STPI Unit Losses Form Part of Total Income: Madras HC allows Set-Off u/s 10A/10B of IT Act against other Profits [Read Order]
Relying on the Supreme Court’s ruling in CIT v. Yokogawa India Ltd. and CBDT Circular No.7/2013, the Court answered the substantial question of law in favour of the assessee and against the Revenue.
![STPI Unit Losses Form Part of Total Income: Madras HC allows Set-Off u/s 10A/10B of IT Act against other Profits [Read Order]](https://images.taxscan.in/h-upload/2025/12/03/2109845-stpi-total-income-madras-hc-it-act-profits-taxscan.webp "STPI Unit Losses Form Part of Total Income: Madras HC allows Set-Off u/s 10A/10B of IT Act against other Profits [Read Order]")
The Madras High Court in a recent case of Cognizant Technology Solutions India Pvt. Ltd has ruled that losses incurred by Software Technology Parks in India (STPI) units form part of the assessee’s total income and can be set off against profits of other taxable units under Sections 10A and 10B of the Income Tax Act, 1961. Cognizant Technology Solutions India Pvt. Ltd., a...
The Madras High Court in a recent case of Cognizant Technology Solutions India Pvt. Ltd has ruled that losses incurred by Software Technology Parks in India (STPI) units form part of the assessee’s total income and can be set off against profits of other taxable units under Sections 10A and 10B of the Income Tax Act, 1961.
Cognizant Technology Solutions India Pvt. Ltd., a major software exporter, operated multiple STPI units across India. For Assessment Years (AYs) 2003–04 and 2004–05, the company claimed set-off of current year losses incurred by certain STPI units against profits earned by other taxable units.
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The Assessing Officer (AO) rejected the claim, holding that STPI units were exempt undertakings under Sections 10A and 10B, and therefore their losses could not be adjusted against taxable income. According to the AO, the scheme of Section 10A treated eligible units as separate sources of income, and any losses had to be carried forward until the end of the tax holiday period.
On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] rejected the appeal on the issue set off. Aggrieved, the assessee filed an appeal before the ITAT. The Income Tax Appellate Tribunal (ITAT) dismissed the grounds of appeal of the assessee on the issue of set off of losses of the STPI units against the income of other taxable units. Cognizant then approached the Madras High Court.
Counsel for Cognizant argued that Section 10A/10B provides for deduction, not exemption. Therefore, losses of eligible units must be considered in computing total income. Reliance was placed on the Supreme Court’s ruling in CIT v. Yokogawa India Ltd. (2016), which clarified that deduction under Section 10A operates at the undertaking level, but the income (or loss) of such units still forms part of the assessee’s total income.
The assessee also cited CBDT Circular No.7/2013, which explicitly clarified that it makes it abundantly clear that losses incurred by units eligible for tax holiday deduction can be set off against other taxable income/ income of units not eligible for tax holiday deduction.
The Revenue contended that after the 2003 amendment, Section 10A(6) required losses of 10A units to be carried forward until the 10-year end of the tax holiday period, after which they could be adjusted. It argued that Yokogawa dealt with profit-making units and did not address the treatment of losses. The Revenue maintained that allowing set-off during the holiday period would defeat the legislative intent of granting a tax holiday only on profits.
The High Court examined the statutory scheme of Section 10A before and after the 2000 and 2003 amendments. It noted that although Section 10A shifted from exemption to deduction, it remained in Chapter III of the Act, which deals with incomes not forming part of total income. The Division bench of Chief Justice Manindra Mohan Shrivastava and Justice Sunder Mohan relied heavily on the Supreme Court’s decision in Yokogawa India Ltd., which held that deduction under Section 10A is to be made at the stage of computing the profits of the eligible undertaking, and such profits (or losses) form part of the total income of the assessee. The Court observed that the principle laid down in Yokogawa applied equally to loss-making units. Further, CBDT Circular No.7/2013 clarified that losses of eligible units can be set off against other taxable income. The Court highlighted that circulars issued by the CBDT are binding on the Revenue authorities. The Court rejected the Revenue’s contention that Section 10A(6) barred the set-off of losses during the holiday period. It held that the provision only restricted carry-forward of losses beyond the holiday period, not their adjustment in the current year. The Madras High Court concluded that losses of STPI units form part of the assessee’s total income and can be set off against profits of other taxable units under Sections 10A and 10B. The substantial question of law was answered in favour of Cognizant and against the Revenue.Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
