CBDT issues clarifications regarding unabsorbed depreciation and unutilised MAT credit for companies opting for concessional tax rates


The Government of India recently announced significant reduction in corporate tax rates through The Taxation Laws (Amendment) Ordinance, 2019 (‘Ordinance’). The Ordinance provides for a reduced tax rate of 22% for existing domestic companies and 15% for newly set up manufacturing companies. The taxpayer has the option to opt for lower tax rate or to continue under the existing tax regime and avail existing deductions and set-off of losses.

The Ordinance also provides that Minimum Alternate Tax (MAT) shall not apply to any taxpayer opting to be governed by these lower tax rates. One of the conditions for availing the lower tax rates is that the taxpayer shall not be eligible to set-off brought forward tax losses against its taxable income.

The drafting of the Ordinance left open certain key questions. The CBDT through Circular No. 29/2019 dated 2 October 2019, has sought to clarify the following two questions:

  • Whether taxpayers will be eligible to set-off unabsorbed depreciation against taxable income of FY 2019-20 and subsequent years?
  • What will be the position of unutilised MAT credit since the provisions of MAT no longer apply to taxpayers opting for concessional tax rates


Clarification 1:

A company opting for the lower tax rates shall not be eligible to set-off any brought forward business loss on account of additional depreciation

Key Takeaway:

The Clarification provided by the CBDT, with due respect, appears misplaced. Denial of benefit of unabsorbed depreciation will require an amendment in section 32(2) which can be carried out only by approval from the Parliament of India or a Presidential Ordinance and not by the CBDT through issuance of Circular. Therefore, to that extent, the Circular No. 29/2019 may be considered as ultra-vires the powers of CBDT and may not survive judicial review. Please refer the subsequent paragraphs for a discussion on this aspect.

It is pertinent to note that the restriction is only on set-off of unabsorbed additional depreciation. The set-off of normal depreciation should continue unabated

Be that as it may, taxpayers opting to be governed by the Circular will have to carry out active number- crunching to determine the component of unabsorbed additional depreciation comprised in brought forward depreciation

Our reasoning:

  1. The restrictions provided under the newly inserted section 115BAA(2) has three clauses, as under:
  • Clause (i) prohibits claiming specified deductions, including additional
  • Clause (ii) prohibits set-off of brought forward tax losses relating to deductions under Clause (i)
  • Clause (iii) provides for claim of current year depreciation in such manner as may be prescribed

It is a settled position under the Income Tax Act, 1961 (Act) that depreciation is an allowance and not a deduction. Therefore, the restriction under Clause (ii) dealing with losses relating to deductions referred in Clause (i) should not cover additional depreciation.


  1. Under section 32(2) of the Act, unabsorbed depreciation is treated as depreciation of the current year and can be carried forward indefinitely to be set-off against taxable income of future years. As such, when the taxpayer off-sets unabsorbed depreciation, technically, the taxpayer claims off-set of the current year depreciation and not of a brought forward loss. Therefore, any restrictions on brought forward losses should not apply to brought forward depreciation


  1. It is also an established position that unabsorbed tax losses are different than unabsorbed A case in point is the provisions of section 79 of the Act which deny benefit of brought forward losses to closely held companies in cases of change in control. Courts have held that section 79 would not apply to brought forward unabsorbed depreciation as depreciation is not a loss.
  2. The CBDT can issue Circulars only for administrative and procedural guidance. A Circular cannot amend or restrict the operation of the law. It is pertinent to note that the clarification is provided by the CBDT by way of a Circular and has not been announced through a Supplementary Ordinance.


Clarification 2:

A company opting for the lower tax rates shall not be eligible to set-off unutilised MAT credit

Key Takeaway:

Since the provisions of MAT do not apply to taxpayers opting for the lower tax rates, any unutilised MAT credit available with these companies up to 31st March 2019 shall lapse. This could require writing-off of unutilised MAT credit as an expense to the Profit and Loss Account, impacting the Profit after Tax.

