This article makes an attempt to analyse the new provisions of section 80JJAA introduced vide Finance Act 2016 and the issues in implementing the said provisions in practice.
Historical Background
The erstwhile section 80JJAA of the Income Tax Act 1961 (‘the Act’) was introduced vide Finance Act 1998 (No.2). The said section was introduced with the intention to create more employment opportunities. The erstwhile section 80JJAA has also had its fair share of amendments which are highlighted below:
As the business environments changed and with the advent of make in India, the Government felt the need to further liberalise the provisions of section 80JJAA by extending the benefits to all the employers rather than restricting it to manufacturing sector only. Accordingly, the Finance Act 2016 substituted the erstwhile section by introducing the new provisions.
The provisions of the new section 80JJAA are discussed as under:
Synopsis of the Section
| CONDITIONS | |
| Additional Employee | Emoluments |
|
|
|
|
|
|
|
|
So practically, for an employer to take benefit of section 80JJAA, he has to employ the employees on or before 3rd August of every year. Any employee employed after 3rd August would not be eligible for deduction under section 80JJAA as it would not be in a position to complete 240 day of service in a year. In order to remove this hardship, the Finance Act 2018 amended the provisions of Section 80JJAA by allowing the benefit for a new employee who is employed for less than the minimum period during the first year but continues to remain employed for the minimum period in subsequent year.
Analysis
The deduction under section 80JJAA is applicable only in a case where there is an increase in total number of employees, and not in a case where there is just an increase in the number of additional employees. For the purpose of analysis, let’s bifurcate the employees in to two groups: one being ‘additional employees’ and other being ‘other employees’.
A taxpayer would believe that by increasing the number of additional employees, he would be eligible to the deduction under section 80JJAA of the Act. However, this might not hold true in following cases:
i) where increase in the number of additional employees is off-set by the reduction in the number of the ‘other employees’ or;
ii) where increase in the number of additional employees does not have the effect of increasing the total number of employees as on the last date of the preceding year.
Let us understand the above with numerical examples:
Example 1
| No. of employees on the last day of the preceding year | No. of ‘additional employees’ joined | No. of ‘other employees’ resigned | Balance Number of employees at the end of each day |
| 200 | 10 | – | 210 (200+ 10) |
| 5 | – | 215 (210+5) | |
| Total | 15 | – |
In the present case, 15 employees have joined and all these fifteen employees have the effect of increasing the employment as on the last day of the preceding year. Also, no other employees have resigned during the year, and accordingly, all the 15 employees would be eligible for deduction under section 80JJAA
Example 2
| No. of employees on the last day of the preceding year | No. of ‘additional employees’ joined | No. of ‘other employees’ resigned | Balance Number of employees at the end of each day |
| 200 | 10 | – | 210 (200+ 10) |
| 5 | – | 215 (210+5) | |
| – | (7) | 208 (215-7) | |
| Total | 15 | – |
In the present case, 15 employees have joined and all these fifteen employees have the effect of increasing the employment as on the last day of the preceding year. However, 7 ‘other employees’ have resigned during the year and accordingly the net increase in the total number of employees is only 8 (215-207). Accordingly, though the number of additional employees employed during the year is 15, deduction under section 80JJAA shall be available only for 8 employees. Thus, the benefit of incentive provision is restricted in this case.
Example 3
| No. of employees on the last day of the preceding year | No. of ‘additional employees’ joined | No. of ‘other employees’ resigned | Balance Number of employees at the end of each day |
| 200 | 10 | – | 210 (200+ 10) |
| 5 | – | 215 (210+5) | |
| – | 20 | 195 (215-20) | |
| Total | 15 | 20 |
In the present case, 15 employees have joined and all these fifteen employees have the effect of increasing the employment as on the last day of the preceding year. However, 20 ‘other employees’ have resigned during the year and accordingly there is net decrease in the total number of employees as compared to the last day of the preceding year. Accordingly, though the number of additional employees employed during the year is 15, deduction under section 80JJAA shall not be available. Thus, the benefit of incentive provision is completely denied in this case.
