Taxation of Companies – Section 79 and MAT Provisions

The taxation of companies under the Income-tax Act, 1961, involves detailed rules for computing taxable income, carrying forward and setting off losses, and applying Minimum Alternate Tax (MAT). Section 79 lays down specific conditions for closely held companies regarding the carry forward of losses, while Section 115JB ensures that companies with substantial book profits pay a minimum level of tax.

Table of Contents

1. Carry Forward and Set-off of Losses in the Cases of Certain Companies [Sec. 79]
2. Taxable Income – How Computed
3. Tax Liability – How Computed
4. Minimum Alternate Tax [Sec. 115JB]

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1. Carry Forward and Set-off of Losses in the Cases of Certain Companies [Sec. 79]

Section 79 is applicable if a closely held company (i.e., a company in which the public are not substantially interested) wants to carry forward and set off of losses. Restrictions provided by section 79 may be grouped under the following categories:

1. Category 1 – Normal provisions
2. Category 2 – Special provisions

These provisions are applicable as follows:

• Closely held companies (but other than an eligible start-up covered by section 80-IAC) – Normal provisions are applicable
• An eligible start-up covered by section 80-IAC – Normal provisions or special provisions, at the option of taxpayer

1.1 Normal Provisions

Normal provisions are applicable if the following conditions are satisfied –

1. Condition 1 – The taxpayer is a company in which the public are not substantially interested.
2. Condition 2 – The persons beneficially holding 51 per cent of the voting power on the following two dates are different:

• • on the last day of the previous year in which the loss was incurred;
  • on the last day of the previous year in which the company wants to set off the brought forward loss.

If the above two conditions are satisfied, brought forward loss cannot be set off.

1.2 Special Provisions

Special provisions are applicable if the following conditions are satisfied:

1. The assessee is a company in which public are not substantially interested.
2. It is an eligible start-up as referred to section 80-IAC.
3. Loss is incurred by the assessee-company during the period of 10 years (beginning from the year in which the company is incorporated).

If the above conditions are satisfied, brought forward loss can be set off against current year’s income only if all the shareholders of the company (who held shares carrying voting power) on the last day of the previous year in which the loss was incurred continue to hold shares on the last day of the current year.

1.3 Exceptions

Normal provisions or special provisions are not applicable in the following cases:

• Change in Voting Power Because of Death or Gift – Where a change in voting power takes place in a previous year consequent upon the death of a shareholder or on account of transfer of shares by way of gift to any relative of the shareholder making the gift, the aforesaid restriction contained under section 79 will not apply.
• Unabsorbed Depreciation – Provisions of section 79 are applicable only in the case of carry forward of losses. As carry forward of unabsorbed depreciation allowance, capital expenditure on scientific research or family planning stands on altogether different footings, their carry forward and set off are not governed by section 79—CIT v. Concord Industries Ltd. [1979] 119 ITR 458 (Mad.), CIT v. Shri Subhulaxmi Mills Ltd. [2001] 119 Taxman 281 (SC).
• Amalgamation/Merger of Foreign Holding Company – If the following conditions are satisfied, provisions of section 79 are not applicable:

1. 1. Condition 1 – The taxpayer (i.e., the company in which loss is incurred) is an Indian company in which public are not substantially interested.
   2. Condition 2 – It is subsidiary of a foreign company.
   3. Condition 3 – The foreign company is amalgamated/demerged with another foreign company.
   4. Condition 4 – Persons holding 51 per cent or more shares in the amalgamating/demerged foreign company become shareholders in the amalgamated/resulting foreign company.

If all the conditions are satisfied, the provisions of section 79 shall be ignored and brought forward loss can be set off and carry forward.

• Company Seeking Insolvency Resolution under Insolvency and Bankruptcy Code – The above provisions of section 79 are not applicable to a company where a change in the shareholding takes place in a previous year pursuant to approved resolution plan under the Insolvency and Bankruptcy Code, 2016, after affording a reasonable opportunity of being heard to the jurisdictional Principal CIT/CIT.
• Distressed Companies – The provisions of section 79 are not applicable to such companies, and their subsidiary and the subsidiary of such subsidiary, where:

1. 1. The National Company Law Tribunal (NCLT) on a petition moved by the Central Government under section 241 of the Companies Act has suspended the Board of Directors of such company and has appointed new directors, who are nominated by the Central Government, under section 242 of the Companies Act; and
   2. A change in shareholding of such company, and its subsidiaries and the subsidiary of such subsidiary, has taken place in a previous year pursuant to a resolution plan approved by NCLT under section 242 of the Companies Act, after affording a reasonable opportunity of being heard to the jurisdictional PCIT/CIT.

