Amendments at a glance, Rate structure, Amendments to Income-tax Act, Amendments to Wealth-tax Act , Amendments to Companies (Profits) Surtax Act - Income Tax - 138/1974

CIRCULAR NO. 138 DATED 17-6-1974 FINANCE ACT, 1974 Amendments at a glance Rate structure Amendments to Income-tax Act Amendments to Wealth-tax Act Amendments to Companies (Profits) Surtax Act 16 FINANCE ACT, 1974 Amendments at a glance SECTION/SCHEDULE PARTICULARS FINANCE ACT 2 and 1st Sch. Rate structure 3-12 16 Continuance of development rebate for a limited period in certain cases 38 INCOME-TAX ACT 10(10) Tax treatment of gratuities 20-21 10(10 A) Exemption of payments in commutation of pension received by Government employees 22-23 10(23B) Exemption from income-tax of profits of institutions established for development of khadi and village industries 27 16(i) to (v) Replacement of the existing provisions for separate deductions in respect of expenses on travelling, taxes on professions, books, etc., by a standard deduction 13-15 36(1)(viii) Higher deduction of profits transferred to special reserve in the case of financial corporations or joint financial corporations established under the State Financial Corporations Act, 1951 26 74A(1)/(3), Carry forward and set off of losses from horse 75(2), 77(2)(b), races 34-37 80, 139(3), 141A(2)(iv), 143(1)(b)(iv), 155(4) and 157 80MM (1), (2) Discontinuance of the exemption in respect of royalties, commission, fees, etc., received by resident non-corporate taxpayers for provision of technical know-how or technical services to Indian concerns 28 80N and its Modification of the provision relating to exemption of dividends received by Expln., 155 (11) Indian companies and resident non-corporate taxpayers on shares allotted to them in a foreign company for the provision of technical "know-how" or technical services to the foreign company 29 80-O (1)/(2), Modifications in the provision relating to concessional taxation of royalties, 155 (12) commission, fees, etc., received by Indian companies or resident non-corporate taxpayers for provision of technical "know-how" or technical services to foreign enterprises 30 139 (1A) Filing of returns of income by certain salaried tax payers to be optional 16-19 209 (1), (2), (3) Ancillary provisions for computing "advance tax" in certain cases 31-33 Rules 5 (3)(c), Relaxation of the provisions relating to recognized provi- 8(iii) of Part A dent funds to enable transfer of amounts from the of 4th Sch. account of an employee in one recognized provident fund to another 24-25 WEALTH-TAX ACT 2 (e)(2)(ii) Right to receive annuity purchased by an assessee to be regarded as an asset 40-42 5 (1)(iva), (1A) Exemption of agricultural land 43-44(2) 5 (1)(ivb), Prov. Exemption of one building or group of buildings owned by a cultivator if required by him as a store house or for keeping livestock 43-44(1) 5 (1)(vi), Prov. Exemption of right or interest in a policy of insurance 41-42 Sch. Increase in the rates of wealth-tax in the case of individual and Hindu undivided families 39 SURTAX ACT 3rd Sch. Increase in the rate of surtax and ceiling of 70 per cent prescribed in the case of closely-held company 45-46 Rate Structure Finance Act, 1974 Rates of income-tax for the assessment year 1974-75 3. The rates of income-tax for the assessment year 1974-75 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, 1974. These rates are the same as those specified in Part III of the First Schedule to the Finance Act, 1973 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 income-tax payable in cases where accelerated assessments were required to be made during the financial year 1973-74. Finance Act, 1974 Rates for deduction of income-tax at source during the financial year 1974-75 from incomes other than "salaries" and retirement annuities 4. The rates for deduction of income-tax at source during the financial year 1974-75 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, 1974. The main features of the rate schedule for deduction of tax at source are the following : 1 . In the case of resident non-corporate taxpayers, income-tax will be deducted from their winnings from lotteries and crossword puzzles at the rate of 33 per cent (income-tax 30 per cent + surcharge 3 per cent) as against 34.5 per cent (income-tax 30 per cent + surcharge 4.5 per cent) during the financial year 1973-74. The rate at which surcharge will be deductible has been reduced from 4.5 per cent to 3 per cent in view of the position that rate of surcharge on income-tax for the purpose of computation of "advance tax", etc., payable during the financial year 1974-75, has been specified at a uniform rate of 10 per cent in the case of all categories of non-corporate taxpayers ( vide paragraph 7 of this circular). The rate for deduction of income-tax at source from interest (other than interest on securities), as also insurance commission has been retained at the existing level of 10 per cent and no surcharge will be deductible at source as at present. The rate at which surcharge will be deductible from any other income (excluding interest payable on tax-free security) has been reduced from 3 per cent to 2 per cent but with a view to maintaining the rate of income-tax deductible at source from dividends in the case of domestic companies and resident non-corporate taxpayers at the same level, the rate at which basic income-tax will be deductible from such income has been raised from 20 per cent to 21 per cent. In other words, tax will be deductible from incomes received by resident non-corporate taxpayers [not being interest (other than interest on securities), winnings from lotteries and crossword puzzles and insurance commission for which separate rates have been prescribed at the existing rate of 23 per cent consisting of 21 per cent as income-tax and 2 per cent as surcharge, as against 20 per cent as income-tax and 3 per cent as surcharge under the Finance Act, 1973. 2. In the case of non-resident non-corporate taxpayers, the rate of surcharge deductible at source has been reduced from 15 per cent to 10 per cent of the basic income-tax. There is no change in the rate of basic income-tax deductible at source in the case of this class of taxpayers. 3 . In the case of companies, both domestic and foreign, the rates for deduction of income-tax and surcharge are the same as were in force during the financial year 1973-74. Finance Act, 1974 5. The rates for deduction of income-tax at source during the financial year 1974-75 from incomes other than "salaries" and retirement annuities have been explained in Board's Circular Nos. 129, 131, 133, 134 and 135, dated 12-3-1974, 18-3-1974, 29-3-1974, 16-5-1974 and 21-5-1974, respectively. Finance Act, 1974 Rates for deduction of income-tax at source from "salaries", computation of "advance tax" and charging of income-tax in special cases during the financial year 1974-75 6. The rates for deduction of income-tax at source from "salaries" in the case of individuals during the financial year 1974-75 and also for computation of "advance tax" payable during that year in the case of all categories of taxpayers have been specified in Part III of the First Schedule to the Finance Act, 1974. These rates are also applicable for deduction of income-tax at source during 1974-75 from retirement annuities payable to partners of registered firms engaged in certain professions (chartered accountants, solicitors, lawyers and architects) and for charging income-tax during 1974-75 on current incomes in special cases where accelerated assessments have to be made. These special cases are : calculation of income-tax on undisclosed income represented by seized assets [section 132(5)]; levy of tax on provisional basis on the income of non-residents from shipping of cargo or passengers from Indian ports [section 172(4)]; assessment of persons leaving India [section 174(2)]; assessment of persons likely to transfer property to avoid tax [section 175]; and assessment of profits of a discontinued business [section 176(2)]. Finance Act, 1974 7. The rates specified in Part III of the First Schedule to the Finance Act, 1974 in the case of non-corporate taxpayers are materially different from those specified in Part I of the First Schedule for the assessment of income liable to tax for the assessment year 1974-75. The main differences are as follows : 1 . In the case of individuals, Hindu undivided families, unregistered firms, associations of persons, bodies of individuals and artificial juridical persons, the rate schedules have been completely recast. In the case of these categories of taxpayers (excluding Hindu undivided families having one or more members with independent total income exceeding Rs. 6,000), the first slab chargeable to tax at nil rate will extend up to Rs. 6,000 as against Rs. 5,000 last year ; the next higher slab will now be Rs. 6001-Rs. 10,000 as against Rs. 5,001-Rs. 10,000 and the rate of income-tax on this slab will be 12 per cent as against 10 per cent ; the next higher slab will continue to be Rs. 10,001-Rs.15,000 but the rate of income-tax applicable thereto will be reduced from 17 per cent to 15 per cent ; the next higher slab of Rs. 15,001- Rs. 20,000 will attract tax at the rate of 20 per cent as against 23 per cent ; the next two higher slabs of Rs. 20,001- Rs. 25,000 and Rs. 25,001-Rs. 30,000 will attract tax at the existing rates of 30 per cent and 40 per cent respectively; the slabs of income above Rs. 30,000 have been recast and the tax rate on the slab of Rs. 30,001- Rs. 50,000 will be 50 per cent ; on the slab of Rs. 50,001-Rs. 70,000, 60 per cent and on the slab of income over Rs. 70,000, 70 per cent. The income-tax so calculated will be increased in all cases by surcharge of 10 per cent of the basic income-tax. 2. In the case of Hindu undivided families, having one or more members with independent total income exceeding Rs. 6,000, the rates of income-tax specified for various slabs are the same as those prescribed for the next higher slab in the case of individuals, other Hindu undivided families, unregistered firms, etc. 3 . In the case of co-operative societies, the rates of basic income-tax have been retained at the existing levels but the rate of surcharge has been reduced from 15 per cent to 10 per cent. 4. In the case of registered firms, the ordinary surcharge has been merged with the basic income-tax and only one surcharge for the purposes of the Union at the uniform rate of 10 per cent has been prescribed. In view of the merger of ordinary surcharge with the basic income-tax, two separate rate schedules have been prescribed in the case of professional firms and other firms. These rate schedules have been set forth in Sub-Paragraph I and Sub-Paragraph II of Paragraph C of Part III of the First Schedule to the Finance Act, 1974. In view of the merger of ordinary surcharge with basic income-tax, the rates of basic income-tax applicable in the case of registered firms are different from the rates specified in Part I of the First Schedule to the Finance Act, 1974. 