[2025] 180 taxmann.
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[2025] 180 [Link] 243 (Article)©
Date of Publishing: November 10, 2025
Issues in set-off of losses under section 10AA
V K SUBRAMANI
FCA
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.
1.1 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 utilized 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.
1.2. 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.
1.3 Legal Precedents
• In CIT v. Yokogawa India Ltd. [2017] 77 [Link] 41/244 Taxman 273/391 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] 191 Taxman 119/325 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] 20 [Link] 727/208 Taxman 144 (Mag.) 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.
1.4 An example
Particulars (Rs. in Lakhs)
SEZ Unit 1 (Loss) (20)
SEZ Unit 2 (Loss) (10)
SEZ Unit 3 (Profit) 50
Domestic Unit (Profit) 60
• Deduction under section 10AA = Rs. 50 lakhs (SEZ Unit 3)
• Total business profit before deduction = Rs. 80 lakhs (60 + 50 - 30)
• Less: 10AA deduction Rs. 50 lakhs
• Total income = Rs. 30 lakhs
Thus, losses of SEZ Units 1 & 2 can be set off against non-eligible business profits but not against eligible SEZ profit
for the purpose of computing deduction under section 10AA.
1.5 Set-off of brought forward losses
Once the deduction under Section 10AA is granted, the brought forward losses or unabsorbed depreciation of earlier
years can be set off only after the 10AA deduction is computed.
The Supreme Court in Yokogawa India Ltd. (supra) clarified that the deduction precedes the aggregation of total
income. It was held that brought forward business losses or depreciation are not adjusted while determining the eligible
profit for section 10AA deduction. Such losses can, however, be set off against the remaining total income after the
deduction is allowed.
1.6 Conclusion
Based on the legal provision and decisions, following conclusions could be drawn:
(i) Section 10AA deduction has to be computed on a unit-wise basis, independent of other units' performance.
(ii) Loss of one SEZ unit cannot be set off against profit of another SEZ unit for deduction purposes. However,
such loss could be adjusted against non-eligible business profits.
(iii) Past business losses or depreciation can be adjusted only after section 10AA deduction.
The rulings in Hindustan Unilever Ltd. (Supra) and Yokogawa India Ltd. (supra) remain the basis for interpreting
Section 10AA computation, ensuring that the incentive structure for SEZ units operates as intended, to promote
genuine export business and resultant profits while maintaining a consistent framework as regards absorption of losses
while computing income liable for income tax.
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