Concessional Income Tax Rates – What if Return is Filed Belatedly

Budget 2020: Concessional Income Tax Rates – Whether Applicable When Return Is Filed Belatedly U/s. 139(4)

Introduction: The Finance Bill, 2020 has proposed to introduce w.e.f. 01.04.2021 (i.e., from assessment year 2021-22 or financial year 2020-21) the concessional (optional) rates of income tax for individuals, HUFs and cooperative societies by inserting two new sections 115BAD (for cooperative societies) and 115BAC (for individuals and HUFs). (For ready reference concessional rates are mentioned in the later part of the article).

It is an issue that whether these concessional tax rates will be available in cases where the Income Tax return is filed belatedly under Section 139(4) or for the first time u/s. 148, 142(1) etc. In this article an attempt has been made to discuss the above issue along with in depth analysis on various other aspects of these new sections.

Budget 2020- No Change In Basic Tax Rates: In budget 2020, there is no change in basic tax rates for the assessment year 2021-22 (financial year 2020-21). They are same as they were for the assessment year 2020-21 (financial year 2019-20). For ready reference the relevant basic tax rates are mentioned in later part of the article.

Levy Of Tax At Special Rates Will Not Be Affected: The new sections 115BAC and 115BAD are inserted in Chapter XII. This Chapter contains various cases where tax is to be charged at special rates / in special manner / as special cases. The sub section (1) of section 115BAC and 115BAD specifically says that the concessional rates are subject to the provisions of Chapter XII. It means the concessional tax rates will not be applicable to those income for which the tax is to be charged at special rates etc. (e.g., like in cases of long term capital gains, section 68 etc. income cases, certain short term capital gain cases etc.)

Concessional Rates Are Optional: The concessional tax rates are optional. They will be applicable only when the option for adopting them will be exercised in given time and given manner. If the option is not exercised or exercised but not in given time and given manner then the basic tax rates will automatically become applicable.

Concessional Rates Are Conditional: The concessional tax rates are conditional. They will be applicable only if the conditions prescribed for them will be followed. Basically the conditions are that various deductions, claims, set off of losses etc. allowable under the Income Tax Act in computing the total income will have to be forgone. All the deductions, claims etc. are not to be forgone. Only the prescribed deductions etc. are to be foregone.

Concessional Rates Are Not Different For Different Type Of Individuals: The basic slab tax rates are different for different type of individual tax payers based on their age i.e., different tax rates (a) for resident senior citizens (b) for resident super senior citizens and (c) for all other resident individuals up to age of 59 years + non resident individuals of all age. But the concessional tax rates are common for both resident and non resident individuals of all the age.

Concessional Rates Not Applicable For BOI And AOP Etc.: Since long the basic tax rates have remained common for individuals (non senior citizens), HUFs, AOPs, BOIs and artificial judicial persons. However, the new concessional rates will be applicable only in respect of individuals and HUFs. The income of AOP, BOI and artificial judicial persons will continue to be charged at basic tax rates.

Rebate Under Section 87A May Be Avilable From Concessional Rates: On insertion of new section 115BAC, there is no consequential amendment in section 87A. Further, section 115BAC also do not contains any provision that the rebate under section 87A will not be allowable in case of opting for concessional rates. Thus, the rebate may be available from concessional rates also. (Note – in case of resident individuals, having total income up to Rs. 5 lakhs, the rebate of 100% of tax up to Rs. 12,500/- is allowable.)

Switching Between Basic Rates And Concessional Rates: In this regard, the position is different for persons having business income and those having no business income.

Persons not having business income: They are free to switch every year, between the basic tax rates and concessional tax rates as per their convenience and benefit. For example, they may pay tax in one year on concessional rates and then may pay tax in next year on basic tax rates and again in the next year on concessional rates etc.