5. In the case of local authorities, the rate of income-tax remains at the existing level of 50 per cent but the rate of surcharge on income-tax has been reduced from15 per cent to 10 per cent. 6 . In the case of Life Insurance Corporation of India and companies, the rates of income-tax and surcharge thereon specified in Part III of the First Schedule to the Finance Act, 1974 are the same as those specified in Part I of that Schedule. Finance Act, 1974 Partially integrated taxation of non-agricultural income with income derived from agriculture 8. The Finance Act, 1973 provided that in the case of individuals, Hindu undivided families, unregistered firms or other associations of persons or bodies of individuals and artificial juridical persons, the net agricultural income would be taken into account for determining the rate of income-tax to be applied to the total income for the purposes of computing "advance tax" payable during the financial year 1973-74 and for charging income-tax on current incomes in special cases where accelerated assessments were required to be made during that financial year, that is to say, for calculation of income-tax under section 132(5) on undisclosed income represented by seized assets, assessment under section174(2) in the case of persons leaving India, assessment under section 175 in the case of persons likely to transfer properties to avoid tax and assessment of profits of a discontinued business under section 176(2). The Finance Act, 1974 seeks to continue the aforesaid scheme of partially integrated taxation of non-agricultural income with income derived from agriculture. For the purposes of making an assessment for the assessment year 1974-75, the net agricultural income will be taken into account in computing income-tax payable on the total income in the cases where the total income of the individual, Hindu undivided family, unregistered firm, association of persons, body of individuals or an artificial juridical person exceeds Rs. 5,000. The income-tax payable in such cases will be calculated as explained in Paragraphs 12 to 25 of the explanatory notes on the provisions relating to direct taxes in the Finance Act, 1973 [Board's Circular No. 126 of 28-11-1973]. Finance Act, 1974 9 . The Finance Act, 1974 further provides that in the case of individuals, Hindu undivided families, unregistered firms or other associations of persons or bodies of individuals or artificial juridical persons, the net agricultural income will be taken into account for determining the rate of income-tax to be applied to the total income for the purposes of computing "advance tax" payable during the financial year 1974-75 and charging income-tax on current incomes in special cases referred to in the preceding paragraph where accelerated assessments have to be made during the financial year 1974-75. In view of the position that the minimum exemption limit in respect of personal incomes has been raised to Rs. 6,000, the net agricultural income will be taken into account in determining the rate of income-tax to be applied to total income only in cases where the total income exceeds Rs. 6,000. The rules for computing net agricultural income have been set forth in Part IV of the First Schedule to the Finance Act, 1974 and differ from the rules prescribed in the Finance Act, 1973, inasmuch as losses in agricultural income incurred in the previous year relevant to the assessment year 1974-75 will be allowed to be set off against agricultural income of the previous year relevant to the assessment year 1975-76. The result will, therefore, be that in computing the net agricultural income for purposes of determining "advance tax" payable during the financial year 1974-75 and for charging income-tax in special cases, losses incurred in agriculture in the previous year relevant to the assessment year 1974-75 will be set off against the agricultural income of the previous year. In the case of an unregistered firm having agricultural income, share of agricultural loss of a partner who has retired or died, will, however, not be set off against income of the firm. For this purpose, the share of a retired or deceased partner in the agricultural loss of the firm will be calculated in the manner laid down in sub-sections (1), (2) and (3) of section 67. Further, a person succeeding another person will not be allowed to set off the loss of the predecessor against his own agricultural income unless the successor inherited the source of the agricultural income of the deceased. The set off of losses in agriculture will, however, be allowed only if such losses have already been determined by the Income-tax Officer. Finance Act, 1974 10. It may be noted that in view of the position that a uniform rate of surcharge of 10 per cent has been specified in Part III of the First Schedule to the Finance Act, 1974 in the case of all non-corporate taxpayers, the marginal provisions contained in the proviso to section 2(2) of the Finance Act, 1974 have not been included in section 2(7) of the Act. Accordingly, the amount of "advance tax" payable in the financial year 1974-75 or income-tax payable in special cases will be determined in accordance with the instructions contained in Paragraphs 12 to 25 of Board's Circular No. 126, dated 28-11-1973, subject to the set off of losses incurred during the previous year relevant to the assessment year 1974-75 as explained in the preceding paragraph and without applying the marginal provisions explained in Paragraph 13 of the Circular. Finance Act, 1974 11. The forms of returns of income in the case of non-corporate taxpayers have been amended so as to cast an obligation on the assessee to furnish the particulars of his agricultural income and an incorrect statement made with reference to agricultural income in the return of income would tantamount to concealment of income or any particulars thereof and accordingly will attract penalty under section 271(1)( c ). Finance Act, 1974 12. Ancillary provisions have also been made by an amendment to section 209 in order to enable the Income-tax Officer to issue notices for payment of "advance tax" after taking into account the net agricultural income assessed for the assessment year which forms the basis of payment of "advance tax". These provisions have been explained in Paragraphs 32 and 33 of this Circular. [Section 2 and the First Schedule to the Finance Act] Amendments to Income-tax Act Rationalisation and Simplification on the Assessment of Salaried Taxpayers Finance Act, 1974 Replacement of the existing provisions for separate deductions in respect of expenses on travelling, taxes on professions, books, etc., by a standard deduction 13. Under section 16, the taxable salary of a person is computed after making the following deductions : 1 . Deduction up to Rs. 500 in respect of expenditure incurred by a taxpayer on the purchase of books and other publications necessary for the purposes of his duties. 2. Deduction in respect of expenditure incurred by a taxpayer in respect of taxes on professions, trades, callings or employments levied under any State or Provincial Act. 3 . Where the taxpayer is not in receipt of a conveyance allowance, deduction in respect of expenditure on travelling for the purposes of employment is calculated as under : (a) where the taxpayer owns a motor car which is used for the purposes of his employment Rs. 200 p.m.; (b) where the taxpayer owns a motor cycle, scooter or other moped which is used for the purposes of his employment Rs. 75 p.m.; (c) in any other case Rs. 50 p.m. 4. Deduction in respect of other expenditure incurred by the taxpayers, which, by the conditions of his service, he is required to spend out of his remuneration wholly, exclusively and necessarily in the performance of his duties. 