Taxation Laws (Amendment) Act, 1975 - Income Tax - 204/1976

Taxation Laws (Amendment) Act, 1975 Circular No. 204 Dated 24/7/1976 1)In respect of the provisions of the Taxation Laws (Amendment) Act, 1975 (hereinafter referred to as "the Amending Act") which came into force with effect from 1-10-1975 and 1-1-1976, explanatory notes were issued under Circular No. 179, dated 30-9-1975 and Circular No. 197, dated 17-4-1976, respectively. The following explanatory notes are hereby issued in respect of the provisions of the Amending Act which have come into force with effect from 1-4-1976 and those which are to come into force with effect from 1-4-1977. AMENDMENTS TO INCOME-TAX ACT "Child" to include step-child and adopted child - New section 2(15A) 2. The term "child", occurs in several provisions of the Act, e.g., section 64 which provides for inclusion of certain types of income arising to a minor child of an individual in the said individual's assessment under certain circumstances. According to the definition introduced by the Amending Act, the term "child", in relation to an individual, will include a step-child and an adopted child of the individual as well. The amended provision is applicable in relation to the assessment year 1976-77 and subsequent years. [Section 2 of the Amending Act] Tax exemption in respect of income of certain trusts of national importance, etc. - New section 10(23C) 3.1 The Amending Act has inserted a new clause (23C) in section 10 exempting from income-tax the income of the following funds: (a) The Prime Minister's National Relief Fund; (b) The Prime Minister's Fund (Promotion of Folk Arts); (c) The Prime Minister's Aid to Students Fund. The provision also empowers the Central Government to grant exemption from income-tax by notification in the official Gazette in respect of- (a) any other fund or institution established for charitable purposes, having regard to its objects and importance throughout India or throughout any one or more States; and (b) any trust or institution, which is either wholly for public religious purposes or wholly for public religious and charitable purposes, and which is administered and supervised in a manner so as to ensure that its income is properly applied for its purposes. 3.2 The tax exemption granted to the funds or institutions notified in this behalf will relate to such assessment year or years as may be specified in the notification, including an assessment year or years which commenced before the date of issue of the notification. 3.3 These provisions have come into force with effect from 1-4-1976. [Section 3(ii) of the Amending Act] Amendments to section 11 4.1 A number of amendments have been made in the provisions of the Income-tax Act relating to taxation of charitable or religious trusts or institutions, with a view to rationalising them and making them more effective. The modifications made in section 11 are explained hereunder: 1. Hitherto, one of the conditions for tax exemption in the case of a trust or institution for charitable or religious purposes was that the whole of its income during any previous year should be applied for its objects within the previous year in which it was derived. Income applied by a trust or institution to charitable or religious purposes during the period of three months immediately following the previous year could be deemed to be income applied to such purposes during the previous year in cases where the trustees exercised an option in this behalf. This provision has been liberalised in two respects. Firstly, instead of having to apply its entire income within the specified period, the trust or institution will have to apply only 75 per cent of the income to such purposes. (In computing this 75 per cent of the income to be so applied, voluntary contributions or donations referred to in section 12 will also be deemed to be part of the income derived from property held under trust.) Secondly, the period during which the specified percentage of the income, has to be applied to charitable or religious purposes has also been extended. If the income applied to charitable or religious purposes during the previous year falls short of 75 per cent of the income derived during the year, the trust or institution may apply an amount equal to the shortfall for such purposes during the previous year immediately following the year in which such income was derived. If the whole or any part of the income has not been received during the previous year, and the shortfall in the income applied to charitable or religious purposes arises on that account only, then a further extended time has been provided for applying the income to such purposes in the year in which such income is received or in the previous year next following. Thus, in a case where the income derived in a previous year amounted to Rs.1 lakh out of which an amount of Rs.40,000 was not received during the previous year, the person in receipt of the income could obviously not apply Rs. 75,000 to such purposes. In such a case if an amount of not less than Rs.60,000 has actually been applied to such purposes in the year in which the income of Rs.1 lakh was derived, the deficiency could be made up in the year in which balance of income is received or in the previous year next following. For availing of the benefit of the extended time beyond the relevant previous year, the trust or institution will, in either case, have to exercise an option in writing under clause (2) of the Explanation to section 11(1) within the time allowed under sub-section (1) or sub-section (2) of section 139 for furnishing the return of income, whether fixed originally or on extension. Income applied to such purposes during the extended time shall be deemed to have been applied to such purposes during the previous year in which it was derived. 2. Where, in the previous year, the income applied by a trust or institution to charitable or religious purposes in India falls short of 75 per cent of its income and the trust or institution has exercised an option under clause (2) of the Explanation to sub-section (1) of section 11 but such shortfall is not made good during the extended period, such income will be deemed to be the income of a later previous year as explained hereunder. In a case where the income was not received in the previous year in which it was derived, it will be deemed to be the income of the previous year immediately following the previous year in which the income was received. In any other case, it will be deemed to be the income of the previous year immediately following the previous year in which the income was derived. 3. Prior to the amendment made by the Amending Act, sub-section (2) of section 11 permitted accumulation of, setting apart of the income of a charitable or religious trust or institution for a period up to 10 years under certain circumstances. Sub-section (3) of section 11, inter alia, provides that where the income of a charitable or religious trust or institution accumulated or set apart under the aforesaid provision is not actually applied to the purposes for which it was so accumulated or set apart within the specified period, it will be deemed to be the income of the previous year immediately following the expiry of the specified period. 4. As the failure to apply the income accumulated or set apart in the specified manner may arise due to circumstances beyond the control of the trustees, etc. the Amending Act has inserted a new sub-section (3A) in section 11. The new sub-section provides that in such cases the Income-tax Officer may, on receipt of an application from the person in receipt of the income, allow such income to be applied for such other charitable or religious purposes in India as are in conformity with the objects of the trust or institution. Where there is a failure to apply the income so accumulated or set apart even for such other purposes, the case will be dealt with under sub-section(3) as if the revised purpose were a purpose for which the income was originally allowed to be accumulated or set, apart under sub-section (2). 4.2 The aforesaid amendments have come into force with effect from 1-4-1976 and will, accordingly, apply in relation to the assessment year 1976-77 and subsequent years. [Section 4 of the Amending Act] Amendments to section 13 5. Section 13 spells out certain circumstances in which the exemption provided under section 11 or section 12 in respect of income from property held under trust for charitable or religious purposes will not be available. The Amending Act has made a number of amendments to this section. These are briefly explained in paragraphs 6 to 8 below. 6. According to the definition contained in clause (15) of section 2, the expression "charitable purpose" includes (a) relief of the poor, (b) education, (c) medical relief, and (d) advancement of any other object of general public utility not involving the carrying on of any activity for profit. The effect of the words in italics above is that a trust or institution established for the advancement of any object of general public utility, other than relief of the poor, education or medical relief, can be said to have been established for charitable purposes only if its object does not involve the carrying on of any activity for profit. Such a restriction does not obtain in the case of trusts established for relief of the poor, education and medical relief. The Amending Act has introduced a new clause (bb) in sub-section (1) of section 13 to provide that in the case of a charitable trust or institution for the relief of the poor, education or medical relief, any income derived from business will not be exempt from income-tax unless the said business is carried on in the course of the actual carrying out of a primary purpose of the trust or institution. The aforesaid provision will come into force with effect from 1-4-1977 and will, accordingly, apply in relation to the assessment year 1977-78 and subsequent years. [Section 5(i)(a) of the Amending Act] 7.1 A new clause (d) has been inserted in sub-section (1) of section 13 and a new sub-section (5) has also been inserted in the said section with a view to regulating the modes and forms in which the funds of trusts or institutions claiming exemption under section 11 or section 12 can be deposited or invested. Clause (d) of section 13(1) provides that if any funds of a charitable or religious trust or institution are invested or deposited or remain invested or deposited in any mode or form other than those specified in section 13(5) at any time during any previous year commencing on or after 1-4-1978, the income of the said trust will lose exemption from income-tax. Although the provision will take effect from 1-4-1977, it will be applicable only in relation to the assessment year 1979-80 and subsequent years. 