An assessee can opt out of 10A/10B exemption in the year of loss – Karnataka HC

CIT v M/s Chelslind Textiles Ltd (ITA No: 361/2009 dtd 04/03/2009) – Karnataka HC


Assessee claimed deduction u/s 10B amounting to Rs.4,75,30,724/- on the business income of Rs.5,36,70,676. During the course of assessment proceedings, the AO allowed the deduction claimed by the assessee. The Commissioner of Income-tax observed that the AO allowed the deduction without setting-off unabsorbed depreciation amount of Rs.4,26,23,711. Therefore, the CIT in his jurisdiction under Section 263 of the Income Tax Act was of the view that the same resulted in excess deduction allowed under Section 10B of the Act and incorrect determination of loss was carried forward. Therefore, he set-aside the said order and directed the Assessing Officer to re-compute the total income after setting-off the unabsorbed depreciation.

Further,the question arose as to whether an assessee incurring losses in the 10A unit has an option to opt out of the benefit under section 10A(8) and make inter-source and inter-head set-off u/s 72.


The Court placed reliance in the case of the Commissioner of Income Tax, LTU, V/s. M/s. Yokogawa India Ltd., in ITA No.78/2011 (Kar HC). It was held that:

  • Though the assessee may be having more than one undertaking for the purpose of Section 10-A it is the profit derived from export of articles or things or computer software from the business of the undertaking alone that has to be taken into consideration and such profit is not to be included in the total income of the assessee. It is only after the deduction of the said profits and gains, the income of the assessee has to be computed.
  • The provisions of this sub-section will apply even in the case where an assessee has opted out of Section 10-A by exercising his option under sub-Section (8). As discussed, it is permissible for an assessee to opt in and opt out of Section 10-A. In the year when the assessee has opted out, the normal provisions of the Act would apply. If in such a year, the assessee has suffered losses, such losses would be subject to inter source and inter head set off. The balance if any thereafter can be carried forward for being set off against profits of the subsequent assessment years in the normal course.
  • As the income of 10-A unit has to be excluded at source itself before arriving at the gross total income, the loss of non 10-A unit cannot be set off against the income of 10-A unit under Section 72. The loss incurred by the assessee under the head profits and gains of business or profession has to be set off against the profits and gains if any, of any business or profession carried on by such assessee. Therefore, as the profits and gains under Section 10-A is not be included in the income of the assessee at all, the question of setting off the loss of the assessee of any profits and gains of business against such profits and gains of the undertaking would not arise.

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