What is Rule 132 of Income Tax?

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. Rule 132 of Income Tax Act outlines the procedure for making such claims and rectifications. In this article, let us delve deep into the significance of Rule 132 and its implications for the taxpayer.

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.

What is stated in the Income Tax Act of rule 132?

Prior to the introduction of Rule 132, businesses were allowed to treat the payment of cess or surcharge as a deductible expense from their taxable income.

However, the Finance Act of 2022 clarified that such deductions for income tax cess or surcharge are not permissible from taxable profits. Rule 132 now allows taxpayers who previously claimed such deductions to voluntarily disclose details about their taxable income, tax liability, and any outstanding cess or surcharge amount.

To do so, taxpayers must electronically file Form 69. Additionally, as per a CBDT notification dated September 29, 2022, taxpayers can apply for a recalculation of total income for past financial years, excluding any cess or surcharge deductions.

Under Rule 132, those who had earlier availed this deduction can now submit Form 69 online, request a revised computation for the concerned years, and pay the additional tax due accordingly.

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.

How to apply for income re-computation under rule 132 to avoid tax penalty?

As per the Income-tax (Thirty-second Amendment) Rules, 2022, the Central Board of Direct Taxes (CBDT) introduced Rule 132, effective from October 1, 2022. This rule lays down the procedure for re-computing total taxable income under Section 155(18) of the Income Tax Act.

Here’s how the process works:

• The assessee must file Form 69 on the Income Tax e-filing portal on or before March 31, 2023, disclosing details of cess or surcharge claimed and the revised total income.
• After submission, the Assessing Officer will recompute the total income and issue a demand notice under Section 156.
• Once the demand is paid, the assessee must file Form 70 within 30 days, confirming payment details.

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.

Advantages of Rule 132

Rule 132 provides a compliance mechanism for taxpayers who previously claimed deductions for surcharge or cess that are disallowed under Section 40(a)(ii). It enables Assessing Officers, under Section 155(18), to recompute total income for earlier years where such claims were made.

Typically, such re-computation would trigger the provisions of Section 270A(3), where the disallowed surcharge or cess is treated as under-reported income, attracting both tax liability and penalties.

However, under Rule 132, if the assessee proactively files an application in the prescribed Form 69—opting to exclude the deduction for surcharge or cess and paying any resulting tax dues—the income will not be treated as under-reported, and no penalty under Section 270A(3) will apply.

To avail of this relief, the application in Form 69 must be submitted by March 31, 2023, and any tax payable after recomputation must be reported separately using Form 70.

Who will be impacted by rule 132?

Rule 132 of the Income Tax Act primarily impacts individuals or entities earning income from a business or profession who have previously claimed a deduction for surcharge or cess.

Any assessee who has availed and received approval for such deductions in earlier assessment years will be required to undergo a mandatory re-computation process by March 31, 2026. Alternatively, they may voluntarily file an application with the Assessing Officer to have their income recalculated.

Those who claimed deductions for education cess or surcharge—now disallowed—will have to revise their income computations. This could lead to the income being treated as under-reported, attracting not only additional tax but also a penalty of 50% of the tax payable.

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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