An independently established unit qualifies for Section 10A exemption despite expansion of an existing business.

Mastek Limited claimed exemption/deductions under Sections 10A and 80HHE of the Income-tax Act, 1961, for Assessment Years 1999–2000 and 2000–2001. The Revenue disputed: (i) the eligibility of Unit No. 107 for Section 10A benefits on the ground that it was merely an extension or reconstruction of Unit No. 106; (ii) the availability of deductions under Section 80HHE and Section 10A in respect of foreign-exchange fluctuation gains; (iii) the allowability of a write-off of business advances amounting to Rs.20,43,252; and (iv) the eligibility of Unit No. 106 for deduction under Section 80HHE.

The Commissioner (Appeals) granted the relevant benefits, and the Income Tax Appellate Tribunal affirmed the orders, while remanding the question of foreign-exchange gains to the Assessing Officer to ascertain whether the gains arose from exports of goods or articles manufactured or produced by the assessee. The Revenue filed the present appeals under Section 260A of the Act.

Whether Unit No. 107 was a separate and independent undertaking eligible for exemption under Section 10A, or was merely an extension, splitting-up, or reconstruction of Unit No. 106?

Whether the assessee was entitled to deduction under Section 80HHE with reference to gains arising from foreign-exchange fluctuations?

Whether the assessee was entitled to deduction under Section 80HHE in respect of Unit No. 106?

Whether the write-off of advances amounting to Rs.20,43,252 was allowable as a business loss or deduction?

Whether the assessee was entitled to deduction under Section 80HHE in respect of foreign-exchange fluctuation gains relating to Unit No. 106?

Whether the assessee was entitled to deduction under Section 10A in respect of foreign-exchange fluctuation gains relating to the new Unit No. 107?

Whether the alternative question concerning deduction under Section 80HHE for Unit No. 106 required determination when Unit No. 107 was held eligible for Section 10A exemption?

The Court applied Section 10A of the Income-tax Act, under which a newly established eligible undertaking is entitled to exemption subject to the statutory conditions, including that it must not be formed by splitting up or reconstruction of an existing business.

It applied Section 80HHE concerning deductions for profits derived from eligible export-related computer software activities and the principle that “derived from” requires a direct nexus between the income and the eligible undertaking.

The Court relied on Textile Machinery Corporation Ltd., Indian Aluminium Co. Ltd., and Digvijay Cement Co. Ltd. for the tests of a new and independent undertaking, including fresh capital investment, additional employment, additional profits and a separate identity.

For foreign-exchange gains, it relied on CIT v. Amba Impex, holding that an exchange-rate difference may remain relatable to the original export even if received in a later year, and on CIT v. Sterling Foods and CIT v. Gaskets and Radiators Distributors for the direct-nexus requirement under the expression “derived from”.

For the written-off advances, the Court applied Section 28 and the principle that a loss directly connected with and incurred in the course of business is allowable as a business loss, relying on Abdul Razak & Co. and CIT v. Nainital Bank Ltd.

The Court found that Unit No. 107 possessed a distinct and independent identity: it operated from separate premises under a separate lease, had separate electricity and water meters, involved fresh investment in furniture, fixtures, computers and equipment, employed additional personnel, and served territories and customers distinct from Unit No. 106.

Unit No. 106’s turnover and employment also increased, demonstrating that its business had not been diverted or reconstructed into Unit No. 107. Applying the statutory tests and the cited precedents, the Court held that Unit No. 107 was not formed by splitting up or reconstruction and therefore qualified for Section 10A benefits.

Regarding foreign-exchange gains, the Court accepted that such gains could be directly referable to export proceeds and therefore eligible for Section 10A or Section 80HHE, provided the Assessing Officer verified that the gains arose from eligible exports; the Tribunal’s direction to conduct that verification was not legally infirm.

The Court further accepted the Tribunal’s factual finding that the advances were made in the course of business and were directly connected with the assessee’s business activities, making their write-off allowable as a business loss under Section 28.

Since Unit No. 107’s Section 10A eligibility was upheld, the alternative question concerning Section 80HHE for Unit No. 106 did not require adjudication.

The alternative question regarding Section 80HHE deduction for Unit No. 106 was not answered as unnecessary.

Both tax appeals were accordingly dismissed.