This provision, in effect, will make the MAT paid in earlier years a final tax payment. However, since an option has been provided to the taxpayer of not opting for the concessional tax rate and utilise the MAT credit, a constitutional challenge to this clarification may not survive


The changes made by the Ordinance and this recent clarification present a strong case for the taxpayers and tax advisors to sit together for carrying out a tax review of existing business operations to ascertain whether any tax optimisation avenues exist and what would be the opportune time for the taxpayer to opt for the lower headline tax rate of 22%

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Information to Include in Director’s Report

The following information must be mandatorily disclosed in the Director’s Report filed by the Board of Directors:

1 Dividend, if declared & amount, if any, carried forwarded to reserves
2 Details of ESOPs:

a. Options granted

b. Options vested

c. Options exercised, and

d. Total number of Options in force, if any

3 Information about the financial performance / financial position and details of the subsidiaries / associates/ JV
4 Details of loans, investments and guarantees by the company
5 Details relating to deposits, covering the following:

Accepted during the year;
Remained unpaid or unclaimed as at the end of the year;
Whether there has been any default in repayment of deposits or payment of interest thereon during the year and if so, number of such cases and the total amount involved (i) at the beginning of the year (ii) maximum during the year and (iii) at the end of the year.
Details of deposits which are not in compliance with the requirements of Chapter V of the Act

6 Website address
7 Disclosures under the Sexual Harassment of Women at Workplace (Prevention, Prohibition & Redressal) Act, 2013
8 Borrowing by the company
9 Details of rent paid
10 Electricity expenses
11 Director remuneration (for each director)
12 Details of transfer of shares during the financia year
13 Break up of related party transaction (1. Name of related party and nature of relationship and 2. Duration of the agreement)



The Code on Occupational Safety, Health and Working Conditions, 2019 (“OSHW”), introduced by the Ministry of Labour and Employment introduces provisions allowing companies to have a single registration, which will be coupled with a single licence, along with a single return, for executing projects for five years involving contract workers, across the country.

An establishment will require a single registration instead of around 10 required to be done for all labour laws, a move that may help India bolster its “ease of doing business” ranking. Significantly, the Code on OSHW will cover all establishments hiring at least 10 workers, including those in services sector, thereby bringing the information technology sector within its ambit.

Employers will have to create a security deposit with the government at the time of obtaining such licence and specify the number of contract workers it might require. In case an employer wants to hire more contract workers, it will have to go back to the government to renew the licence and make an additional deposit.

In a further bid to improve ease of doing business, the Centre has proposed assigning “inspector-cum-facilitators” outside their jurisdiction “through randomised computer system”.

The provision of one licence and one return in place of multiple licences and returns in existing 13 labour laws subsumed in this Code is intended to save time, resources and efforts of businesses.

Mandatory POSH filing under Prevention of Sexual Harassment Act

Constitution of your Internal Committee, POSH ACT
The Government of Maharashtra has issued a letter requiring employers of workplaces in the District of Mumbai City employing 10 or more employees to report details of constitution of their Internal Committee (IC) under Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.
The Form on Page 3 of the letter needs to be filled in and mailed by July 20, 2019, failing which a penalty of INR 50,000 will apply.
The Form and its attachments have to be sent to the address below:
1. District Collector or Deputy District Collector, Office of District collector, Old Customs House, Shahid Bhagat Singh Rd, Marg, Fort, Mumbai, Maharashtra 400001.
2. Copy to- (a)Deputy Commissioner(Women Development), Department of Development of Women and Child, Pune.
(b) Departmental Deputy Commissioner, Department of Women and Child, Konkan Division, Mumbai.
To know more contact us at [email protected]

Important Deadline — Form filing for loans and deposits — June 30

If your company has taken loans or deposits, this form filing requirement applies to you!

Every company having outstanding money/loan received shareholders or directors or any other person has to file Form DPT-3 by June 30, 2019 with respect to deposits/exempted deposits accepted by the Company and the amount of loan/money outstanding as on March 31, 2019.

In case, no amount/loan has been received by the Company which can be considered a deposit or exempted deposit, the filing of form DPT-3 with ROC is not applicable.

