Analysis of Section 115BAA

In Circular No. 29 dated 02.10.2019, the CBDT has expressed the view that the tax credit of MAT paid by a domestic company exercising option under the newly inserted Section 115BAA of the Act shall not be available on the ground that the charging provisions of Section 115JB are itself not applicable to such a company. CA S. Venkatraman has examined the correctness of this view in the light of several judgements of the Supreme Court and opined that the stand of the CBDT is not correct and requires reconsideration

1) The Taxation Law (Amendment) Ordinance 2019 (the Ordinance) promulgated by the President of India on September 20, 2019, inserted a new provision, viz. Section 115BAA in the Income Tax Act (the Act) with effect from Assessment Year 2020-21, giving an option to a domestic company to pay Income Tax at a lower rate at 22% (plus surcharge and Cess, as applicable) for any assessment year, beginning from A.Y.2020-21, subject to certain conditions enumerated in sub-section (2) of Section 115BAA.

1.1) Sub-clause (ii) of the conditions enumerated in sub-section (2) to Section 115BAA of the Act, reads as follows:

“(2) For the purposes of sub-section (1), the following conditions shall apply subject to the condition that the total income of the company has been computed, –

(i) ……
(ii) Without set off of any loss carried forward from any earlier assessment year if such loss is attributable to any of the deductions referred to in sub-clause (i);…

(iii) …………”

1.2) Further, sub-section (3) of Section 115BAA states as follows:

(3) The loss referred to in sub-section (ii) of sub-section (2) shall
be deemed to have been already given full effect to and no further deduction for such loss shall be allowed for any subsequent year.”

1.3) The Government of India, Ministry of Finance, has issued a clarification vide Circular No.29 dated 2nd October 2019, in respect of the Option exercised under Section 115BAA of the Act in which paras 5.1 and 5.1.1, that relate to the brought forward loss on account of additional depreciation, which read as follows: –

“5.1. As regards allowability of brought forward loss on account of additional depreciation, it may be noted that clause (i) of sub-section (2) of the newly inserted Section 115BAA, inter alia, provides that the total income shall be computed without claiming any deduction under clause (iia) of sub-section (1) of Section 32 (additional depreciation); and clause (ii) of the said sub-section provides that the total income shall be computed without claiming set off of any loss carried forward from any earlier assessment year is the same is attributable, inter alia, to additional depreciation.

5.1.1 Therefore, a domestic company which would exercise option for availing benefit of lower tax rates under section 115BAA shall not be allowed to claim set off of any brought forward loss on account of additional depreciation for an assessment year for which the option has been exercised and for any subsequent year.”

1.4) The above clarification of the Ministry of Finance is in line with the legal position as laid down by the Apex Court in the case of CIT vs. Shah Sadiq & Sons (166 ITR 102) (SC).

In the above case, a registered firm had incurred speculation losses in the Assessment Years 1960-61 and 1961-62 that were eligible to be carried forward and set off (under Section 24(2) of the erstwhile Income Tax Act, 1922). The firm claimed set off of the said speculation loss against speculation profit made by it in Assessment Year 1962-63 (under the present Act of 1961). The Assessing Officer disallowed the loss, invoking Section 75(2) of the Act and held that the speculation loss was only available for set off by the partners of the registered firm under the Act and not by the firm itself. At pages 108/109, Their Lordships stated the legal position as follows: –

“In our opinion, the right given to the assessee for the assessment year 1961-62 under section 24(2) of the 1922 Act was an accrued right and a vested right. It could have been taken away expressly or by necessary implication. It has not been done so. Neither section 297(2)(b) nor any other sub-clauses of sub-section (2) of section 297 indicates a contrary intention of the legislature regarding any vested right of the assessee under the 1922 Act. On the contrary, section 6(c) of the General Clauses Act indicates that, that right should be preserved. …………….

Under the Income Tax Act of 1922, the assessee was entitled to carry forward the losses of the speculation business and set off such losses against profits made from that business in future years. The right of carrying forward and set off accrued to the assessee under the Act of 1922. A right which had accrued and had become vested continued to be capable of being enforced notwithstanding the repeal of the statute under which that right accrued unless the repealing statute took away such right expressly. This is the effect of section 6 of the General Clauses Act, 1897.”

