In the wake of rising reports on unemployment, the Central Government has taken various steps to fulfil its commitment of job creation. As part of these efforts, the provisions of Income-tax Act, 1961 (‘IT Act’) were amended[see endnote 1] to substitute the provisions of Section 80JJAA of the IT Act[see endnote 2] with seemingly less restrictive and simpler provisions to encourage job creation. The amended provisions expanded the benefit to all employers including service sector and removed the threshold of 10% increase for claiming deduction. Thus, deduction was available for every additional employee employed.
The importance of the amended provision can be gathered from the fact that upon reduction of corporate tax rates vide the Tax Ordinance [see endnote 3], the corporates opting for lower tax rates have been restricted from availing all major deductions other than the deduction provided in Section 80JJAA of the IT Act. In this backdrop, let us examine some of the hurdles likely to be encountered by the taxpayers while claiming this deduction.
The intent behind amendment to Section 80JJA of the IT Act is simple. Employers receive tax deduction[see endnote 4] for every additional employee whose salary is below twenty-five thousand per month provided there is a degree of permanency in the employment (the employee was required to be employed for a period of at least 240 days). Further, the legislature provided some inherent checks to prevent abuse. The provisions cast a burden on the employer to prove that the employment of the additional employees during the year has led to an increase in the total number of the employees employed by the employer when compared to the last day of the preceding year. Thus, the employer cannot avail deduction on account of replacement of the old employees by new ones.
The provisions of Section 80JJAA of the IT Act require the taxpayer to furnish, along with its return of income, its claim of deduction in Form 10DA[see endnote 5]. A perusal of the Annexure of the Form 10DA demonstrates the following:
- The increase in employment is measured on last day of previous year:Form 10DA postulates that in order to compute the additional employees employed by the employer during the previous year, a comparison should be made between the number of employees as on the last day of previous year to the number of employees as on the last day of the year prior to the previous year. Thus, as per Form 10DA, if the taxpayer was claiming deduction for A.Y. 2019-20, the comparison for computing additional employees should be made between the number of employees as on 31st March 2019 and 31st March 2018. If the number of employees as on 31st March 2019 are more than number of employees as on 31st March 2018, the employer is eligible for deduction.
- The deduction is restricted to only the increase in number of employees as on last day of previous yearOnce the differential of the employees between the last day of previous year and year prior to that has been computed, the form requires the taxpayer to provide the number of employees which satisfy the conditions stated in Section 80JJAA of the IT Act. However, the form provides that the number of additional employees entitled for deduction cannot exceed the differential computed between the two aforesaid dates.
Let us say an employer, ABC Ltd., had 100 employees as on 31st March 2018. Now, say ABC employed 50 employees in the month of April 2018 and these employees continued to be employed throughout the year but 30 of these employees left in March 2019. Thus, the number of employees as on 31st March 2019 is 120. In such a case, deduction, as per Form 10DA, cannot be claimed for salaries paid to more than 20 employees even though, the employer had 50 employees throughout the year which satisfied the conditions stated in Section 80JJAA of the IT Act.
The aforesaid example very well demonstrates the position of a taxpayer which though has incurred cost of additional employment and satisfied all other conditions provided in Section 80JJAA of the IT Act but does not stand to gain tax benefit from such cost. The legislature, in its wisdom, can without a doubt curtail the benefit it seeks to grant to the taxpayer. However, in case of Section 80JJAA of the IT Act, the legislature has not done so. The interpretation derived from the Annexure of Form 10DA, as will be discussed in the following paragraphs, is seemingly not in line with either the literal reading of provisions of Section 80JJAA or its legislative intent.
The provisions of Section 80JJAA cast a burden on the taxpayer 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’. It is clearly evident that the provision benchmarks the total number of employees on the last day of preceding year to examine the increase in number of employees in previous year.
However, the provisions do not provide any specific day of the current year on which the increase in the number of employees has to be examined. Thus, the provisions are widely worded to grant deduction in respect of all additional employees provided there has been an overall increase in the number of employees. Such an increase can be at any time during the previous year.
Thus, demonstration of increase is a factual exercise (wherein taxpayer will be required to prove that the new employees have resulted in fresh employment and is not a case of replacing old employees with new ones). The fiction of increase on last day of previous year, as is contemplated in Form 10DA, makes the entire exercise of examining the fresh employment, a mechanical one and does not get any support from the literal reading of provisions of Section 80JJAA. Thus, the Form notified by the Central Government is not in line with the provisions enacted by the legislature. It is worth mentioning here that the Form 10DA has been notified by the executive by virtue of powers delegated upon it vide provisions of Section 80JJAA. However, the executive cannot exercise the delegated power to introduce conditions /prohibitions not contemplated by the provisions of the Act[see endnote 6].
The computation of additional employees in case of seasonal industries is also a challenge. The period of 240 days has been relaxed to 150 days in case of certain seasonal industries. Despite this, there are serious issues regarding, computation of additional employees in seasonal industries. This is because, in seasonal industries the employees tend to leave after the peak season only to be re-appointed during the next peak season. In such a case, there is no clarity as to whether the deduction can ever be availed if the peak season does not coincide with the last day of previous year. The ambiguity holds ground, specially by virtue of Form 10DA wherein the comparison is mechanically made on last day of two years. In such a case, there may be no additional employment between two dates even though new employees could have been employed during the peak season.
Apart from the Form 10DA, the provisions of Section 80JJAA of the IT Act are themselves not unambiguous. An additional employee has been defined to be an employee who has a salary of less than Rs. 25,000/- per month. Practically there can be cases where an employee has employed for a monthly salary of less than the said limit but ends up having a higher annual average annual salary on account of year end bonus etc. In such case, there is no clarity as to whether the salary paid to such an employee will be eligible for deduction.
Then, there is the issue surrounding the period of computation of employment. The provisions of Section 80JJAA of the IT Act require the new employee to be employed during the previous year for a period of at least 240 days to be an ‘additional employee’ eligible for deduction. There may be cases where the employment of a new employee may be split between two years and the deduction is not available in respect of the salary paid to the new employee merely because the new employee did not complete 240 days in either of those two years.
It is apt to quote here the Bombay High Court which once held that a superficial and narrow interpretation can only defeat the benevolent purpose behind a provision and the substance of the matter may get shrouded under a technicality which cannot be permitted to supersede the dominant intention of the provision[see endnote 7]. The provisions of Section 80JJAA of the IT Act were enacted with a social objective of encouraging employment. In light of the ambiguities in the provisions, this objective should be given paramount importance while interpreting the provisions of Section 80JJA. Meanwhile, in light of the Form notified by the Central Government, some clarity in respect of these provisions in the upcoming Budget may go a long way to avoid any litigation between the taxpayer and taxman.
The author is a Principal Associate, Direct Tax practice, Lakshmikumaran & Sridharan, Delhi]
- Amendment vide Finance Act, 2016 with effect from A.Y. 2017-18
- Section 80JJAA of the IT Act provides deduction to an employer employing additional employees
- The Taxation Laws (Amendment) Ordinance, 2019
- 30% of the additional salaries paid for a period of three years starting from the year in which additional salary is paid
- Form 10DA is notified by Central Government vide Rule 19AB
- Kunj Behari Lal Butail vs State of HP:  3 SCC 40
- Gannon Dunkerley & Co. Ltd.:  159 ITR 162 (Bombay)