Also, in case there are deposits accepted by the Company, you also require a certificate from the statutory auditor certifying the details of the same.

In case of default in filing of form, the Company shall be liable to pay a penalty of Rs. 5,000 and Rs. 500 per day in case of a continuing default. If the Company is non-compliant then it shall be chargeable with fine of Rs. 1 Crore to Rs. 10 Crore. Every officer who is in default shall be chargeable with fine of Rs. 25,000 to Rs. 2 Crore and imprisonment up to 7 years.

LexGyaan Series on ESOPs – Part 1: How do Employee Stock Options Plan (ESOPs) work?


In our experience of having assisted several entrepreneurs with execution of ESOPs for their startups, we have observed that most entrepreneurs are under the impression that by just mentioning the number of ESOPs on their cap table, or in offer letters to their employees, the startup has fulfilled its obligation to grant ESOPs to its employees. This is actually incorrect.

Mentioning ESOP pool on your cap table actually just makes your investors happy. Why? Well when an investor invests in your startup, they want to ensure that they do not get diluted for any reason except in case of future rounds of fundraising by your startup (even for that they have the right to maintain valuation aka pre-emptive right). It is important for investors that their shareholding does not get diluted in order to give shares to your employees, mentors or all those well-wishers of yours, whose help and guidance you took in the initial days of starting up and promised equity to. Only you the founder should get diluted to give these promised equity shares to your mentors and advisors, not the investors. This is the reason why investors require a startup to create an ESOP pool/advisory stock option pool, as a condition precedent to their investment in a startup. This is also the reason why investors require you to convert all loans from friends and family, and conversion of convertible notes, if any.

Related reading: Understand how valuations work and how a founder’s shareholding gets diluted when an investor invests in a startup in our blog titled ” The Valuation Game.. What Does It Mean Exactly? , by our co-founder, Karthik Chandrasekar.  

Therefore, all you have achieved by mentioning a “ESOP Pool” on your cap table and inserting a number against it is (a) carving out the maximum number / percentage up to which your investors won’t get diluted, and (b) demonstrating to your investors, your intention to give ESOPs some day to your employees.

At this stage, where your startup’s ESOPs are only on the cap table, your ESOPs are only a virtual pool. How do you convert the ESOPs in to reality? Well, that’s easy, you will just have to create an actual ESOP pool. In order to do that, you will have to take the following steps:

Step 1

Draft an ESOP Policy in compliance with the Indian Companies Act, 2013. The ESOP Policy will have to set out in detail the terms of ESOPs, cliff period, vesting schedule, exercise price/strike price, exercise period, consequences of employee leaving the startup, consequences of the startup getting acquired, etc.

Sign up here to request a free Demo

Step 2

Once the draft ESOP policy has been finalized and if you have investors in your startup, then check your Shareholders’ Agreement and Articles of Association, to verify if the approval of investors for a ESOP policy will be required. Lost? Well, just look for a clause that is titled either as “reserved matter right” or “affirmative voting matter” or  “affirmative voting right” or “investor protection matter”. Once you find this clause, then look through the several items and check if creating a stock option, ESOP etc is listed therein. If it is, then you would have to send an email to your investor alongwith copy of the ESOP policy for your startup, requesting the investor for its approval to the ESOP policy.

LexGyaan: Most VCs get their respective legal team to also review the ESOP policy. Therefore, be prepared for few iterations and discussions.

 Step 3

Where you don’t have any investors in your startup, you can skip step 2 and directly proceed with step 3, i.e., convene a Board Meeting for approval of the ESOP Policy. How to convene a board meeting properly under Companies Act, 2013?

Step 4

Convene a meeting of Shareholders (aka EGM) of your startup, for approval of the ESOP Policy.

Now you have an ESOP policy and can formally start granting ESOPs. Click here to download a free template of a ESOP grant letter!

Click here to read FAQs on ESOPs.

LexStart makes ESOP creation a breeze. Click here to learn more. Request a Demo.