Example 4
| No. of employees on the last day of the preceding year | No. of ‘additional employees’ joined | No of ‘other employees joined’ | No. of ‘other employees’ resigned | Balance Number of employees at the end of each day |
| 200 | – | – | 20 | 180 (200-20) |
| 10 | – | – | 190 (180+10) | |
| 5 | – | – | 195 (190+5) | |
| – | 20 | – | 215 (195+20) | |
| Total | 15 | 20 |
In the given case, the total number of employees at the end of the year is 215. Thus, there is a net increase in the number of employees as compared to the preceding year. During the year, 15 additional employees have joined, however none of those 15 employees have the effect of increasing the number of employees as on the last date of the preceding year. Deduction in respect of the additional employees will be available only in a case where after the joining of additional employees, the total number of employees on that day goes past 200. In the present case, as the number of employees at the end of each day does not exceed 200 after the joining of the additional employees, said additional employees shall not be eligible for deduction under section 80JJAA. Thus, the benefit of deduction under section 80JJAA will be completely denied in this case, even though there is net increase in the number of employees.
Issues
Issue 1: Suppose Company A acquires another Company B. Will Company A be disentitled forever to the benefit of Section 80JJAA?
Author’s View: The objective of the provisions of Section 80JJAA is to incentivise employment generation. Accordingly, the provisions of the section have to be interpreted liberally and in the light of its intent. Though the section provides the deduction under section 80JJAA shall not be available in case of business re-organisation, this exception shall apply only to the employees that are transferred pursuant to said business re-organisation i.e. increase in the number of employees on account of business re-organisation shall not be considered for the purpose of deduction under section 80JJAA. Denying the benefit of the provision to the company forever, just for the reason that it has acquired another company, shall defeat the intent of the law.
Issue 2: Suppose an employee joins on 1st April 2019 and leave the organisation on 31st December 2019; will deduction under section 80JJAA be available in case of such employee as said employee has served for the period of 240 days? Further, is it necessary for any employee to be employed as on the last day of the financial year to be eligible for deduction under section 80JJAA?
Author’s View: The provisions of section 80JJAA inter alia provide that an additional employee shall be employed for a minimum period of 240 days. The section does not specifically provide that the employee should be present as on the last date of the financial year. Thus, if an employee fulfils all the conditions, then he shall be eligible for deduction under section 80JJAA irrespective of the fact that he is employed or not as on the last day of the previous. However, different view is possible.
Issue 3: Whether deduction shall be available in case of an employee, if he leaves the organisation in the second or third year? In other words, whether the deduction computed in the first year is standard deduction or whether the amount of deduction can change in the second and third year on the basis of employees leaving the organisation?
Authors View: The provisions of section 80JJAA do not specify any conditions in relation to the continued employment of the additional employees in subsequent two financial years. Accordingly, it can be inferred that even if the employee leaves the organisation in the second or third year, the amount of deduction computed in the first year shall remain unaffected. This view is supported by the decision of the Bangalore Tribunal in the case of DCIT v .Page Industries (ITA Nos. 1231 to 1233 of 2014) wherein the Tribunal held that plain reading of Section 80JJAA does not indicate any such condition for availing the deduction of amount equivalent to 30% of additional wages paid to the new regular workmen employed by the assessee that the new regular workmen shall continue at least three years for availing the deduction for three assessment years including the assessment year relevant to the previous year in which such employment is provided. The provision of fiscal statute are required to be strictly interpreted as per the language employed in the section. There is no scope of reading something into the provisions of fiscal statute thereof, even if there is a lacuna in the drafting or language of the provision the same has to be rectified by the legislation. Thus, going by the plain language of the provision of the Section 80JJAA of the Act, it cannot be interpreted that for availing deduction under the said Section on account for additional wages paid to a new regular workmen employed for three assessment years commencing from the assessment year relevant to the previous year in which such employment is provided such workmen should continue in the employment for all the three years. The only condition provided under the explanation being the regular workmen that the workmen should be employed by the assessee in the previous year is the criteria to be fulfilled and to be tested in the first year of the claim of deduction and once deduction is allowable in the first year then, 30% of the such additional wages is allowable as deduction in each of the subsequent two years. As we have already discussed above in the facts emerging from the record, the AO has not disputed the completion of 300 days of employment by these new regular workmen employed by the assessee during the earlier two years and therefore, once the said condition is satisfied, the condition of the continuity in employment does not emanate from the provisions of Section 80JJAA of the Act.