5. Deduction in respect of any allowance in the nature of entertainment allowance specifically granted to the taxpayer by his employer within the limits specified in this behalf. Finance Act, 1974 14. With a view to simplifying the assessment procedures in the case of salaried taxpayers, the Finance Act, 1974 has substituted the separate deductions in respect of items referred to in ( 1 ) to ( 4 ) in the preceding paragraph by a standard deduction in respect of expenditure incidental to employment to be allowed in the computation of the taxable salary. The standard deduction will be allowed in an amount equal to 20 per cent of the "salary" up to Rs. 10,000 and 10 per cent of the "salary" in excess thereof, subject to a maximum of Rs. 3,500. For this purpose, the term "salary" will include fees, commission, perquisites of profits in lieu of or in addition to salary but will not include any payments received by the employee which are specifically exempt from income-tax under clauses ( 10 ), ( 10A ), ( 11 ), ( 12 ) and ( 13A ) of section 10. Thus, retiring gratuities exempt under section 10( 10 ), commuted value of pensions exempt under section 10( 10A ), payments from provident fund exempt under sections 10( 11 ) and 10( 12 ) and house rent allowance exempt under section 10( 13A ) will not be taken into account for the purposes of computing the amount of standard deduction. It may be noted that the standard deduction on the above basis is to be allowed, irrespective of whether any expenditure incidental to employment is actually incurred by the employee or not. In other words, in order to claim the standard deduction, the taxpayer will not be required to prove that he had, in fact, incurred any expenditure for the purposes of his employment. Since a pensioner cannot be said to be deriving any salary from employment, no deduction will be admissible in computing the taxable pension. Where a person retires from service in the course of a previous year, the standard deduction will be calculated only with reference to the salary due to him for the period of his employment during the previous year. Further, in cases where the employee is in receipt of a conveyance allowance or where he is provided with any motor car, motor cycle, scooter or any other moped by his employer (for use otherwise than wholly or exclusively in the performance of his duties) or where he is allowed the use of any one or more motor cars (otherwise than wholly and exclusively in the performance of his duties) out of a pool of motor cars owned or hired by the employer, the deduction under the new provision will be limited to Rs. 1,000 only. Finance Act, 1974 15. The amendment will take effect from 1-4-1975 and will accordingly apply in relation to the assessment year 1975-76 and subsequent years. [Section 4 of the Finance Act] Finance Act, 1974 Filing of returns of income by certain salaried taxpayers to be optional 16. Under section 139(1), every person having a taxable income is required to voluntarily furnish the return of his income before the date specified in the law in this behalf. In the case of salaried taxpayers, the return is required to be furnished before 30th June of the relevant assessment year. In view of the position that appropriate tax due on salary income is required to be deducted at source by the employer, the taxpayers having only salary income do not ordinarily have to pay any further tax on filing the return of income. The existing requirement of law whereunder such salaried taxpayers are obliged to voluntarily file their returns of income before the due date does not result in any particular benefit to the revenue and, on the other hand, adds infructuous work-load on the staff and officers of the Income-tax Department and also imposes an unnecessary burden on the salaried taxpayers. With the replacement of the separate deductions in respect of books, travelling, taxes on professions and expenditure incurred in the performance of duties by a standard deduction, it will also not be necessary to verify the correctness of the claims in respect of these expenses. In view of this position, the Finance Act, 1974 has amended section 139 with a view to making optional the filing of voluntary returns of income by salaried taxpayers who do not have large income. It will, accordingly, not be necessary for a person to furnish a voluntary return of income or the income of any other person in respect of whose total income he is assessable if his total income (or the total income of such other person) consists only of income chargeable under the head "Salaries" or income chargeable under that head and also income in the nature of dividends or interest or income from units in the Unit Trust of India referred to in clauses ( i ) to( ix ) of sub-section (1) of section 80L. The requirements of furnishing a voluntary return in such cases will be waived only if certain conditions specified in this behalf are fulfilled. These conditions are : 1 . If the person concerned was employed by a company at any time during the relevant previous year, he should not have been, at any time during that year, a director of the company or a beneficial owner of shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying 20 per cent or more of the voting power. 2 . The salary of the person concerned (exclusive of the value of all benefits or amenities not provided for by way of monetary payment) should not exceed Rs. 18,000. 3. The income, if any, of the person concerned of the nature referred to in clauses ( i ) to ( ix ) of sub-section (1) of section 80L does not exceed Rs. 3,000 in the aggregate ( i.e., the amount exempt from income-tax under that section). 4 . The tax deductible at source under section 192 from the income chargeable under the head "Salaries" should have been fully deducted. Finance Act, 1974 17. The requirement of filing a voluntary return of income is not being waived in the case of directors of companies and persons having a substantial interest in companies and persons receiving salary exceeding Rs. 18,000, in view of the position that the value of the benefits or amenities provided to such taxpayers in kind has to be determined by the Income-tax Officer. Finance Act, 1974 18. Where a salaried taxpayer has any net agricultural income during the previous year, it cannot be said that his income consists only of income chargeable under the head "Salaries" or of income chargeable under that head and also income of the nature referred to in clauses (i) to (ix) of sub-section ( 1 ) of section 80L. Accordingly, such a person will have to furnish his return of income voluntarily under section 139 ( 1 ) if his taxable income exceeds the minimum amount not chargeable to tax. Finance Act, 1974 19. The aforesaid amendment will take effect from 1-4-1975 and will accordingly apply for the assessment year 1975-76 and subsequent years. Salaried taxpayers will have to furnish their returns of income voluntarily for the assessment year 1974-75 if their total income exceeds Rs. 5,000 even though tax has been fully deducted at source. [Section 10( a ) of the Finance Act] Finance Act, 1974 Tax treatment of gratuities 20. Under section 10( 10 ), as it stood prior to its amendment by the Finance Act, 1974, death- cum -retirement gratuity received under the revised Pension Rules of the Central Government or under any similar scheme of a State Government or a local authority was completely exempt from income-tax. Similarly retiring gratuity received under the new Pension Code applicable to the members of the Defence Services qualified for tax exemption without any ceiling limit. In the case of any other gratuity received by an employee on his retirement or incapacitation or by his widow, children or dependants on his death, the exemption was available to the extent such gratuity did not exceed one-half month's salary for each year of completed service, calculated on the basis of the average salary for the three years immediately preceding the year in which the gratuity was paid, or 15 months' salary so calculated, or Rs. 24,000, whichever was the least. The Finance Act, 1974 has made the following modifications in the existing provisions relating to exemption of gratuities with a view to liberalising the provisions in certain directions and removing certain unintended anomalies : 1. Under section 10( 10 ), as it stood prior to its amendment by the Finance Act, 1974, gratuities received by civilian employees of the Central Government who were not covered by the revised Pension Rules of the Central Government, as for instance, members of the all-India services did not qualify for full exemption from tax. In such cases, the exemption was allowed under the residuary provision and was accordingly limited to one-half month's salary for each year of completed service, calculated on the basis of the average salary for the three years immediately preceding the year in which the gratuity was paid, or 15 months' salary so calculated, or Rs. 24,000, whichever was the least. As this position was clearly unintended, the Finance Act, 1974 has made a specific provision in the law retrospectively, from 1-4-1962, i.e., the date of commencement of the Income-tax Act, to secure that death- cum -retirement gratuities received by all categories of the Central Government employees as also employees of the State Governments are exempted from income-tax in full. 2 . Since the revised Pension Rules have been replaced by the Central Civil Services (Pension) Rules, 1972, with effect from 1-6-1972, a verbal change has been made in section 10( 10 ) so as to include a reference to the new rules from the date on which they came into force. 3. Under the Payment of Gratuity Act, 1972, gratuity is payable to low-paid employees on a somewhat more liberal scale than the exempt amount of gratuity under the Income-tax Act. Under the first-mentioned Act, gratuity is payable to persons drawing wages not exceeding Rs. 1,000 per mensem. For this purpose, "wages" means all cash emoluments including dearness allowance, but excluding any bonus, commission, house rent allowance, overtime wages and any other allowance. Persons employed in managerial or supervisory capacity and Government employees are outside the purview of that Act. Under sub-sections (2) and (3) of section 4 of the Payment of Gratuity Act, gratuity is payable at the rate of 15 days' wages (based on the rate of wages last drawn by the employee) for every completed year of service or part thereof in excess of 6 months, subject to a maximum of 20 months' wages. In the case of employees working in a seasonal establishment, gratuity is calculated at the rate of seven days' wages for each season, subject to the overall limit of 20 months' wages. Section 10( 10 ) has been amended to specifically provide that the entire amount of gratuity received by an employee under sub-section (2) or (3) of section 4 of the Payment of Gratuity Act shall be exempt from income-tax. In this connection, it may, however, be mentioned that under sub-section (5) of section 4 of the Payment of Gratuity Act, an employee can receive better terms of gratuity under any award or agreement or contract with the employer. In cases where a higher amount of gratuity is received by an employee under any award of agreement or contract with the employer, the amount of exempt gratuity will be calculated in accordance with the residuary provision referred to in item (4) below. This amendment will take effect from 1-4-1975 and will accordingly apply for the assessment year 1975-76 and subsequent years. Gratuities received under the Payment of Gratuity Act during the previous year relevant to the assessment years 1973-74 and 1974-75 will be governed by the existing provisions of section 10( 10 ). 