[Opinion] Deductions Under Section 80JJAA of the Income Tax Act, 1961

Eshti Kapoor – [2024] 163 taxmann.com 285 (Article)

Introduction

The Income Tax Act, 1961, Chapter VIA discusses the deductions that must be made in order to calculate total income. It is divided into three parts-

• General
• Deductions in respect of certain Payments
• Deductions in respect of certain Incomes

Section 80JJAA comes under Deductions in respect of certain Incomes.

According to this chapter, an assessee entire income is allowed from his gross total income, and the total amount of deductions is never allowed to exceed the assessee gross total income.

Tax deductions are claims made to lower taxable income resulting from a taxpayer’s various investments and costs. As a result, income tax deductions lower taxpayer’s overall tax payment. It is a type of tax incentive that allows taxpayers to save money. However, how much tax one can save is determined by the sort of tax benefit taxpayer’s claims.

‘Tax Deduction’ and ‘Tax Exemption’ both the terms relate to a reduction in taxable income; they are examples of government-provided tax relief or tax benefits. Tax exemptions, on the other hand, can include full tax relief, lower rates, and taxation on only a selected amount of income. A tax exemption indicates that you do not have to pay taxes on a specific income.

Section 80JJAA of the Income Tax Act is referred to as the deduction in which taxpayers can claim payments made to the most recent and incremental employees in the previous year. Any taxpayer who earns income from a business and is subject to tax under Section 44AB of the Income Tax Act of 1961 should take advantage of the same deduction.

Section 80JJAA encourages firms to create new jobs in the formal sector and offers qualifying workers employment benefits. The government hopes to lower the unemployment rate in the nation by encouraging firms to recruit more workers by offering a tax exemption.

2. Amendments and Changes over the years

2.1 Finance Bill, 1988

The Income-tax Act’s current provisions offer a number of tax breaks to promote the expansion of industry and enterprise. The dearth of job prospects in the nation is an issue. It is suggested to include a new section, 80JJAA, to offer incentives in the form of a special deduction against a company’s business profits, with the goal of encouraging businesses to further increase job possibilities. The deduction would be in addition to any wages or salaries paid, which the company would otherwise be eligible to deduct as business expenses. If the following requirements are met, the suggested deduction amount is 30% of the total wages or pay paid to the new employees.

When starting a new project, there should be at least 100 employees. If a business already exists and employs a minimum of one hundred people, then the total number of new hires must be at least 10% more than the current workforce. In these circumstances, a deduction of 30% of the new employees’ salaries would be permitted. The term “worker” will mean “workman” as defined by the Industrial Workers Disputes Act for the objective of claiming the benefit. The employee in question must be regular employees who has worked for a minimum of 300 days per year.

The tax return must be accompanied by details verified in the required format by the tax auditor. The proposed change will be applicable to the assessment years 1999-2000 and later years, with effect from April 1st, 1999.2

2.2 Finance Bill, 2013

Section 80JJAA of Income-tax Act outlines current provisions that allow an Indian company engaged in industrial undertakings that involve the manufacture or production of articles or things to deduct an amount equal to 30% of the additional wages paid to new regular workers hired throughout the previous year. There is a 3-year window for which the deduction is eligible, covering the A.Y. for the year before to the year that the employment was given. If the industrial undertaking is created through the division, reconstruction, or merging of another industrial operation, then no deduction under this provision is permitted.

It is being claimed that employees in other industries are also eligible for the tax incentive under section 80JJAA, even though it was designed specifically for the hiring of blue-collar workers in the manufacturing sector. Accordingly, it is suggested to alter section 80JJAA to state that an Indian company that makes money from the production of items in its factory is eligible for the deduction. For three assessment years, inclusive of A.Y. relevant to the prior year in which such employment is provided, the deduction shall be made in an amount equal to thirty percent of the additional wages paid to the new regular workers hired by the assessee in such factory in the preceding year.

Additionally, it is proposed to state that if the factory is purchased by the assessee firm as a result of an amalgamation with another company, or if it is split off or transferred from another existing organization, the deduction under this provision will not be applicable. With effect from April 1, 2014, this revision will be applicable to the 2014-15 assessment year as well as any later assessment years.3

2.3 Finance Bill, 2016

In order to replace section 80JJAA of the Income-tax Act regarding the deduction for hiring new employees, clause 44 of the bill proposes to add a new section. The current clause stipulates that after 3 years, new regular workers in a factory would have their 30% of their increased salaries deducted. The provisions cover businesses that make goods in factories. It is suggested that all assessee who are obligated by section 44AB to have an audit of their accounts receive the benefit. The eligibility requirements pertaining to the minimum number of employees and the total number of days they must work throughout the year are also intended to be liberalized.

Under the proposed regulations, employees whose total monthly emoluments are less than or equivalent to Rupees 25 thousand will be eligible for a deduction of costs. However, no deduction would be permitted for costs spent by employees for whom the government pays the full contribution under the Employees’ Pension Scheme, as announced in compliance with the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.

This modification will become effective on 1st April, 2017 and will therefore, be applicable to the A.Y 2017-2018 as well as any subsequent years.4

3. Meaning of Additional Employees

It refers to a worker who was engaged in the preceding year; it excludes the following workers:

• Workers whose monthly total compensation exceeds Rs. 25,000/-.
• Workers who worked fewer than 240 days in the prior year (or 150 days if they manufactured clothing, shoes, or leather goods).
• Workers such as temporary employees who do not contribute to the Recognized Provident Fund.
• Workers enrolled in the Employees’ Pension Plan whose government pays their entire contribution

4. Meaning of Additional Employee Cost

The total amount of wages paid to or payable to additional employees is referred to as the ‘additional employee cost’.

However, if the total number of employees does not rise in the case of an existing business, then extra employee costs will be NIL. This means that the total number of employees joining should exceed the total number of employees departing during the preceding year.

5. Meaning of Emoluments

Any amount paid to an employee in lieu of their employment, regardless of the term used, is referred to as an emolument. This does not, however, include the employer’s contribution to a pension fund or provident fund, nor any payment made to an employee upon their voluntary retirement or termination of employment. Examples of such payments include gratuities, severance pay, benefits from voluntary layoffs, encashment of leaves, refunds of pensions, etc.

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