Case Law Details
Delta Manufacturing Limited Vs PCIT (ITAT Mumbai)
Section 263 Order Quashed as PCIT Invoked Wrong Section to Deny Set-Off of Unabsorbed Depreciation: ITAT Mumbai
In a significant ruling, the Mumbai ITAT quashed a revision order passed under section 263, holding that the very foundation of the PCIT’s action was legally unsustainable. The assessee had received ₹15.56 crore from its wholly owned foreign subsidiary, Rhine Estates Limited (England), on reduction of share capital and treated the amount as deemed dividend under section 2(22)(d). The assessee set off the income against brought-forward unabsorbed depreciation, which was accepted by the Assessing Officer in scrutiny assessment.
The PCIT invoked section 263 on the ground that the assessee had wrongly set off unabsorbed depreciation against dividend income in violation of section 115BBDA, which prohibits deduction or set-off against specified dividend income. According to the PCIT, the Assessing Officer had failed to examine this issue and therefore the assessment order was erroneous and prejudicial to the interests of the Revenue.
The Tribunal, however, found that section 115BBDA had absolutely no application to the facts of the case. It noted that the provision applies only to dividend received by a specified assessee from a domestic company, whereas the assessee itself was a domestic company and the dividend was received from a foreign subsidiary incorporated in England. Further, the provision applied only to dividends declared, distributed or paid on or before 31 March 2020, whereas the receipt in question arose during FY 2021-22. Thus, none of the statutory conditions for invoking section 115BBDA were satisfied.
The Tribunal held that when the very legal premise adopted by the PCIT is non-existent, the assessment order cannot be termed erroneous. It further observed that the relevant facts regarding the foreign subsidiary, reduction of share capital and treatment of the receipt were already available in the financial statements and assessment records. Accordingly, the assumption of jurisdiction under section 263 was held to be invalid, the revisionary order was quashed, and the original assessment order was restored.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This is an appeal filed by the Assessee against the order of the Learned Principal Commissioner of Income Tax, Mumbai – 6 [‘Ld. PCIT’], passed u/s 263 dated 05.02.2026, pertaining to Assessment Year (AY) 2022-23.
2. Briefly, the facts of the case are that the assessee company filed its return of income on 23.11.2022, declaring total income at Rs. Nil after claiming set off of unabsorbed depreciation of Rs. 18,82,71,334/-. Subsequently, the case of the assessee was selected for scrutiny and assessment u/s. 143(3) r.w.s. 144B of the Act was completed on 23.03.2024, accepting the returned income. Though, there was no adjustment or variation between the returned income and the assessed income, however, while computing the tax liability, the Assessing Officer has worked out a tax demand of Rs. 2,29,82,400/- which as per the assessee, relates to disallowance of set off of income under the head ‘Long Term Capital Gain’ against the loss under the head “income from business or profession” amounting to Rs. 9,34,65,082/- against which the assessee has filed an appeal and the proceedings before the ld. CIT(A) are currently pending adjudication.
3. Subsequently, a show cause u/s. 263 dated 28.11.2025 was issued to the assessee. As per the show cause, the ld. PCIT stated that on verification of records, it is seen that the assessee company has credited an amount of Rs. 15,56,86,520/- as dividend income which is reflected as ‘other income’ in its profit and loss account and as per the computation of income, the assessee has set-off this dividend income with unabsorbed depreciation which is not in order as per the provisions of Section 115BBDA of the Act which has resulted in incorrect set-off of carry forward loss of Rs.15,56,86,520/- leading to underassessment. Accordingly, the assessee was asked to show-cause as to why the assessment order so passed should not be set aside for fresh adjudication.
4. In response to show-cause so issued, the assessee filed its submission on 24.12.2025. In its submissions, the assessee company submitted that the foundation of the show-cause notice is erroneous for the reason that Section 115BBDA of the Act applies only to dividend income received from a domestic company and in the present case, the dividend income has been received from a foreign subsidiary company and reference was drawn to the audited financial statements as well as notes to the audited financial statements, wherein the necessary disclosure has been made in respect of Rhine Estates Limited, the foreign subsidiary of the assessee company, from whom the assessee has received a sum of Rs. 15,56,86,520/- towards capital reduction. It was further submitted that the said income has been offered as deemed dividend income u/s 2(22)(d) under the head ‘income from other sources’ and given that, Section 115BBDA of the Act has not application. It was further submitted that the Section 32(2) of the Act clearly provides that unabsorbed depreciation shall be carried forward and shall be allowed to be set off against income under any head other than salary and the law is well settled that unabsorbed depreciation enjoys unrestricted inter-head set-off. Accordingly, the set-off of unabsorbed depreciation against dividend income received from a foreign company is fully permissible under the Act and the assessment order accepting such set-off is in complete consonance with the statutory provisions and does not suffer from any error. It was accordingly submitted that the proceedings so initiated u/s. 263 of the Act may be dropped.
