CHAPTER
Relevant Chapter of Income Tax Act, 1961 is THE Chapter XII that consists of sections 110 to 115BBG under heading “DETERMINATION OF TAX IN CERTAIN SPECIAL CASES.
S. 115BA, 115BAA and S.115BAB are new provisions of options provided to certain specified categories of companies. The provisions of these sections starts with ‘notwithstanding’ and also ‘subject to’ for example:
Notwithstanding anything contained in this Act but 4[subject to the other provisions of this Chapter, other than those mentioned under section 115BA and section 115BAB],
Therefore, provisions of Chapter XII (subject to some exceptions) will apply and other provisions of the Act will not apply, if inconsistent with provisions of this section as per one view and will not apply, as per another possible view.
The provisions seems very confusing, involving many contingencies in near future and in long-term. Also contingencies due to past assessments and disputes.
Furthermore, every year there are changes in provisions and new incentives may be introduced. Therefore, decision to opt for any of new provision should be after very careful examination of facts and circumstances, disputes in earlier years and expectation in medium to long-term about plans of company.
It is also not clear about how the income will be computed so far allowable deductions are concerned. In computation related provisions only what will not be allowed is provided and for depreciation new prescription will apply. The changes noticed are discussed later on in this write-up.
The second provision in this category of new provisions being provision of S.115BAA are reproduced below, in left column of table, with highlights added for easy analysis and in right column short remarks and observations are provided and some more discussions are made below the table on important aspects :
Section 115BAA
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From provisions with highlights added
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Observations / remarks
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1[Tax on income of certain domestic companies.
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Meaning of ‘domestic company’ is important. See note for brain storming given in last.
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115BAA. (1) Notwithstanding anything contained in this Act but subject to the provisions of this Chapter, other than those mentioned under section 115BA and section 115BAB, the income-tax payable in respect of the total income of a person, being a domestic company, for any previous year relevant to the assessment year beginning on or after the 1st day of April, 2020, shall, at the option of such person, be computed at the rate of twenty-two per cent., if the conditions contained in sub-section (2) are satisfied:
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First assessment year can be AY 2020-21
It is optional.
Rate of tax will be 22%.
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Provided that where the person fails to satisfy the conditions contained in sub-section (2) in any previous year, the option shall become invalid in respect of the assessment year relevant to that previous year and subsequent assessment years and other provisions of the Act shall apply, as if the option had not been exercised for the assessment year relevant to that previous year and subsequent assessment years.
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Compliance of conditions is must, failure will deny benefit from year of failure on wards.
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(2) For the purposes of sub-section (1), the total income of the company shall be computed,-
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(i) without any deduction under the provisions of section 10AA or clause (iia) of sub-section (1) of section 32 or section 32AD or section 33AB or section 33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) or sub-section (2AB) of section 35 or section 35AD or section 35CCC or section 35CCD or under any provisions of 2[Chapter VI-A other than the provisions of section 80JJAA or section 80M];
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Major incentives which are available cannot be claimed on exercise of option.
Exception is about deduction for additional/ new employment as per S. 80JJAA and 80M which may not be significant.
Incentives are briefly discussed later on.
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(ii) without set off of any loss carried forward or depreciation from any earlier assessment year, if such loss or depreciation is attributable to any of the deductions referred to in clause (i);
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Loss brought forwarded or the element of loss relating to such incentives will not be set off. In fact as per other provisions these are considered as allowed hence lapsed.
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(iii) without set off of any loss or allowance for unabsorbed depreciation deemed so under section 72A, if such loss or depreciation is attributable to any of the deductions referred to in clause (i); and
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Deemed loss or depreciation brought forwarded will also not be set off.
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(iv) by claiming the depreciation, if any, under any provision of section 32, except clause (iia) of sub-section (1) of the said section, determined in such manner as may be prescribed.
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New rates and manner of depreciation may be provided.
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(3) The loss and depreciation referred to in clause (ii) and clause (iii) of sub-section (2) shall be deemed to have been given full effect to and no further deduction for such loss or depreciation shall be allowed for any subsequent year:
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Initial depreciation and loss of period prior to option year will be deemed to have been allowed.
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Provided that where there is a depreciation allowance in respect of a block of asset which has not been given full effect to prior to the assessment year beginning on the 1st day of April, 2020, corresponding adjustment shall be made to the written down value of such block of assets as on the 1st day of April, 2019 in the prescribed manner, if the option under sub-section (5) is exercised for a previous year relevant to the assessment year beginning on the 1st day of April, 2020.
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WDV b/f to be revised / increased for any normal unabsorbed and un allowed depreciation till AY 2019-20.
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(4) In case of a person, having a Unit in the International Financial Services Centre, as referred to in sub-section (1A) of section 80LA, which has exercised option under sub-section (5), the conditions contained in sub-section (2) shall be modified to the extent that the deduction under section 80LA shall be available to such Unit subject to fulfilment of the conditions contained in the said section.
