Amendments at a glance, Rate Structure, Amendment to Income-tax Act, Amendments to Wealth-tax Act, Amendments to Gift-tax Act, Amendments to Companies (Profits) Surtax Act - Income Tax - 108/1973

Circular No. 108 dated 20-3-1973 Amendments at a glance Rate Structure Amendment to Income-tax Act Amendments to Wealth-tax Act Amendments to Gift-tax Act Amendments to Companies (Profits) Surtax Act 14 FINANCE ACT, 1972 Amendments at a glance Section/Schedule Particulars Finance Act 2 and 1st Sch. Rate structure 3-5 Income-tax Act 2(24)(iva), 12, Changes in the provisions relating to exemption from tax 12A, 13(1) and of the income of charitable and religious trusts 15-19 its Expln./(2) (g)/(3)(cc) to (e)/Expln. 1, 139(4A), 164(2)/(3) 2(24)(ix), Taxation of casual and non-recurring incomes - Winnings 10(3), 56(2)(ib), from lotteries, crossword puzzles, races, card games 74A, 80TT, etc. 6, 7 207(1), 208(1) (a), 209(a)(ii), 211(1), Expln. 212(1) 10(10) Tax treatment of gratuities 24 10(25) Exemption from income-tax of income of approved gratuity funds 25 54C Withdrawal of exemption in respect of capital gains arising from transfer of personal jewellery 28 80C(2)(v) Deduction in respect of long-term savings in specified media - Area of tax incentives widened 12-14 80G(5), Donations to charitable trusts or institutions 20-22 Expln. 2 80-1, 80B(7) Withdrawal of relief in respect of specified priority and 6th Sch. industries 8 80Q, 80L(1)(ix) Withdrawal of deduction in respect of dividends from co-operative societies 9 90, 228A Provisions for enabling the Central Government to enter into tax treaties with foreign countries for exchange of information for preventing evasion or avoidance of taxes and recovery thereof 23 132A(4)(a), Increase in the rate of interest chargeable from assessees, 201(1A), 213, and also payable to assessees by Government under the prov., 214(1), provisions of the Act 27 215(1), 216, 217(1)/(1A), 220(2), 243(1), 244(1) and rule 60 of 2 nd Sch. 139(1)(a), 8(a) Curtailment of time allowed for filing returns of along with its income and modification of the provisions relating to prov. and charging of interest for delay in furnishing such Expln. 1 returns 26 194B Deduction of income-tax from payments in respect of lottery and crossword puzzle prizes 10 194C Deduction of income-tax from payments to contractors and sub-contractors resident in India 11 252(4) Appointment of Vice-Presidents of Appellate Tribunal 31 295(2)(mm) Powers to make rules for admission of additional evidence and rule 46A 29-30 Wealth-tax Act 2(ha), 45(g) Exemption of co-operative societies from wealth-tax 32 5(1)(xviic)/ Exemption from wealth-tax of recognised provident (xviid) funds, approved superannuation funds and gratuity funds 33 5(1)(xxxi), Exemption from wealth-tax of assets forming part of (xxxii) an industrial undertaking 34 5(3), Expln. Concession in regard to holding period of exempt assets 35 21A Forfeiture of exemption from wealth-tax in the case of public charitable or religious trusts and institutions 36-37 31(2), 34A(3) Increase in the rate of interest chargeable from or payable to assessees 38 44A, 32 Extension of scope of tax treaties between the Central Government and the Government of a foreign country 39-40 45(opening Application of other provisions not barred in the case of para) exempted entities 42 46(2)(cc) and Power to make rules for admission of additional evidence 41 rule 5A Gift-tax Act 32(2), 33A(3) Increase in the rate of interest chargeable from or payable to assessees 43 44 Extension of scope of tax treaties between the Central Government and the Government of a foreign country 44 45(e) and Exemption of gifts made to charitable or religious insti- Expln. 3(i)/(ii) tutions or funds 45 46(1)(cc) and Powers to make rules for admission of additional rule 5A evidence 49 Surtax Act 24A Extension of scope of tax treaties between the Central Government and the Government of a foreign country 50 25(1)(cc) and Power to make rules for admission of additional evidence 51 rule 8A Rate Structure Finance Act, 1972 Rates of income-tax for the assessment year 1972-73 3. The rates of income-tax for the assessment year 1972-73 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 Act, 1972. In the case of taxpayers other than companies, the rates are the same as were specified in Part III of the First Schedule to the Finance (No. 2) Act, 1971, for purposes 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 1971-72. In the case of the Life Insurance Corporation of India and other companies, the basic rates of income-tax on incomes assessable for the assessment year 1972-73 are the same as those laid down in Part III of the First Schedule to the Finance (No. 2) Act, 1971, for the purpose of computation of "advance tax" during the financial year 1971-72. The income-tax payable by these entities will, however, be increased by a surcharge on income-tax calculated at the rate of 2.5 per cent on such income-tax. The provision for the levy of surcharge on income-tax has been made in the context of the levy of surcharge at the rate of 2.5 per cent of income-tax payable in advance by all companies during the financial year 1971-72 under the Companies (Surcharge on Income-tax) Act, 1971, enacted in December 1971. These rates have been laid down in Paragraphs E and F of Part I of the First Schedule to the Finance Act, 1972. The rates of income-tax have been summarised in Annexure I to this circular. Finance Act, 1972 Rates for deduction of tax at source during the financial year 1972-73 