Taxpublishers.in - Monday Corner Answer to the Quiz for the week (12 May 2025)

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Quiz for the week (12 May 2025): Goel (P) Ltd is engaged in manufacturing business and has income from business of Rs.580 lakhs before considering the following viz; (i) additional depreciation claim of Rs.10 lakhs; (ii) Brought forward business loss of Rs.30 lakhs (of assessment year 2024-25); (iii) section 80JJAA deduction of Rs.30 lakhs; and (iv) section 80M deduction of Rs.50 lakhs. Make a comparative study of section 115BA; section 115 BAA and section 115BAB to suggest an optimal tax planning idea. Best Answer : Section 115BA is available to domestic companies set up and registered on or after 1st March 2016 and engaged exclusively in the business of manufacturing or production, or research/distribution related to such manufactured articles. The tax rate under this section is 25%, plus surcharge at 7% (where total income exceeds Rs.1 crore but does not exceed Rs.10 crore), and health and education cess at 4%. However, to avail this section, the company must forego deductions under section 10AA, section 32(1)(iia), investment-linked deductions (such as sections 32AD, 35AD), and most of the deductions contained in Chapter VI-A, except section 80JJAA. Set-off of carried forward losses relating to such business is also not permitted. Since section 80M is not allowable under this section, the taxable income will be Rs.550 lakhs (after allowing 80JJAA of Rs.30 lakhs only). The resulting tax liability, after applying 7% surcharge and 4% cess, amounts to Rs.153.01 lakhs. Section 115BAA, introduced by the Taxation Laws (Amendment) Act, 2019, offers a reduced corporate tax rate of 22%, plus surcharge at 10% and cess at 4%, to all domestic companies without any restriction on date of incorporation or type of business activity. To opt for this section, the company must forgo deductions under section 10AA, section 32(1)(iia), section 35 (scientific research), section 35AD, and all Chapter VI-A deductions except section 80JJAA and section 80M. Also, set-off of any brought forward loss or unabsorbed depreciation is not permitted. Accordingly, under this section, Goel (P) Ltd can claim deduction of Rs.30 lakhs under section 80JJAA and Rs.50 lakhs under section 80M, but not the additional depreciation or brought forward loss. The taxable income would be Rs.500 lakhs, and the total tax liability, after applying 10% surcharge and 4% cess, comes to Rs.125.84 lakhs. Section 115BAB is the most concessional regime introduced for new manufacturing domestic companies. It applies where the company is incorporated on or after 1st October 2019 and commences manufacturing on or before 31st March 2024. Goel (P) Ltd has brought forward losses of FY 2023–24, which implies that manufacturing has commenced within the prescribed timeline. The company must also not use second-hand machinery beyond the permitted 20% limit, and must not use previously used hotel or convention centre buildings. The tax rate under this section is 15%, along with surcharge at 10% and cess at 4%. Like section 115BAA, this section also requires companies to forgo deductions under 10AA, section 32(1)(iia), section 35AD, and most of Chapter VI-A deductions, except sections 80JJAA and 80M. Set-off of brought forward losses is also not permitted. Thus, Goel (P) Ltd can claim Rs.30 lakhs under 80JJAA and Rs.50 lakhs under 80M, reducing the taxable income to Rs.500 lakhs. The total tax liability, including surcharge and cess, works out to Rs.85.80 lakhs. In conclusion, the most tax-efficient regime for Goel (P) Ltd is section 115BAB, as it results in the lowest effective tax liability of Rs.85.80 lakhs. If the company does not meet any of the specified conditions under section 115BAB (such as the limit on used machinery or exclusivity of manufacturing business), then section 115BAA should be opted for as it allows both 80JJAA and 80M deductions and results in a tax liability of Rs.125.84 lakhs. Section 115BA is the least advantageous due to a higher base rate of tax and ineligibility for 80M deduction, resulting in the highest liability of Rs.153.01 lakhs. Hence, for optimal tax planning, Goel (P) Ltd should opt for section 115BAB if eligible, or otherwise choose section 115BAA.