4 . In the case of those employees of statutory corporations and employees in the private sector who are not covered by the Payment of Gratuity Act, the ceiling limits over the exempt amount of retiring gratuity have been raised. Under the amended provision, exemption will be allowed in an amount not exceeding one-half month's salary for each year of completed service, calculated on the basis of the average salary for the three years immediately preceding the year in which the gratuity is paid, or 20 months' salary so calculated, or Rs. 30,000, whichever is the least. This amendment will also take effect from 1-4-1975 and will accordingly apply for the assessment year 1975-76 and subsequent years. 5 . Under the existing provision, the ceiling limits laid down in the Income-tax Act over the exempt amount of gratuity operate in relation to the gratuity received by an employee from a particular employer. Hence, where a person works successively or simultaneously with more than one employer, the aggregate gratuity amount exempt from income-tax in such a case may exceed the existing monetary ceiling limit. The Finance Act, 1974 has made a specific provision to secure that the aggregate amount of tax exempt gratuity in such cases does not exceed Rs. 30,000. It has been provided that in the case of gratuities received by an employee from two or more employers in the same year, the maximum amount of gratuity exempt from income-tax will not exceed Rs. 30,000. In cases where an employee who has received gratuity in an earlier year from a former employer or employers receives gratuity from another employer in a later year, the ceiling limit of Rs. 30,000 will be reduced by the amount of gratuity which has been exempted in any earlier year or years. The overall monetary ceiling limit of Rs. 30,000 will apply in relation to all gratuities whether received from the Government statutory corporations or private employers. This amendment will also take effect from 1-4-1975 and will accordingly apply for the assessment year 1975-76 and subsequent years. Finance Act, 1974 21. It may be noted that under the amended provisions, complete exemption in the case of Government servants will be available only in respect of death- cum -retirement gratuity received under the revised Pension Rules of the Central Government or under the Central Civil Services (Pension) Rules, 1972, or under any similar scheme applicable to the Central or State Government employees. Gratuities other than the death- cum -retirement gratuities payable to Central and State Government employees will be exempt only under the residuary provision. To illustrate, "service gratuity" payable under rule 49(1) of the Central Civil Services (Pension) Rules, 1972 in the case of a Central Government servant retiring before completion of the qualifying service of 10 years will be exempt from income-tax only to the extent such gratuity does not exceed one-half month's salary for each year of completed service, calculated on the basis of the average salary for the three years immediately preceding the year in which the gratuity is paid, or 20 months' salary so calculated or Rs. 30,000, whichever is the least. [Section 3( a ) and ( b ) of the Finance Act] Finance Act, 1974 Exemption of payments in commutation of pension received by Government employees 22. Under section 10( 10A ), as it stood prior to its amendment by the Finance Act, 1974, payments in commutation of pension received under the Civil Pensions (Commutation) Rules of the Central Government or under any similar scheme applicable to the members of the Defence Services employees of State Governments, local authorities or statutory corporations were completely exempt from income-tax. In the case of payments in commutation of pensions received under any scheme of any other employer, the exemption was available within certain limits. These limits were ( i ) commuted value of one-third of the pension, where the employee also received a gratuity from his employer ; and ( ii ) commuted value of one-half of the pension, where no gratuity was received by the employee. These limits have been laid down on the consideration that Government employees are normally entitled to have their pensions commuted within these limits. Finance Act, 1974 23. It will be seen that, under section 10( 10A ), as it stood prior to its amendment by the Finance Act, 1974, in the case of civilian employees of the Central Government, payments in commutation of pensions covered by the Civil Pensions (Commutation) Rules of the Central Government alone qualified for tax exemption. In the result, payments in commutation of pensions received by other categories of employees, as for instance, members of the all-India services, did not qualify for exemption from income-tax. As this position was clearly unintended, the Finance Act, 1974 has specifically amended section 10( 10 A ) retrospectively, from 1-4-1962, i.e., the date of commencement of the Income-tax Act, to secure that payments in commutation of pension received by all categories of Central Government and State Government employees will be completely exempt from income-tax. [Section 3( c ) of the Finance Act] Finance Act, 1974 Relaxation of the provisions relating to recognized provident funds to enable transfer of amounts from the account of an employee in one recognized provident fund to another 24. Under clause ( e ) of rule 4 of Part A of the Fourth Schedule, as it stood prior to its amendment by the Finance Act, 1974, recognized provident funds could consist of contributions by the employee and the employer (including accumulations thereof), interest credited in respect of such contributions and accumulations, securities purchased therewith and any capital gains arising from the transfer of capital assets of the fund, and of no other sums. These provisions did not, therefore, permit the transfer of the accumulated balance due and becoming payable to an employee participating in a recognized provident fund maintained by his former employer to the credit of the individual account of the employee in another recognized provident fund maintained by his new employer with whom he obtained re-employment. In view of this position, a recognized provident fund was liable to lose exemption from income-tax on the ground that the fund had received on transfer certain amounts from the individual account of a newly participating employee in another recognized provident fund maintained by his former employer. As the withdrawal of tax exemption in such cases resulted in hardship to the employees participating in the fund, the Finance Act, 1974 has made a specific provision in sub-rule (3) of rule 5 of Part A of the Fourth Schedule permitting the transfer of amounts from the individual account of an employee in a recognized provident fund maintained by his former employer and the interest in respect thereof, to another recognized provident fund. This amendment takes effect from 1-4-1974. Finance Act, 1974 25. Under rule 8 of Part A of the Fourth Schedule, the amount of the accumulated balance due and becoming payable to an employee on the termination of his employment is excluded from the computation of his taxable income if the employee has rendered continuous service with his employer for a period of 5 years or more, or if the services of the employee are terminated by reason of his ill-health or by the contraction or discontinuance of the employer's business or any other cause beyond the control of the employee. If the accumulated balance due to an employee participating in a recognized provident fund is paid to him otherwise than in the circumstances referred to above, as for instance, in cases where the employee voluntarily resigns from his post before the completion of 5 years' service with the employer, the amount paid to the employee is brought within the ambit of taxation. In such cases, the employee is required to pay, in addition to the normal tax payable by him, an amount equal to the difference between the aggregate tax which would have been payable by him if certain tax concessions allowed to employees participat-ing in recognized provident funds had not been allowed to the employee in the years in which he made contributions to the fund and the aggregate tax actually paid by him for these years. Since the accumulated balance due to an employee becomes payable on the day he ceases to be an employee of the employer maintaining the fund, the effect of this provision is that the tax relief allowed to an employee is withdrawn in cases where the amount of the accumulated balance due to him is transferred from the recognized provident fund maintained by the former employer to an recognized provident fund maintained by the new employer. In view of the position that an employee does not receive any immediate benefit by the mere transfer of the amounts to his credit from one account to another and remains in virtually the same position as he would have been had the amounts continued to remain in the provident fund maintained by his former employer, the withdrawal of the tax relief in such cases results in hardship to the employees. With a view to avoiding this hardship, the Finance Act, 1974 has made a specific provision in the aforesaid rule 8 to secure that exemption from income-tax is not withdrawn in such cases. Further, it has also been provided that in cases where the accumulated balance due and becoming payable to an employee includes any amount transferred from any other recognized provident fund maintained by his former employer, then, in computing the period of continuous service of 5 years for the purposes of the aforesaid provision, the continuous service rendered by the employee with such former employer will also be taken into account. These amendments will take effect from 1-4-1975 and will