from incomes other than "salaries" and retirement annuities 4. The rates for deduction of tax at source during the financial year 1972-73 from incomes other than "salaries" and retirement annuities payable to partners of registered firms engaged in specified professions are set forth in Part II of the First Schedule to the Finance Act, 1972. In the context of the provision made in the Income-tax Act for deduction of income-tax at source from income by way of winnings from lotteries and crossword puzzles, the Finance Act, 1972 lays down the rates for deduction of income-tax not only from interest on securities, other categories of interest, dividends and other categories of non-salary income of non-residents, but also for deduction of tax from income by way of winnings from lotteries and crossword puzzles. Under another amendment made in the Income-tax Act, income-tax will be deductible at source from payments made to contractors and sub-contractors in certain cases. The rates prescribed in the Finance Act, 1972 in respect of categories of income which were already liable to such deduction also differ from the rates specified in Part II of the First Schedule to the Finance (No. 2) Act, 1971 for the purposes of deduction of tax at source from such incomes during the financial year 1971-72 in certain respects. The changes made by the Finance Act, 1972 are briefly explained hereinbelow : Payments in respect of lottery and crossword puzzle prizes to residents other than companies - In the case of income by way of winnings from lotteries and crossword puzzles payable to resident recipients other than companies during the financial year 1972-73, tax will be deductible at the rate of 34.5 per cent made up of basic income-tax of 30 per cent and surcharge of 4.5 per cent (being 15 per cent of the income-tax). In view of a specific provision made in the new section 194B inserted by section 28 of the Finance Act, 1972, income-tax will be deductible only where the payment exceeds Rs. 1,000. It is also provided in that section that no deduction will be made from winnings from lotteries and crossword puzzles where the payment is made before 1-6-1972. The provisions of the new section 194B have been explained in paragraph 10 of this circular. Payments to contractors and sub-contractors resident in India - Under the new section 194C, inserted by section 28 of the Finance Act, 1972, income-tax will be deductible at source from income comprised in payments made by the Central Government or any State Government, local authorities, statutory corporations and companies to contractors engaged for carrying out any work or for supplying labour for carrying out such work. Income-tax will be deductible at 2 per cent of such payments. Similarly, deduction will be made from payments made by contractors other than individuals and Hindu undivided families, to sub-contractors at the rate of 1 per cent of the payment. No deduction would, however, be required to be made if the consideration for the contract or the sub-contract does not exceed Rs. 5,000 or where the payment is made before 1-6-1972. In view of the position that the rates for deduction of tax at source in respect of payments to contractors and sub-contractors have been laid down in the Income-tax Act, no specific provision in this regard has been made in Part II of the First Schedule. The provisions of the new section 194C have been explained in detail in paragraph 11 of this circular. Payments of income to domestic companies - In respect of interest other than "interest on securities" payable to a domestic company, the rate for deduction will be 21 per cent, made up of income-tax at 20 per cent and surcharge at 1 per cent (5 per cent of income-tax) as against 20 per cent formerly. In respect of any other income (excluding interest payable on a tax-free security), tax will be deducted at the rate of 23 per cent (made up of income-tax at 22 per cent and surcharge at 1 per cent) as against 22 per cent hitherto. The increase in these rates is being made in the context of the levy of surcharge on income-tax in the case of companies as explained in paragraph 3 of this circular. Payments of income to foreign companies - In the case of income payable to a foreign company, income-tax deductible at source as hitherto has been increased by a surcharge on income-tax of 5 per cent. The rates for deduction of income-tax and surcharge in the case of foreign companies will, therefore, stand as under : Income-tax % Surcharge % a. on income by way of dividends payable by any domestic company 24.5 1.225 b. on income by way of royalties payable by an Indian concern in pursuance of approved agreements 50 2.5 c. on income by way of fees payable by Indian concerns for rendering technical services under approved agreements 50 2.5 d. on income by way of interest payable on tax-free securities 44 2.2 e. on any other income 70 3.5 It will be seen that the rates for deduction of basic income-tax in the case of foreign companies are the same as laid down in Part II of the First Schedule to the Finance (No. 2) Act, 1971. Finance Act, 1972 Rates for deduction of tax at source from "salaries", computation of "advance tax" and charging of income-tax in special cases during the financial year 1972-73 5. The Finance Act, 1972 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 which have the effect of bringing about a change in the tax liability or which provide tax incentive or disincentive in any sphere should apply 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 