7.2 The aforesaid provision in clause (d) of section 13(1) has been made subject to clause (bb) of section 13(1). The effect of this will be that the restriction in clause (d) of section 13(1) will not apply to any investment made in a business by a charitable trust or institution established for the relief of the poor, education or medical relief, if the said business is carried on by the trust or institution in the course of the actual carrying out of a primary purpose of the trust or institution. 7.3 The forms and modes of investing and depositing funds referred to in clause (a) of section 13(1) have been spelt out in sub-section (5) of section 13. For this purpose, the funds of charitable and religious trusts and institutions have been divided into the following four types: (a) funds represented by corpus (including original corpus) of any charitable or religious trust or institution existing immediately before 1-6-1973; (b) funds represented by corpus coming into existence on or after 1-6-1973 and being either the original corpus or contributions with a specific direction to form part of the corpus, but not in the form of cash; (c) funds represented by corpus coming into existence on or after 1-6-1973 and being either original corpus or contributions made with specific direction to form part of the corpus, in the form of cash; (d) funds other than those represented by the corpus referred to in (a), (b) and (c) above. 7.4 Funds of the type mentioned at (a) and (b) in para 7.3 above have been grouped into one category and clause (b) of section 13(5) provides that they may be invested or deposited in any form or mode except in equity shares of a company which is neither a Government company nor a statutory corporation. In other words, in respect of these funds there is no restriction regarding their investment except that they should not be in the form of equity shares of a company which is neither a Government company nor a statutory corporation. It may be noted that these provisions do not prohibit investment in the form of preference shares of companies in the private sector. 7.5 The funds of the type mentioned at (c) in para 7.3 above fall in another category and clause (a) of section 13(5) provides the following forms and modes for their deposit or investment: (a) investment in Government savings certificates; (b) deposit in any Post Office Savings Bank Account; (c) deposit in any account with any nationalised bank (including the State Bank of India and its subsidiary banks); (d) investment in units of the Unit Trust of India; (e) investment in any Central Government or state Government securities; (f) investment in debentures of any corporate body, the principal whereof and the interest whereon are guaranteed by the Central or a State Government; and (g) investment or deposit in any Government company. 7.6 The funds of the type mentioned at (d) in para 7.3 above fall in the third category and clause (c) of section 13(5) provides that they can be invested or deposited only in any of the four forms and modes mentioned at (a) to (a) of paragraph 7.5 above. 7.7 The provision contained in clause (a) of section 13(1), which restricts the deposit or investment of the funds of a charitable or religious trust or institution to the forms and modes specified in section 13(5), will not apply, however, to any moneys accumulated or finally set apart and invested or deposited in the manner referred to in clause (b) of sub-section (2) of section 11. This exception has been carved out because the forms or modes in which the moneys accumulated or set apart, referred to in sub-section (2) of section 11, have been specified in that sub-section itself. 7.8 Although these provisions come into force with effect from 1-4-1977, as mentioned in para 7.1 above, the restrictions contained in section 13(1)(d) will be applicable only in respect of the previous years commencing on or after 1-4-1978. The trusts and institutions concerned have, thus, the time available till then to bring about the necessary changes in the forms and modes of investments held by them so as to conform with the new provisions. [Section 5(1)(b) and section 4(iii) of the Amending Act] 8. Section 13 provides, inter alia that a charitable or religious trust or institution shall not be entitled to exemption under section 11 or section 12 if any part of its income or property is used or applied directly or indirectly for the benefit of any person specified in section 13(3). One of the categories of persons specified therein consists of those who have made a "substantial contribution" to the trust or institution. The expression "substantial contribution" was not defined by the Income-tax Act so far. The new clause (b) of section 13(3) states that a person whose total contribution to the trust up to the end of relevant previous year exceeds Rs.5,000, shall be treated as a person who has made a "substantial contribution". The amount of Rs.5,000 will be reckoned from the date on which the trust or institution is created or established. The object of this provision is to give a precise definition of the term "substantial contribution" rather than leaving it to varying interpretations by various authorities. The amended provision will apply in relation to the assessment year 1977-78 and subsequent years. [Section 5(i)(b) and section 5(iii) of the Amending Act] Determination of annual value where the rent received exceeds the municipal valuation - Section 23(1) 9. Hitherto, the annual value of house property chargeable to income-tax under the head "Income from house property" was deemed to be the sum for which the property might reasonably be expected to let from year to year. In many cases, however, the actual rent received or receivable in a year exceeds the municipal valuation of the property. Sub-section (1) of section 23 has been amended to provide that where any property is in occupation of a tenant and the annual rent received or receivable by the owner is in excess of the sum for which the property might reasonably be expected to let from year to year, the annual rent received or receivable shall be taken as the annual value of the property. Where the property is let out only for a part of the previous year the annual rent for this purpose will be the rent received or receivable for a period of twelve months calculated on the basis of the average rent received or receivable for the period the property was actually let out. This amendment has come into force with effect from 1-4-1976 and is, accordingly, applicable in relation to the assessment year 1976-77 and subsequent years. [Section 6 (Part) of the Amending Act] Restriction of concession in respect of self-occupied property to one house - Section 23(2) 10. The existing provision contained in sub-section (2) of section 23 provides for a concessional treatment in respect of income from self-occupied house property. The annual value of the self-occupied property is first determined in the same manner as if the property had been let out and then it is reduced by one-half of the amount so determined, or Rs.1,800, whichever is less. Where, however, the sum so arrived at exceeds 10 per cent of the owner's total income, as computed without including the income from such property and without making any deduction under Chapter VIA, the excess is disregarded. Hitherto, this concessional tax treatment was available in respect of two houses specified by the assessee. This amendment to sub-section (2) of section 23 now restricts the concession to only one house which may be specified by the assessee. This amendment has come into force with effect from 1-4-1976 and, accordingly, applies in relation to the assessment year 1976-77 and subsequent years. [Section 6 (Part) of the Amending Act] Computation of income from self-occupied house property owned by co-owners - Section 26 11. Section 26 provides that where a property is owned by two or more persons and their respective shares are definite and ascertainable, the share of each such person in the income from the property is to be included in his total income. As mentioned earlier, sub-section (2) of section 23 provides for a concessional tax treatment in respect of income from self-occupied property. The new Explanation to section 26 provides that where a property is used by co-owners for self-residence, each such co-owner will be individually entitled to the concessional tax treatment under sub-section (2) of section 23. This amendment has come into force with effect from 1-4-1976 and, accordingly, applies in relation to the assessment year 1976-77 subsequent years. [Section 7 of the Amending Act] Amendment in the provision relating to depreciation allowance on ships - Section 32(1)(i) 12. Section 32 provides for depreciation allowance on various types of assets used for the purposes of a business or profession, carried on by an assessee. Clause (i) of sub-section (1) of section 32 provided that in the case of a ship, depreciation will be allowed at such percentage on its actual cost to the assessee as may be prescribed in any case or class of cases. The provision as now amended will enable the Board to prescribe, having regard to the date of purchase of ships, different percentages of depreciation in respect of different classes of ships for different periods. [Section 8 of the Amending Act] Extension of agricultural development allowance to cooperative societies - Section 35C 13. Section 35C provides that where a company is engaged in the manufacture or processing of any article which is made from or uses any product of agriculture or dairy farming, etc., and has incurred after 29-2-1968 any expenditure in the provision of any goods or services to a person who is a cultivator or producer of such product in India, the company shall be allowed a weighted deduction of a sum equal to one and one-fifth times the amount of such expenditure. The amendment now made extends the above concession to cooperative societies also. This provision has come into force with effect from 1-4-1976 and is, accordingly, applicable in relation to the assessment year 1976-77 and subsequent years. [Section 9 of the Amending Act] Compulsory maintenance of accounts by certain persons carrying on business or profession - New section 44AA 14.1 A new section 44AA has been inserted to provide for compulsory maintenance of accounts by certain categories of taxpayers. It has been provided that all taxpayers carrying on the profession of law, medicine, engineering, architecture, accountancy, technical consultancy or interior decoration or any other profession that may be notified by the Board shall maintain such books of account and other documents as may enable the Income-tax Officer to compute their total income, under the Income-tax Act. It may be noted that in the case of persons carrying on professions listed above or professions notified by the Board, the requirement of maintenance of accounts is applicable irrespective of the income or gross receipts of the person. 