Does Section 115BAA Override Special Tax Rates?

The central issue before the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) in Maharishi Education Corporation (P.) Ltd. vs. ITO [ITA No. 2639/DEL/2025] was: 

Whether a company opting for the concessional tax regime under Section 115BAA is required to pay tax at 22% on its total income, including Long-Term Capital Gains (LTCG), or whether the special rate of 20% under Section 112 continues to apply on such capital gains. 

In simpler terms — does the concessional rate under Section 115BAA override all other special rate provisions, or does it apply only to regular income? 

Facts Relating to the Issue 

The assessee, Maharishi Education Corporation (P.) Ltd., a domestic company engaged in educational services, opted for the concessional tax regime under Section 115BAA for Assessment Year 2021–22. 

During the year, the company earned Long-Term Capital Gains (LTCG) on the sale of capital assets and claimed that such gains were taxable at 20% under Section 112. 

However, the Assessing Officer (AO) held that once the assessee opted for Section 115BAA, the entire total income, including LTCG, should be taxed at the flat rate of 22% as per the wording of Section 115BAA(1). 

The CIT(A) upheld this view, leading the assessee to appeal before the ITAT, Delhi Bench. 

Arguments of the Appellant (Assessee) 

The assessee submitted that: 

1. Section 115BAA was introduced to allow domestic companies a concessional rate of 22% on regular income in exchange for surrendering specified deductions and incentives. 

2. The section itself begins with a non-obstante clause, i.e., “Notwithstanding anything contained in this Act, but subject to the provisions of this Chapter”. 

3. The phrase “subject to the provisions of this Chapter” is crucial — it implies that while Section 115BAA overrides the general provisions of the Act, it remains subservient to other provisions within Chapter XII, which includes special rate sections such as Section 112 (capital gains), Section 115BBE, and Section 115BBH. 

4. Therefore, special incomes like LTCG, speculative income, or cryptocurrency gains continue to be taxed at their respective special rates, even if the assessee has opted for Section 115BAA. 

5. The legislative intent was never to substitute or override the special tax rates; instead, Section 115BAA was meant to simplify and reduce the tax burden on business income only. 

Arguments of the Respondent (Revenue) 

The Revenue contended that: 

1. Section 115BAA uses the phrase “income-tax payable in respect of the total income”, which includes all components of income, including LTCG. 

2. The provision provides for a composite rate of 22% on the entire total income, without carving out exceptions for any heads of income. 

3. The non-obstante clause gives Section 115BAA an overriding effect over all other provisions of the Act, and hence, the special rates prescribed under Sections 111A, 112, or 112A lose their relevance once an assessee opts for the 115BAA regime. 

4. Consequently, the AO rightly applied a uniform rate of 22% to the assessee’s total income. 

Decision of the Court 

The Delhi Bench of the ITAT upheld the Revenue’s view, ruling that: 

• Where a domestic company opts for taxation under Section 115BAA, the entire total income, including long-term capital gains, is taxable at the flat rate of 22%, as prescribed by the section. 

• The Tribunal held that the language of Section 115BAA is clear and unambiguous — the concessional rate applies “in respect of total income,” and there is no indication that special rate provisions continue to apply separately. 

Thus, the appeal of the assessee was dismissed. 

Reason for Such Decision 

The ITAT relied on a literal interpretation of Section 115BAA(1), emphasizing that the statute uses the expression “income-tax payable in respect of total income shall be computed at the rate of twenty-two percent” without exception. 

In the Tribunal’s view, since Section 115BAA begins with a non-obstante clause, it overrides all other provisions of the Act, and the phrase “subject to the provisions of this Chapter” merely limits the scope to sections within Chapter XII (i.e., Sections 110 to 115BAD). 

However, this reasoning arguably failed to appreciate that Sections 111A, 112, and 112A — all of which also fall within Chapter XII — are precisely the provisions the legislature intended to preserve through the “subject to” clause. 

The ITAT adopted a textual reading over a contextual one, leading to an interpretation that may not align with legislative intent. 

Case Laws Relied Upon 

The Tribunal primarily relied upon the plain language rule of statutory interpretation and general principles of Section 115BAA. 
However, no directly analogous precedents were cited in the order. 

For analytical context, the following judicial principles are relevant: 

• K.P. Varghese v. ITO [1981] 131 ITR 597 (SC) – A statute should be interpreted to give effect to the legislative intent, not merely the literal meaning. 

• CIT v. Vadilal Lallubhai [1972] 86 ITR 2 (SC) – Tax provisions with beneficial or concessional intent should be construed liberally, ensuring harmony between related sections. 

• Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) – The intention behind tax incentives and concessional regimes should be respected, and interpretation should not defeat policy objectives. 

Applicability of the Judgment 

The decision, though limited to one case, holds potentially wide ramifications: 

1. Distortion of Special Rate Structure – If the ruling stands, it could nullify special tax rates applicable to LTCG, dividends, or speculative income for companies under Section 115BAA, effectively taxing all such income at 22%. 

2. Policy Contradiction – It undermines the intent of the legislature that sought to make India’s corporate tax system globally competitive while preserving special rate regimes for specific income types. 

3. Administrative Consequences – The decision could open a floodgate of rectifications, reassessments, and litigation, as companies that opted for Section 115BAA may now face tax recomputation. 

4. Urgent Clarification Required – The CBDT must intervene to clarify that Section 115BAA applies subject to the other provisions of Chapter XII, and that special tax rates under Sections 111A, 112, and 112A remain applicable to companies opting for the concessional regime. 

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