1972-73 or other accounting period which would be relevant for the assessment year 1973-74. The rates for deduction of tax at source from "salaries" in the case of individuals during the financial year 1972-73 and for the 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 Act, 1972. These rates apply also for the purposes of deduction of tax at source during the financial year 1972-73 from retirement annuities payable under section 80E(9) to partners of registered firms engaged in specified professions and for charging or calculating income-tax payable in certain 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] ; section 176(2) [assessment of profits of discontinued business]. The rates of income-tax and surcharge applicable in the case of individuals, Hindu undivided families and all other non-corporate taxpayers are the same as specified in Part I of the First Schedule for the assessment of incomes liable to tax for assessment year 1972-73. In the case of the Life Insurance Corporation of India and other companies, however, while the basic rates of income-tax are the same as the rates of income-tax specified in Part I of the First Schedule for incomes assessable for the assessment year 1972-73, the income-tax calculated at these rates will be increased by a surcharge on income-tax of 5 per cent as against 2.5 per cent applicable in respect of incomes assessable for the assessment year 1972-73. The rates for deduction of tax at source from "salaries", computation of "advance tax" and charging income-tax in special cases during the financial year 1972-73 have been summarised in Annexure II to this circular. AMENDMENTS TO INCOME-TAX ACT Measures for raising additional revenue Finance Act, 1972 Taxation of casual and non-recurring incomes 6. Under the provisions of the Income-tax Act, receipts, which are of a casual and non-recurring nature, are exempt from tax except where the receipts constitute capital gains or arise from a business or the exercise of profession, vocation or occupation or are by way of additions to the remuneration of an employee. In view of this exemption, no tax is currently chargeable in respect of winnings from lotteries, crossword puzzles, races, card games or from gambling or betting. The exemption from tax of such receipts is not in keeping with the principle of taxing equally persons with equal capacity to pay. The exemption also provides scope for tax evasion and conversion of "black" money into "white" by ascribing income, which would normally be taxable, to winnings from lotteries, races, card games, etc. The Finance Act, 1972 has made the following amendments to the Income-tax Act with a view to withdrawing the exemption currently available in respect of casual and non-recurring receipts : 1. The definition of "income" in section 2( 24 ) has been amended to specifically provide that winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever will be regarded as income for purposes of the Income-tax Act. [Section 3( b )( ii ) of the Finance Act] 2. Winnings from state or other lotteries in the case of non-corporate tax-payers will be taxed on a concessional basis in the same manner as long-term capital gains relating to assets other than lands and buildings. Under the new section 80TT, the whole of the income by way of lottery winnings will be allowed as deduction in computing the taxable income where the gross total income of the assessee does not exceed Rs. 10,000 or where winnings do not exceed Rs. 5,000. In other cases, a deduction equal to Rs. 5,000 plus 50 per cent of the balance will be allowed in computing the taxable income. A consequential amendment has also been made to section 80A. [Sections 14 and 22 of the Finance Act] 3. Clause (3) of section 10 has been substituted by a new clause. The effect of this change will be that casual and non-recurring receipts, other than winnings from lotteries, which are in excess of Rs. 1,000 in a year, will be included in the total income in the case of all categories of assessees and charged to tax at normal rates. The exemption of the first Rs, 1,000 of income will, however, not be available in respect of capital gains, receipts arising from business or exercise of profession, vocation, or occupation or receipts by way of addition to remuneration of an employee and such income will continue to be chargeable to tax on the existing basis. It should, however, be noted that receipts which are of a casual and non-recurring nature, will be liable to income-tax only if they can properly be characterised as "income" either in its general connotation or within the extended meaning given to the term by the Income-tax Act. Hence, gifts of a purely personal nature will not be chargeable to income-tax, except when they can be regarded as an addition to the salary or when they arise from the exercise of a profession or vocation. Similarly, capital assets inherited or acquired on partition will not also be liable to income-tax. [Section 4( a ) of the Finance Act] 4. A new clause ( ib ) has been added to sub-section (2) of section 56 to provide that winnings from lotteries, crossword puzzles, races, card games, other games or from gambling or betting will be chargeable to tax under the head "Income from other sources". Accordingly, expenditure, not being in the nature of capital expenditure, incurred wholly and exclusively for the purpose of making or earning such income will be allowed as deduction in computing the income from the aforesaid sources. [Section 10 of the Finance Act] 5. A new section 