Amendments at a glance ,Rate structure , Amendments to Income-tax Act , Amendments to Wealth-tax Act , Amendments to Gift-tax Act , Amendments to Companies (Profits) Surtax Act, Miscellaneous provisions - Income Tax - 72/1972

CIRCULAR NO. 72 DATED 6-1-1972 FINANCE (NO. 2) ACT, 1971 Amendments at a glance Rate structure Amendments to Income-tax Act Amendments to Wealth-tax Act Amendments to Gift-tax Act Amendments to Companies (Profits) Surtax Act Miscellaneous provisions 11 Finance (No. 2) Act, 1971 Amendments at a glance SECTION/SCHEDULE PARTICULARS Finance act 2 and 1st Sch. Rate structure 3-5 54 Exemption from income-tax and surtax income of Housing and Urban Development Finance Corporation 122 Income-tax act 2(17) Definition of "company" 29-30 2(26) Definition of "Indian company" 31 2(18) Definition of "a company in which the public are sub-stantially interested" 32-35 2(43B) Definition of "Tax Recovery Commissioner" 67 10(20) Exemption to local authorities deriving income from supply of water and electricity outside their jurisdictional areas 49 10(26A) Exemption from tax on certain incomes of the resident of Ladakh 89-90 11(1A) Capital gains derived by charitable and religious trusts 73-78 13(4) Forfeiture of exemption from income-tax on the income of charitable or religious trusts in certain cases 79-80 16(iv) Deduction for expenses on travelling to salaried taxpayers 82-84 33(5) Development rebate—Notification for its withdrawal in respect of machinery or plant installed after 31-5-1974 26-28 36(1)(viii) Financial corporations providing long-term finance for agricultural development in India 50-51 37(3) and rule Expenditure incurred on travelling by employees and other 6D persons for the purpose of business or profession 24-25 40(c), Expenditure on provision of remuneration, benefit of amenity 58(1)(a)(iv) to directors of companies and certain other persons 20-23 40(a)(v), Expenditure on payment of salaries or provision of perqui- 40A(5)/6 sites to employees 15-19 54A Withdrawal of tax relief to foreign companies and foreign nationals on capital gains in certain cases 41-42 67(1)(a)/(4), Computation of a partner's share in the income of a firm, 86(iii) and the tax payable by him, where an unregistered firm is assessed as a registered firm 36-40 80C(1) Deduction in respect of long-term savings in specified media - Quantum increased 11-12 80-I(1) and 6th Sch. Priority industries - Reduction in quantum of deduction8-10 80L(1) Deduction in respect of incomes from specified financial (opening para), (viii) assets 13-14 80M(1), (2) Withdrawal of special tax concession to foreign companies in respect of certain inter-corporate dividends 43-44 80MM(1), 2nd Royalties, commission, fees, etc., for provision of technical prov. thereto, know-how or technical services to Indian concerns 52-56 (2A) 80N Dividends on shares in a foreign company allotted in consideration of the provision of technical know-how or technical services 57-59 80-O Royalties, commission, fees, etc., for provision of technical know-how or technical services to foreign enterprises 60-64 80P(2)(a)(vi)/ Income of labour co-operative societies and fisheries (vii), prov. co-operative societies 85-87 80T(b)(i)/(ii), Long-term capital gains in the case of assessees other than 115 companies - Quantum of deduction reduced 6-7 115 Long-term capital gains in case of companies - Rates of tax increased 6-7 194A(3)(v) Interest on deposits made by members with co-operative societies - Deduction of tax at source 88 230A(1), (3) Bar on registration of transfer of immovable property in a case where taxation liabilities remain unsatisfied 71-72 235 Discontinuance of tax relief on dividends paid by a company out of its agricultural income 45-46 Rules 82, 83, Provision for Tax Recovery Commissioners 65-70 86(1), (4), 87, 92(1)/(2)(a) of 2nd Sch. Rule 19A Exclusion of debentures and long-term borrowings from approved sources in computing the capital employed in a new industrial undertaking, ship or hotel, for the purpose of the five-year tax holiday 47-48 Wealth-tax Act 4(1)(a), Prov. Aggregation of assets belonging to the spouse or minor child of an individual with the net wealth of the individual 95 4(1)(b)/(7) Tax treatment of members of co-operative housing societies 5(1)(xxx) 98-101 4(1A) , Expln. Conversion of separate property of an individual into joint (c)/(d), Hindu family property 96-97 5(1)(iv) Exemption in respect of one residential house - Liberalisation thereof 93-94 5(1)(viii), (xv) Withdrawal of exemption from wealth-tax in respect of jewellery, etc., and limiting of exemption in respect of motor cars, etc. 102-106 5(1)(xx) Shares in new industrial companies - Withdrawal of exemption from 107 5(1)(xxviii), Financial assets qualifying for exemption from wealth- (xxix), 21(4)/ tax 108-110 prov. 18(1)(i),(1A) Penalty for failure to furnish returns, etc. 92 32, Expln. II Recovery of wealth-tax arrears 111 Sch. Increase in the rates of ordinary wealth-tax in the case of individuals and Hindu undivided families 91-92 Gift-tax Act 2(xii), 4(2) Conversion of self-acquired property of an individual into property belonging to the Hindu undivided family of which he is a member 112-113 5(1)(v), (va) Drafting amendments as a result of section 88, being replaced by section 80G of the Income-tax Act 116 33, Expln. II Recovery of arrears of gift-tax 115 45, Expln. 3 Exemption of gifts made by charitable or religious institutions or funds 114 Surtax Act 18 Recovery of arrears of surtax 119 3rd Sch. Rates of surtax 117-118 Miscellaneous Provisions 30 Deposit Insurance Corporation 120-121 Rate structure Finance (No. 2) Act, 1971 Rates of income-tax for the assessment year 1971-72 3. The rates of income-tax for the assessment year 1971-72 in the case of all categories of taxpayers, corporate as well as non-corporate, are specified in Part I of the First Schedule to the Finance (No. 2) Act, 1971. These rates - summarised in Annexure I to this circular - are the same as were specified in Part III of the First Schedule to the Finance Act, 1970, for the purpose of computation of "advance tax", deduction of tax at source from "salaries" and retirement annuities payable to partners of registered firms engaged in specified professions and computation of the tax payable in certain special cases, during the financial year 1970-71. These rates were already prescribed for the assessment year 1971-72 under the earlier Finance Act, 1971, which applied the relevant provisions of the Finance Act, 1970, to the financial year 1971-72, with certain modifications so as to bring these in line with the current provisions of the Income-tax Act. These modifications, which have been incorporated in the present Finance (No. 2) Act, 1971 are the following : 1. It has been provided in sub-section (3) of section 2 of the Finance (No. 2) Act, 1971 that in cases to which Chapter XII or section 164 applies, the tax chargeable for the assessment year 1971-72 shall be determined as provided in that Chapter or in that section and with reference to the rates imposed under the Finance (No. 2) Act, 1971 for the assessment year 1971-72 or the rates as specified in the said Chapter XII or section 164, as the case may be. 2. An Explanation has been added at the end of Paragraph C of Part I of the First Schedule to make it clear that the rates of income-tax and surcharges prescribed in the case of registered firms for the assessment year 1971-72 will apply also in the case of an unregistered firm assessed as a registered firm under section 183(b). The modification at (1) has been made in the context of the provision made in section 164 through the Finance Act, 1970, for charging tax on the income of a private discretionary trust at the flat rate of 65 per cent or the higher rate which would be appropriate to the total income of the trust at the rates of tax applicable in the case of an association of persons. The modification at (2) has been made in the context of the amendment of section 183(b) by the Taxation Laws (Amendment) Act, 1970, under which an unregistered firm may be assessed as a registered firm and subjected to the tax chargeable on registered firms at the rates specified in this behalf in the annual Finance Act, and its partners charged to tax on their respective shares in the total income of the firm, where this course is beneficial to the Revenue. Finance (No. 2) Act, 1971 Rates for deduction of tax at source during the financial year 1971-72 from incomes other than "salaries" and retirement annuities 4. The rates for deduction of tax at source during the financial year 1971-72 from incomes other than "salaries" and retirement annuities payable to partners, of registered firms engaged in specified professions, i.e., interest on securities, other categories of interest, dividends, and other categories of non-salary income of non-residents, are set forth in Part II of the First Schedule to the Finance (No. 2) Act, 1971. These rates differ from the rates specified in Part II of the First Schedule to the Finance Act, 1970, for purposes of deduction of tax at source from such incomes during the financial year 1970-71 in certain respects as explained hereinbelow : 1. Payments to residents other than companies - In the case of income by way of interest on securities (not being interest on a tax-free security) or dividends, payable to resident recipients other than companies during the financial year 1971-72, tax is deductible at the rate of 23 per cent made up of basic income-tax of 20 per cent and surcharge of 3 per cent (being 15 per cent of the income-tax). This is higher than the rate at which tax was deductible in such cases during the financial year 1970-71, by 1 per cent. The increase has been made in the context of the increase in the rate of surcharge on the income-tax in the case of non-corporate taxpayers as explained in paragraph 5 of this circular. 2. Payments of income to non-residents other than companies - In the case of income (other than interest on a tax-free security) payable to non-corporate non-residents during the financial year 1971-72, tax is deductible at the minimum rate of 34.5 per cent, made up of income-tax of 30 per cent and surcharge of 4.5 per cent (being 15 per cent of the income-tax). If the rate of income-tax and surcharge appropriate to the payment at the progressive rates of tax applicable in the case of an individual works out at higher than 34.5 per cent, tax is deductible at such higher rate. In respect of interest on a tax-free security payable to non-corporate non-residents, the rate for deduction will be 17.25 per cent made up of income-tax of 15 per cent and surcharge of 2.25 per cent (being 15 per cent of the income-tax). These increases have also been made in the context of the increase in the rate of surcharge on the income-tax in the case of non-corporate taxpayers as explained in paragraph 5 of this circular. 3. Dividends payable by domestic companies to foreign companies - In the case of dividends payable during the financial year 1971-72 by a domestic company on shares in that company held by a foreign company, tax is deductible at source at the uniform rate of 24.5 per cent. Formerly, a lower rate of 14 per cent was applicable in cases where the dividend was payable to the foreign company by a closely-held Indian company mainly engaged in a priority industry. The special concession in respect of taxation of inter-corporate dividends in such cases has been discontinued by an amendment to section 80M as explained in paragraph 45 of this circular. In the context of this change, the special concessional rate of 14 per cent in respect of dividends of the special category has been discontinued and the uniform rate of 24.5 per cent, which has so far been applicable to other dividend payments to foreign companies by domestic companies, has now been made applicable to all dividend payments by domestic companies to foreign companies. Finance (No. 2) Act, 1971 Rates for deduction of tax at source from "salaries" and for computation of "advance tax" during the financial year 1971-72 5. The Finance (No. 2) Act, 1971 follows the principle adopted in the Finance Acts of the preceding years that in prescribing the rates of tax and in making new provisions in the taxation laws, measures which have the effect of bringing about a change in the tax liability or which provide a tax incentive or disincentive in any sphere should apply prospectively to current incomes falling due for assessment in the next following assessment year, and not retrospectively to incomes earned in the past, except where there are special circumstances justifying the retrospective operation of any particular provision. In conformity with this principle, changes in the rates of tax which were considered necessary or desirable have been made operative prospectively in relation to incomes of the financial year 1971-72 or other accounting period which would be relevant for the assessment year 1972-73. The rates for deduction of tax at source from "salaries" in the case of individuals during the financial year 1971-72, and for computation of "advance tax" payable during that year in the case of all categories of taxpayers during the said financial year, are specified in Part III of the First Schedule to the Finance (No. 2) Act, 1971 and have been summarised in Annexure II to this circular. These rates apply also for the purpose of deduction of tax at source during the financial year 1971-72 from retirement annuities payable to partners of registered firms engaged in certain professions (chartered accountants, solicitors, lawyers, etc.) and for charging or calculating income-tax in special cases. These special cases are section 132(5), first proviso [calculating income-tax on undisclosed income represented by seized assets in certain cases]; section 172(4) [levy of tax on provisional basis on the income of non-residents from shipping of cargo or passengers from Indian ports]; section 174(2) [assessment of persons leaving India]; section 175 [assessment of persons likely to transfer property to avoid tax]; and section 176(2) [assessment of profits of a discontinued business]. These rates differ from the rates specified in Part I of the First Schedule to the Finance (No. 2) Act, 1971 for the assessment of incomes liable to tax for the assessment year 1971-72 in the following particulars : 1. Individuals, Hindu undivided families, associations of persons, etc. - In these cases, the rate of surcharge of income-tax has been increased from 10 per cent to 15 per cent of the basic income-tax in all cases where the total income exceeds Rs. 15,000. Where the total income is Rs. 15,000 or less, the rate of surcharge continues to be 10 per cent, as formerly. Further in a case where the total income exceeds Rs. 15,000 by a small amount, the surcharge leviable is the lower of the following two quantities : a. 15 per cent of the income-tax, or b. the aggregate of (i) the surcharge which would be leviable if the total income were Rs. 15,000 only, and (ii) 40 per cent of the amount by which the total income exceeds Rs. 15,000. The operation of this marginal relief provision is illustrated in the following examples : Example I Total income Rs. 15,100 Income-tax Rs. 1,373 (Rs. 1,350 plus 23 per cent of Rs. 100) Surcharge leviable Under alternative (a) Rs. 205.95 (15 per cent of Rs. 1,373) Under alternative (b) Rs. 175.00 (Rs. 135, being 10 per cent of Rs. 1,350 which is the tax on a total income of Rs. 15,000 plus Rs. 40, being 40 per cent of the amount by which total income exceeds Rs. 15,000). As the surcharge calculated under alternative (b) is lower in amount, the surcharge leviable in this case will be Rs. 175 only. Example II Total income Rs. 15,200 Income-tax on Rs. 15,200 Rs. 1,396 (Rs. 1,350+23 per cent of Rs. 200) Surcharge leviable : Under alternative (a) Rs. 209.40 (15 per cent of Rs. 1,396) Under alternative (b) Rs. 215.00 (Rs. 135 plus Rs. 80, being 40 per cent of Rs. 200). As the surcharge calculated under alternative (a) is lower than that under alternative (b), the surcharge leviable will be that under alternative (a), i.e., Rs. 209.40. The marginal relief provision will not, therefore, apply at this level, or above it. 2. Co-operative societies and local authorities - In these cases, the rate of surcharge on income-tax has been increased from 10 per cent of the basic income-tax to 15 per cent at all levels of income. 3. Registered firms - In the case of registered firms, the rate of special surcharge has been increased from 10 per cent to 15 per cent of the aggregate of the basic income-tax and ordinary surcharge. Amendments to Income-tax Act Measures for raising additional revenue Finance (No. 2) Act, 1971 Long-term capital gains 6. Under the provisions of the Income-tax Act, long-term capital gains, i.e. capital gains arising from the transfer of a capital asset which is held for more than 24 months from the date of acquisition, are charged to tax on a concessional basis. In the case of taxpayers other than companies, the concession is allowed by deducting a specified proportion of the long-term capital gains in computing the taxable income, vide section 80T. In the case of companies, lower rates of tax have been specified in respect of long-term capital gains, under section 115. With a view to increasing the incidence of tax on long-term capital gains, the following amendments have been made in the relevant provisions of the Income-tax Act : 1. Taxpayers other than companies - By virtue of the amendment of section 80T, under section 23 of the Finance (No. 2) Act, 1971, the deduction in respect of long-term capital gains in computing the taxable income in such cases will be as under : a. Long-term capital gains relating to buildings or lands or any rights therein - The deduction will be Rs. 5,000 plus 35 per cent of the amount of such gains over Rs. 5,000 (as against 45 per cent before the amendment). b. Long-term capital gains relating to other capital assets - The deduction will be Rs. 5,000 plus 50 per cent of the amount by which such gains exceed Rs. 5,000 (as against 65 per cent before the amendment). 2. Companies - Under section 115, as amended by section 25 of the Finance (No. 2) Act, 1971, the rates of tax in respect of long-term capital gains in such cases will be as under : a. Long-term capital gains relating to buildings or lands or any rights therein - The rate of tax will be 45 per cent, as against 40 per cent before the amendment. b. Long-term capital gains relating to other capital assets - The rate of tax will be 35 per cent, as against 30 per cent before the amendment. Finance (No. 2) Act, 1971 7. The changes set forth in the preceding paragraph will become effective from 1-4-1972 and will, accordingly, apply to the assessment year 1972-73 in relation to current incomes of the financial year 1971-72 or other accounting year corresponding to it. Finance (No. 2) Act, 1971 Priority industries 8. Under the existing law, income derived by certain domestic companies from specified priority industries is charged to tax on concessional basis. The priority industries specified for this purpose comprise the following : a. the business of generation or distribution of electricity or any other form of power; b. the business of construction, manufacture or production of any one or more of the articles or things specified in the list in the Sixth Schedule; and c. the business of any hotel where this business is carried on by an Indian company and the hotel is, for the time being approved in this behalf by the Central Government. The concessional taxation of certain domestic companies in respect of their profits derived from these industries is brought about by allowing a deduction of a specified percentage of such profits in computing the total income of the domestic company vide section 80-I. Finance (No. 2) Act, 1971 9. The Finance (No. 2) Act, 1971 has amended section 80-I and the Sixth Schedule so as to bring about an increase in the incidence of tax on profits from priority industries and to exclude certain industries from the priority list. These amendments are as follows : 1. Under section 80-I, as amended by section 16 of the Finance (No. 2) Act, 1971, the quantum of deduction admissible to a domestic company in respect of profits derived by it from such industries has been reduced from 8 per cent to 5 per cent of such profits. 