Introduction
Job creation is the objective of any welfare
state. In a developing country like India, with its typical demographic
profile, creating employment is a priority of the government. For this purpose,
the state often promotes labour intensive industry and business. Giving a tax
incentive to businesses which provide for jobs is a method adopted for this
purpose. If the object is to promote a certain category of expenditure a tax
incentive/deduction is normally related to the expenditure itself. Section
80JJAA, from the time it was brought on the statute book from assessment year
1999-2000, provided such a deduction with reference to “additional wages”
paid to new regular workmen.
The manner in which it was enacted,
restricted its availability to only a few assessees. Firstly, only those
carrying on the business of manufacture of goods in a factory were entitled to
the deduction. Secondly, the deduction was limited only to payments to workmen.
Thirdly, the deduction was available only with reference to new regular workmen
in excess of 50 workmen, and that too, only if there was an increase of 10% or
more in the number of workmen employed. All in all, the deduction did not
provide the requisite incentive.
Finance Act
2016, with effect from 1st April 2017, liberalised the deduction
substantially. While some further relaxation would make the provision even more
effective, in its current form as well, the deduction is welcome. Though the
amendment to this provision was enacted a year earlier, it does not seem to
have attracted the attention that it deserves. The object of this article is to
explain the provisions, and bring to the notice of the reader certain issues
that may arise.
Scope of the deduction
The deduction granted u/s. 80JJAA (1)
specifies the following conditions:
(1) it applies to an assessee
to whom section 44AB applies
(2) the gross total income of
such an assessee should include any profits and gains derived from business.
If these threshold conditions are satisfied, the
assessee is eligible for a deduction of 30% of “additional employee cost”
incurred in the course of such business for three assessment years commencing
from the year in which such employment is provided.
Exclusions
The deduction will not be available if
(1) the business is formed by
splitting up or the reconstruction of an existing business (the proviso
excludes business which is formed as a result of re-establishment,
reconstruction or revival specified in section 33B)
(2) the business is acquired by
the assessee by way of a transfer from any other person or as a result of any
business reorganisation
(3) the assessee fails to
furnish along with the return of income the report of an accountant as defined
in the explanation to section 288, giving such particulars in the report as may
be prescribed ( Rule 19 AB and form 10DA).
Definitions
The explanation defines the terms
“additional employee cost”, “additional employee” and “emoluments”.
Additional employee cost
This means the total emoluments paid or
payable to additional employees employed during the previous year. In the first
year of a new business, the additional employee cost will be the aggregate
emoluments paid or payable to employees employed during the previous year. In
case of an existing business, if there is no increase in the number of
employees from the total number of employees employed on the last day of the
preceding year, the additional employee cost shall obviously be “nil”
Emoluments paid otherwise than by account
payee cheque, account payee bank draft or the use of electronic clearing system
through a bank account would not be eligible for deduction. This would ensure
that the payment to the employee is verifiable subsequently and, since cash
payments are not permissible, it would significantly reduce misuse.
Additional employee
An additional employee is one who is
employed by the employer during the previous year and thereby increases the
total number of employees employed by the employer. The following employees are
excluded from this definition.
(1) Employees whose total
emoluments are more than Rs. 25,000 per month.
(2) An employee whose entire
contribution is paid by the government under the employees pension scheme
notified in accordance with the Employees Provident Funds and Miscellaneous
Provisions Act 1952 (EPF Act). Under the EPF Act, this refers to employees with
a disability. The rationale and relevance of this exclusion is not understood
and is discussed separately in the following paragraphs.
(3) An employee who is
employed for a period of less than 240 days during the previous year.
(4) An employee who does not
participate in the recognised provident fund.
Emoluments
The term emolument is defined as any sum
paid to the employee but excludes
(1) contribution by the
employer to a pension fund, provident fund or any other fund for the benefit of
employees
(2) any lump sum payment
paid or payable to an employee at the time of termination of his service, or on
superannuation or voluntary retirement such as gratuity, severance pay, leave
encashment, voluntary retrenchment benefits, commutation of pension etc.
Deduction for earlier years
Sub-section 80JJAA (3), provides that the
provisions of this section as they stood prior to the amendment would govern
the deduction for the assessment year 2016-17, and earlier years.
Issues
The amended provisions are certainly far
more liberal than those in force for assessment year 2016-17, and earlier
years. However, certain issues still remain. These are
(1) The deduction is available only to an
assessee to whom section 44AB applies and whose gross total income includes any
profits and gains derived from business. The question that arises is
whether an assessee carrying on a profession would be eligible for the
deduction.
The terms business and profession are defined distinctly in section 2. Further,
section 44AB itself prescribes different thresholds for business and
profession. The Act, where it seeks to include the term profession, does so
explicitly (e.g., section 28). Therefore, it appears that an assessee carrying
on a profession will not be eligible for the deduction.