• Transfer in a Relocation of Capital Asset by Original Fund to Resulting Fund – The provisions of section 79 are not applicable to a case to the extent that a change in the shareholding takes place during the previous year on account of relocation referred to in section 47(viiac)/(viiad).
• Erstwhile Public Sector Company – The provisions of section 79 are not applicable in the case of an erstwhile public sector company subject to the condition that the ultimate holding company of such erstwhile public sector company, immediately after the completion of strategic disinvestment, continues to hold, directly (or through its subsidiary or subsidiaries) at least 51 per cent of the voting power of the erstwhile public sector company in aggregate. If, however, any of the conditions is not complied with in any subsequent year after the completion of strategic disinvestment, the provisions of section 79(1) shall apply for such previous year and subsequent previous years.
• Erstwhile Public Sector Company – It means a company which was a public sector company in earlier previous years and ceases to be a public sector company by way of strategic disinvestment by the Government.
• Strategic Disinvestment – Strategic disinvestment shall mean sale of shareholding by the Central Government or any State Government in a public sector company which results in reduction of its shareholding to below 51 per cent, along with transfer of control to the buyer.

1.4 Case Studies

1. X and Y are two shareholders of Z Ltd., a closely held company. X holds 55 per cent share capital. On January 30, 2025, X transfers his shares to A. Z Ltd. wants to set off brought for­ward loss of Rs. 4,00,000 (business loss – Rs. 1,00,000; unad­justed depreciation – Rs. 3,00,000) of the previous year 2023-24 against the income of the previous year 2024-25 (i.e., Rs. 9 lakh). Can it do so?

Z Ltd. is a company in which the public are not substantially interested and in which shareholders having 51 per cent voting right on March 31, 2024 and March 31, 2025 are not the same. Consequently, section 79 is applicable. Unadjusted depreciation can be set off but not brought forward loss. Income of the previ­ous year 2024-25 will be Rs. 6 lakh (i.e., Rs. 9 lakh—Rs. 3 lakh).

2. XYZ (P.) Ltd. is a company which was started on April 1, 1999 and in which there are only equity shares. The shares are held throughout by X, Y and Z equally. The company has made losses/profits in the past as under and the same have been accepted in the income-tax assessments:

Assessment Year	Business Loss	Unabsorbed Depreciation	Total
	Rs.	Rs.	Rs.
2021-22	Nil	30,00,000	30,00,000
2022-23	Nil	18,00,000	18,00,000
2023-24	9,50,000	8,70,000	18,20,000
Total	9,50,000	56,70,000	66,20,000

During the previous year ending March 31, 2024, X transferred his shares to P and during the previous year ended March 31, 2025, Y transferred his shares to Q. During the previous year ended March 31, 2024, the company made a profit of Rs. 12,00,000 (before debiting Rs. 6,00,000 for depreciation) and during the previous year ended March 31, 2025, the company made a profit of Rs. 80,00,000 (before debiting Rs. 5,00,000 for depreciation).

Compute the taxable income of the company for the assessment year 2025-26. Workings should form part of your answer.

X, Y and Z are three shareholders in XYZ (P.) Ltd. The sharehold­ing pattern of the company on March 31, 2023, March 31, 2024 and March 31, 2025 are as follows:

	X	Y	Z	P	Q
March 31, 2023	33.33%	33.33%	33.33%	—	—
March 31, 2024	—	33.33%	33.33%	33.33%	—
March 31, 2025	—	—	33.33%	33.33%	33.33%

As is evident from the data given above, shareholders having at least 51% of voting power on March 31, 2023 and March 31, 2024 are the same. Consequently, the restriction imposed by section 79 is not applicable. Income for the assessment year 2024-25 will be deter­mined as under:

	Rs.
Business Profit	12,00,000
Less – Current Depreciation	6,00,000
Balance	6,00,000
Less – Brought forward business loss of the assessment year 2023-24	6,00,000
Net Income	Nil

The assessee can carry forward the unabsorbed depreciation (i.e., Rs. 56,70,000) and business loss of Rs. 3,50,000 of earlier years.