accordingly apply in relation to the assessment year 1975-76 and subsequent years. [Section 12 of the Finance Act] Other Amendments to the Income-tax Act Finance Act, 1974 Higher deduction of profits transferred to special reserve in the case of financial corporations or joint financial corporations established under the State Financial Corporations Act, 1951 26. Under section 36(1)( viii ), financial corporations engaged in providing long-term finance for industrial or agricultural development in India are entitled to a deduction, in the computation of their taxable profits, of the amounts transferred by them out of such profits to a special reserve account, up to a specified percentage of their total income as computed before making any deduction under Chapter VIA. The concession is admissible only where the financial corporation is approved by the Central Government for this purpose. In the case of a financial corporation having a paid-up share capital not exceeding Rs. 3 crores, an amount up to 25 per cent of such total income could be taken to the special reserve account, whereas in the case of a financial corporation having a paid-up share capital exceeding Rs. 3 crores, tax exemption in respect of the amount credited to special reserve account was limited to 10 per cent of such total income. With a view to facilitating the building up of internal resources by financial corporations or joint financial corporations established under the State Financial Corporations Act, 1951, the Finance Act, 1974 has amended section 36(1)( viii ) so as to increase the aforesaid limits on the deductible amount in the case of such corporations from the existing levels to 40 per cent of their total income as computed before making any deduction under Chapter VIA. The increased limit will also apply in the case of a financial institution which was in existence at the commencement of the State Financial Corporations Act, 1951 and which is deemed under section 46 of that Act to be a financial corporation established by the State Government of that State within the meaning of that Act. The Tamil Nadu Industrial Investment Corporation Limited (formerly known as the Madras Industrial Investment Corporation) is, under a notification issued by the Central Government, deemed to be a financial corporation established by the Government of Tamil Nadu for that State within the meaning of the State Financial Corporations Act, 1951 and will, accordingly, qualify for higher deduction under the amended provision. This amendment will take effect from 1-4-1975 and will accordingly apply in relation to the assessment year 1975-76 and subsequent years. [Section 5 of the Finance Act] Finance Act, 1974 Exemption from income-tax of profits of institutions established for development of khadi and village industries 27. A large number of public charitable trusts and societies registered under the Societies Registration Act, 1860, are doing commendable work for the development of khadi and village industries under the direct supervision and control of the Khadi and Village Industries Commission. With a view to providing encouragement and support to these institutions, the Finance Act, 1974 has made a specific provision in new clause ( 23B ) of section 10 for exempting from income-tax, income derived by such institutions from production, sale or marketing of khadi or products by village industries. These exemptions will be available only to institutions constituted as public charitable trusts or registered under the Societies Registration Act, 1860, or under any law corresponding to that Act in force in any part of India and existing solely for development of khadi and village industries. The exemption will not be allowed unless the institution applies its income or accumulates it for application solely for the development of khadi and village industries. Further, institutions will qualify for this tax exemption only if they are approved for the purposes of this provision by the Khadi and Village Industries Commission. The Khadi and Village Industries Commission will have power to accord approval to such institutions for a period of three years at a time. This amendment will take effect from 1-6-1974 and will accordingly apply for the assessment year 1975-76 and subsequent years. The Khadi and Village Industries Commission will have the power to grant approval to qualifying public charitable trusts and societies, with effect from 1-6-1974. [Section 3( d ) of the Finance Act] Finance Act, 1974 Discontinuance of the exemption in respect of royalties, commission, fees, etc., received by resident non-corporate taxpayers for provision of technical "know-how" or technical services to Indian concerns 28. Under section 80MM, an Indian company or a resident non-corporate taxpayer deriving income by way of royalties, commission, fees, etc., from an Indian concern in consideration of the provision to the Indian concern of technical "know-how" or technical services, is entitled to a deduction of 40 per cent of such income in the computation of the taxable profits. 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 Board of Direct Taxes. In the case of resident non-corporate taxpayers, the deduction is not allowed unless the accounts of the taxpayers for the assessment year had been audited by a chartered accountant or any other accountant authorised in law to audit the accounts of a company and the taxpayer furnishes the report of such audit in the prescribed form along with the return of income. The Finance Act, 1974 has amended section 80MM with a view to discontinuing this tax concession in the case of non-corporate taxpayers. This amendment will take effect from 1-4-1975 and will accordingly apply for the assessment year 1975-76 and subsequent years. [Section 7 of the Finance Act] Finance Act, 1974 Modification of the provision relating to exemption of dividends received by Indian companies and resident non-corporate taxpayers on shares allotted to them in a foreign company for the provision of technical "know-how" or technical services to the foreign company 29. Under section 80N, Indian companies or resident non-corporate taxpayers deriving income by way of dividends on shares allotted to them in a foreign company in consideration of the provision of technical "know-how" or technical services to such foreign company, are entitled to a deduction of the whole of such income by way of dividends in the computation of their taxable 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 Board of Direct Taxes. The Finance Act, 1974 has made the following changes in the scheme of tax exemption of such dividends : 1. Section 80N has been amended so as to discontinue the concession under that section in the case of resident non-corporate taxpayers. This amendment will take effect from 1-4-1975 and will accordingly apply in relation to the assessment year 1975-76 and subsequent years. 2. As one of the main objectives of the aforesaid tax concession is to augment our foreign exchange resources, a retrospective amendment has been made in section 80N with effect from 1-4-1969 to specifically provide that the deduction under this provision will be allowed only with reference to the income which is received in convertible foreign exchange in India, or having been received in convertible foreign exchange outside India, or having been converted into convertible foreign exchange outside India, is brought into India by or on behalf of the assessee in accordance with any law for the time being in force for regulating payments and dealings in foreign exchange. An independent provision has also been made in section 17 of the Finance Act, 1974 with a view to achieving the same objective for the assessment year 1968-69. For the purpose of section 80N, as also section 17 of the Finance Act, 1974, "convertible foreign exchange" has been defined to mean foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the law for the time being in force for regulating payments and dealings in foreign exchange. It has also been provided that where an income qualifying for deduction under section 80N has been used by the taxpayer outside India in a manner permitted by the Reserve Bank of India, such income shall be deemed to have been brought into India in accordance with the law for the time being in force for regulating payments and dealings in foreign exchange on the date on which such permission is given. 3. It is likely that in some cases there might be considerable time lag between the accrual of income in a foreign country and its remittance to India and, accordingly, situations may arise where foreign income may not be received in India before the completion of the regular assessment for the year in which it becomes chargeable to tax in the case of a taxpayer maintaining accounts on mercantile basis. A similar difficulty may also arise in cases where a host country may place restrictions on remittance of funds to India and the income otherwise qualifying for exemption may not be received in India before the assessment is made. In order to obviate these difficulties, the Finance Act, 1974 has made a specific provision in new sub-section (11) of section 155 to secure that in cases where the deduction under section 80N was not allowed in any year in respect of the whole or any part of the income by way of dividends on the ground that such income had not been received in convertible foreign exchange in India, or having been received in convertible foreign exchange outside India, or having been converted into convertible foreign exchange outside India, had not been brought into India by or on behalf of the taxpayer in accordance with the foreign exchange regulations and subsequently such income or part thereof is received in or brought into India in accordance with these regulations, it will be open to the Income-tax Officer to rectify the original assessment so as to allow the deduction in respect of income so received in, or brought into, India. The rectification will be permissible within the period of four years from the date on which such income is received in, or brought into, India. [Sections 8, 13(1) (part) and 17 (part) of the Finance Act] Finance Act, 1974 Modifications in the provision relating to concessional taxation of royalties, commission, fees, etc., received by Indian companies or resident non-corporate taxpayers for provision of technical "know-how" or technical services to foreign enterprises 30. Under section 80-O, an Indian company or a resident non-corporate taxpayer deriving income by way of royalties, commission, fees, etc., from a foreign Government or a foreign enterprise in consideration of the provision 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 Board of Direct Taxes. The Finance Act, 1974 has made the following changes in the scheme of taxation of such royalties, commission, fees, etc. : 1. Section 80-O has been amended so as to discontinue the concession under that section in the case of resident non-corporate taxpayers. This amendment will take effect from 1-4-1975 and will accordingly apply in relation to the assessment year 1975-76 and subsequent years. 