Analysis of S.115BA- tax @ 25% optional for new companies set up or registered on or after 1st April,2016.

[DEV KUMAR KOTHARI]

Chapter of Income Tax Act, 1961

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 non-abstain clause and also subject to clause , for example:

 Notwithstanding anything contained in this Act but ⁴[subject to the other provisions of this Chapter, other than those mentioned under section 115BAA 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 and its profitability.

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 relating to depreciation are discussed later on in this write-up.

The first provision in this category of new provisions being provision of S.115BA 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 :

From provision	Remarks and observations
3[Tax on income of certain  manufacturing domestic  companies]	Meaning of ‘domestic company’ is also important. See note for brain storming given in last.
115BA. (1) Notwithstanding anything contained in this Act but 4[subject to the other provisions of this Chapter, other than those mentioned under section 115BAA 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, 2017, shall, at the option of such person, be computed at the rate of twenty-five per cent., if the conditions contained in sub-section (2) are satisfied.	First assessment year can  be AY 2017-18 It is optional. Rate of tax will be 25%. Compliance of conditions is must, failure will deny benefit from year of failure.
(2) For the purposes of sub-section (1), the following conditions shall apply, namely:-
(a) the company has been set-up and registered on or after the 1st day of March, 2016;	Cumulative conditions are for set-up and registered on or after 01.03.2016. This is likely to raise disputes.
(b) the company is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it; and	Engaging in any other business will disqualify the company. It is advisable to keep objects clause also restricted to avoid disputes. Because an object clause for other business can be considered for company being set up for other business.
(c) the total income of the company has been computed,- (i) without any deduction under the provisions of section 10AA or clause (iia) of sub-section (1) of section 32 or section 32AC 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 subsection (2AB) of section 35 or section 35AC or section 35AD or section 35CCC or section 35CCD or under any provisions of Chapter VI-A under the heading “C.-Deductions in respect of certain incomes” other than the provisions of section 80JJAA;	Major incentives which are available cannot be claimed.  Exception is  about deduction for additional/ new employment as per S. 80JJAA which may not be significant. Incentives are briefly discussed later on.
(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); and	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 lapsed.
(iii) depreciation under section 32, other than clause (iia) of sub-section (1) of the said section, is determined in the manner as may be prescribed.	For depreciation new prescription is expected.
(3) The loss referred to in sub-clause (ii) of clause (c) 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.	Specified loss or its element is deemed allowed  in other words such loss is  lapsed on exercise of option.
(4) 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 first of the returns of income which the person is required to furnish under the provisions of this Act:	Form no. 10-IB u/r 21AD
Provided that once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.]	No revert back except for opting S.115BAA as per next proviso.
5[Provided further that where the person exercises option under section 115BAA, the option under this section may be withdrawn.]	New conditions will apply on exercise of such option.

*********************

Notes:-

1. Inserted vide THE FINANCE ACT, 2016  w.e.f. 1st day of April, 2017.

2. Substituted vide THE FINANCE ACT, 2018, w.e.f. 1st day of April, 2017, before it was read as, "provisions of section 111A and section 112"

3. Substituted vide Taxation Laws (Amendment) Act, 2019 w.e.f. 01-04-2020 before it was read as

"¹[Tax on income of certain domestic companies."

4. Substituted vide Taxation Laws (Amendment) Act, 2019 w.e.f. 01-04-2020 before it was read as "subject to the ²[other provisions of this Chapter]"

5. Inserted vide Taxation Laws (Amendment) Act, 2019 w.e.f. 01-04-2020

 

Intervening periods:

If a company has opted from AY 2017-18 then some changes applicable in intervening periods will also have to be considered to ascertain impact, if any.

 

Benefits which will be denied on opting S. 115BA  are:

1. 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 32AC  relating to investment in new plant and machinery

 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 35AC relating to expenditure on eligible projects or schemes etc.

 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;

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.

Many might have opted from AY 2017-18 and some might be waiting to get deduction or set off of remaining period of incentive or amount carried forwarded to be set off or to be reduced to low amount so that forgoing the benefit is lesser beneficial and lower rate of tax is more beneficial.

Initial depreciation u/s 32.1.iia is in nature of incentive. This will not be available  if S.115BA is opted.

S.80JJAA relating to weighted deduction for wages and salary paid to additional / new employees will continue.

S.80M newly reinserted has not been allowed for S.115BA whereas it has been allowed for other similar sections 115BAA and 115BAB as per amendment  vide Finance Act, 2020 dated 27-03-2020 w.e.f. 01-04-2021. There seems to be an omission to insert S.80M in clause (c) of sub-section (2) of S. 115BA.

 

Drawback of option:

Main draw back of this section is that once opted, one cannot change it. However, on insertion of new section 115BAA, by exercising option of S.115BAA one can withdraw option u/s. 115BA. However then limitations under S. 115BAA will apply and those are also stringent conditions.

  

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.

 

Domestic company -an interesting issue for brain storming:

Meaning of domestic company highlighted for relevant portion:

From provision  with highlights added	Remarks
2. In this Act, unless the context otherwise requires,-	Contextual phrase is used but there is a definite meaning provided.
[(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 ;]	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.

            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, as per meaning?

And therefore, whether such company is not liable to pay tax?