it has direct nexus with the investments made by the assessee. It is also admitted fact that the assessee is not doing any business here and the assessee is FII and only engaged in the investment and this fact is nowhere denied by both the authorities below. In our opinion, the loss accrued/arose on account of cancellation of foreign exchange forward contract is capital loss having direct nexus with the investment of the assessee and hence the assessee is entitled to set off the same. So far as the reference u/s. 115AD is concerned, in our opinion, the said section decide the quantum of the tax payable by the FIIS on the income from securities or capital gains and it has nothing to do with the determination of the nature of gain or loss, whether same is on account of capital or revenue account. Accordingly, grounds taken by the assessee are allowed."
In All India Tea & Trading Co. Ltd. (supra) relied on by the ld. D.R., it has been held (Headnote): "Held, that the assessee used the lands for agricultural purposes and derived agricultural income from the lands at the time of their requisition in 1949. The lands were being used by the landless people, after requisition, for agricultural purposes and were also deriving agricultural income from the lands at the time of their acquisition in 1959. Therefore, at all material times, the lands were agricultural lands and they were held by the assessee as owner although the assessee lost their physical possession in 1949 by requisition. Though the assessee was prevented from earning any agricultural income from the lands due to the requisition, the landless people by using the lands for agricultural purposes actually derived agricultural income from the lands in 1949, and at no point of time the agricultural lands became
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"capital assets" in the hands of the assessee. Therefore, the sum of Rs. 1,34,459 was exempt from capital gains tax." In the case before us the issue is entirely different, therefore, the decision relied on by the ld. D.R. is distinguishable and not applicable to the facts of the present case.
In the absence of any other distinguishing feature brought on record by the ld. D.R., we respectfully following the consistent view of the Tribunal (supra) hold that the gains arising on cancellation of foreign exchange forward contract has to be treated as capital gain and accordingly the A.O. and the DRP were not justified in treating the said gain as 'income from other sources'. The grounds taken by the assessee are, therefore, allowed.”
As could be seen from the aforesaid decision of, the Tribunal has held that the gain arising on cancellation of foreign exchange forward contract has to be treated as capital gain, hence, not taxable as income from other sources. There being no difference in facts brought to our notice by the learned Departmental Representative in the impugned assessment year, respectfully following the decision of the Co–ordinate Bench rendered in assessee’s own case, we hold that the gain derived from cancellation of foreign exchange forward contract has to be treated as capital gain. That being the case, such gain has to be governed by the provision of Article–13(4) of India–Singapore DTAA. Accordingly, ground no.2, is allowed. Consequently, all other grounds raised by the assessee either being consequential or having become redundant are dismissed.
In the result, assessee’s appeal is partly allowed. Order pronounced in the open Court on 05.10.2018