Rule 132 of Income Tax Act - All You Need to Know
Rule 132 was introduced by the Central Board of Direct Taxes (CBDT) and went into effect on October 1, 2022. The Income Tax Rule 132 of 1962 addresses the re-computation of income under sub-section 18 of section 155 of the Income Tax Act 1961.
A helpful provision in Section 132 permits Assessing Officers to comply with Section 155's requirement that they recalculate the Total Income for any prior years in which the assesses would have claimed a deduction for a surcharge or cess that would have been ineligible under Section 40(a) (ii). Legal professionals claim that the new rule affects people who earn a living from a business or profession and have taken advantage of the cess/surcharge deduction.
This blog will examine all the information you need about Rule 132 of Income Tax Act.
Backstory
Previously, it was unclear whether businesses could deduct cess/surcharge payments. However, according to reports, numerous companies have reportedly been making Income Tax deductions.
Recent court rulings had previously permitted the same. The tax authorities, however, were opposed to the notion. So the Centre made it clear that income tax cess/surcharge cannot be considered a deduction in the Finance Act 2022. It also allowed taxpayers to recalculate their taxable profits and pay the extra tax to the authorities.
Due to an amendment to the Income Tax Act, the decision is applicable with a retroactive date of 2005. In this situation, Rule 132 is applicable.
What Is Stated in The Income Tax Act of Rule 132?
Before the introduction of Rule 132, the payment of cess or surcharge of businesses was regarded as an expenditure 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. However, with the help 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 submit the required information electronically. In addition, the CBDT stated in a notification dated September 29, 2022, that assessees can now request a recalculation of their total income from prior years without being allowed to claim a deduction for surcharge or cess.
By 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.
How to Apply for Income Re-Computation Under Section 132 to Avoid Tax Penalty?
According to the Income-tax (Thirty-second Amendment) Rules, 2022, the Central Board of Direct Taxes (CBDT) has added Section 132 with effect from October 1, 2022, to provide a procedure for recalculating total taxable income by section 155(18) of the Act.
The steps are outlined below-
- On or before March 31, 2023, the assessee must apply in Form 69 on the income-tax website with information regarding the amount claimed as surcharge or cess and total income.
- The assessing officer must recalculate the total income upon receiving the application and issue a demand notice by Section 156 of the Act.
- Within 30 days of making the required payment, the assessee must submit Form 70 with the necessary payment information.
The rule above is crucial for assesses who have deducted surcharge and cess from their total taxable income. Such an assessee must specify the assessment year in which they made the deduction claim and submit a single Form 69 application (for all assessment years) by the deadline of March 31, 2023.
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Advantages Of Rule 132
- Rule 132 is a helpful provision that enables assessees to comply with Section 155's provision that allows Assessing Officers to recalculate the total income for any prior years in which the assessee would have claimed a deduction for a surcharge or cess that would have been disallowed under Section 40(a) (ii).
- This re-computation always triggers section 270A (3) provisions, in which the disallowed surcharge is treated as unreported income and is therefore subject to taxes and, more importantly, penalties.
- According to the new rule, an assessee may submit an application in the prescribed form for a recalculation of income without claiming a surcharge or cess deduction and upon payment of the applicable taxes (if any). In that case, the income would not be considered under-reported, and no penalty under section 270A would be assessed (3).
- For the re-computation of income under the new Income Tax Section 155(18), as added by the Finance Act of 2022, this application must be moved to form 69 on or before March 31, 2023. Taxes due after the income has been recalculated must be separately reported on Form 70.
Who Will Be Impacted by Rule 132?
This new Rule 132 will impact people who earn their living from a business or profession and who have previously claimed a surcharge or cess deduction.
Additionally, all assessees whose claim for the education cess and surcharge has been made 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 affected by this new rule who may need to recalculate their income are those who have income from a business or profession and have taken advantage of the cess/surcharge deduction.
Deductions will not be allowed, resulting in a higher 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.
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