[Opinion] Issues in Set-off of Losses Under Section 10AA

VK Subramani – [2025] 180 taxmann.com 243 (Article)

1. Introduction

The establishment of Special Economic Zones (SEZs) across the country was aimed at promoting exports and attracting foreign investment by offering fiscal incentives. One of the most significant tax benefits available to SEZ units is the deduction under Section 10AA of the Income-tax Act, 1961. However, complexities arise when a company operates multiple SEZ units with some earning profits and other or others incurring losses besides other domestic units. The treatment of current year losses and brought forward losses in such situations has been clarified over time through judicial decisions.

2. Section 10AA

Section 10AA grants a deduction of profits derived from the export of articles or things or from services by units established in an SEZ. The income tax benefits are as under:

• 100% deduction of export profits for the first 5 consecutive assessment years beginning with the assessment year relevant to the previous year in which the unit begins to manufacture or produce such articles or things or provide services;
• 50% for the next 5 assessment years, and
• Up to 50% deduction for the following 5 years, subject to reinvestment. The amount of deduction is so much of the amount not exceeding 50% as is debited to profit and loss account of the previous year of which the deduction is to be allowed and credited to reserve account to be created and utilised for the purposes of the business of the assessee as per section 10AA(2).

For the purpose of deduction under this section each SEZ undertaking is treated as a distinct and independent entity. This distinction is important when deciding the question of whether losses from one SEZ unit is eligible for set off against another SEZ unit’s profit.

3. Set Off of Current Year Losses

The deduction under Section 10AA is undertaking-specific and not based on the aggregate income of the assessee. Each eligible SEZ unit’s profit must be computed separately, without adjusting losses of other units (SEZ or non-SEZ) before allowing the deduction.

4. Legal Precedents

• In CIT v. Yokogawa India Ltd. [2012] 391 ITR 274 (SC) it was held that the discordant use of the expression ” total income of the assessee” used in section 10A must be understood as “total income of the undertaking’. Though section 10A is retained in Chapter III it is not to be construed as ‘exemption’ but as ‘deduction’. The income of the eligible undertaking has to be computed under Chapter IV for quantifying the deduction and not at the stage of computation of total income under Chapter VI. This deduction is allowable before computing the total income and the loss of one eligible unit must not be set off to deny the quantum of deduction of other eligible unit.
• In Hindustan Unilever Ltd. v. CIT [2010] 325 ITR 102 (Bom.) the assessee had 4 units which were eligible for the benefits of section 10B. Of the 4 units, a unit identified as Chorwad unit incurred loss of Rs. 1.33 crore. The other 3 units had income of Rs. 14.53 crore. It was held that the assessee is eligible for claim of deduction of Rs. 14.53 crore and the loss from the said one unit was eligible for set off against profits of other regular units/business. It was held that the deduction has to be given unit-wise before aggregation as an entity. The loss of one eligible unit is not liable for adjustment against income of other eligible units.
• In CIT v. Black & Veatch Consulting P. Ltd. [2012] 348 ITR 72 (Bom) it was held that the deduction under section 10A must be computed at the stage when the profits of the business are computed in the first instance. It is anterior to the application of the provisions of section 72 which deals with carry forward and set off of business losses. It was held that the brought forward depreciation of other units is not to be set off against the income of eligible units. It rejected the idea of applying section 80A and held that the Revenue wanted to telescope Chapter VI-A in the context of deduction of section 10A,which is not the legislative intent. In essence it held that the deduction under section 10A/10AA must be allowed before set off of business losses or unabsorbed depreciation of other units.

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