Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2026 Supreme(Online)(ITAT) 7517

INCOME TAX APPELLATE TRIBUNAL (INDORE BENCH)
B.M. Biyani, Accountant Member, Paresh M Joshi, Judicial Member
DCIT-4(1), Indore – Appellant
Versus
Maral Overseas Ltd. – Respondent
ITA No.570/Ind/2025

Advocates:
For the Appellants/Petitioners: Shri Ashish Porwal, Sr.DR
For the Respondents: Shri Satyajeet Goel, CA

New units created through substantial capital investment and separate infrastructure qualify as independent industrial undertakings for tax exemption, regardless of whether they represent capacity expansion of an existing facility. Business expenditures for staff welfare and promotional activities are deductible when shown to serve commercial expediency.

Headnote:(A) Income Tax Act, 1961 - Section 10B - 100% Export Oriented Undertaking (EOU) - Exemption - Substantial expansion - New Industrial Undertaking - Assessee claimed exemption for new units established through significant capital investment and capacity enhancement - Department disputed eligibility, contending units were mere expansions - Held, undertaking means a unit having separate infrastructure, plant, machinery, and identifiable output - Since new units were independently operable and met technical requirements, they qualify for independent exemption status for ten consecutive years. (Paras 6.1, 6.4, 6.5, 76)

(B) Income Tax Act, 1961 - Section 37(1) - Business expenditure - Staff welfare - Contribution to society running a school - Nexus with business - Expenditure incurred for employee retention, welfare, and operational efficiency constitutes business purpose - Wholly and exclusively laid out for business despite third-party incidental benefit. (Paras 8.1, 8.2)

(C) Income Tax Act, 1961 - Section 37(1) - Ad-hoc disallowance - Business promotion - Unverifiable expenses - Ad-hoc additions without identifying specific defects or infirmities are unsustainable - Deletion upheld where expenses are shown to be incurred in the ordinary course of business. (Paras 10.1, 10.2)

Facts of the case:
The assessee, engaged in the textile manufacturing sector, established new production units as 100% export-oriented undertakings. The tax authority disallowed the exemption claimed under Section 10B, arguing these were mere capacity expansions of existing units rather than new independent undertakings. Additionally, the authority disallowed payments made as staff welfare contributions and made ad-hoc disallowances against business promotion expenses due to lack of itemized vouchers.

Findings of Court:
The court found that the new units were independent, possessed separate infrastructure, and were managed under clear institutional approval processes. Following judicial precedents, it held that capacity enhancement leading to a distinct, viable industrial undertaking qualifies for tax benefits separately. Staff welfare contributions were deemed business expenses based on commercial expediency and precedent. Ad-hoc disallowances were found unjustified in the absence of specific evidence of personal use.

Issues: 1. Whether new units created by capacity expansion qualify as independent undertakings for Section 10B exemption. 2. Whether contributions to an employee-focused school society are allowable as business expenditure under Section 37(1). 3. Whether ad-hoc disallowances of business promotion expenses are legally sustainable.

Ratio Decidendi: An undertaking constitutes a separate industrial unit for exemption if it is functionally independent, maintains separate books, possesses distinct plant and machinery, and is approved as an export-oriented unit. Capacity enhancement does not preclude new unit status if the expansion transforms into a distinct, identifiable production undertaking. Business expenditure is allowable if it promotes commercial efficiency, even if it incidentally benefits third parties.

Result: Appeal of the Revenue is dismissed.

Table of Content
1. nexus of staff welfare/business promotion expenditure for deduction. (Para 10)

आदेश / O R D E R

Per Paresh M Joshi, J.M.:

This is an Appeal filed by the Revenue under section 253 of the income tax Act 1961,[ herein after referred to as the Act for the sake of brevity] before this tribunal. The Revenue is aggrieved by the order bearing Number:-1041/2021-22 dated 20.07.2022[DR No:- 35/11/11 D No:- 408] passed by the Ld. CIT(A) u/s 250 of the Act, which is herein after referred to as the “Impugned order”. The Relevant Assessment year is 2004-05 and the corresponding previous year period is from 01.04.2003 to 31.03.2004.

