Section 10B deduction and profit estimation require statutory eligibility and proved defects, not mere suspicion or low gross profit.

Section 10B relief may be claimed for the unexpired eligible period where a unit was originally formed as a new undertaking, used only new machinery, and was not shown to result from splitting up, reconstruction, or transfer of old machinery; later acquisition of EOU status does not by itself disqualify the claim. Estimated profit addition based on low gross profit is unsustainable where the books are not shown defective, the accounts are not rejected on proved infirmity, and there is no independent material of suppressed sales or inflated expenses. The ratio emphasizes statutory eligibility for export-oriented deductions and the limits on pure guesswork in profit estimation.

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Issues: (i) whether the assessee was entitled to deduction under section 10B despite having been an existing DTA unit which later obtained EOU status, and (ii) whether the addition made by estimating profits on account of low gross profit was sustainable.

Issue (i): whether the assessee was entitled to deduction under section 10B despite having been an existing DTA unit which later obtained EOU status.

Analysis: The unit had been formed as a new unit and had used only new machinery. It was not shown to have been formed by splitting up or reconstruction of an existing business, nor by transfer of previously used machinery. The substituted section 10B and the CBDT circulars contemplated relief to eligible export-oriented undertakings for the unexpired period of the ten-year tax holiday, and the subsequent grant of EOU status did not by itself convert an otherwise new unit into an ineligible old unit. Once the statutory conditions were satisfied, prior claim of deduction under another export incentive provision did not bar the assessee from claiming section 10B relief for the balance eligible period.

Conclusion: The assessee was entitled to deduction under section 10B for the unexpired eligible period, and the Revenue's challenge failed.

Issue (ii): whether the addition made by estimating profits on account of low gross profit was sustainable.

Analysis: The Assessing Officer did not establish defects in the books of account, nor did he reject the accounts on any proved infirmity. The decline in profit was explained by exchange-rate fluctuation, higher costs, and lower realisation, and the comparative material placed on record supported the assessee's explanation. In the absence of evidence of suppressed sales, inflated expenses, price rigging, or bogus claims, a mere fall in profit rate or suspicion could not justify estimation of profits on a pure guesswork basis.

Conclusion: The addition based on estimated gross profit was not sustainable and was rightly deleted.

Final Conclusion: The Revenue's appeal was dismissed, and the assessee's claims on both contested issues were upheld.

Ratio Decidendi: A deduction claim under section 10B cannot be denied merely because an existing unit later acquires EOU status if the unit was originally new and otherwise satisfies the statutory conditions, and profits cannot be estimated in the absence of proved defects in the accounts or independent material showing suppression or inflation.

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