ACIT, AIR INDIA BUILDING, NARIMAN POINT, MUMBAI V. EMERGING MARKETS LIMITED , MUMBAI

ITA 2670/MUM/2024

AI Insights

The case revolves around the treatment of losses incurred from Forward Foreign Exchange Contracts (FCC) by Emerging Markets Ltd., a Foreign Portfolio Investor, during the assessment year 2020-21. The assessee entered into FCC with HDFC Bank to hedge investments in Indian securities against foreign currency fluctuations. The losses from these contracts were initially treated as income from other sources by the Assessing Officer (AO) but were later reclassified as short-term capital losses by the CIT(A). The Revenue appealed against this decision, arguing that the CIT(A) erred in law and fact. The Tribunal, referencing previous decisions and the nature of the assessee's activities, upheld the CIT(A)'s decision.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 470803 (ITAT-MUMBAI)
• Duration Of Justice: 5 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-11-2024
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 28-10-2024
• Assessment Year: 2020-2021
• Appeal Filed On: 10-05-2024
• Other Referred Cases: Citicorp Investment Bank (Singapore) Ltd V/s DDIT, DDIT v/s D.B. International (Asia) Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JANCY ELIZABETH
• Assessee Lawyers: AJIT JAIN; SIDDHESH CHOUGULE
• Keywords: Set aside; Business income; Capital asset; Capital receipt; Capital Gains; Wholly owned subsidiary; Double taxation relief; Permanent establishment
• Section: 143(3); 142(1); 143(2); 250; 56; 14A; 2(14)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “I” BENCH, MUMBAI BEFORESHRI SANDEEP SINGH KARHAIL, JUDICIAL MEMBER & SHRI OMKARESHWAR CHIDARA, ACCOUNTANT MEMBER ITA No.2670/MUM/2024 (Assessment Year :2020–21) ACIT 17th Floor, Air India Bldg, Nariman Point Mumbai - 400001 Maharashtra. ............... Appellant v/s Emerging Markets Ltd., Mumbai Maharashtra. PAN – AAFCC4539A ……………… Respondent Assessee by :Shri Ajit Jain & Shri Siddhesh Chougule Revenue by :Ms. Jancy Elizabeth, Sr.DR Date of Hearing – 28/10/2024 Date of Order - 05/11/2024 O R D E R PER SANDEEP SINGH KARHAIL, J.M. The present appeal has been filed by the Revenue challenging the impugned order dated 09/02/2024, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals)-56, Mumbai [“learned CIT(A)”], for the assessment year 2020-21. 2. In this appeal, the Revenue has raised the following grounds: – ITA No. 2670/Mum/2024 2 “1. Whether on facts & circumstances of the case, the Ld CIT(A) has erred in treating the loss of Rs 3,19,33,010 as short term capital loss when there is no transfer of asset or erosion of asset of the assessee. 2. Whether on facts & circumstances of the case the Ld CIT(A) has failed to appreciate that the activity/transaction resulting in losses of Rs 3,19,33,010 claimed as short term capital loss is not part of the actual activity of the assessee and cannot be categorized under heads of income as defined in section 14A to E and can only be categorized as Income from \"Other Sources\" as per Sec 14 F and section 56 of the IT Act 1961. 3. Whether on facts & circumstances of the case Ld. CIT(A) has failed to take into account that Article 23 of the Indo-UK DTAA was incorporated specifically to give liberty to the contracting state to categories a particular income as per its laws in case, there is no defined category of the Income in the DTAA.” 3. The solitary issue arising in the present appeal pertains to treating the loss arising from Forward Foreign Exchange Contracts (“FCC”) as a short- term capital loss. 4. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is incorporated in the United Kingdom and is a wholly owned subsidiary of CDC Group Plc. The assessee is registered as Foreign Portfolio Investors with the Securities and Exchange Board of India and is engaged in investment activities. For the year under consideration, the assessee filed its return of income on 28/01/2021 declaring a total income of INR 137,66,14,090. The return filed by the assessee was selected for scrutiny through CASS and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the year under consideration, the assessee entered into FCC with HDFC Bank Ltd to hedge the amounts invested by it in Indian securities. These contracts are rolled over every three months, which essentially involves ITA No. 2670/Mum/2024 3 the cancellation of old contracts and entering into new contracts. The profit or loss on rollover of the contract is settled in cash between the assessee and the bank. During the year under consideration, the assessee incurred a loss from FCC amounting to INR 3,19,33,010 and the said amount was carried forward as a short-term capital loss. During the assessment proceedings, the assessee was asked to show cause as to why the profit/loss on rollover/cancellation of FCC be not treated as income from other sources. In response, the