Section 10B deduction cannot be restricted under anti-abuse rules without proof of a profit-shifting arrangement.

Section 10B deduction for a 100% export-oriented undertaking cannot be restricted under section 80-IA(10) merely because its profits are higher than a sister concern's. The anti-abuse provision applies only where there is a close connection and the business is shown to have been arranged so as to earn more than ordinary profits. A mere margin comparison, without a clear finding of such an arrangement or a lawful benchmark for ordinary profit, is insufficient. Extraordinary profits alone do not establish profit shifting, and year-end amalgamation by itself does not prove the arrangement.

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Issues: Whether deduction under section 10B could be restricted by applying section 80-IA(10) merely because the assessee earned higher profits than its sister concern, in the absence of a categorical finding of an arrangement producing more than ordinary profits.

Analysis: Section 10B is an incentive provision for a 100% export-oriented undertaking, while section 80-IA(10) operates as an anti-abuse safeguard where, owing to a close connection or other reason, the course of business is so arranged that the assessee earns more than ordinary profits. A mere comparison of the assessee's export business margin with the domestic margin of a sister concern, without first recording a clear finding of an arrangement between them and without determining what constitutes ordinary or reasonable profit on a lawful basis, is not sufficient. Extraordinary profits by themselves do not establish the existence of an arrangement, and amalgamation at the end of the relevant year does not, by itself, prove such an arrangement.

Conclusion: The restriction of deduction on the basis of the sister concern's profit margin was unsustainable, and the question was answered in favour of the assessee.

Ratio Decidendi: Extraordinary profits alone cannot justify invoking section 80-IA(10); the Revenue must first establish a close connection and a profit-shifting arrangement before recomputing deduction-eligible profits.

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