2014 (4) TMI 856 - HC - Income Tax

Nature of Liability Contingent or not Loss of fluctuation of foreign exchange - Whether the Tribunal was right in holding that loss arising out of fluctuation in foreign exchange for restatement liabilities is not the contingent liability is valid in law Held that - The decision in Oil and Natural Gas Corporation Ltd., vs. Commissioner of Income Tax 2010 (3) TMI 81 - SUPREME COURT followed - the assessee was entitled to adjust the actual cost of imported assets claimed in foreign currency on account of fluctuation in the rate of exchange at each of the relevant balance-sheet dates, pending actual payment of the liability u/s 43A - the loss claimed on revenue account was allowable u/s 37(1) and the assessee was entitled to adjust the actual cost acquired in foreign exchange in terms of Section 43A - the restatement of the liability itself came at the end of the accounting year on account of the foreign exchange rate fluctuation and thereby the assessee was stated to have been saddled with the loss arising out of the restatement of the liability - the restatement had come at the end of the accounting year and that the present liability itself was on account of the exchange fluctuation Decided against Revenue.

Summary

Issues:
- Appeal against the order passed by the Income Tax Appellate Tribunal regarding foreign exchange loss treatment as contingent liability under Section 263 of the Income Tax Act, 1961.

Analysis:
1. The case involved an appeal by the Revenue against the Income Tax Appellate Tribunal's decision on the treatment of foreign exchange loss as a contingent liability. The substantial question of law revolved around whether the Tribunal was correct in setting aside the Commissioner of Income Tax's order and holding that the loss arising from fluctuation in foreign exchange for restatement liabilities was not a contingent liability.

2. The assessee, engaged in the business of manufacturing and selling UPS, claimed foreign exchange loss due to the restatement of outstanding balances on the balance sheet. The Assessing Officer accepted this claim, but the Commissioner of Income Tax initiated proceedings under Section 263, considering the loss as a contingent liability related to transactions from earlier years. The Revisional Authority upheld this view, citing a Supreme Court judgment and treating the loss as a contingent liability.

3. The assessee appealed to the Income Tax Appellate Tribunal, which ruled in favor of the assessee. The Tribunal considered the loss from restatement of foreign liabilities as an ascertained liability rather than a contingent one, following a Special Bench decision. It noted that the event causing the liability change occurred at the end of the financial year, making it an ascertained liability. The Tribunal remanded the matter to the Assessing Officer to verify the taxation treatment of similar profits in past years.

4. The Revenue appealed against the Tribunal's decision, arguing that the Tribunal's observations might hinder reconsideration of the assessee's claim. However, the High Court, relying on a Supreme Court decision, upheld the Tribunal's decision. It emphasized that the restatement of liability due to foreign exchange rate fluctuation at the end of the accounting year led to an ascertained loss, not a contingent liability, aligning with the Apex Court's interpretation of Section 43A and Section 37(1) of the Income Tax Act, 1961.

5. Ultimately, the High Court dismissed the Revenue's appeal, stating that the restatement of liability at the year-end due to exchange rate fluctuation resulted in an allowable loss under the Income Tax Act. The Court found no grounds to overturn the Tribunal's decision based on the Apex Court's precedent. The judgment favored the assessee's position on the treatment of foreign exchange loss, emphasizing the timing and nature of the liability restatement.