My client hedged a loan given to its foreign subsidiary and made a gain on the forward contract. It says the gain is capital. Will that hold?
It did not hold here. The Chennai Tribunal upheld the Commissioner (Appeals) and taxed a forward exchange contract gain of Rs.19,90,79,300 as revenue, reasoning that where the exchange fluctuation gain or loss cannot be adjusted on capital account — as it can be under s.43A where a capital asset is acquired from outside India — it must be treated as revenue and offered to tax, because there cannot be a situation in which the fluctuation gain or loss is adjusted neither on capital account nor on revenue account. The Tribunal reached that conclusion after considering, among other things, the ICDS notified on 29 September 2016 and operative from AY 2017-18.
Decided by the ITAT (Manu Kumar Giri (Judicial Member) and Amitabh Shukla (Accountant Member)) on 2025-04-25, reported as ITA Nos.1332/Chny/2024 and 1694/Chny/2024, Assessment Year 2018-19 (Income Tax Appellate Tribunal, 'A' Bench, Chennai). It bears on section 43AA, section 43A, section 145, section 145(2), section ICDS VI of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
Section 43AA, inserted by the Finance Act 2018 with retrospective effect from 1 April 2017, now provides that, subject to s.43A, any gain or loss arising on account of any change in foreign exchange rates shall be treated as income or loss computed in accordance with the ICDS, and it names forward exchange contracts expressly as one of the transactions covered. The practical consequence, which this order works out, is that the capital-versus-revenue argument no longer stands on its own: the taxpayer must be able to point to an actual capital-account adjustment, and s.43A supplies one only where the asset was acquired from a country outside India. A hedge of a loan advanced to a subsidiary produces no such adjustment, and the gain then falls to be taxed. Note that the assessee here was in the business of generation and distribution of electricity, not of lending, which is what made the loan a capital-account item — and that is precisely why the hedge gain had nowhere to go on capital account.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee is in the business of generation and distribution of electricity. It had given a loan of USD 60 million to its subsidiary IL&FS Maritime Offshore Pte Ltd, Singapore, and on 29 March 2017 entered into a foreign currency forward contract with a bank to hedge the risk on repayment of that loan. It treated the resulting foreign exchange gain of Rs.19,90,79,300 as capital in nature and deducted it while computing taxable income, contending that it is not in the business of providing loans, that the loan was on capital account, that repayment of the principal would be a capital receipt, and relying on the Supreme Court's decisions in Sutlej Cotton Mills Ltd v. CIT [116 ITR 1] and Tata Locomotive and Engineering Co Ltd v. CIT [60 ITR 405]. The Assessing Officer added the amount and the Commissioner (Appeals) confirmed the addition, reasoning that the forward contract was an independent transaction between the assessee and the bank in which the foreign borrower had no role, and that a gain on a forward contract not adjusted on capital account in the balance sheet must be treated as taxable revenue. The assessee appealed and the Revenue also appealed.
The Tribunal found no case for interference with the order of the Commissioner (Appeals) and dismissed all the grounds of appeal raised by the assessee on this issue (para 9.0). The forward exchange contract gain of Rs.19,90,79,300 accordingly stood taxed as revenue. Both appeals were, in the result, partly allowed on other grounds (para 30.0).
The Tribunal held that the decision of the Commissioner (Appeals) was based on a correct understanding and appreciation of the facts on record and that he had analysed the issue of forward exchange contracts in line with the statutory provisions of the Act, the standard guidelines published by the CBDT under the Income Computation and Disclosure Standards dated 29 September 2016 operative from AY 2017-18 onwards, the Supreme Court decisions in Sutlej Cotton Mills and Tata Locomotive and Engineering Company and in Garden Silk Mills [320 ITR 720], the assessee's deficient compliance in providing the details requested, and the Supreme Court's decision in PCIT v. Bangalore International Airport Ltd [(2023) 154 taxmann.com 395]. It noted that in Bangalore International Airport the Supreme Court held that foreign exchange rate fluctuation should be adjusted to the actual cost of the asset, with less depreciation consequently claimable, because the gain or loss is directly relatable to the asset acquired; and it reasoned that where such an adjustment of fluctuation gain or loss cannot be made on capital account, as in the assessee's case, the fluctuation gain or loss should be treated as revenue and offered to tax, since there cannot be a situation in which the fluctuation gain or loss is adjusted neither on capital account nor on revenue account, irrespective of whether it results in more tax or not. The transaction therefore fell in the nature of a revenue receipt (para 9.0).
There cannot be a situation wherein the fluctuation gain/loss is not adjusted either on capital account or on revenue account irrespective of whether it results in more tax or not.
