INCOME TAX OFFICER, WARD-1(3), HYDERABAD vs. BHAGYANAGAR INDIA LIMITED , SECUNDERABAD

आयकर अपीलीय अधिकरण, हैदराबाद पीठ
IN THE INCOME TAX APPELLATE TRIBUNAL
Hyderabad ‘B’ Bench, Hyderabad

श्री विजय पाल राि, उपाध् यक्ष एिं
श्री मिुसूदन सािडिया, लेखा सदस् य के समक्ष ।
BEFORE SHRI VIJAY PAL RAO, VICE PRESIDENT AND SHRI MADHUSUDAN SAWDIA, ACCOUNTANT MEMBER
आ.अपी.सं /ITA No.1200/Hyd/2019
(निर्धारण वर्ा/Assessment Year:2016-17)

Income Tax Officer,
Ward-1(3), Hyderabad.

Vs.
M/s. Bhagyanagar India
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. 2. 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.

ITA No.1200/Hyd/2019 2

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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.”

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addition of Rs.2,22,94,090/- made by the Ld. AO towards amortisation of FCMITDA.
6. 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. 7. 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 ITA No.1200/Hyd/2019 7

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 ITA No.1172/Mum/2023 & 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.
8. 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 ITA No.1200/Hyd/2019 8

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 ITA no.99 & 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 ITA No.1200/Hyd/2019 9

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.
9. 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 U 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 ITA No.1200/Hyd/2019 10

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.
10. 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 ITA No.1200/Hyd/2019 11

was therefore submitted that the same treatment ought to be respected in the year under appeal.
11. 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 ITA No.1200/Hyd/2019 12

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.

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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

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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.”
14. 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

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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.

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BY ORDER,