Persons having business income: They are not entitled for switching between different options from year to year. Once the option is exercised validly, they are bound to follow the same for subsequent years also. However, they are given only one time chance for withdrawal from the concessional rate scheme. But after that they will not be entitled for re entry in the concessional rate scheme.

Thus, for business entities, there is no restriction for one time entry in the scheme and one time exit from the scheme. The restriction is only regarding re entry in the scheme. There is an another aspect of this scheme i.e., if in later years, the withdrawing person ceases to have business income then he will become again entitled for concessional rate scheme, but as a non business entity.

However, further situations have not been dealt with by the proposed provisions. For example, suppose if a debarred business entity becomes re entitled for concessional scheme as non business entity and if thereafter such person again earn business income then whether his entitlement for concessional rates will be continued or not on re conversion from non business entity to business entity.

It is also mentionable here that one time withdrawal cannot be made in the initial year of opting for the scheme itself. It can be made only in any of the subsequent years.

Impact Of Breach Of Conditions: The breach of condition means non compliance with the conditions on which the concessional rate option will be available i.e., concession is available on forgoing of prescribed deductions, claims etc. If the concessional rate option is exercised but at the same time the restricted deductions etc. are also claimed then there will be breach of condition for concessional rate.

If the option is exercised in given time and in given manner but any condition there for is violated then in such situation, the impact is different in respect of business entities and non business entities.

In respect of persons not having business income, the option will become invalid only for the relevant assessment year (not for ever) and the basic tax rates will automatically become applicable for that assessment year only. From next assessment year the option will be available.

However, in respect of person having business income, the option will become invalid not only for the relevant assessment year but such person will become debarred from the scheme for the subsequent assessment years also.

In cases of debarring of business entity, it has not been specifically provided that when such person will not have business income, he will again become entitled for concessional scheme as non business entity. (However, the author is of the opinion that in such cases also the concessional rate benefit as non business entity should be allowed on the similar line as it is allowable to the concessional rate scheme withdrawing person. However, clarification from CBDT is required on this issue.)

Thus, on conversion from business to non business entity and from business to non business entity, the case of the assessee will be considered afresh ignoring the previous history (for business entity condition breach cases CBDT clarification required).

The breach of condition is very sensitive matter as the availability of option substantially depends upon that. In many cases it may happen that inadvertently due to mistake, oversight, ignorance etc. the person may exercise the option but may also claim restricted deductions. To avoid such situation, it is expected that the return form and related software utilities should be designed in such a manner that the on exercise of option, the departmental computer system / return preparation utilities automatically disable filling of amounts in columns for restricted deductions in returns.

Time & Manner Of Exercising Option: The persons not having business income are required to exercise the option every year. This option is to be exercised along with their return of income. The system of exercising option will start from the return for assessment year 2021-22.

The persons having business income are not required to exercise option every year. They have to exercise it only once for any assessment year. Thereafter, the option will automatically become applicable for them in subsequent assessment years. Till they will not exercise this option, they will continue to be governed under the basic tax rates. The system of exercising option will start from assessment year 2020-21. They are not mandatorily required to exercise option from assessment year 2020-21. They may exercise it for any later year also. The option can also be withdrawn once (as mentioned earlier).

Mode Of Exercising Option: In case of non business income the option is to be exercised along with return of income (every year).

Whereas, in case of business income it has been only mentioned that the option (one time) is to be exercised before the due date of filing of return of income. It is not mentioned that it is to be exercised alongwith return. Thus, it may be exercised otherwise than by way of filing of return. Here it is a considerable issue that how the option shall be exercised (other than in return). How the assessee will inform the department (otherwise by way of filing of return) for his intention to avail concessional rates.

Availability Of Option For Belated Return / Timely Return: In case of non business income, the return in which the option is exercised must be filed within due date u/s. 139(1). Thus, in case of belated return U/s. 139(4), the option will not be available for non business entities.

