Does Section 115BAA Override LTCG Rates? ITAT Ruling Explained

Does Section 115BAA Override LTCG Concessional Rate? A Critical Review of the Maharishi Education ITAT Ruling

The recent ITAT Delhi ruling in Maharishi Education Pvt. Ltd. has caused confusion by holding that long-term capital gains (LTCG) for companies under Section 115BAA are taxable at 22%, overriding the special concessional rates under Sections 112/112A. Traditionally, LTCG has always been taxed at special rates—12.5% for most gains—while Section 115BAA applies only to business income. The Tribunal relied on the literal “notwithstanding anything in this Act” language but overlooked the crucial “subject to the provisions of this Chapter” clause, which preserves Sections 112/112A. Legislative intent confirms that the concessional corporate regime does not alter capital gains rates. Practically, companies should continue computing LTCG under Sections 112/112A while applying 115BAA for business income, maintain detailed working papers, and defend the statutory position in scrutiny or appeals. The ruling appears per incuriam, inconsistent with the law and structural hierarchy, and is unlikely to survive appellate review.

A. Background

For years, there has been absolute clarity in the corporate tax ecosystem that long-term capital gains (LTCG) are taxable under their special provisions, primarily Section 112 / Section 112A, irrespective of the corporate tax regime opted. The concessional regimes — whether Section 115BA, 115BAB or 115BAA — merely determine the rate of tax on business income, not special category income such as capital gains, winnings, casual income, etc.

However, the recent ruling of the SMC Bench of ITAT Delhi in the case of Maharishi Education Corporation Pvt. Ltd. has created unprecedented uncertainty by holding that LTCG for companies opting for Section 115BAA is taxable at 22%, and not at 12.5% as per Sections 112 / 112A.

This has raised a fundamental question that Does Section 115BAA override the special rate provisions under Section 112?

B. Summary of the Tribunal Ruling

Before we dive into this, let’s first understand the facts and reasoning, in brief:

• The assessee, a domestic company, had opted for Section 115BAA (22%) concessional corporate tax regime.
• It also earned long-term capital gains.
• Assessee contended that LTCG must be taxed separately under Section 112.
• The Department argued that Section 115BAA applies to “total income” and therefore includes LTCG.
• The Tribunal agreed with the Department and held that Once a company opts for Section 115BAA, the entire total income (including LTCG)is taxable at 22% and accordingly, the lower rate under Section 112 is not available

The Tribunal therefore upheld the computation made by the AO and CIT(A).

C. Where the Interpretation Went Wrong?

The controversy stems from the literal reading of the opening words of Section 115BAA(1):

“Notwithstanding anything contained in this Act… the income-tax payable in respect of the total income… shall… be computed at the rate of twenty-two percent…”

However, the sentence does not end there — and that is where the entire ruling missed a crucial phrase:

“…but subject to the provisions of this Chapter …”

Section 115BAA forms part of Chapter XII — Determination of tax in certain special cases, which contains the following scheme:

Therefore, the “subject to” clause means that Section 115BAA cannot override other provisions within the same Chapter — including Section 112 and Section 112A. Therefore, the hierarchy is clear Special rate provisions prevail over concessional business regime. The Tribunal ruling overlooked this structural interpretation.

D. Legislative Intent

The purpose for which the Section 115BAA is introduced is to provide a concessional tax rate for business income. Further, there is no indication of legislative intent to disturb special tax rates.

If Parliament intended to tax LTCG at 22%, the amendment would have been:

• In Section 112 / 112A, or
• Through an Explanation to Section 115BAA, or
• Through a proviso overriding Chapter XII

None of these have occurred.