2. Under the amendment of the Sixth Schedule by section 30 of the Finance (No. 2) Act, 1971, the following items have been omitted from the list of articles and things relating to priority industries in that Schedule : a. Aluminium (metal), formerly included in item 2 of the list. b. Motor trucks and buses, formerly listed as item 10. c. Cement and refractories, formerly listed as item 12. d. Soda ash, formerly listed as item 14. e. Petro-chemicals, formerly listed as item 18. f. Automobile ancillaries, formerly listed as item 20. Profits from the manufacture of these articles will not, hereafter, qualify for the deduction under section 80-I. Finance (No. 2) Act, 1971 10. The changes set forth in the preceding paragraph will come into effect on 1-4-1972 and will, accordingly, apply from the assessment year 1972-73 in relation to current incomes of the financial year 1971-72 or other accounting period corresponding to it. Incentives for savings and investment Finance (No. 2) Act, 1971 Deduction in respect of long-term savings in specified media 11. Under the provisions of section 80C, tax relief is allowed in respect of long-term savings effected by certain categories of taxpayers out of their income. In the case of an individual, long-term savings through life insurance or deferred annuity policies on the life of the individual, his spouse or child, certain provident funds and superannuation funds and 10-Year and 15-Year Cumulative Time Deposit Accounts, qualify for tax relief. In the case of Hindu undivided families, long-term savings effected through insurance policies on the life of any member of the family qualify for tax relief. In the case of an assessee being an association of persons or a body of individuals consisting only of husband and wife governed by the system of community of property in force in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu, long-term savings through policies of life insurance or for deferred annuities on the life of any member of such association or body or on the life of any child or either member, as also through the Public Provident Fund and 10-Year and 15-Year Cumulative Time Deposit Accounts, qualify for the tax relief. Prior to the amendment of section 80C by section 15 of the Finance (No. 2) Act, 1971, the tax relief was allowed by deducting 60 per cent of the first Rs. 5,000 of the qualifying savings plus 50 per cent of the balance of such savings, in computing the taxable income of the assessee. With a view to providing a further incentive for effective long-term savings, particularly by taxpayers in the lower and middle income brackets, the following changes have been made in the relevant provisions : 1. The quantum of the deduction in respect of long-term savings in computing the taxable income has been varied so as to allow a deduction of the whole of the first Rs. 1,000 of the qualifying savings plus 50 per cent of the next Rs. 4,000 plus 40 per cent of the remainder of such savings. [This will mean that in the case of a person who saves Rs. 1,000 or less, the whole of such savings will be allowed as a deduction from his taxable income, as against 60 per cent of such savings formerly. In the case of a person who saves more than Rs. 1,000 but less than Rs. 5,000, the amount of the deduction will be higher than formerly. On a saving of Rs. 5,000 the quantum of the deduction remains the same, namely Rs. 3,000.] 2. The monetary limit over the savings qualifying for the deduction has been increased from Rs. 15,000 to Rs. 20,000 in the case of an individual and also in the case of a married couple governed by the system of community of property in force in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu. [The monetary limit of Rs. 30,000 applicable to the qualifying savings by a Hindu undivided family, remains unchanged.] Finance (No. 2) Act, 1971 12. The changes set forth in the preceding paragraph will take effect from 1-4-1972 and will, accordingly, apply for the assessment year 1972-73 in relation to current incomes of the financial year 1971-72 or other accounting year corresponding to it. Finance (No. 2) Act, 1971 Deduction in respect of incomes from specified financial assets 13. Under a provision introduced through the Finance Act, 1970, income derived by a taxpayer from investments in specified categories of financial assets is exempt from tax up to an aggregate amount of Rs. 3,000 which is deducted in computing the taxable income. The investments covered by this provision are : (i) Government securities; (ii) notified debentures; (iii) deposits under notified schemes of the Central Government; (iv) shares in Indian companies; (v) units in the Unit Trust of India; (vi) deposits with banking companies, co-operative banks, land mortgage banks and land development banks; and (vii) deposits with approved financial corporations engaged in providing long-term finance for industrial development in India. Section 80L, which deals with this matter, has been amended by section 17 of the Finance (No. 2) Act, 1971, so as to modify this provision in certain respects as explained hereunder : 1. The deduction under this provision has been limited to individuals, Hindu undivided families, and associations of persons or bodies of individuals consisting only of husband and wife governed by the system of community of property in force in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu. It will, therefore, not be allowed henceforth in the case of other categories of taxpayers, such as companies, partnership firms, etc. 2. Deposits with a co-operative society made by a member of the society have been included in the categories of financial assets specified in the provision. Accordingly, interest on such deposits will also qualify for the deduction under this provision, along with incomes derived from the financial assets already listed therein. Finance (No. 2) Act, 1971 14. The changes set forth in the preceding paragraph will be effective from 1-4-1972 and will, accordingly, apply to the assessment year 1972-73 in relation to current incomes of the financial year 1971-72 or other accounting year corresponding to it. Imposition of restraints on business expenses so as to reduce income disparities Finance (No. 2) Act, 1971 Expenditure on payment of salaries or provision of perquisites to employees 15. With a view to imposing restraints on business expenses so as to reduce income disparities, a provision has been made in a new sub-section (5) introduced in section 40A by section 10 of the Finance (No. 2) Act, 1971 placing certain ceiling limits on the deductible amount of expenditure incurred by a taxpayer on payment of salary to any employee or a former employee or in providing any perquisites, etc., to any such employee. Under the new provision, expenditure incurred by an assessee on payment of salary to an employee in respect of the period of his employment in India during the relevant year will not be allowed as a deduction in computing the taxable profits to the extent it exceeds an amount calculated at the rate of Rs. 5,000 for each month or part of such period. Similarly, expenditure incurred by the assessee on payment of salary to a former employee, i.e., an individual who ceases or ceased to be the employee of the assessee during the previous year or any earlier previous year, will not be allowed as deduction in computing the taxable profits to the extent it exceeds Rs. 60,000 for the year. For this purpose, "salary" has been defined, broadly, on the lines of the provision in section 17, subject to certain modifications. The expression "salary" will include wages, any annuity or pension; any gratuity; any fees or commission; profits in lieu of or in addition to any salary or wages; any advance of salary; and the annual accretion to the balance at the credit of an employee participating in a recognised provided fund to the extent it is chargeable to tax. In this context, the expression "profits in lieu of salary" will have the same meaning as in section 17(3) and will, therefore, include any compensation paid by the assessee to an employee or a former employee in connection with the termination of his employment or modification of the terms and conditions relating thereto. The term "salary" will, however, not include "perquisite" and the sums transferred from the account of the employee in an unrecognised provident fund to a recognised provident fund. Finance (No. 2) Act, 1971 16. Under section 40(a)(v) [as it stood before its omission by the Finance (No. 2) Act, 1971], any expenditure which resulted directly or indirectly in the provision of any benefit or amenity or perquisite to an employee or any expenditure or allowance in respect of any assets of the assessee used by such employee either wholly or partly for his own purposes or benefit, was not allowable as deduction in computing the taxable profits of the business or profession to the extent the aggregate of such expenditure and allowance exceeded one-fifth of the salary payable to the employee or an amount calculated at the rate of Rs. 1,000 for each month or part thereof comprised in the period of his employment during the relevant accounting year, whichever is less. This provision has now been omitted from section 40 by section 9 of the Finance (No. 2) Act, 1971, and a modified provision has been incorporated in the new sub-section (5) of section 40A inserted by section 10 of the Finance (No. 2) Act, 1971. Under the new provision, the aggregate of expenditure incurred by an assessee in providing any perquisite, whether convertible into money or not, to an employee, and the amount of expenditure or allowance (such as depreciation allowance) in respect of assets of the assessee used by the employee for his own purposes or benefit, will not be allowed as deduction, in computing the profits of the business or profession, to the extent it exceeds 20 per cent of the amount of salary payable to the employee or an amount calculated at the rate of Rs. 1,000 for each month or part thereof comprised in the period of employment of the employee in India during the relevant accounting year, whichever is less. For this purpose, the expression "perquisite" has been defined to mean : (i) rent-free accommodation provided to employee by the assessee; (ii) any concession in the matter of rent respecting any accommodation provided to the employee by the assessee; (iii) any benefit or amenity granted or provided free of cost or at concessional rate to the employee by the assessee; (iv) payment by the assessee of any sum in respect of any obligation which but for payment by the assessee would have been payable by the employee, e.g., provision of educational facilities for the employee's children, reimbursement of employee's club bills, hotel bills, etc., by the assessee; (v) payment by the assessee of any sum, whether directly or through a fund (other than a recognised provident fund or an approved superannuation fund), to effect an assurance on the life of the employee or to effect a contract for an annuity. Finance (No. 2) Act, 1971 17. It has been specifically provided that the following items will not be taken into account in computing the expenditure or allowance that will not be deductible under the new provisions set forth in paragraphs 15 and 16 : 1. The value of any travel concession or assistance granted by the assessee to an employee who is a citizen of India (and his spouse and children) in connection with his proceeding to any place in India, whether on leave or after retirement from service, to the extent the amount thereof does not exceed the value of the travel concession or assistance which would have been received by the employee if he had proceeded to his home district in India. [The value of such travel concession or assistance is already exempt from tax under section 10(5).] 2. Passage moneys or the value of any free or concessional passage granted by the assessee to an employee who is not a citizen of India (and his spouse and children) in connection with his proceeding to his home country out of India, whether on leave or on retirement from service. [Such passage moneys and the value of such free or concessional passage is already exempt from tax under section 10(6)(i).] 3. The employer's contributions to the employee's account in a recognised provident fund or an approved superannuation fund or for the employee's benefit to an approved gratuity fund. 4. Where the assessee is a company, expenditure incurred by it for the purpose of promoting family planning amongst its employees. Finance (No. 2) Act, 1971 18. The ceiling limit over the deductible amount of expenditure in respect of salary and perquisites, etc., as explained above, will, however, not be applicable to the expenditure or allowance in relation to the following : 1. Any employee in respect of any period of his employment outside India. 2. Any employee being a foreign technician who is entitled to exemption from tax on his remuneration under section 10(6)(vii) or section 10(6)(viia). 3. Any employee whose income chargeable under the head "Salaries" does not exceed Rs. 7,500 per annum. Finance (No. 2) Act, 1971 19. In order to prevent the frustration of the new restrictions set forth in the preceding paragraphs by converting "contracts of service" into "contracts for service", it has been provided in a new sub-section (6) of section 40A that expenditure incurred by an assessee in payment of fees for services rendered by a person, who at any time during the 24 months immediately preceding the relevant accounting year was his employee, will not be allowed as a deduction in computing the taxable profits of the assessee to the extent it exceeds Rs. 60,000 in a year. In a case where the assessee also incurs, in relation to such person, any expenditure on payment of salary [as defined under sub-section (5)], the deduction in respect of expenditure on payment of fees and that on payment of salary will be limited to Rs. 60,000 in the aggregate. Finance (No. 2) Act, 1971 Expenditure on provision of remuneration, benefit or amenity to directors of companies and certain other persons 20. Under section 40(c), expenditure incurred by a company on the provision of any remuneration or benefit or amenity to a director or a person who has a substantial interest in the company or to a relative of the director or of such person, and the expenditure or allowance in respect of any assets of the company which are used by such persons for their own purposes or benefit, is not allowable as a deduction in computing the taxable profits of the company, to the extent such expenditure or allowance is, in the opinion of the Income-tax Officer, excessive or unreasonable. This provision has been amended by section 9 of the Finance (No. 2) Act, 1971 in order to secure that the aggregate of such expenditure and allowance will be further subject to an overall ceiling limit of Rs. 72,000, in a year, in respect of any one director or person who has a substantial interest in the company or a relative of the director or such person. Where such expenditure or allowance relates to only a part of a year, the monetary ceiling will be an amount calculated at the rate of Rs. 6,000 per month or part of a month comprised in the period to which the expenditure or allowance relates. Where the director or other person or relative is also an employee of the company, expenditure of the nature referred to in clauses (i), (ii), (iii) and (iv) of the second proviso to section 40A(5)(a) (reproduced in paragraph 17 above), will not be taken into account for applying the ceiling. Finance (No. 2) Act, 1971 21. It has been specifically provided [in the first proviso to section 40A(5)(a)] that where a company incurs expenditure on payment of any salary or the provision of any perquisite to a person, who, besides being an employee of the company, is also a director of the company or a person who has a substantial interest in it or a relative of a director of such person, the deduction to the company in respect of such expenditure, taken together with the allowance in respect of assets provided for his use, shall not exceed Rs. 72,000 for the year. This provision will be relevant in a case where an individual is a director, etc., of the company for a part of the year and a mere employee (or former employee) for the remainder of the year, and the aggregate ceiling calculated under sections 40(c) and 40A(5) with reference to the number of months or part of months comprised in the two periods adds up to more than Rs. 72,000 for the year. Finance (No. 2) Act, 1971 22. A consequential amendment to section 58 by section 12 of the Finance (No. 2) Act, 1971 has omitted the reference to section 40(a)(v) in section 58(1)(a)(iv). The amended provisions of section 40(c) and also the new provisions in section 40A(5) and (6) will apply in computing the income chargeable under the head "Income from other sources", by virtue of the existing provisions in section 58(1)(b) and section 58(2). Finance (No. 2) Act, 1971 23. The provisions set forth in paragraphs 15 to 22 above will be effective from 1-4-1972 and will, accordingly, apply to the assessment year 1972-73 in relation to current incomes of the financial year 1971-72 or other accounting year corresponding to it. Finance (No. 2) Act, 1971 Expenditure incurred on travelling by employees and other persons for the purposes of business or profession 24. Section 37(3) provides that deduction for expenditure incurred in a business or profession in connection with travelling by employees and other persons (e.g., directors of a company, partners of a firm, etc.) for the purposes of the business or profession, in computing the taxable profits of the business or profession, shall be subject to the limits and conditions specified in the Income-tax Rules. In pursuance of this provision, certain limits over the deductible amount of expenditure on travelling have been specified in rule 6D of the Income-tax Rules. Under this rule, expenditure incurred by an assessee in connection with travelling by an employee or any other person within India outside the headquarters of such employee or other person for the purposes of the business or profession of the assessee is limited to the aggregate of : a. the actual expenditure, in respect of travel by rail, road, waterways or air, and b. an amount calculated at specified rates per day or part thereof of the period spent outside such headquarters, in respect of any other expenditure (including hotel expenses or allowances paid) in connection with such travel. The rates of daily allowance for the purpose of computing the amount under item (b) above as laid down in rule 6D before its recent amendment were as under : i. in respect of an employee whose salary is Rs. 1,000 per month or more Rs. 100 per day or part thereof; ii. in respect of any other employee Rs. 50 per day or part thereof; iii. in respect of any other person an amount calculated at the rates applicable in the case of the highest paid employee of the assessee. The rates of Rs. 100 and Rs. 50 specified at (i) and (ii) above are to be increased, respectively, to Rs. 150 and Rs. 75 in respect of the period of stay of the employee or other person at Bombay, Calcutta or Delhi. Finance (No. 2) Act, 1971 25. With a view to curbing ostentatious expenditure on travelling for business purposes, rule 6D of the Income-tax Rules has been amended by the Income-tax (Third Amendment) Rules, 1971 [Notification No. SO 2168, dated 28-5-1971]. Under the amendment, the rate of daily allowance of Rs. 100, specified at (i) of sub-rule (2)(b) of rule 6D, has been reduced to Rs. 80, and the rate of Rs. 50, specified against (ii) of the said sub-rule, has been reduced to Rs. 40. In respect of the period spent by the employee or other person (outside his headquarters) at Bombay, Calcutta or Delhi, the reduced limits over the deductible amount of daily allowance will be Rs. 120 and Rs. 60 respectively. The reduced rates will take effect from 1-4-1972 and will, accordingly, apply to the assessment year 1972-73, i.e., in respect of current incomes of the financial year 1971-72 or other accounting period corresponding to it. Measures for rationalisation of certain provisions of income-tax law Finance (No. 2) Act, 1971 Development rebate 26. The Income-tax Act provides for the grant of a deduction by way of development rebate on machinery and plant installed for the purpose of the business, in computing the taxable profits of the business. This