However, in case of business income it may be available even when the return is filed belatedly. For business entities, the basic requirement is that the option is to be exercised before the due date u/s. 139(1). It is not to be exercised along with return of income. Thus, first the option may be validly exercised (otherwise than by way of filing of return) within the above time period u/s. 139(1) and later on, the return may be filed belatedly u/s. 139(4) with concessional rates.

Further, the option is to be exercised only in the first year. In the subsequent years the option is not required to be exercised, the same will be applicable automatically without any reference to the fact that whether the return for that year is filed in due date or belatedly. Therefore, in case of business income, the concessional rates will be applicable in later years automatically even though the return is filed belatedly u/s. 139(4).

It is important to mention here that in cases of non business entities willing to avail concessional rates, the non filing of return within due date u/s. 139(1) may have severe consequences. It may happen that a person may make his tax planning, advance tax planning, TDS planning etc. throughout the year on the basis of concessional rates and due to non filing of return within due date, the option may lapse and his entire tax planning may fail.

TDS To Be Made By Employer On Employee Salary As Per Basic Tax Rates: As per section 192, the TDS on salary is to be made “on the basis of the rates in force for the financial year in which the payment is made”. As per section 2(37A), “rates in force” for the purpose of TDS on salary means “rates of income-tax specified in this behalf in the Finance Act of the relevant year”. The relevant rates of income tax for above purpose (i.e., TDS on salary) have been mentioned in Part III of First Schedule to Finance Bill. These are the basic slab rates and not the concessional rates mentioned in section 115BAB. Thus, CRO may not be available at the time of TDS by employer. It may be available only at the time of filing of return etc. (as discussed earlier). In case where the tax liability as per CRO will be less than basic rates, the employee will have to claim refund in his return. However, in cases where the tax liability as per CRO will be more than the basic rates, the employee will have to pay the difference by way of advance tax or self assessment tax. He may also request his employer to deduct the balance tax also.

Availability Of Concessional Rate For Return U/S. 142(1) / 148 Etc. : In case of non business income, if the original return was filed (with option exercised) within due date U/s. 139(1) then the concessional rate will also be applicable for subsequent returns filed U/s. 148 etc. But if no original return u/s. 139(1) within due date was filed for the relevant assessment year, then in return under section 148 etc., the concessional rates will not be applicable.

However, in case of business entities, if the option has been validly exercised in any year (before due date u/s. 139(1)) than in that year as well as in the subsequent years, in all the cases (till withdrawal / condition breach) the concessional rates will be applicable i.e., (a) return filed U/s. 139(1) within due date – the concessional rates will be applicable in return u/s. 148 etc. (b) return filed U/s. 139(4)– the concessional rates will be applicable in return u/s. 148 etc. (c) no return U/s. 139(1) or 139(4) and return filed for the first time U/s. 148 etc. for later years – the concessional rates will be applicable in return u/s. 148 etc.

Alternate Minimum Tax Provisions Not Applicable: In cases of individuals and HUFs (having business income) and resident co operative societies exercising CRO, the liability for minimum alternative tax (AMT) will not be there. Similarly, in such cases carry forward and set off of AMT credit will also not be available.

PRACTICAL EXAMPLES:

Consistently No Business Income Cases:

(1) In A.Y. 2021-22, no business income, concessional rate option (CRO) not exercised – basic tax rate will automatically become applicable – may choose CRO or basic rate in subsequent years.

(2) In A.Y. 2021-22, no business income, CRO exercised, return filed U/s. 139(1) in due date – concessional rates applicable, may choose CRO or basic rate in subsequent years.

(3) In A.Y. 2021-22, no business income, CRO exercised, return filed U/s. 139(4) after due date – basic tax rates applicable, may choose CRO or basic rate in subsequent years.

(4) In A.Y. 2021-22, no business income, CRO exercised, return filed U/s. 139(1) in due date, deduction also taken (breach of condition) – basic tax rates applicable, may choose CRO or basic rate in subsequent years.