74A has been inserted in the Income-tax Act. Under this section, losses from lotteries, crossword puzzles, races, card games, etc., will be allowed to be set off only against income from the same source. Losses relating to these sources incurred in one year will also not be allowed to be carried forward to be set off against income of a subsequent year. For this purpose, each of the following sources will be regarded as a separate and distinct source : a. lotteries ; b. crossword puzzles ; c. races, including horse races ; d. card games ; e. other games of any sort ; f. betting or gambling of any form or nature not falling under any of the foregoing items. Thus, while losses from bridge may be set off against winnings from any other card game, these will not be set off against income from any other source. Consequential amendments have been made to sections 75 and 77. [Sections 11, 12 and 13 of the Finance Act] 6. By virtue of the amendment made to section 207, income by way of winnings from lotteries, crossword puzzles, races including horse races, card games, other games or from gambling or betting will not be included in the "income subject to advance tax" and, accordingly, no "advance tax" will be payable in respect of income from the aforesaid sources. Consequential changes have also been made to sections 208, 209, 211 and 212. [Sections 33 to 37 of the Finance Act] Finance Act, 1972 7. The provisions set forth in the preceding paragraph have come into force with effect from 1-4-1972. It has, however, specifically been provided in section 59 of the Finance Act, 1972 that income by way of casual and non-recurring receipts will continue to be exempt from income-tax for the assessment year 1972-73 to the same extent as hitherto. [Section 59 of the Finance Act] Finance Act, 1972 Withdrawal of relief in respect of specified priority industries 8. Under section 80-I, income derived by certain domestic companies from specified priority industries is charged to tax on a concessional basis. The priority industries specified in this behalf comprise : 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 such 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 profits from these industries is brought about by allowing a deduction of a certain percentage of such profits in computing the taxable income of the domestic company. The amendments made by the Finance (No. 2) Act, 1971 reduced this percentage from 8 per cent to 5 per cent and also curtailed the scope of the application of this section by omitting some items from the list of articles and things in the Sixth Schedule. The Finance Act, 1972 has altogether omitted section 80-I, thus wholly withdrawing the concession available to priority industries under that section from 1-4-1973, i.e., for and from the assessment year 1973-74. Consequential amendments have been made in section 80B and section 80J and the Sixth Schedule has also been omitted from 1-4-1973. [Sections 15, 18, 19 and 43 of the Finance Act] Finance Act, 1972 Withdrawal of deduction in respect of dividends from co-operative societies 9. Under section 80Q, dividends received by an assessee from a co-operative society are completely exempt from income-tax without any ceiling limit. This exemption facilitates tax avoidance by persons who would otherwise earn taxable income by arranging to carry on their activities through the medium of one or more co-operative societies. This special concession in respect of dividends from co-operative societies has, therefore, been withdrawn by omitting section 80Q. Such dividends have, however, been included in the categories of financial assets income wherefrom qualifies for deduction up to Rs. 3,000 in the aggregate in the hands of an individual or a Hindu undivided family by adding a new clause ( ix ) to sub-section (1) of section 80L. The above changes will take effect from 1-4-1973 and will, accordingly, apply to the assessment year 1973-74 and onwards. [Sections 20 and 21 of the Finance Act] Amendments to Wealth-tax Act Finance Act, 1972 Exemption of co-operative societies from wealth-tax 32. Under section 3, wealth-tax is chargeable in respect of the net wealth of ( i ) individuals, ( ii ) Hindu undivided families, and ( iii ) companies. Wealth-tax is, however, not being charged in respect of the net wealth of companies from the assessment year 1960-61 onwards in view of a special provision made in this behalf in the Finance Act, 1960. Recently, some doubt has been raised that a co-operative society could, in law, be regarded as an "individual" for purposes of the Wealth-tax Act and charged to tax accordingly. Such an interpretation would not be in keeping with the intention underlying these provisions . Levy of wealth-tax on co-operative societies will also have an adverse effect on the co-operative movement in the country. Section 45 has, therefore, been amended to provide for exemption of co-operative societies from wealth-tax retrospectively from 1-4-1957 ( i.e. , from the date of commencement of the Wealth-tax Act). A definition of the term "co-operative society" has also been incorporated in the Wealth-tax Act by inserting a new clause ( ha ) in section 2 and renumbering the existing clause ( ha ) as clause ( hb ). [Sections 44 and 50( b ) of the Finance Act] Finance Act, 1972 Exemption from wealth-tax of recognised provident funds, approved superannuation funds and gratuity funds 33. The Wealth-tax Act does not contain any specific provision for the exemption of recognised provident funds, approved superannuation