deduction has been in force since 1955 and is designed to enable industry to generate internal finances for replacement of machinery and equipment in a period of rising costs and increasing sophistication. The rates of development rebate currently in force are : New ships 40 per cent of the actual cost. New machinery and plant installed in certain priority industries, as also in approved hotels or for scientific research 25 per cent. New machinery and plant installed in any other industry 15 per cent. Lower rates apply in the case of second-hand ships and second-hand machinery and plant acquired from abroad. Finance (No. 2) Act, 1971 27. In his Budget Speech for the year 1971-72, the Minister of Finance observed as under : "The practice of offering a development rebate in respect of new investment has had, I feel, a full play. I am, accordingly, serving the required notice that no development rebate will be allowed on ships acquired or machinery or plant installed after 31-5-1974. Whatever the revenue implications of this step - and they are sizeable - will be fully revealed only after 1974-75, i.e., from the Fifth Plan onwards. But, I shall consider myself amply rewarded if advance notice of this change quickens the pace of investment in the remaining years of the Fourth Plan." Finance (No. 2) Act, 1971 28. In pursuance of the above announcement, the Central Government has issued Notification No. SO 2167, dated 28-5-1971, in exercise of the powers conferred by section 33(5) directing that the deduction in respect of development rebate shall not be allowed in respect of a ship acquired or machinery or plant installed after 31-5-1974. Finance (No. 2) Act, 1971 Definition of "company" 29. Under section 2(17), before its amendment by the Finance (No. 2) Act, 1971, the term "company" was defined, inter alia, to mean : (i) any Indian company; or (ii) any association, whether incorporated or not and whether Indian or non-Indian which is declared by a general or special order of the Central Board of Direct Taxes to be a company for the tax purposes of the Act. This power to declare any association to be a "company" for tax purposes has been made use of for several years past with a view to conferring the status of a "company" on foreign companies as also on entities which are not otherwise within the scope of that concept. Such declaration is given by the Board, ordinarily, in the case of any entity which possesses the ordinary characteristics of a company limited by shares and which is a legal person according to the laws of the country in which it is incorporated. Besides declaring companies registered in foreign countries to be "companies" for purposes of taxation in India, statutory corporations established by a Central, Provincial or State enactment, such as road transport corporations, air transport corporations, etc., have been declared to be companies. Foreign corporations in which the capital is held wholly or partly by a foreign Government have also been declared as "companies" for the purposes of income-tax, where such corporations are legal entities separate from the Government and are capable of holding property independently and of suing and being sued according to the laws of that country. The provision has also been used, on a few occasions, to confer the status of company on bodies such as chambers of commerce, clubs, etc., even though these bodies do not possess the ordinary characteristics of a company limited by shares. The declaration under this provision has been given in some cases with retrospective effect to cover past years as well. Finance (No. 2) Act, 1971 30. The requirement that a foreign company could be treated as a company for purposes of the Income-tax Act only if it has been declared as a company by the Board generates unnecessary work. Further, giving retrospective effect to declarations made in the case of foreign companies or other non-corporate entities may not be said to be strictly in accordance with the provisions of the law. In order to place the existing practice, that has been followed over the last many years, on a statutory footing and to reduce the number of cases in which declaration as a company has to be given by the Board, the definition of "company" in section 2(17) has been amended by section 3(a) of the Finance (No. 2) Act, 1971. Under the amended definition, the term "company" will include, besides an Indian company, any body corporate incorporated by or under the laws of any country outside India. The term will also include any institution, association or body which is or was assessable or was assessed, under the 1922 Act or the 1961 Act, as a company for any assessment year up to and including the assessment year 1970-71. Further, as under the earlier definition, the Central Board of Direct Taxes will have the power to declare, by general or special order, that any institution, association or body, whether incorporated or not and whether Indian or non-Indian, will be treated as a "company" for purposes of the Income-tax Act. This power of the Board has now been specifically made exercisable even in relation to past assessment years (whether commencing before, or on, or after 1-4-1971) and the declaration will have effect for any assessment year or years specified therein. Finance (No. 2) Act, 1971 Definition of "Indian company" 31. The definition of the term "Indian company" in section 2(26) before its amendment by the Finance (No. 2) Act, 1971, covered only those companies which are formed and registered under the Companies Act, 1956, or the law relating to companies formerly in force in any part of India including Jammu and Kashmir or in the Union territories of Dadra and Nagar Haveli, Goa, Daman and Diu and Pondicherry. It did not cover statutory corporations which, as stated in paragraph 29, had to seek a declaration to be a "company" for purposes of taxation. Such a declaration did not, however, confer the status of "Indian company" on such statutory corporations. Apart from this, statutory corporations, by their very nature, do not often have a share capital as such and hence such a corporation is not in a position to qualify for being treated as a "domestic company", i.e., an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India. This position sometimes results in unintended difficulties both as regards the rates of tax applicable to the corporation's income and also its eligibility to some of the tax concessions, such as the export markets development allowance, which are available only to domestic companies. The definition of "Indian company" in section 2(26) has, therefore, been amended by section 3(c) of the Finance (No. 2) Act, 1971 so as to cover statutory corporations established in India as also any institution, association or body which is declared by the Board to be a company under section 2(17) and which has its principal office in India. Finance (No. 2) Act, 1971 Definition of "a company in which the public are substantially interested" 32. The Income-tax Act makes a distinction in tax treatment as between a widely-held domestic company (i.e., a domestic company in which the public are substantially interested) and a closely-held domestic company (i.e., a domestic company in which the public are not substantially interested). Closely-held companies are required (subject to certain exceptions) to distribute dividends up to the statutory percentage of their distributable income failing which they are liable to pay additional income-tax with reference to their undistributed profits. Closely-held companies are (subject to certain exceptions) also liable to income-tax on their income at rates which are higher than the rates applicable in the case of widely-held domestic companies. Finance (No. 2) Act, 1971 33. A company is treated, for purposes of income-tax, as "a company in which the public are substantially interested", only if it satisfies the various tests laid down in the definition of the term in section 2(18). Broadly speaking the aim of these tests is to decide whether there is wide public participation in the ownership of the shares in, and control over, the affairs of the company. Entities like chambers of commerce, clubs, etc., which are declared to be "companies" by the Board under the relevant provisions of the Income-tax Act, are essentially non-profit making concerns and in the absence of share capital, in the ordinary sense of the term, it is not practicable to apply to such entities the tests of "a company in which the public are substantially interested". The same difficulty arises with regard to companies limited by guarantee. Finance (No. 2) Act, 1971 34. In order to obviate the difficulties pointed out above, the definition of "a company in which the public are substantially interested " in section 2(18) has been amended by section 3(b) of the Finance (No. 2) Act, 1971 in order to provide that a company which is registered under section 25 of the Companies Act, (i.e., a company having for its object the promotion of commerce, art, science, religion, charity or any other useful object and which prohibits payment of dividends to its members) will be regarded as a company in which the public are substantially interested without the application of the various tests as to the composition of the ownership of the shares in, and control over, the affairs of the company. Further, in order to cover the cases of entities which are not registered as companies but are declared to be companies for tax purposes and to companies limited by guarantee which are not registered under section 25, the Central Board of Direct Taxes has been empowered to direct that any such entity or company shall be treated as a company in which the public are substantially interested. Such direction will be made by the Board having regard to the object of the company, the nature and composition of its membership and other relevant considerations. The Board is empowered to issue such direction even in respect of a past year and the direction will have effect for the assessment year or years specified therein. Finance (No. 2) Act, 1971 35. The amendment to clauses (17), (18) and (26) of section 2 explained in paragraphs 29 to 34, have taken effect from 1-4-1971. Finance (No. 2) Act, 1971 Computation of a partner's share in the income of a firm, and the tax payable by him, where an unregistered firm is assessed as a registered firm 36. A partnership firm enjoys a concessional tax treatment if it is "registered" for purposes of the Income-tax Act. While in the case of an unregistered firm, income-tax is payable on the total income of the firm at the progressive rates of tax applicable in the case of individual. Hindu undivided families, associations of persons, etc., a registered firm pays tax on its income at lower rates and the partners of the firm are chargeable to tax in respect of their shares in the profits of the firm. Under section 183(b) the Income-tax Officer is required to assess an unregistered firm as a registered firm and charge tax on the firm as well as its partners on that footing if such a course is more favourable to Revenue. Prior to the assessment year 1971-72, in a case where an unregistered firm was treated as a registered firm, the firm was not chargeable to income-tax on its income at the rates applicable in the case of a registered firm but only the partners were required to pay tax on their shares in the profits of the firm. As a result of an amendment made in the relevant provision of the Income-tax Act through the Taxation Laws (Amendment) Act, 1970, this position has, however, been changed and with effect from the assessment year 1971-72, an unregistered firm which is assessed as a registered firm is chargeable to tax on its total income at the rates applicable in the case of registered firms and, further, the partners of such a firm are chargeable to tax in respect of their shares in the profits of the firm. In conformity with this change, the rate schedule of tax in the case of a registered firm, in Paragraph C of Part I and in Paragraph C of Part III of the First Schedule to the Finance (No. 2) Act, 1971 applies also to an unregistered firm assessed as a registered firm under section 183(b) [vide paragraph 3 supra]. Finance (No. 2) Act, 1971 37. Under section 67, any interest, salary, commission or other remuneration paid by the firm to its partners is included in the total income of the firm, but in determining the shares of the individual partners in the income of the firm, these sums are excluded from the firm's total income. Further, where the firm is a registered firm, the tax, if any, payable by the firm on its total income is also deducted from its total income and the balance apportioned amongst the partners according to their profit-sharing ratios. The salary, interest, commission or other remuneration paid to a partner is then added to the amount falling to his share as aforesaid and the resultant amount is treated as his share in the income of the firm. This provision secures that the partner of a registered firm is not subjected to tax in respect of his share in the tax paid by the registered firm. Finance (No. 2) Act, 1971 38. In the context of the change in section 183(b) explained in paragraph 36 above, section 67 relating to the computation of a partner's share in the income of a firm, has been amended by section 13 of the Finance (No. 2) Act, 1971 in order to provide that in computing the partner's share in a case where an unregistered firm is assessed as a registered firm, the tax payable by the firm on its total income will be allowed as a deduction. This provision will place an unregistered firm which is assessed as a registered firm, and its partners, on a par with a registered firm and its partners in the matter of income-tax. Finance (No. 2) Act, 1971 39. Under section 86(iii), in the case of a partner in an unregistered firm, no income-tax is payable by him in respect of any portion of his share in the profits of the firm on which income-tax is payable by the firm. In the context of the change in the provisions of section 183(b) and the provision in the Finance (No. 2) Act, 1971 for levy of tax on the total income of an unregistered firm assessed as a registered firm at the same rates as in the case of a registered firm, section 86(iii) has been amended by section 24 of the Finance (No. 2) Act, 1971 in order to make it clear that in the case of a partner of an unregistered firm which is treated as a registered firm, the partner will be liable to pay income-tax on his share in the profits of the firm. Finance (No. 2) Act, 1971 40. The provisions set forth in paragraphs 36 to 39 have taken effect from 1-4-1971 and, accordingly, apply in relation to assessments for the assessment year 1971-72 and subsequent years. Finance (No. 2) Act, 1971 Withdrawal of tax relief to foreign companies and foreign nationals on capital gains in certain cases 41. Under section 54A, foreign companies or individuals of foreign citizenship holding investments in shares in Indian companies have been eligible for relief from the tax chargeable on capital gains arising to them on the sale of such shares if the sale proceeds are reinvested within a period of 2 years in certain approved investments. The investments approved for the purpose of this provision comprise Government securities (including certain small savings securities of the Central Government) and ordinary shares of certain categories of public companies engaged in specified industries. This provision was introduced in the law in 1965, with a view to conserving our foreign exchange resources by encouraging foreign enterprises and foreign nationals to retain in India the sale proceeds of their investments in shares in Indian companies instead of repatriating such sale proceeds outside India. Finance (No. 2) Act, 1971 42. In actual practice the impact of this provision on our foreign exchange resources has been found to be minimal. There has also been a distinct improvement in our balance of payments position. In these circumstances, section 54A has been omitted by section 11 of the Finance (No. 2) Act, 1971 so as to withdraw the above tax relief with effect from 1-4-1972. Accordingly, from the assessment year 1972-73, foreign enterprises and foreign nationals will be chargeable to tax on the capital gains arising to them on the sale of shares held by them in Indian companies, regardless of whether the sale proceeds are invested in other assets in India or are repatriated outside India. Finance (No. 2) Act, 1971 Withdrawal of special tax concession to foreign companies in respect of certain inter-corporate dividends 43. Under the provisions of the Income-tax Act, inter-corporate dividends, i.e., dividends received by a company (whether Indian or foreign) on its holding of shares in domestic company, are subjected to tax on a concessional basis. This is brought about by allowing a deduction of a specified percentage of the dividends in computing the taxable income of the company receiving the dividends, and taxing the remainder at the rate of tax applicable to the ordinary income of the company. Under section 80M, before its amendment by the Finance (No. 2) Act, 1971, the deduction was : a. in respect of dividends received by a domestic company from any other domestic company, 60 per cent of such dividends; b. in respect of dividends received by a foreign company from a domestic company; i. where the company paying the dividend is a closely-held Indian company mainly engaged in a priority industry, 80 per cent of the dividends; ii. in any other case, 65 per cent of the dividends. As a result of this deduction, the effective rate of tax on the dividends works out to 22 per cent [55 per cent of 40 per cent] in the case of a widely-held domestic company which is liable to tax on its income at the rate of 55 per cent; and 26 per cent [65 per cent of 40 per cent] in the case of a closely-held domestic company, which is not an industrial company, where the rate of tax on the ordinary income is 65 per cent. In the case of a foreign company, the effective incidence of tax on dividends received by it from a closely-held Indian company mainly engaged in a priority industry worked out to 14 per cent [70 per cent of 20 per cent] and in respect of dividends received by it from any other domestic company, the effective rate of tax worked out to 24.5 per cent [70 per cent of 35 per cent]. Finance (No. 2) Act, 1971 44. The special concessional rate of 14 per cent in respect of dividends received by a foreign company from a closely-held Indian company mainly engaged in a priority industry was provided in the context of the higher rate of tax applicable to the ordinary income of a closely-held domestic company, which reduces the amount available for distribution of dividends. However, closely-held domestic companies which are engaged in industrial activities are now subjected to tax on the first Rs. 10 lakhs of their income at the same rate as is applicable to widely-held domestic companies, i.e., 55 per cent and even on the balance of the income, a closely-held domestic company engaged in industrial activities is subjected to tax at 60 per cent which is less than the rate of tax applicable to other closely-held domestic companies. Section 80M has, accordingly, been amended by section 18 of the Finance (No. 2) Act, 1971 so as to discontinue the special concessional treatment allowed to foreign companies in respect of dividends received by them on their investments in the shares of closely-held Indian companies engaged in priority industries. The quantum of the deduction in respect of such dividends in computing the taxable income of the foreign company has been reduced from 80 per cent to 65 per cent so as to bring it in line with the quantum of the deduction allowed in respect of dividends received by a foreign company from domestic companies generally. As a result of this change, the effective incidence of tax on dividends received by a foreign company from any domestic company will, henceforth, be 24.5 per cent. This amendment will come into effect from 1-4-1972 and will, accordingly, apply for the assessment year 1972-73 and subsequent years. Finance (No. 2) Act, 1971 Discontinuance of tax relief on dividends paid by a company out of its agricultural income 45. Section 235 before its amendment by the Finance (No. 2) Act, 1971, provided for the grant of relief to shareholders