14.2 In the case of a person engaged in business, or a profession other than those referred to above, the requirement of maintenance of accounts is applicable only if the income from such business or profession exceeds Rs.25,000 or the total sales, turnover or gross receipts thereof are in excess of Rs.2,50,000 in any of the three years immediately preceding the previous year. In the case of a business newly set up, such books of account, etc., have to be maintained if the income is likely to exceed Rs.25,000 or the turnover or the gross receipts are likely to exceed Rs.2,50,000 during the previous year. 14.3 Under sub-section (3) of section 44AA, the Board has been empowered to prescribe, by rules, the books of account and other documents to be kept and maintained, having regard to the nature of the business or profession carried on by any class of persons and the form and the manner in which and the place at which they shall be so kept and maintained. Under sub-section (4), the Board has been empowered to prescribe, by rules, the period for which the books of account and other documents are to be retained. 14.4 Section 44AA has come into force with effect from 1-4-1976. The requirement contained in sub-sections (1) and (2) of this section regarding maintenance of books of account and documents will, therefore, apply in relation to books of account, etc., for accounting years commencing on or after that date. [Section 11 of the Amending Act] Amendment of the provision relating to cost of acquisition for the purpose of computing capital gains - Section 49 15. The income chargeable under the head "Capital gains" is computed after deducting from the full value of the consideration received as a result of the transfer of the capital asset the expenditure incurred in connection with such transfer and the cost of acquisition of the capital asset together with the cost of any improvement thereto. Section 49 specifies the manner in which the cost of acquisition is to be determined in the case of certain types of capital assets. This section, however, did not contain any provision for determining the cost of acquisition of a capital asset in cases where the asset became the property of a Hindu undivided family by the mode referred to in section 64(2). Section 64(2) provides that where an individual, being a member of a Hindu undivided family, converts at any time after 31-12-1969, his separate property into property belonging to the Hindu undivided family, he will be deemed to have transferred the property through the family to the members of the family for being held by them jointly. Under the provisions of section 64(2), as amended by section 13(b) of the Amending Act, income derived from the converted property will be deemed to arise to the individual himself and not to the family. By virtue of the aforesaid provision, capital gains arising from the transfer of the converted property will be chargeable to tax in the hands of the individual. However, where the converted property is transferred by the Hindu undivided family after the death of the individual, capital gains arising from the transfer will be chargeable to tax in the hands of the family. Section 49, as amended by the Amending Act, provides that the cost of acquisition of such an asset in the case of the Hindu undivided family will be deemed to be the cost for which the individual acquired the said property. The cost of the acquisition of the asset in such cases will be increased by the cost of improvement of the asset incurred or borne by the individual or, as the case may be, the Hindu undivided family. The amended provision takes effect from 1-4-1976 and will, accordingly, apply in relation to the assessment year 1976-77 and subsequent years. [Section 12 of the Amending Act] Income of individual to include income of spouse, minor child, etc. - Section 64 16.1 Section 64 contains provisions intended to check tax avoidance by persons through diversion of income to the members of their family. A number of amendments have been made in this provision which are explained hereinbelow: 16.2 Clause (ii) of the amended sub-section (1) of section 64 is a new clause which provides that where the spouse of an individual derives any income by way of salary, commission, fees or any other form of remuneration from a concern in which the individual has a substantial interest, such income will be included in computing the total income of the individual. An exception has, however, been provided in cases where the spouse in receipt of such income possesses technical or professional qualifications and the income is solely attributable to the application of his or her technical or professional knowledge and experience. 16.3 For the purpose of this provision, an individual will be deemed to have substantial interest in a concern, if: (a) where the concern is a company, at any time during the previous year, its shares (not being shares entitled to a fixed rate of dividend) carrying not less than twenty per cent of the voting power are owned beneficially by such individual or partly by him or partly by one or more of his relatives; (b) in any other case, such individual is entitled, or such individual and one or more of his relatives are entitled, in the aggregate, to twenty per cent or more of the profits of the concern at any time during the previous year. The term "relative for this purpose will have the meaning assigned to it in section 2(41) and will, therefore, mean the husband, wife, brother or sister or any lineal ascendant or descendant of the individual. 16.4 Clause (iii) of the amended sub-section (1) of section 64 provides that the income arising to a minor child from admission to the benefits of partnership will be included in all cases in the income of that parent who has higher income even though neither of the parents is a partner in the firm to the benefits of which the minor is admitted. It may be noted that the provisions of clause (iii) will apply even in a case where the minor is admitted to the benefits of partnership in a firm by reason of the investment made by him out of gifts made by his grandparent. 16.5 Clauses (iv) and (v) of the amended sub-section (1) of section 64 contain the same provisions as those contained in clauses (iii) and (iv). It may be noted that whereas the new clause (vi) of sub-section (1) will cover only assets transferred on or after 1-6-1973, the amended sub-section (2) will cover the cases where the conversion of property has taken place on or after 1-1-1970. [Section 13 of the Amending Act] Unexplained expenditure, etc. - New section 69C 17. The new section 69C provides that where an assessee incurs in any financial year an expenditure about the source of which he offers no explanation or the explanation offered by him is found to be not satisfactory, the amount covered by such expenditure shall be treated as income of the assessee for the financial year in which such expenditure is incurred. The provision is only clarificatory. Accordingly although it comes into force with effect from 1-4-1976, the principle will apply not only in relation to assessments for the assessment year 1976-77 and subsequent years but also to assessments for earlier assessment years. [Section 14 (Part) of the Amending Act] Amount borrowed or repaid on hundi - New section 69D 18.1 The new section 69D provides that if any amount is borrowed from any person on a hundi or any amount due on it is repaid to any person, otherwise than through an account payee cheque drawn on a bank, the amount so borrowed or repaid shall be assessed as the income of the person borrowing or repaying the said amount, for the previous year in which the amount is borrowed or repaid. Where any amount borrowed is assessed as the borrower's income under this provision, it will not be assessed again in his hands under this provision, on repayment of that amount. The requirement contained in the provision will apply also to the amount of interest paid on the amount borrowed on hundi. 18.2 The term "hundi" which has not been defined in the Income-tax Act, denotes, in common commercial parlance, an indigenous instrument in vernacular language which can be used by the holder thereof to collect money due thereon without using the medium of currency. It may also be regarded as an indigenous form of a bill of exchange expressed in vernacular language which has been in use in the mercantile community in India for the purpose of collecting dues. There are numerous varieties of hundis, for example, darshani hundi, muddati hundi, shahajogi hundi, jokhmi hundi, namjog hundi, dhanijog hundi, jawabi hundi and zickrichit. The characteristics of hundis will differ according to the variety of the same. It may, however, be mentioned here that the characteristics of a hundi resemble almost all the characteristics of a bill of exchange. The following characteristics are found in most of the hundis: (a) a hundi is payable to a specified person or order or negotiable without endorsement by the payee; (b) a holder is entitled to sue on a hundi without an endorsement in his favour; (c) a hundi accepted by the drawee could be negotiated without endorsement; (d) if a hundi is lost, the owner could claim duplicate or a triplicate from the drawer and present it to the drawee for payment. Interest can be charged where usage is established. 18.1 This provision will come into force with effect from 1-4-1977. Accordingly, any payment on or after 1-4-1977 in respect of an amount borrowed on a hundi will have to comply with the requirements of this provision regardless of whether the hundi was executed prior to the said date or on or after that date. [Section 14(Part) of the Amending Act] Treatment of losses in speculation business- Section 73. 19.1 Section 73 provides that any loss computed in respect of speculation business carried on by an assessee will not be set off except against the profits and gains, if any, or another speculation business. Further, where any loss, computed in respect of a speculation business for an assessment year is not wholly set off in the above manner in the said year, the excess shall be allowed to be carried forward to the following assessment year and set off against the speculation profits, if any, in that year, and so on. The Amending Act has added an Explanation to section 73 to provide that the business of purchase and sale or shares by companies which are not investment or banking companies or companies carrying on business of granting loans or advances will be treated on the same footing as a speculation business. Thus, in the case of aforesaid companies, the losses from share dealings will now be set off only against profits or gains of a speculation business. Where any such loss for an assessment year is not wholly set off against profits from a speculation business, the excess will be carried forward to the following assessment year and set off against profits, if any, form any speculation business. 