funds and approved gratuity funds constituted for the benefit of employees. Such funds have, however, not been charged to tax as it was not the intention to bring them within the ambit of the Wealth-tax Act. Because of certain amendments made to the Wealth-tax Act in 1970, relating to taxation of discretionary trusts, a doubt was raised regarding the tax treatment of such funds. The levy of wealth-tax on such funds will substantially erode their corpus and hamper the setting up of such funds for the benefit of employees in the public and private sectors. Section 5 has, therefore, been amended to provide for exemption of provident funds to which the Provident Funds Act, 1925 applies, as also all provident funds, superannuation funds and gratuity funds which are recognised or approved for the purposes of the Income-tax Act. The exemption has been given retrospective effect from 1-4-1957, i.e. , the date of commencement of the Wealth-tax Act. [Section 45( a )( i ) of the Finance Act] Finance Act, 1972 Exemption from wealth-tax of assets forming part of an industrial undertaking 34. The Wealth-tax Act provides for exemption from tax in respect of investments made in specified financial assets up to an aggregate value of Rs. 1,50,000. The specified investments qualifying for this exemption are: 1. Government securities including small savings securities of the Central Government. 2. Fixed deposits with the Central Government as also in Post Offices on Government account and Recurring and Time Deposits in Post Offices. 3. Shares in Indian companies. 4. Notified debentures. 5. Units in the Unit Trust of India. 6. Deposits with banking companies, including co-operative banks, land mortgage banks and land development banks. 7. Deposits with approved financial institutions engaged in providing long-term finance for industrial development in India. 8. Shares in co-operative society. 9. Deposits made by a member of a co-operative society with the society (other than 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, which are separately exempted from wealth-tax without any limit to the extent such deposits have been made under the house building scheme of the society). The Finance Act, 1972 has added two new clauses ( xxxi ) and ( xxxii ) to sub-section (1) of section 5 enlarging this list so as to include the value of assets forming part of an industrial undertaking belonging to the assessee, as also the value of his interest in the assets forming part of an industrial undertaking belonging to a firm or an association of persons of which the assessee is a partner or a member. Accordingly, in computing the exemption from wealth-tax up to Rs. 1,50,000, the value of these assets will also be taken into account. The value of any land or building or any rights in any land or building or the value of assets of the industrial undertaking which are otherwise exempt from wealth-tax under section 5(1) will, however, not be taken into account for the purposes of this exemption. "Industrial undertaking" for the purposes of this provision has been defined to mean an undertaking engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining. This provision will take effect from 1-4-1973 and will, therefore, apply for the assessment year 1973-74 and subsequent assessment years. Consequential amendments have also been made to sub-section (1A) of section 5. [Section 45( a )( ii ) and ( b ) of the Finance Act] Finance Act, 1972 Concession in regard to holding period of exempt assets 35. Under sub-section (3) of section 5, certain assets qualify for exemption from wealth-tax only if these are held by the assessee for a period of at least six months ending with the relevant valuation date. Some of these assets are ( i ) deposits in notified schemes framed by the Central Government ; ( ii ) Government securities ; ( iii ) shares in Indian companies; ( iv ) notified debentures ; ( v ) units in the Unit Trust of India ; ( vi ) deposits with banking companies, co-operative banks, etc. In the case of shares in a company, the exemption from tax is available if the shares have been held from the date on which these were first issued even if the holding period is less than six months. This restriction has been placed in order to prevent misuse of the tax exemption by changing investments from non-exempt assets to exempt assets for a short period merely to obtain the benefit of the tax concession. This provision, sometimes, results in hardship even in bona fide cases of conversion of one category of exempt assets to another category of exempt assets. For example, an employee receiving the balance to his credit in a recognised provident fund (which is exempt from wealth-tax) and depositing the amount in a bank may forfeit exemption from tax in respect of the amount merely because he has not been able to hold the bank deposit for a period of six months. In order to obviate hardship in such cases, section 5(3) has been amended to provide that in computing the period of six months in relation to any asset, in a case where such asset was acquired by the assessee by conversion of, or in exchange for, or with the proceeds of, or with the money constituting, any other asset exempt from wealth-tax under sub-section (1) or sub-section (2) of section 5, so much of the period for which the assessee held such other asset as falls within the period of twelve months ending with the relevant valuation date, will also be taken into account. This relaxation will be available only if the assessee acquires the relevant