Taxation of Companies and Alternative Tax Regimes — Practice

Question 1

A company's tax liability computed under the regular provisions of the Act is ₹40 lakh. Its book profit, computed under section 115JB, is ₹500 lakh, and the applicable MAT rate is 15%. Determine which amount the company is actually liable to pay, and the amount of MAT credit, if any, arising.

Accepted Answer

MAT liability = 15% × ₹500 lakh = ₹75 lakh. Since the regular tax liability of ₹40 lakh is lower than the MAT liability of ₹75 lakh, the company is liable to pay tax under MAT, ₹75 lakh, rather than the lower ₹40 lakh that would otherwise have been payable under the regular provisions. MAT credit arising = MAT paid − Regular tax liability = ₹75 lakh − ₹40 lakh = ₹35 lakh, which is carried forward and made available for set-off against regular tax liability in a future year in which the regular tax liability computed under the Act's normal provisions exceeds the MAT liability for that future year, reflecting that this ₹35 lakh represents tax paid earlier than the regular provisions alone would have required, to be recovered through reduced regular tax liability once the company's regular-provisions computation itself produces a higher liability than MAT in some subsequent year, rather than a permanently additional tax burden borne by the company over its life as a whole.

Question 2

In a later year, the same company (from the previous problem, carrying forward ₹35 lakh of MAT credit) has a regular tax liability of ₹90 lakh and a MAT liability of ₹60 lakh. Determine the actual tax payable this year, applying the available MAT credit.

Accepted Answer

Since the regular tax liability of ₹90 lakh exceeds the MAT liability of ₹60 lakh this year, the company is liable to pay tax under the regular provisions, ₹90 lakh, and this is precisely the situation in which previously accumulated MAT credit becomes available for set-off, since the regular tax liability now exceeds MAT liability. The company can set off its available MAT credit of ₹35 lakh against this regular tax liability, but only to the extent that doing so does not reduce the tax payable below the MAT liability for this year, ₹60 lakh, since MAT credit set-off cannot be used to reduce actual tax payable below what MAT itself would require for the current year; the maximum set-off available is therefore ₹90 lakh − ₹60 lakh = ₹30 lakh (not the full ₹35 lakh credit balance), reducing actual tax payable to ₹90 lakh − ₹30 lakh = ₹60 lakh, with the remaining ₹5 lakh of MAT credit (₹35 lakh − ₹30 lakh utilised) continuing to be carried forward for set-off in a further future year, within the overall carry-forward period MAT credit is permitted to be utilised.

Question 3

A company has total income of ₹200 lakh computed under the regular provisions, before considering additional depreciation of ₹25 lakh it would be entitled to claim only under the regular regime (this deduction is not available under section 115BAA). Assuming a regular corporate tax rate of 30% and a section 115BAA rate of 22% (ignoring surcharge and cess for simplicity), determine which regime produces a lower actual tax liability for this company.

Accepted Answer

Under the regular regime, the company can claim the additional depreciation of ₹25 lakh, reducing total income to ₹200 lakh − ₹25 lakh = ₹175 lakh; tax liability = 30% × ₹175 lakh = ₹52.5 lakh. Under section 115BAA, the company forgoes the additional depreciation deduction, so total income remains ₹200 lakh (the deduction is simply not available at all under this regime); tax liability = 22% × ₹200 lakh = ₹44 lakh. Comparing the two, section 115BAA produces the lower actual tax liability, ₹44 lakh versus ₹52.5 lakh under the regular regime, despite the company forgoing a genuine ₹25 lakh deduction it could have claimed under the regular regime, because the rate differential (22% versus 30%) is large enough to more than offset the value of the forgone deduction in this specific case; this illustrates precisely the genuine, quantified comparison this chapter's method note emphasises — the correct regime choice depends on comparing the two actual computed liabilities for the company's specific facts, not on assuming the lower headline rate automatically produces the lower actual tax liability, since a company with a much larger forgone-deduction claim relative to its income could, in a different set of facts, find the regular regime's higher headline rate nonetheless produces the lower actual liability once its larger deduction claim is properly valued.