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S.80LA benefits will continue subject to relevant conditions.
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Explanation.-For the purposes of this sub-section, the term "Unit" shall have the same meaning as assigned to it in clause (zc) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005).
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(5) Nothing contained in this section shall apply unless the option is exercised by the person in the prescribed manner on or before the due date specified under sub-section (1) of section 139 for furnishing the returns of income for any previous year relevant to the assessment year commencing on or after the 1st day of April, 2020 and such option once exercised shall apply to subsequent assessment years:
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From 10-IC U/ R 21AE
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Provided that in case of a person, where the option exercised by it under section 115BAB has been rendered invalid due to violation of conditions contained in sub-clause (ii) or sub-clause (iii) of clause (a), or clause (b) of sub-section (2) of said section, such person may exercise option under this section:
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A company which opted for S.115BAB, as new manufacturing company opting to avail 15% tax which fails to satisfy conditions of that section can opt for this section that is S.115BAA to avail 22% rate of tax.
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Provided further that once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.]
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No withdrawal of option will be permitted.
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NOTES:-
1. Inserted vide Taxation Laws (Amendment) Act, 2019 w.e.f. 01-04-2020
2. Substituted vide Finance Act, 2020 dated 27-03-2020 w.e.f. 01-04-2021 before it was read as
"Chapter VI-A under the heading "C.-Deductions in respect of certain incomes" other than the provisions of section 80JJAA"
Benefits which will be denied on opting S. 115BAA are:
- without any deduction under the provisions of section 10AA relating to Special provisions in respect of newly established Units in Special Economic Zones.
clause (iia) of sub-section (1) of section 32 relating to initial depreciation.
section 32AD relating to investment in new plant and machinery in notified backward area in certain states.
section 33AB relating to tea,coffee and rubber development accounts.
section 33ABA relating to site restoration fund.
Some clauses of S. 35 relating to scientific research namely
Clause (i) sub-clause (ii) relating to weighted deduction for contribution to scientific research association
or sub-clause (iia) paid to company for scientific research ,
or sub-clause (iii) – payment to research association
or sub-section (2AA) relating to payments made to National Laboratory , university or institute of technology etc.
or sub-section (2AB) of section 35 relating to scientific research by a company engaged in specified businesses.
section 35AD option exercised relating to specified business.
section 35CCC expenditure on agricultural extension project.
section 35CCD expenditure on skill development projects
and
under any provisions of Chapter VI-A under the heading “C.-Deductions in respect of certain incomes” other than the provisions of section 80JJAA;
S.80JJAA relating to weighted deduction for wages and salary paid to additional / new employees will continue.
Deduction u.s. 80M , newly reinserted will continue w.e.f. 01.04.2021
Decision making:
Therefore, for decision making it is required to ascertain inter alia:
How much loss relating to special or incentive deductions was allowed in past which remained un-allowed and forms part of brought forwarded loss in the year in which one opts to avail this section?
What are chances of availing incentives?
Whether restrictions can be complied with.
Changes relating to depreciation vide NOTIFICATION NO. 82/2020 dated 1st October, 2020 :
Rate of depreciation on any block of assets which are more than 40% shall be restricted to 40% on exercise of option for lower rate of tax..
WDV b/f shall be increased by the amount of lapsed initial depreciation forming part of b/f depreciation.
As per provisions of S. 115BAB vide explanation meaning of unabsorbed depreciation shall be as follows:
"unabsorbed depreciation" shall have the meaning assigned to it in clause (b) of sub-section (7) of section 72A.] the said meaning reads as follows:
[(b) "unabsorbed depreciation" means so much of the allowance for depreciation of the predecessor firm or the proprietary concern or the private company or unlisted public company before conversion into limited liability partnership or the amalgamating company or the demerged company, as the case may be, which remains to be allowed and which would have been allowed to the predecessor firm or the proprietary concern or the company or amalgamating company or demerged company, as the case may be, under the provisions of this Act, if the reorganisation of business or conversion or amalgamation or demerger had not taken place;]]
Domestic company -an interesting issue for brain storming:
Meaning of domestic company highlighted for relevant portion:
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From provision with highlights added
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Remarks
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2. In this Act, unless the context otherwise requires,-
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Contextual phrase is used but there is a definite meaning provided
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[(22A) "domestic company" means an Indian company, or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of such income ;]
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Questions for brain storming are:
What are the prescribed arrangements for the declaration and payment, within India, of the dividends?.
As per general understanding recommendation of dividend by board of directors and arrangement for payment to shareholders are arrangements for the purpose of this meaning and any other purpose.
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Similar wordings or wordings on similar lines are also used in annual finance Acts which prescribed rate of tax for domestic company.
Can it be said that a company who has not declared and / or made arrangements for payment of dividends is not a domestic company?
And therefore, whether such company is not liable to pay tax?