5. The submissions so filed by the assessee were considered. As per the ld. PCIT, the Assessing Officer vide notices issued u/s. 142(1) has called for various details from the assessee, however, details relating to dividend income of Rs. 15,56,86,520/- received by the assessee company have not been called for. It was further held that even the assessee company in its submissions has not contended that the details of dividend were asked for during the course of assessment proceedings. As per ld. PCIT, the AO should have conducted inquiry on this issue during assessment proceedings and given that detailed inquiry has not been conducted in the matter, the assessment order passed u/s. 143(3) r.w.s. 144B is erroneous in so far as prejudicial to the interest of revenue and the assessment order so passed by the Assessing Officer was set aside and the Assessing Officer was directed to make a detailed inquiry in the matter and reassessed the income in accordance with law after giving an opportunity of being heard to the assessee.
6. Against the said order, the assessee is an appeal before us. During the course of hearing, our reference was drawn by the ld AR to the audited financial statements of the assessee company and in particular notes to the financial statements wherein the assessee company has disclosed this transaction. It was submitted by the ld AR that as per note no. 45 and 48 of the notes to the standalone financial statements, wherein it has been clearly stated that the Rhine Estates Limited, a wholly owned subsidiary of the assessee company which has been incorporated in England has sold its business assets and its entire stake in Pilamec Limited to Bunting Magnetics Europe Ltd on 11.10.2021. It has been further stated that the assessee company has received a consideration of Rs. 15,56,86,520/- for reduction in share capital of its wholly owned subsidiary resulting in net gain of Rs. 11,98,39,870/-. It was further submitted that during the course of assessment proceedings, notices were issued by the Assessing Officer and in response to the notices so issued, the assessee has submitted that during the period under consideration, there was a reduction of share capital of Rhine Estates Limited a subsidiary company of the assessee company and in the reduction, the number of shares have been reduced from 7,62,500 to 3,27,107 and the resulting capital gain have been added to the profit before exception item as the same is considered to be an exceptional item. However, the said gain is not taxable under the head ‘profit and gains from business or profession’ and hence, the same has been reduced and offered as income under the head ‘income from other sources’ being the deemed dividend u/s 2(22)(d) of the Act. It was further submitted that the financial statements of Rhine Estates Limited were also submitted before the Assessing Officer as part of its submissions. It was submitted that taking into consideration the submissions so filed by the assessee, the Assessing Officer has completed the assessment wherein he has not proposed any adjustment or variance to the returned income or in terms of the claim of the set off the losses. It was accordingly submitted that the matter was duly examined by the Assessing Officer and it is therefore not a case where the matter has not been examined by the Assessing Officer or the Assessing Officer was not seized of the relevant information.
7. Further, our reference was drawn to the provisions of Section 115BBDA of the Act, which reads as under:
“115BBDA. Tax on certain dividends received from domestic companies.
(1) Notwithstanding anything contained in this Act, where the total income of a specified assessee, resident in India, includes any income in aggregate exceeding ten lakh rupees, by way of dividends declared, distributed or paid by a domestic company or companies, on or before the 31st day of March 2020, the income-tax payable shall be the aggregate of –
(a) the amount of income-tax calculated on the income by way of such dividends in aggregate exceeding ten lakh rupees, at the rate of ten per cent; and
(b) the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the amount of income by way of dividends.
(2) No deduction in respect of any expenditure or allowance or set off of loss shall be allowed to the assessee under any provision of this Act in computing the income by way of dividends referred to in clause (a) of subsection (1).
(3) In this section, “dividends” shall have the same meaning as is given to “dividend” in clause (22) of section 2 but shall not include sub-clause (e) thereof.]
[Explanation. – For the purposes of this section, –
(a) “dividend” shall have the meaning assigned to it in clause (22) of section 2 but shall not include sub-clause (e) thereof;
(b) “specified assessee” means a person other than, –
(i) a domestic company; or
(ii) a fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10; or
(iii) a trust or institution registered under section 12A or section 12AA.]”