asset within thirty days after he ceases to hold the first asset. The concession under this provision will, however, not apply in the case of shares or securities held as stock-in-trade by the assessee for the purposes of his business. These amendments will take effect from 1-4-1973 and will, therefore, apply for the assessment year 1973-74 and subsequent years. [Section 45( c ) of the Finance Act] Finance Act, 1972 Forfeiture of exemption from wealth-tax in the case of public charitable or religious trusts and institutions 36. Income derived from property held under trusts or other legal obligation for charitable or religious purposes is exempt from income-tax to the extent such income is applied to such purposes or accumulated for being so applied in accordance with the provisions of the Income-tax Act. Section 13 provides for the forfeiture of the exemption from tax in the case of a trust or institution created or established after 31-3-1962, if under the terms of the trust or the rules governing the institution, any part of the income enures for the direct or indirect benefit of the author of the trust, founder of the institution, a substantial contributor to the trust and their relatives, etc. In the case of a trust or institution, whenever created or established, the exemption is forfeited also where the trust income or property is used or applied during the relevant year for the direct or indirect benefit of such person. This disability does not apply in the case of a trust or institution created or established before 1-4-1962, if the use of the trust income or property is in compliance with a mandatory provision in the terms of trust or rules governing the institution. Finance Act, 1972 37. Under section 5(1)( i ), property held under trust or other legal obligation for any public purpose of a charitable or religious nature in India is exempt from wealth-tax. The Wealth-tax Act, however, does not contain any provision for the forfeiture of the exemption from wealth-tax, on the lines of the aforesaid provisions in section 13 of the Income-tax Act. To provide a further deterrent to the misuse of the income or property of the trust or institution by such persons, the provisions in the Wealth-tax Act, have been brought in line with the provisions in the Income-tax Act. Accordingly, a new section 21A has been introduced to secure that where any part of the income of the trust or institution enures for the direct or indirect benefit of the author of the trust, substantial contributor, etc., or where any income or property of the trust or institution is used or applied, directly or indirectly, for the benefit of any such person, the trust or institution will be liable to pay wealth-tax on the value of its entire property at the rate of 1.5 per cent or the rate applicable in the case of an individual, whichever is beneficial to the Revenue. For the purposes of this provision, it has been specifically provided that any part of the property or income of a trust shall be deemed to have been used or applied for the benefit of any of the specified categories of persons if it can be deemed to have been so used or applied within the meaning of clause ( c ) of sub-section (1) of section 13 of the Income-tax Act at any time during the period of twelve months ending with the relevant valuation date. Where the trust funds are invested in any concern in which any of the specified persons has a substantial interest, and the quantum of the investment does not exceed 5 per cent of the capital of the concern, the trust or institution forfeits exemption from income-tax only in respect of the income arising from such investment and not its entire income. Similarly, exemption from wealth-tax, in such cases, will be denied only in relation to such investment and other assets will continue to qualify for exemption. The new section 21A takes effect from 1-4-1973 and will, therefore, apply in relation to assessments for the assessment year 1973-74 and subsequent assessment years. [Section 46 of the Finance Act] Finance Act, 1972 Increase in the rate of interest chargeable from or payable to assessees 38. Simple interest at 9 per cent per annum is chargeable from assessees on the arrears of tax due from them for the period of the default in payment. Likewise, assessees are entitled to receive simple interest from the Central Government at 9 per cent per annum on the amount of refunds due to them for the period of delay in the issue of refund beyond six months from the date of the order giving rise to the refund. In line with the increase in the rate of interest chargeable from or payable to assessees under the Income-tax Act, sections 31 and 34A have been amended to raise the rate of interest provided therein from 9 per cent per annum to 12 per cent per annum with effect from 1-4-1972. Section 60 of the Finance Act, 1972 specifically clarifies that the increase in the rate of interest will apply in respect of any period falling after 31-3-1972, also in those cases where the interest became chargeable or payable from an earlier date. [Sections 47 and 60 of the Finance Act] Finance Act, 1972 Extension of scope of tax treaties between the Central Government and the Government of a foreign country 39. Under section 44A, the Central Government is empowered to enter into an agreement with the Government of any foreign country for the avoidance or relief of double taxation with respect to wealth-tax payable under the Act and under the corresponding law in force in the foreign country. On the lines