of a company on that part of the dividend on their shares which is attributable to the paying company's agricultural income which has been subjected to agricultural income-tax under a State law. The quantum of the relief is the proportionate amount of the agricultural income-tax borne by the company on its profits, but limited to the amount of Central income-tax payable by the shareholder, on that part of the dividend which is attributable to the profits of the company assessed to agricultural income-tax. In the case of shareholder other than a company, the relief was further limited to an amount calculated at 27.5 per cent on that portion of the dividend which is attributable to the profits of the company assessed to agricultural income-tax. Finance (No. 2) Act, 1971 46. The provisions referred to in the preceding paragraph was contrary to the concept underlying the present scheme of taxation of companies and their shareholders, under which no part of the Central income-tax borne by the company on its income is considered as having been paid on behalf of the shareholders. So far as the shareholder is concerned, the proximate source of the dividend is the investment in the shares and not the profits of the company. In these circumstances, it was anomalous to grant relief to shareholders in respect of the agricultural income-tax borne by a company on its profits. The provision in section 235 has, accordingly, been omitted by section 28 of the Finance (No. 2) Act, 1971. This omission will take effect from 1-4-1972 and the relief will, therefore, cease to be available to shareholders from the assessment year 1972-73. Finance (No. 2) Act, 1971 Exclusion of debentures and long-term borrowings from approved sources in computing the capital employed in a new industrial undertaking, ship or hotel, for the purpose of the 5-year tax holiday 47. Under the provisions of section 80J, the deduction under that section is allowed in respect of profits and gains derived from a new industrial undertaking or ship or the business of a hotel, up to an amount calculated at the rate of 6 per cent per annum on the capital employed in the industrial undertaking or ship or hotel business, as the case may be, computed in the manner laid down in the Income-tax Rules. Rule 19A, before its recent amendment, provided, inter alia, for the inclusion, in the capital base of a new industrial undertaking or a hotel, all debentures (in the case of a company) and certain long-term borrowings from approved sources (in the case of all categories of taxpayers), for the purpose of the provision in section 80J. In the case of a ship too, rule 19A, in effect, provided for the inclusion of all borrowings in the capital base. Finance (No. 2) Act, 1971 48. As the interest payable on debentures and long-term borrowings (in fact on all borrowings) is already allowed as a deduction in arriving at the profits on the industrial undertaking or hotel, the inclusion of such debentures and borrowings again in the capital base and exemption of profits up to 6 per cent of such capital base amounts to a double advantage besides creating a bias in favour of borrowed capital as against own capital. It was, accordingly, announced by the Finance Minister in paragraph 43 of his Budget speech for 1971-72 that debentures and long-term borrowings would be excluded from the capital base for the purpose of the tax holiday exemption. In pursuance of this announcement, rule 19A has been amended by the Income-tax (Third Amendment) Rules, 1971 [Notification (Income-tax) No. SO 2168, dated 28-5-1971].Under rule 19A, as amended by the said Notification, all borrowed moneys, whether by way of debentures, long-term borrowings or otherwise, will be excluded in computing the capital employed in a new industrial undertaking or ship or hotel. This amendment will come into force on 1-4-1972 and will, accordingly, apply in relation to the assessment year 1972-73 and subsequent years. Measures for achieving certain economic objectives Finance (No. 2) Act, 1971 Local authorities deriving income from supply of water and electricity outside their jurisdictional areas 49. Under section 10(20), before its amendment by the Finance (No. 2) Act, 1971, a local authority was exempted from tax on its income under the head "Interest on securities", "Income from house property", "Capital gains" or "Income from other sources", as also on its income from a trade or business carried on by it which accrues or arises from the supply of a commodity or service within its own jurisdictional area. Income derived by a local authority from the supply of a commodity or service outside its own territorial limits was, however, liable to tax. In order to encourage local authorities to supply drinking water and electricity to adjoining villages on an increasing scale, section 10(20) has been amended by section 4(a) of the Finance (No. 2) Act, 1971 in order to extend the scope of this exemption to cover income derived by a local authority from the supply of water or electricity outside its own jurisdictional area. Accordingly, income derived by a local authority from the supply of water or electricity outside its territorial limits will also be exempt from income-tax. This provision will be effective from 1-4-1972 and will, accordingly, apply in relation to assessments for the assessment year 1972-73 and subsequent years. Finance (No. 2) Act, 1971 Financial corporations providing long-term finance for agricultural development in India 50. Under section 36(1)(viii), financial corporations engaged in providing long-term finance for industrial development in India, are entitled to a deduction, in the computation of their taxable profits, of amounts transferred by them out of such profits to a special reserve account up to a specified percentage of their total income. Where the financial corporation has a paid-up share capital not exceeding Rs. 3 crores, the special reserve may be up to 25 per cent of the current profits, while in the case of a financial corporation having a paid-up share capital exceeding Rs. 3 crores, the special reserve may be up to 10 per cent of the current profits. This deduction is available only where the financial corporation is approved by the Central Government for this purpose. The objective underlying this provision is to enable financial corporations to build up their internal resources at an accelerated pace and thus become independent of subventions from Government for financing their activities. Finance (No. 2) Act, 1971 51. Certain financial corporations have recently been set up for the purpose of providing long-term finance for agricultural development in India. One such corporation is the Agricultural Refinance Corporation which has been established under an Act of Parliament with a view to providing refinance to co-operative and commercial banks for financing compact area schemes. Similarly, another corporation, called the Agricultural Finance Corporation which is registered as a company, has been established as a consortium of major commercial banks in the country. With a view to encouraging these and similar other financial corporations to build up their internal resources at a fast rate, section 36(1)(viii) has been amended by section 8 of the Finance (No. 2) Act, 1971 so as to extend to such corporations the same tax concession as has been available to financial corporations engaged in providing long-term finance for industrial development in India. Accordingly, a financial corporation which is engaged in providing long-term finance for agricultural development in India will be entitled to a deduction, in the computation of its profits, of amounts carried to a special reserve account out of its current profits. The quantum of the deduction will be the same as under the existing provision, namely, up to 25 per cent of current profits in the case of a financial corporation having a paid-up capital not exceeding Rs. 3 crores, and up to 10 per cent of the current profits in any other case. The aggregate of the deductions on this account over a period of years will not, however, exceed the amount of the paid-up capital. The concession in these cases will also be subject to the requirement of approval of the corporation by the Central Government. The above provision will be effective from 1-4-1972 and will, accordingly, apply in relation to the assessments for the assessment year 1972-73 and subsequent years. Finance (No. 2) Act, 1971 Royalties, commission, fees, etc., for provision of technical know-how or technical services to Indian concerns 52. Under section 80MM, an Indian company, deriving income by way of royalties, commission, fees, etc., from an Indian concern in consideration for the provision to the Indian concern of technical know-how or technical services, is entitled to a deduction of 40 per cent of the amount of such income in the computation of its taxable income. This tax concession is available only if the agreement under which the technical know-how or technical services are provided is approved by the Central Government on an application made in this behalf before 1st October of the relevant assessment year. The objective of this provision is to encourage Indian companies to carry out research and development programmes and develop indigenous technical know-how. Finance (No. 2) Act, 1971 53. Section 80MM has been amended by section 19 of the Finance (No. 2) Act, 1971 so as to extend this tax concession also to cover cases where technical know-how or technical services are provided by resident non-corporate taxpayers such as individuals, Hindu undivided families, partnership firms, etc. In order to avoid any possible abuse of the concession, it has been provided that the concession would be available only if the accounts of the resident non-corporate taxpayer (not being a co-operative society) for the relevant accounting year have been audited by a chartered accountant or any other accountant authorised in law to audit the accounts of companies and the taxpayer furnishes the report of such audit in a form to be prescribed in the Income-tax Rules along with his return of income. Finance (No. 2) Act, 1971 54. In the context of the amendment of section 80MM to extend the deduction under that section to resident non-corporate taxpayers, section 80A has been amended by section 14 of the Finance (No. 2) Act, 1971 so as to secure that where the deduction under section 80MM is granted to a firm, association of persons or body of individuals, no further deduction under that section will be granted to any partner of the firm or any member of the association or body in relation to his share in the income of the firm, association or body. Finance (No. 2) Act, 1971 55. The existing requirement, under section 80MM, relating to approval by the Central Government of agreements under which the technical know-how or technical services are provided, has, in actual practice, led to certain avoidable difficulties to taxpayers. The power of granting approval, for the purpose of the tax concession, has, accordingly, been vested in the Central Board of Direct Taxes. Finance (No. 2) Act, 1971 56. The amendments to section 80MM take effect from 1-4-1972 and will, accordingly, apply to assessments for the assessment year 1972-73 and subsequent years. As a transitional measure, it has been provided that the approval of the Board will not be necessary in the case of agreements which are approved for the purpose of the tax concession by the Central Government before 1-4-1972 and that the applications for such approval pending with the Central Government immediately before that date will stand transferred to the Board for disposal. Finance (No. 2) Act, 1971 Dividends on shares in a foreign company allotted in consideration of the provision of technical know-how or technical services 57. Under section 80N, an Indian company deriving income by way of dividends on shares allotted to it in a foreign company in consideration of the provision of technical know-how or technical services to such foreign company is exempted from tax in India on the whole of such dividend income. This tax concession is available only if the agreement under which the technical know-how or technical services are provided to the foreign company is approved by the Central Government before 1st October of the relevant assessment year. The objective of this provision is to encourage Indian companies to develop technical know-how and make it available to foreign companies so as to augment our foreign exchange resources and establish a reputation for Indian technical know-how in foreign countries. Finance (No. 2) Act, 1971 58. Under section 80N, before its amendment, the tax concession was available only in a case where the technical know-how or technical services were provided to a foreign company by an Indian company and the shares in the foreign company were allotted to it in consideration thereof. Where, however, the shares are allotted to any resident non-corporate taxpayer, the dividend income does not enjoy exemption from tax in his hands. Section 80N has, accordingly, been amended by section 20 of the Finance (No. 2) Act, 1971 so as to extend its operation to resident non-corporate taxpayer as well. Dividend income received on shares allotted to a resident non-corporate taxpayer in a foreign company in consideration of the provision of technical know-how or technical services to such foreign company will, henceforth, be exempt from tax. Further, the power to accord approval to agreements under which the technical know-how or technical services are provided has been vested in the Central Board of Direct Taxes, instead of the Central Government. The requirement that the approval of the agreement should be obtained before 1st October of the relevant assessment year has also been replaced by the requirement that the application for the grant of such approval should be made before that date. The date on which the approval is actually granted will, therefore, no longer be material in cases where the applications for such approval are made within the time allowed for the purpose. Finance (No. 2) Act, 1971 59. The new provisions will be operative from 1-4-1972 and will, accordingly, apply in relation to assessments for the assessment year 1972-73 and subsequent years. As a transitional measure, it has been specifically provided that the approval of the Board will not be necessary in a case where the agreement under which the technical know-how or technical services are provided is approved for the purpose by the Central Government before 1-4-1972 and that the applications pending with the Central Government on that date will stand transferred to the Board for disposal. The amendment of section 80A, as explained in paragraph 54, will apply also in relation to the deduction under section 80N. Finance (No. 2) Act, 1971 Royalties, commission, fees, etc., for provision of technical know-how or technical services to foreign enterprises 60. Under section 80-O, an Indian company deriving income by way of royalties, commission, fees etc., from a foreign company, in consideration of the provision to the foreign company of technical know-how or technical services is exempted from taxation in India on the whole of such income. This tax concession is available only if the agreement under which the technical know-how or technical services are provided is approved by the Central Government before 1st October of the relevant assessment year. The objective of this provision is to encourage Indian companies to develop technical know-how and make it available to foreign companies so as to augment our foreign exchange earnings and establish a reputation for Indian technical know-how in foreign countries. Finance (No. 2) Act, 1971 61. Under section 80-O, prior to its amendment by the Finance (No. 2) Act, 1971, the tax concession was available only where the foreign concern to which the technical know-how or technical services were provided was a "company" and was declared as such by an order of the Board under the relevant provision of the Income-tax Act. It has been found that Indian concerns have been providing technical know-how not only to foreign companies but also to foreign Governments, public utilities, etc. Although, in these cases, the supply of technical know-how to foreign enterprise results in the export of Indian technical know-how and adds to the foreign exchange earnings, the Indian company which undertook this work was not entitled to the tax concession. Further, the tax concession was not available where the technical know-how or services were provided by a non-corporate taxpayer. Finance (No. 2) Act, 1971 62. Section 80-O has been amended by section 21 of the Finance (No. 2) Act, 1971 so as to extend this tax concession also to cover cases where technical know-how or technical services are provided by resident non-corporate taxpayers, such as individuals, Hindu undivided families, partnership firms, etc., and to make this concession available in all cases where the technical know-how or technical services are provided to a foreign Government or a foreign enterprise, regardless of whether the foreign enterprise is a corporate body or not. In order, however, to avoid any possible abuse of the concession, it has been provided that in the case of resident non-corporate taxpayers (other than co-operative societies), the concession would be available only if the accounts of the taxpayer, for the relevant accounting year have been audited by a chartered accountant or any other accountant authorised in law to audit the accounts of companies and a report of such audit in a form to be prescribed for this purpose is furnished along with the return of income. Finance (No. 2) Act, 1971 63. In order to remove certain practical difficulties in the operation of the provision in section 80-O, the power to accord approval to the agreement under which the technical know-how or technical services are provided has been vested in the Central Board of Direct Taxes instead of the Central Government. Further, the requirement that the approval to the agreement should be obtained before 1st October of the relevant assessment year has been replaced by the requirement that the application for the grant of such approval should be made to the Board before that date. The date on which the approval is actually granted will, therefore, no longer be material if the relevant application is made within the time allowed. Finance (No. 2) Act, 1971 64. The amended provisions of section 80-O will be operative from 1-4-1972 and will, accordingly, apply in relation to assessments for the assessment year 1972-73 and subsequent years. As a transitional measure, it has been specifically provided that the approval of the Board will not be necessary in a case where the agreement under which the technical know-how or technical services are provided is approved for the purpose of the tax concession by the Central Government before 1-4-1972 and that the applications pending with the Central Government immediately before that date will stand transferred to the Board for disposal. The amendment of section 80A, as explained in paragraph 54, will apply also in relation to the deduction under section 80-O. MEASURES FOR STREAMLINING OF RECOVERY WORK Finance (No. 2) Act, 1971 Tax Recovery Commissioners 65. The Second Schedule to the Income-tax Act contains a self-contained code for recovery of taxes and other dues under that Act. Where a taxpayer is in default in payment of tax, the Income-tax Officer forwards to the "Tax Recovery Officer" a certificate specifying the amount of arrears due from the taxpayer and thereupon the Tax Recovery Officer proceeds to recover from the defaulter the amount specified therein by one or more of the modes mentioned below: a. attachment and sale of the defaulter's movable property ; b. attachment and sale of the defaulter's immovable property ; c. arrest of the defaulter and his detention in prison; d. appointment of a receiver for the management of the defaulter's movable and immovable properties. For this purpose, "Tax Recovery Officer" has been defined in the Income-tax Act to mean : (i) a Collector or an Additional Collector ; (ii) any officer of a State Government who exercises powers to effect recovery of arrears of land revenue, etc., under the relevant State law, if such officer is authorised to exercise the powers of a Tax Recovery Officer; and (iii) any gazetted officer of the Central or State Government authorised by the Central Government to exercise the powers of a Tax Recovery Officer. Although the existing definition includes the State Government Officers referred to above, in actual practice, the work of tax recovery has already been taken over by gazetted officers of the Central Government, who are generally Income-tax Officers, and the present position is that, except in relation to a few districts, the work has entirely been taken over by the Income-tax Department. Finance (No. 2) Act, 1971 66. In the course of effecting recoveries of taxes, the Tax Recovery Officer is required to pass various orders relating to attachment and sale of properties, appointment of receivers, etc. At present, the appeals against such orders lie to certain State Government officials. Where the Tax Recovery Officer is a Collector or an Additional Collector or a gazetted officer of the Central or State Government, including an Income-tax Officer, who is authorised by the Central Government to exercise the functions as such, the appeal generally lies to the Revenue Commissioner having jurisdiction over the district concerned. Where, however, the Tax Recovery Officer is a State Government officer other than a Collector or an Additional Collector, the appeal lies to the revenue authority to which an appeal or application for revision would ordinarily lie if the order passed by the officer were an order under the law relating to land revenue or other public demands of the State concerned. In practical terms, this means that where the Tax Recovery Officer is a Tehsildar or a Mamlatdar, an appeal against his order in certain States lies to the Collector of the district. Finance (No. 2) Act, 1971 67. In view of the position that the tax recovery work has been taken over practically in its entirety by officers of the Income-tax Department, the rules in the Second Schedule have been amended by section 29 of the Finance (No. 2) Act, 1971 in order to provide that an appeal from an original order passed by a Tax Recovery Officer, not being an order which is conclusive, would lie to a senior officer of the Income-tax Department who would be designated as the Tax Recovery Commissioner. Provision has been made in a new clause (43B) of section 2 by section 3(d) of the Finance (No. 2) Act, 1971, to define the Tax Recovery Commissioner as a Commissioner or an Assistant Commissioner of Income-tax who may be authorised by the Central Government, by general or special notification in the Official Gazette, to exercise the powers of a Tax Recovery Commissioner. Under the amendments to the Second Schedule by section 29 of the Finance (No. 2) Act, 1971, an appeal from an original order passed by a Tax Recovery Officer [being any gazetted officer of the Central Government or State Government who has been authorised by the Central Government under section 2(44)(iii) to exercise the power of a Tax Recovery Officer under the Second Schedule] will hereafter lie to the Tax Recovery Commissioner instead of the revenue authority to which appeals ordinarily lie against the orders of a Collector under the law relating to land revenue of the State concerned. Appeals against the orders passed before the date of appointment of a Tax Recovery Commissioner in respect of any area by any Tax Recovery Officer (including State Revenue Officers) will also lie to the Tax Recovery Commissioner and not to the appellate authority of the State Government. Further, as a transitional measure, it has been provided that the appeals pending with the State Government authorities on the date of appointment of a Tax Recovery Commissioner, in respect of any area wherein the work of recovery of tax has been taken over by Tax Recovery Officers of the Central Government, will stand transferred to the Tax Recovery Commissioner exercising jurisdiction over that area. Finance (No. 2) Act, 1971 68. Apart from attending to the appellate work, the Tax Recovery Commissioners will be placed in overall administrative charge of tax recovery work in their respective jurisdictions. Further, in order to enable the Tax Recovery Commissioners to perform their functions effectively, certain ancillary provisions have been made in the Second Schedule. These ancillary provisions are as follows: 1. Tax Recovery Commissioners will, in the discharge of their functions, be deemed to be acting judicially within the meaning of the Judicial Officers' Protection Act, 1850 [vide rule 82 of the Second Schedule]. 2. Every Tax Recovery Commissioner shall have the powers of a civil court while trying a suit for the purpose of receiving evidence, administering oaths, enforcing attendance of witnesses and compelling production of documents [vide rule 83 of the Second Schedule]. 3. Tax Recovery Commissioners will have the power to review the orders passed by them under the Second Schedule for the purpose of rectifying any mistake apparent from the record [vide rule 87 of the Second Schedule]. Finance (No. 2) Act, 1971 69. The power of the Board to make rules for regulating the procedure to be followed by Tax Recovery Officers, etc., has been enlarged in order to enable the Board to make rules for regulating the procedure to be followed by Tax Recovery Commissioners and to define the areas within which Tax Recovery Commissioners may exercise jurisdiction [vide rule 92 of the Second Schedule]. Finance (No. 2) Act, 1971 70. The amendments set forth in paragraphs 67 to 69 will take effect from 1-1-1972. Finance (No. 2) Act, 1971 Bar on registration of transfer of immovable property in a case where taxation liabilities remain unsatisfied 71. Section 230A, before its amendment by the Finance (No. 2) Act, 1971, provided that a document of transfer of immovable property (other than agricultural land) valued at more than Rs. 50,000 shall not be registered unless a certificate is obtained from the Income-tax Officer to the effect that the transferor has paid, or made satisfactory provision for payment of, all existing tax liabilities under the Income-tax Act, Wealth-tax Act, Gift-tax Act and other direct taxes laws, or that the registration of the document will not prejudicially affect the recovery of any such liability. With a view to making this provision more effective in achieving the purpose for which it is intended and removing certain practical difficulties in its operation, section 230A has been amended by section 27 of the Finance (No. 2) Act, 1971 making certain modifications therein as explained below : 1. The scope of the section has been enlarged to cover transfers of agricultural land valued at more than Rs. 50,000. [Agricultural land is liable to wealth-tax and transfers of agricultural land are liable to gift-tax. Capital gains arising from transfer of agricultural land situated in urban areas are liable to income-tax. Apart from these considerations agricultural land is liable to be attached and sold for recovery of income-tax arrears. Hence, transfers of agricultural land have been brought within the scope of the restriction on registration in cases where taxation liabilities remain unsatisfied.] 2. The provision has been extended to cover existing liabilities under the Companies (Profits) , 1964 as also the Super Profits Tax Act, 1963 which preceded it. 3. The Central Board of Direct Taxes has been empowered to exempt, by notification in the Official Gazette, any institution, association or body or any class of institutions, associations or bodies from the requirement of obtaining a tax clearance certificate under this provision. [This power has been conferred on the Board so as to obviate practical difficulties in the case of institutions such as, banks, Life Insurance Corporation, etc., which advance moneys in a large number of cases on the mortgage of immovable property and have to release the property from the mortgage when the debt has been discharged by the borrower. The requirement of a tax clearance certificate in such cases throws an avoidable administrative burden on the institutions concerned and also on the Income-tax Department, without any significant advantage to the Revenue. Under the new provision, the Board will be required to record the reasons for exempting any institution, etc., from the requirement of obtaining a tax clearance certificate.] Finance (No. 2) Act, 1971 72. The amendments to section 230A take effect from 1-10-1971. MEASURES FOR GRANTING TAX RELIEF AND REMOVING CERTAIN ANOMALIES AND PRACTICAL DIFFICULTIES Finance (No. 2) Act, 1971 Capital gains derived by charitable and religious trusts 73. Under section 11, income derived from property held under trust for charitable or religious purposes is exempt from income-tax to the extent such income is actually applied to such purposes during the previous year itself or within three months next following. As "income" includes "capital gains", a charitable or religious trust would forfeit exemption from income-tax in respect of its income by way of capital gains unless such income is also applied to the purposes of the trust during the stipulated period. In some cases, charitable or religious trusts are required to sell, in the interest of the trust, capital assets forming part of the corpus of the trust property solely with a view to acquiring other capital assets to be held as part of the corpus of trust. The requirement that the capital gains arising from such transactions should be utilised for charitable or religious purposes, during the accounting year itself or within three months immediately following, has the unintended effect of progressively reducing the corpus of the trust and the income yielded by it. Finance (No. 2) Act, 1971 74. This difficulty has been accentuated as a result of certain amendments made in the scheme of tax exemption of charitable and religious trusts through the Finance Act, 1970. Under one of these amendments, a charitable or religious trust would forfeit exemption from tax on its income if the trust funds, constituting its corpus or income, are invested in a concern in which the author or founder of the trust or any substantial contributor to it or any relative of such author, founder or contributor is substantially interested. Where the investment of the trust funds in such concern exceeds 5 per cent of the capital of the concern, exemption is forfeited in respect of the whole of the income of the trust, while in a case where the investment does not exceed 5 per cent, the exemption is lost only in respect of the income from such investment, the other income continuing to enjoy tax exemption. In order to enable charitable and religious trusts to change their investments suitably, without forfeiting exemption from tax, a specific provision was also made in the Income-tax Act to the effect that the aforesaid provisions would not apply in a case where the investment of the trust funds in the prohibited concerns does not continue after 31-12-1970. In order to avail of the benefit of this relaxation, many charitable or religious trusts divested themselves of investments in prohibited concerns before 1-1-1971. If the provisions of the law were construed strictly, such trusts would have forfeited exemption from tax in respect of their income by way of capital gains arising from the transfer of such investments unless they applied such incomes to charitable or religious purposes during the relevant accounting year or within three months immediately following. Finance (No. 2) Act, 1971 75. The question of eliminating the disadvantage to charitable or religious trusts in being obliged to spend away the capital gains arising from the transfer of assets constituting the corpus of the trust instead of adding to the corpus, was considered by Government in 1963 and administrative instructions were issued to the effect that where a charitable or religious trust transferred a capital asset forming part of the corpus of its property solely with a view to acquiring another capital asset for the use and benefit of the trust and utilised the capital gains arising from the transaction in acquiring a new capital asset, the amount of capital gains so utilised should be regarded as having been applied to the charitable or religious purposes of the trust. These instructions have recently been reiterated. Finance (No. 2) Act, 1971 76. With a view to placing the aforesaid administrative instructions on a legal footing and removing the disadvantage to charitable and religious trusts for the past as also the future, section 11 has been amended, by section 5 of the Finance (No. 2) Act, 1971 by way of insertion of a new sub-section (1A). Under the new sub-section, it has been provided that in a case where a capital asset being property held under trust for charitable or religious purposes is transferred and the whole or any part of the net consideration for the transfer (i.e., full value of the consideration as reduced by the expenditure incurred wholly and exclusively in connection with the transfer) is utilised for acquiring another capital asset to be held as part of the corpus of the trust, the capital gain arising from the transfer will be regarded as having been applied to charitable or religious purposes. Where the whole of such net consideration is utilised in acquiring the new capital asset, the entire amount of the capital gain will be regarded as having been applied to charitable or religious purposes, while in a case where only a part of the net consideration is utilised for acquiring the new capital asset, an amount, if any, by which the cost of acquisition of the new asset exceeds the aggregate of the cost of acquisition of the capital asset transferred and the cost of any improvements made to such asset, will be regarded as having been applied to such purposes. Finance (No. 2) Act, 1971 77. In a case where the asset which is transferred formed part of property held under trust in part only for charitable or religious purposes, a proportionate amount of the capital gain will be regarded as having been applied to charitable or religious purposes. Thus, where the whole of the net consideration received as a result of the transfer is utilised in acquiring the new capital asset, the whole of the "appropriate fraction" of the capital gain will be regarded as having been applied to charitable or religious purposes, while in a case where only a part of the net consideration is utilised for acquiring the new capital asset, so much of the "appropriate fraction" of the capital gain as is equal to the amount, if any, by which the "appropriate fraction" of the amount utilised for acquiring the new asset exceeds the "appropriate fraction' of the cost of the transferred asset will be regarded as having been applied to such purposes. The "appropriate fraction" in this context means the fraction obtained by dividing the amount of the income which, under the terms of the trust, is applicable to charitable or religious purposes, by the whole of the income derived from property held under trust in part only for such purposes. Finance (No. 2) Act, 1971 78. The insertion of new sub-section (1A) in section 11 takes effect retrospectively from 1-4-1962, i.e., the date of commencement of the Income-tax Act and, therefore, places the concession already allowed under executive orders on a legal footing right from the date from which the requirement of application, by charitable or religious trusts, of at least 75 per cent of their income to charitable or religious purposes during the year of accrual of such income was introduced in the income-tax law. Finance (No. 2) Act, 1971 Forfeiture of exemption from income-tax on the income of charitable or religious trusts in certain cases 79. The Finance Act, 1970 made certain amendments in the scheme of tax exemption of charitable and religious trusts, inter alia, to curb the use of the funds of such trust to acquire control over industry and business. Under the provision in section 13(2)(h), a charitable or religious trust forfeits exemption from tax, if any, of the funds of the trust are, or continue to remain, invested for any period during the previous year in any concern in which the author, founder or contributor has a substantial interest. Since the expression "funds of the trust" is wide enough to include not only the uninvested cash but also shares, stocks, securities, etc., forming part of its corpus, and, in fact, property of every kind belonging to the trust, it follows that a trust will forfeit exemption from tax if it continues to hold any shares in a company in which its author or other connected persons are substantially interested, regardless of whether the shares formed part of the original corpus of the trust or were subsequently acquired by it. Under another provision, in section 13(4), it was provided that in a case where the investment of the funds of the trust in a concern in which the author of the trust or other connected persons had a substantial interest does not exceed 5 per cent of the capital of the concern, the exemption from tax would be denied only in relation to the income arising from such investment and the remaining income will continue to enjoy exemption from tax. Finance (No. 2) Act, 1971 80. The relevant provision in section 13(4) before its amendment by the Finance (No. 2) Act, 1971, however, referred, in one place, to "the moneys of the trust" instead of to "the funds of the trust" and this verbal variation in the phraseology used within section 13(4) itself, and between section 13(2)(h) and section 13(4), was likely to create unintended hardship in certain cases. This is because in a case where the shares in the prohibited concern form part of the corpus of the trust or have been donated to it in kind, it could be argued that since the shares were not paid for by the trust in cash, no "moneys of the trust" had been invested in the prohibited concern and as such the saving provision in section 13(4) would not apply and that the trust would lose exemption from tax in respect of its entire income and not merely in respect of income from such investment alone, even if the trust investment in the prohibited concern did not exceed 5 per cent of the capital of the concern. Such an interpretation would not have been in keeping with the intention underlying the provision. Finance (No. 2) Act, 1971 81. Section 13(4) has, accordingly, been amended by section 6 of the Finance (No. 2) Act, 1971 in order to clarify that in a case where the investment made by a charitable or religious trust in a concern in which the author of the trust or his relatives, etc., have a substantial interest does not exceed 5 per cent of the capital of the concern (whether the investment is made by the trustees themselves or it forms part of the original corpus settled on trust or represents a donation made to it in kind), the trust will forfeit the exemption from tax only in relation to the income arising from such investment and its remaining income will continue to be eligible for exemption from tax. This amendment has been made effective retrospectively from 1-4-1971, i.e., the date from which section 13 was substituted by a new section, and will, accordingly, apply in relation to assessments for the assessment year 1971-72 and subsequent years. Finance (No. 2) Act, 1971 Deduction for expenses on travelling to salaried taxpayers 82. Under section 16(iv), a salaried taxpayer owning a motor car, or a motor cycle, scooter or other moped and using it for the purposes of his employment, and also one who does not own any such conveyance but uses the public transport system for travelling for the purpose of employment, is entitled to standard deduction from his salary income to cover the expenditure incurred by him on such travelling, including maintenance of the conveyance and its wear and tear. For the assessment year 1971-72, the standard deduction for a motor car is Rs. 200 per month and for a motor cycle, scooter or other moped, it is Rs. 60 per month. In the case of salary taxpayers who do not own a conveyance of the types referred to above, e.g., employees owning cycles or using the public transport system for travelling for the purposes of employment, the standard deduction is allowed in an amount of Rs. 35 per month. Finance (No. 2) Act, 1971 83. Under an amendment of section 16(iv) by section 7 of the Finance (No. 2) Act, 1971, the standard deduction for employees owning a motor cycle, scooter or other moped, has