Section 80 JJAA- Tax incentive for employment generation

Background:

The erstwhile Section 80JJAA of the Income Tax Act,1961 provided a deduction to the businesses engaged in the manufacture of goods in a factory. The provision provided for a deduction of 30% of additional wages paid to new regular workmen in a factory for three years subject to other conditions. Finance Act,2016 substituted the erstwhile Section 80JJAA of the Income Tax Act,1961 to broaden and liberalize the scope of the employment generation incentive. The deduction was extended to all sectors and not restricted only to assessees deriving income from the manufacture of goods in a factory .

Conditions for deduction:

• Assesse should be subject to get accounts audited under section 44AB.
• Business should not be formed by splitting up, or the reconstruction, of an existing business.

Exception: re-establishment, reconstruction or revival by the assessee of the business in the circumstances and within the period specified in section 33B.

• Business should not be acquired by the assessee by way of transfer from any other person or as a result of any business reorganisation.
• Furnish along with the return of income a report of the accountant (FORM NO. 10DA) one month before the due date for filing of return under section 139(1).

Quantum of deduction:

30% of additional employee cost incurred in the course of business in the previous year.

"additional employee cost" means total emoluments paid or payable to additional employees employed during the previous year:

Conditions:

(a) there should be an increase in the number of employees from the total number of employees employed as on the last day of the preceding year;

(b) emoluments should be paid by an account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed (i.e Credit Card, Debit Card, Net Banking, IMPS, UPI, RTGS, NEFT & BHIM Aadhar Pay) .

Note:

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.

"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; 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.

"additional employee":

Pre-Requisites for inclusion in ‘additional employee’:

(i) employed during the previous year; and

(ii) employment has the effect of increasing the total number of employees employed by the employer as on the last day of the preceding year,

Conditions for inclusion in 'additional employee':

(a) total emoluments of such employee should be less than equal to Rs.25,000/- per month;

(b) the entire contribution of such an employee is not 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;

(c) employed for a period of more than or equal to 240 days during the previous year;

Exception: in the case of an assessee who is engaged in the business of manufacturing of apparel or footwear or leather products, the employee should be employed for a period of more than equal to 150 days.

Note: 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.

(d) should participate in the recognised provident fund;

Period of deduction:

3 assessment years including the assessment year relevant to the previous year in which such employment is provided.

Availability of deduction in special circumstances:

• Available to Companies exercising the option under Section 115BA ( Tax on income of certain domestic companies engaged in the business of manufacture or production at the rate of 25% subject to other conditions specified), Section 115BAA (Tax on income of certain domestic companies at the rate of 22% subject to other conditions specified) or Section 115BAB ( Tax on income of new manufacturing domestic companies at the rate of 15% subject to other conditions specified).
• Available to individual and HUF who have exercised the option under Section 115BAC (new tax slabs) for concessional rate of tax.
• Available to Co-operative Society who have exercised the option under Section 115BAD (Tax on income of cooperative societies at the rate of 22% subject to other conditions specified).

Conclusion:

The requirement of employment generation in the economy is very evident and this is envisaged by the fact that although the new optional and concessional tax regime for taxpayers has removed most of the exemptions, section 80JJAA remains untouched. Further, there are various provisions in the Act that prohibit cash transactions and allow/ encourage payment or receipt only through banking channels and Section 80JJAA is one such provision. Despite a few pitfalls and issues around interpretations, this provision is encouraging enough to examine a claim of deduction for employment generation.