Section 80JJAA of the Income Tax Act, 1961 is a tax incentive for employment generation and provides for deduction from income from business of an assessee for the employment of new employees by the assessee. This deduction is provided in order to promote employment generation in the country. However, there are many conditions which an assessee needs to be fulfilled before any deduction is claimed under this provision to prevent abuse of the deduction and an assessee should claim the deduction in a fair manner.
Introduction
Deduction under section 80JJAA is a much less talked and less popular deduction and not so famous among the tax professionals too irrespective of the fact that this deduction if claimed, can provide deduction upto 190% of the expenses incurred towards salaries and wages paid to the new employees. Apart from achieving social objectives of employment generation, this deduction u/s 80JJA actually gives incentive in the form of ‘cashback’ to the employer by lowering his tax outgo for generating new employment.
Section 80JJAA is placed under Part-C of Chapter VI-A of the Income Tax Act, 1961 which allows for a deduction from the gross total income of an assessee in respect of employment of new employees.
Historical Background of section 80JJA
Section 80JJAA was introduced by the Finance (No. 2) Act, 1998, w.e.f. 1-4-1999 for granting benefits to companies creating employment opportunities. The intention behind providing fiscal incentives in the Income-tax Act was to encourage employers to create more employment opportunities.
At that time, an amount of 30% of additional wages paid to the new workmen was allowed as a deduction for a period of 3 years beginning with the year in which the new workman is employed, provided other conditions as laid down in the provision were met.
The provisions applied to the business of manufacture of goods in a factory where 'workmen' are employed for not less than 300 days in a previous year. Further, benefits were allowed only if there was an increase of at least 10 per cent in the total number of workmen employed on the last day of the preceding year.
Those provisions were very stringent and hardly can be met which made the deduction less popular. Further, this deduction was only limited to manufacturing industries, basically factories. Hence, all other assessees even traders were excluded from the benefits.
With a view to extending this employment generation incentive to all sectors, section 80JJAA was rewritten in 2016. It was provided that the deduction under the said provisions shall be available in respect of cost incurred on any employee whose total emoluments are less than or equal to Rs. 25,000 per month. No deduction, however, shall be allowed in respect of cost incurred on those employees, for whom the entire contribution under Employees' Pension Scheme notified in accordance with Employees' Provident Fund and Miscellaneous Provisions Act, 1952, is paid by the Government.
It was further provided to relax the norms for the minimum number of days of employment in a financial year from 300 days to 240 days and also the condition of 10 per cent increase in the number of employees every year was done away with so that any increase in the number of employees will be eligible for deduction under the provision.
It was also provided that in the first year of a new business, 30 per cent of all emoluments paid or payable to the employees employed during the previous year shall be allowed as a deduction.
The provisions of 2016 were further amended in 2018 by the Finance Act, 2018 to extend the reduced number of 150 working days to footwear and leather industry. Further, the provisions were also rationalized to allow the deduction of 30% for a new employee who is employed for less than the minimum period during the first year but continues to remain employed for the minimum period in the subsequent year.
With this historical journey, we have the present form of section 80JJAA which provides a deduction for employment of new employees. The relaxation in the conditions has made the provisions much more attractive than the earlier version of the deduction.
Section 80JJAA: Deduction in respect of employment of new employees
The bare provisions of section 80JJAA from the assessment year 2019-20 and subsequent years reads as follows-
(1) Where the gross total income of an assessee to whom section 44AB applies, includes any profits and gains derived from business, there shall, subject to the conditions specified in sub-section (2), be allowed a deduction of an amount equal to thirty per cent of additional employee cost incurred in the course of such business in the previous year, for three assessment years including the assessment year relevant to the previous year in which such employment is provided.
(2) No deduction under sub-section (1) shall be allowed,—
(a) if the business is formed by splitting up, or the reconstruction, of an existing business:
Provided that nothing contained in this clause shall apply in respect of a business which is formed as a result of re-establishment, reconstruction or revival by the assessee of the business in the circumstances and within the period specified in section 33B;
(b) if the business is acquired by the assessee by way of transfer from any other person or as a result of any business reorganisation;
(c) unless the assessee furnishes 41[the report of the accountant, as defined in the Explanation below sub-section (2) of section 288, before the specified date referred to in section 44AB] giving such particulars in the report as may be prescribed.
