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Facts
The assessee, Bhagyanagar India Limited, engaged in manufacturing copper products and power generation, filed its return for AY 2016-17, declaring nil income under normal provisions and a book profit under Section 115JB. The Assessing Officer made disallowances of Rs. 75,59,818/- under Section 14A and added Rs. 2,22,94,090/- towards amortisation of Foreign Currency Monetary Item Translation Difference Account (FCMITDA) for computing book profit under Section 115JB. The Ld. CIT(A) subsequently deleted both these additions/disallowances, leading to the Revenue's appeal before the Tribunal.
Held
The Tribunal upheld the CIT(A)'s deletion of the Section 14A disallowance, noting that no fresh investments were made and the assessee had sufficient own funds, thus negating a direct nexus between borrowed funds and exempt income. Regarding the FCMITDA amortisation, the Tribunal ruled that it was not a provision for diminution in asset value and was accounted for per revised AS-11, hence not liable for addition back under Section 115JB as per Explanation 1 to Section 115JB(2)(i). The Tribunal also affirmed the deletion based on the principle of consistency.
Key Issues
1. Whether disallowance under Section 14A for expenses related to exempt income was warranted when investments were from internal accruals and no fresh investments were made. 2. Whether the amortisation of Foreign Currency Monetary Item Translation Difference Account (FCMITDA) should be added back for computing book profit under Section 115JB.
Sections Cited
14A, 115JB, 37(1), 80-IA, 143(2), 143(3), 43A, 115JB(2)(i), Rule 8D
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Income Tax Appellate Tribunal, Hyderabad ‘B’ Bench, Hyderabad
Before: SHRI VIJAY PAL RAO & SHRI MADHUSUDAN SAWDIA
(निर्धारण वर्ा/Assessment Year:2016-17) Income Tax Officer, M/s. Bhagyanagar India Ward-1(3), Hyderabad. Vs. Limited, Hyderabad. PAN:AAACB8963C (Appellant) (Respondent) निर्धाररती द्वधरध/Assessee by: Shri K.C. Devdas, C.A. रधजस् व द्वधरध/Revenue by: Shri Narender Kumar Naik, CIT-DR सुिवधई की तधरीख/Date of hearing: 24/07/2025 घोर्णध की तधरीख/Pronouncement: 08/08/2025 आदेश/ORDER PER MADHUSUDAN SAWDIA, A.M. : This appeal is filed by Revenue, feeling aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals)-1, Hyderabad (“Ld. CIT(A)”), dated 16.05.2019 for the A.Y. 2016-17.
The revenue has raised the following grounds of appeal:
++“ 1. The order of the Ld. CIT(A) is erroneous on facts as well as in law.
2. The Ld. CIT(A) erred in deleting the disallowance made u/s. 14A of Rs.75,59,818/- ignoring the fact that the expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt.
The Ld. CIT(A) erred in deleting the adjustment made u/s. 115JB with regard to the income disallowed u/s. 14A.
The Ld. CIT(A) erred in deleting the addition of Rs.2,29,94,090/- without verifying the merits of issue basing on the fact that similar claim in earlier years was allowed by the A.O.”
3. The brief facts of the case are that, Bhagyanagar India Limited (“the assessee”) is a company engaged in the business of manufacturing copper products and generation of power. It filed it’s return of income for the Assessment Year 2016–17 on 14.10.2016, declaring Rs. nil income under the normal provisions of the Income Tax Act, 1961 (“the Act”), after claiming deduction under Section 80- IA of the Act to the extent of its gross total income, and reported book profit of Rs.1,78,69,216/- under Section 115JB of the Act. The case of the assessee was selected for complete scrutiny under CASS and accordingly, notice under Section 143(2) of the Act was issued to the assessee on 07.08.2017. The Learned Assessing Officer (“Ld. AO”) completed the assessment under Section 143(3) of the Act on 26.12.2018. While doing so, the Ld. AO made disallowances of Rs.27,464/- under Section 37(1) of the Act, disallowance of Rs.6,09,705/- out of miscellaneous expenditure, and a disallowance of Rs.75,59,818/- under Section 14A of the Act. These disallowances led to an addition of Rs.81,96,987/- to the gross total income of Rs.41,59,816/-, thereby computing the gross total income at Rs.1,23,56,803/-. After allowing deduction under Section 80-IA amounting to Rs.1,23,56,803/-, the assessed total income under normal provisions of the Act remained Rs. nil. However, while computing book profit under Section 115JB of the Act, the Ld. AO made addition of Rs.75,59,818/- under Section 14A of the Act and Rs.2,22,94,090/- towards amortisation of foreign currency monetary item translation difference account (“FCMITDA”). Accordingly, the Ld. AO computed the total book profit of the assessee for the purpose of section 115JB of the Act at Rs.4,77,23,124/-.