of the amendments made to the corresponding provisions in the Income-tax Act, the scope of these provisions has also been enlarged to empower the Central Government to enter into agreement with the Government of a foreign country also for enabling exchange of information for the prevention of evasion or avoidance of wealth-tax (including investigation of cases of such evasion or avoidance) and for recovery of such tax in the treaty countries. Finance Act, 1972 40. The new section 228B relating to the recovery of tax in pursuance of agreements with foreign countries inserted in the Income-tax Act under section 39 of the Finance Act, 1972 has also been made applicable to Wealth-tax Act by amending section 32. [Sections 48 and 49 of the Finance Act] Finance Act, 1972 Power to make rules for admission of additional evidence 41. The Finance Act, 1972 has amended the Income-tax Act with a view to regulating the admission of evidence which is not produced by the assessees before the Income-tax Officer but is produced for the first time in the course of proceedings before the Appellate Assistant Commissioner. Corresponding amendments have also been made to the Wealth-tax Act by inserting a new clause ( cc ) in sub-section (2) of section 46 and the Central Board of Direct Taxes has been empowered to prescribe in the Wealth-tax Rules, the circumstances in which, the conditions subject to which and the manner in which the Appellate Assistant Commissioner of Wealth-tax may permit the appellant to produce evidence which he did not produce or which he was not allowed to produce before the Wealth-tax Officer. Under the Wealth-tax (Amendment) Rules, 1973, a new rule 5A has been inserted in the Wealth-tax Rules, 1957. This rule is broadly on the lines of rule 46A of the Income-tax Rules, 1962, the scope of which has been explained in paragraph 29 of this circular. [Section 51 of the Finance Act and rule 2 of the Wealth-tax (Amendment) Rules, 1973] Finance Act, 1972 Miscellaneous 42. Certain entities enumerated in section 45 have been exempted from wealth-tax. This section has been amended to clarify that while wealth-tax is not to be levied in respect of the net wealth of the entities enumerated in this section, the application of the other provisions of the Act ( e.g. , calling for evidence from such entities) will not be barred. This amendment is effective from 1-4-1972. [Section 50( a ) of the Finance Act] Amendments to Gift-tax Act Finance Act, 1972 Increase in the rate of interest chargeable from or payable to assessees 43. Simple interest at 9 per cent per annum is chargeable from assessees on the arrears of tax due from them for the period of default in payment. Likewise, assessees are entitled to receive simple interest from the Central Government at 9 per cent per annum on the amount of refunds due to them for the period of delay in the issue or refund beyond six months from the date of the order giving rise to the refund. In line with the increase in the rate of interest chargeable from or payable to assessees under the Income-tax Act and the Wealth-tax Act, sections 32 and 33A have also been amended to raise the rate of interest provided therein from 9 per cent per annum to 12 per cent per annum with effect from 1-4-1972. Section 60 of the Finance Act, 1972 specifically clarified that the increase in the rate of interest will apply in respect of any period falling after 31-3-1972, also in those cases where the interest became chargeable or payable from an earlier date. [Sections 52 and 60 of the Finance Act] Finance Act, 1972 Extension of scope of tax treaties between the Central Government and the Government of a foreign country 44. On the lines of the amendments made to the corresponding provisions in the Income-tax Act and the Wealth-tax Act, the scope of section 44 has been enlarged to empower the Central Government to enter into agreement with the Government of a foreign country also for enabling exchange of information for the prevention of evasion or avoidance of gift-tax (including investigation of cases of such evasion or avoidance) and for recovery of such tax in the treaty countries. The new section 228A relating to recovery of tax in pursuance of agreements with foreign countries inserted in the Income-tax Act has also been applied to the Gift-tax Act by amending section 44 of the Gift-tax Act. [Sections 53 and 54 of the Finance Act] Finance Act, 1972 Exemption of gifts made by charitable or religious institutions or funds 45. Section 45( e ) excludes from the purview of that Act any gifts made, inter alia, by an institution or fund, the income whereof is exempt from income-tax under section 11 of the Income-tax Act. Under an amendment made to the Gift-tax Act through the Finance (No. 2) Act, 1971, 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 provisions of section 11 of the Income-tax Act relating to application of income during the accounting year itself ; or ( 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. Finance Act, 1972 46. Section 12 of the Income-tax Act has been substituted by two new sections 12 and 12A. As already explained, the effect of the substitution of section 12 is that voluntary contributions received by charitable or religious trusts or institutions will qualify for exemption from income-tax only if the conditions specified in section 11 regarding application of income or accumulation thereof are satisfied also in relation to such income by way of voluntary contributions. Further, the trust or institution will forfeit exemption