Explanation.—For the purposes of this section,—
(i) "additional employee cost" means the total emoluments paid or payable to additional employees employed during the previous year:
Provided that in the case of an existing business, the additional employee cost shall be nil, if—
(a) there is no increase in the number of employees from the total number of employees employed as on the last day of the preceding year;
(b) emoluments are paid otherwise than by an account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account 42[or through such other electronic mode as may be prescribed]:
Provided further that in the first year of a new business, emoluments paid or payable to employees employed during that previous year shall be deemed to be the additional employee cost;
(ii) "additional employee" means an employee who has been employed during the previous year and whose employment has the effect of increasing the total number of employees employed by the employer as on the last day of the preceding year, but does not include—
(a) an employee whose total emoluments are more than twenty-five thousand rupees per month; or
(b) an employee for whom the entire contribution is paid by the Government under the Employees' Pension Scheme notified in accordance with the provisions of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952); or
(c) an employee employed for a period of less than two hundred and forty days during the previous year; or
(d) an employee who does not participate in the recognised provident fund:
Provided that in the case of an assessee who is engaged in the business of manufacturing of apparel or footwear or leather products, the provisions of sub-clause (c) shall have effect as if for the words "two hundred and forty days", the words "one hundred and fifty days" had been substituted:
Provided further that where an employee is employed during the previous year for a period of less than two hundred and forty days or one hundred and fifty days, as the case may be, but is employed for a period of two hundred and forty days or one hundred and fifty days, as the case may be, in the immediately succeeding year, he shall be deemed to have been employed in the succeeding year and the provisions of this section shall apply accordingly;
(iii) "emoluments" means any sum paid or payable to an employee in lieu of his employment by whatever name called, but does not include—
(a) any contribution paid or payable by the employer to any pension fund or provident fund or any other fund for the benefit of the employee under any law for the time being in force; and
(b) any lump sum payment paid or payable to an employee at the time of termination of his service or superannuation or voluntary retirement, such as gratuity, severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension and the like.
(3) The provisions of this section, as they stood immediately prior to their amendment by the Finance Act, 2016, shall apply to an assessee eligible to claim any deduction for any assessment year commencing on or before the 1st day of April, 2016.
Who can claim deduction under section 80JJAA
At present, deduction under section 80JJAA for providing employment to new additional employees can be claimed by any assessee having income from business and is liable for tax audit under section 44AB.
Upto AY 2015-16, the deduction was limited to an Indian Company. For the AY 2016-17, the benefit of this deduction was extended to all assessees having manufacturing units rather than restricting it to corporate assessees only. From AY 2017-18 till date, the deduction can be claimed by any assessee having business income from manufacturing or non-manufacturing like trading, etc. activities and is also liable to tax audit u/s 44AB.
Therefore, a person having income from profession cannot claim deduction under this section. Further, this deduction can be claimed by any person be an Individual, HUF, firm, LLP, a company having income from business and to whom section 44AB applies.
Readers are aware that from the AY 2020-21, a proviso is added to clause(a) of section 44AB to provide for a higher turnover limit of Rs. 5 crore if at least 95% of both the receipts and payments transactions are made through banking channels. Normally, the limit of turnover for tax audit is Rs. 1 crore for a person carrying on business. Thus, if a person is out of the purview of the provisions of section 44AB due to applicability of proviso to section 44AB(a), he will not be able to claim the deduction from AY 2020-21. However, he is able to continue to claim the remaining quantum of deduction that was allowed to him in the earlier year(s). This aspect is discussed later in a separate section.
Quantum or Amount of Deduction under section 800JJA for creation of new employment
Section 80JJAA(1) provides for deduction of an amount equal to 30 per cent of additional employee cost incurred in the course of such business in the previous year, for 3 assessment years including the assessment year relevant to the previous year in which such employment is provided. This deduction is available subject to fulfillment of conditions specified in section 80JJAA(2).
The deduction will be allowed in 3 assessment years beginning from the assessment year in which additional employment is provided.
From the plain reading of sub-section (1), it appears that once a deduction of 30% is allowed in the first assessment year the same will be continued for remaining succeeding two assessment years. The amount of deduction is determined on the basis of additional employee cost in the first previous year and once the additional employee cost of a previous year, which is the first previous year, is determined and found allowable as deduction u/s 80JJAA, it will be allowed in three installments. Hence, the conditions and other parameters are required to be checked in the first previous year in which additional employee cost is incurred.
The quantum of deduction will remain constant for all the three years, despite subsequent changes in employment status or salary levels. For instance, the amount of deduction claimed in the first year would remain constant in subsequent two years, even in case some employees including the employees in respect of whom the additional deduction is claimed, leave the organization or the salary of such employee crosses the ceiling of Rs. 25,000 p.m.
