Indian court explains how to calculate tax holidays

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2026

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Indian court explains how to calculate tax holidays

bangalore-highcourt.jpg

An Indian high court ruling has clarified one of the important issues surrounding tax holiday computation when a holiday period has ended.

The decision of the Karnataka High Court outlines the principles for computing relief under section 10A of the Income Tax Act, 1961.

Section 10A provides for a five-year total tax holiday to industrial undertakings which manufacture or produce any article and are set up in notified free trade zones.

In a batch of appeals filed by the tax department against Yokogawa India Limited and other related cases, the court ruled that although section 10A has been amended to indicate the tax holiday to be a deduction from the total income as against the exemption, it would need to be read as being a deduction in the computation of total income.

Consequently, it continues to retain the character of an exemption. The profits eligible for relief under section 10A are to be computed, before giving effect to the carry forward and set off provisions under section 72 of the Act.

“The judgment will settle a protracted litigation on the manner of computation of the tax holiday when there are other business losses,” said Gokul Chaudhri of BMR Advisors – Taxand.

Facts

Yokogawa had two separate business divisions, one of which was a unit registered under the Software Technology Park of India scheme. The company had claimed a relief under section 10A of the Act before setting off brought forward losses and depreciation.

However, during the course of the assessment proceedings the assessing officer (AO) held that relief under section 10A is to be provided after setting off all brought forward. Accordingly, the relief under section 10A was recomputed at nil, after setting off the losses under section 72.

On appeal, the Commissioner of Income Tax (Appeals) [CIT (A)] ruled in favour of the company by holding that total income used in the provisions of section 10A refers to the global income of the company and the income eligible for exemption has to be excluded at source even before arriving at the gross total income. Consequently, losses of a non 10A unit cannot be set off against the income of the 10A unit.

Ruling

The court observed: The scheme of the Act provides for deduction in computing total income, but the Act does not contain any mechanism for any deduction from the total income already computed as provided under the Act.

It was also held that section 10A provides for carry forward of depreciation and business losses relating to any year of the tax holiday period to be set off against income of any year, post the tax holiday period. Thus, the legislative intent was to compute the amount of unabsorbed business loss and depreciation at the end of the tax holiday period separately, to enable its set off after tax holiday period. Reliance was placed on the Bombay High Court decision in Hindustan Unilever Ltd (325 ITR 102).

This ruling was pronounced by a division bench of Justice N Kumar and Justice Ravi Malimath.

Additional reporting from www.taxsutra.com.

more across site & shared bottom lb ros

More from across our site

While it’s great that the OECD is alive to multinationals’ fears of being caught in a compliance trap, the ‘common understanding’ illustrates a worrying lack of readiness
Rising demand for specialist expertise has fuelled the growth in tax partner headcounts, Cain Dwyer found; in other news, Switzerland has been urged to reconsider pillar two
An OECD report on the taxation of the digital economy is expected by the end of 2026, according to the group of nations
Trophy assets are evolving from personal indulgences to structured investments, prompting family offices to prioritise tax efficiency, governance discipline, and cross-border compliance
As demand for complex, cross-border private client counsel spikes, Patrick McCormick sees opportunity in starting from scratch
As part of an exclusive global alliance, KPMG will become one of Anthropic’s ‘preferred consultants’ for private equity
In the second part of this series, the focus shifts to how taxpayers can manage ongoing risks across the lifecycle of cross-border structures
Jurisdictions have moved to ensure that multinationals are not punished for late GIR filings due to a lack of available filing portals or exchange relationships
HMRC’s push for unified tax adviser registration won’t prevent every instance of improper conduct, but it is good for taxpayers and the UK’s reputation
Elsewhere, the UAE’s tax office has issued an update on registration penalties and two firms have been busy making lateral hires
Gift this article