E. Implications if the Interpretation Is Not Corrected

If this ruling stands unchallenged:

This could:

• Distort the capital gains regime
• Create inconsistencies across concessional regimes
• Lead to arbitrary tax positions in scrutiny assessments
• Increase litigation and compliance burden for corporate taxpayers

F. What Should Companies Do Now? (Practical Action Points)

In light of the ITAT ruling in Maharishi Education Corporation Pvt. Ltd., corporate taxpayers opting for the concessional regime under Section 115BAA should consider the following step-by-step approach until there is legal clarity from a higher judicial forum:

a) No change in tax computation for now — continue applying Section 112 / 112A

There is no amendment in the law, and the Tribunal ruling does not have general precedential value across the country. The prevailing statutory framework still provides special rates on LTCG.
Therefore, companies should continue:

• Applying LTCG rate under Section 112/112A
• Computing business income separately under Section 115BAA @ 22%

There is no reason to voluntarily pay LTCG @ 22% in the absence of statutory change.

b) If your case is under scrutiny — highlight the “subject to” clause

Where scrutiny or reassessment proceedings are ongoing, the assessee should place emphasis on statutory hierarchy and specifically point out:

• Section 115BAA(1) begins with “notwithstanding anything contained in this Act”,
  BUT continues with “subject to the provisions of this Chapter”
• Sections 112 and 112Aare within the same Chapter (Chapter XII) and therefore prevail
• Concessional regime for business income cannot override special rate provisions

c) If a demand has already been raised / processing mismatch at CPC

Where CPC has processed the return by taxing LTCG @ 22%:

Recommended remedy sequence:

1. File Rectification u/s 154with detailed computation note

2. If rejected → Appeal to CIT(A)(raise structural / legislative intent arguments)

3. Mention that recovery should be stayed until final adjudication, citing:

• • Absence of statutory amendment
  • Legal principle that special provisions prevail over general provisions

d) Maintain supporting working papers now — they will matter later

All companies opting for 115BAA should:

• Keep a separate computation sheet for LTCG under Section 112/112A
• Maintain asset-wise LTCG workings
• Attach computation note and tax position while filing the return (highly recommended going forward)
• Ensure CARO / tax audit reporting clarity where applicable

This will be crucial if the matter escalates years later during reassessment or litigation.

e) At policy level — this ruling is unlikely to survive

While litigation cannot be predicted, the ruling appears:

• Contrary to statutory wording
• Contrary to Memorandum to Finance Act 2019
• Disruptive to structural consistency across 115BA / 115BAB / 115BAA regimes

Therefore, from a risk management perspective, taxpayers should continue to follow Sections 112 and 112A and defend the position wherever questioned, rather than voluntarily switching to 22%.

G. Conclusion

The ITAT’s ruling in Maharishi Education System v. ACIT reinforces a crucial principle: opting for concessional tax regime under Section 115BAA does not nullify the applicability of special concessional tax rates under Sections 111A, 112 and 112A. Section 115BAA provides for a reduced corporate tax rate but does not override the computation mechanism or rate applicability prescribed for specific income streams such as Short-Term and Long-Term Capital Gains. Therefore, capital gains continue to be taxed at their respective special rates even when a company opts for Section 115BAA.

Further, to avoid any confusion—this logic extends beyond companies. Whether an assessee is an Individual, HUF, AOP, BOI, or Co-operative Society, opting for a concessional tax regime (new regime) does not result in the loss of concessional tax rates for capital gains or other incomes taxable at special rates under the Act. Even where the regular slab/concessional tax structure shifts due to regime selection, special rate taxation remains fully intact and continues to operate independently.

Accordingly, businesses and taxpayers can confidently exercise the concessional regime under Section 115BAA (or similar new-regime provisions applicable to other assessees) without the fear of losing LTCG/STCG concessional benefits.

The Maharishi Education ruling appears to be per incuriam, as it fails to acknowledge:

• The statutory hierarchy created by the phrase “subject to the provisions of this Chapter”, and
• The structural relationship between Section 115BAA and Section 112 / 112A

Therefore, the ruling:

• Is unlikely to withstand appellate scrutiny
• Is against legislative intent
• Should not form the basis for reassessment or coercive recovery until clarified by a higher court

The concern, however, is that similar automated processing at CPC and subsequent confirmations by AO and CIT(A) could multiply disputes given the ruling. Corporate taxpayers opting for 115BAA should remain vigilant and maintain robust documentation on computation of tax on LTCG under Section 112 / 112A.

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In case you have any questions / query, you can email me at sharshil323@gmail.com.