Non-applicability of Tax Audit in subsequent years: If in the first previous year when the assessee incurred additional employee cost the assessee is subject to tax audit under the provisions of section 44AB and other conditions are fulfilled and hence the assessee is allowed 30% of additional employee cost in the first previous year. In the subsequent year, the assessee is not liable to tax audit u/s 44AB due to applicability of higher turnover limit of Rs. 5 crore. In this case, he cannot claim any new or fresh deduction in the subsequent year but he can continue to claim the remaining 60% deduction in two years @ 30% per year which he claimed in the first year. This is because the conditions for claiming deduction u/s 80JJAA were attached for the first year and not for claiming balance deduction in the subsequent year.
New Employees left the organization subsequent year: Once the assessee is entitled and eligible for claiming the deduction for additional employee cost in the first year, its eligibility to claim the remaining balance amount of deduction does not get altered if the workmen or employees for whom deduction was allowed in the first year left the organization in the subsequent year. There is no condition attached that the new workmen or employees shall continue to be employed in the organization in the subsequent years also.
Conditions for claiming deduction under section 80JJAA
Section 80JJAA(2) provides the following conditions to be satisfied for claiming deduction u/s 80JJAA(1). It states that no deduction under section 80JJAA(1) shall be allowed-
(a) if the business is formed by splitting up, or the reconstruction, of an existing business,
However, this condition shall not apply in respect of a business which is formed as a result of re-establishment, reconstruction or revival by the assessee of the business in the circumstances and within the period specified in section 33B.
Section 33B specifies the following circumstances where the business of any industrial undertaking carried on in India is discontinued in any previous year by reason of extensive damage to, or destruction of, any building, machinery, plant or furniture owned by the assessee and used for the purposes of such business as a direct result of—
(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
(ii) riot or civil disturbance; or
(iii) accidental fire or explosion; or
(iv) action by an enemy or action taken in combating an enemy (whether with/
without a declaration of war)
and such business is re-established, reconstructed or revived by the assessee, within a period of 3 years from the end of the previous year in which such business is discontinued
(b) if the business is acquired by the assessee by way of transfer from any other person or as a result of any business reorganisation,
(c) unless the assessee furnishes a report from the accountant in Form No. 10DA on or before the specified date as referred to in section 44AB.
Rule 19AB of the Income Tax Rules, 1962 specifies that the report of an accountant which is required to be furnished by the assessee along with the return of income under clause (c) of sub-section (2) of section 80JJAA shall be in Form No.10DA.
Note: Though the Act has been changed to prescribe for furnishing the report one month prior to the due date of filing of return of income, no corresponding change in the Rule 19AB has been made till the time of publishing this article. Rule 19AB still requires furnishing the report of an accountant in Form 10DA alongwith the return of income. However, please note that the provisions of the Act shall prevail over the Rules being subordinate legislation. Hence, Form 10DA needs to be filed one month prior to the due date of filing of return u/s 139(1). For the AY 2020-21, Form 10DA needs to be filed on or before 31.12.2020 as per extension of due date of filing of return of income u/s 139(1) to 31.01.2021 granted by CBDT on 24.10.2020.
From AY 2020-21, the report in Form 10DA shall be required to be furnished by the assessee at least one month prior to the due date of filing of return of income prescribed u/s 139(1).
“Specified date” referred to in section 44AB
"Specified date", in relation to the accounts of the assessee of the previous year relevant to an assessment year, means date one month prior to the due date for furnishing the return of income under sub-section (1) of section 139.
Hence, if Form 10DA is filed belated, deduction will not be allowed under section 80JJAA.
Online filing of Form 10DA with DSC
Rule 12(2) of the Income Tax Rules, 1962 provides that Form 10DA shall be required to be file online on the e-filing portal with digital signature (DSC).
Prior to AY 2020-21, the report in Form 10DA was required to be filed along with the return of income. However, Finance Act, 2020 has amended the filing requirement of Form 10DA.
The term ‘accountant’ means a Chartered Accountant in practice. It is not necessary that the auditor of the company or who has conducted the tax audit shall give the report in Form 10DA. The report in Form 10DA can be given by any CA in practice holding CoP and need not be the auditor of the assessee.
Meaning of “Additional Employee Cost” for section 80JJA
As stated earlier, the deduction under section 80JJAA(1) is allowed to an assessee on the basis of additional employee cost of the previous year.
Explanation (i) to section 80JJAA defines the term “additional employee cost”. According to it, "additional employee cost" means total emoluments paid or payable to additional employees employed during the previous year.