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Handle my notice → Ask a CA on WhatsAppIt did not hold here. The Chennai Tribunal upheld the Commissioner (Appeals) and taxed a forward exchange contract gain of Rs.19,90,79,300 as revenue, reasoning that where the exchange fluctuation gain or loss cannot be adjusted on capital account — as it can be under s.43A where a capital asset is acquired from outside India — it must be treated as revenue and offered to tax, because there cannot be a situation in which the fluctuation gain or loss is adjusted neither on capital account nor on revenue account. The Tribunal reached that conclusion after considering, among other things, the ICDS notified on 29 September 2016 and operative from AY 2017-18. This was decided by the ITAT (Manu Kumar Giri (Judicial Member) and Amitabh Shukla (Accountant Member)) and bears on section 43AA, section 43A, section 145, section 145(2), section ICDS VI of the Income Tax Act 1961. It is reported as ITA Nos.1332/Chny/2024 and 1694/Chny/2024, Assessment Year 2018-19 (Income Tax Appellate Tribunal, 'A' Bench, Chennai). Section 43AA, inserted by the Finance Act 2018 with retrospective effect from 1 April 2017, now provides that, subject to s.43A, any gain or loss arising on account of any change in foreign exchange rates shall be treated as income or loss computed in accordance with the ICDS, and it names forward exchange contracts expressly as one of the transactions covered. The practical consequence, which this order works out, is that the capital-versus-revenue argument no longer stands on its own: the taxpayer must be able to point to an actual capital-account adjustment, and s.43A supplies one only where the asset was acquired from a country outside India. A hedge of a loan advanced to a subsidiary produces no such adjustment, and the gain then falls to be taxed. Note that the assessee here was in the business of generation and distribution of electricity, not of lending, which is what made the loan a capital-account item — and that is precisely why the hedge gain had nowhere to go on capital account. If it applies to you, the first step is this: Identify, before arguing that a forex gain is capital, exactly where on capital account the gain or loss is to be adjusted; if there is no adjustment available under s.43A the argument is likely to fail after s.43AA.
The assessee is in the business of generation and distribution of electricity. It had given a loan of USD 60 million to its subsidiary IL&FS Maritime Offshore Pte Ltd, Singapore, and on 29 March 2017 entered into a foreign currency forward contract with a bank to hedge the risk on repayment of that loan. It treated the resulting foreign exchange gain of Rs.19,90,79,300 as capital in nature and deducted it while computing taxable income, contending that it is not in the business of providing loans, that the loan was on capital account, that repayment of the principal would be a capital receipt, and relying on the Supreme Court's decisions in Sutlej Cotton Mills Ltd v. CIT [116 ITR 1] and Tata Locomotive and Engineering Co Ltd v. CIT [60 ITR 405]. The Assessing Officer added the amount and the Commissioner (Appeals) confirmed the addition, reasoning that the forward contract was an independent transaction between the assessee and the bank in which the foreign borrower had no role, and that a gain on a forward contract not adjusted on capital account in the balance sheet must be treated as taxable revenue. The assessee appealed and the Revenue also appealed. The matter was decided on 2025-04-25 by the ITAT (Manu Kumar Giri (Judicial Member) and Amitabh Shukla (Accountant Member)). On those facts the ITAT held as follows. The Tribunal found no case for interference with the order of the Commissioner (Appeals) and dismissed all the grounds of appeal raised by the assessee on this issue (para 9.0). The forward exchange contract gain of Rs.19,90,79,300 accordingly stood taxed as revenue. Both appeals were, in the result, partly allowed on other grounds (para 30.0).
The Tribunal held that the decision of the Commissioner (Appeals) was based on a correct understanding and appreciation of the facts on record and that he had analysed the issue of forward exchange contracts in line with the statutory provisions of the Act, the standard guidelines published by the CBDT under the Income Computation and Disclosure Standards dated 29 September 2016 operative from AY 2017-18 onwards, the Supreme Court decisions in Sutlej Cotton Mills and Tata Locomotive and Engineering Company and in Garden Silk Mills [320 ITR 720], the assessee's deficient compliance in providing the details requested, and the Supreme Court's decision in PCIT v. Bangalore International Airport Ltd [(2023) 154 taxmann.com 395]. It noted that in Bangalore International Airport the Supreme Court held that foreign exchange rate fluctuation should be adjusted to the actual cost of the asset, with less depreciation consequently claimable, because the gain or loss is directly relatable to the asset acquired; and it reasoned that where such an adjustment of fluctuation gain or loss cannot be made on capital account, as in the assessee's case, the fluctuation gain or loss should be treated as revenue and offered to tax, since there cannot be a situation in which the fluctuation gain or loss is adjusted neither on capital account nor on revenue account, irrespective of whether it results in more tax or not. The transaction therefore fell in the nature of a revenue receipt (para 9.0). In the words reproduced by the source cited on this page: "There cannot be a situation wherein the fluctuation gain/loss is not adjusted either on capital account or on revenue account irrespective of whether it results in more tax or not." The decision followed or applied PCIT v. Bangalore International Airport Ltd [(2023) 154 taxmann.com 395 (SC)] — applied by analogy; Sutlej Cotton Mills Ltd v. CIT [116 ITR 1 (SC)] — considered; Tata Locomotive and Engineering Co Ltd v. CIT [60 ITR 405 (SC)] — considered.