Question 4

A well-established textile manufacturing company, in operation for fifteen years, transfers its existing plant and machinery to a newly incorporated subsidiary, which then claims section 115BAB's concessional rate on the basis that it is a 'new' manufacturing company. Explain why this claim is likely to fail, and the specific eligibility condition this scenario violates.

Accepted Answer

Section 115BAB is available specifically to new domestic manufacturing companies satisfying specified conditions, including that the company must not be formed by splitting up or reconstructing a business already in existence; here, the newly incorporated subsidiary has been formed specifically by transferring an already-established manufacturing operation's existing plant and machinery from the well-established parent company, which is precisely the kind of reconstruction of an existing business this eligibility condition is designed to exclude from the concessional rate. The claim is likely to fail because, despite the subsidiary being technically newly incorporated, it has not genuinely commenced new manufacturing investment or activity; it has simply continued the same pre-existing manufacturing operation under a new corporate wrapper, and permitting such an arrangement to access the concessional rate would defeat the entire purpose of section 115BAB, which is specifically designed to incentivise genuinely new manufacturing investment, not to reward the restructuring of already-established manufacturing capacity into a newly incorporated entity purely to access a lower tax rate with no genuine new economic activity or investment actually having occurred.

Question 5

A company's total income is ₹15 crore, and tax computed on this income (at the applicable rate) is ₹4.5 crore. The applicable surcharge rate for a company at this income level is 7%, and the health and education cess rate is 4%. Compute the company's final tax liability, showing the correct sequence.

Accepted Answer

Step 1: tax on total income = ₹4.5 crore (given). Step 2: surcharge = 7% × ₹4.5 crore = ₹0.315 crore, computed on the tax figure itself, not on the ₹15 crore total income directly. Step 3: aggregate of tax and surcharge = ₹4.5 crore + ₹0.315 crore = ₹4.815 crore. Step 4: cess = 4% × ₹4.815 crore = ₹0.1926 crore, computed on the aggregate of tax and surcharge, not on tax alone before surcharge is added. Final tax liability = ₹4.815 crore + ₹0.1926 crore = ₹5.0076 crore. This sequence, tax first, then surcharge computed on that tax, then cess computed on the combined tax-plus-surcharge figure, must be followed precisely; computing cess on tax alone before adding surcharge, or computing surcharge directly on total income rather than on the tax already computed on that income, would each produce a materially incorrect final liability, illustrating why this chapter emphasises the correct sequence as a specific, examinable computational discipline in its own right.

Question 6

A company accrues and charges ₹18 lakh of employer's contribution to provident fund as an expense in its profit and loss account for the financial year ended 31 March, but actually pays only ₹12 lakh of this amount before the due date for filing its return of income, with the remaining ₹6 lakh paid after that due date. Explain how this should be treated in computing the company's total income for the year, applying section 43B.

Accepted Answer

Section 43B requires certain specified statutory liabilities, including employer's contribution to provident fund, to be allowed as a deduction only in the year of actual payment, regardless of the year in which the liability was incurred and accounted for in the books, subject to the specific relaxation that payment made before the due date for filing the return of income for that year is treated as deductible for that same year, even though actual payment occurred after the financial year end itself. Here, the ₹12 lakh paid before the return filing due date is deductible in computing total income for this financial year, since it satisfies section 43B's payment-before-return-due-date condition; the remaining ₹6 lakh, paid only after the return filing due date, is not deductible in this year at all, and must be added back to the profit as per the profit and loss account in computing total income for this year (since it was already charged as an expense in the books but does not satisfy section 43B's condition for deductibility in this year), becoming deductible instead only in the later year in which it is actually paid, illustrating precisely why section 43B requires careful, item-by-item tracking of actual payment dates against the return filing due date, rather than assuming the full amount charged in the books is automatically deductible in the year of accrual the way it would be for an ordinary expense not subject to this specific payment-basis restriction.

Question 7

A holding company receives dividend income of ₹40 lakh from its subsidiary and, in the same financial year, itself distributes ₹35 lakh of dividend to its own shareholders before the prescribed due date. Explain the purpose of section 80M's deduction in this scenario, and its effect on the holding company's taxable income.