2. Section 80-O has been amended retrospectively from 1-4-1972, i.e. , the date from which section 80-O, as it stands at present, was brought into force, in order to secure that the deduction under that section shall be allowed only with reference to the income which is received in convertible foreign exchange in India, or having been received in convertible foreign exchange outside India or having been converted into convertible foreign exchange outside India, is brought into India by or on behalf of the taxpayer in accordance with the foreign exchange regulations. An independent provision has also been made in section 17 of the Finance Act, 1974 so as to achieve the same objective with reference to the assessment years 1968-69 to 1971-72. "Convertible foreign exchange", for the purpose of section 80-O, and the related provision in section 17 of the Finance Act, 1974, will have the same meaning as for the purpose of section 80N as explained in paragraph 29 above. As in the case of tax exemption under section 80N, it has been provided that any income used by the taxpayer outside India in the manner permitted by the Reserve Bank of India, shall be deemed to have been brought into India in accordance with the foreign exchange regulations on the date on which such permission is given. 3. A new sub-section (12) has also been inserted in section 155 to enable rectification of an assessment where exemption under section 80-O was denied on the ground that income otherwise qualifying for deduction had not been received in convertible foreign exchange outside India, or having been converted into convertible foreign exchange outside India, had not been brought into India by or on behalf of the taxpayer in accordance with the foreign exchange regulations. The provision in new sub-section (12) of section 155 is in pari materia with the provision in sub-section (11) of that section relating to tax exemption of dividends received from foreign companies. [Sections 9, 13(1) (part) and 17 (part) of the Finance Act] Finance Act, 1974 Ancillary provisions for computing "advance tax" in certain cases 31. Under the Income-tax Act, "advance tax" is to be paid during every financial year in instalments on specified dates on the taxpayers' income (other than capital gains and certain casual and non-recurring incomes) charged to tax for the assessment year next following the financial year. In the case of persons who have been assessed to income-tax by way of regular assessment, "advance tax" is ordinarily required to be paid with reference to the last assessed income of the taxpayer on the issue of notice of demand by the Income-tax Officer. Persons who have not previously been assessed by way of regular assessment are required to send an estimate of their current income to the Income-tax Officer and pay advance tax thereon at the rates in force. In cases where the total income of the latest previous year on the basis of which tax has been paid by the taxpayer under section 140A exceeds the total income of an earlier previous year assessed by way of regular assessment, the "advance tax" is demanded by the Income-tax Officer on the basis of the total income of the first-mentioned previous year. Finance Act, 1974 32. The Finance Act, 1974 provides that in the case of individuals, Hindu undivided families and certain other categories of non-corporate taxpayers, the net agricultural income of the taxpayer shall be taken into account for the purposes of computing "advance tax" payable during the financial year 1974-75. The Finance Act, 1974 also specifies separate rates for computing "advance tax" in the case of Hindu undivided families having at least one member whose total income of the relevant previous year exceeds the maximum amount not chargeable to tax in his case. With a view to facilitating the proper implementation of these provisions, the Finance Act, 1974 has made certain ancillary provisions in this regard in section 209. According to one of the provisions, where the order of the Income-tax Officer under section 210 requiring a person to pay "advance tax" is made on the basis of the total income of the latest previous year for which regular assessment has been made in the case of the taxpayer, the Income-tax Officer will have to compute the "advance tax" on the basis of the net agricultural income which has been taken into account for the purposes of charging income-tax for that year. In cases where the order under section 210 is made by the Income-tax Officer on the basis of the total income of any previous year for which tax has been paid by the assessee on self-assessment under section 140A, the Income-tax Officer will compute the "advance tax" on the basis of the net agricultural income as returned by the assessee in the return of income for that year. In cases where an estimate of "advance tax" is sent by taxpayer under section 212, the taxpayer will have to compute the "advance tax" payable by him by taking into account his estimated net agricultural income for the period which would be the previous year for the immediately following assessment year. Finance Act, 1974 33. In cases where the order of the Income-tax Officer under section 210 requiring a Hindu undivided family to pay "advance tax" is made on the basis of the total income of the family for the latest previous year for which the family has been assessed by way of regular assessment, the separate rates of tax prescribed for Hindu undivided families will apply to the family if the total income of any member of the family for the assessment year relevant to that latest previous year exceeds the maximum amount not chargeable to tax in his case. In cases where the order of the Income-tax Officer under section 210 is made on the basis of the total income of the families for a previous year for which the family had paid tax on self-assessment under section 140A, the separate rates prescribed for Hindu undivided families will apply if the total income of any member of the family for the assessment year relevant to such previous year exceeds the maximum amount not chargeable to tax in his case. These amendments will take effect from 1-4-1974 and will accordingly apply for the purposes of computing "advance tax" during the financial year 1974-75 and subsequent years. [Section 11 of the Finance Act] Finance Act, 1974 Carry forward and set off of losses from horse races 34. Under section 74A, losses from lotteries, crossword puzzles, races, card games, etc., are allowed to be set off only against income from the same source. Losses relating to these sources incurred in one year are also not allowed to be carried forward to be set off against income of a subsequent year. For this purpose, each of the following sources is 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 ) Gambling or betting of any form or nature not falling under any of the foregoing items. In view of this provision, loss incurred by an owner of race horses in the activity of owning and maintaining such horses is not allowed to be set off in the year in which it is incurred against any source of income except his winnings from races nor is it allowed to be carried forward to be set off against income from any source in any subsequent year. Finance Act, 1974 35. The Finance Act, 1974 has amended section 74A so as to provide that the losses incurred by owners of race horses in the activity of owning and maintaining such horses, to the extent these cannot be set off against other income from the source "races, including horse races", will be carried forward and set off against income from the aforesaid source in subsequent years up to a period of four assessment years following the assessment year for which the loss is first computed. In a case where the taxpayer has no income by way of stake money in the relevant year, the whole of the revenue expenditure laid out or expended by him wholly and exclusively for the purposes of maintaining race horses will be regarded as the loss incurred by him in the activity of owning and maintaining such horses. Where the assessee has income by way of stake money in the relevant year, the amount of loss incurred by him in the activity of owning and maintaining race horses, will be the amount by which the stake money falls short of the revenue expenditure laid out or expended by him wholly and exclusively for the purposes of maintaining such horses. The loss incurred by the taxpayer in the activity of owning and maintaining race horses will be set off against his winnings, if any, from races, in the same previous year and the balance, if any, will be carried forward to be set off against income from the same source in subsequent years. It should be noted that no deduction will be made in respect of the actual cost of the race horses nor will any depreciation be allowed in respect of such horses. Further, the loss computed for any previous year will be allowed to be set off in a subsequent year not only against the stake money received in the relevant subsequent year but also other winnings, if any, from races. The