Section 115BAA was introduced in the Income Tax Act, 1961 (“Act”) by the Taxation Laws (Amendment) Act, 2019 to provide for optional concessional rate of income tax for domestic companies from AY 2020-21. In order to opt for this concessional rate of tax u/s 115BAA, certain exemptions and deductions have to be forgone and also there are restrictions in the allowability of set-off of brought forward loss and unabsorbed depreciation while computing the total income under the provisions of section 115BAA.
This article discusses the allowability of set-off of brought forward loss and unabsorbed depreciation from the computation of total income of a domestic company if section 115BAA is opted.
The specified conditions for availing the concessional rate of tax are contained in sub-section (2) of section 115BAA which reads as follows-
The total income of the domestic company shall be computed—
(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 Chapter VI-A under the heading "C.—Deductions in respect of certain incomes" other than the provisions of section 80JJAA;
(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);
(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
(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.
Clause (ii) and clause (iii) makes a reference to the set-off of brought forward loss and unabsorbed depreciation of the earlier assessment years. These two clauses also refer to clause (i). Hence, there is inter-relation between the clause (i) and clauses (ii)/(iii).
Further, sub-section (3) of section 115BAA provides that “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”. This provision links with clause (ii)/(iii) of the sub-section (2) and hence, the provisions of clauses (i)/(ii)/(iii)of sub-section (2) and (3) are co-related.
Proviso to sub-section (3) provides that where there is unabsorbed 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.
It is thus imperative to discuss each of the clauses of sub-section (2) before we discuss the allowability of quantum of set-off of loss and unabsorbed depreciation under section 115BAA.
Restricted Exemptions and Deductions: Clause (i) of section 115BAA(2)
Clause (i) restricts the following exemptions and deductions while computing the total income of the company which opts for section 115BAA-
In other words, while computing the total income of a domestic company opting section 115BAA the above-mentioned exemptions and deductions are not allowable. The total income, in this case, is computed without considering these deductions and exemptions. Apart from the above, all other deductions and exemptions are available to a domestic company even after opting section 115BAA.
Whether a company which opts for a concessional tax regime under Section 115BAA can set-off brought forward loss of earlier assessment years
It is true that the concession in the tax rates were given at the cost of certain exemptions and deductions. Further, the brought forward loss and unabsorbed depreciation shall also be required to be adjusted to the extent of such restricted exemptions and deductions. It does not prohibit set-off of the entire amount of brought forward losses of earlier years.
Sub-section (2) of section 115BAA provides for restriction of the following exemptions and deductions-
Section 115BAA(2)(ii) expressly provides that ‘total income of a company which has opted section 115BAA shall be computed without set-off of any loss carried forward or depreciation from any earlier assessment year to the extent such loss or depreciation attributable to the above-mentioned exemptions and deductions’.
It is not the case that the entire amount of brought forward losses from earlier year(s) is disallowed if section 115BAA is opted. Only the losses that relate to the above-mentioned restricted exemptions and deductions are required to be excluded from the total amount of brought-forward of losses. The losses pertain to other than the restricted exemptions and deductions are still allowed from the income computed under this scheme.
The intention is that when the restricted exemptions and deductions are not allowed from the computation of total income under section 115BAA then the same will not be allowed to be set-off in the current assessment year which is included in the opening amount of loss.
In other words, a company has to bifurcate the total amount of loss attributable to various provisions and the loss that consists of above mentioned exemptions and deductions are to be ignored and the balance amount of normal loss is eligible for set-off and carried forward.
Similarly, in clause (iii) of Section 115BAA(2) restricts set-off of any loss or unabsorbed depreciation under section 72A while computing the total income for concessional tax rate under section 115BAA.
In this case also if such loss or depreciation is attributable to any of the restricted deductions referred to in clause (i) of section 115BAA(2) then the loss to that extent shall be excluded from the total amount of loss. One needs to recompute the loss to exclude the amount of loss which is related to restricted deductions.
Note: Section 72A contains provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger, etc.
There is no provision which restricts set-off of current year loss or carried forward loss with the income determined under section 115BAA. The only prohibition is that the loss which is related to the restricted deductions are not allowed to be set-off under the concessional tax regime u/s 115BAA.
