The Assessing Officer says my client's SEZ unit is a reconstruction of its existing EOU business, and he is raising it in year three after allowing the claim twice. Can he?
The Delhi High Court held that the conditions in s.10AA(4) are unit specific and not assessee specific, so an assessee who already runs an export business — even one that enjoyed s.10A relief — is not disqualified from claiming s.10AA on a genuinely new SEZ unit. It also held, following its own earlier decisions, that the objection under clause (ii) that the undertaking was formed by splitting up or reconstruction relates to the date of formation and must be taken in the first year in which the exemption is claimed, not in a later year. The Revenue's appeal was dismissed with no substantial question of law arising.
Decided by the High Court (Sanjiv Khanna J and Anup Jairam Bhambhani J) on 2018-12-04, reported as ITA No. 824/2018 (Delhi High Court). It bears on section 10AA, section 10AA(4), section 10A, section 10B, section 80-IA(3), section 260A, section 143(3) of the Income Tax Act 1961, in Deductions & Disallowances, Capital Gains Exemptions and Appeals matters.
This is the answer to the commonest s.10AA(4) notice: the officer points to the assessee's existing unit, calls the SEZ unit a reconstruction, and reopens or disallows in a year well after the unit started. Two propositions defeat that. The first is textual — s.10AA speaks of the Unit as the eligible entity, so where an assessee has several units in an SEZ each is tested separately, and the existence of a similar business already being carried on is not itself disqualifying; clause (iii), which bars the transfer of previously used machinery or plant to the new business, presupposes that a similar business may already exist. The second is temporal — clause (ii) fixes on how the undertaking was formed, so the scrutiny belongs to the year of formation. The Court's factual method is worth copying: it looked at the revenue of the existing non-exempt business year by year to see whether it had been transferred away, at the growth in revenue of the new unit, at the physical expansion of the existing unit, and at the proportion of newly recruited technical manpower in the SEZ unit. Note the limit of the decision: the Court did not hold that a later year can never be examined, and it did not decide anything about clauses (i) or (iii), which were not in dispute.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee ran a hundred per cent Export Oriented Unit whose income was entitled to exemption under s.10A up to AY 2011-12. It then set up a new unit in a Special Economic Zone and claimed exemption under s.10AA. The SEZ unit commenced business in the period relating to AY 2011-12 (paragraph 11), and the s.10AA claim was made and allowed in AY 2011-12 and AY 2012-13, the Assessing Officer not disallowing it in the assessment orders passed after scrutiny under s.143(3). In AY 2013-14 the Assessing Officer disallowed the claim, invoking clause (ii) of s.10AA(4) — that the unit was formed by the splitting up or reconstruction of a business already in existence. There was no dispute that clauses (i) and (iii) of s.10AA(4) were satisfied. The Tribunal, by order dated 23 January 2018, examined the revenue earned by the existing EOU business and by the new SEZ unit from FY 2009-10 to FY 2016-17, the physical expansion of the EOU by an additional 21,817 square feet, and the proportion of new employees in the SEZ unit (83 per cent for AY 2011-12 and 64 per cent for AY 2013-14), and held the new unit was not formed by splitting up or reconstruction. The Revenue appealed under s.260A.
The appeal was dismissed with no order as to costs, the Court finding that no substantial question of law arose (paragraph 14). Sub-section (4) stipulates the conditions which an undertaking as a unit must fulfil, so the eligibility requirements are unit specific and not, unless so stipulated, assessee specific; where there are multiple units in an SEZ each unit is separately entitled on satisfaction of the conditions (paragraph 6). Income earned by a new SEZ unit satisfying the statutory conditions is exempt under s.10AA notwithstanding that the assessee who set it up had availed of the benefit of s.10A (paragraph 8). The objection under clause (ii) relates to the date on which the undertaking is created or formed and should be taken in the first year in which the new unit is set up and exemption is first claimed (paragraphs 9 and 10). On the facts found by the Tribunal, the new unit was a separate identity, was not formed by splitting up or reconstruction, involved fresh investment, and was not formed by transferring previously used machinery or plant (paragraph 13).