been increased from Rs. 60 per month to Rs. 75 per month, and in the case of employees not maintaining a motor car or motor cycle, scooter or other moped, it has been increased from Rs. 35 to Rs. 50 per month. The standard deduction in the case of employees owning a motor car continues to remain at the level of Rs. 200 per month. Finance (No. 2) Act, 1971 84. These increases in the standard deduction are operative from 1-4-1972 and will, accordingly, apply for assessments for the assessment year 1972-73 and subsequent years. Finance (No. 2) Act, 1971 Labour co-operative societies and fisheries co-operative societies 85. Under the Income-tax Act, co-operative societies enjoy certain tax concessions in respect of their income. Co-operative societies connected with agriculture, banking, rural credit, milk production and cottage industries enjoy complete exemption from tax in respect of their business income from these activities, while co-operative societies engaged in other activities are liable to tax on their business income in excess of Rs. 20,000. Further, the income of all co-operative societies by way of interest or dividends received from investments with other co-operative societies is wholly exempt from income-tax, and in the case of certain co-operative societies having a gross income not exceeding Rs. 20,000, income by way of interest on securities or income from house property also enjoys complete exemption from income-tax. Finance (No. 2) Act, 1971 86. With a view to promoting self-help among persons of small means who form co-operative societies for the collective disposal of their labour, or for fishing and allied activities, section 80P has been amended by section 22 of the Finance (No. 2) Act, 1971 so as to exempt from tax the business income of labour co-operative societies and also co-operative societies engaged in fishing and other allied pursuits e.g., catching, curing, processing, preserving, storing and marketing of fish, or the purchase of materials and equipment in connection therewith for the purpose of supplying them to their members. In order, however, to prevent any possible misuse of the tax concession by those for whom it is not intended, it has been provided, that the tax concession will be available only in the case of such of these co-operative societies as, under their rules and bye-laws, restrict the voting rights to members who constitute the labour force or actually carry on the fishing or other allied activities, the State Government and the co-operative credit societies that provide financial assistance to them. Finance (No. 2) Act, 1971 87. These provisions will take effect from 1-4-1972 and will, accordingly, apply in relation to assessments for the assessment year 1972-73 and subsequent years. Finance (No. 2) Act, 1971 Interest on deposits made by members with co-operative societies 88. Under section 194A, taxpayers other than individuals and Hindu undivided families are required to deduct income-tax at source from interest (other than "interest on securities") credited or paid by them to persons resident in India where any single payment exceeds Rs. 400. This provision does not, however, apply in the case of interest paid by banking companies and co-operative banks (including co-operative land mortgage banks and co-operative land development banks) or interest paid by co-operative societies to other co-operative societies or interest on deposits made under certain schemes approved by the Central Government. As mentioned in paragraph 13, deposits with a co-operative society made by a member of the society have been included in the categories of financial assets, income from which enjoys exemption from income-tax up to Rs. 3,000 under section 80L. In the context of this change, section 194A has been amended by section 26 of the Finance (No. 2) Act, 1971 so as to provide that income-tax will not be deductible at source from interest paid on deposits with a co-operative society made by a member of the society. This amendment is effective from 1-4-1971. Finance (No. 2) Act, 1971 Exemption from tax of certain incomes of the residents of Ladakh 89. Under section 10(26A), before its amendment by the Finance (No. 2) Act, 1971, income accruing or arising to any resident of Ladakh district from any source in that district or outside India was completely exempt from income-tax up to and including the assessment year 1969-70. The exemption was available only in the case of persons, other than Government servants, who were resident in Ladakh district in the previous year relevant to the assessment year 1962-63. This concession was allowed in view of the position that the residents of Ladakh had suffered hardship and their trade had been adversely affected as a result of the Chinese aggression and it was necessary to allow them time to rehabilitate themselves. The strategic importance of the area was also kept in view in this connection. Since these considerations continue to be valid, the exemption from tax which was available in such cases up to and including the assessment year 1969-70 has been revived for a further period of five years, i.e., for the assessment years 1970-71 to 1974-75, by the amendment of section 10(26A) under section 4(b) of the Finance (No. 2) Act, 1971. Finance (No. 2) Act, 1971 90. The provision in section 10(26A) was not applicable to Government servants. Under another provision, viz., that in section 10(26) members of Scheduled Tribes residing in specified areas in the north-eastern part of India are exempt from tax in respect of income arising to them in such areas and also in respect of income by way of dividends or interest on securities, whether arising within or outside such areas. Originally, this provision was not applicable in the case of Government servants. The exclusion of Government servants from the purview of the exemption was, however, held by the Supreme Court to be unconstitutional and, accordingly, the provision has since been modified through the Taxation Laws (Amendment) Act, 1970, so as to extend the tax concession to Government servants as well. For similar reasons, the tax concession available in the case of the generality of taxpayers in Ladakh district, has now been extended to Government servants who were resident there during 1961-62. This has been done with retrospective effect from the assessment year 1962-63. [The scope of the amendment has been explained in detail in Board's Circular No. 67, dated 23-9-1971.] AMENDMENTS TO WEALTH-TAX ACT Finance (No. 2) Act, 1971 Increase in the rates of ordinary wealth-tax in the case of individuals and Hindu undivided families 91. Under the provisions of the Wealth-tax Act, before its amendment by the Finance (No. 2) Act, 1971, the rates of ordinary wealth-tax in the case of individuals and Hindu undivided families ranged from 1 per cent in the first slab of taxable net wealth (after an initial exemption of Rs. 1,00,000 in the case of individuals and Rs. 2,00,000 in the case of Hindu undivided families) to a maximum of 5 per cent on net wealth in the slab over Rs. 20,00,000. Section 36 of the Finance (No. 2) Act, 1971 has made certain modifications in these rates with a view to increasing the yield of revenue and to increase the incidence of tax on wealth in higher slabs. Under the rate schedule as modified, wealth-tax will be chargeable on every rupee of the net wealth where the net wealth exceeds the exemption limit of Rs. 1,00,000 in the case of an individual or Rs. 2,00,000 in the case of a Hindu undivided family. Accordingly, wealth-tax will be chargeable on the first slab of Rs. 5,00,000 of the net wealth at the rate of 1 per cent. The rates of wealth-tax in the next two slabs, i.e., from Rs. 5,00,001—Rs. 10,00,000 and Rs. 10,00,001—Rs. 15,00,000 will continue at 2 per cent and 3 per cent, respectively. On net wealth in the slab over Rs. 15,00,000, the revised rate of ordinary wealth-tax is 8 per cent, as against 4 per cent in the slab Rs. 15,00,001 —Rs. 20,00,000 and 5 per cent on net wealth over Rs. 20,00,000 formerly. No wealth-tax will be payable in a case where the net wealth does not exceed Rs. 1,00,000 in the case of an individual or Rs. 2,00,000 in the case of a Hindu undivided family. Further, where the net wealth exceeds the exemption limit of Rs. 1,00,000 or Rs. 2,00,000, as the case may be, by a small margin, the wealth-tax payable will be the lower of (a) tax at the rate of 1 per cent on the amount of the net wealth, or (b) an amount equal to 10 per cent of the amount by which the net wealth exceeds the exemption limit. This is illustrated in the following table : Individuals: Net wealth Wealth-tax at 1% of the excess over Wealth-tax at 10% of the net wealth Rs. 1,00,000 1 2 3 Rs. Rs. Rs 1,00,000 Nil Nil 1,10,000 1,100 1,000 1,11,000 1,110 1,100 1,11,100 1,111 1,110 1,11,200 1,112 1,120 It will be observed from the above table that up to a net wealth of Rs. 1,11,100, the amount calculated under the marginal provision as explained above (col. 3) is lower than the amount arrived at by applying the rate of one per cent to the whole of the net wealth (col. 2). On the other hand, when the net wealth amounts to Rs. 1,11,200, wealth-tax at the rate of 1 per cent of the entire wealth is lower than the amount calculated by applying the marginal provision. Hence, in the case of an individual, the marginal provision ceases to be applicable from this level upward. In the case of a Hindu undivided family, there will be a similar margin immediately above Rs. 2,00,000, in which the tax calculated at 10 per cent of the excess of the net wealth over Rs. 2,00,000 will be less than that calculated at the rate of 1 per cent on the entire net wealth. Finance (No. 2) Act, 1971 92. The rates of additional wealth-tax on lands and buildings situated in urban areas continue without change. The increases in the rates of ordinary wealth-tax as explained in the preceding paragraph will come into effect from 1-4-1972 and will, accordingly, apply for the assessment year 1972-73 and subsequent years. A consequential amendment has also been made by section 33 of the Finance (No. 2) Act, 1971 to section 18 relating to penalties for failure to furnish wealth-tax returns and for other defaults. Finance (No. 2) Act, 1971 Liberalisation of the exemption in respect of one residential house 93. Section 5(1)(iv), before its amendment by the Finance (No. 2) Act, 1971, exempted from wealth-tax one house or part of a house belonging to the assessee and exclusively used by him for residential purposes, subject to a maximum value of Rs. 1,00,000 in respect of the exemption. This exemption was not available in respect of a house which is let out on rent even though that may be the only house belonging to the assessee. Finance (No. 2) Act, 1971 94. One result of the modifications in the rate schedule of wealth-tax as explained in paragraph 91 will be that in the case of an assessee who owns a house which is let out on rent who has no other investment qualifying for exemption from wealth-tax will be payable on the entire value of such house where it exceeds the exemption limit of Rs. 1,00,000, subject only to the marginal relief provision explained earlier. As this might cause genuine hardship to persons of small means who depend upon house property, often as the sole means of livelihood and may even discourage construction of the house property by such persons, the exemption in section 5(1)(iv) has been liberalised. Under the provision as amended by section 32(a) of the Finance (No. 2) Act, 1971, one house or part of a house belonging to the assessee will be entitled to exemption from wealth-tax, subject to the ceiling limit of Rs. 1,00,000 over the exemption even where the house is not used by the assessee for his own residence but is let out on rent. This liberalisation of the exemption in section 5(1)(iv) comes into effect on 1-4-1972 and will, accordingly, apply for the assessment year 1972-73 and subsequent years. Finance (No. 2) Act, 1971 Aggregation of assets belonging to the spouse or minor child of an individual with the net wealth of the individual 95. Under the provisions in section 4, assets held by the spouse or minor child of an individual are required to be included in computing the net wealth of the individual in certain cases. This provision applies to cases where such assets have been transferred by the individual (a) to the spouse, otherwise than for adequate consideration, or in connection with an agreement to live apart, or (b) to a minor child (not being a married daughter) otherwise than for adequate consideration, or (c) to any person or association of persons, otherwise than for adequate consideration, for the immediate or deferred benefit of the individual himself, his or her spouse or minor child (not being a married daughter) or both; or (d) to a person or association of persons otherwise than under an irrevocable transfer. Transfers made in these cases prior to 1-4-1956, are outside the scope of this provision. Transfer of assets in regard to which gift-tax is chargeable, or which are specifically exempt from the charge of gift-tax under section 5 of the Gift-tax Act, for the assessment year 1964-65 or any subsequent assessment year, are also outside the scope of this provision. This latter provision was introduced in the Wealth-tax Act in the context of the increases made under the Finance Act, 1964 in the rates of gift-tax. As the rates of gift-tax at present applicable on gifts up to Rs. 20,00,000 are considerably lower than those prevailing under the Finance Act, 1964 and the incidence of wealth-tax has also been substantially increased, section 31(a)(i) of the Finance (No. 2) Act, 1971 has amended section 4 of the Wealth-tax Act so as to restore the position which obtained prior to the assessment year 1964-65. Accordingly, the value of assets transferred by an individual in the circumstances detailed earlier, after the end of the previous year under the Gift-tax Act relevant to the assessment year 1971-72, will be includible in the net wealth of the individual making the transfer. The provision excluding from aggregation of assets comprised in a transfer in respect of which gift-tax was chargeable under the Gift-tax Act, or which is specifically exempt from charge of gift-tax under section 5 of that Act, will apply only in relation to transfers in respect of which gift-tax is chargeable or which are specifically exempt from gift-tax for the assessment years 1964-65 to 1971-72 (both inclusive). Assets which are the subject of transfer in respect of which gift-tax is chargeable during the assessment year 1972-73 or in any later year will, nevertheless, be aggregated with the net wealth of the individual making the transfer. Finance (No. 2) Act, 1971 96. Conversion of separate property of an individual into Hindu joint family property - The provision in the Wealth-tax Act for the aggregation of assets transferred by an individual to or for the benefit of the spouse or minor child in certain circumstances as explained in the preceding paragraph, has so far not been applicable in relation to transfer of assets made through the medium of a Hindu undivided family. This is in view of the position that, according to the courts, the conversion of the separate property of an individual into joint Hindu family property, by impressing such separate property with the character of property belonging to the family or throwing it into the common stock of the family, does not amount to a "transfer" of such property, even where the converted property is subsequently partitioned amongst the members of the joint family resulting in passing of the property to the spouse or minor children. With a view to closing this loophole for the avoidance or reduction of tax liability through the device of converting separate property of an individual into joint Hindu family property, section 31(b) of the Finance (No. 2) Act, 1971 has introduced a new provision in section 4 to cover such cases. Under the new provision, which is contained in new sub-section (1A) of section 4, in a case where an individual converts his separate property into joint family property of a Hindu undivided family of which he is a member, by impressing such property with the character of joint family property or by throwing such property into the common stock of the Hindu undivided family, he will be deemed to have transferred the converted property through the family to the members of the family for being held by them jointly. The share in the converted property in so far as it is attributable to the interest of the individual, his spouse or minor children (other than married daughters) will be included in the net wealth of the individual. Further, in the event of a partial or total partition in the Hindu undivided family, the shares allotted to the spouse or minor children in the converted property will also be similarly included in the net wealth of the individual. Finance (No. 2) Act, 1971 97. The amendment explained in the preceding paragraph will take effect from 1-4-1972 and will, accordingly, be applicable for the assessment year 1972-73 and subsequent assessment years. However, the provision will apply in relation to conversions of separate property into joint Hindu family property effected after 31-12-1969 which is the date specified for the purpose in the corresponding provision in section 64 of the Income-tax Act relating to aggregation of income from such converted property with the income of the individual making the conversion in so far as the income is attributable to the individual's own share in the property of the family or to the shares of his spouse or any minor son in the property of the family. Finance (No. 2) Act, 1971 Tax treatment of members of co-operative housing societies 98. Co-operative housing societies are becoming increasingly popular amongst members of the middle and upper middle classes as these enable them to pool their resources and build houses or flats in multi-storeyed buildings, often with the aid of loans from State Governments, State Housing Boards and other financing bodies. Co-operative house building societies fall broadly into two classes, namely, (a) those in which the houses or flats legally belong to the members themselves, the society being only a means to secure the land, the necessary financial resources by way of loan or otherwise, arranging for the construction and attending to the maintenance of the houses or flats, (b) societies in which the building belongs to the society itself and not to individual members to whom the house or flat is merely allotted or leased for use. While in the former type of societies, the houses or flats are, for wealth-tax purposes, treated as belonging to the members themselves, in the latter type of societies, the members cannot legally be regarded as owning the houses or flats and their right vis-a-vis the society is only to the extent of the value of the shares held by them in the society, which would constitute movable property for purposes of wealth-tax. This places members of the second-mentioned type of co-operative societies at a disadvantage as compared to members of the first-mentioned type of societies inasmuch as they will not be eligible for the exemption in section 5(1)(iv) in respect of their residential house up to a value of Rs. 1,00,000. Finance (No. 2) Act, 1971 99. With a view to removing this disparity between members of co-operative housing societies, section 31(c) of the Finance (No. 2) Act, 1971 has introduced a new sub-section (7) in section 4 under which a member of a co-operative housing society to whom a building or part thereof is allotted or leased under a house building scheme of the society will be regarded as the owner of that building or part for purposes of wealth-tax. It has also been provided that in determining the value of such building or part for purposes of inclusion in the net wealth the value of any outstanding instalments of the amount payable by the member of the society to the society towards the cost of such building or part (including the land appurtenant thereto) under the house building scheme of the society will be deducted as a debt owed by him in relation to such building or part. Accordingly, the value of the house or flat for wealth-tax purposes will be taken to be the difference between the market value of the flat if it were free from any encumberance and the discounted value of outstanding