2019 (11) TMI 591 - HC - Income Tax

Computation of Book Profit for the purpose of 115JB - claim of the assessee that the amortized amount of exchange difference arising out of foreign currency borrowings are not contingent liability - HELD THAT - Tribunal and the Commissioner (Appeals) held that the forward foreign exchange contract entered into by the assessee to buy or sell foreign currency at an agreed price at a a future date cannot be considered as a contingent in nature as it creates a continuing binding obligation on the date of the contract against the assessee. We find no error in the view taken by the Tribunal that in the present case where an obligation was undertaken to meet a liability and only consequential effect was to be determined, it could not be said that the amount in question was in a nature of contingent liability. Nothing is shown to us how the view taken is erroneous in law or on facts. Additional question of law to the effect that the Tribunal erred in not treating as capital expenditure for computation of book profit under Section 115JB when this amount was treated by the Assessing Officer and accepted by Assessee as a capital expenditure. Not only this point was not urged before the Tribunal but it does not even find reference in the present appeal memo. It is not permissible for the Appellant to urge said question for the first time in this Court, that too during the course of the oral argument. No substantial question of law

Summary

Issues:
Challenge to judgment of Income Tax Appellate Tribunal regarding addition to book profit on account of foreign currency transaction difference and treatment of foreign exchange fluctuation loss as contingent liability for computation of Book Profit under Section 115JB of the Income Tax Act, 1961.

Analysis:
The case involved an appeal challenging the judgment of the Income Tax Appellate Tribunal regarding the addition of a specific amount to the book profit on account of foreign currency transaction difference. The Assessing Officer had made an addition of a certain amount to the book profit, treating it as contingent in nature. The Commissioner of Income Tax (Appeals) partly allowed the appeal of the Respondent by deleting the addition, stating that the liability was not contingent. Subsequently, the Appellant (Revenue) filed an appeal before the Income Tax Appellate Tribunal, which was dismissed.

The key issue raised in the appeal was whether the amortized amount of exchange difference arising from foreign currency borrowings should be considered a contingent liability and included in the computation of Book Profit under Section 115JB of the Income Tax Act, 1961. The Appellant contended that the loss on account of foreign exchange fluctuation is contingent in nature and should not be considered while computing book profit. However, both the Tribunal and the Commissioner (Appeals) held that the forward foreign exchange contract entered into by the assessee created a binding obligation and was not contingent in nature. They reasoned that since the obligation was undertaken to meet a liability and only the consequential effect needed to be determined, it could not be classified as a contingent liability. The Court found no error in this view and upheld the decision of the Tribunal.

During the proceedings, the Appellant sought to raise an additional question of law, arguing that a specific amount should be treated as capital expenditure for computation of book profit under Section 115JB. However, the Court noted that this point was not raised before the Tribunal and was not included in the original appeal memo. As the appeal was solely focused on the contingent liability aspect, the Court held that the Appellant could not introduce a new argument during the oral arguments. The Court dismissed the appeal, stating that the proposed question did not give rise to any substantial question of law, thereby upholding the decision of the Tribunal.

In conclusion, the High Court upheld the Tribunal's decision regarding the treatment of foreign exchange fluctuation loss and the addition to book profit, emphasizing that the obligation arising from the forward foreign exchange contract was not contingent in nature and should be included in the computation of Book Profit under Section 115JB of the Income Tax Act, 1961.