In case of an existing business, the additional employee cost shall be nil, if-
(a) there is no increase in the number of employees from the total number of employees employed as on the last day of the preceding year;
(b) emoluments are paid otherwise than by an account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account or such other electronic mode as may be prescribed.
In case of a new business, in the first year, emoluments paid or payable to employees employed during that previous year shall be deemed to be the additional employee cost.
Notes:
1. CBDT has notified the 'other electronic mode of payments' by Notification No. 08/2020 dated 29.01.2020. These electronic modes are-
(i) Account Payee Cheques
(ii) Demand Draft/Pay Order
(iii) Credit Card
(iv) Debit Card
(v) Net Banking
(vi) IMPS (Immediate Payment Service)
(vii) UPI (Unified Payment Interface)
(viii) RTGS (Real Time Gross Settlement)
(ix) NEFT (National Electronic Funds Transfer)
(x) BHIM (Bharat Interface for Money) Aadhar Pay
2. Though it appears that there is no requirement to pay the emoluments through banking channels or electronic modes in case of new business in the first year, but from the overall intention of allowing the deduction and the harmonious interpretation for existing and new businesses, it can be interpreted that the emoluments must be paid in electronic modes for a new business in the first year also. The Note No. 3 with (#) sign of Form 10DA issued under Rule 19AB also states that in case of new business during the first year “# the amount shall be nil if the emoluments are paid otherwise than by an account payee cheque or account payee bank draft or by way of a electronic clearing system through a bank account”. Contrary interpretation cannot be ruled out.
The words “Other electronic modes of payments” have been inserted by the Finance (No. 2) Act, 2019, w.e.f A.Y. 2020-21.
Meaning of “Additional Employee” for section 80JJAA
Explanation (ii) to section 80JJAA defines the term “additional employee”. According to it, "additional employee" means an employee who has been employed during the previous year and whose employment has the effect of increasing the total number of employees employed by the employer as on the last day of the preceding year, but does not include,-
(a) an employee whose total emoluments are more than Rs. 25,000 p.m.; or
(b) an employee for whom the entire contribution is paid by the Government under the Employees' Pension Scheme notified in accordance with the provisions of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952; or
(c) an employee employed for a period of less than 240 days during the previous year; or
A relaxation is provided in the case of an assessee who is engaged in the business of manufacturing of apparel or footwear or leather products where the additional employee shall be required to be employed for a period of at least 150 days instead of 240 days.
It is further provided that where an employee is employed during the previous year for a period of less than 240 days or 150 days, as the case may be, but is employed for a period of 240 days or 150 days, as the case may be, in the immediately succeeding year, he shall be deemed to have been employed in the succeeding year and the provisions of this section shall apply accordingly.
Notes:
1. The business of manufacturing of Apparel was introduced w,e,f, 01.04.2017 by the Taxation Laws (Amendment) Act, 2016.The business of manufacturing of footwear or leather products was inserted w.e.f. 01.04.2019 by the Finance Act, 2018.
2. Finance Act, 2018 has further rationalized the deduction of 30% under section 80JJAA by allowing the benefit for a new employee who is employed for less than the minimum period of 240 days or 150 days during the first year but continues to remain employed for the minimum period of 240 days or 150 days in the subsequent year.
(d) an employee who does not participate in the recognised provident fund.
Meaning of Emoluments
Explanation (iii) to section 80JJAA defines the term ‘emoluments’. AS per the explanation, "emoluments" means any sum paid or payable to an employee in lieu of his employment by whatever name called, but does not include-
(a) any contribution paid or payable by the employer to any pension fund or provident fund or any other fund for the benefit of the employee under any law for the time being in force; and
(b) any lump-sum payment paid or payable to an employee at the time of termination of his service or superannuation or voluntary retirement, such as gratuity, severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension and the like.
Thus, in calculating the emoluments, employers’ contribution to EPF, ESIC and any other fund for the benefit of the employee shall not be considered. Further, any amount payable by the employer to the employee at the time of retirement or resignation or otherwise termination from the employment shall also not be required to be considered for the purpose of calculating emoluments under section 80JJAA.
Certain organizations pay the leave encashment at the end of every year whereas some employers pay the accumulated leave at the time of resignation or retirement. Where the same is paid annually, the same shall constitute ‘emoluments’ and if the same is paid at the time of leaving the organization, the same shall not be treated as ‘emoluments’.
