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Explained: What is Rule 132 of Income Tax and how it is important for taxpayers?

Nov 6, 2022,

Synopsis
For those with income from a business or profession who have also taken advantage of the cess/surcharge deduction, Rule 132 has been adopted.

The Central Board of Direct Taxes (CBDT) has amended the Income Tax Act to include Rule 132. The re-computation of income under sub-Section 18 of Section 155 of the Income Tax Act, 1961, is addressed in Rule 132 of the Income Tax Rules, 1962, which was implemented on October 1, 2022. It is crucial for anyone in charge of managing businesses to be aware of the recently added Rule 132 of the Income Tax Act. The income tax act's CBDT regulation 132 considers whether businesses should deduct surcharge payments when determining their taxable income. To seek for the re-computation of total income under Section 155(18), Form 69 has been made available by the Income Tax Department under Rule 132 of the Income Tax Act. For those with income from a business or profession who have also taken advantage of the cess/surcharge deduction, Rule 132 has been adopted. Hence, Form 69 must be used by taxpayers who have claimed a deduction for a cess or surcharge and submitted on the income tax portal electronically with the duly filed information like taxable income, tax paid, and deduction claimed as cess or surcharge.

Nidhi Manchanda, Certified Financial Planner, Head of Training, Research & Development at Fintoo said “It is very crucial for the taxpayers who are professionals or run businesses to know about the recently added Rule 132 of Income Tax Act. Before the introduction of this rule 132, taxpayers were not allowed to deduct income tax paid while calculating net profit of a business. However, there was not much clarity on whether cess or surcharge is allowed as a deduction or not. And thus, some businesses had been taking the advantage of this loophole in the income tax act and were claiming cess and surcharge as an allowable deduction because of lack of clarity."

Nidhi Manchanda said "Now, with the introduction of Rule 132, the Government provided a one-time window till 31st March 2023 to recompute the taxable profits without cess or surcharge as deduction and deposit the additional tax on such under reported income from retrospective effect from 2005. It is suggested to comply with the regulations and make an application in Form 69. No penalty would be leviable on such payment till 31st March 2023."

Dr. Suresh Surana, Founder, RSM India said “An assessee is liable to pay Income-tax at the applicable tax rates on the total taxable income which includes basic tax rate, surcharge and health & education cess (‘cess’). The Income-tax paid in respect of the income is not allowable as deduction under section 40(a)(ii) of the Income-tax Act, 1961 (‘the Act’) for the purpose of computing total income. However, practically various assessees had claimed deduction of cess, contending that Income-tax do not include cess for the purpose of disallowance under section 40(a)(ii) of the Act and relying on certain judicial precedents in this regard. Some taxpayers may have applied the same analogy to even claim the surcharge as deduction on the contention that it is not in the nature of Income tax."

Dr. Suresh Surana said “Notably to ensure that the surcharge and cess are not claimed as deduction by the taxpayers, the Finance Act, 2022 brought clarity by way of retrospective amendment (with effect from 1 April 2005). As per the clarificatory retrospective amendment, surcharge and cess would be part of the definition of income-tax and is to be disallowed under section 40(a)(ii) of the Act. Further, it also amended section 270A of the Act to levy penalty for under-reporting of income in cases where such deduction is claimed by the assessee. In order to provide one-time relief from penalty, the assessee is allowed to re-compute their total taxable income for all such earlier years as per section 155(18) of the Act. In this regard, the Central Board of Direct Taxes (CBDT) has inserted Rule 132 w.e.f. 1 October 2022 vide Income-tax (Thirty-second Amendment) Rules, 2022 to provide procedure on re-computation of total taxable income under section 155(18) of the Act. The procedure is summarised below –

a. Assessee to make application in Form 69 providing details of amount claimed as surcharge / cess and total income; on the income-tax portal on or before 31 March 2023

b. On receipt of the application, the assessing officer shall re-compute the total income and issue demand notice under section 156 of the Act (Note – the assessing officer may even issue demand notice for subsequent assessment year if the aforesaid claim results into loss and the same is carried forward and set-off in subsequent assessment year)

c. The assessee should make payment as per the demand notice and intimate the payment details in Form 70 within 30 days of making said payment.

He further added that “The aforesaid rule is important to those assessees who have claimed deduction of surcharge and cess while computing total taxable income. Such assessee needs to identify the assessment year wherein they have claimed said deduction and file single application (for all assessment years) in Form 69 on or before 31 March 2023. On receipt of demand notice from the assessing officer, the assessee needs to make payment of demand raised therein, if any and intimate the same to the assessing officer in Form 70. If the assessee does not file the said application within the prescribed timeline, the assessing officer can suo-moto pass rectification order under section 154 of the Act on or before 31 March 2026. Further, the assessing officer may additionally levy penalty amounting to 50% of tax amount on such amount of surcharge and cess claimed as deduction by the assessee."

Gopal Bohra, Partner, N.A. Shah Associates, in Q2 said “Until the amendment made by the Budget 2022, taxpayers were claiming payment of education cess as deductible expenditure based on the various high court decisions which held that education cess is not a tax. Whereas the tax department was contesting that the education cess is income tax and not deductible as an expenditure while computing the taxable income. Budget 2022 amended section 40(a)(ii) retrospectively from AY 2005-06 by providing that income tax shall include education cess and accordingly not a deductible expenditure."

“Since many taxpayers have claimed the education cess as deductible expenditure in earlier years, the Budget 2022 has also provided that such taxpayers can file an application to the tax officer in a prescribed form requesting for recomputation of the taxable total income. Now the Board has issued Rule 132 along-with Form 69 enabling taxpayers to file the online application for recomputation of taxable income without allowing deduction of education cess which is claimed earlier. On failure to file the application for recomputation of income in form 69 on or before 31.3.2023, taxpayer will liable to a penalty for underreporting of income apart from tax and interest on the disallowance of education cess," said Gopal Bohra.

Mr. Shravan Shetty, Managing Director, Primus Partners said “CBDT's rule 132 comes under the income tax act which highlights whether businesses should consider paying surcharges as a deduction while calculating taxable income. To make things clear and to prevent businesses from claiming deductions from the cess, this amendment has been introduced under the Finance Act 2022. Businesses must note that the government has allowed a one-time window for taxpayers to recompute their taxable profits. This is an important step as businesses will be able to electronically submit Form 69, make the necessary payments with respect to Forms 69 and 70. All businesses must take the opportunity to revaluate their files 2005 onwards to ensure that they no penalty is levied upon them by authorities."

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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