4. Aggrieved by the order of the Ld. AO, the assessee filed appeal before the Ld. CIT(A). The Ld. CIT(A) deleted the disallowance of Rs.75,59,818/- made by Ld. AO under Section 14A of the Act contending that the investment was made out of internal accruals and not from borrowed fund. The Ld. CIT(A) also relied on the decision of this Tribunal in the assessee’s own case for Assessment Years 2008–09 and 2009–10, where under similar facts, the disallowance under Section 14A had been deleted by the Tribunal.
The observation of the Ld. CIT(A) have been stated at para no.4.3 of his order, which is to the following effect :
“ 4.3 With regard to the addition of Rs.6,09,705/- towards expenditure relating to Wind power unit, I have carefully considered the facts of the case, assessment order and submissions of the appellant. The appellant before me has not submitted any details or any explanation to substantiate the same. Hence the addition made by the Assessing Officer is upheld.
With regard to the disallowance u/s. 14A of Rs.75,59,818/-, I have carefully considered the facts of the case, assessment order and submissions of the appellant. The appellant submitted that the investment made out of internal accruals and not from borrowed fund. In this regard the appellant relied upon in its own case for the AY 2008-09 & 2009-10, wherein the Hon’ble ITAT, Hyderabad held this observation ws correct and the disallowance u/s. 14A deleted. Respectfully following the same, for this Assessment Year also, the addition made by the Assessing Officer with regard to disallowance u/s. 14A is deleted.”
4.1 The Ld. CIT(A) also deleted the disallowance of Rs.2,22,94,090/- made on account of amortisation of FCMITDA contending that such amortisation not a reserve to be added under section 115JB of the Act. The observation of the Ld. CIT(A) in this regard are placed at para no.5.3 of his order, which is to the following effect :
“ With regard to the computation of book profits u/s. 115JB by making disallowance u/s. 14 of Rs.2,22,94,090/- towards foreign exchange amortisation reserve. The submissions of the appellant that for the A.Y. 2013-14 onwards, the expenses amortised 1/6 th of the total amortisation expenditure allowed by the Assessing Officer. This amortisation amounts were shown in asset side and not reflected in the reserves. Therefore, as per the Assessment Order, it is not a reserves to be added u/s. 115JB. Hence all the submissions of the appellant are accepted and the addition made in this regard is deleted.”
Aggrieved by the order of Ld. CIT(A), the revenue is in appeal before the Tribunal. At the outset, the Learned Departmental Representative (“Ld. DR”) submitted that, they are in appeal on two issues i.e. (i) the deletion made by the Ld. CIT(A) on account of the addition of Rs.75,59,818/- made by the Ld. AO under Section 14A of the Act and (ii) the deletion made by the Ld. CIT(A) on account of the addition of Rs.2,22,94,090/- made by the Ld. AO towards amortisation of FCMITDA.
As far as the deletion of Rs.75,59,818/- is concerned, the Ld. DR relied on the findings of the Ld. AO and submitted that the Ld. AO has clearly recorded in the assessment order that although the assessee claimed that only internal accruals were used for making investments, no supporting evidence was furnished to establish that no interest-bearing funds were utilized. It was also submitted that the reserves pointed out by the assessee pertained to reserves arising out of amortisation of FCMITDA, and such reserves could not be construed as free reserves or internal accruals for the purpose of making investments. Accordingly, the Ld. DR submitted that the Ld. AO was justified in invoking Section 14A of the Act and computing disallowance in accordance with Rule 8D of the Income Tax Rules, 1962.