Typically, the following shall be counted towards emoluments-
Transitional Provisions
Sub-section (3) is the transitional provision which provides that any deduction allowed to an assessee prior to the substitution of this section 80JJAA by the Finance Act, 2016 shall be continued to be allowed even after the applicability of this provision from AY 2016-17. This could have been allowed upto AY 2017-18 if the first year of deduction was AY 2015-16.
Who cannot avail Deduction u/s 80JJAA
1. Not registered with EPF: An employer who is not registered with EPFO or has no RPF trust of its own cannot have employees who can participate in EPF and hence such employer cannot claim deduction u/s 80JJAA. However, if the employer gets himself registered voluntarily, then he is eligible for claiming deduction subject to fulfilment of other conditions.
2. Not Subject to tax audit: If the employer is not subject to tax audit, he cannot claim deduction under this section.
3. Professionals: This deduction can be claimed only by a person having income from business. Thus this deduction cannot be claimed by the professionals.
4. Contractual employees vs regular employees: Contractual employees do not participate in the provident fund scheme and hence are not eligible for deduction.
Illustrations explaining the concept of Deduction u/s 80JJAA
Example 1: Illustration on Additional Employee
A Ltd. has the following data on joining of various employees during the FY 2019-20 (AY 2020-21)
Total employee strength of A Ltd. as on 31.3.2019 was 100.
Calculate ‘additional employee’ for A Ltd. for the purpose of availing deduction u/s 80JJAA.
As per the definition of ‘additional employee’ given in Explanation (ii) to section 80JJAA, additional employee means an employee-
(i) who has been employed during the previous year, and
(ii) whose employment has increased the total number of employees employed by the employer as on the last day of the preceding year.
However, additional employee does not include an employee-
(a) whose total emoluments per month exceeds Rs. 25,000, or
(b) whose entire contribution is paid by the Government, under the Employees’ Pension scheme, or
(c) who is employed for less than 240 days during the previous year (less than 150 days in case of manufacture of apparel or footwear or leather products) [There should be a degree of permanency in the employment]
(d) who does not participate in the Recognised Provident Fund.
Note: If a person joins on or before 4th August of the previous year, he can work for at least 240 days in that previous year. In case of a leap year, the date shifts to 5th August.
If we read the (i) and (ii) with Form 10DA, we can find that an additional employee should not only be employed but also be retained in the organization by the employer to avail the deduction for him. These two conditions actually intend to compare the total number of employees as on the last day of the previous year with the total number of employees as on the last day of the preceding year. Once the total number of employees increased as on the last day of the previous year, it can be said that the employer has generated new employment and thereafter one has to find out the eligible additional employees. This is interpreted on the premise that the Act has not defined the term ‘employee’. Instead, it has used the words ‘total number of employees’ which signifies total employee strength of the employer needs to be compared and should not be limited to employees satisfying the conditions mentioned in (a) to (d) above. In other words, for determining ‘total number of employees’, employees earning more than Rs. 25,000 p.m. shall also be counted.
Further, clause (a) of the first proviso to Explanation (i) to section 80JJAA states that there should be an increase in the total number of employees employed as on the last day of the preceding year.
The employer has to demonstrate that there has been an 'increase in the number of employees from the total number of employees employed as on the last day of the preceding year’ due to induction of ‘additional employees’. For this purpose, the provision provides that comparison should be made between the total number of employees on the last day of the preceding year with the number of employees inducted or joined during the previous year.
Nowhere the provisions provide for any specific day of the previous year on which the increase in the number of employees has to be examined. Thus, the provisions grant deduction in respect of all additional employees provided there has been an overall increase in the number of employees in the previous year. Such an increase can happen at any time during the previous year. However, Form 10DA has specified the last day of the previous year as the cut-off date to determine the increase in employment in a mechanical manner.
Hence, the Form 10DA has added another restriction that the new employee must be retained in the employment till the last day of the previous year in order to claim deduction under this section 80JJAA even though he was employed for more than 240 days in the previous year. In this sense, it can be said that the Form 10DA so notified does not fall in line with the provisions enacted by the legislature.
In order to check the eligible additional employees, it should be borne in mind that all the conditions mentioned in (a) to (d) above are separated by ‘or’ and not by ‘and’. Hence non-satisfaction of any one of the conditions will exclude the new employee as an eligible additional employee. For example, if the emoluments of an employee are more than Rs. 25,000 p.m. he will be ineligible for deduction even if he is a member of Provident Fund. Therefore, all the conditions must be satisfied cumulatively to become an eligible additional employee.