The Court began from the language of s.10AA, which refers to the 'unit' of the assessee as the entity eligible for exemption, and drew from that the conclusion that clauses (i) to (iii) of sub-section (4) are tested unit by unit (paragraph 6). It then read clause (ii) as a deliberate choice of words: the legislative mandate is not to disqualify an existing assessee in the same line of business, but to require that the unit not be set up by splitting up or reconstruction, because any wider reading would defeat the purpose of encouraging new SEZ units, new jobs, growth and foreign exchange earnings (paragraph 8). Clause (iii), which bars the transfer of previously used machinery or plant to the new business, was treated as exposition and affirmation of that reading, since it accepts that a similar business may already exist (paragraph 8). On timing, the Court relied on its earlier decision in CIT v. Heartland Delhi Transcription Services Pvt. Ltd. (2014) 366 ITR 523 (Delhi), which construed the identically worded clause (ii) of s.10B(2) as referring to the date of formation and as not applying to the period after formation, and on CIT v. Tata Communications Internet Services Ltd. (2012) 251 CTR 290, which reached the same conclusion on the similarly worded s.80-IA(3), namely that the violation must be raised and considered in the first year of the claim (paragraphs 9 and 10). Finally it accepted the Tribunal's findings of fact, noting that the existing business had not been transferred away, that its revenue continued to grow, that the new unit's revenue grew far faster, that the EOU was physically expanded, and that new employment was created, so that the setting up of the new unit was a legitimate business decision and not a subterfuge (paragraph 12).
Thus the eligibility requirements are unit specific and not assessee specific.
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Handle my notice → Ask a CA on WhatsAppThe Delhi High Court held that the conditions in s.10AA(4) are unit specific and not assessee specific, so an assessee who already runs an export business — even one that enjoyed s.10A relief — is not disqualified from claiming s.10AA on a genuinely new SEZ unit. It also held, following its own earlier decisions, that the objection under clause (ii) that the undertaking was formed by splitting up or reconstruction relates to the date of formation and must be taken in the first year in which the exemption is claimed, not in a later year. The Revenue's appeal was dismissed with no substantial question of law arising. This was decided by the High Court (Sanjiv Khanna J and Anup Jairam Bhambhani J) and bears on section 10AA, section 10AA(4), section 10A, section 10B, section 80-IA(3), section 260A, section 143(3) of the Income Tax Act 1961. It is reported as ITA No. 824/2018 (Delhi High Court). This is the answer to the commonest s.10AA(4) notice: the officer points to the assessee's existing unit, calls the SEZ unit a reconstruction, and reopens or disallows in a year well after the unit started. Two propositions defeat that. The first is textual — s.10AA speaks of the Unit as the eligible entity, so where an assessee has several units in an SEZ each is tested separately, and the existence of a similar business already being carried on is not itself disqualifying; clause (iii), which bars the transfer of previously used machinery or plant to the new business, presupposes that a similar business may already exist. The second is temporal — clause (ii) fixes on how the undertaking was formed, so the scrutiny belongs to the year of formation. The Court's factual method is worth copying: it looked at the revenue of the existing non-exempt business year by year to see whether it had been transferred away, at the growth in revenue of the new unit, at the physical expansion of the existing unit, and at the proportion of newly recruited technical manpower in the SEZ unit. Note the limit of the decision: the Court did not hold that a later year can never be examined, and it did not decide anything about clauses (i) or (iii), which were not in dispute. If it applies to you, the first step is this: Identify the first assessment year in which the s.10AA claim was made for that unit and check what happened to it — if the claim was accepted, and particularly if it was accepted in a s.143(3) scrutiny, say so at the front of the reply, because Macquarie makes the year of formation the right year for the clause (ii) objection.