In case a domestic company has opted for a concessional tax regime under section 115BAA has to compute the total income without considering the restricted deductions. Hence, the current year loss cannot include any amount which is related to restricted deductions.
However, in case of brought forward loss, the situation is not the same. Since Section 115BAA is applicable from AY 2020-21, the amount of carried forward loss of previous year(s) may include an amount which is related to restricted deduction. Hence, one needs to recompute the amount of brought forward loss eligible for set-off under the new tax regime under section 115BAA.
Further, it should be noted that there is no such amendment in section 72 or section 72A which restricts set-off of carried forward amount of loss which is not related to restricted deductions. Further, no such provision exists in section 71 which restricts set-off of current year amount of loss if such amount of loss is computed as per section 115BAA(2) without taking into account the restricted deductions.
Amount of loss related to restricted deduction shall be deemed to have been allowed and shall not be allowed in any subsequent year. As per section 115BAA(3), the loss and depreciation referred to in section 115BAA(2)(ii) and section 115BAA(2)(iii) 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.
In this case it should be remembered that the amount of loss as referred to in section 115BAA(2)(ii)/(iii) refers to the amount of loss related to restricted deduction included in carried forward business loss. In case of unabsorbed depreciation, it relates to unabsorbed additional depreciation.
Recomputation of brought forward loss and unabsorbed depreciation: Clause (ii) of Section 115BAA(2)
To illustrate, suppose the brought-forward business loss of a company for earlier assessment year (as per old scheme of tax) is Rs. 9,50,000/-. It was then computed as below-
Now, presently when the company opts for section 115BAA, it is not the case that the company cannot claim the entire amount of loss of Rs. 9,50,000/-. The company is eligible to claim loss of Rs. 8,00,000/- after adjusting the loss of Rs. 1,50,000/- which is related to prohibited section 35(1)(ii).
As per section 115BAA(2)(ii), the company is eligible for set-off of carried forward loss of Rs. 8,00,000 while computing the total income under section 115BAA for the assessment year in which carried forward loss of Rs. 8,00,000 is set-off.
Further, as per section 115BAA(3), the loss of Rs. 1,50,000 included in the total amount of carried forward of loss of Rs. 9,50,000/- is deemed to have been given full effect to and no further deduction for such loss of Rs. 1,50,000 shall be allowed for any subsequent year.
Order of set-off of losses
Consider that the above table is for AY 2018-19. In AY 2019-20, the company had a profit of Rs. 3,00,000 against which brought forward loss of AY 2018-19 was adjusted.
The loss remaining after set-off in AY 2019-20 is Rs. 6,50,000/-. In AY 2020-21 when the company opted for section 115BAA, whether it can set-off entire amount of brought forward loss of Rs. 6,50,000/- or it should be recomputed to Rs. 5,00,000 i.e Rs. 6,50,000 - deduction u/s 35(1)(ii) of Rs. 1,50,000.
It is not expressly provided in the provision when a part of the brought forward loss is set-off in any assessment year, then how the order of set-off for the restricted deductions is required to be given. Whether the loss on account of restricted deduction (section 35(1)(ii) in this case) shall be required to be considered first or not, is not clear from the plain reading of the provision. Further, the provisions for set-off of losses in the ACt do not provide for any order of priority between general business loss and loss attributable to the restricted deductions.
As we know, the provisions of Section 115BAA is a beneficial provision introduced in the statute to provide for the benefit of lower tax rates to domestic companies by disallowing certain enumerated deductions.
Section 115BAA is a complete code itself. It is only where the aspect relating to determination of total income is involved, the other provisions of the act are to be referred to and such provisions are to be read only to the extent they are not contrary to the prescriptions of Section 115BAA of the Act.
Since section 115BAA is a beneficial provision it has to be interpreted liberally. If the Legislature has failed to clarify its meaning by the use of appropriate language, the benefit thereof must go to the taxpayer. It is settled law that in case of doubt, that interpretation of a taxing statute which is beneficial to the taxpayer must be adopted. It is a settled law that in case of taxing statutes, beneficial provisions should be liberally construed.
