Overview of crucial aspects when filing income tax returns
The assessees are required to file their income tax returns, offering their income earned during the year to tax. The provisions of Income-tax Act (ITA), 1961 state that income earned in the previous financial year (PY) is liable to be taxed in the assessment year. The Income Tax Return (ITR) is to be filed within the due date prescribed under Section 139(1) of the ITA. The due date of filing the return of income is approaching. The process of filing an ITR can be a bit complex and challenging, and should be carried out with accuracy.
Below is a list of things that taxpayers should consider while filing their ITR:
Sunset clause not extended – Section 115BAB
Companies engaged in manufacturing are eligible to opt for the lower rate of tax under Section 115BAB provided they have commenced manufacturing by 31 March 2024. This option has to be exercised prior to filing the first return of the company. A company that has opted for the provision in previous years but has failed to commence manufacturing will be ineligible for the lower rate. Such a company may exercise the option to avail the lower rate under Section 115BAA.
Disallowance of delayed payments made to MSEs
This provision is effective from AY 2024-25. The Finance Act, 2023 inserted Section 43B(h), which stipulates that any sum owed to Micro and Small enterprises will be allowed as a deduction only if the payment has been made within the due date stipulated by the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006. Alternatively, the payment will be allowed in the year in which the payment has been actually made. Furthermore, the extended timeline up to the due date of ITR filing, provided under Section 43B of the ITA , is not applicable for delayed MSE payments.
As per section 15 of MSMED Act, a buyer is liable to make payment to the supplier within a period of 15 days in absence of an agreed period or a maximum period of 45 days if the period has been agreed upon.
Employee contribution to funds - Section 36(1)(va)
An employer is mandated to contribute funds collected from an employee for PF or other welfare funds within prescribed due dates as per relevant laws. Any delayed contribution is not allowed as a deduction.
The Hon’ble SC in a recent decision1 has ruled in favor of Revenue and held that the employees contribution paid beyond due dates shall not be allowed as a deduction as per the provisions of Section 36(1)(va) of the ITA and the provisions of Section 43B of the ITA do not apply.
Prior to this ruling by the SC, deductibility of employee’s contribution to provident fund collected by the employer and deposited beyond the due date specified in the relevant statutes but before the filing of the return of income, had been a matter of litigation resulting from contrary decisions of various High Courts.
Given the contrary rulings on the issue, an explanation was introduced to Section 36(1)(va), clarifying that the due date for depositing the contribution collected by the employer shall not be or never has been the due date mentioned in Section 43B of the ITA. The amendment is effective from 1 April 2021.
Relaxation from Section 40(a)(i)/ (ia) - Non Deduction of TDS (Form 26A)
If tax is required to be deducted at source of any payment and such payment is made without deducting tax at source, then such expense or proportionate expense is not allowed as a deduction while computing taxable income. The expense is allowed as a deduction in the year in which tax is paid to the government. This often leads to a cashflow issue for the company, as the payment to the recipient has already been made and now to claim a deduction of the expense, the tax would either need to be borne by the payer or a separate recovery of tax payable would be required from the recipient.
A provison in the said section was inserted a few years ago, suggesting that if the recipient has paid the tax, it shall be deemed that the tax has been paid on the date the recipient has furnished his return of income; and deduction of the expense shall be allowed to the payer in the year in which the recipient files the return. The payer is required to obtain and file Form 26A duly signed by a CA.
Some relevant tax deductions
Deduction for generation of additional employment (Section 80JJAA):
An employer who is subject to tax audit under Section 44AB of the ITA is allowed additional deduction of cost of salaries from taxable income for creating new jobs. If an employer has increased the number of people employed with him, he can be eligible for a deduction of the additional salary cost over a period of three years, i.e., 30% per year. The deduction is subject to the fulfillment of conditions specified in the section, including that the salary cost of each eligible new employee should not exceed INR 25,000 per month. Additionally, a CA report in Form 10DA is to be filed one month before the due date under Section 139(1).
Deduction under Section 80M:
A domestic company distributing dividends can claim a deduction under this section if its gross total income includes dividends from other domestic or foreign companies, or business trusts. The deductible amount is the lower of the dividends received or the dividends distributed by the company by the due date. Due date here is defined to mean the date one month prior to the income return filing due date under Section 139(1).
Form 71 to Allow TDS Credit in Respect of Income Disclosed in ITR Filed in Earlier Years
TDS credit can be claimed by any assessee only in the year in which the corresponding income is offered to tax. It has been observed that assessees face difficulty in claiming the TDS credit against the income offered to tax due to the difference in timing of TDS and income reporting.
- Where the TDS has been deducted in Year 1, but the income is offered to tax in Year 2 - In such cases, the assessee can simply carry forward the TDS credit to the subsequent year by making relevant disclosures in the ITR.
- Where the income has been offered in Year 1 but the TDS is deducted in the subsequent year, i.e., in Year 2. - This causes a TDS mismatch, as the income has already been taxed on an accrual basis in Year 1, but the tax is deducted in the subsequent year.
A procedure to address the second issue has now been provided in Section 155(20) of the ITA. The assessees need to file Form 712 within two years from the end of the FY in which the tax was withheld. The Assessing Officer (AO) shall thereafter rectify the return of income under Section 154 of the ITA.
Preparation and filing of an ITR is a critical assignment wherein the assessees should carefully review and disclose all the relevant aspects of their income. Also, one should carefully consider various updates pertaining to the law while computing taxable income, to ensure that the ITR is processed correctly without any defaults or defects.
1. Checkmate Services Private Ltd. Vs CIT – I [2022] 143 taxmann.com 178 (SC)[12-10-2022]
2. Rule 134 of the Income Tax Rules