However, it is pertinent to note that the Hon’ble Bangalore Tribunal in the case of ACIT v Bosch Ltd (74 taxmann.com 161) has held that In each of such three years it has to be seen that the workmen was employed for at least 300 days during that previous year and that such workmen was not a casual workmen or workmen employed through contract labour. Therefore, if some workmen were employed for a period of less than 300 days in the previous year then no deduction is allowable in respect of payment of wage to such workmen in the previous year even if such workmen employed in the preceding year for more than 300 days but in the present year, such workmen was not employed for 300 days or more.
Issue 4: Is deduction under section 80JJAA required to be claimed in two consecutive financial years succeeding the financial year in which the employee was employed?
Author’s View: The Hon’ble Delhi Tribunal in the case of Amar Ujala Publications ITA No. 4166 of 2012 has held that deduction under section 80JJAA is available for three consecutives assessment years
Issue 5: Whether the words ‘more than Rs. 25,000 per month’ can be construed to mean ‘more than Rs. 3,00,000 per annum?
Author’s View: Section 80JJAA is a beneficial section and accordingly the provisions of the section have to be interpreted liberally. It is quite possible that the salary of the employee might increase beyond Rs. 25,000 at the end of the year or in one of the month the employee might receive more than Rs. 25,000 because of bonus. In such cases, it has to be seen whether the average monthly salary of the employees is below 25,000 i.e. if the employee has earned less than Rs. 3,00,000 in a year, then he shall be eligible for deduction even if in certain months his salary is more than Rs. 25,000. Any contrary interpretation shall defeat the purpose of the law.
Issue 6: Suppose a company has 1000 employees in FY 2018-19. These employees consist of additional employees and other employees. Out of these employees, 100 employees are such who joined in FY 2018-19, but couldn’t complete the minimum period of 240 days in the year FY 2018-19. However, these 100 employees have completed 240 days in FY 2019-20 and according to the amendment of Finance Act 2018, these employees will be deemed to be as additional employees in the year FY 2019-20. A question arises as to whether the company would be eligible for deduction under section 80JJAA of the Act in respect of emoluments paid to the above-stated 100 employees if there is no change in the total number of employees during the FY 2019-20.
Author’s View: Let us tabulate the above information
| Number of employees as on 31 March 2019 | 1000 |
| Number of employees who joined in FY 2018-19 but could not complete 240 days in FY 2018-19 | 100 |
| Number of employees from above who completed 240 days in FY 2019-20 | 100 |
| Total number of employees as on 31 March 2020 | 1000 |
From the above example, as per the amendment of the Finance Act 2018, 100 employees will be deemed to be considered as additional employees for FY 2019-20. However, there is no increase in the number of employees as on 31 March 2020 as compared to the number of employees as on 31 March 2019. This is so because the 100 employees that are considered to be additional employees for FY 2019-20 have actually been employed in FY 2018-19 and thus, they are already included in the number of employees as on 31 March 2019. Thus, in this case, deduction shall be denied to the company as there is no increase in the number of employees as on 31 March 2020 as compared to the number of employees as on 31 March 2019. However, such interpretation will defeat the intent of the amendment.
Conclusion
The intention of liberalising the provisions of section 80JJAA was to provide impetus to the employment generation for the weaker sections of the society. However, we have seen that the increase in the number of additional employees can be off-set by the decrease in the number of additional employees. Also, if the additional employees do not have the effect of increasing the number of employees as on the last date of the preceding year, the deduction shall not be available. Further, the amendment of Finance Act 2018 will be rendered useless, if the section does not provide for adjusting the number of employees at the end of the preceding year by excluding the deemed additional employees. Although the section is short and specific, there are a lot of unsolved issues which are capable of different interpretations.
All the above issues will lead to restrictive application of section 80JJAA thereby not fulfilling the intent of the legislation. At present, the improved section 80JJAA is like an old wine in a new bottle as it is still plagued with issues of the erstwhile section. Only once the clarifications are issued and the section is further liberalized, we shall be able to say that the new improved section 80JJAA is a new wine in a new bottle! And at last, we shall all say Cheers!
Author Bio
