The Central Board of Direct Taxes (CBDT) has amended the existing tax laws with a new Rule 132, which came into force in October 2022. This new rule is aimed at revising the taxations and allowing tax assessors (codified under section 155) to account for tax deductions claimed by assessees, hitherto disallowed under section 40 (a) (ii). This new law mostly affects legal professionals who earlier used these deductions on cess and surcharge. In this article, let us delve deep into the significance of Rule 132 and its implications for the taxpayer.

• Rule 132 disallows deductions on surcharges and cess while calculating taxable income.
• It clarifies that taxes on profits, such as income tax, cess, and surcharge, cannot be deducted from business income.
• The rule applies retroactively, affecting past assessments based on relevant amendments.
• It enforces stricter compliance by disallowing improper tax deductions.

In the past, companies attempted to claim surcharges and cess as deductions when calculating taxable income, but this practice was opposed by the tax authorities. To address this, Rule 132 was clarified in 2022 through the Finance Act of 2022, confirming that surcharges and cess cannot be deducted from taxable income.
 

The rule allows taxpayers to have their taxes recalculated in accordance with the revised interpretation. Retroactive applicability to transactions post-2005 has been introduced, subject to specific amendments.

Earlier, taxpayers could deduct surcharges and cess from their taxable income, reducing their overall tax liability. With Rule 132, these deductions are now deemed impermissible, meaning that taxpayers who previously claimed these deductions may have underpaid taxes. As a result, taxes need to be revised retroactively, dating back to transactions made post-2005. Taxpayers must submit the necessary information through Form 69 to recalculate and pay the revised taxes.

There are specific steps to be followed for the reassessment process under Rule 132:
 

• The assessee must log in to the Income Tax portal, locate Form 69, and fill it out with all relevant income details, particularly for the years in which surcharge and cess were wrongly claimed as deductions.
• Once submitted, the tax department begins the recalculation process and issues a demand notice if additional taxes are owed.
• After the demand notice is issued, the assessee must make the payment and submit Form 70, confirming the payment completion.
• This process applies to assessees who claimed deductions for surcharge and cess, and they must specify the relevant assessment years in Form 69.

Notably, the deadline for completing this process was March 31, 2023, and failure to comply by that date could result in legal action.

The Income Tax Department may initiate search and seizure operations if it suspects that a person or entity has hidden or undisclosed wealth or has engaged in significant tax evasion.
 

• Search refers to the investigative actions taken when there is suspicion of unaccounted wealth, while seizure refers to the confiscation of assets, such as money or jewellery, that are suspected of being acquired through undisclosed income.
• Section 132 of the Income Tax Act empowers tax authorities to seize assets they believe have been unfairly acquired. Additionally, Section 132A allows the tax department to requisition documents or assets from other authorities (like banks) that may substantiate the ownership or source of the assets.
• However, these actions must follow the proper legal process, with all necessary permissions obtained before the operation is conducted, ensuring that the powers granted under Sections 132 and 132A are not misused.

Rule 132 takes a solid step toward ensuring accurate tax compliance by disallowing improper deductions and enforcing the correct payment of taxes. In addition, Section 132A empowers tax authorities to legally demand valid documents that prove the legitimate acquisition of suspicious assets. Ensuring proper tax collection helps strengthen public funds, which can be utilised for public welfare schemes, ultimately contributing to social progress.
 

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