ITAT Holds That Section 115BBDA Is Not Applicable to Dividend Received from Foreign Subsidiary

The Income Tax Appellate Tribunal (ITAT) Mumbai has held that Section 115BBDA was inapplicable to dividend income received from a foreign subsidiary company, and, therefore, the assessee was entitled to set off unabsorbed depreciation against such income.

Delta Manufacturing Limited filed its return of income for assessment year 2022-23, declaring nil income after claiming a set-off of unabsorbed depreciation amounting to Rs 18.82 crore. During that relevant year, the company received Rs 15.56 crore from its wholly owned subsidiary, Rhine Estates Limited, incorporated in England. The amount was offered as a deemed dividend under Section 2(22)(d) under the head “Income from Other Sources”. The AO completed the assessment without making any additions to the returned income.

Subsequently, the Principal Commissioner of Income Tax issued a notice under Section 263 due to underassessment of income, as the assessee had wrongly set off unabsorbed depreciation against dividend income, which violates Section 115BBDA. The PCIT set aside the assessment order of the AO for fresh adjudication. Aggrieved by the revision order, the assessee preferred an appeal before the tribunal.

The Tribunal observed that the amount in question had been received from Rhine Estates Limited, which is a foreign company incorporated in England, upon reduction of its share capital. The Tribunal noted that Section 115BBDA applies only when the recipient is a specified assessee other than a domestic company and the dividend is declared, distributed, or paid by a domestic company, but in the present case, the assessee itself was a domestic company, but the dividend had been received from a foreign subsidiary incorporated in England. The Tribunal further observed that Section 32(2) permits unrestricted carry forward and set off of unabsorbed depreciation against income under any head other than salary.

The Tribunal held that the very foundation on which the PCIT invoked Section 263 could not be proved and, therefore, the revision order could not be sustained. The Tribunal set aside the order passed by the principal commissioner and restored the assessment order passed by the AO while allowing the appeal of the assessee.