Section 10B eligibility for converted EOU units upheld where approval follows and exports are made after conversion.

A Domestic Tariff Area unit later approved as a 100% Export Oriented Unit can claim deduction under section 10B from the year of EOU approval, provided the statutory conditions are met. The Gujarat HC relied on CBDT Circular No. 1 of 2005, treating it as clarificatory and binding on the Department, and held that the deduction is limited to exports made after such approval. The conversion of an existing unit did not, on these facts, defeat eligibility merely because the business had earlier operated in the domestic tariff area.

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Issues: Whether the assessee was entitled to deduction under section 10B of the Income-tax Act, 1961 after conversion of its existing Domestic Tariff Area unit into a 100% Export Oriented Unit, and whether such conversion attracted the bar relating to formation by reconstruction or transfer of previously used plant and machinery.

Analysis: The assessee had previously been claiming deduction under section 80HHC and later obtained approval as a 100% EOU. The Revenue contended that the unit was only a converted existing business and therefore did not satisfy the conditions of section 10B(2). The Court relied on CBDT Circular No. 1 of 2005, which clarified that an undertaking set up in a domestic tariff area and subsequently approved as a 100% EOU becomes eligible for deduction under section 10B from the year in which it satisfies the basic condition of EOU approval, and that the deduction is restricted to exports made after such approval. The Court also followed the view that the circular was clarificatory and binding on the Department.

Conclusion: The assessee was entitled to deduction under section 10B on the converted EOU unit, and the Revenue's challenge failed.

Ratio Decidendi: A DTA unit that is subsequently approved as a 100% EOU is eligible for deduction under section 10B from the year of such approval, subject to the statutory conditions, and a clarificatory CBDT circular governing that position binds the Department.

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