Section 10A exemption survives firm-to-company conversion where the business is treated as transformed, not reconstructed.

Conversion of a partnership firm into a company, followed by approval as an STP unit, did not disqualify the undertaking from section 10A exemption. The conversion was treated as a transformation, not a transfer, and therefore did not amount to formation of the business by splitting up or reconstruction of an existing undertaking. The CBDT circulars recognising conversion of an existing DTA unit into an STP unit were treated as binding on tax authorities. Section 10A(9) also did not apply, because the conversion did not involve transfer of ownership or beneficial interest in the manner contemplated by that provision. The exemption claim was upheld.

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Issues: Whether the assessee was entitled to exemption under section 10A of the Income-tax Act on conversion of a partnership firm into a company and subsequent approval as an STP unit, and whether the conditions in section 10A(2) and section 10A(9) disentitled the claim.

Analysis: The undertaking had been carrying on software export activity before conversion, but the scheme of STP conversion and the CBDT circular recognised that an existing DTA unit could be converted into an STP unit and still obtain the deduction for the eligible remaining period. The conversion of the firm into a company was treated as a transformation and not a transfer, and therefore did not amount to formation of the undertaking by splitting up or reconstruction of an existing business. The Board circulars were taken as binding on the tax authorities, and the objection based on section 10A(9) was rejected because the conversion did not involve transfer of ownership or beneficial interest in the sense intended by that provision.

Conclusion: The assessee remained eligible for exemption under section 10A, and the revenue's challenge failed.

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