(2) If an assessee acquires a business
either by way of transfer or business reorganisation, such an assessee
would not be eligible for the deduction. While denying the benefit to an
assessee who acquires business on transfer may have some logic, one does not
understand as to why the benefit should be denied in a case of business
reorganisation. An undertaking may be transferred in the course of an
amalgamation or demerger. The business in such a situation is continued in a
different entity post such amalgamation/demerger. The possible reason for this
exclusion may be that the benefit is not intended to be given on account of
employees added due to a business being received on amalgamation/demerger.
However, succession to a business which
falls neither in the term “transfer” or “business reorganisation”, should not
result in a denial of the deduction. To illustrate if a business is succeeded
by legal heirs on the demise of the proprietor, the legal heirs should be
entitled to the deduction, in regard to the remaining assessment year/s for
which the claim is available
(3) The term additional employee excludes a
person whose emoluments are more than 25,000 per month. It may so happen
that an employee joins employment at a lower salary, but during the period of
three years for which an assessee employer is entitled to the claim his
emoluments cross 25,000. The issue would be whether emoluments paid to such
an employee, should be excluded in totality or if such exclusion is
partial/limited. The exclusion of the employee is one “whose total emoluments
are more than Rs. 25,000 per month”. Therefore, till the emoluments reach that
threshold, the employee would continue to be an additional employee. The
provision to be interpreted is a deduction granting relief. Consequently, the
emoluments paid till they reach the threshold should be eligible for the
deduction.
(4) An employee who is employed for a
period of less than 240 days is excluded from the definition of “additional
employee”. An issue is whether leave taken by the employee is to be
included for counting the days of employment. If an employee is entitled to a
certain number of days leave for the days served, the days of paid leave should
certainly be included for the purposes of calculating the number of 240 days.
Even otherwise, just because an employee has gone on leave, it cannot be said
that his employment has ceased during that period.
(5) An employee who does not participate
in a recognised provident fund is excluded from the definition of additional
employee. In a situation where the provident fund act does not apply to the
establishment, on account of the number of employees being less than the
threshold limit, this should not act as a disability. This is on account of the
established principle of law that an assessee cannot be asked to do the impossible.
Therefore, if the relevant statute does not apply to the assessee, he should
not be denied deduction.
(6) A very odd
provision seems to be the provision of Explanation (ii)(b). As has been
mentioned in the foregoing paragraphs, under the Employees Provident funds and
Miscellaneous Provisions Act 1952, the contribution to the employees pension
fund is to be borne by the government in the case of an employee having a
disability. Such an employee is excluded from the definition of an additional
employee and consequently the emoluments paid to him do not qualify for
deduction. This provision does not seem to have any rationale, except perhaps,
that the Government does not want to give an additional benefit in such cases,
over and above the PF contribution that it is already bearing. The government
always seeks to promote and ensure that persons with disability are employed
gainfully. Therefore those employers who employ differently abled persons ought
to get an incentive. An amendment to this provision is called for.
(7) One more issue is in respect of
calculation of number of additional employees. This could be a potent point for
litigation and therefore working of it is a key element. Consider the following
example in respect of eligible employees:
|
Year 1 |
Year 2 |
Employees at the beginning of the year |
50 |
52 |
Resigned during the year |
3 |
5 |
Added during the year |
5 |
2 |
Net Addition |
2 |
(3) |
Total at year end |
52 |
49 |
Considering the
above example, following questions arise:
a) In Year 1, should net
additional employees be considered for deduction or gross addition?
b) Does one need to maintain a
list of eligible employee and if so, how? If the numbers resigning / retrenched
are more, will deduction be denied?
c) In Year 2, if there is a
net deduction, should the assessee still make a claim for 2 the additions made?
While at first blush this appears to be a
controversial issue, the answer is contained in the definition of additional
employee in the Explanation to the section. According to clause (ii) of the
explanation the term “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
day of the preceding year. In the illustration given above, the employer
employs five new employees during the year, but three resign resulting in a net
addition of two employees.
The issue arises because while the
explanation requires a comparison to be made with the strength of the employees
as on the last day of the preceding year, it does not contain a stipulation as
to when this comparison is to be made. When there is no specific mention one
would have to go by a purposive interpretation of the section. The incentive is
for employment generation. This is how the explanatory memorandum
describing the amendment refers to it. In light of the same, it will be
appropriate to consider only the net addition of employees. As to the point of
time when the comparison is to be made, it should be the last day of the
previous year for which the deduction is to be claimed. In respect of which
employee the deduction is to be claimed will be left to the discretion of the
employer assessee. Therefore in year one, the deduction should be claimed in
respect of the net increment of two employees. As far as the second year is
concerned, it appears that the assessee would not be entitled to any deduction.
Conclusion