The assessee ran a hundred per cent Export Oriented Unit whose income was entitled to exemption under s.10A up to AY 2011-12. It then set up a new unit in a Special Economic Zone and claimed exemption under s.10AA. The SEZ unit commenced business in the period relating to AY 2011-12 (paragraph 11), and the s.10AA claim was made and allowed in AY 2011-12 and AY 2012-13, the Assessing Officer not disallowing it in the assessment orders passed after scrutiny under s.143(3). In AY 2013-14 the Assessing Officer disallowed the claim, invoking clause (ii) of s.10AA(4) — that the unit was formed by the splitting up or reconstruction of a business already in existence. There was no dispute that clauses (i) and (iii) of s.10AA(4) were satisfied. The Tribunal, by order dated 23 January 2018, examined the revenue earned by the existing EOU business and by the new SEZ unit from FY 2009-10 to FY 2016-17, the physical expansion of the EOU by an additional 21,817 square feet, and the proportion of new employees in the SEZ unit (83 per cent for AY 2011-12 and 64 per cent for AY 2013-14), and held the new unit was not formed by splitting up or reconstruction. The Revenue appealed under s.260A. The matter was decided on 2018-12-04 by the High Court (Sanjiv Khanna J and Anup Jairam Bhambhani J). On those facts the High Court held as follows. The appeal was dismissed with no order as to costs, the Court finding that no substantial question of law arose (paragraph 14). Sub-section (4) stipulates the conditions which an undertaking as a unit must fulfil, so the eligibility requirements are unit specific and not, unless so stipulated, assessee specific; where there are multiple units in an SEZ each unit is separately entitled on satisfaction of the conditions (paragraph 6). Income earned by a new SEZ unit satisfying the statutory conditions is exempt under s.10AA notwithstanding that the assessee who set it up had availed of the benefit of s.10A (paragraph 8). The objection under clause (ii) relates to the date on which the undertaking is created or formed and should be taken in the first year in which the new unit is set up and exemption is first claimed (paragraphs 9 and 10). On the facts found by the Tribunal, the new unit was a separate identity, was not formed by splitting up or reconstruction, involved fresh investment, and was not formed by transferring previously used machinery or plant (paragraph 13).
The Court began from the language of s.10AA, which refers to the 'unit' of the assessee as the entity eligible for exemption, and drew from that the conclusion that clauses (i) to (iii) of sub-section (4) are tested unit by unit (paragraph 6). It then read clause (ii) as a deliberate choice of words: the legislative mandate is not to disqualify an existing assessee in the same line of business, but to require that the unit not be set up by splitting up or reconstruction, because any wider reading would defeat the purpose of encouraging new SEZ units, new jobs, growth and foreign exchange earnings (paragraph 8). Clause (iii), which bars the transfer of previously used machinery or plant to the new business, was treated as exposition and affirmation of that reading, since it accepts that a similar business may already exist (paragraph 8). On timing, the Court relied on its earlier decision in CIT v. Heartland Delhi Transcription Services Pvt. Ltd. (2014) 366 ITR 523 (Delhi), which construed the identically worded clause (ii) of s.10B(2) as referring to the date of formation and as not applying to the period after formation, and on CIT v. Tata Communications Internet Services Ltd. (2012) 251 CTR 290, which reached the same conclusion on the similarly worded s.80-IA(3), namely that the violation must be raised and considered in the first year of the claim (paragraphs 9 and 10). Finally it accepted the Tribunal's findings of fact, noting that the existing business had not been transferred away, that its revenue continued to grow, that the new unit's revenue grew far faster, that the EOU was physically expanded, and that new employment was created, so that the setting up of the new unit was a legitimate business decision and not a subterfuge (paragraph 12). In the words reproduced by the source cited on this page: "Thus the eligibility requirements are unit specific and not assessee specific." The decision followed or applied Commissioner of Income Tax v. Heartland Delhi Transcription Services Pvt. Ltd. (2014) 366 ITR 523 (Delhi) — relied upon, on the identically worded clause (ii) of s.10B(2); Commissioner of Income Tax v. Tata Communications Internet Services Ltd. (2012) 251 CTR 290 — relied upon, on the similarly worded s.80-IA(3).
