1. Introduction

The erstwhile provisions of Section 80JJAA provided for: 

a) A deduction of thirty percent of additional wages paid to new regular workmen in a factory for three years (i.e. the 30% deduction would be allowed for 3 years).

b) The provisions applied to the business of manufacture of goods in a factory where 'workmen' were employed for not less than three hundred days in a financial year.

c) Benefits were allowed only if there was an increase of at least ten percent in total number of workmen employed on the last day of the preceding financial year.

The Finance Bill 2016 substituted a new section 80JJAA to incentivise employment generation across all sectors (Memorandum to Finance Bill 2016). The new provisions provide for a deduction if following conditions are fulfilled:

a) Assessee is subject to audit under section 44AB

b) Assessee’s gross total income includes any profits or gains from business

c) Assessee furnishes the prescribed[1] report along with return of income

d) Deduction shall be available in respect of “additional employee cost” incurred in the course of such business in the previous year on any employee (as against “workman” under erstwhile definition), whose total emoluments are less than or equal to twenty five thousand rupees per month.

Issue

Before proceeding with definitions of additional employee cost, additional employee, emoluments, one key questions is:

1. Whether the business which leads to additional employee cost must be subject to audit u/s 44AB? 

The language of the section emphasises that the assessee must be subject to tax audit. Nowhere is it required that the business which generates the additional employee cost must also be subject to tax audit.

It is well known that Guidance Note to tax audit prescribes that tax audit is triggered for all businesses if any of assessee’s businesses crosses the threshold limit of turnover, sales, etc. The Guidance Note also states that if assessee opts for presumptive taxation (say 44AD) for any one of his businesses, the turnover of such business must be deducted.  

Say an assessee X has two businesses, A and B which have turnover of Rs 90 lakhs and 45 lakhs respectively (totally Rs 1.35 lakh which below tax audit limit of Rs 2 crore for AY 2017-18). X offers income from A to tax at presumptive rate (44AD) and seeks deduction for additional employee cost u/s 80JJAA in respect of business B.

X cannot seek deduction u/s 80JJAA for business B as it violates 44AD claim on business A which states that eligible assessee cannot seek deduction under chapter C of Part VI-A. Further, X is not subject to tax audit and hence cannot claim section 80JJAA.

It may be noted that new section 44ADA does not have any such criteria for eligible person. Hence if X above has income from profession C upto 50 lakhs, the claim of section 80JJAA does not hamper his claim from profession C at presumptive rates. 

The moot question is whether X can get books of business A only audited by claiming profit less than 8% of turnover. 

Important Definitions u/s 80JJAA

i) "additional employee cost" means total emoluments paid or payable to additional employees employed during the previous year

ii) For existing business, additional employee cost shall be nil if

a) there is no increase in the number of employees from the total number of employees employed as on the last day of the preceding financial year

b) Employees are paid otherwise than through bank accounts

iii) In the first year of a new business, emoluments paid or payable to employees employed during that financial year shall be deemed to be the additional employee cost

iv) “additional employee" means

an employee who has been employed during the financial year and whose employment has the effect of increasing the total number of employees employed by the employer as on the last day of the preceding year; but does not include,

a) an employee whose total emoluments are more than twenty-five thousand rupees per month

b) an employee for whom the entire contribution is paid by the Government under the Employees' Pension Scheme

c) an employee employed for a period of less than two hundred and forty days during the financial year

d) An employee who does not participate in the recognised provident fund

v) "emoluments" means any sum paid or payable to an employee in lieu of his employment by whatever name called, but does not include

a) contribution paid or payable by the employer to any pension fund or provident fund or any other fund for the benefit of the employee under any law for the time being in force

b) any lump-sum payment paid or payable to an employee at the time of termination of his service or superannuation or voluntary retirement, such as gratuity, severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension and the like

2. Issues

2.1 It may be seen that in the definition of additional employee, the conditions to be fulfilled are based on time (240 days), emoluments paid (Rs 25,000 per month) and participation in recognised provident fund (RPF). The other condition of Govt not contributing to Employee’ Pension Fund (EPF) is assumed to be met as that condition usually applies only to disabled employees as per Rule 29 of EPF rules.

Questions arise on eligibility of employee viz if time condition is fulfilled, whether the emoluments condition and RPF condition are to be fulfilled for all days for which time condition was fulfilled.  In opinion of author, the RPF and emoluments condition, if jointly fulfilled during time condition would entitle the Company for deduction for those months.  Alternative view could be that if emoluments paid during entire Financial year to be considered and if emoluments exceed Rs 25,000 per month on an average, the deduction would not be available in respect of that employee. 

2.2.Time condition 

It appears that only employees who are appointed in financial year FY 2016-17 ie as at 04-Aug-2016 or before (upto 01-Apr-2016) (for apparel manufacturing entities 150 days is the time condition) can fulfil the time condition.  As regards employees who have served during FY 2015-16, the position even under erstwhile law as per recent Bangalore ITAT ruling in Texas Instruments (India) P. Ltd. [TS-703-ITAT-2016(Bang)] dated 29-12-2016 is that they will not be eligible even though they fulfil condition of 300 (now 240) days in subsequent year. 

