2016 (8) TMI 1468 - AT - Income Tax

Rectification u/s 154 - AO enhanced book profit computed u/s. 115JB by making addition on account of amortised amount of exchange differences arising out of foreign currency borrowings - CIT(A) upholding the claim of the assessee that the amortised amount of exchange differences arising out of foreign currency borrowings are not contingent liability and should not form part of computation of Book Profit for the purposes of S.115JB - HELD THAT - CIT(A) reached to the conclusion that the said liability is not contingent. As per the CIT(A), a contingent liability depend purely on happening and not happening of the event, whereas if an event has already been taken place, which in the present case, is of entering into the contract and undertaking of obligation to meet the liability, and only consequential effect of the same is to be determined, then, it cannot be said that it is in the nature of contingent liability. After applying the proposition of law laid down by Hon ble Supreme Court in the case of Woodward Governor India 2009 (4) TMI 4 - SUPREME COURT and Bharat Earth Movers 2000 (8) TMI 4 - SUPREME COURT , CIT(A) recorded a finding to the effect that it was not a contingent liability. Accordingly we do not find any reason to interfere in the order of the CIT(A), which is a well reasoned order. Appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Whether the amortised amount of exchange differences arising out of foreign currency borrowings should form part of the computation of "Book Profit" for the purposes of Section 115JB of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Computation of "Book Profit" under Section 115JB:
The primary issue revolves around whether the amortised amount of exchange differences arising from foreign currency borrowings should be included in the computation of "Book Profit" under Section 115JB of the Income Tax Act, 1961. The Assessing Officer (AO) enhanced the book profit by adding the amortised amount, treating it as a contingent liability. However, the CIT(A) deleted this addition, leading to the revenue's appeal.

2. Legal Provisions and Judicial Precedents:
The judgment references Section 115JB, which mandates that book profit shall be deemed the total income of the assessee if the income tax payable is less than 7.5% of the book profit. The section also outlines specific adjustments to be made to the net profit as shown in the profit and loss account. The CIT(A) and the tribunal relied on various judicial precedents, including the Supreme Court's decisions in Apollo Tyres Ltd. v. CIT and CIT v. HCL Comnet Systems and Services Ltd., which restrict the AO's power to alter the net profit except for specified adjustments.

3. Nature of Liability:
The CIT(A) analyzed whether the liability arising from foreign currency borrowings is contingent or ascertained. It was noted that the auditor's report categorized the amortisation of foreign currency loans as capital expenditure and not as a contingent liability. The CIT(A) concluded that the AO erred in treating the amortised amount as a contingent liability since the liability was ascertained and recognized in accordance with Accounting Standard 11 (AS-11).

4. Supreme Court Rulings:
The CIT(A) and the tribunal referred to several Supreme Court rulings to support their conclusions. In Bharat Earth Movers' case, the Supreme Court clarified the distinction between accrued and contingent liabilities, stating that if a business liability has definitely arisen in the accounting year, it should be allowed as a deduction. Similarly, in Rotork Controls India Pvt. Ltd vs. CIT, the Supreme Court held that a provision is recognized when an enterprise has a present obligation as a result of a past event, and it is probable that an outflow of resources will be required to settle the obligation.

5. Tribunal's Conclusion:
The tribunal upheld the CIT(A)'s order, agreeing that the liability from foreign currency borrowings was not contingent. The tribunal emphasized that the AO should accept the net profit shown in the profit and loss account prepared in accordance with the Companies Act, except for permissible adjustments. The tribunal also highlighted that anticipated liabilities, if coupled with a present obligation, should be recognized as crystallized liabilities.

6. Dismissal of Revenue's Appeal:
The tribunal found no reason to interfere with the CIT(A)'s well-reasoned order, concluding that the liability in question was not contingent. Consequently, the appeal of the revenue was dismissed.

Final Judgment:
The appeal of the revenue was dismissed, and the order of the CIT(A) was upheld, confirming that the amortised amount of exchange differences arising from foreign currency borrowings should not form part of the computation of "Book Profit" under Section 115JB of the Income Tax Act, 1961. The judgment was pronounced in the open court on August 24, 2016.