Based on the above legal premises, the solution to Example 1 is given below-
Example 2: Illustration on Additional Employee Cost read with Emoluments
A Ltd. provides the following data for the FY 2019-20 related to the employment of new employees-
Calculate the additional employee cost of A Ltd. for the purpose of claiming deduction u/s 80JJAA.
Before computing the additional employee cost, we need to understand the concept of ‘emoluments’ which is the basic parameter for computing the additional employee cost for the purpose of claiming deduction u/s 80JJAA.
“Emoluments" means -
any sum paid or payable to an employee in lieu of his employment by whatever name called, but does not include-
a) Employer’s contribution paid or payable to any pension fund or provident fund or any other similar fund,
b) any lump-sum payment paid or payable to an employee at the time of termination of his service or superannuation or voluntary retirement, such as gratuity, severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension and the like.
Further such emoluments shall be paid through banking channels.
The term termination shall include ‘resignation’ of the employee. [CIT vs. D.P. Malhotra (1998) 229 ITR 394 (Bom.)]
Further, the emoluments must be paid or payable in money terms. The use of the word ‘sum’ denotes that if any part of remuneration is paid in non-money terms, the same shall not be included. Hence, any perquisite values if not in money terms shall not be included in emoluments. 'Any sum' referred to in the provision would only mean cash amount of money. [H.H. Sri Rama Verma vs. CIT (1990) 187 ITR 308 (SC), Red Chillies Entertainment Pvt. Ltd. vs. ACIT ITA No. 1577/Mum/2013 ITAT Mumbai]
Further, "additional employee cost" is defined to mean total emoluments paid or payable to additional employees employed during the previous year.
"Additional employee cost" shall be determined for the eligible additional employees; means an employee whose total emolument is Rs. 25,000 p.m., worked for at least 240 days in the previous year, and is a member of RPF.
The condition only states that the total emoluments shall not exceed Rs. 25,000 per month to become an eligible additional employee. However, the term ‘emoluments’ and ‘additional employee cost’ is defined on an annual basis and not on a monthly basis. Thus, it appears that the monthly emoluments paid or payable to an employee during the previous year shall be on the basis of the average of the total emoluments paid or payable to an employee from the date of his joining till the last day of the previous year whether paid on monthly basis or on other periodic basis. For example, if the bonus or exgratia is paid one-time at the year-end or during festive occasion, the same shall be included in the total emoluments paid during the previous year.
Now a question remains to answer whether the condition of emoluments being Rs. 25,000 p.m. shall be seen at the time of joining of the employee or till the period of 240 working days or till the last day of the previous year. This assumes significance if the employee is given increment in between the first previous year from his date of joining.
There is no clarity on the issue. Hence it is tried to interpret the same in a most objective manner.
The combined reading of the definition of emoluments to an employee and additional employee cost reveals that the emoluments paid to an employee during the previous year need to be considered for the purpose of computing the deduction.
If only the emoluments agreed to be paid at the time of joining and later increased it may be prone to misuse of the provision. One may join an employee at a lower remuneration and will increase later to take the benefit of a higher amount of deduction.
Similarly, the emoluments for the period of 240 days is not in line with the computation methodology of computing an increase in the number of employees till the last day of the previous year prescribed by the Form 10DA.
Hence the most rational view is that the emoluments paid or payable to the new employee from the date of his joining to the last day of the previous year shall be taken and then the same is averaged out to get the monthly emoluments to determine an eligible additional employee.
Note: This average monthly emolument is computed to compare the same with the Rs. 25,000 condition. However, it should be noted that Additional employee cost cannot exceed Rs. 3,00,000 per additional employee in a previous year.
Based on the above legal premises, the solution to Example 1 is given below-
Example 3: Illustration on an employee worked for less than 240 days in a previous year
Mr. Rakesh joined ABC Ltd. on 01.09.2018 and is continuing his employment. His monthly salary is Rs. 24,000 and is a member of EPF. Calculate the deduction available to ABC Ltd. under section 80JJAA.
Mr. Rakesh was appointed in the financial year FY 2018-19 on 01.09.2018 which is prior to the benchmark date of 4th Aug 2018 to complete 240 working days in 2018-19. Since he was employed for less than 240 days in 2018-19, ABC Ltd. cannot claim any deduction u/s 80JJAA in FY 2018-19. However, Mr. Rakesh will still be considered for calculating total number of employees for 2018-19.
In the subsequent year 2019-20, he has worked for full-year and thus fulfilled the 240 days of working period. ABC Ltd. will be able to claim deduction u/s 80JJAA in AY 2020-21 though he was originally employed in preceding FY 2018-19. Mr Rakesh shall be deemed to have been employed in FY 2019-20 and all the provisions of section 80JJAA shall apply accordingly.
