Library / Income-tax Act, 2025: The Professional's Master Guide

53. Case Study 6: Start-up Company, Section 140 and MAT

Facts. InnoAI Pvt. Ltd., a DPIIT recognised start-up incorporated in 2021 with an Inter Ministerial Board certificate, earns book profit and business income of Rs. 3 crore in Tax Year 2026-27. It has brought forward business loss (tax) of Rs. 1.2 crore. In the books, the brought forward loss is Rs. 1.2 crore and unabsorbed depreciation is nil. During the year, a new investor acquired 55% of the shares by fresh issue; all original shareholders continue to hold their shares. It is in the normal regime and wants to claim section 140 for three years starting this year.

53.1 Step 1: loss set off and section 119

More than 49% of voting power has changed hands, so the normal 51% test fails. But the company is an eligible start-up and all shareholders of the loss year continue to hold their shares, so the relaxation applies. The Rs. 1.2 crore loss can be set off.

53.2 Step 2: normal tax

Business income	3,00,00,000
Less: brought forward loss	(1,20,00,000)
Gross total income	1,80,00,000
Less: section 140 (100% of eligible profits)	(1,80,00,000)
Total income under normal provisions	Nil

53.3 Step 3: MAT

Book profit before adjustment	3,00,00,000
Less: lower of brought forward loss (1.2 crore) and unabsorbed depreciation (nil) as per books	Nil
Book profit	3,00,00,000
MAT at 14%	42,00,000
Surcharge 7% and cess 4%	4,73,760
MAT payable	46,73,760

The trap. Because the MAT adjustment allows only the lower of brought forward loss and unabsorbed depreciation as per books, and unabsorbed depreciation is nil, no reduction is available. MAT of Rs. 46.7 lakh is payable despite section 140, and from Tax Year 2026-27 it is a final tax with no credit.

53.4 Step 4: compare section 200

Under section 200, section 140 is not available, but MAT does not apply. Tax = (3 crore less 1.2 crore loss) x 25.168% = Rs. 45,30,240, slightly lower than MAT, and the section 140 years are not used up. The company should compare the multi-year position: if profits are expected to rise sharply, preserving section 140 years is valueless when MAT applies on book profit anyway. This case shows why start-ups should plan the section 140 years together with MAT.