The 115BAA Conundrum: Does a Flat 22% Tax Obliterate Special Capital Gains Rates?

 A  significant legal fault line has emerged across India’s tax tribunals, creating uncertainty for corporations that opted for the concessional tax regime under Section 115BAA. The core question is deceptively simple: does choosing this flat 22% tax rate also apply this rate to capital gains income, or do the special rates under sections like 111A and 112 continue to apply? The recent Delhi ITAT ruling in Maharishi Education Corporation has thrown a wrench into what was becoming a settled interpretation, prompting a crucial discussion on legislative intent and statutory harmony.

The Delhi ITAT’s Override Theory

The Delhi bench, in its 2025 decision, delivered a strict, literal interpretation. It focused on the "non-obstante" or "notwithstanding" clause in Section 115BAA, which states that the provision applies despite anything contained in any other section of the Act. The tribunal reasoned that this powerful language overrides all other rate provisions, including those for capital gains. Consequently, for a company that has opted for 115BAA, its total income—including capital gains—would be taxed at the flat rate of 22%, plus surcharge and cess.

This interpretation, while textually rigid, creates a seismic shift. It effectively nullifies the detailed, purpose-built tax frameworks for different types of capital assets. Long-term gains on equity (Section 112A) or short-term gains on listed securities (Section 111A), which have their own concessional rates, would be subsumed into the flat rate. This approach, as the ruling itself acknowledges, may "compromise the structural integrity" of the Income-tax Act by rendering specific chapters redundant.

The Counterview: A Harmonious Construction

In contrast, the Hyderabad ITAT (in Tech Mahindra Ltd.) and the Ahmedabad ITAT (in ABC Infra Pvt. Ltd.) have championed a principle of harmonious construction. They argue that Section 115BAA is a concessional computation regime for business income, not a blanket rate override for all income streams. Their reasoning rests on the legal maxim generalia specialibus non derogant—the general does not derogate from the specific.

This view finds strong support in practical evidence:

1. CBDT Guidance: The instructions for filing Form ITR-6 (for companies) and the specific Form 10-IC (the form for opting into 115BAA) require taxpayers to compute capital gains separately under the relevant sections before arriving at the total income.

2. Legislative Intent: Parliament designed distinct rates for different capital gains to incentivize certain investments and market behaviors. It is illogical to assume this intricate design was meant to be silently erased by a general provision without explicit wording.

3. Global Precedent: Most tax jurisdictions with concessional corporate rates maintain separate regimes for capital gains, recognizing their distinct nature from business profits.

Analysis and the Path Forward for Taxpayers

The harmonious interpretation by the Hyderabad and Ahmedabad benches is not only more pragmatic but also aligns with the principle of minimizing litigation. It provides a predictable and logical framework for taxpayers.

Until a higher court—likely the Supreme Court—provides a definitive ruling or Parliament amends the law to explicitly include or exclude capital gains from 115BAA, taxpayers are caught in a dilemma. However, the weight of current jurisprudence and administrative practice leans heavily towards the latter view.

Recommendations for Companies:

• Continue Separate Computation: For now, the safest course of action is to compute capital gains under the specific sections (111A, 112, 112A) and then apply the 115BAA rate to the remaining total income.

• Ensure Robust Disclosure: Meticulously fill out Form 10-IC and the tax return, ensuring clear disclosure of the separate computation of capital gains. Detailed notes in the audit report can further strengthen the position.

• Prepare for Scrutiny: Be aware that the Delhi ruling may embolden assessing officers to issue demands based on the override theory. Having a well-documented position based on the contrary tribunal rulings is essential.

In conclusion, while the Delhi ITAT's ruling highlights a textual ambiguity, the approach of the Hyderabad and Ahmedabad benches better serves the principles of legislative coherence, taxpayer fairness, and administrative efficiency. For corporations navigating this uncertainty, transparency and adherence to the documented procedural guidance remain the best defence.