The Central Board of Direct Taxes (CBDT) has introduced Rule 132, which came into effect on October 1, 2022. Rule 132, deals with the re-computation of income under sub-section 18 of section 155 of the Income Tax Act, 1961, in the Income Tax Rules, 1962. According to legal experts, the new rule impacts individuals having income from business or profession and have availed deduction on cess/surcharge. In this article, we take a look into all details you need to know about Rule 132.
Why has CBDT introduced Rule 132?
The new rule has been introduced in view of disputes over whether a cess or surcharge on income tax paid by businesses can be allowed as a deduction or not.
“While calculating the net taxable profit of a business, the law had clarified that income tax paid by a business cannot be allowed as a deduction. However, the law had not specified whether a cess or surcharge on such income tax is allowable as a deduction or not. Various businesses had been claiming deductions of such cess or surcharge in their tax calculations. These were disputed by the tax authorities but the courts in recent judgement had allowed the deduction for cess and surcharge,” says Ankit Jain, Partner, Ved Jain & Associates.
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In Finance Act 2022, the Government clarified that a deduction for such cess and surcharge on income tax is not an allowable deduction from the taxable profit. The clarification was made by way of amendment of the income tax act with retrospective effect from 2005. However, the Government provided a one-time window, allowing those taxpayers who had claimed the cess or surcharges as a deduction from their taxable profits, to recompute their taxable profits after removing such cess or surcharge and deposit the tax on such income.
Rule 132 lays down the procedure for recomputing such income.
“Any taxpayer who has claimed deduction of cess or surcharge can share the details of their taxable income, tax paid and the amount of cess/surcharge claimed as a deduction with the tax authorities. The information is to be submitted electronically on the income tax portal using Form 69. On receipt of Form 69, the tax officer will recompute the taxable income of the taxpayer and inform the additional tax to be payable by the taxpayer. The taxpayer can then make the payment of tax and inform the tax officer of the payment of tax in Form 70. No penalty would be leviable on such payment,” says Jain.
Benefits of Rule 132
Rule 132 is a beneficial clause allowing assessees to comply with the provision of Section 155 which allowed Assessing Officers to re-compute the total income for such previous years in which the assessee would have claimed deduction of surcharge or cess subject to be disallowed u/s 40(a)(ii), according to Pallav Pradyumn Narang, Partner at CNK.
“This recomputation invariably attracts provisions of section 270A(3) wherein this disallowed surcharge is treated as under-reported income and subject to taxes and importantly penalties,” says Narang.
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“As per the new Rule, an assessee can suo moto submit an application in the prescribed form for re-computation of income, without claiming a deduction for surcharge or cess and on payment of appropriate taxes (if any) in that case it would not be deemed as under-reported income hence no penalty will be levied under section 270A(3). This application has to be moved in form 69 on or before the 31st day of March 2023 for the re-computation of income under the new Income Tax Section 155(18), as inserted by the Finance Act, 2022. Taxes payable post recomputation of income have to be separately reported in form 70,” he adds.
Rule 132 vs Revised Returns
Experts say that Rule 132 differs greatly from a revised return. A Revised return can only be filed up to 31st December 2022 for ITR filed for FY 2021-22 (AY 2022-23). However, an assessee can file for re-computation of income all the way from FY 2004-05 (AY 2005–06) in Form 69 up to 31st March 2023
What the Finance Act 2022 said?
Finance Act 2022 inserted Section 155(18). Under this section, the Assessing Officer has the power to re-compute the total income of the assessee and accordingly amend the assessment order of previous years, with effect from 2005-2006, owing to the retrospective amendment to Section 40(a)(ii) of the Income Tax Act, 1961. Section 40 deals with amounts that are not deductible while filing income tax returns by assessees.
