Section 17(2) – Perquisites under the Income Tax Act
April 23, 2018
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April 24, 2018

Deduction under Section 80J

Last Update Date : April 23, 2018

Whenever we go to any restaurants, book a cab or go for shopping in a mall, one thing catches our eyes is the discounts that they offer. Sometimes, to avail the discount, we tend to overdo the things. But when it comes down to paying taxes, the same individual has minimal knowledge about the deductions that are offered to him by the Income Tax Department. One such deduction is under section 80J. In this article, we will throw some light on the deductions allowed under section 80J.

section 80j

What is Section 80J?

Section 80J covers the deduction related to the profits and gains from newly established industrial undertakings or ships or hotel business in certain cases.

Section 80J is further divided into two sub-sections 80JJA and 80JJAA.

Section 80JJA describes the deductions on profits and gains from businesses related to collection and processing of biodegradable wastes.

Section 80JJAA deduction in respect of the employment of new workers.

Deductions under Section 80JJA

Where the total gross income of an assessee includes any profits and gains derived from the business of collecting and processing or treating of bio-degradable waste for generating power, producing biogas, making pellets or briquettes for fuel or organic manure, there shall be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to the whole of such income, or five lakh rupees, whichever is less.

What is a Biodegradable Waste?

Biodegradable waste is an organic waste like food materials, kitchen wastes and other natural wastes which can get decomposed by certain micro-organisms like bacteria, fungi, and others, under certain temperature and environment into useful gases for fuel and the remains of the process can be used as fertilisers.

Purpose of Biodegradable Wastes

The deduction will be applicable only if this biodegradable waste is used for the following occasions

  • Generation of Power
  • Production of Biogas
  • Production of organic manure
  • Production of bio-fertilizers
  • Production of bio-pesticides
  • Production of pellets or briquettes (compressed capsule-like structure from biodegradable waste used as fuel for gas stoves)

Persons Covered

All the assessee’s who gain form business of collection and processing of biodegradable wastes.

Eligible Amount

The amount gained as profit from the business of collection and processing of biodegradable wastes.

Extent of Deduction

100% profits or gains earned from the business of collection and processing of biodegradable wastes or Rs 5,00,000 (whichever is less) can be deducted for 5 years from the start of operations of the business.

Computation of Deduction

If Mr Utkarsh has started a company of installation of a biogas plant in housing societies and circulation of the generated of biogas from the organic wastes of all houses in that society which is further distributed in the society itself. This concept was welcomed by many such societies.
The whole project of installation of biogas plant, installation of gas-pipelines, training for operation of the plant and yearly maintenance of the plant and the pipes gets a yearly profit of Rs 2,00,000 per housing society. He manages to do such project for 5 societies in that year which amounts to a total profit of the year to Rs 10,00,000.
Therefore, out of this 10,00,000, he can claim a deduction of Rs 5,00,000 under section 80JJA.

Inclusion of section 80JJA in the deductions

Applications of bio-degradable waste do not harm the environment in any manner, and it solves the purpose of waste disposal in a very useful way. Therefore, Government of India encourages such projects to provide better living at the proper discretion of such waste.

Deductions under Section 80JJAA

Where the total gross income of an assessee, being an Indian company, includes any profits and gains derived from any industrial undertaking engaged in the manufacture or production of article or thing, if the prescribed conditions are satisfied, there shall be allowed a deduction of an amount equal to thirty percent of additional wages paid to the new regular workmen employed by the assessee in the previous year for three assessment years including the assessment year relevant to the previous year in which such employment is provided.

In simple words, if you comply with the conditions, you would enjoy a deduction of 30% of total additional wages paid to the new regular workmen employed by you in the previous year for next three assessment years including the current assessment year.

Previous Year or Financial Year and Assessment Year

Everybody loves watching Filmfare Awards. The awards presented during the event, are actually for the movies that were released last year. Applying the similar concept here, the financial year in which you earn the income is called as the previous year or financial year and the following financial year is called the assessment year for the income earned in a previous year.

