The more you give employment – The more you gain – Section 80JJAA

• Taxation
• ||
• April 24, 2024

Backdrop

To foster employment in India, the Hon’ble Government of India has introduced section 80JJAA of the Income-tax Act, 1961 (‘the Act’). The provision has been mainly introduced to encourage employment through deductions for hirers. Hence, the section shall incentivize both job seekers and job creators.

From the income-tax front, the section has been subjected to various amendments. At present, the deduction under section 80JJAA of the Act is made available to all those Assessee who are required to audit their accounts under section 44AB of the Act, and their gross total income includes profits and gains from Business. 

Interpreting section 80JJAA

The applicability and quantum of deduction as allowed under section 80JJAA of the Act discussed in sub-section (1) are explained as follows:

• The assessee must be subject to tax audit under section 44AB of the Act and
• Have any profits and gains derived from the business. This means that this benefit is not available to assessees who earn income from their profession.
• The deduction shall equal 30% of the additional employee cost incurred in the previous year for three assessment years starting from the year in which the employment is made.

Subsection (2) starts with the exclusions by highlighting the cases in which 80JJAA of the Act cannot be availed. Hence, no deduction under section 80JJAA of the Act is allowed if:

• An existing business is divided or rebuilt to create a new enterprise. Where the re-establishment, reconstruction, or revival by the Assessee of the Business are in the circumstances and within the period specified in section 33B, then benefit under section 80JJAA of the Act is available.
• The business is acquired by way of transfer or as a result of business reorganization.
• If the report in Form 10DA is not furnished before filing a tax audit report for a Financial Year.

Further, the explanation of the section 80JJAA of the Act covers the terminologies used in the section. For the purpose of interpreting the section, the following terms used in the section shall be considered:

1. Additional employee cost: Total emoluments paid to or payable to additional employees hired during the previous year. However, the cost of hiring extra employees for the current business will be taken as ‘nil’ if:

• • a. There is no change in the total number of employees on the last day of the previous year in terms of the number of employees employed.
  • b. Emoluments are paid otherwise than by an account payee bank draft or cheque or the use of an electronic clearing system (ECS) connected to a bank account or through other prescribed electronic modes.
    

Note: Where the Business is newly set up during the year, emoluments paid or payable to employees employed during that previous year shall be deemed to be the additional employee cost. 

2. An “Additional Employee” is a person who has been employed by the employer on the last day of the previous year and whose employment increased the total number of employees as of that date. However, this person does not include —

1. 1. a. An employee is receiving emoluments of more than INR 25,000 in total per month. or
   2. b. An employee enrolled in the Employee Pension Plan for whom the government pays the whole contribution or
   3. c. An employee who worked for less than 240 days in the preceding year (in case apparel, footwear, or leather products business, it is 150 days) or
   4. d. An employee is not participating in a recognized provident fund.

Furthermore, suppose an employee works for less than 240 days or 150 days (as the case may be) during the year and works for 240 days or 150 days (as the case may be) in the next year. In that case, he will be considered to have worked in the year that follows, treating it as his first year of employment.

3. Emoluments mean any sum paid or payable to an employee in lieu of his employment but does not include—

• • Any payment made by the employer to a pension fund, provident fund, or other fund established by law for the benefit of the employee and
  • Any lump sum payment, such as a gratuity, severance pay, leave encashment, voluntary retrenchment benefits, pension commutation, or the like, made to an employee at the moment of his employment termination, allowance, or voluntary retirement.

Queries while interpreting section 80JJAA of the Act

In the above part, we have explained the section as mentioned in the Income-tax Act, 1961. However, there are various judicial precedents explaining the section for the ease of the taxpayer. We have mentioned a few scenarios below to ease the interpretation of the said section:

1. Can the new claim of deduction under section 80JJAA of the Act be made during the audit proceedings?
   A taxpayer shall be allowed to claim deduction under section 80JJAA of the Act (otherwise than by filing a revised return) by filing the revised claim during audit proceedings.
2. Is it mandatory to file form 10DA before filing the return of income or tax audit report for claiming the deduction under section 80JJAA of the Act?
   The requirement of filing the audit report before furnishing the return of income is a directory requirement, and it would be satisfied if the audit report was furnished during the assessment proceedings.Hence, where the Form 10DA is furnished during the course of assessment proceedings, the compliance under section 80JJAA of the Act would be done.
3. The total payments of employees increase to INR 27,000 per month from INR 23,000 per month. Will the company be eligible for deduction in the subsequent two years?
   The Company will be eligible for the deduction in the upcoming two years as the section puts restrictions only for the first year when we need to check the emolument should not be more than INR 25,000. Once the employee is qualified as an additional employee, the deduction can be claimed in 3 years, irrespective of the fact that the total emoluments paid to such employee has exceeded INR 25,000 per month. The section shall not be re-visited in the subsequent years. The equal deduction amounting to 30% of additional emolument shall be allowed in all the three years.
4. The deduction claimed under section 80JJAA of the Act shall not be re-visited in the subsequent years. The quantum of deduction claimed in the first year shall remain the same for subsequent years as well.
5. Any additional employee employed by the Assessee during the year and left the organization on 31 March of the Financial Year will not be considered for claiming the deduction of the employment, as this does not have the effect of increasing the total number of employees on the last date of the previous year.
6. Employees covered under Pradhan Mantri Rojghar Protsahan Yojana, where the government has paid ESI and EPF, shall not be covered by the definition of additional employee cost.
7. The provisions of section 80JJAA do not specify any conditions in relation to the continued employment of the additional employees in the subsequent two financial years. Hence, where the additional employee in respect of whom the Assessee has claimed deduction under section 80JJAA of the Act says in FY 2020-21, and the employee left the organization in FY 2021-22, the deduction in respect of such employee would still be considered. The section does not talk about continued employment. This seems to be an open item, which may be plugged by the legislation later.

Considering the above possible interpretations, we understand that section 80JJAA of the Act has many open questions and is subject to litigation before the tax authorities. We have taken support from various judicial precedents to understand the intricacy of the section.

For your ready reference, form 10DA is being reproduced below:

Conclusion

The provisions outlined in section 80JJAA of the Income-tax Act, 1961, serve as a crucial incentive for boosting employment in India. Despite being intended to promote job creation by providing businesses with deductions, the section contains a number of intricate details and interpretations that have come under judicial review. Therefore, It’s imperative for stakeholders to navigate these intricacies with caution, seeking guidance from legal precedents or professional experts to effectively leverage the benefits offered by this provision.

Our team of professionals at Mercurius provides end-to-end assistance in managing the paperwork related to taxes, registration, bookkeeping, compliance, and other areas. Please contact us here if you require individualized assistance or if you have any more questions.