Section 115BBDA IT Act | Foreign Dividend Income Not Subject to Set-off Restriction on Unabsorbed Depreciation : ITAT Mumbai

The Income Tax Appellate Tribunal, Mumbai, has clarified that Section 115BBDA of the Income Tax Act, 1961, does not apply to dividend income received from foreign subsidiaries, thereby affirming the right of domestic companies to set off unabsorbed depreciation against such income. This ruling reinforces statutory interpretation principles and curbs overreach under revisionary powers under Section 263.

Background & Facts

The Dispute

The dispute arose from the assessment of Delta Manufacturing Limited for Assessment Year 2022-23. The company declared nil total income in its return filed on 23.11.2022, after claiming set-off of unabsorbed depreciation of Rs. 18,82,71,334. The Assessing Officer (AO) completed the assessment under Section 143(3) read with Section 144B on 23.03.2024, accepting the returned income without any adjustment. However, the Principal Commissioner of Income Tax (PCIT) invoked Section 263 on 05.02.2026, setting aside the assessment on the ground that the company had incorrectly set off unabsorbed depreciation against dividend income received from its foreign subsidiary, Rhine Estates Limited, allegedly in violation of Section 115BBDA.

Key Facts

• The assessee, Delta Manufacturing Limited, is a domestic company incorporated in India, with PAN AAACG5018K.
• On 11.10.2021, its wholly owned subsidiary, Rhine Estates Limited (incorporated in England), reduced its share capital from 7,62,500 to 3,27,107 shares.
• As a result, Delta Manufacturing Limited received Rs. 15,56,86,520, which it treated as deemed dividend under Section 2(22)(d) and offered to tax under the head "Income from Other Sources".
• The company disclosed this transaction in Notes 45 and 48 of its audited standalone financial statements, submitted to the AO during assessment.
• The AO did not raise any specific query regarding this income during the assessment proceedings.
• The PCIT, in the show-cause notice dated 28.11.2025, alleged that the set-off of unabsorbed depreciation against this dividend violated Section 115BBDA.
• The assessee responded on 24.12.2025, contending that Section 115BBDA is inapplicable as the dividend was received from a foreign company, not a domestic one.

Procedural History

• 23.11.2022: Assessee filed return of income declaring nil income, claiming set-off of unabsorbed depreciation of Rs. 18,82,71,334.
• 23.03.2024: Assessment completed under Section 143(3) r.w.s. 144B; no adjustment made to returned income.
• 28.11.2025: Show-cause notice issued under Section 263 by PCIT, alleging erroneous set-off under Section 115BBDA.
• 24.12.2025: Assessee submitted detailed reply, attaching audited financial statements and disclosures regarding Rhine Estates Limited.
• 05.02.2026: PCIT passed order under Section 263, setting aside the assessment order.
• 11.06.2026: Hearing held before ITAT Mumbai.
• 15.06.2026: ITAT pronounced order.

Relief Sought

The assessee sought setting aside of the PCIT’s order dated 05.02.2026, and restoration of the AO’s assessment order dated 23.03.2024, affirming the legality of the set-off of unabsorbed depreciation against dividend income received from a foreign subsidiary.

The Legal Issue

The central question was whether Section 115BBDA of the Income Tax Act applies to dividend income received from a foreign subsidiary, and whether the Assessing Officer’s failure to examine this income during assessment renders the order erroneous and prejudicial to revenue under Section 263.

Arguments Presented

For the Appellant

The assessee contended that Section 115BBDA applies only to dividends received from domestic companies, as per its plain language. The dividend in question was received from Rhine Estates Limited, a foreign company incorporated in England, and therefore the provision was inapplicable. Further, Section 32(2) permits unrestricted inter-head set-off of unabsorbed depreciation against any head of income except salary. The AO had all relevant facts, including audited financial statements and disclosures, and made no adverse inference. The PCIT’s invocation of Section 263 was based on a misreading of the law and failure to appreciate the factual record.

The assessee relied on Malabar Industrial Co. Ltd. v. CIT, CIT v. Gabriel India Ltd., and CIT v. Vikas Polymers to support the proposition that where facts are on record and the AO has considered them, revision under Section 263 is impermissible.

For the Respondent

The Revenue argued that the AO had not specifically inquired into the nature of the Rs. 15,56,86,520 received, and therefore the assessment was incomplete. It was contended that the dividend income, even if from a foreign entity, should have been subjected to Section 115BBDA’s restrictions on set-off, and the AO’s failure to apply this provision rendered the assessment erroneous and prejudicial to revenue. The PCIT, therefore, acted within his revisionary powers.

The Court's Analysis

The Tribunal undertook a detailed textual analysis of Section 115BBDA. It observed that sub-section (1) applies only if three conditions are cumulatively satisfied: (i) the assessee is a "specified assessee" (i.e., not a domestic company); (ii) the dividend is received from a "domestic company"; and (iii) the dividend is declared/distributed/paid on or before 31.03.2020.

"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."

The Tribunal held that all three conditions were unmet. The assessee was a domestic company, the dividend came from a foreign entity, and the receipt occurred in FY 2021-22, well after the 2020 cutoff. Consequently, Section 115BBDA(2), which bars set-off of losses, could not be invoked.

The Tribunal further emphasized that Section 32(2) explicitly permits set-off of unabsorbed depreciation against any head of income except salary. The AO had access to the financial statements and disclosures, and chose not to make an adverse inference. The PCIT’s revisionary order was based on a legal misconception, not on any factual oversight by the AO.

The Tribunal reiterated the settled principle that Section 263 cannot be invoked merely because the AO did not raise a particular query. The jurisdiction requires a finding that the order is both erroneous and prejudicial to revenue. Here, the order was legally sound, and the PCIT’s action was an abuse of revisionary power.

The Verdict

The appeal was allowed. The order of the Principal Commissioner of Income Tax dated 05.02.2026 under Section 263 was set aside. The assessment order of the Assessing Officer dated 23.03.2024 was restored. No monetary relief was directed as the issue pertained to the legality of set-off, not quantification of tax.

What This Means For Similar Cases

Section 115BBDA Is Narrowly Construed

• Practitioners must verify the source of dividend income before applying Section 115BBDA - it applies only to dividends from domestic companies.
• Dividends from foreign subsidiaries, even if treated as deemed dividend under Section 2(22)(d), are outside the scope of Section 115BBDA.
• The restriction on set-off under Section 115BBDA(2) does not apply to domestic companies receiving foreign dividends.

Section 263 Cannot Be Used to Rectify Oversight

• If the AO has all relevant documents and chooses not to make an adjustment, the order cannot be deemed "erroneous" merely because a different interpretation is later proposed.
• Revision under Section 263 requires a demonstrable legal error, not a difference of opinion or procedural lapse.
• Tax authorities must not use Section 263 as a tool for re-assessment without establishing prejudice to revenue.

Unabsorbed Depreciation Set-off Remains Broadly Permissible

• Section 32(2) continues to allow unrestricted inter-head set-off of unabsorbed depreciation against income under any head except salary.
• This includes dividend income from foreign sources, royalty, interest, or capital gains.
• Taxpayers may confidently claim such set-offs provided the underlying income is properly disclosed and taxed under the correct head.