Section 80IC deduction cannot be curtailed ad hoc when separate accounts are maintained and no book defects are shown.

Separate accounts and Form 10CCB for an eligible undertaking supported deduction under section 80IC, and an ad hoc restriction to 50% of eligible profits was not justified where the Revenue could not show shifting of expenses or defects in the unit's books. The article also notes that a commission expense debited to the eligible Dehradun unit, if disallowed, would only increase the unit's eligible profits for Chapter VI-A purposes, so the corresponding deduction would not be defeated. The settled principle applied is that disallowances linked to the eligible business enhance deductible profits rather than reducing the section 80IC claim.

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Issues: (i) Whether the Revenue was justified in restricting the deduction under section 80IC of the Income-tax Act, 1961 to 50% of the eligible profits of the Dehradun unit. (ii) Whether the commission expenditure of Rs. 5 crores was disallowable, and if disallowed, whether the eligible deduction under section 80IC was to be computed on the enhanced profits.

Issue (i): Whether the Revenue was justified in restricting the deduction under section 80IC of the Income-tax Act, 1961 to 50% of the eligible profits of the Dehradun unit.

Analysis: The Dehradun unit was accepted as an eligible undertaking, and the assessee had furnished a separate profit and loss account and Form 10CCB. No concrete material was brought to show that expenses of the eligible unit were shifted to non-eligible units or that the books of the eligible unit were defective. The estimate-based reduction was unsupported by specific adverse findings, and the issue had already been decided in the assessee's favour in an earlier year on materially similar facts. A mere comparison of overall profitability, without evidence of manipulation, was insufficient to sustain the ad hoc restriction.

Conclusion: The restriction of deduction to 50% was not justified, and the deduction under section 80IC was to be allowed on the eligible profits as claimed, after excluding ineligible income where applicable.

Issue (ii): Whether the commission expenditure of Rs. 5 crores was disallowable, and if disallowed, whether the eligible deduction under section 80IC was to be computed on the enhanced profits.

Analysis: The commission was debited to the profit and loss account of the eligible Dehradun unit. Once the unit's profits were fully eligible for deduction, disallowance of an item of expenditure would only enhance the eligible profits. Under the settled principle reflected in the CBDT circular on disallowances and Chapter VI-A deductions, disallowances linked to the eligible business increase the quantum of deductible profits. The Revenue also failed to show that the expenditure was outside the business of the eligible unit.

Conclusion: No interference was warranted with the deletion of the commission disallowance, and in any event the corresponding increase in eligible profits would not prejudice the assessee's deduction under section 80IC.

Final Conclusion: The Revenue failed on both substantive grounds, and the order granting relief to the assessee was upheld in full.

Ratio Decidendi: Where an eligible undertaking maintains separate accounts and the Revenue cannot establish shifting of expenses or specific defects in the eligible unit's books, deduction under section 80IC cannot be curtailed on an ad hoc basis; likewise, a disallowance relatable to the eligible unit does not defeat the deduction but enhances the eligible profits.

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