Shareholders holding 51 per cent of the voting right on March 31, 2023 and March 31, 2025 are not the same. Consequently, the restriction imposed by section 79 is applicable and business loss of the assessment year 2023-24 cannot be set off against profit of the assessment year 2025-26. However, in the given problem unabsorbed depreciation of Rs. 56,70,000 pertaining to the as­sessment year 2023-24 and earlier years can be set off against the income of the assessment year 2025-26, as section 79 is not applicable in the case of carry forward of unabsorbed deprecia­tion. Consequently, income of the assessment year 2025-26 will be determined as under:

	Rs.
Business Profit	80,00,000
Less – Current Depreciation	5,00,000
	75,00,000
Less – Unabsorbed depreciation	56,70,000
Net Income	18,30,000

Note – The unadjusted business loss of Rs. 3,50,000 cannot be set off against the above income, as the section 79 provisions are applicable.

3. Suppose in problem 2, Y and Q are relatives and shares are transferred by Y to Q by way of gift during the previous year ending March 31, 2025.

Section 79 is not applicable if shareholding changes due to death of a shareholder or gift of shares to a relative. Consequently, brought forward business loss of Rs. 3,50,000 can be set off against the income of Rs. 18,30,000 [net income of the assessment year 2025-26 – Rs. 14,80,000 (i.e., Rs. 18,30,000—Rs. 3,50,000)].

2. Taxable Income – How Computed

It is determined as follows:

• First ascertain income under the different heads of income.
• Income of other persons may be included in the income of the company under sections 60 and 61.
• Current and brought forward losses should be adjusted accord­ing to the provisions of sections 70 to 80. Provisions of section 79 regarding set off and carry forward of losses of closely held companies are given in para 1.
• The total of income computed under different heads is gross total income.
• From the gross total income so computed, the following deduc­tions are permissible under sections 80C to 80U:

Section	Nature of Deduction
80G	Donations to charitable institutions and funds
80GGA	Donations for scientific research or rural development
80GGB	Contribution to political parties
80-IA	Profits and gains from industrial undertakings engaged in infrastructure, etc.
80-IAB	Profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone
80-IAC	Profits and gains derived from eligible start-up
80-IB	Profits and gains from certain industrial undertakings other than infrastructure development undertakings
80-IBA	Profits and gains from housing projects
80-IC	Profits and gains of certain undertakings in certain States
80-IE	Profits of hotels and convention centres
80-IAB	Profits of undertakings in North Eastern States
80JJA	Profits from the business of collecting and processing of biodegradable waste
80JJAA	Employment of new employees
80LA	Income of Offshore Banking Units

The resulting sum is net income.

3. Tax Liability – How Computed

Tax liability of a company is calculated as follows:

Computation 1 – Under Normal Provisions	Computation 2 – Under Minimum Alternative Tax
Step 1 – Find out taxable income under normal Provisions	Step 8 – Find out book profit
Step 2 – Find out income tax at the rate of 30 per cent (35 per cent in the case of a foreign company) of income computed under (1) supra. There is no exemption limit	Step 9 – Find out 15 per cent2 2 of book profit
Step 3 – Add – Surcharge1	Step 10 – Add – Surcharge1
Step 4 – Find out (2) + (3)	Step 11 – Find out (9) + (10)
Step 5 – Add HEC at the rate of 4 per cent of (4)	Step 12 – Add HEC at the rate of 4 per cent of (11)
Step 6 – Deduct tax rebate or tax credit under sections 86, 90, 90A and 91	Step 13 – Find out (11) + (12)
Step 7 – Find  out  (4) + (5) — (6) [it cannot be less than  zero]

Tax liability of a company is (7) or (13), whichever is more.