Example: You are employed on 1st April 2018. Therefore, your financial year or previous year will be 2018-19, and your assessment of the income earned in 2018-19 will be assessed in the Assessment Year 2019-20.

Eligibility Condition of the Business

  • The business is meant to be an Indian Company and achieving profits by its operations in India.
  • A business formed as a result of re-establishment, reconstruction or revival is considered for this deduction.
  • The business formed by splitting up or the reconstruction of an existing business is not eligible for this deduction.
  • The business acquired by the individual by transferring it from any other person or as a result of business reorganisation is not eligible.
    • The individual must file income tax return along with a report of a Chartered Accountant in Form 10DA.
    Note: Image of FORM 10DA: Please find the attached pdf in the mail for the same.

Qualifying Conditions for the Deduction

  • The deduction is limited to the only manufacturing industry
  • The deduction is available only for employment of “workmen” which broadly includes only blue collared employees
  • The minimum number of employees that the business should have to claim this deduction is 50.
  • The increase in the number of employees should be at least 10% as compared to the previous year. For example, if a company has 100 workers in F.Y. 2018-19, then for this company to be eligible for deduction under section 80JJAA, it should have a minimum of 100 + 10% of 100 = 110 workers.
  • Total emoluments of the new employee shall not be more than Rs 25,000 per month.
    Emoluments are the amount paid or payable to an employee concerning his employment, excluding the contribution made by him towards Provident Fund, Superannuation Fund, Retirement Benefits, Lump-sum consideration paid at the time of the termination of the employment.
  • The employees not participating in Recognised Provident Fund and whose 100% contribution to the National Pension Scheme is made by the government are not qualified for deduction under section 80JJAA.
  • The new employee should be employed for a minimum of 240 days in the previous year or financial year. If the business is in manufacturing apparels, the employment limit is 150 days.
    In Union Budget 2018-19, the section is made applicable to the footwear and leather industry with same criterion that of apparels industry.
  • The individual’s account must be audited under section 44AB.
  • The emoluments must be paid only in the form of account payee cheques, bank draft or electronic transfer. Transfer through any other medium will score you negative points in claiming the deduction.

Example

If Ms Aditi starts a company which manufactures fasteners on 1st April 2018-19. The number of blue collared employees at the start of the company is 100. The salary for all these employees is Rs 20,000. Aditi satisfies all the conditions of the business as specified above.

Under Section 80JJAA, the deductions available for Ms Aditi are as follows

Year 1: Employee Cost = Number of Employees x Salary of each employee
= 100 x 20,000
= Rs 20,00,000

Deduction allowed = 30% of Rs 20,00,000
= Rs 6,00,000

Year 2: 50 more employees get added, and 5 more employees leave the company.

In total there is an addition of 45 employees to the initial 100. The total number of employees is 145.
Now, the employees eligible for deduction are 145-100-10 = 35. (100 is the initial amount, and 10 is 10% of initial employees which should be considered as initial for year 2)

Employee Cost = Number of Employees x Salary of each employee
= 35 x 20,000
= Rs 7,00,000

Deduction allowed = 30% of Rs 7,00,000
= Rs 2,10,000

Year 3: 50 more employees get added, and 5 more employees leave the company.

In total there is an addition of 45 employees to the initial 145. The total number of employees is 190.
Now, the employees eligible for deduction are 190-145-15 = 30. (145 is the initial amount, and 15 is 10% of initial employees which should be considered as initial for year 3).

Employee Cost = Number of Employees x Salary of each employee
= 30 x 20,000
= Rs 6,00,000

Deduction allowed = 30% of Rs 6,00,000
= Rs 1,80,000

The deductions under section 80JJAA, are allowed only up to 3 years from the start of the company.

Section 80JJA provides 100% deduction on the profit earned from business of collection and processing of biodegradable waste for 5 years from start of operations in order to motivate eco-friendly businesses and section 80JJAA provides 100% deduction on the wages of workmen in the first year and then for two years, 30% deduction on the additional employees.

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