1.5) Though the above observations of the Apex Court were made in the context of repeal of an Act and its substitution by a new Act, the above principle of law is equally applicable to the present set of circumstances.

1.6) Sub-clause (ii) to sub-section (2) of Section 115BAA provides that if a domestic company opts to pay at a lower rate as prescribed under the said Section, the total income of such domestic company shall be computed without claiming set off of any loss carried forward from any earlier assessment year, if such loss is attributable to additional depreciation. Sub-section (3) to Section 115BAA specifically refers to such loss in sub-clause (ii) of sub-section (2) and by a deeming fiction, deems such loss to have already been given full effect to and also that no further deduction for such loss shall be allowed for any subsequent year. In the circumstances, the ratio of the decision of the Apex Court in Shah Sadiq & Sons case (supra) is clearly applicable, since, sub-section (3) to Section 115BAA expressly takes away the vested right to carry forward the loss on account of additional depreciation that had accrued to a domestic company which opts for the lower rate of tax under Section 115BAA of the Act. Hence the clarification of the Ministry of Finance in paras 5.1 and 5.1.1 of their Circular (para 1.3 above) is in line with the legal position.

2) The Ordinance has also inserted sub-section (5A) in Section 115JB of the Act with effect from Assessment Year 2020-21 that, inter alia, prescribes that the provisions of Section 115JB of the Act will be inapplicable to a person who has exercised the option referred to under Section 115BAA.

2.1) The Circular No.2 dated October 2, 2019 of the Ministry of Finance in paras 5.2 and 5.2.1 has given the following further clarification: –

5.2 As regards allowability of brought forward MAT credit, it may be noted that as the provisions of section 115JB relating to MAT itself shall not be applicable to the domestic company which exercises option under Section 115BAA, it is hereby clarified that the tax credit of MAT paid by the domestic company exercising option under section 115BAA of the Act shall not be available consequent to exercising of such option.

5.2.1 Further, as there is no time line within which option under section 115BAA can be exercised, it may be noted that a domestic company having credit of MAT may, if so desire, exercise the option after utilising the said credit against the regular tax payable under the taxation regime existing prior to promulgation of the Ordinance.

2.2) It must, at the very outset, be stated that the provisions relating to MAT credit and its carry forward and utilisation in subsequent years are enshrined in the provisions of Section 115JAA of the Act and not under Section 115JB of the Act. While sub-section (2) to Section 115JAA of the Act provides as to how the tax credit is to be calculated, sub-sections (4) and (5) to Section 115JAA of the Act prescribed for the year / years in which such tax credit shall be set off and the extent to which it can be set off.

2.3) The Hon’ble Supreme Court in CIT vs. Tulsyan NEC Ltd. (330 ITR 226) (SC), was concerned with the provisions of Section 115JAA of the Act, in the context of chargeability of interest under Sections 234A, 234B and 234C of the Act. In the said case, the issue that arose before the Hon’ble Supreme Court was whether MAT credit admissible in terms of Section 115JAA has to be set off against tax payable (assessed tax) before calculating interest under Section 234A, 234B and 234C of the Act. At page 233, Their Lordships discussed the nature of MAT credit in the following words:

“The relevant provisions under Section 115JAA of the Act, introduced by the Finance Act, 1997, with effect from April 1, 1997, i.e. applicable for the assessment years 1997-98 and onwards, governing the carry forward and set off of credit available in respect of tax paid under section 115JA, show that when tax is paid by the assessee under section 115JA, then the assessee becomes entitled to claim credit of such tax in the manner prescribed. Such a right gets crystallized no sooner the tax is paid by the assessee under section 115JA, as per the return of income filed by that assessee for a previous year (say, year one). (See to section 115JAA (1)] ….”

2.4) Further, at page 234 Their Lordships explained the nature of the right by way of MAT credit in the following words:

“Although the right to avail of tax credit gets crystallized in year one, on payment of tax under section 115JA and the set of thereof follows statutorily, the amount of credit available and the amount of set off to be actually allowed as in all cases of deductions/allowances under sections 30-37, is fluid/inchoate and subject to final determination only on adjudication of assessment either under section 143(1) or under section 143(3). The fact that the amount of tax credit to be allowed or to be set off is not frozen and is ambulatory, does not take away/destroy the right of the assessee to the amount of tax credit.”

