Facts of the Case

The present case pertains to Assessment Year 2003–04, where the assessee filed its return declaring income of ₹1.14 crore but paid tax under Section 115JB on book profits. The case was initially assessed under Section 143(3), and subsequently reopened under Section 147.

During reassessment, the Assessing Officer (AO) enhanced the income and made two key disallowances:

  • Deduction under Sections 80IA/80IB amounting to ₹4.32 crore on the ground that profits of eligible units were not adjusted against losses of other units.
  • Deduction under Section 80M amounting to ₹3.97 crore on the ground that dividend income was not distributed to shareholders.

The CIT(A) deleted both disallowances, and the Income Tax Appellate Tribunal upheld the deletion. The Revenue filed an appeal before the Delhi High Court.

Issues Involved

  1. Whether deduction under Sections 80IA/80IB requires adjustment of profits of eligible units against losses of other units.
  2. Whether deduction under Section 80M is allowable when dividend distribution was allegedly not made.

Petitioner’s Arguments (Revenue)

  • The Revenue contended that losses from other eligible units must be adjusted against profits of profitable units before allowing deduction under Sections 80IA/80IB.
  • It relied on judicial precedent (Microlabs Ltd.) to argue that Section 80IA(5) mandates such adjustment.
  • Regarding Section 80M, the Revenue argued that deduction is not permissible as the assessee had not distributed dividend.

Respondent’s Arguments (Assessee)

  • The assessee argued that deductions under Section 80IA must be computed considering only profits of eligible units as independent sources of income.
  • It contended that losses already adjusted in earlier years cannot be notionally brought forward.
  • For Section 80M, the assessee demonstrated that dividend of ₹3.97 crore had indeed been distributed to shareholders.

Court’s Findings / Order

On Section 80IA/80IB

  • The Court held that profits of eligible business must be computed as if it is the only source of income.
  • There is no requirement to adjust losses of other units or previously absorbed losses.
  • The Court followed its earlier ruling in Pr. CIT vs Sterling Agro Industries Ltd. and agreed with the Madras High Court view, rejecting the Karnataka High Court’s view in Microlabs Ltd.

On Section 80M

  • The Court observed that deduction is allowable to the extent dividend is distributed.
  • It upheld the factual finding that dividend of ₹3.97 crore was distributed.
  • Hence, disallowance by AO was based on incorrect facts.

Final Order

  • No substantial question of law arose.
  • Appeal of the Revenue was dismissed.

Important Clarification

  • Section 80IA(5) creates a legal fiction treating eligible business as the only source of income, but does not permit reopening or re-adjustment of past losses already set off.
  • Deduction under Section 80M depends strictly on actual dividend distribution, not assumptions by the AO.

Sections Involved

  • Section 80IA
  • Section 80IB
  • Section 80M
  • Section 147
  • Section 143(3)
  • Section 115JB
  • Section 148

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS05102023ITA2232023_153001.pdf

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