assessee submitted that the gains earned on cancellation/rollover of FCC are essentially in the nature of capital receipts and consequently not exigibleto tax under the Act. It was further submitted that the reason for this treatment is that the FCC have been entered into by the assessee to protect the principal component of the investment and thus they are on capital account. The assessee submitted that the income from FCC is inextricably linked to the investment activities of the assessee, which is the main business of the company and since the investments are held as capital assets, the gains/losses from cancellation/rollover of FCC entered into to hedge the foreign currency exposure arising due to such capital assets must be considered as arising into capital field. On a without prejudice basis, the assessee submitted that even if the gains/losses from cancellation/rollover of FCC are not considered as falling into the capital field, the same should be considered as business income/losses as the FCC are inextricably linked to the business (investment business) of the assessee and in the absence of the permanent establishment of the assessee in India, such gains are not taxable in India. The assessee further submitted that it has carried forward the net loss of INR 3,19,33,010 incurred during the year ITA No. 2670/Mum/2024 4 under consideration on rollover/cancellation of FCC as short-term capital loss purely on protective bases and out of abundant caution for the eventuality that if the gains arising in the subsequent year(s) are treated as capital gains, the same can be set off against the brought forward losses. 5. The Assessing Officer (“AO”) vide order dated 27/05/2022 passed under section 143(3) section 144C(3) of the Act disagreed with the submissions of the assessee and held that the gains earned on cancellation/rollover of FCC are not in the nature of capital receipts. The AO further held that it is not the business of the assessee to enter into FCC and therefore, the gains from such transactions cannot be business gains. The AO held that the FCC have been entered into by the assessee to stop erosion of capital gain and such gains are taxable as income from other sources. As regards the decision of the Tribunal in Citicorp Investment Bank (Singapore) Ltd V/s DDIT, reported in (2012) 24 taxmann.com 211 (Mum-Trib.), the AO held that the Department is in appeal before the Hon’ble High Court. Accordingly, the AO concluded that the loss of INR 3,19,33,010 is allowed to be carried forward under the head income from other sources. 6. The learned CIT(A), vide impugned order, allowed the appeal filed by the assessee following the decision of the Tribunal in Citicorp Investment Bank (Singapore) Ltd (supra) and DDIT v/s D.B. International (Asia) Ltd., reported in [2018] 96 taxmann.com 75 (Mum-Trib.) and held that loss on rollover/cancellation of FCC is in the nature of short-term capital loss eligible for carry forward under the head “capital gains”. Being aggrieved, the Revenue is in appeal before us. ITA No. 2670/Mum/2024 5 7. We have considered the submissions of both sides and perused the material available on record. The assessee is registered in India as a Foreign Portfolio Investor. For safeguarding itself from foreign currency fluctuation risk, the assessee entered into FCC with HDFC Bank. As per the assessee, the profit/loss on rollover/cancellation of the old contracts is settled in cash between the assessee and the Bank. As the investments are held as capital assets by the assessee, therefore the gains/losses from cancellation/rollover of FCC entered into to hedge the foreign currency exposure arising due to such capital assets were considered as arising in the capital field. In this regard, reliance was also placed on section 2(14) of the Act which includes the securities held by a Foreign Institutional Investor within the definition of “capital asset”. During the year under consideration,the net loss of INR 3,19,33,010on FCC was considered as loss under the head “capital gains” as the underlying securities were held as capital assets. The AO, on the other hand, treated the loss as losses under the head “income from other sources”. 8. 