2019 (11) TMI 591 - HC - Income Tax

High Court rules forex loss part of Book Profit under Income Tax Act, dismissing contingent liability argument.

The High Court upheld the Tribunal's decision, ruling that the foreign exchange fluctuation loss should be included in the computation of Book Profit ... Contingent liability - computation of book profit under Section 115JB - forward foreign exchange contract - capital expenditure - raising new ground for first time in higher courtContingent liability - forward foreign exchange contract - computation of book profit under Section 115JB - Whether the amortised foreign exchange difference arising from foreign currency borrowings constituted a contingent liability and therefore should be excluded from book profit for computation under Section 115JB. - HELD THAT: - The Tribunal, approving the Commissioner (Appeals), held that the forward foreign exchange contract entered into by the assessee created a continuing binding obligation on the date of the contract and thus could not be characterised as a contingent liability. In the present case the obligation was undertaken to meet a liability and only the consequential effect (the exchange difference) required determination; accordingly the amount could not be treated as contingent in nature. The High Court found no error in the Tribunal's factual and legal conclusion and observed that nothing was shown to demonstrate that the view taken was erroneous in law or on facts. [Paras 5]The amortised exchange difference was not a contingent liability and therefore was not to be excluded from book profit computation under Section 115JB on that ground.Capital expenditure - raising new ground for first time in higher court - Whether the sum could be treated as capital expenditure for computation of book profit when that contention was not raised before the Tribunal. - HELD THAT: - The appellant sought, during argument before the High Court, to contend that the amount had been treated as capital expenditure by the Assessing Officer and accepted by the assessee and therefore should be treated as such for book profit computation. The Court noted this point was not urged before the Tribunal nor mentioned in the appeal memo; the appeal to the Tribunal proceeded on a single focused ground (that the amount was a contingent liability). Accordingly the Tribunal's decision was confined to that ground. It is impermissible to advance a new substantive ground for the first time in the High Court during oral argument; the proposed question did not give rise to a substantial question of law. [Paras 6, 7]The contention that the amount was capital expenditure was not permitted to be raised for the first time in this Court and does not constitute a substantial question of law.Final Conclusion: The appeal is dismissed: the Tribunal's finding that the amortised foreign exchange difference was not a contingent liability (and thus not excludable from book profit on that basis) is sustained; the new contention seeking treatment as capital expenditure is disallowed as not having been raised earlier and does not give rise to a substantial question of law. 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.