“The Finance Act, 2022 added Explanation 3 to Section 40 (a)(ii), wherein it states that the term tax includes and shall be deemed to have always included cess and surcharge, meaning thereby, that any amount paid by the assessee on account of cess/surcharge on the profits or gains of any business or profession shall not be covered as deductible amount while filing Income Tax Return. This amount, towards cess/ surcharge, shall be calculated from the Financial Year 2005-2006 and subsequently, the Assessing Officer shall rectify his/her order passed for those years,” says Abhinay Sharma, Managing Partner, ASL Partners.
Sharma further says that such an amended order of the Assessing Officer shall lead to a change in the computation of tax for the assessees and shall be deemed to be under-reported income as per Section 270A and shall attract the requisite penalty i.e., 50% of the amount of tax payable on under-reported income.
However, the assessees can avoid such a penalty by voluntarily moving an application, within the stipulated time i.e., 31st March 2023, with the Assessing Officer requesting re-computation of income for those years by disallowing deductions, claimed towards cess/surcharge paid on the profit/gain.
“Prior to the amendment to Section 155, the amount paid towards cess/surcharge was considered as an expenditure and thus, was claimed as a deduction by the assessees. The insertion of subsection 18 to section 155 disallowed this claim and with retrospective effect,” says Sharma.
What are Form 69 and Form 70?
An application requesting for recomputation of total income of the previous year under sub-section (18) of section 155 without allowing the claim for deduction of surcharge or cess, which has been claimed and allowed as deduction under section 40 in the said previous year, shall be made in Form No. 69 on or before the 31stday of March 2023, according to Aditya Chopra, Managing Partner, Victoriam Legalis, Advocates & Solicitors.
“Accordingly, the AO shall modify the assessment order of past years on account of such retrospective disallowance of deduction for surcharge/ cess. Further, new IT Form 70 is meant for intimating the AO about payment of tax on re-computed income u/s 155(18). A form 70 also has to be submitted regarding intimation to the Assessing Officer of the payment of tax on income recomputed under sub-section (18) of section 155,” he adds.
How to apply for recomputation under Rule 132
According to Chopra, the process of moving an application under Rule 132 is as follows:
(a) The assessee shall make an application, in Form No. 69, requesting AO for recomputation of total income of the previous year without allowing the claim for deduction of surcharge or cess.
(b) The application shall be furnished electronically on or before 31-03-2023 to PDGIT (Systems) or other prescribed tax authorities.
(c) PDGIT (Systems) or the DGIT (Systems) shall lay down the procedures and standards for furnishing and verification of Form No. 69 and forward the application to AO.
(d) On receipt of the application, the AO shall recompute the total income by amending the relevant order. He shall issue a notice under section 156 specifying the time within which amount of tax payable (if any) is to be paid:
i. For AY in which assessee had claimed the deduction; and
ii. For the AYs subsequent to AY referred in (i), if the order of such AY results in variation in carry forward of loss or allowance for unabsorbed depreciation or credit for tax under sections 115JAA or 115JD.
The assessee shall furnish the details of payment of tax in Form No. 70 to AO within 30 days from the date of making the payment.
Who will be impacted by Rule 132?
Individuals with income from business or profession, who have claimed deduction of surcharge or cess in the previous years, will be impacted by this new Rule 132.
“In case of all those assessees where the claim of education cess & surcharge has been made and allowed for any assessment year, they will be subjected to compulsory rectification proceeding by 31st March 2026; or such assessees can voluntarily apply for re-computation of their income with the Assessing Officer,” says Sharma.
“Individuals with income from business or profession, who have availed deduction on cess/surcharge are the ones who will be impacted by this new rule and may need to re-compute their income. Deductions shall not be permitted and therefore, the income will be higher which will be will be acknowledged as under-reported income. The taxpayer will be required to pay taxes on such income along with a penalty equal to 50 per cent of the tax due on such income,” says Chopra.
What happens if you don’t furnish information
The last date to furnish such information in Form 69 is March 31, 2023.
“If the information is not furnished by such time, the taxpayer can be held to be in default. In such a case, he would become liable for interest and penalty along with the tax amount,” says Jain.