instalments of the amount payable by him to the society towards the cost of the building or flat. As the member will be considered as the owner of such house or flat, he will also become entitled to the exemption in respect of one house up to the value of Rs. 1,00,000 in the computation of his net wealth, under section 5(1)(iv) as amended by the Finance (No. 2) Act, 1971 [vide paragraph 94 of this circular]. Finance (No. 2) Act, 1971 100. As a corollary to the provision explained in the preceding paragraph, it has also been provided, in a new clause (xxx) inserted in section 5(1) by section 32(a)(v) of the Finance (No. 2) Act, 1971, that the amount paid by the member to the society as his share in the cost of construction of the building, which is generally held in the books of the society as a deposit by such member, will not again be included in his net wealth as this is already covered by the net value of the house or flat. Finance (No. 2) Act, 1971 101. The amendments explained in paragraphs 99 and 100 will come into effect from 1-4-1972 and will, accordingly, apply for the assessment year 1972-73 and subsequent years. Finance (No. 2) Act, 1971 Withdrawal of exemption from wealth-tax in respect of jewellery, etc., and limiting of exemption in respect of motor cars, etc. 102. Section 5(1) provides exemptions from wealth-tax in respect of certain assets by excluding these in the computation of the net wealth. One of these exemptions which is contained in clause (viii) of section 5(1), is in respect of— "furniture, household utensils, wearing apparel, provisions and other articles intended for the personal or household use of the assessee". Another item of exemption [which was provided in section 5(1)(xv) prior to 1-4-1963] was in respect of— "jewellery belonging to the assessee, subject to a maximum of Rs. 25,000 in value". In the case of CWT v. Mrs. Arundhati Balkrishna [1970] 77 ITR 505, the Supreme Court held that the expression "other articles intended for the personal or household use of the assessee" in section 5(1)(viii) included jewellery which was held by the assessee for her personal or household use. The Court further held that the exemption of jewellery up to Rs. 25,000 in value under section 5(1)(xv), as it existed prior to 1-4-1963, operated in respect of jewellery other than that held for personal or household use of the assessee. The interpretation placed by the Supreme Court on the provisions in clauses (viii) and (xv) of section 5(1) revealed that these clauses did not bring out correctly the intention underlying them, namely, that up to the assessment year 1962-63, jewellery should be exempted from wealth-tax only up to a value of Rs. 25,000 and from the assessment year 1963-64 onwards, when the specific exemption in section 5(1)(xv) was omitted from the Act, jewellery should not at all qualify for exemption from wealth-tax. Finance (No. 2) Act, 1971 103. With a view to bringing out this intention clearly and implementing the purpose underlying the withdrawal of exemption from jewellery altogether from wealth-tax from the assessment year 1963-64, clause (viii) of section 5(1) has been amended by section 32 of the Finance (No. 2) Act, 1971, retrospectively, from 1-4-1963, so as to exclude jewellery altogether from the purview of that clause. Further, the term "jewellery" has been given an extended meaning prospectively so as to include: a. ornaments made of gold, silver, platinum, or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone and whether or not worked or sewn into any wearing apparel; and b. precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel. Finance (No. 2) Act, 1971 104. Further, under the amendment, the operation of the exemption in clause (viii) has been restricted prospectively in the following respects : 1. Furniture, utensils and other articles, which, though held for personal or household use of the assessee, are made of, or contain (whether by way of embedding, covering or otherwise), gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, have been excluded altogether from the purview of the exemption. 2. Motor cars and other mechanically propelled vehicles, aircraft and boats will hereafter be exempt up to an aggregate value of Rs. 25,000 only. Finance (No. 2) Act, 1971 105. During the course of the debate on the Budget for the year 1971-72 in the Lok Sabha, it was suggested that the inclusion of furniture, utensils or other articles which are made wholly or partly of, or contain (whether by way of embedding, covering or otherwise) gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals in the net wealth would result in unintended hardship inasmuch as taxpayers would be required to disclose the value of petty items like silver plated cutlery, blades containing coating of platinum or other precious metals, etc. It was, accordingly, suggested that such furniture, utensils and other articles should continue to enjoy exemption from wealth-tax. In his reply to the debate, the Finance Minister has observed as follows : 'In giving an extended meaning to the term "jewellery" and excluding furniture, utensils and other articles falling under the categories described above from the scope of the exemption, it is not the intention to enter into pettifogging enquiries into the details of such articles so as to cause embarrassment or harassment to taxpayers. This will be secured through suitable administrative instructions. Without the extended meaning of the term "jewellery" and special provisions excluding furniture, etc., which incorporate precious metals in their construction, it will leave a big loophole for tax evasion as healthy persons could then convert their wealth into such assets which, in the ultimate analysis, do not add to the productive potential of the country.' The above observations of the Finance Minister will be carefully borne in mind by assessing officers while dealing with such cases. Finance (No. 2) Act, 1971 106. The exclusion of jewellery from the purview of the exemption is operative retrospectively from the assessment year 1963-64. The extended meaning of the term "jewellery" as stated in paragraph 103, as also the exclusion of furniture, utensils and other articles referred to in item (a) and the limitation of the exemption in respect of conveyances to Rs. 25,000, as stated in item (b) of paragraph 104, will become effective from 1-4-1972, i.e., for the assessment year 1972-73 and subsequent assessment years. Finance (No. 2) Act, 1971 Shares in new industrial companies 107. Clause (xx) of section 5(1), before its amendment by the Finance (No. 2) Act, 1971, exempted from wealth-tax the value of shares held by the assessee in any company established with the object of carrying on an industrial undertaking in India, where such shares formed part of the initial issue of equity share capital made by the company after 31-3-1964. The exemption is available for a period of 5 years commencing with the assessment year next following the date on which such company commences the operations for which it has been established. In the context of the improved climate for new equity issues of industrial companies, this exemption has been withdrawn in respect of shares forming part of an initial issue of equity share capital made after 31-5-1971, under an amendment to section 5(1)(xx) by section 32 of the Finance (No. 2) Act, 1971. Such shares will, however, be included in the categories of investments which are exempt from wealth-tax up to the aggregate value of Rs. 1,50,000 under the provision introduced last year. In a case where subscription list in respect of an initial issue of share capital opened before 1-6-1971, shares forming part of such issue will continue to qualify for exemption without any ceiling limit irrespective of whether such shares are actually subscribed for before or after that date. Finance (No. 2) Act, 1971 Financial assets qualifying for exemption from wealth-tax 108. Under a provision introduced by the Finance Act, 1970, exemption from wealth-tax is available in respect of the investments in specified financial assets up to an aggregate value of Rs. 1,50,000. The categories of investments qualifying for this exemption comprise— a. Government securities, including small savings securities of the Central Government. b. Fixed deposits with the Central Government, as also in Post Offices on Government account, and Recurring and Time Deposits in Post Offices. c. Shares in Indian companies. d. Notified debentures. e. Units in the Unit Trust of India. f. Deposits with banking companies, including co-operative banks, land mortgage banks and land development banks. g. Deposits with approved financial corporations engaged in providing long-term finance for industrial development in India. By certain amendments to section 5 under section 32 of the Finance (No. 2) Act, 1971, this list has been enlarged so as to include (i) shares in a co-operative society [new clause (xxviii) of section 5(1)], and (ii) deposits made by a member of a co-operative society with the society [new clause (xxix) of section 5(1)]. Accordingly, in computing the exemption from wealth-tax up to Rs. 1,50,000, these assets will also be taken into account. [Deposits made with a co-operative housing society by a member of the society to whom a building or part thereof is allotted or leased under a house building scheme of the society, are exempted from wealth-tax without any limit, to the extent such deposits have been made under the house building scheme of the society, vide clause (xxx) of section 5(1), as explained in paragraph 100.] Finance (No. 2) Act, 1971 109. The exemption in respect of investments in specified financial assets as explained in the preceding paragraph has been available also to a discretionary trust which is chargeable to tax on its net wealth at the flat rate of 1½ per cent or at the rates applicable in the case of an individual, whichever is higher. As this is not in consonance with the intention underlying the provision made last year for the taxation of discretionary trusts in this manner, section 21(4) has been amended by section 34 of the Finance (No. 2) Act, 1971 so as to withdraw the exemption in respect of these items of financial assets in computing the net wealth of a discretionary trust. However, it has been specifically provided that the exemption in respect of these assets will continue to be available in the case of discretionary trusts referred to in the proviso to section 21(4), that is to say— a. a testamentary trust; b. a non-testamentary trust created before 1-3-1970 bona fide for the benefit of the relatives of the settlor or members of the Hindu undivided family which created the trust, where such relatives or members were mainly dependent on the settlor for their support and maintenance; c. provident funds, superannuation funds, gratuity funds, pension funds and other funds created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in such business or profession. Finance (No. 2) Act, 1971 110. The enlargement of the scope of financial assets qualifying for exemption from wealth-tax so as to include shares in co-operative societies and deposits by members with a co-operative society, as also the withdrawal of the exemption in respect of these assets in the case of discretionary trusts which are chargeable to tax at the flat rate of 1½ per cent or at the rates applicable in the case of an individual, whichever is higher, will all become effective from 1-4-1972, i.e., for the assessment year 1972-73 and subsequent assessment years. Finance (No. 2) Act, 1971 Recovery of wealth-tax arrears 111. Under section 32, the provisions of the Income-tax Act relating to recovery of arrears of income-tax are made applicable also for the purposes of recovery of arrears of wealth-tax and sums imposed by way of a penalty, fine and interest. In the context of the amendments made in the Income-tax Act so as to vest in Tax Recovery Commissioners jurisdiction over orders of Tax Recovery Officers, a consequential amendment has been made in section 32 by section 35 of the Finance (No. 2) Act, 1971 so as to confer on Tax Recovery Commissioners jurisdiction over appeals against orders of Tax Recovery Officers in proceedings for recovery of wealth-tax also. This amendment will take effect from 1-1-1972 from which date the relevant amendments to the Income-tax Act will become effective. AMENDMENTS TO GIFT-TAX ACT Finance (No. 2) Act, 1971 Conversion of self-acquired property of an individual into property belonging to the Hindu undivided family of which he is a member 112. Under the Gift-tax Act, gift-tax is levied for every assessment year in respect of gifts made by a person during the previous year, i.e., the financial year immediately preceding the relevant assessment year or any other corresponding accounting year. The term "gift" is defined in section 2(xii) to mean the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money's worth and to include the transfer of any property deemed to be a gift under section 4. Although under section 2(xxiv), the expression "transfer of property" has also been given an extended meaning so as to cover certain transactions which would not ordinarily be comprised within that term, it was held by the Supreme Court in the case of Goli Eswariah v. CGT [1970] 76 ITR 675 that the act of conversion of separate property by a coparcener of a Hindu undivided family into property belonging to the family did not fall within the normal or even the extended meaning of the term "transfer of property" under the Gift-tax Act and hence, such an act of conversion of separate property into Hindu undivided family property did not attract liability to gift-tax. Finance (No. 2) Act, 1971 113. With a view to closing this loophole for avoidance of gift-tax liability by using the device of converting self-acquired property into Hindu undivided family property, section 37 of the Finance (No. 2) Act, 1971 has amended sections 2 and 4 for the purpose. Under the amendment to section 4, it has been provided that where a member of a Hindu undivided family converts his separate property into joint family property, he shall be deemed to have made a gift, in favour of the family, of so much of that property as the other members of the family would be entitled to if a partition of the converted property had taken place immediately after such conversion. The definition of the term "gift" in section 2(xii) has also been modified so as to cover the transfer or conversion of any property referred to in section 4, deemed to be a gift under that section. These amendments will take effect from 1-4-1972 and will, accordingly, apply for the assessment year 1972-73 and subsequent years. Finance (No. 2) Act, 1971 Exemption of gifts made by charitable or religious institutions or funds 114. Section 45 excludes from the purview of the Gift-tax Act, inter alia, any gifts made by an institution or fund the income whereof is exempt from income-tax under section 11 of the Income-tax Act. Under certain amendments made through the Finance Act, 1970, to the provisions of sections 11 and 13 of the Income-tax Act, charitable or religious institutions and funds may not qualify for exemption from income-tax on the whole or a part of their income in certain circumstances. Some of these circumstances are : (a) where the institution or fund fails to apply its income to charitable or religious purposes within the same year or within three months immediately following that year; and (b) where the institution or fund makes investments in a concern in which the founder of the institution or fund and his relatives have a substantial interest and the investment does not exceed 5 per cent of the capital of such concern. As it is not the intention that gifts made by a charitable institution or fund (which would comprise the application of its income to the charitable or religious purposes of the institution or fund) should be brought within the purview of liability to gift-tax in these circumstances, section 37 of the Finance (No. 2) Act, 1971 has made a clarificatory amendment in section 45 to bring out this intention. Under the amendment, it has been provided that a charitable institution or fund will not forfeit the exemption from gift-tax in respect of gifts made by it merely because (a) subsequent to the gift, any income of the institution or fund becomes chargeable to income-tax due to non-compliance with any of the provisions of section 11 of the Income-tax Act relating to the application of income during the accounting year itself, (b) the institution or fund forfeits exemption in respect of a part of its income which arises from investments made in a concern in which the founder of the institution or fund or his relatives have a substantial interest, where the aggregate of the funds invested by the institution or fund in such a concern does not exceed 5 per cent of the capital of that concern. This amendment has been made retrospective from 1-4-1971 and, accordingly, applies for the assessment year 1971-72 and subsequent years. Finance (No. 2) Act, 1971 Recovery of arrears of gift-tax 115. Section 33 applies for purposes of gift-tax the provisions of the Income-tax Act relating to recovery of arrears of income-tax. In the context of the amendment made in the Income-tax Act so as to vest in Tax Recovery Commissioners jurisdiction to hear appeals against orders of Tax Recovery Officers, a consequential amendment has been made in section 33 by section 37(d) of the Finance (No. 2) Act, 1971 so as to vest such jurisdiction in respect of orders passed by Tax Recovery Officers in the course of recovery proceedings relating to gift-tax as well. This amendment will take effect from 1-1-1972 from which date the corresponding amendments to the Income-tax Act will also become effective. Finance (No. 2) Act, 1971 Drafting amendments to section 5(1) 116. Section 5(1) relating to exemption in respect of certain gifts exempts, inter alia, gifts made to an institution or fund established for a charitable purpose, as also gifts made to any temple, mosque, gurdwara, church or other place of worship which has been notified by the Central Government for the purpose of the exemption under the Income-tax Act in respect of donations made for the repair or renovation of such places. These provisions in section 5(1) of the Gift-tax Act, before amendment by the Finance (No. 2) Act, 1971, referred to section 88 of the Income-tax Act. As section 88 has been replaced with effect from 1-4-1968 by section 80G, two drafting amendments have been made to section 5(1) by section 37(c) of the Finance (No. 2) Act, 1971 so as to refer to section 80G of the Income-tax Act. These amendments have been made retrospectively from 1-4-1968. AMENDMENTS TO COMPANIES (PROFITS) SURTAX ACT Finance (No. 2) Act, 1971 Rates of surtax 117. Under the provisions of the Companies (Profits) Surtax Act, surtax is leviable on so much of the chargeable profits of a company as exceed the "statutory deduction", at the rate or rates specified in the Third Schedule to that Act. The term "statutory deduction" is defined to mean an amount equal to 10 per cent of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of Rs. 2,00,000, whichever is greater. The rate of tax presently leviable is 25 per cent. Finance (No. 2) Act, 1971 118. Section 38 of the Finance (No. 2) Act, 1971 has amended the Third Schedule so as to levy surtax in two slabs on the amount by which the chargeable profits exceed the amount of the "statutory deduction" at the following rates: a. on the amount of such excess up to 5 per cent of the amount of capital as computed in accordance with the Second Schedule 25 per cent; b. on the balance of such excess 30 per cent. This amendment will come into force with effect from 1-4-1972 and will, accordingly, apply for the assessment year 1972-73 and subsequent years. Finance (No. 2) Act, 1971 Recovery of arrears of surtax 119. Section 18 applies for purposes of surtax certain provisions of the Income-tax Act, including the provisions relating to recovery of arrears of income-tax. In the context of the amendments made in the Income-tax Act so as to vest in Tax Recovery Commissioners jurisdiction to hear appeals against the orders of Tax Recovery Officers, section 38 of the Finance (No. 2) Act, 1971 has made a consequential amendment to section 18 so as to vest such jurisdiction in respect of appeals in proceedings relating to