19.2 The object of this provision is to curb the device sometimes resorted to by business houses controlling groups of companies to manipulate and reduce the taxable income of companies under their control. 19.3 This provision will come into force with effect from 1-4-1977 and will apply in relation to the assessment year 1977-78 and subsequent years. [Section 15 of the Amending Act] Deduction to be made in computing total income - Section 80A 20. Two amendments have been made to section 80A. They are both of a consequential nature. The amendment to sub-section (1) is in consequence of insertion of two new sections 80V and 80VV by section 26 of the Amending Act, regarding deduction of interest on money borrowed to pay taxes and allowance of expenses incurred in connection with income-tax proceedings, respectively. The second amendment is to sub-section (3) which is in consequence of omission of section 80H by section 20 of the Amending Act. [Section 16 of the Amending Act] Amendment to section 80B 21. This section contains definitions of the terms used in Chapter VIA. Through the amendment, clauses (1) and (9) have been omitted. This amendment is consequential to the omission of section 80H by section 20 of the Amending Act. [Section 17 of the Amending Act] Deduction in respect of donations to certain funds, charitable institutions, etc. - Section 80G 22.1 Section 80G provides that in computing the total income of an assessee, a deduction will be allowed in respect of donations to certain funds, charitable institutions, etc., and the said deduction will be fifty per cent of the aggregate of sums specified in sub-section (2) in the case of a company and fifty-five per cent of the said aggregate in the case of other assessees. The amendment introduced now provides for deduction at a uniform rate of fifty per cent in the case of all assessee-companies as well as others. 22.2 The second amendment contained in this section is consequential to the insertion of clause (23C) in section 10. 22.3 These amendments have come into force with effect from 1-4-1976 and will, accordingly, apply in relation to the assessment year 1976-77 and subsequent years. [Section 18 of the Amending Act] Deduction in respect of rents paid - New section 80GG 23.1 Under section 10(13A), any house rent allowance specifically granted to an employee by his employer to meet expenditure actually incurred on payment of rent is exempted from income-tax to such extent (not exceeding Rs.400 per month) as may be prescribed. The Amending Act has introduced a new section 80GG providing a somewhat similar concession to other assessees also. Under the new provision, an assessee will be entitled to a deduction in respect of house rent paid by him for his own residence in excess of 10 per cent of his total income but subject to a ceiling of 15 per cent thereof, or Rs.300 p.m., whichever is less. The deduction will be permissible only if the individual concerned does not own any house property himself anywhere, nor does his spouse, minor child or the Hindu undivided family of which he is a member own any house property anywhere. Further, this deduction will be permissible only subject to certain conditions or limitations that may be prescribed under the rules, taking into account the area or place where the accommodation is situated. An Explanation has also been appended to section 80GG to make it clear that 10 per cent or 15 per cent of the total income mentioned in the provision is to be computed before making any deduction under that section. Since the new provision will apply to all assessees who are not covered by section 10(13A) it will include self-employed persons as well as salaried employees who are not in receipt of any house rent allowance from their employer. 23.2 Under the Income-tax (Fourth Amendment) Rules, 1976 notified by the Board under Notification No. SO 275(E), dated 1-4-1976, a new rule 11B has been inserted in the Income-tax Rules, 1962, prescribing the condition for allowance of deduction under section 80GG. The new rule states that the deduction to be allowed under section 80GG in respect of any expenditure incurred by an assessee towards payment of rent for any furnished or unfurnished accommodation occupied by him for the purposes of his own residence will be allowed subject to the condition that the accommodation is situated in any of the following places, namely: Agra, Ahmedabad, Allahabad, Amritsar, Bangalore, Bombay, Calcutta, Cochin, Coimbatore, Delhi, Hyderabad, Indore, Jabalpur, Jaipur, Kanpur, Lucknow, Madras, Madurai, Nagpur, Patna, Poona, Sholapur, Srinagar, Surat, Trivandrum, Vadodara (Baroda) and Varanasi (Banaras). [Section 19 of the Amending Act] Deduction in case of new industrial undertakings employing displaced persons, etc. - Section 80H 24. Section 80H provided that in computing profits and gains derived from an industrial undertaking employing displaced persons, etc., and fulfilling certain conditions, an amount equal to fifty per cent of the said profits would be allowed as deduction. The Amending Act has omitted this provision. No deduction under section 80H will be available in relation to the assessment year 1976-77 and subsequent years. [Section 20 of the Amending Act] Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas - Section 80HH 25. The Amending Act has omitted sub-section (8) of section 80HH. This amendment is consequential to the omission of section 80H by section 20 of the Amending Act. [Section 21 of the Amending Act] Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases - Section 80J 26. Consequent upon omission of section 80H by section 20 of the Amending Act, this amendment omits references to section 80H in section 80J. [Section 22 of the Amending Act] Deduction in respect of interest on certain securities, dividends, etc. - Section 80L 27.1 Section 80L provides for deductions in respect of interest on certain securities, dividends, etc., in computing the taxable income of an individual, Hindu undivided family, etc. The aggregate of these deductions, however, is not to exceed Rs. 3,000. The amendment introduces an additional item to qualify for such deduction, namely, interest on deposits with any authority constituted in India under any law for dealing with and satisfying the need for housing accommodation or for planning, development or improvement of cities, towns, etc. The object is to provide an incentive to making of deposits with State Housing Boards, etc., so as to provide more funds to them for house building activity. 27.2 This amendment has come into force with effect from 1-4-1976 and will, accordingly, apply in relation to the assessment year 1976-77 and subsequent years. [Section 23 of the Amending Act] Deduction in respect of cooperative societies - Section 80P 28. This amendment is also of consequential nature. Since section 80H has been dropped by section 20 of the Amending Act, this amendment omits references to section 80H from section 80P. [Section 24 of the Amending Act] Deduction in respect of profits and gains from the business of publication of books - Section 80QQ 29. This amendment also is of a consequential nature. It omits references to section 80H from section 80QQ. [Section 25 of the Amending Act] Deduction in respect of interest on moneys borrowed to pay taxes - New section 80V 30. Section 80V provides for deduction in respect of interest paid by the assessee in the previous year on money borrowed for payment of income-tax payable under the Income-tax Act. The object of this provision is to encourage taxpayers to pay their taxes promptly, even by borrowing. [Section 26 (Part) of the Amending Act] Deduction in respect of expenses incurred In connection with proceedings under the Act - New section 80VV 31.1 In the case of a taxpayer having income from business, the expenses incurred by him in connection with his assessment proceedings are allowed to be deducted in computing his taxable income. Under the newly inserted section 80VV, provision has been made to allow to all taxpayers, having income from any source, deduction of expenditure incurred by them in respect of any proceedings before the income-tax authorities or the Appellate Tribunal or any court, relating to the determination of any liability under the Income-tax Act by way of taxes, penalty or interest. There is, however, a ceiling of Rs. 5,000 on the maximum amount deductible in respect of the expenditure incurred by the assessee in any one previous year. As the expenditure deductible under this provision is only that relating to determination of liability under the Income-tax Act by way of tax, penalty or interest, any expenditure incurred by the assessee in connection with any prosecution proceedings launched against him will not be allowable under this section. [Section 26 (Part) of the Amending Act] 31.2 A consequential amendment has also been made in section 37 to provide that any expenditure of the nature described in section 80VV will not be allowed as deduction under section 37. 31.3 These amendments have come into force with effect from 1-4-1976 and will, accordingly, apply in relation to the assessment year 1976-77 and subsequent years. [Sections 10 and 26 (Part) of the Amending Act] Income-tax on undistributed Income of certain companies - Sections 104 and 109 32.1 Section 104 provides for levy of additional income-tax on undistributed profits of companies in which public are not substantially interested. Hitherto, this provision did not apply to (a) industrial companies, that is, Indian companies whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, and (b) Indian companies the value of whose capital assets in the form of machinery or plant as on the last day of the relevant previous year was Rs. 50 lakhs or more. Under the amendment, such companies will no longer be outside the scope of section 104. 