from tax in respect of its entire income if any part of its income enures or any part of its income or property is used or applied directly or indirectly for the benefit of the author of the trust, founder of the institution, a person who has made a substantial contribution to the trust or institution, the relative of such author, founder, etc. The new section 12A provides that exemption from income-tax in respect of income derived from property or by way of voluntary contributions by charitable or religious trusts or institutions will be available only if ( a ) the trust or institution applies for its registration to the Commissioner of Income-tax within the specified period, and ( b ) where the total income of the trust or institution (without giving effect to the provisions of sections 11 and 12) exceeds Rs. 25,000 in any previous year, the accounts of the trust or institution for that year have been audited by a chartered accountant or any other accountant entitled to be appointed as an auditor of companies. Finance Act, 1972 47. In the context of these changes in the Income-tax Act, section 45 has been amended to provide that a charitable institution or fund will not forfeit 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 by way of voluntary contributions becomes chargeable to income-tax due to non-compliance with the provisions of the substituted section 12 of the Income-tax Act ; or ( b ) the institution or fund is denied exemption from income-tax by reason of the non-fulfilment of the conditions in new section 12A relating to the filing of an application for registration with the Commissioner of Income-tax or the audit of the accounts of the institution or fund by a chartered accountant, etc., or the institution or fund forfeits exemption in respect of its income by way of voluntary contributions on the ground that the funds of the institution or fund have been invested in a prohibited concern provided, however, the investment in such concern does not exceed 5 per cent of its capital. Finance Act, 1972 48. The changes set forth in the preceding paragraphs will be effective from 1-4-1973 and will, accordingly, apply in relation to the assessment year 1973-74 and subsequent years. [Section 55 of the Finance Act] Finance Act, 1972 Powers to make rules for admission of additional evidence 49. At present, an Appellate Assistant Commissioner of Gift-tax has a wide and unrestricted discretion in regard to admission of evidence which is not produced by the assessee before the Gift-tax Officer but is produced for the first time in the course of the appellate proceedings. With a view to regulating the admission of such additional evidence, section 46 has been amended in order to empower the Central Board of Direct Taxes to prescribe in the Gift-tax Rules, the circumstances in which, the conditions subject to which and the manner in which the Appellate Assistant Commissioner of Gift-tax may permit the appellant to produce the evidence which he did not produce or which he was not allowed to produce before the Gift-tax Officer. Under the Gift-tax (Amendment) Rules, 1973, a new rule 5A has been inserted. This rule is broadly on the lines of rule 46A of the Income-tax Rules, the scope of which has been explained in paragraph 29 of this circular. [Section 56 of the Finance Act and rule 2 of the Gift-tax (Amendment) Rules, 1973] Amendments to Companies (Profits) Surtax Act Finance Act, 1972 Extension of scope of tax treaties between the Central Government and the Government of a foreign country 50. Section 24A of the Companies (Profits) Surtax Act, which empowers the Central Government to enter into an agreement with the Government of any foreign country for the avoidance or relief of double taxation with respect to surtax payable under that Act and a similar tax under any corresponding law in force in the foreign country has been amended on the lines of the amendments made to the corresponding provisions in the Income-tax Act, the Wealth-tax Act and the Gift-tax Act. The scope of these provisions has been enlarged to empower the Central Government to enter into agreement with the Government of a foreign country also for enabling exchange of information for the prevention of evasion or avoidance of surtax (including investigation of cases of such evasion or avoidance) and for recovery of such tax in the treaty countries. The Central Government has also been empowered to make provisions for implementing the agreement by the issue of a notification in the Official Gazette. [Section 57 of the Finance Act] Finance Act, 1972 Power to make rules for admission of additional evidence 51. In line with the amendments made to the corresponding provisions in the Income-tax Act, the Wealth-tax Act and the Gift-tax Act, section 25 has been amended with a view to empowering the Central Board of Direct Taxes to prescribe in the Companies (Profits) Surtax Rules, the circumstances in which, the conditions subject to which and the manner in which the Appellate Assistant Commissioner may permit the appellant to produce evidence which was not produced or which was not allowed to be produced before the Income-tax Officer. Under the Companies (Profits) Surtax (Amendment) Rules, 1973, a new rule 8A has been inserted in the Companies (Profits) Surtax Rules. This rule is broadly on the lines of rule 46A of the Income-tax Rules, the scope of which has been explained in paragraph 29 of this circular. [Section 58 of the Finance Act and rule 2 of the Companies (Profits) Surtax (Amendment) Rules, 1973]