Can losses from tax-exempt units be used to offset profits elsewhere? The Madras High Court says yes, but the journey to this ruling is anything but straightforward. In a landmark decision that could reshape how businesses approach tax planning, the Madras High Court recently ruled in favor of Cognizant Technology Solutions India Pvt. Ltd., a leading software exporter. The case centered on whether losses incurred by Software Technology Parks of India (STPI) units could be set off against profits from other taxable units under Sections 10A and 10B of the Income Tax Act, 1961. But here's where it gets controversial: while the Assessing Officer (AO) and Revenue authorities argued against such set-offs, the court sided with Cognizant, sparking a debate that could have far-reaching implications for tax strategies across industries.
Cognizant, operating multiple STPI units across India, had claimed set-offs for losses incurred in Assessment Years (AYs) 2003–04 and 2004–05 against profits from other taxable units. The AO rejected this claim, asserting that STPI units, being exempt under Sections 10A and 10B, could not have their losses adjusted against taxable income. According to the AO, these units were treated as separate income sources, and any losses had to be carried forward until the tax holiday period ended. This interpretation was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)] and later by the Income Tax Appellate Tribunal (ITAT), leaving Cognizant with no choice but to appeal to the Madras High Court.
And this is the part most people miss: The crux of Cognizant’s argument was that Sections 10A and 10B provide for a deduction, not an exemption. This distinction is critical because, as the Supreme Court clarified in CIT v. Yokogawa India Ltd. (2016), deductions under Section 10A operate at the undertaking level, but the income (or loss) of such units still forms part of the assessee’s total income. Cognizant also cited CBDT Circular No.7/2013, which explicitly states that losses from units eligible for tax holiday deductions can be set off against other taxable income. This circular, being binding on Revenue authorities, added weight to Cognizant’s case.
The Revenue, however, countered that the 2003 amendment to Section 10A(6) required losses from 10A units to be carried forward until the end of the 10-year tax holiday period. They argued that the Yokogawa case dealt with profit-making units and did not address loss-making units. Allowing set-offs during the holiday period, they claimed, would undermine the legislative intent of granting tax holidays only on profits.
The Madras High Court, after a meticulous examination of the statutory scheme of Section 10A before and after the 2000 and 2003 amendments, ruled in favor of Cognizant. The Division Bench, comprising Chief Justice Manindra Mohan Shrivastava and Justice Sunder Mohan, relied heavily on the Yokogawa ruling, emphasizing that the principle applies equally to loss-making units. The Court also highlighted that CBDT Circular No.7/2013 unequivocally allows such set-offs, and Revenue authorities are bound by it. The Court dismissed the Revenue’s argument that Section 10A(6) barred set-offs during the holiday period, clarifying that the provision only restricts carry-forward beyond the holiday period, not adjustments in the current year.
This ruling not only provides clarity for businesses operating STPI units but also raises thought-provoking questions. Should tax holidays be strictly limited to profits, or should businesses be allowed to offset losses during this period? Does this decision open the door for more aggressive tax planning strategies? We’d love to hear your thoughts in the comments below. For those interested in diving deeper into the tax implications of succession, check out this comprehensive guide here. And if you found this analysis valuable, consider supporting our journalism by subscribing to Taxscan Premium here or follow us on Telegram here for quick updates.
Citation: Cognizant Technology Solutions India Private Limited vs Commissioner of Income Tax Large Taxpayer Unit, 2025 TAXSCAN (HC) 2533, TCA Nos.277 to 280 of 2016, 25 November 2025, Coram: Honourable Mr. Manindra Mohan Shrivastava, Honourable Mr. Justice Sunder Mohan, Counsel for Appellant: Mr. N.V. Balaji, Counsel for Respondent: Mr. Karthik Ranganathan.