8. It was submitted that the aforesaid provisions applies to the specified assessee, being resident in India and in whose case, total income includes dividend income declared/distributed or paid by a domestic company. It was submitted that the specified assessee has been defined in the explanation to mean a person other than a domestic company. It was accordingly submitted that the said provision on the face of it does not apply to the assessee company, not being a specified assessee and secondly, the dividend has not been received from a domestic company as it has been received from a foreign subsidiary company. It was accordingly submitted that the very foundation for invocation of provisions of Section 263 does not exist in the instant case and in light of the same, the impugned order so passed by the ld. PCIT deserves to be set aside. Further, reference was drawn to the provisions of Section 32(2) of the Act which provides that unabsorbed depreciation shall be carried forward and allowed to be set off against income under any head other than the salary. It was submitted that even the said provisions are clearly satisfied in the instant case. It was accordingly submitted that there is no basis for the ld. PCIT to invoke his jurisdiction u/s. 263 of the Act. Further, reliance was placed on the decision of Hon’ble Supreme Court in case of Malabar Industrial Company Ltd. v. CIT [2000] 109 taxmann 66 (SC), the decision of Hon’ble Jurisdictional High Court in case of CIT v. Gabriel India Ltd. [1993] 71 taxman 585 (Bombay) and the decision of Hon’ble Delhi High Court in case ofCIT v. Vikas Polymers [2010] 194 Taxman 57 (Delhi).
9. The ld. DR has been heard, who has relied on the order passed by the ld. PCIT and it was submitted that the Assessing Officer has not issued any specific notice/show cause inquiring about the dividend income received by the assessee company from its foreign subsidiary company and therefore, where the matter has not been inquired by the Assessing Officer, the ld. PCIT was right in holding that the order so passed by the Assessing Officer is prejudicial to the interest of the revenue and hence, he supported the order and the findings of the ld. PCIT.
10. We have heard the rival contentions and pursued the material available on record. Admittedly and undisputedly, the dividend income under consideration is the amount received by the assessee company from its foreign subsidiary company, Rhine Estates limited, incorporated in England pursuant to reduction of latter’s share capital. These facts are clearly emanating from the financial statements, the tax return so filed by the assessee and submissions made during the course of the assessment proceedings. In the said factual background, we find that the provisions of section 115BBDA are clearly not applicable. The said provisions on plain reading apply to an assessee who is a person other than a domestic company whereas the assessee company is a domestic company. Secondly, it applies to dividend declared/distributed/paid by a domestic company and in the instant case, the amount has been received from a foreign company incorporated under the laws of England and doesn’t qualify as a domestic company. Thirdly, it applies to dividend declared/distributed/paid by a domestic company on or before 31/03/2020 and in the instant case, the amount has been received by the assessee company during the financial year 2021-22. Therefore, all three conditions as so laid down in sub-section (1) to section 115BBDA essential for invocation of section 115BBDA doesn’t get satisfied in the instant case and in absence thereof, provisions of sub-section (2) which debars any claim of deduction or set off of losses cannot be invoked. We therefore agree with the contention advanced by the ld AR that where the very foundation so invoked by the ld PCIT in terms of applicability of section 115BBDA doesn’t exist in the instant case, the order so passed by the ld PCIT deserve to be set-aside.
11. It is a settled legal proposition that before invocation of jurisdiction u/s 263 of the Act, it is essential to determine whether the order so passed by the Assessing officer is erroneous and prejudicial to the interest of the Revenue. It is also a settled legal proposition that in a case where it is held that the matter has not been examined by the Assessing officer, the ld PCIT based on examination of the facts of the case has to record his prima facie findings as to the satisfaction of these conditions. In the instant case, we find that the order so passed by the Assessing officer cannot be held as erroneous as the provisions so sought to be invoked by the ld PCIT doesn’t apply in the facts of the present case. The necessary facts were available and submitted before the Assessing officer and where considering the same, the Assessing officer didn’t draw any adverse inference, we find that the order so passed by the Assessing officer cannot be held as erroneous in so far as prejudicial to the interest of the Revenue. During the revisionary proceedings as well, the ld PCIT has not disputed the said factual position and without even prima facie examining the applicability of section 115BBDA, which are non-existent, as we have discussed above, has set-aside the assessment order, which cannot be sustained. In the result, we are of the considered view that the ld PCIT was not justified in exercise of his jurisdiction u/s 263 of the Act and the order so passed is hereby set-aside and that of the Assessing officer is sustained.
12. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 15.06.2026
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