As far as the deletion of Rs.2,22,94,090/- is concerned, the Ld. DR relied on the assessment order of Ld. AO and submitted that the assessee has amortised the said amount by creating FCMITDA towards loss in repayment of loan which was taken in foreign currency for acquisition of capital assets and hence, in terms of Section 43A of the Act, any loss on account of foreign exchange fluctuation was liable to be capitalised. He placed reliance on the decision of the coordinate bench of the Tribunal in the case of DCIT Vs. Patanjali Foods Ltd. in & others dated 05.04.2024, to contend that such losses cannot be amortised for purposes of Section 115JB, as they relate to capital assets. It was therefore argued that the assessee’s action of amortising the loss should be disregarded, and the amortised amount should be added back under Section 115JB of the Act.
Per contra, as far as the deletion of Rs.75,59,818/- is concerned, the Learned Authorised Representative (“Ld. AR”) submitted that no fresh investments were made during the year under consideration. Therefore, the question of examining nexus between interest-bearing funds and investments does not arise. He submitted that the investment as on 31.03.2015 was Rs.27,08,44,392/- and as on 31.03.2016 it was Rs.26,11,13,270/- (page no.59 of the paper book no.1), thereby showing a reduction in investment to the extent of Rs.97,31,122/-, which evidences that no fresh funds were deployed during the year. He further submitted that the assessee had sufficient own funds in the form of reserves and surplus. He referred to the note no.2.2 of the balance sheet as on 31.03.2016, placed at page no.61 of the paper book no.1, which showed even after reducing the amount of FTMITDA, the total reserves and surplus of the assessee was Rs.120,35,35,938/-, which were sufficient to cover the entire investments of Rs.26,11,13,270/-.
The Ld. AR invited our attention to the decision of this Tribunal in the assessee’s own case for Assessment Years 2008–09 and 2009–10 in & 1435/Hyd/2012 dated 10.05.2013, which was subsequently rectified vide order passed on M.A. no.148 and 149/Hyd/2013 dated 13.09.2013, wherein this Tribunal at para no.20 & 21 of its order (page no.94 of paper book no.1) along with para no.8 of MA order (page no.83 of the paper book no.1) had held that as the assessee had sufficient internal accruals and share capital to support the investments, no addition can be made under section 14A of the Act. Accordingly, the Ld. AR submitted that, as the assessee had sufficient own funds in the form of reserves and surplus during the year under consideration, the addition made by the Ld. AO under section 14A of the Act is liable to be deleted.
As far as the deletion of Rs.2,22,94,090/- is concerned, the Ld. AR submitted that the said addition representing amortisation of FCMITDA was unjustified. He explained that the assessee had availed an External Commercial Borrowing (ECB) of USD 1,35,60,000 from ICICI Bank on 14.11.2011 repayable in 8 years beginning from January’2013 and the foreign exchange loss arising due to revaluation of this liability was amortised over the life of the loan in accordance with revised Accounting Standard 11(“AS-11”) in accordance with the MCA Notification No. GSR 914(E) dated 29.12.2011, which permitted such amortisation. The Ld. AR drew our attention to statement of profit and loss account of the assessee (page no.60 of the paper book) and note no.2.2 related to FCIMTDA (page no.61 of the paper book) and submitted that the assessee has claimed the amortised amount of Rs.2,22,94,090/- in profit and loss account in accordance with revised AS-11. He emphasized that no amount has been set aside by the assessee as provision for diminution in the value of any asset as alleged by the Ld. AO. He further submitted that as per Explanation 1 to Section 115JB(2)(i) of the Act, only such amounts that are set aside as provision for diminution in the value of any asset shall be added back while computing book profit. In the present case, since there is no such set aside of any amount as provision for diminution in the value of any asset , the addition made by the Ld. AO is outside the scope of the statutory adjustment permitted under the said explanation.
In their alternate submission, the Ld. AR also placed reliance on the principle of consistency, pointing out that in all previous assessments for AYs 2013–14 to 2015–16, the same accounting treatment was accepted by the revenue without any adjustment under Section 115JB. The assessment orders for these years, placed at page nos. 14 to 27 of the paper book no.2, corroborate this fact. It was therefore submitted that the same treatment ought to be respected in the year under appeal.