However, such employees may still be considered for calculating Total No. of employees. 

2.3 Emoluments condition 

The determination of additional employee is to be done at end of financial year on basis of number of days employed.  If emoluments are payable but not yet paid (say due to bonus provided but not paid), whether such emoluments are to be added in calculating emoluments per month.

2.4 While “additional employee” is defined, “employee” is not defined. Hence, whether “Total Number of employees” referred to in definition of “additional employee” employed as at 31-3-2016 include employees 

a) drawing more than 25,000 as monthly emoluments?

b) Employed for less than 240 days as at 31-3-2016?

c) Who do not participate in recognised provident fund?

It may be noted that under erstwhile section, “regular workman” and “workman” were both defined. 

In my opinion, the employees employed as at 31-3-2016 need not fulfil the 3 criteria mentioned above as they apply only to “additional employees”.

2.5 Whether No. of additional employees depend on new employees who have left service during FY 2016-17 

E.g. If total No. of employees as at 31-3-2016 is 100 and 10 eligible employees join in April 2016 - July 2016 and another 10 employees join in December 2016. 5 leave in March 2017, of which 3 joined in April 2016 and 2 joined in December 2016. 

How many are the additional employees as at 31-3-2017? 

Points:

i) Additional employee is defined but Employee is not defined

ii) All employees as at 31-3-2016 should be considered to give 100 as starting point

iii) Whether additional employee should be employed as on 31-3-2017? In my opinion, no such condition is prescribed.

Given the above, in my view, the No. of additional employees will be 10 as per below Table: 

2.6 If old employees leave whether No. of additional employees will be reduced? 

E.g. If total No. of employees as at 31-3-2016 is 100 and 10 eligible employees join in April - July and another 10 employees join in December 2016. 15 leave in March 2017, of which 3 joined in April 2016 and 2 joined in December 2016 and 10 joined in Dec 2015 

How many are the additional employees as at 31-3-2017? 

In opinion of author, there is a distinction between employee and additional employee.  If an employee who has satisfied “additional employee” test leaves, the total number of employees will reduce but not number of “additional employees”.  The number of “additional employees” will always be subject to the increase in total number of employees.  Hence additional employees will be as below: 

Though total number of additional employees is 10, the increase in total number of employees at year end is to be considered and so the total number of additional employees will be ‘5’ (ie limited to increase in number of employees from year to year).

In such cases, the employee should have the option of selecting the additional employees (5 out of 10) based on the highest emoluments paid to them so as to avail maximum deduction.

2.7 Whether employees who did not satisfy “additional employee” test in prior financial year will become Additional employee in current financial year?

No.  Employees have to be appointed in relevant financial year and satisfy the conditions as the definition of additional employee states “whose employment has the effect of increasing the total number of employees…”. 

Some questions

1) Whether monthly emoluments condition to be satisfied each month or during period of employment during Financial Year?

2) Whether monthly emoluments are to be calculated for every 30 days of employment or for every calendar month?

3) Whether incentives paid for a particular month taking an employee’s emoluments beyond Rs 25,000 would lead to such employee not being an Additional employee for that particular month? Alternatively, whether such employee will not qualify as additional employee at all?

4) Whether recovery of notice pay would reduce the emoluments paid per month?

5) Whether additional employees to be calculated monthwise after 240 days in the financial year? (As before completion of 240 days in the financial year, it is not known whether they will qualify as additional employees)

6) Whether an employee treated as additional employee during a Financial Year can again be taken as additional employee during next Financial Year?

No.

7) Whether it is possible to have total employees of 300 as at 31-3-2016, additional employees of 100 (satisfying all conditions) during FY 2016-17 and total employees of 350 as at March 31, 2017?

Yes, if additional employees leave the company.  However, by definition, additional employees will be reduced to 50 only.

8. Whether accrued bonus will be included in computing the emoluments per month

Yes as the words used in definition of “emoluments” are “paid or payable”.  The provisions of Payment of Bonus Act would also have to be borne in mind.

Related issues

- Impact on advance tax payment for March 2017

- Impact on AMT u/s 115JC for assessees other than Companies

- Impact on new section 115ABA prescribing lower rate of tax for startups

Conclusion

The newly inserted section is advantageous to all assessees having income from businesses (and subject to tax audit) and will aid hiring decisions and boost employment.  However, several implementation issues remain due to the wording of the section leading to more than one interpretation.  Given that Chartered Accountants will have to issue reports certifying the deduction claimed, it is hoped that these are addressed in Finance Bill 2017 either by way of an amendment or by insertion of suitable Explanations.

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[1] Nothing prescribed by CBDT as at 23-Jan-2017