32.2 Section 109 lays down the "statutory percentage", i.e., the percentage of the profits up to which dividends must be distributed to escape the additional income-tax on undistributed profits. Hitherto, the statutory percentage was nil in the case of industrial companies, 90 per cent in the case of investment companies and 60 per cent in the case of remaining companies covered by section 104. According to the amendment, the statutory percentage will be 45 per cent in the case of industrial companies and consultancy service companies, i.e., those Indian companies whose business consists wholly in the provision of technical know-how, or in rendering of services in connection with the provision of technical know- how, to other persons. In the case of investment companies and the remaining companies covered by section 104, the statutory percentage will continue to be 90 per cent and 60 per cent respectively as at present. In the case of a company which derives only a part of its gross total income from the provision of technical know-how or construction of ships or manufacture or processing of goods, etc., the statutory percentage in relation to the said part of its gross total income would be 45 per cent. [Sections 27 and 28 of the Amending Act] Return of income - Section 139 33. Sub-section (6) of section 139 has been amended to empower the Board to call for information in the return of income, in such cases as may be prescribed, regarding the income exempt from tax assets of prescribed nature and value and particulars of expenditure under prescribed heads and exceeding prescribed limits and such other outgoings. The amendment made in sub-section (2) of section 139 is consequential to the amendment made in section 142(1) under section 43 of the Amending Act. [Section 38 of the Amending Act] Permanent account numbers - New section 139A 34.1 The new section 139A has made the following provisions: 1. Every person, including a representative assessee, who has taxable income in an accounting year and who has not been allotted any permanent account number, shall, within the prescribed time, apply to the Income-tax Officer for allotment of a permanent account number. 2. Every person, carrying on business whose sales, turnover or gross receipts are likely to exceed Rs. 50,000 in any accounting year, and who has not been allotted a permanent account number, shall, within the prescribed time, apply for allotment of a permanent account number. 3. The Income-tax Officer may allot a permanent account number to any other person also by whom tax is payable. 4. Permanent account numbers already allotted by the Income-tax Department may, by notification in the Official Gazette, be deemed to have been allotted under this provision with effect from the date specified by the Board. Under its Notification No. SO 274(E), dated 1-4-1976, the Board has specified 1-4-1976 as the date for this purpose. 5. Where a permanent account number has been allotted, the person concerned shall be under obligation to quote the number in all his returns to, or correspondence with, any income-tax authority and in all documents relating to such transactions as may be prescribed in the interests of revenue. 6. After a permanent account number has been allotted to a person, he must intimate the Income-tax Officer any change in address or in the name or nature of the business. 7. The Board has been given powers to frame rules to provide for (a) the form and manner in which an application for allotment of a permanent account number is to be made, (b) the particulars which it shall contain, and (c) the categories of transactions in respect of which the permanent account number will be required to be quoted in the documents. A new rule 114 inserted by the Income-tax (Third Amendment) Rules, 1976 under Board's Notification No. SO 266(E), dated 31-3-1976 provides for the matters covered by items (a) and (b). The Explanation to the section contains definitions of 'accounting year' and 'permanent account number', which are self-explanatory. 34.2 The object of this amendment is to provide for easy identification of the taxpayers for purposes of linking papers relating to them, including challans of payment of tax for which credit is to be given to the taxpayers. It is also intended to enable cross check of information received with the information furnished by the taxpayers with regard to the transactions relating to their business, investments, etc. [Section 39 of the Amending Act] Return by whom to be signed - Section 140 35. Clauses (c) and (d) of section 140 have been substituted by three new clauses. The new provisions lay down that in the case of a company, the return of income shall be signed by the managing director, and where for any unavoidable reason the managing director is not able to sign the return or there is no managing director, by any other director. In the case of a firm, the return shall be signed by the managing partner or where there is no managing partner or where he is not able to sign for any unavoidable reason, the same may be signed by any other partner (not being a minor). The object of this provision is to ensure that the returns of income are signed by the persons mainly responsible for the affairs of the company or the firm and that such persons are not able to avoid the penal consequences of tax fraud. The amended provisions have come into force with effect from 1-4-1976 and will, accordingly, apply in relation to returns furnished on or after that date. [Section 40 of the Amending Act] Self-assessment - Section 140A 36.1 The provision regarding payment of self-assessment tax is contained in section 140A. It was applicable so far only to cases where the tax payable on the basis of a return furnished under section 139, as reduced by any tax already paid under any provision of the Income-tax Act, exceeded Rs. 500. In such cases, the assessee was required to pay the tax so payable within 30 days of furnishing the return. The amendment makes a departure from the existing provision in two respects. Firstly, the provision will now be applicable to all cases where any tax, howsoever small, is payable on the basis of a return filed under section 139 or section 148 after taking into account the amount of tax, if any, already paid under any provision of the Income-tax Act. Secondly, the amount in question shall now be payable before the filing of the return and the return shall be accompanied by proof such payment. 36.2 The amendment also changes the penalty for non-payment of self-assessment tax. It will now be levied at 2 per cent of the tax due for every month of default, whereas so far it was not related to the period of default. [Section 41 of the Amending Act] Provisional assessment for refund - Section 141A 37. Section 141A, as it stood prior to its amendment by the Amending Act, provided that in a case where the regular assessment was not made within six months from the date of receipt of a return claiming refund, the Income-tax Officer should proceed to make the provisional assessment. No time limit was, however, laid down for completing the provisional assessment. The amended section provides that the Income-tax Officer shall make the provisional assessment of the sum refundable to the assessee within six months of the date of furnishing the return. The amended provision will apply to all returns furnished on or after 1-4-1976. [Section 42 of the Amending Act] Service of notice under section 142(1) after Issue of notice under section 139(2) 38. Hitherto, where a return under section 139 had not been filed, a notice under section 142(1) could be served only after a notice under section 139(2) had been served on the assessee. The amendment to sub-section (1) provides that a notice under that sub-section may be served after the issue of a notice under section 139(2) without having to wait for the service of the notice on the assessee. The object of this amendment is to expedite the issue of notice under section 142(1) calling for books of account, etc., in cases in which returns have not been filed voluntarily. [Section 43(i) of the Amending Act] Audit in certain cases - New sub-sections (2A), (2B), (2C) and (2D) of section 142 39.1 New sub-sections (2A), (2B), (2C) and (2D) have been inserted in section 142 empowering the Income-tax Officer to direct an assessee to get his accounts audited. Under sub-section (2A), the Income-tax Officer has been empowered to direct an assessee, in a case where the nature and complexity of the accounts and the interests of the revenue so require, to get his accounts audited by a chartered accountant had furnish a report of such audit in the prescribed manner. Such a direction can, however, be issued only with the prior approval of the Commissioner. The chartered accountant for the purposes of conducting the audit is also to be nominated by the Commissioner. 39.2 The expenses of, and incidental to, such an audit (including audit fee) are to be determined by the Commissioner and paid by the assessee. In case of default in payment, the same will be recoverable from the assessee in the manner provided in Chapter XVIID for the recovery of arrears of income-tax. The determination of fee and other expenses relating to audit by the Commissioner shall be final. 39.3 The form of audit report and the particulars required to be set forth therein are to be prescribed by the rules. 39.4 Sub-section (2B) provides that the direction for such an audit will be binding even if the accounts of the assessee have already been audited under any other law in force or otherwise. 39.5 Under sub-section (2C), the Income-tax Officer is required to specify the period within which the audit report is to be furnished by the assessee. He is, however, empowered to extend this period on an application by the assessee for any good and sufficient reason. The aggregate of the period originally fixed and that allowed to the assessee by way of extension, for furnishing the audit report, cannot exceed 180 days from the date on which the direction under sub-section (2A) was received by the assessee. 39.6 The amendment to sub-section (3) provides that the assessee will be given an opportunity of being heard in respect of any material gathered by the Income-tax Officer on the basis of the audit report and proposed to be utilised for the purpose of assessment, except where the assessment is made under section 144. 