N.V. Vasudevan, Judicial Member - The Assessee is a partnership firm. It is engaged in the business of manufacture and export of ready-made garments. For AY 08-09, the Assessee filed return of income declaring total income of Rs. 12,89,760/-. The Assessee had three units. Unit-I is a Domestic Tariff Area (DTA) Unit. This unit was not entitled to any exemption. We will refer to this as a non-eligible unit. Unit II and Unit III were 100% Export Oriented Units eligible for exemption u/s.10-B of the Act. These units will be referred to as eligible units. The position of income and loss of the three units for the previous year was as follows:

2. While filing the return of income, the Assessee set off losses of eligible units (Unit-II and III) against the profits of Unit-I, i.e., Rs. 6,78,13,152-6,65,23,391 (Rs. 6,22,40,143 + Rs. 42,83,248) and offered the balance sum of Rs. 12,89,761 to tax.

3. The AO held that income of eligible units that are entitled to exemption u/s.10-B of the Act will not form part of the total income under the A