Consistently Business Income Cases :

(5) In A.Y. 2021-22, business income, concessional rate option (CRO) not exercised – basic tax rate will automatically become applicable, may choose CRO or basic rate in subsequent years.

(6) In A.Y. 2021-22, business income, CRO exercised on / before return due date U/s. 139(1) – concessional rates applicable, concessional rates will be automatically applicable in subsequent years till one time withdrawal / breach of condition.

(7) In A.Y. 2021-22, business income, CRO exercised after return due date U/s. 139(1) –basic tax rate will automatically become applicable – may choose CRO or basic rate in subsequent years.

(8) In A.Y. 2021-22, business income, CRO exercised on / before return due date U/s. 139(1), CRO withdrawn in A.Y. 2021-22 itself – withdrawal of CRO is not permissible in the year of exercising option. It can be withdrawn only in the subsequent years. Thus, concessional rates will be applicable in A.Y. 2021-22 and subsequent years (till one time withdrawal in any subsequent year / on breach of conditions).

(9) (In A.Y. 2021-22, business income, concessional rate benefit validly taken). (In A.Y. 2022-23 also business income, CRO withdrawn) – basic tax rates will apply in A.Y. 2022-23 as well as in subsequent years (In subsequent years, the CRO will never be available as business entity. However, if in subsequent years there is no business income then CRO option for non business entity will be available).

(10) In A.Y. 2021-22, business income, CRO exercised on / before return due date U/s. 139(1), deduction also taken (breach of condition) – basic tax rate will automatically become applicable for A.Y. 2021-22 and subsequent years (The provisions are silent on the issue that when a business entity is debarred from CRO due to breach of condition, whether will be re entitled for CRO in subsequent years as non business entity or not. However, the author is of the view that the same should be allowed on the same basis on which it is allowed in CRO withdrawal cases).

Non Business Income Cases Coverted To Business Income Cases :

(11) (In A.Y. 2021-22, no business income) (In A.Y. 2022-23, business income) – CRO may be exercised as business entity in A.Y. 2022-23 or in subsequent years, irrespective of fact that whether CRO was exercised / not exercised / exercised but not validly / or there is breach of condition in earlier years as non business entity.

Business Income Cases Converted To Non Business Income Cases:

(12) (In A.Y. 2021-22, business income) (In A.Y. 2022-23, no business income) – CRO may be exercised as non business entity in A.Y. 2022-23 or in subsequent years, irrespective of fact that whether CRO was exercised / not exercised / exercised but not validly / withdrawn / or there is breach of condition (for condition breach provisions are silent) in earlier years as business entity.

Multiple Conversion Cases:

(13) (In A.Y. 2021-22, business income, condition breach / CRO withdrawn) (In A.Y. 2022-23, no business income) (In A.Y. 23-24, again business income) – CRO may be available in A.Y. 22-23 as non business entity but may not be available in A.Y. 23-24 as business entity, as once CRO is withdrawn / not allowed for condition breach as business entity, it may not be available in any subsequent year as business entity.

Contradictory Regime: The government is continuously saying that it wants to make the tax laws simple. The simplification is to be achieved through reduction in the no. of deductions etc. The concessional tax rates require forgoing of deductions etc. Therefore, for achieving the simplification vide forgoing of deductions etc., the concessional rates should have been promoted.

However, it appears that contradictorily, in the entire regime the concessional rates have been discouraged. For example, if there is breach of condition, the CRO will not be available. If there is withdrawal from CRO, it will not be available as business entities subsequently.

It is suggested that instead of that (for promoting forgoing of deductions etc.), it should have been provided that on breach of condition the CRO will not be debarred but the claimed deductions will not be allowed. Similarly, on withdrawal from CRO, the re entry in CRO should not have been banned but second withdrawal from CRO should have been banned.