Based on above principles, it can be interpreted that in the given example, the amount of brought forward loss of Rs. 6,50,000 in AY 2020-21 is fully available for set-off and the loss to the extent it is attributable to restricted deduction u/s 35(1)(ii) of Rs. 1,50,000 is already adjusted in AY 2019-20.
Restriction on Set-off of Unabsorbed Depreciation under section 115BAA
Section 115BAA(2)(i)/(ii)(iii) not only restricts set-off of loss but also restricts allowance on account of unabsorbed depreciation allowance. However, like loss, not the entire amount of unabsorbed depreciation is not restricted from set-off under section 115BAA. It is only the additional depreciation as specified u/s 32(1)(iia) is not allowed as deduction under clause (i) and set-off of carried forward unabsorbed depreciation allowance under clause (ii)/(iii) of section 115BAA(2). However, the unabsorbed depreciation on account of normal depreciation shall continue to be allowed as deduction under this section while computing the total income for the relevant assessment year.
Under Income Tax Act, 1961 depreciation provisions are covered in section 32.
Section 32(1) of the Income Tax Act, 1961 provides the provisions for depreciation allowance on fixed assets. There are two types of depreciation i.e. Written down Value (WDV) Method and Straight Line Method (SLM) provided in section 32.
While SLM method of depreciation is prescribed only for the assets of an undertaking engaged in generation or generation and distribution of power, WDV method of depreciation is prescribed in the case of any block of assets in other cases. These are known as normal depreciation.
Apart from the normal depreciation under section 32(1), there is another depreciation allowance known as ‘additional depreciation allowance’ which is provided under section 32(1)(iia).
Section 32(1)(iia) provides for an additional depreciation @ 20% on the actual cost of the asset on those machinery or plant (other than ships and aircraft) which have been acquired and installed after 31st March 2005 by the assessee engaged in the business of manufacture or production of any article or thing or in the business of generation, transmission or distribution of power.
In case an assessee sets up an undertaking or enterprise for manufacture or production of any article or thing, on or after the 1st day of April, 2015 in any notified backward area then the rate of additional depreciation is increased to 35% instead of 20%.
An exception is provided that where an asset is eligible for additional depreciation under section 32(1)(iia) is acquired by the assessee during the previous year and is put to use for the purposes of business for a period of less than 180 days in that previous year, and the deduction under this sub-section in respect of such asset is restricted to 50 per cent of the amount of additional depreciation under clause (iia) for that previous year, then, the deduction for the balance 50 per cent of the additional amount of depreciation for such asset under clause (iia) shall be allowed under this sub-section in the immediately succeeding previous year in respect of such asset.
In other words, where the assets which are eligible for additional depreciation have been put to use for a period of less than 180 days in the previous year in which the assets are acquired, additional depreciation shall be allowed at the rate of 50% of the prescribed additional depreciation rate. This means the additional rate of depreciation in that previous year shall be 10% or 17.50%, as the case may be.
The remaining half depreciation, which has not been allowed in the year in which plant or machinery is acquired and is put to use can be claimed by the assessee in the next succeeding year.
Proviso to section 115BAA(3)
The proviso to Section 115BAA(3) provides that a domestic company having unabsorbed depreciation shall make corresponding adjustment to the WDV of such block of assets (i.e. add back to the block) as on April 1, 2019 in the prescribed manner, if the option is exercised for the tax year beginning on April 1, 2020. Sub-section (3) provides that the loss referred to in sub-section (2) shall be treated as having been given effect to. The proviso, however, provides that there would be an adjustment to the block of assets to the extent of the depreciation that has remained unabsorbed for the years prior to assessment year 2020-21.
Section 115BAA(2)(i) restricts allowance of various deductions, including additional depreciation under section 32(1)(iia). Further, section 115BAA(2)(iv) states that depreciation under any provision of section 32 can be claimed, except for additional depreciation under section 32(1)(iia).
Hence, it is clear that for availing concessional tax rate under section 115BAA, the assessee can claim ‘normal depreciation’ under section 32 but cannot claim additional depreciation while computing the total income under section 115BAA.