Quiz for the week (12 May 2025):

Goel (P) Ltd is engaged in manufacturing business and has income from business of Rs.580 lakhs before considering the following viz; (i) additional depreciation claim of Rs.10 lakhs; (ii) Brought forward business loss of Rs.30 lakhs (of assessment year 2024-25); (iii) section 80JJAA deduction of Rs.30 lakhs; and (iv) section 80M deduction of Rs.50 lakhs. Make a comparative study of section 115BA; section 115 BAA and section 115BAB to suggest an optimal tax planning idea.

Best Answer :

Section 115BA is available to domestic companies set up and registered on or after 1st March 2016 and engaged exclusively in the business of manufacturing or production, or research/distribution related to such manufactured articles. The tax rate under this section is 25%, plus surcharge at 7% (where total income exceeds Rs.1 crore but does not exceed Rs.10 crore), and health and education cess at 4%. However, to avail this section, the company must forego deductions under section 10AA, section 32(1)(iia), investment-linked deductions (such as sections 32AD, 35AD), and most of the deductions contained in Chapter VI-A, except section 80JJAA. Set-off of carried forward losses relating to such business is also not permitted. Since section 80M is not allowable under this section, the taxable income will be Rs.550 lakhs (after allowing 80JJAA of Rs.30 lakhs only). The resulting tax liability, after applying 7% surcharge and 4% cess, amounts to Rs.153.01 lakhs.

Section 115BAA, introduced by the Taxation Laws (Amendment) Act, 2019, offers a reduced corporate tax rate of 22%, plus surcharge at 10% and cess at 4%, to all domestic companies without any restriction on date of incorporation or type of business activity. To opt for this section, the company must forgo deductions under section 10AA, section 32(1)(iia), section 35 (scientific research), section 35AD, and all Chapter VI-A deductions except section 80JJAA and section 80M. Also, set-off of any brought forward loss or unabsorbed depreciation is not permitted. Accordingly, under this section, Goel (P) Ltd can claim deduction of Rs.30 lakhs under section 80JJAA and Rs.50 lakhs under section 80M, but not the additional depreciation or brought forward loss. The taxable income would be Rs.500 lakhs, and the total tax liability, after applying 10% surcharge and 4% cess, comes to Rs.125.84 lakhs.

Section 115BAB is the most concessional regime introduced for new manufacturing domestic companies. It applies where the company is incorporated on or after 1st October 2019 and commences manufacturing on or before 31st March 2024. Goel (P) Ltd has brought forward losses of FY 2023–24, which implies that manufacturing has commenced within the prescribed timeline. The company must also not use second-hand machinery beyond the permitted 20% limit, and must not use previously used hotel or convention centre buildings. The tax rate under this section is 15%, along with surcharge at 10% and cess at 4%. Like section 115BAA, this section also requires companies to forgo deductions under 10AA, section 32(1)(iia), section 35AD, and most of Chapter VI-A deductions, except sections 80JJAA and 80M. Set-off of brought forward losses is also not permitted. Thus, Goel (P) Ltd can claim Rs.30 lakhs under 80JJAA and Rs.50 lakhs under 80M, reducing the taxable income to Rs.500 lakhs. The total tax liability, including surcharge and cess, works out to Rs.85.80 lakhs.

In conclusion, the most tax-efficient regime for Goel (P) Ltd is section 115BAB, as it results in the lowest effective tax liability of Rs.85.80 lakhs. If the company does not meet any of the specified conditions under section 115BAB (such as the limit on used machinery or exclusivity of manufacturing business), then section 115BAA should be opted for as it allows both 80JJAA and 80M deductions and results in a tax liability of Rs.125.84 lakhs. Section 115BA is the least advantageous due to a higher base rate of tax and ineligibility for 80M deduction, resulting in the highest liability of Rs.153.01 lakhs. Hence, for optimal tax planning, Goel (P) Ltd should opt for section 115BAB if eligible, or otherwise choose section 115BAA.