Set off of Losses and Unabsorbed Depreciation for companies opting for section 115BAA

Section 115BAA has been introduced by the Government to provide a concessional tax regime for companies in India. Earlier, the companies were subject to income tax at a flat rate of 25% or 30% plus surcharge & cess. To provide ease of business to the companies, the Government introduced section 115BAA which allows domestic companies to opt for a concessional tax rate of 22% plus surcharge @ 10% plus cess subject to foregoing certain deductions. One such restriction is in respect of 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 impact of section 115BAA over the allowability of set-off of brought forward loss and unabsorbed depreciation in the case of a domestic company opting for the said section.

Section 115BAA (2) prescribes the conditions to be fulfilled if a company opts for concessional tax rates u/s 115BAA. The condition so prescribed is as follows:

No additional depreciation allowed

The reading of the above provision makes it clear that if a company opts for section 115BAA, its total income shall be computed without considering depreciation u/s 32(1) (iia) which relates to additional depreciation. This can be so interpreted that a company opting for section 115BAA cannot claim additional depreciation in respect of its plant & machinery at the prescribed rates of 20% or 35%. But it will not have any impact on the claim for normal depreciation in respect of the assets of the company.

Moving ahead to clause (ii) of section 115BAA (2):

• Clause (ii) of section 115BAA (2) expressly provides that where a company opts for section 115BAA, it shall compute its total income without set off of any loss carried forward or unabsorbed depreciation from any earlier assessment year. But it is not the case that the entire brought forward losses or unabsorbed depreciation is disallowed if a company opts for section 115BAA.

• The words “attributable to any of the deductions referred to in clause (i)” indicate that only that portion of carrying forward losses or depreciation shall be disallowed while calculating total income u/s 115BAA which relates to restricted items as prescribed under clause (i) of section 115BAA (2). Therefore, a company is allowed to carry forward losses & depreciation relating to items that are not mentioned in clause (i) of section 115BAA (2).

• The intention of the law behind clause (ii) is that when a particular deduction is not allowed in the concessional tax regime, then any carry-forward losses relating to such deduction shall also be treated as lapsed and the company should be barred from taking the benefits of set-off of losses attributable to such deductions in the future. For example, if the claim for additional depreciation is not allowed under section 115BAA, any unabsorbed depreciation or losses associated with additional depreciation in earlier years shall also be disallowed.

• Thus, the company opting for section 115BAA will be required to make a proper analysis of its brought forward losses and unabsorbed depreciation of earlier years and bifurcate it in accordance with clause (i) of the section 115BAA (2) and should utilize only that part which is not barred by clause (i).

• Clause (iii) of section 115BAA (2) is similar to clause (ii) and deals with set off of carry forward losses or absorbed depreciation in the cases of amalgamation or demerger as per section 72A.

Now we shall move to sub-section 3 of section 115BAA:

We have already discussed that if a company opts for section 115BAA, it will compute its total income without taking into consideration specified deductions. Further, if any brought forward losses or depreciation are attributable to such specified deductions, such loss or depreciation shall also be ignored.  Sub-section (3) to section 115BAA further clarifies the above fact by stating that once a company opts for section 115BAA, the brought forward losses or depreciation relating to such specified or ineligible deductions u/s 115BAA shall be deemed to have been allowed and shall not be allowed in any subsequent year.

Therefore, if a company opts for section 115BAA, the brought forward losses/ depreciation relating to specified deductions shall cease and the company will not be able to claim any deductions thereof in the future.

It is also important to read the proviso to sub-section (3) to section 115BAA which is as follows:

• We have already discussed that section 115BAA restricts the claim for additional depreciation u/s 32(1) (iia). However, there is no restriction on the claim of normal depreciation. Further, sub-section (3) of section 115BAA makes it clear that if a company opts for section 115BAA, the brought forward losses relating to restricted deductions & unabsorbed additional depreciation shall be deemed to have been allowed and the company can not claim it in subsequent years.

• However, the proviso to section 115BAA (3) provides that a domestic company having unabsorbed depreciation shall make the corresponding adjustment to the WDV of such block of assets as of 1^st April 2019 in the prescribed manner in case the company exercises the option under section 115BAA.

• In simple words, the brought forward losses relating to restricted deductions shall lapse in case a company opts for section 115BAA for P.Y. 2019-20 (A.Y. 2020-21). But Proviso to section 115BAA (3) calls for adjustment of Losses or unabsorbed depreciation relating to additional depreciation to the opening WDV of block of the asset as of 01-04-2019. It means that the balance of losses/ unabsorbed depreciation (relating to additional depreciation) shall be added back to the WDV of the block of assets as of 01-04-2019 and depreciation in the future shall be computed accordingly.

• It is also important to note that the benefit of adjustment to WDV of assets as of 10-04-2019 is specifically allowed only in respect of A.Y. 2020-21 only. Therefore, if a company exercises option u/s 115BAA in any assessment year after AY 2020-21, it shall not be allowed to add back losses or unabsorbed depreciation relating to additional depreciation to WDV of the block of assets.

Thus, 2 important points come out of the above discussion:

• There is no timeline for a company to opt for section 115BAA. The option can be exercised by the company in A.Y. 2020-21 or afterward.
• If a company opts for section 115BAA:
  In A.Y. 2020-21: Brought Forward Losses or unabsorbed depreciation relating to additional depreciation shall be added to the WDV of the block of assets as of 01-04-2019.
  In A.Y. 2021-22 or onwards: Brought Forward Losses or unabsorbed depreciation relating to additional depreciation shall not be added to the WDV of the block of assets.

The CBDT has also issued Notification No. 82/2020 dated 1^st October 2020 to give effect to the provisions of section 115BAA.

Author's Note: In our opinion, the above discrimination has been intentionally done in the law to encourage the existing companies to opt for the concessional tax regime in the first year of its operation i.e. A.Y. 2020-21 itself. In subsequent years, the choice to opt or not opt for section 115BAA should be guided by the quantum of additional depreciation lying yet to be availed by the company. Since section 115BAA restricts the set-off of unabsorbed additional depreciation, hence, such a company may defer the option to exercise section 115BAA and wait till such unabsorbed additional depreciation is fully exhausted.

About Author: The Author is Mr. Naveen Goyal who is a qualified practicing Chartered Accountant with an experience of over 16 years in direct and indirect taxes. For queries contact: admin@taxwink.com

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