Apply for re-computation of income under Rule 132 to avoid tax penalty

Those with income from business or profession, who have availed deduction on cess/surcharge, must do so by March 31

Rule 132, introduced by the Central Board of Direct Taxes (CBDT), came into effect on October 1, 2022. It deals with the application for re-computation of income under Section 155(18). CBDT has also notified Form 69 that can be used to apply for re-computation of income.

Abhinay Sharma, managing partner, ASL Partners says, “Finance Act 2022 had inserted Section 155(18). The Assessing Officer (AO) has been given the power to re-compute the total income of assessees who fall under Section 40(a)(ii) of the Income-Tax Act, 1961.”

Section 40 deals with amounts that can’t be availed as deduction when computing profits and gains from business or profession while filing income-tax return.

The issue

Earlier, there was lack of clarity regarding whether surcharge or cess can be allowed as expenditure. Contradictory legal pronouncements exist on the matter.

Naveen Wadhwa, deputy general manager, Taxmann says, “The main issue of contention was whether cess is considered a tax and whether cess should also attract disallowance.”

Before the amendment to Section 155, the amount paid towards cess or surcharge was considered an expenditure and assessees claimed it as a deduction. Sharma adds, “The insertion of subsection 18 to Section 155 disallowed this claim and with retrospective effect.”

CBDT issued a notification on September 29, 2022. Maneet Pal Singh, partner, I.P. Pasricha & Co says, “According to the notification, assessees can apply for re-computation of their total income of previous years without allowing the claim of deduction of surcharge or cess.”

When these deductions are not allowed, the assessee’s income upon recalculation will in all likelihood be higher. The additional income thus calculated will be considered under-reported income. Sameer Jain, managing partner, PSL Advocates & Solicitors says, “The assessee will be required to pay tax on it as well as a penalty equal to 50 per cent of the tax due on the under-reported income.”

Relief granted

However, relief has been granted to such assessees. Pallav Pradyumn Narang, partner, CNK says, “According to the new rule, an assessee can submit an application requesting for re-computation of total income of the previous year, nullifying the claim for deduction of surcharge or cess, without attracting penalties under Section 270A (3).”

The application for re-computation must be submitted using Form No. 69 on or before March 31, 2023.
 

Wadhwa adds, “On receipt of the application, the AO will re-compute the total income by amending the relevant order. He will then issue a notice specifying the time within which the amount of tax payable (if any) should be paid.”

After paying the tax, the assessee must furnish details of the payment made in Form No. 70 to the AO. This must be done within 30 days of making the payment.

A surcharge or cess deduction claimed in earlier years will not be penalised if the above conditions are met.

What should you do?

File for re-computation of income from FY 2004-05 (AY 2005–06) before the March 31, 2023 deadline.

Suresh Surana, founder, RSM India says, “In case the assessee has any pending litigation concerning a claim of deduction of surcharge and/or cess, he may apply Rule 132 to avoid a penalty of 50 per cent of the amount of tax payable on under-reported income.”

The total income mentioned in Form 69 shouldn’t be according to the income-tax return filed. Surana adds, “It should be the total income mentioned in the latest assessment, reassessment, or re-computation order, as the case may be.”

If the assessee has passed away, Form 69 can be filed on his behalf by the legal heir.

Singh says, “Assessees should voluntarily come forward requesting for re-computation of the total income by disallowing the claim of education cess and surcharge and pay the amount due thereon within the specified date.” This will enable them to avoid paying a hefty penalty.

When should you file a revised return

1. A revised return is filed to rectify an error (trivial ones) made at the time of filing the original income-tax return (ITR)
2. It can be filed even if you have received a tax refund
3. Revised return can only be filed up to December 31, 2022 for ITR filed for FY 2021-22 (AY 2022-23)

When should you apply for re-computation

1. An assessee needs to apply for re-computation of total income when he has wrongly claimed a deduction of surcharge/cess during a previous assessment year
2. An assessee can file for re-computation of income from FY 2004-05 (AY 2005–06) up to March 31, 2023