Accepted Answer

Without a specific relief provision, dividend income received by the holding company from its subsidiary would be included in the holding company's own total income and taxed, and then, when the holding company itself distributes dividend to its own shareholders, that dividend would again be taxed in the hands of those further shareholders, creating a cascading, multiple-layer taxation of what is, in economic substance, the same underlying stream of profit passing through successive layers of corporate ownership before reaching the ultimate individual shareholder. Section 80M addresses this by allowing the holding company a deduction for dividend received from another domestic company, to the extent the holding company itself distributes dividend to its own shareholders on or before the prescribed due date, specifically designed to prevent this cascading effect; here, the holding company received ₹40 lakh of dividend income but itself distributed ₹35 lakh before the prescribed due date, so the section 80M deduction available is limited to the lower of the dividend received (₹40 lakh) and the dividend distributed by the due date (₹35 lakh), meaning ₹35 lakh is deductible from the holding company's total income, leaving ₹5 lakh of the dividend received (the portion not matched by a corresponding onward distribution before the due date) remaining taxable in the holding company's hands, reflecting that relief under section 80M is specifically tied to, and limited by, the extent of onward distribution actually made within the prescribed timeframe.

Question 8

Explain the underlying policy rationale for MAT, using the example of a company that legitimately claims substantial accelerated depreciation and profit-linked deductions to report near-zero tax liability under the regular provisions, despite reporting healthy accounting profit.

Accepted Answer

Without MAT, a company could, entirely legitimately, claim accelerated depreciation, various profit-linked deductions, and other exemptions available under the regular provisions of the Act, reducing its computed total income, and therefore its regular tax liability, to a very low or even negligible figure, despite reporting substantial, healthy profit in its own financial statements prepared for shareholders and other users under the Companies Act; this outcome, while entirely lawful under the specific letter of each individual deduction and exemption provision, was considered by policymakers to be inconsistent with the broader principle that a genuinely profitable company should bear some minimum, meaningful tax burden reflecting its actual reported profitability, rather than being able to reduce its tax liability to near zero purely through the cumulative, legitimate stacking of multiple individual deduction and exemption provisions. MAT addresses this specific concern by establishing a floor: regardless of how favourably the regular provisions treat the company's specific mix of income and deductions, the company must pay tax at least equal to a specified percentage of its book profit, ensuring that a company reporting substantial accounting profit to its shareholders cannot simultaneously report negligible or zero tax liability to the tax authorities, without necessarily eliminating the deductions and exemptions themselves, which remain available and continue to reduce the company's regular-provisions computation, but are now effectively capped in their overall tax-reducing benefit by this book-profit-based minimum floor.

Question 9

A company's net profit as per its profit and loss account, prepared under the Companies Act, is ₹300 lakh. This figure includes a provision for doubtful debts of ₹20 lakh (not an ascertained liability) and an amount of ₹15 lakh credited representing a reversal of an earlier year's provision that had itself been added back to book profit in that earlier year. Explain, in outline, how each of these two items should be treated in arriving at book profit under section 115JB.

Accepted Answer

Section 115JB requires net profit as per the profit and loss account to be adjusted by specific additions and deductions prescribed under the section to arrive at book profit for MAT purposes, and provisions for unascertained liabilities, such as a general provision for doubtful debts not based on a specific, ascertained shortfall, are specifically required to be added back to net profit in arriving at book profit, since section 115JB does not permit deduction of general, unascertained provisions in computing book profit even though such a provision may have been validly charged as an expense under ordinary accounting principles in preparing the profit and loss account; the ₹20 lakh provision for doubtful debts should therefore be added back. The ₹15 lakh reversal of a provision that had itself been added back to book profit in an earlier year should correspondingly be deducted from net profit in arriving at book profit for the current year, since section 115JB specifically permits deduction of amounts withdrawn from a provision or reserve if the amount was credited to the profit and loss account and the provision or reserve was, in the year it was originally created, itself added back to book profit at that time, precisely to prevent the same underlying provision amount from effectively being taxed twice, once when originally added back in the year of creation, and again when its subsequent reversal is credited back to profit in a later year, without this specific, matching deduction being available to offset that second, otherwise duplicative inclusion.