3.1 Income Taxable at Special Rate

There are a few cases where income is taxable at special rates given under different provisions of the Act. For instance, long-term capital gains are taxable at the rate of 12.5 per cent by virtue of section 112. Short-term capital gains (if securities transaction tax is applicable) is taxable at the rate of 20 per cent under section 111A. Royalty income in certain cases is taxable in the hands of a foreign company at the rate of 10 per cent.

4. Minimum Alternate Tax [Sec. 115JB]

These provisions are as follows:

• Find out the normal tax liability ignoring provisions of minimum alternate tax [i.e., Step 7 in the table given under para 3].
• Find out book profit [see para 4.2].
• Find out minimum alternate tax [i.e., Step 13 in the table given under para 3].
• If tax computed at the Step 7 is more than (or equal to) tax computed at Step 13, the provisions of minimum alternate tax are not applicable.

4.1 When Applicable

If tax computed at the Step 7 is less than tax computed at Step 13, the provisions of minimum alternate tax are applica­ble as follows:

1. It will be assumed that “book profit” of the company is taxa­ble income.
2. 15 per cent³ of book profit [+ SC + HEC] is tax liability of the company [i.e., Step 13 in the table given under para 3].
3. Tax computed at Step 13 is the minimum alternate tax which the company is liable to pay.
4. The extra tax which the company has to pay because of minimum alternate tax [i.e., Step 13 minus Step 7] will be available for “tax credit” under section 115JAA. Tax credit (i.e., Step 13 minus Step 7) can be set off against future tax liability of the company subject to a few conditions.

However, the tax credit is available only in that year in which tax computed at Step 7 is more than tax computed at Step 13.

Exceptions – The provisions of minimum alternate tax are not applicable in the following cases:

Nature of Income	Time Frame When MAT Provisions are Not Applicable
Income from any business/services in the hands of entrepreneur/developer in a special economic zone	Income arising after March 31, 2005 but before April 1, 2011
Income of a shipping company which is subject to the provisions of “tonnage income” of year 2005-06 onwards)Chapter XII-G (i.e., sections 115V to 115VZC)	Income arising after March 31, 2004 (i.e., assessment year 2005-06 onwards)
Income which accrues and arises to a company from life insurance business referred to in section 115B	Income arising after March 31, 2000 (i.e., assessment year 2001-02 onwards)
In the case of a foreign company where its total income comprises solely of profits and gains referred to in sections 44B, 44BB, 44BBA and 44BBB	Income arising after March 31, 2000 (i.e., assessment year 2001-02 onwards)
A domestic company which has opted for the new tax regime under section 115BAA/115BAB	Income arising on or after April 1, 2019 (i.e., assessment year 2020-21 onwards)

Foreign Company – The provisions of minimum alternate tax are not applicable to a foreign company in the following two cases:

1. The assessee is a resident of a country/specified territory with which India has an agreement under section 90/90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement;
2. The assessee is a resident of a country with which India does not have an agreement referred to above and the assessee is not required to seek registration under any law for the time being in force relating to companies.

4.2 Book Profit – How to Determine [Sec. 115JB]

Net profit as per statement of profit and loss (after a few adjustments) is book profit. For this purpose, statement of profit and loss shall be prepared within the parameters of Schedule III to the Companies Act, 2013. However, in the case of an insurance company/banking company/company engaged in the generation or supply of electricity/any other class of company (for which a form of financial statement has been specified in or under the Act governing such class of company), statement of profit and loss shall be prepared in accordance with the provisions governing such company. For computation of book profit, one may proceed as follows:

Step 1 – Find out net profit [before other comprehensive income (OCI)] as per the statement of profit and loss of the company [see para 4.2.1].

Step 2 – Make adjustments which are given under Explanation 1 to section 115JB(2).

Step 3 – Make specific adjustments in the case of demerger as given by new sub-section (2B) to section 115JB.

Step 4 – Make further adjustments pertaining to OCI items that will be permanently recorded in reserves (i.e., never to be reclassified to the statement of profit and loss).

