To prevent the spread of the COVID-19 pandemic and to protect the health and livelihoods of people, numerous measures including lockdown have been taken across the world.
Authored by Rajesh Patil and Urvi Shah
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To prevent the spread of the COVID-19 pandemic and to protect the health and livelihoods of people, numerous measures including lockdown have been taken across the world. These necessary measures have however resulted in causing a certain impact on economies.
The economic package announced recently indicates that the ‘Make in India’ program will be one of the important tools to address the difficult times brought upon by the pandemic.
'Make in India' is a program designed to facilitate investment, foster innovation, enhance skill development, and build best-in-class manufacturing infrastructure in the country. This initiative’s primary objective is to attract investments from across the globe and strengthen India’s manufacturing sector while generating employment opportunities.
Recognizing the need to incentivize employment generation, in Budget 2016, the provisions of section 80JJAA of the Income-tax Act, 1961 were liberalized by extending the benefits to all sectors, hitherto restricted to the manufacturing sector.
As per the amended provisions, certain taxpayers can claim a deduction of 30 percent of additional employee cost incurred in the course of business in the previous year, subject to fulfillment of certain conditions, for a period of three assessment years.
Interestingly, the deduction is available only in case of profits and gains derived from the business. A moot question is whether a taxpayer who is engaged in a profession would be eligible to claim deduction under section 80JJAA. There are diverse judicial precedents on the matter that say that business includes profession.
Here it is also worth noting that the benefit of the section is available even to taxpayers opting for the concessional tax rate (22 percent or 15 percent) under the new tax regime. The new tax regime aims to simplify income-tax laws by removing certain tax incentives/deductions. This indicates that the intention is to give the benefit of this section to maximum taxpayers.
Considering that the objective of the amendment is to extend the employment generation incentives to all sectors, it is arguable that deduction under section 80JJAA should also be available to taxpayers engaged in the profession. However, it is likely to be a subject matter of litigation.
While determining the amount of deduction, it is imperative to understand the terms ‘additional employee cost’ and ‘additional employee’.
‘Additional employee cost’ means the total emoluments paid or payable to additional employees employed during the previous year, subject to certain conditions.
‘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 date of the preceding year, but does not include, inter alia, an employee whose total emoluments are more than Rs 25,000 per month or employed for less than 240 days during the previous year.
So, a taxpayer can avail deduction only when there is an increase in the total number of employees on the last date of the previous year and not merely on the employment of the additional employee.
While there is an ongoing lockdown in view of the COVID-19 pandemic, there is no doubt that this pandemic has created an atmosphere of disruption and uncertainty for businesses and will leave a big impact on the way businesses will operate, going forward. Salary cuts and layoffs usually become a norm in such difficult times.
Considering the backdrop of the current scenario, a question which comes to mind is whether conditions prescribed are to be fulfilled in all three financial years in which deduction under section 80JJAA is claimed, or in the first year of deduction only.
In case an employee is employed in the financial year 2018-19, in the following situations, whether deduction in respect of such employee can be claimed in financial years 2018-19, 2019-20 and 2020-21:
The section does not specify any condition in relation to the continued employment of such new employees, as at the end of the year or the subsequent years. Accordingly, it can be said that the amount of deduction related to a particular year, crystalizes in such year.
The same amount is eligible for deduction in the computation of taxable income of subsequent years, subject to satisfaction of other conditions. This view is supported by Bangalore Tribunal in one case.
Contrarily, in another case, the Bangalore Tribunal, while explaining the provisions of this section, held that in case the condition is not fulfilled for any of the three financial years, the company shall not be eligible to claim the deduction under section 80JJAA for the said financial year.
Considering the contrary decisions, the matter is not free from doubt. Also, practical difficultly may arise in filing Form 10DA when there is no net increase in the number of employees to claim deduction under section 80JJAA in subsequent assessment years.
The ruling of the Apex Court, that a form prescribed under the Rules may not have an effect on the interpretation or operation of the parent statute, may help in making out a case in such a scenario.
Additionally, the following concerns may crop up while determining the number of additional employees:
To ascertain whether a deduction is allowed in the above situations, one may bear in mind that the Apex Court has held that incentive provisions / beneficial provisions should be construed liberally. Otherwise, it will defeat the purpose of the law. But the uncertainty over the degree to which the provisions may be construed beneficially will linger.
The success of the ‘Make in India' program is going to be critical for India to combat the COVID-19 impact by generating employment opportunities. Considering the current pandemic, clarifications/amendments from time to time on a proactive basis may be useful. This will help companies take decisions appropriately with minimal risk of litigation.
Rajesh Patil is Director and Urvi Shah is Senior Manager with Deloitte Haskins and Sells LLP. Views are personal
First Published: IST