Question 10

A company opts for section 115BAA. Explain whether this company can still claim an ordinary, routine business expense (such as salary paid to employees or rent for office premises) as a deduction, distinguishing this from the specific, forgone category of exemptions and deductions section 115BAA actually requires the company to give up.

Accepted Answer

Yes, a company opting for section 115BAA can still claim ordinary, routine business expenses genuinely incurred in the course of carrying on its business, such as salary paid to employees, rent for office premises, and similar day-to-day operating expenses, as deductions in computing its total income, since these are ordinary business expenditure deductible under the general provisions governing computation of income from business or profession, not among the specific category of exemptions and profit-linked or investment-linked deductions section 115BAA requires the company to forgo. Section 115BAA's forgone-deduction requirement is specifically targeted at a defined, limited list of exemptions and deductions, most notably additional depreciation and various profit-linked deductions available under specific incentive provisions of the Act, not at the ordinary, routine business expenditure every company incurs in the normal course of earning its income; a company opting for section 115BAA continues to compute its business profit in largely the same way as under the regular regime for ordinary expense deductibility purposes, with the specific difference being the unavailability of the defined, narrower category of incentive-style exemptions and deductions section 115BAA explicitly lists as forgone, which is precisely the distinction a candidate must draw correctly rather than mistakenly assuming section 115BAA denies all deductions of any kind.

Question 11

A domestic company declares and pays a dividend of ₹8 lakh to a resident individual shareholder during the financial year. Explain the company's obligation regarding tax deduction at source on this payment, and why this obligation exists even though the company itself is no longer subject to a distribution tax on the dividend.

Accepted Answer

Since dividend income is now taxed in the hands of the shareholder receiving it, rather than through a company-level distribution tax borne by the paying company itself, the company is required to deduct tax at source on the dividend paid to the shareholder under the applicable TDS provisions specifically governing dividend payments, where the amount paid or payable to that shareholder exceeds the prescribed threshold, remitting the deducted amount to the government and issuing the shareholder a TDS certificate reflecting the deduction, which the shareholder can then claim credit for against their own final tax liability on this dividend income when filing their own return. This TDS obligation exists precisely because the tax on this dividend income is now the shareholder's own liability, not the company's, and TDS functions as the mechanism ensuring the government collects at least a portion of the eventual tax due on this income at the point the income is actually paid out, rather than relying entirely on the shareholder to correctly self-report and pay tax on the dividend income only at the time of filing their own return, months or potentially over a year after the dividend was actually received; the company's shift away from bearing a distribution tax itself does not eliminate its role in the tax collection process, merely shifts that role from being the ultimate taxpayer to being a withholding agent collecting tax on behalf of, and ultimately payable by, its shareholders.

Question 12

Explain the key eligibility difference between section 115BAA and section 115BAB, and why a well-established, diversified domestic company with no new manufacturing activity can access one of these sections but not the other.

Accepted Answer

Section 115BAA is available to any domestic company, regardless of its nature of business, its date of incorporation, or whether it engages in manufacturing at all, provided it satisfies the specified conditions around forgoing certain exemptions and deductions; it is a broadly available concessional regime open to essentially any domestic company willing to make this trade-off. Section 115BAB, by contrast, is available specifically to new domestic manufacturing companies satisfying a distinct, more restrictive set of conditions, including incorporation after a specified date, commencement of manufacturing by a specified deadline, and not being formed by splitting up or reconstructing an existing business, meaning it is deliberately targeted at incentivising genuinely new manufacturing investment rather than being broadly available to any company regardless of its business nature or history. A well-established, diversified domestic company with no new manufacturing activity can access section 115BAA, since that section imposes no restriction based on the company's business nature, age, or manufacturing status, but cannot access section 115BAB, since it fails the fundamental eligibility requirement of being a new manufacturing company at all, illustrating precisely why these two sections, though both concessional regimes offering lower rates in exchange for forgoing similar categories of deductions, serve genuinely different policy purposes and are available to genuinely different, non-overlapping categories of companies based on their specific eligibility conditions.

