Section 10AA deduction sustained despite revised return, change in constitution, leased machinery, and deemed export sales.

Deduction under section 10AA was held available where the claim was made in a revised return and the audit report was filed during assessment, because the then-applicable law did not require the claim to be confined to a return filed within the due date. Conversion of a proprietorship into a partnership was treated as a change in constitution, not reconstruction or split-up of the undertaking, so the deduction was not denied. Lease of some machinery did not defeat eligibility because the unit was not formed by transfer of previously used machinery. Sales to merchant exporters as deemed exports also did not bar the claim, as the relevant year's law did not yet require receipt of sale proceeds in convertible foreign exchange.

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Issues: (i) whether deduction under section 10AA could be claimed in a revised return and whether filing the audit report during assessment defeated the claim; (ii) whether conversion of a proprietorship concern into a partnership firm amounted to reconstruction so as to deny deduction under section 10AA; (iii) whether lease of certain machinery disqualified the unit from deduction under section 10AA; and (iv) whether sales to merchant exporters as deemed exports, without receipt of convertible foreign exchange by the assessee, disentitled the assessee to deduction under section 10AA.

Issue (i): whether deduction under section 10AA could be claimed in a revised return and whether filing the audit report during assessment defeated the claim.

Analysis: The revised return under section 139(5) substituted the original return, and the statute then applicable to section 10AA did not contain a proviso requiring the claim to be made only in a return filed within the due date under section 139(1). The audit report in Form 56F was filed during assessment, but that by itself did not invalidate the substantive claim. The later legislative amendment inserting such a due-date condition from 1 April 2024 also indicated that the requirement was not part of the law for the year in question.

Conclusion: The assessee's claim could not be rejected on these grounds and the issue was decided in favour of the assessee.

Issue (ii): whether conversion of a proprietorship concern into a partnership firm amounted to reconstruction so as to deny deduction under section 10AA.

Analysis: The conversion was approved by the SEZ authorities and the material on record showed only a change in constitution, not formation of a new unit by splitting up or reconstruction of an existing business. The prohibition in section 10AA applies where the undertaking is formed by such prohibited means, and that condition was not shown to exist on the facts.

Conclusion: The conversion did not disqualify the assessee, and the issue was decided in favour of the assessee.

Issue (iii): whether lease of certain machinery disqualified the unit from deduction under section 10AA.

Analysis: The undertaking already had substantial plant and machinery of its own at the time of formation, and the statutory condition regarding previously used machinery is relevant at the stage of formation of the eligible unit. Acquisition of some machinery on lease, without showing that the unit was formed by transfer of used machinery, did not violate section 10AA.

Conclusion: The lease of machinery did not bar the deduction, and the issue was decided in favour of the assessee.

Issue (iv): whether sales to merchant exporters as deemed exports, without receipt of convertible foreign exchange by the assessee, disentitled the assessee to deduction under section 10AA.

Analysis: The goods were sold to merchant exporters in the SEZ framework and were ultimately exported, with the transactions supported by the SEZ documentation. For the relevant year, section 10AA did not contain the later-added condition that sale proceeds must be received in India in convertible foreign exchange within a prescribed period. The reasoning adopted treated such deemed exports as eligible for the deduction in the facts found.

Conclusion: The absence of direct receipt of foreign exchange by the assessee did not defeat the claim, and the issue was decided in favour of the assessee.

Final Conclusion: The Revenue failed on all material grounds, the deduction under section 10AA was upheld, and the assessment additions were not sustained.

Ratio Decidendi: In the absence of a then-applicable statutory condition to file the return within the due date or to receive export proceeds in convertible foreign exchange, and where the undertaking was not formed by split-up or reconstruction, the deduction under section 10AA could not be denied merely because the claim was made in a revised return, the audit report was filed during assessment, the business changed constitution, machinery was leased, or the sales were effected through merchant exporters as deemed exports.

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