set off will, however, be allowed only if the taxpayer carries on the activity of owning and maintaining race horses in the previous year relevant to the subsequent assessment year. For the purposes of section 74A(3), a race horse would mean a horse maintained for running in race upon which wagering or betting may be lawfully made and "income by way of stake money" would mean the gross amount of prize money received on a race horse or race horses by the owner on account of the horse or horses or any one or more of the horses winning or being placed second or in a lower position in a horse race. Finance Act, 1974 36. The Finance Act, 1974 has made another amendment of a drafting nature to section 74A for clearly bringing out the intention that the loss relating to sources specified in that section, i.e. , winnings from lotteries, crossword puzzles, races, card games, etc., will be set off only against the income from the same source in the year in which the loss is incurred. Finance Act, 1974 37. Consequential amendments have been made in sections 75, 77, 80, 139, 141A, 143, 155 and 157 with a view to securing the following objectives, namely : 1. Section 75(2) has been amended to provide that losses incurred by a registered firm in the activity of owning and maintaining race horses will not be carried forward and set off against the income of the registered firm in any subsequent year. 2. Section 77(2)( b ) has been amended to provide that losses incurred by an unregistered firm in the activity of owning and maintaining race horses will not be carried forward and set off against the income of any partner of such firm in any subsequent year. 3. Section 80 has been amended to provide that losses incurred in the activity of owning and maintaining horses will not be carried forward and set off against income of the taxpayer for any subsequent year unless such losses have been determined in pursuance of a return under section 139. 4. Section 139(3) has been amended in order to enable a taxpayer incurring a loss in the activity of owning and maintaining horses to voluntarily furnish a return of such loss so as to enable him to carry forward the loss to be set off against his income from the source "races, including horse races" in subsequent years. 5. Section 141A(2)( iv ) has been amended to provide that in making a provisional assessment under section 141A, the Income-tax Officer shall have the power to make any adjustment to the income or loss declared in the return to give effect to any loss carried forward under section 74A. Section 143(1)( b )( iv ) has likewise been amended to enable similar adjustment in making a summary assessment under section 143(1). 6. Section 155(4) has been amended to enable rectification of assessments, within an extended period in cases where it becomes necessary to do so due to reassessment of income of the taxpayer under section 147 for an earlier year and such rectification is called for in order to recompute the loss relating to the activity of owning and maintaining race horses carried forward and set off in a subsequent year. 7. Section 157 has been amended so as to provide for intimation by the Income-tax Officer in respect of losses computed by him in respect of the activity of owning and maintaining race horses by the taxpayer. The above amendments will take effect from 1-4-1975 and will accordingly apply in relation to the assessment year 1975-76 and subsequent years. Losses incurred in the activity of owning and maintaining race horses in the previous year relevant to the assessment year 1974-75 or any earlier previous year will not, therefore, be carried forward to be set off against income of subsequent years. [Sections 6, 10( b ) and 13(2) of the Finance Act] Finance Act, 1974 Continuance of development rebate for a limited period in certain cases 38. Under the notification of the Government of India in the Ministry of Finance (Department of Revenue and Insurance) No. SO 2167, dated 28-5-1971 issued under sub-section (5) of section 33, development rebate will not be allowed in respect of ships acquired or machinery or plant installed after 31-5-1974. In several cases, entrepreneurs were not able to obtain timely delivery of machinery or plant from foreign as well as indigenous manufacturers for reasons beyond their control. The critical shortage of petroleum products underlines the need for switch over from oil to coal as a source of energy. In view of this position, the Finance Act, 1974 has made an independent provision in section 16 thereof so as to continue the development rebate for a specified period in the following cases : ( a ) in the case of ships acquired after 31-5-1974 but before 1-6-1975, if the taxpayer furnishes evidence to the satisfaction of the Income-tax Officer that he had entered into a contract for the purchase of such ships with the builder or owner thereof before 1-12-1973 ; ( b ) in the case of machinery or plant (other than a coal-fired boiler, furnace, kiln, oven or the like, or machinery or plant for converting any boiler, furnace, kiln, oven or the like from oil firing to coal firing) installed by the taxpayer after 31-5-1974 but before 1-6-1975, if the taxpayer furnishes evidence to the satisfaction of the Income-tax Officer that ( a ) he had purchased such machinery or plant before 1-12-1973, or ( b ) had entered into a contract for the purchase of such machinery or plant, with the manufacturer or owner of, or a dealer in, such machinery or plant before that date, or ( c ) had, where such machinery or plant has been manufactured in an undertaking owned by him, taken steps for the manufacture of such machinery or plant before that date ; ( c ) in the case of machinery or plant, being a coal-fired boiler, furnace, kiln, oven or the like, or any machinery or plant for converting any boiler, furnace, kiln, oven or the like from oil firing to coal firing, installed by the taxpayer after 31-5-1974 but before 1-6-1977. The effect will, therefore, be that notwithstanding the withdrawal of development rebate in respect of ships acquired or machinery or plant installed after 31-5-1974 development rebate will continue to be allowed in respect of ships and machinery and plant where the conditions specified above and those in the Income-tax Act are fulfilled. [Section 16 of the Finance Act] Amendments to Wealth-tax Act Finance Act, 1974 Increase in the rates of wealth-tax in the case of individuals and Hindu undivided families 39. The rate schedules of wealth-tax relating to individuals and Hindu undivided families contained in the Schedule to the Wealth-tax Act have been amended on the following lines : 1. In the case of individuals and Hindu undivided families (other than Hindu undivided families having one or more members with independent net wealth exceeding Rs. 1 lakh), the rate of wealth-tax on the net wealth slab of Rs. 5,00,001 - Rs. 10,00,000 has been raised from 2 per cent to 3 per cent and on the next slab of Rs. 10,00,001 - Rs. 15,00,000 from 3 per cent to 4 per cent. The rates of wealth-tax on the initial slab up to Rs. 5,00,000 and on the slab over Rs. 15,00,000 have been retained at the existing levels. 2. In the case of Hindu undivided families having one or more members with independent net wealth exceeding Rs. 1 lakh, the rate of wealth-tax on the first slab up to Rs. 5,00,000 has been raised from 2 per cent to 3 per cent and on the next slab of Rs. 5,00,001 - Rs. 10,00,000 from 3 per cent to 4 per cent. The rate of wealth-tax on the slab over Rs. 10 lakhs has been retained at the existing level of 8 per cent. The new rates of wealth-tax will apply in relation to the assessment year 1975-76 and subsequent years. [Section 14(3) of the Finance Act] Finance Act, 1974 Modifications of some of the existing exemptions 40. Under section 2( e )( 2 )( ii ) the value of any right to a non-commutable annuity is not included in "assets" and is accordingly exempt from wealth-tax. Under section 5(1)( vi ), the value of any right or interest of a taxpayer in any policy of insurance before the moneys covered by the policy become due and payable to the taxpayer is also not included in the net wealth. The aforesaid exemptions have been largely used by taxpayers for reducing the incidence of wealth-tax by taking single premium insurance policies and non-commutable annuities for large amounts. The Finance Act, 1974 has made the following two modifications in these provisions of the Wealth-tax Act : 1. Section 2( e )( 2 )( ii ) has been amended so as to provide that the value of the taxpayer's right to receive an annuity purchased by him or purchased by another person in pursuance of a contract with the taxpayer will be regarded as his asset for the purposes of wealth-tax, irrespective of whether the annuity is commutable or not. The effect of this amendment will be that the right to a non-commutable annuity which is purchased by the taxpayer himself or which is purchased by another person in pursuance of a contract with him will become chargeable to wealth-tax except to the extent it may qualify for exemption under any provisions of section 5. Under section 5(1)( via ), the right of the taxpayer to receive an annuity payable by the Central Government under the provision of section 280D of the Income-tax Act is exempt from wealth-tax. Similarly, under section 5(1)( vii ) , the right of the taxpayer to receive a pension or other life annuity in respect of past services under an employer is exempt from wealth-tax. These types of annuities will, therefore, continue to be exempt as hitherto. Life annuities payable under any policy of insurance will also be exempt to the extent explained in paragraph 41. 