Question 13

A company pays ₹20 lakh as professional fees to a resident consultant during the year, but fails to deduct tax at source on this payment as required. Explain the specific disallowance consequence this triggers under section 40(a), and the relief available if the company subsequently deducts and deposits the tax in a later year.

Accepted Answer

Where a company fails to deduct tax at source on a payment such as professional fees to a resident, where TDS was required under the applicable provisions, section 40(a) disallows a specified percentage (commonly 30% for payments to a resident payee) of the expenditure in computing the company's business income for the year the expense was otherwise claimed, meaning the company loses the deduction for this portion of the expenditure despite having genuinely incurred and paid it, purely as a consequence of the TDS compliance failure, a disallowance that exists specifically to create a strong compliance incentive for payers to actually deduct and deposit tax at source as required, rather than treating TDS non-compliance as a matter carrying only a separate, modest interest or penalty consequence unconnected to the payer's own deduction claim. If the company subsequently deducts the tax and deposits it with the government in a later financial year, the disallowed portion of the expenditure becomes deductible in that later year, the year of actual deduction and deposit, rather than being permanently lost, reflecting that section 40(a)'s disallowance is fundamentally a timing consequence linked to the delay in TDS compliance, encouraging prompt compliance by deferring, rather than permanently denying, the deduction, in a manner conceptually similar to section 43B's own payment-timing-linked deduction mechanism discussed elsewhere in this chapter.

Question 14

A domestic company (not opting for any concessional regime) has total income of ₹250 lakh computed under the regular provisions, and book profit of ₹280 lakh under section 115JB. The regular corporate tax rate is 30%, MAT rate is 15%, surcharge applicable at this income level is 7%, and cess is 4%. Compute the company's final tax liability, working through each step in sequence.

Accepted Answer

Step 1, regular tax on total income = 30% × ₹250 lakh = ₹75 lakh. Step 2, MAT = 15% × ₹280 lakh (book profit) = ₹42 lakh. Step 3, compare: regular tax of ₹75 lakh exceeds MAT of ₹42 lakh, so the company is liable under the regular provisions, ₹75 lakh, not MAT, since MAT applies only where the regular tax liability computed would otherwise be lower than MAT; here the reverse holds, so no MAT liability arises and no MAT credit is generated this year. Step 4, surcharge = 7% × ₹75 lakh = ₹5.25 lakh. Step 5, aggregate of tax and surcharge = ₹75 lakh + ₹5.25 lakh = ₹80.25 lakh. Step 6, cess = 4% × ₹80.25 lakh = ₹3.21 lakh. Final tax liability = ₹80.25 lakh + ₹3.21 lakh = ₹83.46 lakh. This problem illustrates the complete, integrated computation sequence this chapter establishes as the master format: compute regular tax, separately compute MAT and compare the two, apply whichever is higher as the base tax liability, then apply surcharge and cess in the correct sequence on top of that base figure, exactly the systematic, comprehensive computation discipline the method chapter identifies as this paper's domestic-half foundation.

Question 15

Explain why a company that has validly opted for section 115BAA need not separately compute MAT at all, connecting this to the broader trade-off that section offers.

Accepted Answer

Once a company validly opts for section 115BAA, MAT under section 115JB simply does not apply to it at all, meaning the company need not perform the separate book-profit-based MAT computation, or compare it against regular tax liability, in the way a company remaining under the ordinary regular regime must. This is a further, specific feature of the trade-off section 115BAA offers: in exchange for accepting a lower headline tax rate and forgoing specified exemptions and deductions, the company also gains the administrative and computational simplicity, and the certainty, of never being subject to a MAT floor at all, removing an entire layer of computation and potential minimum-tax exposure that companies remaining under the regular regime must continue to assess and compute every year.

Practice — Taxation of Companies and Alternative Tax Regimes

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