In the case of CIT vs. Texas Instruments India Pvt. Ltd. in ITA No. 141/2020 decided on 21.4.2021, the Karnataka High Court has held that a software engineer is a workman within the meaning of Section 2(s) of Industrial Disputes Act so long as such a software professional does not discharge supervisory functions. The benefit of Section 80JJAA can be claimed by an employer/assessee even if the employee were not to omplete 300 days in a particular assessment year but in the subsequent year so long as there is continuity of employment, the Assessee could continue to claim further benefit in the next two years as provided in under Section 80JJAA of the Act.
Points to ponder with deduction under section 80JJAA
Audit of business vs. Audit of assessee: Section 80JJAA emphasizes that the assessee must be subject to tax audit under section 44AB. It does not require the business which employs additional employees must be subject to tax audit. For example, if Mr. Rakesh has two businesses B1 and B2. The turnover of B1 is Rs. 6 crore whereas the turnover of B2 is Rs. 90 lakh only. New employees were joined in B2. Rakesh will be able to claim deduction under section 80JJAA if other conditions specified therein are fulfilled. Even though B2 is not subject to tax audit, but, Rakesh, an assessee, is subject to tax audit, hence eligible to claim deduction under this section.
Person opting presumptive tax scheme u/s 44AD: A person (individual, HUF or firm) if opts for section 44AD then he cannot claim deduction u/s 80JJAA since section 44AD prohibits claiming of any deduction under any provisions of Chapter VIA under the heading "C. - Deductions in respect of certain incomes" and section 80JJAA is placed in the Part-C of Chapter VI-A.
An employee included in additional employee and total number of employees is different: Total number of employees employed as on the last day of the previous year and preceding year are not required to satisfy the conditions of per month emoluments of Rs. 25,000, minimum working days of 240 days and participation in EPF. However, an additional employee needs to satisfy these conditions.
Highest paid additional employees may be chosen: Consider a case where there are 100 employees as on 31.03.19. As on 31.03.2020, there are 105 employees. During the year, 15 eligible additional employees have joined the employer and 10 old employees retired/resigned during FY 2019-20.
So the employer can claim deduction for 5 employees. Suppose out of 15 employees, 7 were employed at a monthly pay of Rs. 10,000 and 8 were employed at Rs. 15,000. In this case, the employer may opt for additional employee cost at Rs. 75,000 (Rs. 15,000*5). The period of employment should also be taken into consideration to get maximum benefit.
Even joining of one new employee is eligible for deduction: This deduction is available even if there is only joining of one new employee during the relevant previous year. There is no requirement of joining of any minimum number of employees, unlike its predecessor provision. This makes the present deduction more liberal.
Casual or part-time employees: Casual or part-time employees do not participate in provident fund, hence are ineligible additional employees. Employees in this provision intend to mean regular employees of the employer.
Deduction under this section is in addition to section 37: The emoluments paid or payable to the additional employees is allowed as deduction u/s 37(1) of the Act. This deduction u/s 80JJAA is in addition to the deduction allowed u/s 37(1) which effective means deduction of 190% of the expenditure incurred.
Some inherent checks to prevent abuse of deduction u/s 80JJAA
The deduction under section 80JJAA is prone to misuse and abuse by claiming the deduction for bogus or ghost employees. Hence, the legislature has provided some inherent checks to prevent abuse.
Net employment generation is measured on the basis of the increase in the total number of the employees employed by the employer when compared to the last day of the preceding year. Thus one cannot avail deduction by replacing the old employees with the new ones.
The provisions cast an obligation to audit the claim for the deduction and thus is required to furnish an audit report in Form 10DA. Applicability of tax audit mandates that the assessee has kept books of accounts and that such books and records have been duly verified and audited.
Further, participation in EPF and payment by cheques are measures to prevent claiming deduction from bogus employees.
Overview and study of Audit Report in Form No. 10DA
In order to claim the deduction under section 80JJAA, the assessee needs to furnish an audit report in Form 10DA one month prior to the due date of filing of return u/s 139(1).
The one-page report required to certify the amount of deduction under this section and the details of workings needs to be given in the Annexure to Form 10DA.
Apart from some basic information like name, address, PAN/Aadhaar No. of the assessee, it requires the workings on the followings:
I. In case of an existing business
The auditor is required to report the number of employees employed as on the last day of the previous year and the preceding previous year in order to compute the additional employees employed by the assessee during the previous year.