recovery of surtax as well. This amendment will take effect from 1-1-1972 from which date the corresponding amendments to the Income-tax Act also come into effect. Miscellaneous Provisions Finance (No. 2) Act, 1971 Deposit Insurance Corporation 120. The Deposit Insurance Corporation was set up under the Deposit Insurance Corporation Act, 1961, and came into existence on 1-1-1962. Under section 30 of that Act, the Corporation was exempted from taxation on its income for an initial period of 5 years covering its profits up to 31-12-1966. This period was extended by 5 years, i.e., to cover profits of the Corporation up to 31-12-1971, by an amendment of section 30 through the Finance (No. 2) Act, 1967. Finance (No. 2) Act, 1971 121. The Corporation has now embarked on an ambitious scheme of extending the coverage of insurance to the co-operative banking sector and also extending such coverage to a higher quantum of individual deposits than formerly. With a view to enabling the Corporation to build up its reserve funds to an adequate extent and also gain experience of the additional risks involved in extending its activities, as stated above, section 30 of the Deposit Insurance Corporation Act, 1961 has been amended by section 53 of the Finance (No. 2) Act, 1971 so as to continue the exemption from taxation of the Corporation on its income for a further period of 5 years. This will cover the profits of the Corporation up to 31-12-1976. Finance (No. 2) Act, 1971 Housing and Urban Development Finance Corporation (P.) Ltd. 122. The Housing and Urban Development Finance Corporation (P.) Ltd. is registered as a company under the Companies Act and is wholly owned by the Government. The primary objective of the Corporation is to provide finances to State Housing Boards, etc., for accelerating housing and urban development programmes. The Corporation will concentrate progressively, on the financing of programmes intended for housing the weaker sections of the community and will thus meet a pressing social need. With a view to enabling the Corporation to perform these functions effectively and to build up its resources, section 54 of the Finance (No. 2) Act, 1971 has made an independent provision exempting from income-tax and surtax the income of the Corporation for a 10-year period covering the assessment years 1971-72 to 1980-81 (both inclusive). Finance (No. 2) Act, 1971 Repeal of the provision in section 2 of the Finance Act, 1971 relating to rates of income-tax 123. As the provisions in the Finance Act relating to rates of income-tax seek to replace the corresponding provisions in the earlier Finance Act, 1971, with retrospective effect from 1-4-1971, section 2 of the Finance Act, 1971 has been repealed by section 55 of the Finance (No. 2) Act, 1971.ANNEXURE I RATES OF INCOME-TAX FOR THE ASSESSMENT YEAR 1971-72 A. TAXPAYERS OTHER THAN COMPANIES 1. Individuals, Hindu undivided families, unregistered firms, associations of persons (other than co-operative societies),bodies of individuals and artificial juridical persons Rates of income-tax (1) where the total income does not exceed Rs. 5,000 Nil (2) where the total income exceeds Rs. 5,000 but does not exceed Rs. 10,000 10 per cent of the amount by which the total income exceeds Rs. 5,000 (3) where the total income exceeds Rs. 10,000 but does not exceed Rs. 15,000 Rs. 500 plus 17 per cent of the amount by which the total income exceeds Rs. 10,000 ; (4) where the total income exceeds Rs. 15,000 but does not exceed; Rs. 20,000 Rs. 1,350 plus 23 per cent of the amount by which the total income exceeds Rs. 15,000; (5) where the total income exceeds Rs. 20,000 but does not exceed Rs. 25,000 Rs. 2,500 plus 30 per cent of the amount by which the total income exceeds Rs. 20,000; (6) where the total income exceeds Rs. 25,000 but does not exceed Rs. 30,000 Rs. 4,000 plus 40 per cent of the amount by which the total income exceeds Rs. 25,000; (7) where the total income exceeds Rs. 30,000 but does not exceed Rs. 40,000 Rs. 6,000 plus 50 per cent of the amount by which the total income exceeds Rs. 30,000 ; (8) where the total income exceeds Rs. 40,000 but does not exceed Rs. 60,000 Rs. 11,000 plus 60 per cent of the amount by which the total income exceeds Rs. 40,000 ; (9) where the total income exceeds Rs. 60,000 but does not exceed Rs. 80,000 Rs. 23,000 plus 70 per cent of the amount by which the total income exceeds Rs. 60,000 ; (10) where the total income exceeds Rs. 80,000 but does not exceed Rs. 1,00,000 Rs. 37,000 plus 75 per cent of the amount by which the total income exceeds Rs. 80,000 ; (11) where the total income exceeds Rs. 1,00,000 but does not exceed Rs. 2,00,000 Rs. 52,000 plus 80 per cent of the amount by which the total income exceeds Rs. 1,00,000 ; (12) where the total income exceeds Rs. 2,00,000 Rs. 1,32,000 plus 85 per cent of the amount by which the total income exceeds Rs. 2,00,000 : Provided that for the purposes of this paragraph, in the case of a Hindu undivided family which at any time during the previous year satisfies either of the following two conditions, namely,— (a) that it has at least two members entitled to claim partition who are not less than eighteen years of age, or (b) that it has at least two members entitled to claim partition who are not lineally descended one from the other and who are not lineally descended from any other living member of the family : (i) no income-tax shall be payable on a total income not exceeding Rs. 7,000; (ii) where the total income exceeds Rs. 7,000 but does not exceed Rs. 7,660, the income-tax payable thereon shall not exceed forty per cent of the amount by which the total income exceeds Rs. 7,000. Surcharge on income-tax The amount of income-tax computed in accordance with the preceding provisions of this paragraph shall be increased by a surcharge for purposes of the Union calculated at the rate of ten per cent of such income-tax. 2. In the case of every co-operative society Rates of income-tax (1) where the total income does not exceed Rs. 10,000 15 per cent of the total income; (2) where the total income exceeds Rs. 10,000 but does not exceed Rs. 20,000 Rs. 1,500 plus 25 per cent of the amount by which the total income exceeds Rs. 10,000; (3) where the total income exceeds Rs. 20,000 Rs. 4,000 plus 40 per cent of the amount by which the total income exceeds Rs. 20,000. Surcharge on income-tax The amount of income-tax computed at the rate hereinbefore specified shall be increased by a surcharge for purposes of the Union calculated at the rate of ten per cent of such income-tax. 3. In the case of every registered firm Rates of income-tax (1) where the total income does not exceed Rs. 10,000 Nil; (2) where the total income exceeds Rs. 10,000 but does not exceed Rs. 25,000 4 per cent of the amount by which the total income exceeds Rs. 10,000; (3) where the total income exceeds Rs. 25,000 but does not exceed Rs. 50,000 Rs. 600 plus 6 per cent of the amount by which the total income exceeds Rs. 25,000 ; (4) where the total income exceeds Rs. 50,000 but does not exceed Rs. 1,00,000 Rs. 2,100 plus 12 per cent of the amount by which the total income exceeds Rs. 50,000 ; (5) where the total income exceeds Rs. 1,00,000 Rs. 8,100 plus 20 per cent of the amount by which the total income exceeds Rs. 1,00,000. Surcharges on income-tax The amount of income-tax computed at the rate hereinbefore specified shall be increased by the aggregate of surcharges for purposes of the Union calculated as specified hereunder : (a) in the case of a registered firm whose total income includes income derived from a profession carried on by it and the income so included is not less than fifty-one per cent of such total income, a surcharge calculated at the rate of ten per cent of the amount of income-tax computed at the rate hereinbefore specified; (b) in the case of any other registered firm, a surcharge calculated at the rate of twenty per cent of the amount of income-tax computed at the rate hereinbefore specified ; and (c) a special surcharge calculated at the rate of ten per cent on the aggregate of the following amounts, namely : (i) the amount of income-tax computed at the rate hereinbefore specified; and (ii) the amount of the surcharge calculated in accordance with clause (a), or as the case may be, clause (b) of this sub-paragraph. Explanation : For the purposes of this paragraph, "registered firm" includes an unregistered firm assessed as a registered firm under clause (b) of section 183 of the Income-tax Act. 4. In the case of every local authority Rate of income-tax On the whole of the total income - 50 per cent. Surcharge on income-tax The amount of income-tax computed at the rate hereinbefore specified shall be increased by a surcharge for purposes of the Union calculated at the rate of ten per cent of such income-tax.B. Companies 1. In the case of the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956,— Rates of income-tax (i) on that part of its total income which consists of profits and gains from life insurance business 52.5 per cent ; (ii) on the balance, if any, of the total income the rate of income-tax applicable, in accordance with with Paragraph F of this Part, to the total income of a domestic company which is a company in which the public are substantially interested. 2. In the case of a company, other than the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956,— Rates of income-tax 1. In the case of a domestic company— (1). where the company is a company in which the public are substantially interested,— (i) in a case where the total income does not exceed Rs. 50,000 45 per cent of the total income ; (ii) in a case where the total income exceeds Rs. 50,000 55 per cent of the total income ; (2) where the company is not a company in which the public are substantially interested,— (i) in the case of an industrial company— (a) on so much of the total income as does not exceed Rs. 10,00,000 55 per cent ; (b) on the balance, if any, of the total income 60 per cent ; (ii) in any other case 65 per cent of the total income : Provided that the income-tax payable by a domestic company being a company in which the public are substantially interested, the total income of which exceeds Rs. 50,000 shall not exceed the aggregate of— (a) the income-tax which would have been payable by the company if its total income had been Rs. 50,000 (the income of Rs. 50,000 for this purpose being computed as if such income included income from various sources in the same proportion as the total income of the company); and (b) eighty per cent of the amount by which its total income exceeds Rs. 50,000. II. In the case of a company other than a domestic company— (i) on so much of the total income as consists of— (a) royalties received from an Indian concern in pursuance of an agreement made by it with the Indian concern after the 31st day of March, 1961, or (b) fees for rendering technical services received from an Indian concern in pursuance of an agreement made by it with the Indian concern after the 29th day of February, 1964. and where such agreement has, in either case been approved by the Central Government 50 per cent ; (ii) on the balance, if any, of the total income - 70 per cent. ANNEXURE II RATES OF INCOME-TAX FOR DEDUCTION OF TAX AT SOURCE FROM "SALARIES" AND RETIREMENT ANNUITIES AND FOR COMPUTING "ADVANCE TAX" PAYABLE DURING THE FINANCIAL YEAR 1971-72 A. Taxpayers Other Than Companies 1. Individuals, Hindu undivided families, unregistered firms, associations of persons (other than co-operative societies), bodies of individuals and artificial juridical persons Rates of income-tax (1) where the total income does not exceed Rs. 5,000 Nil; (2) where the total income exceeds Rs. 5,000 but does not exceed Rs. 10,000 10 per cent of the amount by which the total income exceeds; Rs. 5,000 ; (3) where the total income exceeds Rs. 10,000 but does not exceed Rs. 15,000 Rs. 500 plus 17 per cent of the amount by which the total income exceeds Rs. 10,000 ; (4) where the total income exceeds Rs. 15,000 but does not exceed Rs. 20,000 Rs. 1,350, plus 23 per cent of the amount by which the total income exceeds Rs. 15,000 ; (5) where the total income exceeds Rs. 20,000 but does not exceed Rs. 25,000 Rs. 2,500 plus 30 per cent of the amount by which the total income exceeds Rs. 20,000 ; (6) where the total income exceeds Rs. 25,000 but does not exceed Rs. 30,000 Rs. 4,000 plus 40 per cent of the amount by which the total income exceeds Rs. 25,000 ; (7) where the total income exceeds Rs. 30,000 but does not exceed Rs. 40,000 Rs. 6,000 plus 50 per cent of the amount by which the total income exceeds Rs. 30,000 ; (8) where the total income exceeds Rs. 40,000 but does not exceed Rs. 60,000 Rs. 11,000 plus 60 per cent of the amount by which the total income exceeds Rs. 40,000 ; (9) where the total income exceeds Rs. 60,000 but does not exceed Rs. 80,000 Rs. 23,000 plus 70 per cent of the amount by which the total income exceeds Rs. 60,000 ; (10) where the total income exceeds Rs. 80,000 but does not exceed Rs. 1,00,000 Rs. 37,000 plus 75 per cent of the amount by which the total income exceeds Rs. 80,000 ; (11) where the total income exceeds Rs. 1,00,000 but does not exceed Rs. 2,00,000 Rs. 52,000 plus 80 per cent of the amount by which the total income exceeds Rs. 1,00,000 ; (12) where the total income exceeds Rs. 2,00,000 Rs. 1,32,000 plus 85 per cent of the amount by which the total income exceeds Rs. 2,00,000 : Provided that for the purposes of this paragraph, in the case of a Hindu undivided family which at any time during the previous year relevant to the assessment year commencing on the 1st day of April, 1972 satisfies either of the following two conditions, namely : (a) that it has at least two members entitled to claim partition who are not less than eighteen years of age, or (b) that it has at least two members entitled to claim partition who are not lineally descended one from the other and who are not lineally descended from any other living member of the family, (i) no income-tax shall be payable on a total income not exceeding Rs. 7,000, (ii) where the total income exceeds Rs. 7,000 but does not exceed Rs. 7,660, the income-tax payable thereon shall not exceed forty per cent of the amount by which the total income exceeds Rs. 7,000. Surcharges on income-tax The amount of income-tax computed in accordance with the preceding provisions of this paragraph shall be increased by a surcharge for purposes of the Union calculated at the following rates, namely :— (a) in a case where the total income does not exceed Rs. 15,000 - 10 per cent ; (b) in any other case -15 per cent : Provided that the amount of surcharge payable shall, in no case, exceed the aggregate of the following sums, namely : (i) an amount calculated at the rate of 10 per cent on the amount of income-tax on an income of Rs. 15,000 if such income had been the total income (the income of Rs. 15,000 for this purpose being computed as if such income included income from various sources in the same proportion as the total income of the person concerned); and (ii) 40 per cent of the amount by which the total income exceeds Rs. 15,000. 2. In the case of every co-operative society Rates of income-tax (1) where the total income does not exceed Rs. 10,000 15 per cent of the total income; (2) where the total income exceeds Rs. 10,000 but does not exceed Rs. 20,000 Rs. 1,500 plus 25 per cent of the amount by which the total income exceeds Rs. 10,000; (3) where the total income exceeds Rs. 20,000 Rs. 4,000 plus 40 per cent of the amount by which the total income exceeds Rs. 20,000. Surcharge on income-tax The amount of income-tax computed at the rate hereinbefore specified shall be increased by a surcharge for purposes of the Union calculated at the rate of fifteen per cent of such income-tax. 3. In the case of every registered firm Rates of income-tax (1) where the total income does not exceed Rs. 10,000 Nil; (2) where the total income exceeds Rs. 10,000 but does not exceed Rs. 25,000 4 per cent of the amount by which the total income exceeds Rs. 10,000 (3) where the total income exceeds Rs. 25,000 but does not exceed Rs. 50,000 Rs. 600 plus 6 per cent of the amount by which the total income exceeds Rs. 25,000 ; (4) where the total income exceeds Rs. 50,000 but does not exceed Rs. 1,00,000 Rs. 2,100 plus 12 per cent of the amount by which the total income exceeds Rs. 50,000 ; (5) where the total income exceeds Rs. 1,00,000 Rs. 8,100 plus 20 per cent of the amount by which the total income exceeds Rs. 1,00,000. Surcharges on income-tax The amount of income-tax computed at the rate hereinbefore specified shall be increased by the aggregate of surcharge for purposes of the Union calculated as specified hereunder : (a) in the case of a registered firm whose total income includes income derived from a profession carried on by it and the income so included is not less than fifty-one per cent of such total income, a surcharge calculated at the rate of ten per cent of the amount of income-tax computed at the rate hereinbefore specified ; (b) in the case of any other registered firm, a surcharge calculated at the rate of twenty per cent of the amount of income-tax computed at the rate hereinbefore specified ; and (c) a special surcharge calculated at the rate of fifteen per cent on the aggregate of the following amounts, namely : (i) the amount of income-tax computed at the rate hereinbefore specified; and (ii) the amount of the surcharge calculated in accordance with clause (a), or, as the case may be, clause (b) of this sub-paragraph. Explanation: For the purposes of this paragraph "registered firm" includes an unregistered firm assessed as a registered firm under clause (b) of section 183 of the Income-tax Act. 4. In the case of every local authority Rate of income-tax On the whole of the total income - 50 per cent. Surcharge on income-tax The amount of income-tax computed at the rate hereinbefore specified shall be increased by a surcharge for purposes of the Union calculated at the rate of fifteen per cent of such income-tax.B. Companies 1. In the case of the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956,— Rates of income-tax (i) on that part of its total income which consists of profits and gains from life insurance business 52.5 per cent ; (ii) on the balance, if any, of the total income the rate of income-tax applicable, in accordance with Paragraph F of this Part, to the total income of a domestic company which is a company in which the public are substantially interested. 2. In the case of a company, other than the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956,— Rates of income-tax 1. In the case of a domestic company, — (1) where the company is a company in which the public are substantially interested,— (i) in a case where the total income does not exceed Rs. 50,000 45 per cent of the total income ; (ii) in a case where the total income exceeds Rs. 50,000 55 per cent of the total income ; (2) where the company is not a company in which the public are substantially interested,— (i) in the case of an industrial company— (a) on so much of the total income as does not exceed Rs. 10,00,000 55 per cent ; (b) on the balance, if any, of the total income 60 per cent ; (ii) in any other case 65 per cent of the total income : Provided that the income-tax payable by a domestic company, being a company in which the public are substantially interested, the total income of which exceeds Rs. 50,000 shall not exceed the aggregate of— (a) the income-tax which would have been payable by the company if its total income had been Rs. 50,000 (the income of Rs. 50,000 for this purpose being computed as if such income included income from various sources in the same proportion as the total income of the company); and (b) eighty per cent of the amount by which its total income exceeds Rs. 50,000. II. In the case of a company other than a domestic company : (i) on so much of the total income as consists of— (a) royalties received from an Indian concern in pursuance of an agreement made by it with the Indian concern after the 31st day of March, 1961, or (b) fees for rendering technical services received from an Indian concern in pursuance of an agreement made by it with the Indian concern after the 29th day of February, 1964, and where such agreement has, in either case, been approved by the Central Government - 50 per cent ; (ii) on the balance, if any, of the total income -70 per cent.