2.5) Finally, at page 236 Their Lordships concluded in the following words:

“Thus, the right to set off arises as a result of the payment of tax under section 115JA(1) although quantification of that right depends upon the ultimate determination of total income for the first assessment year. Further, an assessee has a right to take into account the set off even while estimating its liability to pay advance tax on the “current income” in accordance with the provisions of Chapter XVII-C. …”

2.6) After holding as above, the Apex Court concluded that MAT credit is to be set off against tax payable before calculating interest under Sections 234A, 234B and 234C of the Act.

2.7) It can be seen from the aforesaid ratio laid down by the Apex Court that, MAT credit gets crystallised under Section 115JAA(1) of the Act, when tax is paid by an assessee on book profits, either under Sections 115JA or 115JB of the Act. Though such right is only subject to final determination either under Section 143(1) or under Section 143(3) of the Act, the Apex Court has also held that, that does not take away or destroy the right of the assessee to the amount of MAT credit. Applying the ratio of the decision of the Hon’ble Supreme Court in Shah Sadiq & Sons (supra) the MAT credit that gets crystallised on payment of tax on book profits under Section 115JAA/115JB, is a vested right and unless any amendment takes away such right expressly or by necessary implication, such vested right is preserved under Section 6(c) of the General Clauses Act.

2.8) It is evident that sub-section (5A) to Section 115JB of the Act only seeks to provide that a domestic company that opts for the lower rate of tax under section 115BAA of the Act, will henceforth not be liable to pay MAT under Section 115JB of the Act. This, by no stretch of imagination, can be said as taking away, either expressly or by implication, the vested right to MAT credit that has already accrued to such domestic company in earlier years when the said domestic company paid tax under Section 115JB of the Act.

2.9) In the circumstances, the above clarification of the Ministry of Finance that “as the provisions of Section 115JB relating to MAT itself shall not be applicable to the domestic company which exercises option under Section 115BAA, it is hereby clarified that the tax credit of MAT paid by the domestic company exercising option under Section 115BAA of the Act shall not be available consequent to exercising of such option” needs reconsideration as it is not in line with the above decisions of the Hon’ble Supreme Court.

3) The Hon’ble Madras High Court in CIT vs. S.S.C. Shoes Ltd. (259 ITR 674), had occasion to consider the legal position in a similar case. In the said case, the legislature had introduced Section 80VVA by the Finance Act, 1983, with effect from A.Y.1984-85 pursuant to which deductions specified in sub- section (2) to the said Section were restricted to 70% of the amount of profits computed under sub-section (2) of Section 80VVA. Section 80VVA(4) further provided, that the amount of 30% of the deduction remaining unallowed was to be added to the amount to be allowed in the next financial year and was deemed to be part of the deduction admissible under the said provision for the subsequent year. The legislature deleted Section 80VVA by Finance Act, 1987 with effect from A.Y.1988-89 and introduced Section 115J in the Act.

3.1) The Hon’ble Madras High Court while allowing the claim of deduction, which was denied by the Department, observed as follows at page 677: –

“We, therefore, hold that the statutory right under Section 80VVA(4) of the Act conferred on the assessee is not taken away by the deletion of Section 80VVA from the statute book and the assessee is entitled to claim the deduction, but was disallowed as a deduction, in the next following assessment year. In other words, a vested right had accrued in favour of the assessee and that right is not taken away either expressly or by necessary implication by the deletion of Section 80VVA of the Act.

The Supreme Court has considered a similar question in CIT vs. Shah Sadiq & Sons (166 ITR 102) where the Supreme Court held that the accrued right of the assessee could be taken away expressly or by necessary implication. ……. Though the Supreme Court was dealing with a case of repeal of an enactment, the principle laid down by the Supreme Court would apply to carry forward the deduction provided under Section 80VVA(4) of the Act.”

3.2) While the above is the legal position, as seen from the decision of the Apex Court and the Hon’ble Madras High Court, Assessees would be well advised to examine the possibility of the Department not allowing carry forward MAT credit in cases where domestic companies opt for lower rate of tax under Section 115BAA of the Act by relying on the above Circular of the Ministry of Finance and the consequential litigation risks involved in the matter.