Delhi High Court: Eligible Export Unit’s Loss Must Count in Overall Business Income

The Delhi High Court has held that the loss of a unit eligible for deduction under section 10B of the Income-tax Act, 1961 (profits of 100% export-oriented undertakings) cannot be kept out when the assessee's overall business income is computed. The loss can be set off against the profits of the assessee's other units, and any unabsorbed balance can be carried forward. The ruling was pronounced on 11 August 2026 by a Division Bench of Justice Dinesh Mehta and Justice Rajneesh Kumar Gupta in Aricent Technologies Holding Ltd. v. DCIT, Circle-11(1), New Delhi, ITA 1015/2019 (Delhi High Court judgment dated 11.08.2026).

The facts

The appeal related to assessment year 2005-06. The assessee, formerly known as Flextronics Software System Ltd., had 10 units engaged in software exports, six of which were export-oriented units. One of them, Unit V at Gurgaon, was eligible for the section 10B benefit and incurred a loss of Rs. 1,34,24,747 for the year. The assessee set this loss off against the profits of its other undertakings.

The Assessing Officer rejected the set-off in the assessment order dated 31 December 2008. His view, as recorded in the judgment, was that income eligible for deduction under section 10B does not enter the gross total income because it is deducted at the source level itself, that losses of the eligible undertaking must likewise be excluded at source, that section 72 would not apply to such losses, and that the Act contains no provision allowing set-off or carry forward of an eligible undertaking's loss.

The CIT(A), by order dated 31 October 2012, allowed the assessee's appeal, holding that section 10B is a deduction provision and not an exemption. The Income Tax Appellate Tribunal reversed this by order dated 21 May 2019. It held that the section 10B deduction must be worked out on a standalone basis for the eligible unit alone, so the loss of Rs. 1,34,24,747 could not be set off against the income of the other business undertakings for that year.

Question before the High Court

The High Court framed this substantial question of law: whether the Tribunal erred in law in not allowing the set-off of the loss of a unit eligible for deduction under section 10B against the taxable profits of other non-eligible units, considering that the profits of other eligible units had not been brought to tax.

What the Court held

The Court accepted that under section 10B(1) the profit or gain of each eligible unit from export turnover has to be calculated separately. That separate calculation, however, is needed only to work out the quantum of the section 10B deduction. In paragraph 19 the Bench said:

"Calculation of export profits for the purpose of calculation of deduction under Section 10B of the Act of 1961 by itself does not change the treatment of profit or loss of each unit when the combined profit of the assessee is to be calculated. In other words, calculation of export profit under Section 10B of the Act of 1961 is confined to Section 10B alone and it does not have any bearing on Section 70/71 or 72 of the Act of 1961. Hence, there cannot be denial of set off of loss or carry forward of the loss of eligible undertaking."

The Court relied on the Supreme Court's decision in CIT v. Yokogawa India Ltd. [2017] 391 ITR 274 (SC), which affirmed the Karnataka High Court's view in [2012] 341 ITR 385 (Kar.). As the Bench read it, where an assessee suffers a loss in a year, that loss is subject to inter-source and inter-head set-off, and any balance can be carried forward against the profits of later years in the normal course.

It also referred to CBDT Circular No. 7/DV/2013 dated 16 July 2013, which states that if, after aggregation of income under sections 70 and 71, the resultant amount is a loss from an eligible unit (for assessment year 2001-02 and later years), it is eligible for carry forward and set-off under section 72. The Tribunal had relied on CIT v. KEI Industries Ltd. [2015] 373 ITR 574 (Delhi) and the Yokogawa rulings; the High Court read the Yokogawa line of authority as supporting the assessee.

The question was answered in favour of the assessee. The Tribunal's order dated 21 May 2019 and the assessment order dated 31 December 2008 were set aside. Senior Advocate Ajay Vohra appeared for the appellant and Senior Standing Counsel Siddhartha Sinha for the Revenue.

Why the ruling matters

The judgment separates two exercises that are often mixed up in computations for multi-unit businesses:

• Quantum of the unit-linked deduction: worked out unit by unit on the eligible unit's own export profits, as section 10B(1) requires.
• Overall business income: computed at the assessee level, where the eligible unit's profit or loss is aggregated with the other units under sections 70 and 71, and any unabsorbed loss goes into section 72 carry forward.

An eligible unit's tax-favoured status therefore does not turn its loss into a non-event. Ignoring such a loss where profitable units coexist with a loss-making eligible unit would overstate the assessee's business income. The treatment is symmetrical: the eligible undertaking stays inside the business computation whether it earns a profit or makes a loss.

What professionals should check

• Pending assessments, appeals and remand proceedings for years in which section 10A or 10B units were in operation, to see whether an eligible unit's loss was excluded from the set-off or carry-forward working.
• Unit-wise accounts and the reconciliation between standalone unit results and the consolidated business income, so the incorporation of the eligible unit's loss is clearly traceable.
• Whether CBDT Circular No. 7/DV/2013 and this ruling have been cited where the Revenue or the Tribunal has adopted the standalone approach.

The ruling decides the set-off and carry-forward treatment of the loss. It does not decide separate questions about the quantum of the section 10B deduction for profitable eligible units, which depend on their own facts. The case concerns assessment year 2005-06 and was decided under the Income-tax Act, 1961; for years from 1 April 2026, set-off and carry forward are governed by the Income-tax Act, 2025.

Updated on 28 September 2026: identified the case (Aricent Technologies Holding Ltd. v. DCIT, ITA 1015/2019, decided 11 August 2026), linked the official Delhi High Court judgment, and added the facts, the loss amount, the Court's reasoning, the CBDT circular and the precedents relied on.