Section 132 of the income tax act contains a helpful provision that enables assessing officers to comply with Section 155’s mandate that they recalculate the total income for any earlier years in which the assessee claimed a deduction for a surcharge or cess but did not qualify under Section 40(a) (ii). Legal experts assert that those who depend on a business or profession for their livelihood and have taken advantage of the cess/surcharge deduction are impacted by the new rule.

The Central Board of Direct Taxes has amended the Income Tax Act to include Rule 132 Central Board of Direct Taxes (CBDT). The re-computation of income under sub-Section 18 of Section 155 of the Income Tax Act, 1961, is addressed in Rule 132, which was adopted on October 1, 2022. The new rule primarily addresses the issue of whether company income tax surcharges or cess should be considered deductible.

According to the new rule, Form 69 can be used to request a recalculation of total income under Section 155. (18). The issue has been in the news for a while because it was unclear in the past whether a surcharge or cess could be added as an expense or a deduction because there are conflicting legal provisions on the subject.

What does Rule 132 say?

Before the introduction of Rule 132, firms’ payment of cess or surcharge was regarded as an expense for which they could deduct their expenses.

According to the Finance Act of 2022, a deduction for such a cess and surcharge on income tax is not permitted from the taxable profit. With the use of Rule 132, taxpayers who have claimed a cess or surcharge deduction can disclose information about their taxable income, tax liability, and the remaining cess or surcharge to be paid. Form 69 must be used to electronically submit the required information.

The CBDT stated in a notification dated September 29, 2022, that assessee can now request a recalculation of their total income from prior years without being allowed to claim a deduction for surcharge or cess.

In accordance with Rule 132, taxpayers who have previously claimed this deduction can now submit a form 69 online application for a recalculation of their income for those years and pay the resulting tax.

Who should file a revised return?

Those who incorrectly deducted a surcharge or cess during a prior assessment year should submit a request for a recalculation of their total income. An assessee may submit a request for re-computation of income from FY 2004-05 (AY 2005-06) up until March 31 of the following year under the new regulation.
To correct an error committed when filing the initial income tax return, a revised return must be filed. For this year, ITRs filed for FY 2021–22 can only be updated and submitted through December 31. (AY 2022-23). Even if someone has gotten a tax refund, they can still file it.

Who will be impacted by Rule 132?

This new Section 132 of income tax will affect those having income from a company or profession and have previously claimed a surcharge or cess deduction.

All assessees whose claim for the education cess and surcharge has been lodged and approved for any assessment year will be subject to a mandatory rectification process by the end of March 2026, or they can voluntarily apply to the assessing officer for a recalculation of their income.

The people who will be affected by this new rule and who may need to recalculate their income are those with income from business or profession and who have taken advantage of the cess/surcharge deduction. Deductions won’t be allowed, resulting in a greater income that will be recognized as having been underreported. In addition to paying taxes on that income, the taxpayer will also be liable for a penalty equal to 50% of the taxes owed.

Conclusion

CBDT’s rule 132 comes under the Income Tax Act, highlighting whether businesses should consider paying surcharges as a deduction while calculating taxable income. To make things clear and to prevent businesses from claiming deductions from the cess, this amendment has been introduced under the Finance Act 2022. Businesses must note that the government has allowed a one-time window for taxpayers to recompute their taxable profits. All businesses must take the opportunity to evaluate their files from 2005 onwards to ensure that no penalty is levied upon them by authorities.

Key takeaways

The important points to consider while tax deduction under Section 132 of Income Tax are

Recalculating the deduction for a surcharge or cess who did not qualify under Section 40(a).
Legal experts assert that those who depend on a business or profession for their livelihood and have taken advantage of the cess/surcharge deduction are impacted by the new rule.
Form 69 can be used to request a recalculation of total income under Section 155. (18).

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Written By :

Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Reviewed By :

Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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