Similar to brought forward losses, clause (ii) and clause (iii) of sub section (2) of section 115BAA, provides for non-allowance of set off of unabsorbed depreciation from earlier assessment years, if such depreciation/losses are attributable to deduction mentioned in clause (i).
In this context, CBDT has issued a Circular (refer Circular No. 29/2019) on 02-10-2019 on the allowability of brought forward loss on account of additional depreciation. The circular states that a domestic company which would exercise an option for availing benefit of lower tax rate 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 Assessment Year.
Further, as there is no timeline within which option under section 115 BA can be exercised. it may be noted that a domestic company brought forward losses on account of additional depreciation may, if it so desires, exercise the option after set oil of the losses so accumulated
Similar to losses, section 115BAA(3) provides that the brought forward unabsorbed additional depreciation shall be deemed to have been given full effect to and no further deduction for such brought forward additional depreciation shall be allowed for any subsequent year.
However, proviso to sub section (3) allows adjustment in opening WDV of the assets pertaining to the AY 2020-21 for additional depreciation allowance which could not be given full effect upto AY 2019-20, if the option of lower or concessional rate of tax is exercised for the AY 2020-21.
Further, the adjustment in the WDV is specifically allowed for the assessees who opt for a lower or concessional rate of tax u/s 115BAA for the AY 2020-21 only. Assessees opting in subsequent years will not be allowed to adjust the unabsorbed additional depreciation to the WDV, if any.
CBDT vide Notification No. 82/2020/F. No. 370142/30/2020-TPL dated 01.10.2020 has prescribed for the upward addition to the WDV of the assets as on 01.04.2019 for the amount of unabsorbed additional depreciation. In other words, such amount of unabsorbed additional depreciation shall be required to be added back to the opening WDV of the assets in the AY 2019-20.
A question may come to the mind of the readers why the adjustment is specified for AY 2020-21 only. In this context one should note that section 115BAA is made applicable from AY 2020-21 itself. Hence, AY 2020-21 is the first year of the operation of section 115BAA. However, section 115BAA is optional and can be opted in any assessment year, not necessarily being opted in AY 2020-21 itself.
A domestic company having unabsorbed additional depreciation may not opt for a concessional tax regime if it has brought forward additional deporection. Since section 115BAA(2)(ii)/(iii) restricts set-off of such unabsorbed additional depreciation, hence, such a company may defer the option to exercise section 115BAA. Such a company has the option to opt section 115BAA in future after exhausting the benefit of set-off of brought-forward of such unabsorbed additional depreciation. It appears that in order to encourage such a company for early exercise of the option from AY 2020-21 itself, the legislation has allowed the taxpayers to add back the amount of unabsorbed additional depreciation to the opening WDV of the assets as on 01.04.2019 to enable such companies to claim depreciation at the normal rates on such enhanced WDV.
It should be noted that the proviso to section 115BAA(3) was not there in the Ordinance 2019 but was introduced as a part of the Taxation Laws (Amendment) Act, 2019.
It is further to be clarified that Section 32(1)(iia) provides for additional depreciation at 20% of the actual cost of plant or machinery to an assessee engaged in the business of manufacture or production of any article or thing. However, in cases where the plant or machinery has been put to use for a period less than 180 days during the previous year, the deduction shall be restricted to 50% thereof and the remaining 50% would be allowed in the immediately succeeding previous year.
Hence, where the asset is put to use for less than 180 days then only 50% of additional depreciation can be claimed. The balance 50% remains unclaimed in the first previous year of acquisition. The claimed portion of the amount of additional depreciation remains unabsorbed in case of inadequate profits.
The proviso to section 115BAA(3) mentions the adjustment in the opening amount of WDV of the asset for AY 2020-21 in respect of the claimed portion of additional depreciation which remains unabsorbed. The adjustment prescribed in the proviso to section 115BAA(3) is not related to the unclaimed remaining 50% portion of the additional depreciation. The taxpayer has to forego the benefit of such remaining 50% of the additional depreciation if the beneficial provision of section 115BAA is opted in the AY 2020-21.
If section 115BAA is opted from AY 2020-21 or afterwards (i.e. after AY 2020-21) and still if there is a claim of unabsorbed additional depreciation, in that case, the same shall be waived off and won’t be added to the WDV of the assets.
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