Year-specific section 80IB eligibility and a 2% exempt-income cap under section 14A shaped the tax ruling.

Deduction under section 80IB depends on satisfaction of the statutory conditions in the relevant assessment year, and the benefit does not continue merely because it was allowed in earlier years. Where the undertaking no longer qualifies as a small scale industrial undertaking on the last day of the previous year, the deduction cannot be claimed for that year. On section 14A, the disallowance was restricted to 2% of exempt income for the years where the issue survived, and no further adjustment was required where the assessee had already disallowed more than that amount. The article therefore states that eligibility under section 80IB is year-specific, while section 14A disallowance may be capped at the applied judicial benchmark.

---

---

Issues: (i) Whether deduction under section 80IB was available to the assessee for the relevant assessment years despite the undertaking ceasing to be a small scale industrial undertaking; (ii) Whether disallowance under section 14A was to be restricted to 2% of exempt income for the relevant years.

Issue (i): Whether deduction under section 80IB was available to the assessee for the relevant assessment years despite the undertaking ceasing to be a small scale industrial undertaking.

Analysis: The deduction under section 80IB is linked to fulfillment of the statutory conditions in the relevant year, and clause (g) of section 80IB(14) defines a small scale industrial undertaking by reference to its status as on the last day of the previous year. The Court distinguished authorities dealing with initial eligibility and earlier-year allowance, and held that where the undertaking no longer satisfies the small scale requirement in the year of claim, the deduction cannot continue merely because it was allowed in earlier years. The benefit under section 80IB(3) is therefore not perpetual once the factual condition ceases to exist.

Conclusion: Deduction under section 80IB was rightly denied to the assessee.

Issue (ii): Whether disallowance under section 14A was to be restricted to 2% of exempt income for the relevant years.

Analysis: For the assessment years where the issue was pressed, the Court followed the binding High Court guidance applied by the Tribunal and restricted the disallowance under section 14A to 2% of the exempt income. The Tribunal also noted that where the assessee had already disallowed more than that amount, no further adjustment was warranted. The issue for one year was not pressed and therefore did not require adjudication on merits.

Conclusion: The disallowance under section 14A was restricted to 2% of exempt income for the relevant years where the issue survived.

Final Conclusion: The appeals succeeded only to the limited extent of the section 14A restriction, while the denial of deduction under section 80IB was sustained.

Ratio Decidendi: Eligibility for deduction under section 80IB must exist in the relevant assessment year, and where the statutory status of the undertaking changes, the deduction cannot continue on the basis of prior-year allowance alone.

---