2. Section 5(1)( vi ) has been amended so as to secure that the value of the taxpayer's right or interest in a policy of insurance will be completely exempt from wealth-tax only if the premia thereon are payable over a period of ten years or more. In cases where premia are payable over a period of less than ten years, only a proportionate amount of the value of the taxpayer's right or interest in the policy of insurance will be exempt from wealth-tax. Thus, where premia on a policy are payable over a period of eight years, only 8/10th of the value of taxpayer's right in the insurance policy will be exempt and the balance will be included in his net wealth. Finance Act, 1974 41. Under the Insurance Act, 1938, contracts for granting of annuities upon human lives are regarded as "life insurance business" and, accordingly, a contract for life annuity will be regarded as life insurance policy. Annuities payable in respect of contracts with the Life Insurance Corporation of India, approved by the Commissioners of Income-tax under section 80E of the Income-tax Act, provide for life annuities in old age and, accordingly such contracts will be regarded as life insurance policies. The effect will, therefore, be that the value of the taxpayer's right or interest in such an annuity contract will qualify for exemption from wealth-tax, if the premia are payable over a period of ten years or more and a proportionate exemption will be allowed in cases where the premia are payable over a shorter period. Similarly, the value of a right to any life annuity will be exempt from tax if the premia in respect thereof are payable over a period of ten years or more and will qualify for proportionate exemption where such premia is payable over a shorter period. Thus, in the case of a life annuity obtained in consideration of a lump sum payment, the taxpayer will be entitled to an exemption of one-tenth of the value of his right in such annuity. Finance Act, 1974 42. The amendments explained in paragraphs 40 and 41 above will take effect from 1-4-1975 and will accordingly apply for the assessment year 1975-76 and subsequent years. It may be noted that from the assessment year 1975-76 onwards the exemption in respect of rights in annuities and insurance moneys will be available only to the extent explained in the preceding paragraphs, irrespective of the date on which the insurance policies were taken or the annuity contracts entered into. Finance Act, 1974 43. Under section 5(1)( iv ), the value of one house or part of a house belonging to a taxpayer is exempt up to Rs. 1 lakh. Under section 5(1)( ivb ), one building or one group of buildings owned by a cultivator or a receiver of rent or revenue of agricultural land is also exempt from wealth-tax without any monetary limit. The latter exemption is available only if the building or group of buildings is on or in the immediate vicinity of the agricultural land and is required by the cultivator, etc., by reason of his connection with the land as dwelling house, store house or out-house. Agricultural land belonging to the taxpayer is also exempt from wealth-tax up to a value of Rs. 1,50,000. In a case where the taxpayer also owns a house situated in a place with a population exceeding 10,000, the limit of exemption in respect of the value of agricultural land is reduced by an amount equal to the difference between Rs. 1,50,000 and value of the house property which is exempted from the wealth-tax. Apart from the various immovable assets referred to above, a taxpayer is also entitled to an exemption in respect of certain financial assets up to an aggregate value of Rs. 1,50,000. Finance Act, 1974 44. The Finance Act, 1974 has made the following modifications, in section 5 : 1. The separate exemption available under section 5(1)( ivb ) in respect of one building or one group of buildings owned by a cultivator or receiver of rent or revenue of agricultural land and used by him as dwelling house has been withdrawn. The existing exemption will, however, continue in respect of any one building or one group of buildings owned by a cultivator or receiver of rent or revenue of agricultural land where such building or group of buildings is required by him, by reason of his connection with the land, as store house or for keeping livestock. 2. The separate exemption in respect of agricultural land has been withdrawn and linked with the existing exemption in respect of specified financial assets. In other words, a taxpayer will be able to claim a deduction up to Rs. 1,50,000 in the aggregate in respect of the specified financial assets and agricultural land. The aforesaid amendments will take effect from 1-4-1975, and will accordingly apply for the assessment year 1975-76 and subsequent years. [Section 14(1) and (2) of the Finance Act] Amendments to Companies (Profits) Surtax Act Finance Act, 1974 Rates of surtax 45. 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 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 computed in accordance with the provisions of the Second Schedule or an amount of Rs. 2,00,000, whichever is greater. At present, surtax is levied in two slabs on the amount by which the chargeable profits exceed the amount of statutory deduction. On the amount of such excess up to 5 per cent of the amount of capital computed in accordance with the Second Schedule, the rate is 25 per cent and on the balance of such excess, 30 per cent. The Finance Act, 1974 has raised the rate on second slab from 30 per cent to 40 per cent. Finance Act, 1974 46. It has further been provided that in the case of a domestic company in which the public are substantially interested and whose paid-up share capital (subscribed and paid for in cash) as on the last day of the previous year is not less than 25 per cent of the amount of its capital as computed for the purposes of surtax, the aggregate amount of the liability of the company in respect of income-tax and surtax will be limited to 70 per cent of its total income for the relevant year. A similar dispensation will also be available in respect of a company which is a 100 per cent subsidiary of such a company. Where the aggregate liability towards income-tax and surtax exceeds 70 per cent of the total income of the company, the surtax payable by it will be reduced by the amount of such excess. This ceiling of 70 per cent will not apply in the case of foreign companies which have not made the prescribed arrangements for the declaration and payment of dividends within India or closely-held domestic companies. These amendments will take effect from 1-4-1975, and will accordingly apply in relation to the assessment year 1975-76 and subsequent years. [Section 15 of the Finance Act] Application of correct rates of income-tax and wealth-tax in respect of Hindu undivided families which have at least one member having taxable income/wealth - Avoidance of mistakes in applying higher rates The Revenue Audit have brought to the notice of the Board cases where in spite of Instruction No. 1118, dated 16-11-1977 and 1193, dated 5-7-1978 the prescribed higher rates have not been applied correctly. 2. While the Board would like to reiterate the above instructions, they further desire that the Assessing Officers dealing with the cases of Hindu undivided families must obtain a declaration in writing from the assessees whether any member has taxable wealth. The fact of higher rates being applied in respect of the specified Hindu undivided family should also be highlighted in the assessment order invariably to avoid mistake in calculation of tax. 3. These instructions may be brought to the notice of all concerned. Instruction : No. 1363, dated 22-10-1980 [Source : 85th Report of P.A.C. (1981-82) (Seventh Lok Sabha), p. 52]. Separate Rate Schedule for ordinary Wealth-tax in the case of certain Hindu undivided families Attention is invited to Paras 49 50 of the Board's Circular No. 126, dated the 28th November, 1973 (F. No. 131/(21)/73-TPL) wherein it has been clarified that under the Finance Act, 1973, a new Rate Schedule of ordinary wealth-tax has been prescribed in the case of Hindu undivided families having one or more members with independent net wealth exceeding Rs. 1 lakh and that these rates would take effect from 1st April, 1974, so as to apply in relation to assessment years 1974-75 and onwards. The Revenue Audit have brought to the notice of the Board many cases where the prescribed higher rates have not been applied correctly. 2. The Board desire that necessary instructions in this regard should be reiterated amongst all the assessing officers in your charge to ensure the application of correct rates. Remedial measures for rectification, etc., may also be taken wherever necessary. Instruction : No. 1193, dated 5-7-1978 [Source : 85th Report of P.A.C. (1981-82) (Seventh Lok Sabha), p. 51]. Application of correct rates of income-tax and wealth-tax in respect of the HUFs which have at least one member having taxable income/wealth for the assessment year It has come to the notice of the Board that there has been a large scale failure on the part of the Departmental officials to apply the higher rates of income-tax and wealth-tax leviable on HUFs which have at least one member having taxable income/wealth for the relevant assessment year, as the case may be. It is also noticed that such failure is fairly widespread not only in the assessments made for the assessment year 1974-75 when the higher rates were prescribed for the first time, but in later years also. That such failure should happen in spite of instructions highlighting the changes in rates of tax made by the annual Finance Acts and specific columns provided in the return forms for this purpose is a matter of great concern. 2. It has, therefore, been decided that the U.D.Cs/Supervisors/Head Clerks should review the tax calculations for the assessment years 1974-75 and onwards while checking tax calculations during the current year with a view to finding out mistakes in the application of rates of taxes in the case, of such HUFs in order to take remedial action before it gets barred by limitation. A footnote should be recorded in the current ITNS 154/W.T. assessment form in the cases of such HUFs that the tax calculations for 1974-75 assessment and onwards have been reviewed. These instructions may be brought to the notice of all concerned. The receipt of these instructions may kindly be acknowledged. Instruction : No. 1118, dated 16-11-1977 [ Source : 85th Report of P.A.C. (1981-82) (Seventh Lok Sabha) pp. 49-50].