We have heard the rival contentions and perused the material available on record. The core issue related to deletion of Rs.75,59,818/- is whether the disallowance under Section 14A of the Act was warranted in the present facts, particularly when no fresh investments were made during the year under consideration. On perusal of the audited balance sheet of the assessee placed at page no.59 of the paper book no.1, we note that the total investments of the assessee as on 31.03.2015 stood at Rs.27,08,44,392/-, which decreased to Rs.26,11,13,270/- as on 31.03.2016. Thus, there is no increase in investment during the year. Rather, there is a reduction, clearly indicating that no new funds were deployed during the year towards investments. Further, the note no.2.2 of the balance sheet placed at page no.61 of the paper book no.1 reveals that even after reducing the amount of FCMITDA, the total reserves and surplus of the assessee was Rs.120,35,35,938/-, which were sufficient to cover the entire investments of Rs.26,11,13,270/-. Further, the Ld. AO has not brought on record any direct nexus between interest-bearing borrowed funds and investments yielding exempt income. We also note that the Ld. CIT(A), after referring to the coordinate bench decision in the assessee’s own case and after verifying the relevant balance sheet figures, rightly held that the assessee had sufficient own funds to make the investments and that no disallowance under Section 14A was warranted. We have gone through the decision of this Tribunal in assessee’s own case for Assessment Years 2008–09 and 2009–10 (supra), wherein at para nos.20 and 21 of it’s order (page no.94 of paper book no.1), which was subsequently rectified in M.A. nos.148 and 149/Hyd/2013 dated 13.09.2013 (para no. 8, page no.83 of the paper book no.1), this Tribunal has held as under :
“20. As regards indirect interest expenditure, if it can be proved that the entire borrowals, on which interest expenditure has been incurred during the year, has been applied for the purpose of the business, then no part of the borrowals can be taken to be indirectly applied for investments. Therefore if the entirety of borrowals can be established to have been utilised for the purpose of business and therefore could not have been used for the purpose of investment, then there can be disallowance even in respect of indirect interest expenditure. This point has not been examined by the lower authorities.
We therefore set aside this issue to the files of the AO to rework the disallowance under Section 14A after examining whether the borrowals on which interest payable in the current year, has been utilized only for the purpose of business or could any part of it have been utilized for fresh investments during the year. Thereafter the AO may rework the disallowance of indirect expenditure interest that may have been utilised for making investments which earns interest free income in accordance with law after giving reasonable opportunity to the Assessee. In the circumstances this ground of appeal
regarding disallowance u/s.14A is treated as allowed for statistical purposes.” “8. We have heard both the parties and perused the material on record. We find force in the argument of the learned A.R. Being so, we inclined to rectify the same by amending the Para 20 and 21 of our order dated 10.05.2013 as follows : Para-20. As regards indirect interest expenditure, if it can be proved that the entire borrowals, on which interest expenditure has been incurred during the year, has been applied for the purpose of the business, then no part of the borrowals can be taken to the indirectly applied for investments. Therefore if the entirety of borrowals can be established to have been utilized for the purpose of business and therefore could not have been used for the purpose of investment, then there can be disallowance even in respect of indirect interest expenditure. Further, the learned Counsel for the assessee pointed out that neither the Assessing Officer nor the CIT(A) held that any of the borrowed funds have been utilized for making of investments and Rule 8D was mechanically applied. The learned Counsel for the assessee, had submitted before the CIT(A) that : Para-21. Hence, it has been established that sufficient internal accruals of the capital resources/tax free investments were available which has been demonstrated by the Learned Counsel for the assessee in his paper at pages 31 and 32. Under these circumstances, the Order of the CIT(A) in confirming the disallowance under section 14A of the Income Tax Act, 1961 is unsustainable. Therefore, the grounds of appeal with respect to issue of disallowance under section 14A raised by the assessee are allowed. 8.1. In view of the above, assessee appeal in ITA.No.99/Hyd/2012 is partly allowed.”
