The Central Board of Direct Taxation (CBDT) introduced Rule 132, which came into force on October 1, 2022. Rule 132 deals with the recalculation of income under Subsection 18 of Section 155 of the Act of 1961 on income tax. , in the Income Tax Rules, 1962. According to legal experts, the new rule has an impact on people with business income or a profession who have benefited from a deduction on the tax/surcharge . In this article, we go over all the details you need to know about Rule 132.
Why did CBDT introduce Rule 132?
The new rule was introduced due to disputes over whether or not a tax or surcharge on income tax paid by businesses can be allowed as a deduction.
“When calculating the net taxable profit of a company, the law had specified that the income tax paid by a company could not be deducted. However, the law had not specified whether or not a tax or surcharge on this income tax is deductible. Various companies had claimed deductions of this tax or surcharge in their tax calculations. These were challenged by the tax authorities, but the courts in a recent judgment allowed the deduction for the tax and surcharge,” says Ankit Jain, Partner, Ved Jain & Associates.
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In the Finance Act 2022, the government clarified that a deduction for such a tax and surcharge on income tax is not an allowable deduction from taxable profit. The clarification was made through an amendment to the Income Tax Act with retroactive effect from 2005. However, the government provided a single window, allowing taxpayers who had claimed the tax or surcharges as a deduction of their taxable profits, to recalculate their taxable profits after abolition of this tax or surcharge and file the tax on this income.
Article 132 lays down the procedure for recalculating this income.
“Any taxpayer who has claimed a contribution or surcharge deduction may share with the tax authorities details of their taxable income, the tax paid and the amount of the contribution or surcharge claimed as a deduction. The information must be submitted electronically to the income tax portal using Form 69. Upon receipt of Form 69, the tax officer recalculates the taxpayer’s taxable income and advises of the additional tax to be paid by the taxpayer. The taxpayer can then make the tax payment and notify the tax officer of the tax payment in Form 70. No penalty would be due on such payment,” says Jain.
Benefits of Rule 132
Rule 132 is a beneficial clause allowing assessees to comply with the provision in Section 155 that allowed assessment officers to recalculate total income for previous years in which the assessee would have claimed the deduction of a surcharge or a deductible subject to being refused. 40(a)(ii), according to CNK Partner Pallav Pradyumn Narang.
“This recalculation invariably attracts the provisions of Section 270A(3) where this unauthorized surcharge is treated as underreported income and subject to taxes and more importantly penalties,” Narang says.
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“Under the new rule, an assessee may suo moto submit an application in the prescribed form for the recalculation of income, without claiming a deduction for surcharge or surtax and upon payment of the appropriate taxes (if any), in that case, it would not be considered under-reported income, so no penalty will be imposed under Section 270A(3).This request must be moved to Form 69 by March 31, 2023 for the recalculation of income under new section 155(18) income tax as inserted by the Finance Act 2022. Taxes payable after recalculation of income must be reported separately in the form 70,” he adds.
Rule 132 vs Revised Statements
Experts say Rule 132 differs greatly from a revised statement. A revised return can only be filed until December 31, 2022 for the ITR filed for fiscal year 2021-22 (AY 2022-23). However, an assessee may request a recalculation of income from fiscal year 2004-05 (AY 2005-06) in Form 69 until March 31, 2023.
What does the 2022 finance law say?
The 2022 finance law inserted article 155(18). Under this section, the assessment officer has the power to recalculate the assessee’s total income and vary the assessment order from previous years accordingly, with effect from 2005-2006, because of the retroactive amendment to section 40(a)(ii)) of the Income Tax Act 1961. Section 40 deals with amounts which are not deductible when filing income tax returns by the people assessed.
“The Finance Act 2022 has added Explanation 3 to Section 40(a)(ii), in which it states that the term tax includes and is deemed to have always included tax and surcharge, which means that any amount paid by the assessee into account of cess/surtax on the profits or gains of any business or profession will not be covered as a deductible amount when filing the tax return. will be calculated from the financial year 2005-2006 and thereafter the valuation agent will rectify its order placed for these years,” said Abhinay Sharma, Managing Partner, ASL Partners.
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Sharma further says that such amended order of the Assessing Officer will result in a change in the calculation of tax for those assessed and will be deemed to be underreported income pursuant to Section 270A and result in the required penalty. , i.e. 50% of the amount of tax payable on under-declared income.
However, assessees can avoid such a penalty by voluntarily moving an application, within the stipulated time frame, i.e. March 31, 2023, with the assessment officer requesting a recalculation of income for those years in disallowing deductions, claimed for assessment/surcharge paid on gain/profit.
“Before the amendment to Section 155, the amount paid for tax/surcharge was considered an expense and therefore claimed as a deduction by assessees. The insertion of paragraph 18 in article 155 rejected this request and with retroactive effect,” explains Sharma.
What are Form 69 and Form 70?
A claim for recalculation of the previous year’s total income under subsection (18) of Section 155 without allowing the claim for deduction of surtax or deductible, which has been claimed and allowed as a deduction in under Section 40 in said prior year, must be made on Form No. 69 by March 31, 2023, according to Aditya Chopra, Managing Partner, Victoriam Legalis, Barristers and Advocates.
“As a result, the AO will amend the prior years’ assessment order due to this retroactive denial of surcharge/cessation deduction. In addition, the new computer Form 70 is intended to inform the AO of the payment of the recalculated income tax u/s 155(18) A Form 70 must also be submitted regarding notification to the assessment officer of payment of recalculated income tax under subsection (18) of article 155”, he adds.
How to request a recalculation under Rule 132
According to Chopra, the process for moving a request under Rule 132 is as follows:
(a) The assessee must submit a request, on Form No. 69, asking AO to recalculate the total income for the previous year without authorizing the claim for deduction of surtax or deductible.
(b) The request must be provided electronically no later than 31-03-2023 to PDGIT (Systems) or other prescribed tax authorities.
c) The PDGIT (Systems) or the DGIT (Systems) establishes the modalities and standards for the provision and verification of Form No. 69 and forwards the request to AO.
(d) Upon receipt of the request, the AO shall recalculate the total income by modifying the corresponding order. It issues a notice under Section 156 specifying the time within which the amount of tax due (if any) must be paid:
I. For AY in which the assessee had claimed the deduction; and
ii. For AYs subsequent to the AY referred to in (i), if the order of such AYs results in a change in loss carryforward or provision for unabsorbed depreciation or tax credit under Sections 115JAA or 115JD.
The assessee must provide tax payment details on Form No. 70 to AO within 30 days from the date of payment.
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Who will be impacted by Rule 132?
Individuals with business or professional income, who have requested a surcharge or transfer deduction in previous years, will be impacted by this new rule 132.
“In the case of all assessees for whom the request for contribution and education supplement has been made and authorized for any assessment year, they will be subject to a compulsory rectification procedure by March 31, 2026; or these assessees can voluntarily request a recalculation of their income from the assessment officer,” says Sharma.
“Persons with business or professional income, who have benefited from the deduction on the tax/surcharge are those who will be impacted by this new rule and may have to recalculate their income. Deductions will not be authorized and, therefore, the income will be higher, which will be recognized as under-declared income. The taxpayer will have to pay taxes on this income as well as a penalty equal to 50% of the tax due on this income, “said Chopra.
What happens if you do not provide information
The deadline for providing this information in Form 69 is March 31, 2023.
“If the information is not provided within this period, the taxpayer may be held to be in default. In such a case, he would become liable for interest and penalties as well as the amount of tax,” says Jain.