4.2.1 Assessing Officer’s Power to Alter Net Profit

Only in the following two cases, the Assessing Officer can rewrite the statement of profit and loss:

• If Statement of Profit and Loss Is Not Prepared According to the Companies Act – If it is discovered that the statement of profit and loss is not drawn up in accordance with the provisions of the Companies Act, the Assessing Officer can recalculate the net profit. If there is no allegation of fraud or misrepresentation but only a difference of opinion as to the question whether a particular amount should be properly shown in the statement of profit and loss or in the balance sheet, the provisions of section 115JB do not empower the Assessing Officer to disturb the profit as shown by the assessee.
• If Accounting Policies, Accounting Standards, or Rates or Method of Depreciation Are Different – The accounting policies, the accounting stand­ards adopted for preparing such accounts, the method and rates of depreciation which have been adopted for preparation of the statement of profit and loss laid before the annual general meeting, should be followed while preparing statement of profit and loss for the purpose of computing book profit under section 115JB.

Some companies follow an accounting year under the Companies Act which is different from financial year (i.e., previous year ending March 31) under the Income Tax Act. These companies generally prepare two sets of accounts—one for the Companies Act and another for the Income Tax Act. Different accounting poli­cies/standards, and method or rate of depreciation are adopted in two sets of account so that higher profits is reported to share­holders and lower profit is disclosed to tax authorities.

To curb the aforesaid practice, it has been provided that accounting poli­cies, accounting standards, depreciation method and rates of depreciation for two sets of account shall be the same. In case it is not so, the Assessing Officer can recalculate net profit after adopting the same accounting policies, accounting standards and depreciation method and rates which have been adopted for reporting profit to shareholders.

4.2.2 Adjustments to Net Profit to Convert it into Book Profit

Net profit as shown in statement of profit and loss shall be adjusted as follows:

Barring the adjustment given below, no other adjust­ment is permitted by law. None of the adjustment given below provides for the increase or decrease of the book profits by extraordinary items—Gulf Oil Corpn. Ltd. v. CIT [2008] 111 ITD 124 (Hyd.).

Likewise, none of the adjustments given below provides for adjust­ment in respect of expenses on prior period/extraordinary items, which are business expenditure, but have been shown separately in statement of profit and loss due to specific requirement of Accounting Standards prescribed by the Institute of Chartered Accountants of India—CIT v. Khaitan Chemicals & Fertilizers Ltd. [2008] 175 Taxman 195 (Delhi).

Positive Adjustments – Net profit as shown in statement of profit and loss (prepared in accordance with the provisions of the Companies Act) is to be increased by the following amounts if debited to the statement of profit and loss:

Amount to be Added Back if Debited to Statement of Profit and Loss	Comments
1. Income tax paid or payable and the provisions therefor	Income tax,  interest under the  Income Tax  Act, dividend tax under section 115-O, distribution tax under section 115R including surcharge, education cess, secondary and higher education cess and health and education cess if debited to statement of profit and loss shall be added back. No adjustment is required in respect of the following taxes (including interest, penalty, fine, surcharge, education cess, etc.)—Securities transaction tax, banking cash transac­tion tax, wealth-tax, gift-tax, fringe benefit tax, indirect taxes. Moreover, no adjustment is required in respect of penalty/fine under the Income Tax Act.
10. Income exempt from tax	No adjustment is required in respect of reserve created under sec­tion 35AC.
3. Amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities
4. Amount by way of provision for losses of subsidiary companies
5. Amount or amounts of dividends paid or proposed
6. Amount of expenditure relatable certain incomes (if such income is not subject to minimum alternate tax)	Expenses pertaining to income given under point 10 below,  if debited to statement of profit and loss, shall be added back.
7. The amount of depreciation
8. Amount of deferred tax and the provisions therefor and the amount set aside as provision for diminution in the value of any asset
8A. Amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset
8B. Amount of income/loss in the case of units referred to in section 47(xvii)

Negative Adjustments – Net profit as shown in the statement of profit and loss is to be reduced by the following amounts:

Amount to be Deducted from Net Profit	Comments
9. Amount withdrawn from reserves or provisions, if any such amount is credited to the statement of profit and loss	See para 4.2.2a
10. Income exempt from tax	The following income, if credited to statement of profit and loss, shall be deducted: long-term capital gain exempt under section 10(38) for the assessment years 2005-06 and 2006-07; income exempt under section 10(23G) up to the assess­ment year 2004-05; income exempt under other clauses of section 10; income exempt under sections 10A and 10B up to the assessment year 2007-08; income exempt under sections 11 and 12; share of profit from an AOP on which no income tax is payable in accordance with the provisions of section 86; (in the case of a foreign company) interest, royalty or dividend or technical fees chargeable to tax under sections 115A to 115BBE, or capital gain arising on transactions in securities, if income-tax payable in respect of these incomes under normal provisions (other than provisions governing MAT) is less than the rate of MAT; and royalty in respect of patent chargeable to tax under section 115BBF. The above incomes are not subject to minimum alternate tax. Moreover, there is no minimum alternate tax (a) in respect of income arising after March 31, 2005 but before April 1, 2011 from special economic zone to a developer or entrepreneur, (b) income of shipping companies subject to the provisions of “tonnage income” and (c) income from life insurance business of a company (arising after March 31, 2000).
11. Depreciation (other than because of revaluation of assets) debited to statement of profit and loss
12. Amount withdrawn from revaluation reserve credited to statement of profit and loss to the extent it does not exceed the amount of depreciation on account of revaluation of assets.
12A. Aggregate amount of unabsorbed depreciation and loss brought forward if corporate insolvency resolution process has been started
13. Amount of loss brought forward or unabsorbed depreciation, whichever is less, as per books of account	See para 4.2.2b.
14. Profit of sick industrial unit
15.The amount of deferred tax, if any such amount is credited to the statement of profit and loss.
15A. Amount of income/loss in the case of units referred to in section 47(xvii)

Note – Section 115JB(2D) provides that where in the case of the company there is an increase in book profit of the previous year due to income of past year (or years) included in the book profit on account of an advance pricing agreement [sec. 92CC] or on account of secondary adjustment [sec. 92CE], the Assessing Officer shall, on an application made by the assessee, recompute the book profit of the past year (or years) and tax payable, if any, by the assessee during the previous year under section 115JB(1), in manner prescribed by rule 10RB. The time limit under section 154 of 4 years shall be reckoned from the end of the financial year in which the said application is received by the Assessing Officer. However, benefit of this provision shall apply only if the assessee has not utilised MAT credit in any subsequent assessment year under section 115JAA.

4.2.2a Reserves Credited to Statement of Profit and Loss

The amount withdrawn from reserves and credited to statement of profit and loss shall be reduced as follows:

• The amount withdrawn from any reserve created before April 1, 1997 otherwise than by way of a debit to the statement of profit and loss, shall not be reduced from the book profits; and
• The amount withdrawn from any reserves or provisions created on or after April 1, 1997, which are credited to the statement of profit and loss, shall not be reduced from the book profits, unless the book profits were increased by the amount transferred to such reserves or provisions in the year of crea­tion of such reserves (out of which the said amount was with­drawn).

4.2.2b Brought for Ward Loss/Depreciation

Section 115JB provides that in computing book profit, the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account, shall be reduced from net profit.

• Adjustment Only When There Is Unadjusted “Loss” Before Depreciation as Well as Unabsorbed Depreciation Pertaining to Earlier Years – For this purpose, “loss” does not include depreciation and, therefore, in a case where an assessee has shown profit in a year, but after adjustment of depreciation, it results in loss, no adjustment in book profit is allowed. In other words, where a company does not have both brought forward losses (before depreciation) and unabsorbed depreciation but has only one of them, nothing is deductible, since one of the two figures is nil. Loss (before depreciation) as per the books of account of the assessee, has to be considered, irrespective of the fact whether the same is allowable (or not) under section 79.

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1. Surcharge is as follows:

	Net Income Range	Assessment Years 2025-26 and 2026-27
Domestic Company	0 – Rs. 1 crore Rs. 1 crore – Rs. 10 crore Above Rs. 10 crore	NIL 7% 12%
Foreign Company	0 – Rs. 1 crore Rs. 1 crore – Rs. 10 crore Above Rs. 10 crore	Nil 2% 5%

2. 9 per cent, if the assessee is a unit located in an International Financial Services Centre and derives its income solely in convertible foreign exchange.

3. 9 per cent, if the assessee is a unit located in an International Financial Services Centre and derives its income solely in convertible foreign exchange.