12. On perusal of above, we found that this Tribunal has held that, if the investment is from internal accruals of the capital resources, no disallowance under section 14A of the Act is sustainable. Therefore, respectfully following the decision of this Tribunal, in absence of any direct nexus between interest-bearing borrowed funds and investments yielding exempt income, we find no reason to uphold the disallowance under Section 14A of the Act. Accordingly, the disallowance of Rs.75,59,818/- made under Section 14A of the Act is directed to be deleted and the order of the Ld. CIT(A) is upheld.
13. As far as the deletion of Rs.2,22,94,090/- is concerned, we have gone through para no.46A of AS-11 which is to the following effect :
“ 46A. (1) In respect of accounting periods commencing on or after the 1st April, 2011, for an enterprise which had earlier exercised the option under paragraph 46 and at the option of any other enterprise (such option to be irrevocable and to be applied to all such foreign currency monetary items), the exchange differences arising on reporting of long term foreign currency monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, in so far as they relate to the acquisition of a depreciable capital asset, can be added to or deducted from the cost of the asset and shall be depreciated over the balance life of the asset, and in other cases, can be accumulated in a “Foreign Currency Monetary Item Translation Difference Account” in the enterprise’s financial statements and amortised over the balance period of such long term asset or liability, by recognition as income or expense in each of such periods, with the exception of exchange differences dealt with in accordance with the provisions of paragraph 15 of the said rules.”
On perusal of above, it is abundantly clear that, the assessee has an option to accumulate the loss on account of fluctuation in foreign currency towards the loan taken in foreign currency for the purpose of long term assets and amortise the same over the tenure of loan. Accordingly, the foreign exchange fluctuation loss on ECB was accounted for strictly in line with the amended AS-11. The assessee exercised the option available under Para 46A to amortise the loss over the loan tenure and recorded the same in FCMITDA without routing it through the Profit and Loss Account and routed the amount of amortisation only through the profit and loss account.
On perusal of statement of profit and loss account of the assessee (page no.60 of the paper book) and note no.2.2 related to FCIMTDA (page no.61 of the paper book), we found that the assessee has claimed the amortised amount of Rs.2,22,94,090/- in profit and loss account in accordance with revised AS-11. Further, no amount has been set aside by the assessee as provision for diminution in the value of any asset as alleged by the Ld. AO. We have also gone through Explanation 1 to Section 115JB(2)(i) of the Act, and found that only such amounts that are set aside as provision for diminution in the value of any asset shall be added back while computing book profit. In the present case, since there is no such set aside of any amount as provision for diminution in the value of any asset , the addition made by the Ld. AO is outside the scope of the statutory adjustment permitted under the said explanation. Hence, the adjustment made by the Ld. AO is not in conformity with the statutory mandate of Section 115JB of the Act.
We further note that in all preceding assessment years, i.e., from AYs 2013–14 to AY 2015–16 (page nos.14 to 27 of the paper book no.2), the assessments were completed under Section 143(3) of the Act and no such addition was made under Section 115JB of the Act for the very same treatment of amortisation of FCMITDA. The principle of consistency, as laid down in Radhasaomi Satsang v. CIT [193 ITR 321 (SC)] and followed in several decisions, squarely applies to the facts of the case. Therefore, on account of consistency also, the addition made by the Ld. AO is liable to be deleted.
As far as the reliance placed by the Ld. DR on the decision in the case of DCIT Vs. Patanjali Foods Ltd. (supra), we find that the same was rendered in the context of Section 43A of the Act, which governs capitalisation of foreign exchange loss while computing income under the normal provisions of the Act. The computation under Section 115JB is based on book profit as per the Profit and Loss Account prepared in accordance with the Companies Act, and only specific additions or reductions enumerated in Explanation 1 to Section 115JB(2) of the Act are permitted. Therefore, the reliance of Ld. DR on the decision in the case of DCIT Vs. Patanjali Foods Ltd. (supra) is not applicable to the case of the assessee.
In view of our discussion as above, we hold that the amortisation of FCMITDA of Rs.22,29,40,090/- cannot be added back while computing book profit under Section 115JB of the Act.
Therefore, the findings of the Ld. CIT(A) are upheld.
In the result, the appeal of the Revenue is dismissed.