Factual Matrix

2.1 That as and by way of an assessment order made u/s 143(3) of the Act the assesse’s total income was computed and assessed at Rs.- 28,01,85,652/- i.e. the loss assessed to be carried forwarded. The income of the assessee as per the return of income before the exemption u/s 10B was at Rs- 28,19,75,153/-. The Ld. AO disallowed deduction u/s 35D of Rs. - 6, 89,501/-. The Ld. AO disallowed out of staff welfare the expenses sum of Rs.-10,00,000/-. In addition the Ld. AO also disallowed out of business promotion expenses an amount of Rs.- 1,00,000/-. That the aforesaid assessment is dated 27.12.2006 and that the same is hereinafter referred to as the “impugned assessment order”.

2.2 The assessee had filed its return of income on 01.11.2004 declaring total income Nil after claiming deduction u/s 10B along with statutory audit report, tax audit report, certificate in form 56G. certificate in form 10CCAC and in form 29B etc. This return has been processed u/s 143 (1). The case was selected for scrutiny and statutory notice w/s 143 (2) was issued on 09.03.2005 which was duly served on the assessee on 08.04.2005. Later on further notices were issued u/s 142 (1) (ii). Detailed questionnaire were issued on 10.04.2006 and 06.11.2006. In response, Shri Ajay Tulsiyan, FCA and Sh. Vishal Bhatia, ACA attended from time to time with whom the case was discussed. Books of account were produced which were examined by test check. Written submissions were made during the course of hearing, which were placed on record after perusal.

2.3 That the assessee company continue to derive income from manufacturing and mainly export of yarn and fabrics as also the garments.

2.4 That the assessee has various units and separate set of books are maintained for the purpose.

2.5 That unit wise final accounts are prepared and then merged in comprehensive final accounts.

2.6 That for the year under consideration the assessee has not claimed any deduction u/s 80 HHC as in the past, in respect of its export business of its non EOU units.

2.7 That the assessee had claimed the deduction u/s 10B in the respect of its units III and IV situated at Khalbujurg being eligible EOUs, both under the normal computation and also in the computation u/s 115 JB.

2.8 That the said claim was disallowed in the regular assessment proceedings for the assessment year 2002-03 and 2003-04 and therefore the assessee was asked to explain as to why the exemption u/s 10B should not be disallowed for the reasons elaborated in the assessment order for the those years.

2.9 That the assessee made following submissions before the Ld. AO:-

“The company has claimed deduction u/s 10B in respect of the profits of units III and II being eligible EOUs, both under the normal computation and also in the computation u/s 115JB as per the detailed working enclosed with the return also read with note no:- 3 &6 forming the part of the return. The said claim has been disallowed in the regular assessment proceedings for the assessment year 2001-02 to 2003-04. However the said claim was allowed in the first appeal for the AY 2001-02 and 2002-03, whereas the first appeal for AY 2003-04 is still pending. A detailed note on the allowability of this claim is annexed here with at page no. 51 to 54. Detailed note on alloability of claim u/s 10B

1. That the claim of exemption

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2026 Supreme(Online)(ITAT) 7517

INCOME TAX APPELLATE TRIBUNAL (INDORE BENCH)B.M. Biyani, Accountant Member, Paresh M Joshi, Judicial MemberDCIT-4(1), Indore – AppellantVersusMaral Overseas Ltd. – RespondentITA No.570/Ind/2025

Cases Referred (2)

INCOME TAX APPELLATE TRIBUNAL (INDORE BENCH)
B.M. Biyani, Accountant Member, Paresh M Joshi, Judicial Member
DCIT-4(1), Indore – Appellant
Versus
Maral Overseas Ltd. – Respondent
ITA No.570/Ind/2025