39.7 The provisions explained in paragraphs 38 to 39.6 have come into force with effect from 1-4-1976 and will apply to all proceedings pending on the said date or started on or after that date. [Section 43(ii) of the Amending Act] Best judgment assessment - Section 144 40. The amendment provides that in the event of any failure on the part of the assessee to comply with the direction regarding audit of accounts, the Income-tax Officer will be required to make a best judgment assessment under section 144. [Section 44 of the Amending Act] Reopening of assessment at the instance of the assessee - Section 146 41. A new sub-section (2) has been inserted in section 146 to provide that every application filed under section 146 shall be disposed of by the Income-tax Officer within a period of 90 days from the date of filing thereof. While computing this period, however, any delay in the disposal of the case which is attributable to the assessee is to be excluded. The amended provision will apply in respect of applications filed on or after 1-4-1976. [Section 46 of the Amending Act] Rectification of mistake - Section 154 42. The amendment to section 154 is consequential to the amendment made in section 274 by section 65 of the Amending Act. [Section 48 of the Amending Act] Discontinued business - Section 176 43. Sub-section (4) of section 176 provides that any sum received after the discontinuance of a profession will be treated as income of the recipient in the year of receipt if it would have been included in the total income of the person who carried on the profession, had it been received before such discontinuance. The new sub-section (3A) inserted by the Amending Act provides for a similar treatment to be given to a sum received after discontinuance of a business. The provision will apply in relation to the assessment year 1976-77 and subsequent years. [Section 49 of the Amending Act] Procedure on receipt of application for registration of a firm - Section 185 44.1 The Explanation to section 185(1) has been amended to provide that if a partner in a firm in an undisclosed benamidar of an outsider and any one or more of the partners had knowledge or belief thereof but such knowledge or belief had not been communicated to the Income-tax Officer in the prescribed manner, the firm shall not be treated as a genuine firm for the purposes of registration under the Income-tax Act. 44.2 By extending the present provision to cover benamidars of outsiders as well, the amendment is intended to curb the practice of having benami partners in a firm as a device of tax avoidance. The provision will apply in relation to the assessment year 1976-77 and subsequent years. [Section 51 of the Amending Act] Settlement of cases - New Chapter XIXA 45. Section 57 of the Amending Act has inserted a new Chapter XIXA which makes provisions for settlement of cases. These provisions come into force with effect from 1-4-1976. They are mainly intended to provide a statutory basis for settlement of cases which is at times necessitated by the nature and circumstances of certain cases or the complexity of the investigation involved therein. The substance of the main provisions made in this behalf is explained in paragraphs 46 to 58 below. Definitions - New section 245A 46. This section contains definitions of two terms, namely, "case" and "income-tax authority". The definition of income-tax authority given here, it may be noted, differs from the list of income-tax authorities given in section 116, inasmuch as the definition given in section 245A(b) does not include the Central Board of Direct Taxes and Inspectors of Income-tax. The term "case" has been defined as any proceeding under the 1961 Act and the 1922 Act for or in connection with the assessment or reassessment in respect of any year or years which may be pending before the income- tax authority, as defined in clause (b), on the date on which an application for settlement is made. The expression "proceeding" will not, however, include a proceeding for collection or recovery of any tax, interest or penalty. Settlement Commission - New section 245B 47. The section describes the constitution of the Income-tax Settlement Commission and the qualifications and mode of appointment of its Chairman and members. It also provides that the Central Government may, until the appointment of regular members, require any two members of the Central Board of Direct Taxes to serve as members of the Settlement Commission, in addition to their duties as members of the Board. Application for settlement of cases - New section 245C 48.1 An application for settlement of cases can be made by an assessee at any stage of his case. Keeping in view the definitions given in section 245A, it follows that a settlement application can be filed only while a proceeding under the 1961 Act or the 1922 Act, for or in connection with an assessment or reassessment is pending before any Director of Inspection, Commissioner, Assistant Commissioner or Income-tax Officer. (There is a special provision in respect of proceedings pending before the Tribunal which is explained in paragraph 58 below.) Thus, where an assessment has been made and the assessee has filed an appeal to the Appellate, Assistant Commissioner of Income-tax against the same, it will still be open for him to make an application for settlement. Similarly, in the course of proceedings initiated for reassessment, the assessee will be entitled to make an application for settlement. In case, however, no proceeding is pending before any income-tax authority, no application for settlement will lie. 48.2 An application for settlement has to be in Form. No. 34B prescribed by rule 44C(1) and has to be accompanied by a fee of Rs. 500 as prescribed under rule 44C(3) vide Income-tax (Third Amendment) Rules, 1976 notified under Board's Notification No. SO 266(E), dated 31-3-1976. 48.3 An application for settlement, if once made, shall not be allowed to be withdrawn. Procedure on receipt of an application under section 245C - New section 245D 49.1 On receipt of the application for settlement, the Settlement Commission will call for a preliminary report from the Commissioner having jurisdiction over the case. At this stage, it will be open to the Commissioner to object to the application being proceeded with by the Settlement Commission if the Commissioner is of the view that concealment of income or perpetration of fraud for evading any tax or other sum chargeable under the 1961 Act or the 1922 Act on the part of the applicant has been established or is likely to be established in relation to the case by any income-tax authority. In such an event, the Settlement Commission will be debarred from proceeding with the application. 49.2 On the basis of the report of the Commissioner and having regard to the nature and circumstances of the case or the complexity of investigation involved, the Settlement Commission will pass an order, either allowing the application to be proceeded with or rejecting the same. An order of rejection of the application will, however, be passed only after giving the applicant an opportunity of being heard. A copy of this order will be sent by the Settlement Commission to the applicant and the Commissioner. 49.3 After admitting the application, the Settlement Commission may direct the Commissioner to make or cause to be made such further enquiry or investigation as it considers necessary, and to furnish a report on the matters covered by the application and any other matter relating to the case. The Settlement Commission may also call for the relevant records from the Commissioner for its examination. After examining the records and the Commissioner's report and after giving an opportunity to the applicant and to the Commissioner to be heard, and after examining any further evidence placed before it or obtained by it, the Settlement Commission may pass such orders as it thinks fit. The order may cover not only the matters included in the application but also any other matter relating to the case which is referred to in the Commissioner's report. The order will provide for the terms of settlement, including any demand by way of tax, penalty or interest, and the manner of payment of the sum due under the settlement, etc. The order will also provide that the settlement will be void if it is subsequently found to have been obtained by fraud or misrepresentation of facts. 49.4 Before the order of settlement is passed, the materials brought on record before the Settlement Commission will be considered by all its members and in case there is a difference of opinion among the members, the order will be based on the majority decision. In case the settlement becomes void on being found to have been obtained by fraud or misrepresentation of facts, the proceedings with regard to the matters covered by the settlement will be deemed to have been revived from the stage at which the application was allowed to be proceeded with. The provisions relating to period of limitation laid down by section 153 will not be applicable to such a case and a period of two years from the end of the financial year in which the settlement became void will be available to the income-tax authority concerned to complete the relevant proceedings. Power of Settlement Commission to reopen completed proceedings - New section 245E 50. Cases may arise where although the application for settlement relates to a particular year, the income in question may have to be spread over a number of years on the basis of settlement. The Settlement Commission is, therefore, empowered to reopen completed proceedings with the concurrence of the applicant, if it is of the opinion that it is necessary or expedient to do so for the proper disposal of the case pending before it. The reasons for such an opinion will have to be recorded in writing. However, no proceeding can be reopened after the expiry of a period of eight years from the end of the assessment year to which the proceeding relates. Powers and procedure of Settlement Commission - New section 245F 51.1 In addition to the specific powers given to the Settlement Commission, all the powers that are available to an income-tax authority under the Income-tax Act will also be exercisable by the Settlement Commission. Any of the powers mentioned in Part C of Chapter XIII can, therefore, be exercised by the Settlement Commission. 51.2 After an application for settlement is allowed to be proceeded with, the Settlement Commission will have exclusive jurisdiction over the case until the order under section 245D(4) is passed. In relation to the matters before the Settlement Commission, it will be competent during this period for the Settlement Commission to exercise the powers and perform the functions of any income-tax authority under the Income-tax Act. However, in the absence of any express direction to the contrary, this will not affect the operation of the provisions of the Income-tax Act insofar as they relate to any other matter or the operation of the provisions relating to the payment of tax on self-assessment or advance tax in respect of the matters before the Settlement Commission. 