Once the increase in the number of employees has been computed, the form requires the auditor to provide the number of additional employees which satisfy the conditions stated in section 80JJAA for the previous year and the immediately preceding previous year.
Then, the auditor should report the total amount of emoluments paid or payable to the additional employees entitled for deduction u/s 80JJAA in respect of the above number of employees.
Finally, the auditor has to work out the amount of deduction eligible u/s 80JJAA in respect of payments for the emoluments paid or payable to the additional employee @ 30% of the additional employee cost as computed above and the balance amount of deduction from the earlier year and years.
II. In case of new business
In case of new business, the auditor has to report the 30% of the amount of emoluments paid or payable to additional employees employed during the first year of business as the amount of deduction under section 80JJAA without any detailed workings.
However, the form provides that the number of additional employees entitled for deduction cannot exceed the differential number of employees computed between the two last dates of the years.
Belated filing of Form 10DA and allowability of deduction under section 80JJAA
As stated above, an audit report in Form 10DA is a prerequisite to claim the deduction under section 80JJAA. Further, from AY 2020-21, the report is required to be furnished one month before the due date of filing of return of income prescribed u/s 139(1).
Hence, it follows that if the report is not furnished within the stipulated period, deduction under section 80JJAA will not be allowed.
However, one may take the shelter of the decision of ITAT Delhi in the case of Mrs. Manju Kapoor Dalmia vs. ITO in ITA No. 154/Del/2011 decided on 21.04.2011 for AY 2006-07, which was rendered in the context of furnishing a certificate in Form 10CCD for claiming deduction under section 80QQB, in case of delay in filing of Form 10DA for claiming deduction under section 80JJAA.
In this case, it was held that filing a certificate for claiming the deduction u/s 80QQB is a procedural provision and it should not be construed as mandatory. Going by this ratio, one can say that deduction under section 80JJAA cannot be denied to an assessee on the grounds of non-filing of the audit report in Form 10DA since filing a report in Form 10DA for claiming deduction u/s. 80JJAA is a procedural provision.
However, there must be sufficient and reasonable cause which prevented the assessee from filing an audit report in Form 10DA within the prescribed time limit for claiming the deduction.
Recently, in the case of International Tractors Ltd. vs. DCIT in ITA 35/2019 decided on 7.4.2021 the Assessee did not make any claim of deduction under section 80JJA for the AY 2007-08. The amount of deduction was pegged at Rs. 1.07 crore. The deduction was claimed by the assessee by way of a letter filed before the AO along with accompanied Chartered Accountant's report in the prescribed Form No. 10DA. The AO has denied the deduction. On the first appeal, CIT(A) allowed the claim of the assessee. On the second appeal before the ITAT, the Hon’ble Tribunal remanded the file to the AO with the observation that CIT(A) has rightly allowed the deduction under section 80JJAA. On further appeal before the Delhi High Court, it sustained the order of the CIT(A) and allowed the claim of the assessee. Thus, deduction u/s 80JJAA was allowed to the assessee in this case.
Deduction u/s 80JJAA is allowed if opts for concessional tax under section 115BAA/115BAB
One can guess the importance of this section from the fact that the new concessional tax regime as stipulated in section 115BAA and section 115BAB and section 115BAC and section 115BAD allows the assessee to claim deduction under section 80JJAA whereas these provisions prohibits the deduction under other section of Chapter-VI A of the Act.
Even after relaxation, deduction under this section is still restrictive
One of the conditions is that the additional employee must be employed for a minimum period of 240 days in the previous year. Though employed for more than 240 days but if he resigns on or before the last day of the previous year, there is no benefit of deduction.
If left employees are more than new joinings in the previous year, there is no tax benefit even if old employees left and new employees stayed. The situation is much graved in this pandemic where typically, the number of left employees are more than new joinees since deduction is allowed on net additions and not on gross additions.
In case of seasonal industries, joinings are more during peak season and leavings are more in non-peak season. Thus by the year-end, if overall the employees' strength reduces, there is no benefit.
Deduction under this section is allowed after comparing the strength of the employees with the preceding year and the current year and then the deduction is allowed if the overall employees' strength increases. The employment of new employees is not taken care of independently.
The ceiling of Rs. 25,000 monthly emoluments is too low considering the fact that even an unskilled worker earns more than this limit. Further, in case of a new business, it may not be governed by EPF Act.
Even though the section is made simple but some expressions or wordings of the provision is capable of more than one interpretation. Despite a few pitfalls and issues around interpretations, the deduction is encouraging. It would be better if suitable amendments are made in the law or clarifications are issued by the CBDT.
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