It was decided by the ITAT on 2025-04-25 and is reported as ITA Nos.1332/Chny/2024 and 1694/Chny/2024, Assessment Year 2018-19 (Income Tax Appellate Tribunal, 'A' Bench, Chennai). Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 43AA, section 43A, section 145, section 145(2), section ICDS VI, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The Tribunal found no case for interference with the order of the Commissioner (Appeals) and dismissed all the grounds of appeal raised by the assessee on this issue (para 9.0). The forward exchange contract gain of Rs.19,90,79,300 accordingly stood taxed as revenue. Both appeals were, in the result, partly allowed on other grounds (para 30.0). It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 43AA, section 43A, section 145, section 145(2), section ICDS VI of the Income Tax Act 1961, and was decided by Manu Kumar Giri (Judicial Member) and Amitabh Shukla (Accountant Member). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check whether s.43A is engaged at all — it requires a capital asset acquired from a country outside India, and it operates on payment, adjusting the actual cost. Where the underlying is a loan to a subsidiary rather than an asset, expect the department to say the forward contract is an independent transaction with a third party, as it did here. Distinguish PCIT v Bangalore International Airport Ltd carefully: it concerned external commercial borrowing to acquire capital assets, where the fluctuation is adjusted to actual cost with a consequent reduction in depreciation — an adjustment that is unavailable in a case like this one. For AY 2017-18 and later, cite s.43AA and ICDS VI as the governing rule rather than arguing the point purely on Sutlej Cotton Mills.
Searched for later treatment; none was found. That is not the same as a source affirming it. The citator returns nothing. A case-name search returns 84 documents; the Madras High Court matters in this company's name are either non-tax (arbitration, labour, electricity) or predate this order - PCIT v. IL & FS Tamil Nadu Power Co. Ltd. (12 November 2024) is earlier and is not an appeal from it. No later treatment of the s.43AA holding on forward contract gains was found. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
CAUTION ON PARAGRAPH NUMBERS: paragraphs 7.6 and 7.7 of this order, including the sentence in capitals holding the profit to be revenue in nature, are an extract from the order of the Commissioner (Appeals) reproduced inside the Tribunal's order, and end with an ellipsis; they are NOT the Tribunal's own paragraphs. Note in particular that the sentence quoted below from para 9.0 also appears, word for word, in the CIT(A) extract at para 7.6; it is quoted here from para 9.0, where it is the Tribunal's own reasoning, and the locator must not be changed to 7.6. The Tribunal's own conclusion is at para 9.0. The appeal numbers are ITA Nos.1332/Chny/2024 and 1694/Chny/2024; a reading of the running header as '/Chny/2025' on an earlier fetch was not reproduced on two later fetches, both of which return 2024 for the header as well as for the result table, and should be disregarded. The result table at para 30.0 does carry a genuine defect: it shows two rows, both for assessment year 2018-19 and both partly allowed, but prints the number 'ITA No. 1332 / Chny / 2024' on both rows rather than naming the second appeal. The order records that the forward contract was entered into on 29 March 2017 to hedge the risk on repayment of a loan of USD 60 million given to IL&FS Maritime Offshore Pte Ltd, Singapore. The order runs to 33 pages and the final numbered paragraph is 30.0. The order was pronounced on 25 April 2025 at Chennai by Manu Kumar Giri, Judicial Member and Amitabh Shukla, Accountant Member. The order reproduces the text of s.43A and s.43AA, which is where the s.43AA text quoted in the reasoning below was read. The Tribunal's own para 9.0 does not name s.43AA; it refers to the ICDS 'dated 29.09.2016 operative from AY-2017-18 onwards'. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Tribunal found no case for interference with the order of the Commissioner (Appeals) and dismissed all the grounds of appeal raised by the assessee on this issue (para 9.0). The forward exchange contract gain of Rs.19,90,79,300 accordingly stood taxed as revenue. Both appeals were, in the result, partly allowed on other grounds (para 30.0).
TaxSphere, “IL&FS Tamilnadu Power Company v DCIT — a forward contract gain that cannot be adjusted on capital account must be taxed as revenue”, https://taxnotice.vittsphere.com/caselaw/case/ilfs-tamilnadu-power-v-dcit-forward-contract-gain-taxable-under-43aa/ (validity last checked 2026-09-08)
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