51.3 The Settlement Commission has the power to regulate its own procedure relating to the fixation of the place and time of its meetings, etc. It may also act even if some member or members are not present at any of its meetings. Inspection, etc., of reports - New section 245G 52.1 Although no person is entitled to inspect or obtain copies of any reports given by any income-tax authority to the Settlement Commission, the Settlement Commission has been given full discretion to allow inspection of such reports or to furnish copies thereof to the applicant on an application and on payment of the prescribed fee. In case, however, some evidence has been brought on record against the applicant in any report furnished by the income-tax authority, he will be entitled to obtain a certified copy of any such report or part thereof on making an application to the Settlement Commission and on payment of the prescribed fee. The provision is intended to enable the applicant to rebut the evidence against him. 52.2 The scale of fees for the above purposes has been prescribed under rule 44D newly inserted in the Income-tax Rules, through the Income-tax (Third Amendment) Rules, 1976 notified under Board's Notification No. SO 266(E), dated 31-3-1976. Powers of Settlement Commission to grant immunity from prosecution, etc. - New section 245H 53.1 The Settlement Commission has been given the power to grant immunity to the applicant from prosecution as also from imposition of penalty. The immunity from prosecution may relate to any offence under the Income-tax Act or under the Indian Penal Code or any other Central Act, for the time being in force. Such an immunity can be granted if the Settlement Commission is satisfied that the applicant has extended full co-operation in the proceedings before it and has made a full and true disclosure of his income and the manner in which such income has been derived. While granting immunity, the Settlement Commission is competent to impose such conditions as it may think fit. 53.2 In case the Settlement Commission is satisfied that a person to whom an immunity from prosecution or penalty was granted has failed to comply with the conditions subject to which the immunity was granted or that in the course of the settlement proceedings such person had given false evidence or concealed material particulars, it will be competent for the Settlement Commission to withdraw the immunity. On the withdrawal of the immunity, the applicant will become liable to prosecution and/or imposition of penalty in respect of any offence or default for which he would have been so liable had the immunity not been granted to him. Order of settlement to be conclusive - New section 245-1 54. An order made by the Settlement Commission under sub-section (4) of section 245D will not be called in question in any proceeding under the Income-tax Act or under any other law for the time being in force except as provided in this Chapter. Thus, every order of the Settlement Commission under section 245D(4) will be final. Recovery of sums due under order of the Settlement Commission - New section 245J 55. For the recovery of any sum due from any person in pursuance of the order passed by the Settlement Commission under section 245D(4), the provisions of Chapter XVII are applicable. In case of any default in payment of such sums, penalty can also be imposed and recovered under the provisions of Chapter XVII by the Income-tax Officer having jurisdiction over such person. The recovery will, however, be subject to such conditions, if any, as may be specified by the Settlement Commission in its order. Bar on subsequent application for settlement in certain cases - New section 245K 56. If an order under section 245D(4) provides for imposition of a concealment penalty, the person concerned will not be entitled to make any application for settlement in relation to any other matter. A similar bar has also been placed on a person who is subsequently convicted of any offence under Chapter XXII in relation to the same case in respect of which an order of settlement under section 245D(4) was passed by the Settlement Commission. Proceedings before the Settlement Commission to be judicial proceedings - New section 245L 57. This section provides that all the proceedings under this Chapter before the Settlement Commission will be deemed to be judicial proceedings within the meaning of sections 193 and 228 and for the purposes of section 196 of the Indian Penal Code. Certain persons who have filed appeals to the Appellate Tribunal entitled to make application to the Settlement Commission - New section 245M 58.1 This provision enables an assessee whose appeal is pending before the Tribunal to approach the Settlement Commission for settlement of his case. Such a person is required first to make an application to the Appellate Tribunal seeking its permission to withdraw the appeal. The Appellate Tribunal is required to allow all such applications. The assessee is, thereupon, required to file his application for settlement before the Settlement Commission within thirty days of the receipt of the Tribunal's order granting withdrawal. All the provisions relating to an application filed under section 245C will apply to such an application. 58.2 In case the application of the assessee under this section is not entertained by the Settlement Commission, his appeal to the Appellate Tribunal will not be regarded as having been withdrawn and the provisions of sections 253, 254 and 255 will, so far as may be, apply accordingly. In. other words, the appeal to the Appellate Tribunal will, in such a case, stand restored. 58.3 In a case, however, where the Income-tax Officer has also preferred an appeal under section 253(2) to the Appellate Tribunal against the same order to which the appeal of the assessee relates, the assessee will not be entitled to make an application for settlement. [Section 57 of the Amending Act] Appeals to the Appellate Assistant Commissioner - Section 246 59. The Amending Act has amended section 246 conferring a right of appeal to the Appellate Assistant Commissioner against penalties levied appeal under new section 271A for failure to maintain books of account and section 272B for failure to comply with the provisions relating to permanent account numbers. [Section 58 of the Amending Act] Appeal s to the Appellate Tribunal - Section 253 60. The amendments to this section are consequential to the amendments made in the penal provisions through sections 62, 63 and 65 of the Amending Act. [Section 60 of the Amending Act] Penalty for failure to furnish returns, comply with notices and concealment of income, etc. - Section 271 61.1 This section provides for levy of penalty in cases of default in filing of returns, failure to comply with certain notices issued in the course of assessment proceedings and cases in which particulars of income have been concealed. A number of amendments have been made to the existing provisions contained in this section. These are discussed hereinbelow. 61.2 Section 271(1)(b) provides for levy of penalty in cases of failure without reasonable cause to comply with a notice under section 142(1) or section 143(2). Under the amendment, failure to comply with a direction issued under section 142(2A) regarding audit of accounts will also be punishable under this section. 61.3 Even though the income of a charitable or religious trust may not be liable to tax after giving effect to the provisions of sections 11 and 12, sub-section (4A) of section 139 casts an obligation on the person in receipt of such income to file a return if the income without giving effect to the provisions of sections 11 and 12 exceeds the exemption limit. Since the quantum of penalty for default in filing the return was to be calculated with reference to the amount of tax payable, no penalty for default in filing the return under section 139(4A) could be levied in cases where no tax was payable after giving effect to the provisions of sections 11 and 12. The amended provision provides for levy of penalty in such cases in a sum not exceeding one per cent of the total income of the trust (without giving, effect to the provisions of sections 11 and 12) for each year of default or part thereof. 61.4 Hitherto, under section 271(1)(i), there was a ceiling of 50 per cent of assessed tax on the penalty for non-filing or late filing of returns in the case of assessees other than charitable or religious trusts or institutions. This ceiling has now been removed. Attention is invited in this connection, however, to paragraph 61.12. 61.5 Hitherto, a person was liable under section 271(1)(iii) to a minimum penalty equal to the concealed income and a maximum penalty of twice that amount. Under the amended provision, the minimum penalty leviable will be equal to the tax sought to be evaded and the maximum penalty will be twice that amount. 61.6 Hitherto, in a case in which the concealed income exceeded Rs. 25,000, the penalty order was required to be passed by the Inspecting Assistant Commissioner. The amendment provides that in such a case the penalty will now be leviable by the Income-tax Officer, but with the prior approval of the Inspecting Assistant Commissioner. 61.7 The Explanation to section 271(1)(iii) has been omitted and four new Explanations have been added in its place. 61.8 New Explanation 1 provides that where in respect of any facts material to the computation of his total income, an assessee fails to offer an explanation or is unable to substantiate an explanation offered by him or offers an explanation which is found to be false, the amount added or disallowed in computing the total income of such person as a result thereof will be treated as his concealed income. If, however, the explanation offered by the assessee is bona fide and all the facts relating to the explanation and material to the computation of total income have been disclosed by the assessee, Explanation I will not be applicable. 61.9 New Explanation 2 makes a provision in respect of"intangible additions". Additions are sometimes made by the Income-tax Officers for purely technical reasons, e.g., application of a presumptive rate of gross profit or of yield, or on account of estimated disallowance of certain expenses, shortfalls, wastage, etc., but no penalty for concealment is levied in respect of these additions for want of adequate evidence to establish that these additions represent the assessees concealed income. In later assessments, when called upon to explain certain deposits, etc.,the assessees urge at times that such deposits, etc., have come out of the income represented by the aforesaid additions made earlier. Despite this virtual confession of concealment on the part of the assessee, no penalty was hitherto leviable in such cases as the time limit for initiating concealment penalty proceedings in respect of the earlier year in which the addition was made would have expired. The penalty could also not be imposed in respect of the year in which the deposit was made as there was no concealment in that year, the deposit having been explained as out of an earlier year's income. New Explanation 2 provides that in such cases, the assessee would become liable to penalty for concealment in respect of additions made in the earlier year in which the additions were made. 61.10 New Explanation 3 provides that if a person, who has not hitherto been assessed to tax under the 1961 Act or the 1922 Act, does not file a return of income for an assessment year voluntarily within the normal period of limitation and no notice under sections 139(2) and 148 is issued to him till the expiry of the said period, he will be treated to have concealed his income and penalty will be leviable on him accordingly if he is later found to have had taxable income in that year. The provision will be applicable in respect of defaults in filing the return for the assessment year 1974-75 and subsequent years. 