Tax Incentive for additional employee cost u/s 80JJAA: An Analysis

Before I delve into my topic of discussion, lets have a little background of Section 80JJAA of the Income Tax Act 1961.

Background

Section 80JJAA was introduced to incentivise employing additional workforce. The section was amended by Finance Act 2016 and then again by Finance Act 2018. I have covered key provisions of this section and attempted to through light on some of the finer points to be kept in mind while planning to take benefit under this section.

Conditions to be fulfilled

In order to claim deduction under this section, all of the below conditions must be cumulatively satisfied

1. The assessee must be subject to Tax Audit u/s 44AB
2. The gross total income of such assessee must include profits and gains derived from business.
3. The business is not formed by splitting up or reconstruction of an existing business.
4. Business is not acquired from any other person through transfer or business re-organisation.
5. Form 10DA is obtained from a practicing CA on or before the due date for filing of return u/s 139(1).
6. The assessee incurs additional employee cost which results in the increase in the total number of employees employed as at the end of the previous year as compared with the immediately preceeding previous year.
7. Such employees:-
   1. Not drawing wages or salary more than Rs. 25,000/- per month.
   2. Such wages or salary is paid through A/c Payee cheque, bank draft or through ECS from a bank account
   3. Employed for a period of 240 days or more during the previous year(150 days in case of assessee engaged in the manufacture of apparel, footwear or leather goods).
   4. Duly covered under PF scheme and no benefit of pension amount has been claimed from the Govt.

Amount of Deduction

The amount of deduction under this section shall be the 30% of the additional employee cost corresponding to eligible employees as satisfy the conditions given above. Such deduction will be available for a period of 3 assessment years starting with the assessment year relevant to the previous year in which such employees were employed.

However if an eligible employee is employed for a period of less than 240 days(or 150 days as the case may be) during the pervious year but is employed for a period of 240 days or more (or 150 days or more as the case may be) in the immediately succeeding year, then it would be deemed that such employee was employed in the immediately succeeding year for the purpose of this section.

Illustration

The Case

ABC Pvt. Ltd. Is engaged in the business of manufacturing furniture.

The pre-GST sales turnover of the company during F.Y 18-19 is  Rs. 5.65 Crores.

 Details of there employees including workers and admin staff are given as under:-

The unskilled labour are paid on a daily basis in cash, which is duly accounted for in the books of accounts. All other classes of employees are paid through ECS from the company’s current account with XYZ Bank Ltd.

As per company policy, the Basic Salary is 40% of the total salary mentioned in the table above. All employees whose basic salary is lower than 15,000/- per month are covered under PF scheme and the company is duly complying with the same.

Calculate the deduction allowable under Section 80JJAA, also indicate for how many employees will the deduction be allowable in the next previous year assuming they are employed for the entire next year.

The Solution

Before you go through the possible solution given here, you advised to first attempt solving the above case on your own and then go through the solution to gadge your level of understanding of the concepts.

As per the provisions of Section 80JJAA, in order to claim deduction all of the conditions mentioned before in this article must be cumulatively satisfied. Lets examine the satisfaction of each condition one byu one

1. The assessee has a sales turnover greater than Rs. 2 Crores and hence will be liable for tax audit u/s 44AB and hence the first condition is satisfied.
2. As the assessee is carrying on business it is assumed that it derives profits & gains from such business.
3. It is assumed that conditions 3 to 5 are also satisfied in the given case.
4. As there are additions in employees as compared to the preceding year, the company has incurred additional employee cost.
5. For condition 7 it can be noticed as under:-
   1. Semi Skilled Operators : the addition in the total number of employees is 4 as one has resigned. Such employees are covered under PF and there total salary is not more than 25,000/- per month and such salary is paid by ECS and they are employed for a period greater than 240 days(as can be calculated from their date of joining). Also the fact that they are covered under PF is gadged from the fact that the basic salary as per company policy of 40% of total salary, makes it less than Rs. 15,000/- per month and hence the employees are covered under PF.. Thus the additional cost of 4 employees will be eligible
   2. Unskilled labour is paid in cash and hence not eligible.
   3. As it can be seen from the date of joining that such additional employees are employed for only 237 days, such additional employees are ineligible for the purpose of calculation of deduction.
   4. For admin and Manager category, as the total salary/wages exceeds Rs. 25,000/- per month, the same is ineligible.

From the foregoing discussion it can be seen that the amount of deduction allowable under Section 80JJAA for the F.Y 18-19 (i.e. AY 2019-20) shall be :

4 X 18000 X 30% = Rs. 21,600/-

And such deduction will be allowed for 3 A.Ys beginning from A.Y 2019-20.

Deduction in respect of 2 Floor supervisors employed for a period of 237 days but employed for the full year during F.Y 2020-21 shall be allowable from A.Y 2021-22 onwards for total 3 A.Ys as though such employees were employed during the F.Y 2020-21, as per the deeming provision contained in section 80JJAA.

Conclusion

One must go through the provisions of the section carefully and ensure all the conditions are fulfilled. Some degree of care is required during the planning phase for taking benefit under this section.