It was decided by the High Court on 2018-12-04 and is reported as ITA No. 824/2018 (Delhi High Court). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 10AA, section 10AA(4), section 10A, section 10B, section 80-IA(3), section 260A, section 143(3), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was dismissed with no order as to costs, the Court finding that no substantial question of law arose (paragraph 14). Sub-section (4) stipulates the conditions which an undertaking as a unit must fulfil, so the eligibility requirements are unit specific and not, unless so stipulated, assessee specific; where there are multiple units in an SEZ each unit is separately entitled on satisfaction of the conditions (paragraph 6). Income earned by a new SEZ unit satisfying the statutory conditions is exempt under s.10AA notwithstanding that the assessee who set it up had availed of the benefit of s.10A (paragraph 8). The objection under clause (ii) relates to the date on which the undertaking is created or formed and should be taken in the first year in which the new unit is set up and exemption is first claimed (paragraphs 9 and 10). On the facts found by the Tribunal, the new unit was a separate identity, was not formed by splitting up or reconstruction, involved fresh investment, and was not formed by transferring previously used machinery or plant (paragraph 13). It arises in Deductions & Disallowances, Capital Gains Exemptions and Appeals matters, on section 10AA, section 10AA(4), section 10A, section 10B, section 80-IA(3), section 260A, section 143(3) of the Income Tax Act 1961, and was decided by Sanjiv Khanna J and Anup Jairam Bhambhani J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Build the factual record the Delhi High Court used: a year-by-year table of revenue of the existing non-exempt business alongside revenue of the new unit; evidence of fresh capital investment in the new unit; evidence of physical expansion of the existing unit; and the proportion of employees in the SEZ unit who were newly recruited rather than transferred. Argue clause (ii) unit by unit, not entity by entity — quote paragraph 6 for the proposition that the eligibility requirements are unit specific and not, unless so stipulated, assessee specific. Point to clause (iii) as internal support: a separate condition barring transfer of previously used plant would be pointless if clause (ii) already disqualified every assessee with a business already in existence. Check clause (iii) on its own facts anyway — the Explanation to s.10AA(4) imports Explanations 1 and 2 to s.80-IA(3), which allow a limited proportion of previously used machinery and cover imported second-hand machinery. Do not stretch the case: it turns on findings of fact the Tribunal made, and the High Court declined to admit the appeal because no substantial question of law arose.
Still good law. The citedby index for this doc id is almost empty (one hit), but a second probe on the case name with section 10AA found the judgment doing real work. In Lotus Footwear Enterprises v DCIT (ITAT Chennai, 25 September 2025) the Bench adopted it at para 84 as support for holding that a new SEZ unit was not formed by splitting up or reconstruction, and allowed the assessee 100 per cent deduction under section 10AA for all four years. It is also cited in M/s Advance Grp Cooling Towers v ITO (ITAT Mumbai, 17 July 2019). Nothing overruling, doubting or confining it was found, and no Supreme Court challenge appears. Practical point for a reader: the judgment's two limbs - that section 10AA(4) is tested unit by unit, and that a splitting-up objection belongs to the first year of the claim - have not been disturbed. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
There is an internal date discrepancy in the judgment. Paragraph 3 records that the SEZ unit's income was claimed exempt under s.10AA "for a period of ten years commencing from the Assessment Year 2010-11", while paragraph 11 records that it is accepted and admitted that the unit in the SEZ commenced business in the period relating to the assessment year 2011-12 and that the deduction was claimed and allowed in AY 2011-12 and 2012-13. The reasoning turns on the AY 2011-12 commencement. Paragraph 9 reproduces a long passage from the Delhi High Court's decision in Heartland Delhi Transcription Services on s.10B; those are the quoted decision's words, not this Bench's, and the paragraph numbering inside the quotation is not this judgment's. The judgment as retrieved runs to fourteen numbered paragraphs and ends with the signatures of Sanjiv Khanna J and Anup Jairam Bhambhani J and the date 4 December 2018; the revenue table reproduced at paragraph 12 contains figures that do not all read cleanly in the retrieved text (one total appears as "16,27,64,32,69"), so the table should not be quoted for arithmetic. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed with no order as to costs, the Court finding that no substantial question of law arose (paragraph 14). Sub-section (4) stipulates the conditions which an undertaking as a unit must fulfil, so the eligibility requirements are unit specific and not, unless so stipulated, assessee specific; where there are multiple units in an SEZ each unit is separately entitled on satisfaction of the conditions (paragraph 6). Income earned by a new SEZ unit satisfying the statutory conditions is exempt under s.10AA notwithstanding that the assessee who set it up had availed of the benefit of s.10A (paragraph 8). The objection under clause (ii) relates to the date on which the undertaking is created or formed and should be taken in the first year in which the new unit is set up and exemption is first claimed (paragraphs 9 and 10). On the facts found by the Tribunal, the new unit was a separate identity, was not formed by splitting up or reconstruction, involved fresh investment, and was not formed by transferring previously used machinery or plant (paragraph 13).
TaxSphere, “PCIT v Macquarie Global Services Pvt Ltd — s.10AA(4) is unit specific, and the splitting-up objection belongs to the first year”, https://taxnotice.vittsphere.com/caselaw/case/pcit-v-macquarie-global-services-10aa-4-unit-specific-first-year/ (validity last checked 2026-09-08)
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