Section 10B deduction upheld for a new export unit where reconstruction and used-machinery objections were not established.

Deduction under section 10B was available because the new 100% export-oriented undertaking was not formed by reconstruction of an existing business and no transfer of previously used machinery was established. The earlier unit had ceased long before the new unit began, defeating any reconstruction objection, and the small plant-and-machinery figure was not shown to represent used assets deployed in the new unit. Manufacture or production was also satisfied: the assessee's handmade quilts and bed spreads were produced through substantial designing, supervision, packing, finishing and quality control, including controlled job work, which did not negate manufacture. The statutory approval as a 100% EOU was likewise satisfied, so the disallowance could not stand.

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Issues: Whether the assessee was entitled to deduction under section 10B of the Income-tax Act, 1961 in respect of the new 100% export-oriented unit, including whether the unit was formed by reconstruction of an existing business or by transfer of previously used machinery, and whether the manufacturing activity carried on through job work and finishing operations satisfied the statutory conditions.

Analysis: Section 10B(2) requires that the undertaking must manufacture or produce articles or things, must not be formed by splitting up or reconstruction of a business already in existence, and must not be formed by transfer to a new business of plant or machinery previously used for any purpose. The earlier unit had ceased business long before the new unit commenced, so the new undertaking could not be treated as a reconstruction of an existing business. The record did not establish that the new unit was formed by transfer of old machinery, and the small amount reflected as plant and machinery was not shown to have been used in the new unit. The assessee's products were handmade quilts and bed spreads, with substantial activities of designing, supervision, packing, finishing and quality control being carried out either directly or through job work under its control. Such outsourcing did not destroy the character of manufacture or production. The approval as a 100% EOU was also a relevant statutory requirement and stood satisfied.

Conclusion: The assessee satisfied the conditions for deduction under section 10B, and the disallowance by the lower authorities was unsustainable.

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