M&A Tax: Viewpoints: Delhi ITAT decision raises concerns for domestic companies claiming Section 115BAA’s concessional tax rate

Delhi ITAT decision raises concerns for domestic companies claiming Section 115BAA’s concessional tax rate

In a decision¹ that is likely to give investment holding companies, family offices, and corporate finance or treasury teams cause for concern, a Delhi bench of the Income Tax Appellate Tribunal (“Tribunal”) has held that a company electing to be taxed at the concessional 22% rate under Section 115BAA of the Income Tax Act, 1961 (“ITA”) must also apply that rate to its long-term capital gains, instead of availing the more beneficial rates prescribed under Section 112.

Section 115BAA was enacted under Chapter XII of the ITA in 2019 to simplify India’s corporate tax regime and incentivise investment in the economy by providing an optional concessional tax regime for domestic companies. From assessment year 2020-21 onwards, a company can elect to be taxed at 22% (plus applicable surcharge and cess) but, to do so, must compute its total income without claiming certain specified deductions and without setting off or carrying forward losses related to those deductions.

Once an election is made it may not be revoked,² though it may be invalidated if the company fails to compute its total income in the manner described above.³ In such cases the company will be taxed under the regular provisions of the ITA as if the election had never been made.

Vitally, Section 115BAA is explicitly meant to be subject to the provisions of the rest of Chapter XII of the ITA.⁴ Chapter XII, titled “Determination of tax in certain special cases” contains special provisions for the computation of tax in particular cases, laying down distinct tax rates or rules that override the general provisions of the ITA. Key among these is section 112, which prescribes beneficial tax rates for gains arising on the sale of long-term capital assets.⁵

In the case before the tribunal, the taxpayer, who had elected into Section 115BAA’s concessional regime, sought to apply Section 112’s beneficial 20% rate to long-term capital gains arising on the sale of land. In a brief decision, the tribunal found that the taxpayer was ineligible to claim the 20% rate because it had elected into Section 115BAA. It held that the gain would be taxable at Section 115BAA’s 22% rate.

This ruling is likely to unsettle companies that have elected into Section 115BAA’s concessional regime but also hold significant investments in securities or immovable property. Many taxpayers likely elected for the Section 115BAA regime under the impression that their long-term capital gains would continue to benefit from Section 112’s concessional rates. With the reduction in the long-term capital gains tax rate to 12.5%, the difference between being taxed at 12.5% and 22% is material.

The ruling appears to be based on a misreading of Section 115BAA and how it is intended to interact with the rest of Chapter XII, particularly Section 112. On the face of it, neither party appears to have drawn the Tribunal’s attention to, nor the Tribunal appeared to have considered, the express language of Section 115BAA which makes it subject to the other provisions of Chapter XII, including Section 112. It seems unlikely that the Tribunal would have reached the same conclusion had it considered that language and the structural relationship between these provisions. It is difficult to see how the taxpayer fails to succeed on appeal, but whether the taxpayer will appeal remains to be seen. In any event, this ruling may be best viewed as per incuriam.

Readers seeking to understand how this ruling may affect their business or investment structures may reach out to the authors.

Authors

Tax Team

You can direct your queries or comments to the relevant member.

¹Maharishi Education v Income Tax Officer, ITA No.2639/Del/2025

²Second proviso to Section 115BAA(5)

³First proviso to Section 115BAA(1)

⁴Except for Section 115BA, which offers a concessional corporate tax rate of 25% to certain domestic manufacturing companies incorporated on or before 1 March 2016, and Section 115BAB, which provides an even lower tax rate of 15% for new domestic manufacturing companies incorporated on or after 1 October 2019.

⁵ Earlier, the applicable rates varied depending on the type of asset and whether the seller was a resident or non-resident, but a uniform 12.5% tax rate was enacted by the Finance Act, 2025 for gains arising on transfers undertaken on or after 23 July 2024.

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