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 (supra) 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. The relevant findings of the coordinate bench, in the afore-noted decision, are reproduced as follows: – ITA No. 2670/Mum/2024 6 “4.3 We have perused the records and considered the rival submissions carefully. The dispute is regarding nature of income arising from early settlement of forward foreign exchange contract. There is no dispute that the forward contract had been entered into by the assessee to safeguard the foreign exchange loan taken for purchase of debentures. There is also no dispute that debentures are capital assets and the income from sale of which has been treated as capital gain. The only dispute is regarding nature of income from the settlement of forward contract. We find that the same issue has already been considered by the Tribunal in the case of sister concern of the assessee i.e.Citicorp Banking Corporation Bahrain [ITA No. 6525/M/09] for the assessment year 2005-06. The Tribunal in the said case referred to the decision of Special Bench in the case of Apollo Tyres Ltd. ( supra), in which nature of income arising from cancellation of foreign exchange forward contracts entered into by the assessee to safeguard the foreign exchange loan taken for purchase of plant and machinery had been considered. Since the forward contract had been taken to safeguard the foreign exchange loan taken in connection with acquisition of capital assets it was held that income arising from settlement of forward contract was capital in nature. The Tribunal in case of the sister concern noted that, the forward contract had been taken to safeguard foreign currency loan availed for purchase of shares which were capital assets. Therefore, income arising from settlement of forward contract was treated as capital in nature. The facts in the present case are identical with the only difference that in this case the assessee had acquired the foreign exchange loan for purchase of debentures which are admittedly capital assets. Therefore, in our view the case is covered by the decision of the Tribunal in case of Citicorp Banking Corporation, Bahrain (supra). The case of the assessee is also supported by the decision of DRP in assessee's own case for the assessment year 2007-08 in which it has held that loss arising from settlement of forward contract taken by the assessee to safeguard the foreign exchange loan taken for acquisition of shares/debentures was capital loss. 4.4 The ld. DR has raised an additional plea that the assessee should be given benefit of DTAA only when it was proved that money had been sent to Singapore. But we find that no dispute has been raised by authorities below regarding money being transferred to Singapore nor any such issue is in dispute before us. No doubt the respondent can raise an additional plea for the first time before the Tribunal in support of order of CIT(A) but same should be based on facts already on record. The plea raised on the presumption that money may not have been transferred to Singapore cannot be admitted at this stage. 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. Therefore, respectfully following the decision of the Tribunal in the case of sister concern Citicorp Banking 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.” ITA No. 2670/Mum/2024 7 9. We find that similar findings were rendered by another coordinate bench of the Tribunal in D.B. International (Asia) Ltd. (supra), as follows: – “8. We have considered rival submissions and perused materials on record. As could be seen, this is a recurring dispute between the assessee and the Department from the preceding assessment years. While deciding the issue in assessment years 2005-06 and 2006-07 in ITA no.4583/Mum./2009 and ITA no.2954/Mum./2010, dated 3rd October 2012, the Tribunal has held that the gain arising from forward exchange contract should be assessed as capital gain. Following the aforesaid decision, the Tribunal again in assessee's own case for assessment year 2008-09 in ITA no.6984/Mum./2011, dated 17th July 2013, has 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. The DRP having followed the decision of the Tribunal in assessee's own case, we do not see any reason to interfere with the directions of the DRP on the issue. The ground raised is dismissed.” 10. During the hearing, the learned DR neither brought any material on record to deviate from the aforesaid findings of the coordinate benches nor produced any judgment/order contrary to the aforesaid decisions. The learned DR vehemently relied on the assessment order and submitted that Department’s appeal against the aforesaid decisions are currently pending consideration before the Hon’ble jurisdictional High Court. It is trite that mere pendency of the appeal does not alter the findings under challenge unless the same is overruled by the higher judicial forum.Therefore, in view of the facts and circumstances of the present case, legal position and judicial pronouncements as noted above, 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, the impugned order passed by the learned CIT(A) is upheld and grounds raised by the Revenue, in the present appeal, are dismissed. ITA No. 2670/Mum/2024 8 11. In the result, the appeal by the Revenue is dismissed. Order pronounced in the open Court on 05/11/2024 Sd/- (OMKARESHWAR CHIDARA) ACCOUNTANT MEMBER Sd/- (SANDEEP SINGH KARHAIL) JUDICIAL MEMBER MUMBAI, DATED: 05/11/2024 krk Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. By Order Assistant Registrar ITAT, Mumbai "