Concessional Rates For Cooperative Societies: The concessional rates are applicable only to resident cooperative societies. The concessional rate is 22% instead of 10%, 20% and 30% non concessional rates (alongwith applicable surcharge and education cess). The option will have to be validly exercised once for any year then it will automatically become applicable for subsequent years. The option will have to be exercised prior to the due date of filing of return u/s. 139(1) for initial year of opting. For availing concessional rates, the prescribed deductions etc. will have to be forgone. On breach of conditions, the option will not be available for that assessment year as well for subsequent assessment years. There is no option for withdrawal for option in the same or later year (as against one time withdrawal permitted for individuals and HUFs). The income to be charged at special rates etc. will not be affected on opting for CRO. It may happen that for coming out of concessional rate scheme, the people may adopt alternate way i.e., breach of condition. This may be drawback of the new system.

Concessional Tax Rates For Individual And HUF:

Sl. No.	Total income	Rate of tax
1.	Upto Rs 2,50,000	Nil
2.	From Rs 2,50,001 to Rs 5,00,000	5 per cent
3.	From Rs 5,00,001 to Rs 7,50,000	10 per cent
4.	From Rs 7,50,001 to Rs 10,00,000	15 per cent
5.	From Rs 10,00,001 to Rs 12,50,000	20 per cent
6.	From Rs 12,50,001 to Rs 15,00,000	25 per cent
7.	Above Rs 15,00,000	30 per cent

The tax calculated under concessional rates will be increased by applicable surcharge and cess.

Surcharge: – 10% of income tax where total income exceeds Rs. 50,00,000.

15% of income tax where total income exceeds Rs. 1,00,00,000.

25% of income tax where total income exceeds Rs. 2,00,00,000.

37% of income tax where total income exceeds Rs. 5,00,00,000.

Health and Education cess: – 4% of income tax and surcharge.

Basic Tax Rates For Individual, HUF, AOP / BOI / Artificial Judicial Persons:

For Individual (resident or non-resident), who is of the age of less than 60 years on the last day of the relevant previous year / HUF, AOP / BOI / Artificial Judicial Person

Net income range	Income-Tax rate
Up to Rs. 2,50,000	Nil
Rs. 2,50,000- Rs. 5,00,000	5%
Rs. 5,00,000- Rs. 10,00,000	20%
Above Rs. 10,00,000	30%

Resident senior citizen, i.e., every individual, being a resident in India, who is of the age of 60 years or more but less than 80 years at any time during the previous year:

Net income range	Income-Tax rate
Up to Rs. 3,00,000	Nil
Rs. 3,00,000 – Rs. 5,00,000	5%
Rs. 5,00,000- Rs. 10,00,000	20%
Above Rs. 10,00,000	30%

Resident super senior citizen, i.e., every individual, being a resident in India, who is of the age of 80 years or more at any time during the previous year:

Net income range	Income-Tax rate
Up to Rs. 5,00,000	Nil
Rs. 5,00,000- Rs. 10,00,000	20%
Above Rs. 10,00,000	30%

Plus: –

Surcharge: – 10% of income tax where total income exceeds Rs. 50,00,000.

15% of income tax where total income exceeds Rs. 1,00,00,000.

25% of income tax where total income exceeds Rs. 2,00,00,000.

37% of income tax where total income exceeds Rs. 5,00,00,000.

Health and Education cess: – 4% of income tax and surcharge.

Note: – A resident individual is entitled for rebate under section 87A if his total income does not exceed Rs. 5,00,000. The amount of rebate shall be 100% of income-tax or Rs. 12,500, whichever is less.

Non Concessional Rates For Cooperative Societies :

Net income range	Income-Tax rate
Up to Rs. 10,000	10%
Rs. 10,000 to Rs. 20,000	20%
Above Rs. 20,000	30%

Plus:

Surcharge:- 12% of tax where total income exceeds Rs. 1 crore.

Health and Education cess: 4% of income tax plus surcharge.