61.11 New Explanation 4 defines "the amount of tax sought to be evaded". According to the definition, this expression will ordinarily mean the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of which particulars have been concealed. In a case, however, where on setting off the concealed income against any loss incurred by the assessee under other head of head of income or brought forward from earlier years, the total income is reduced to a figure lower than the concealed income or even to a minus figure, "the tax sought to be evaded" will mean the tax chargeable on the concealed income as if it were the total income. Another exception to the general definition of the expression "tax sought to be evaded" given earlier is a case to which Explanation 3 applies. Here, the tax sought to be evaded will be the tax chargeable on the entire total income assessed. 61.12 A ceiling of 200 per cent of the tax sought to be evaded has been laid down in respect of the aggregate amount of penalties leviable under section 271(1)(i) and section 271(1)(iii) read with Explanation 3. In other words, where an assessee fails to file the return of income for an assessment year within the normal period of limitation and is later found to have taxable income for that year, although penalties will be leviable on him under both the provisions contained in section 271(1)(i) and (iii) read with Explanation 3, the aggregate of such penalties will be restricted to a maximum of 200 per cent of the tax sought to be evaded. 61.13 The aforesaid amendments have come into force with effect from 1-4-1976. Except as stated in Explanation 3, the amended provisions will, therefore, apply to cases where the respective defaults occur on or after that date. A penalty under section 271(1)(i) will be leviable according to the amended provision in respect of cases where the default in filing the return occurred on or after 1-4-1976, that is to say, where the last date for filing the return expired on or after that date. A penalty under section 271(1)(ii) will be leviable according to the amended provision in respect of cases where the date of failure to comply with a notice under, section 142(1)/143(2) or direction issued under section 142(2A) falls on or after 1-4-1976. A penalty under section 271(1)(iii) will be leviable, subject to Explanation 3, in respect of cases where the return containing the concealment is filed on or after 1-4-1976. In a case where Explanation 3 applies, as stated earlier, the penalty under the amended provision will be imposable in respect of the assessment year 1974-75 and subsequent years. [Section 61 (Part) of the Amending Act] Failure to keep, maintain or retain books of account, documents, etc. - New section 271A 62. This section has been inserted to provide for penalty for failure to keep and maintain books of account, etc., and for not retaining them for the prescribed period. As explained in paragraphs 14.1 and 14.2 of this circular assessees falling in certain categories are required to maintain such books of account and other documents as may enable the Income-tax Officer to compute their total income in accordance with the provisions of the Income-tax Act. The Board has also been given the power to prescribe, through rules, the books of account, documents, etc., to be maintained by any class of taxpayers. The Board has been empowered to prescribe the period for which the books of account are to be retained. In case of default in complying with these provisions, the assessee will be liable to a penalty which shall not be less than 10 per cent but not more than 50 per cent of the tax which would have been avoided if the income returned had been accepted as the correct income. [Section 62 of the Amending Act] Penalty for failure to answer questions, sign statements, allow inspections, etc. - New section 272A 63. Hitherto, offences mentioned in section 276 were punishable with fine. The said fine could, however, be imposed only on conviction by a court of law. The amended provision instead provides for imposition of penalties in such cases by specified income-tax authorities. Further, these authorities have also been empowered to impose penalties up to Rs. 1,000 for offences of the nature specified in sub-section (1) of section 271A. In a case where the contravention or failure occurs before the Commissioner, the Appellate Assistant Commissioner or the Inspecting Assistant Commissioner, the order imposing the penalty will be passed by the authority concerned, but where it occurs before an Income-tax Officer, he will have to refer the case to the Inspecting Assistant Commissioner and the order imposing the penalty will be passed by the latter. The person on whom penalty is proposed to be levied must be given an opportunity of being heard before the penalty order is passed. [Section 63 (Part) of the Amending Act] Penalty for failure to comply with provisions relating to permanent account numbers - New section 272B 64. The new section 139A makes certain provisions requiring certain categories of persons to obtain permanent account number, to intimate change of address, etc., and to quote the permanent account number in certain documents (vide para 34.1 above). In case of failure of a person without reasonable cause to comply with these provisions, the Income-tax Officer has been empowered to impose a penalty which may extend up to Rs. 500. [Section 63 (Part) of the Amending Act] Procedure in regard to imposition of penalty - Section 274 65. Hitherto, in a case in which the concealment of income exceeded Rs. 25,000, the penalty order under section 271(1)(iii) was passed by the Inspecting Assistant Commissioner. As explained in para 61.6 above, the penalty orders in such cases will now be passed by the Income-tax Officer with the prior approval of the Inspecting Assistant Commissioner. Sub-section (2) of section 274 which provided for the imposition of concealment penalty by the Inspecting Assistant Commissioner has, accordingly, been deleted. [Section 65 of the Amending Act] Failure to make payments or deliver returns, etc. - Section 276 66. This section provided for imposition of fine on prosecution of a person by the court. Section 63 of the Amending Act has inserted a new section 272A (explained in para 63 above) through which such fines have been replaced now by penalties which can be imposed by income-tax authorities. Section 276 has, therefore, been omitted. [Section 67 of the Amending Act] Failure to produce books of account and documents - Section 276D 67. This section provides that in cases of failure of an assessee to produce the books of account, documents, etc., that may be called for by the Income-tax Officer by a notice issued under section 142(1), the assessee will be liable to punishment with rigorous imprisonment for a term which may extend to one year or with fine or with both. The amendment provides that the failure on the part of the assessee to comply with the direction for audit of accounts issued under section 142(2A) will also render him liable to the said punishment. [Section 69 of the Amending Act] Information by contractors in certain cases - Section 285A 68.1 The existing provision in this section requires certain contractors to intimate particulars relating to then, contracts to the Income-tax Department. Hitherto, this provision was applicable only to persons entering into contracts for construction of buildings or for the supply of goods or services in connection therewith if the value of the contract exceeded Rs. 50,000. The amendment extends the scope of the provision to cover all works and labour contracts. All persons entering into a contract for carrying out any work, or for the supply of goods or services in connection therewith, will have to intimate the particulars of the contract if the value of the work or supply, or the aggregate value of both, exceeds Rs.50,000. The object of this provision is to obtain timely information about the major work or labour contracts for purposes of proceedings under the Income- tax Act. 68.2 This amendment has come into force with effect from 1-4-1976 and is applicable in relation to contracts entered into on or after that date. [Section 75 of the Amending Act] Submission of statements by producers of cinematograph films - New section 285B 69.1 This is a new provision requiring producers of films to furnish to the Income-tax Officer statements of all payments over Rs. 5,000 made by them to persons engaged in the production of a film. The statement is to be furnished within thirty days from the end of the financial year in which the production of film is carried on or within thirty days from the date of completion of the film, whichever is earlier. The form (if the statement has been prescribed by new rule 121A inserted in the Income-tax Rules by the Income-tax (Third Amendment) Rules, 1976 under the Board's notification No. SO 266(E), dated 31-3-1976. The object of the provision is to check inflation of expenditure by film producers and to enable the Income-tax Department to get information about the recipients of payments for necessary action in their cases. 69.2 This provision has come into force with effect from 1-4-1976, and will apply in relation to films completed during the financial year 1976-77, or as the case may be, payments made during the financial year 1976-77 and subsequent years. [Section 76 of the Amending Act] Power to make rules - Section 295 70. This section confers powers on the Board to make rules for carrying out the purposes of the Income-tax Act. The amendments to section 295 are consequential to the insertion of certain new provisions, namely, those in sections 44AA, 80GG, 139(6),139A, 142(2A) and 285B. [Section 79 of the Amending Act] Rules and notifications to be placed before Parliament - Section 296 71. This section provides for rules framed under the Income-tax Act to be placed before Parliament. At present, the rules framed under the Act are to be laid before each House of Parliament while it is in session for a total period of thirty days which may be comprised in one session or in two successive sessions. The amendment substitutes the words "two or more successive sessions" for the words "two successive sessions". [Section 80 of the Amending Act]