The Finance Act, 1976--Explanatory notes on provisions relating to direct taxes - Income Tax - 202/1976

The Finance Act, 1976--Explanatory notes on provisions relating to direct taxes Circular No. 202 Dated 5/7/1976 Subject : The Finance Act, 1976--Explanatory notes on provisions relating to direct taxes. Introduction The Finance Bill, 1976, as passed by Parliament, received the assent of the President on 27th May, 1976, and has been enacted as Act No.66 of 1976. This circular explains the substance of the provisions relating to income-tax and other direct taxes contained in the Finance Act, 1976. Provisions in brief 2. The provisions in the Finance Act, 1976 (hereinafter referred to as the Finance Act), in the sphere of direct taxes relate to the following matters: (i) Prescribing the rates of income-tax (including surcharge thereon) on income liable to tax for the assessment year 1976-77; the rates at which income-tax will be deductible at source during 1976-77 from interest (including interest on securities), dividends, salaries, insurance commission, winnings from lotteries and crossword puzzles and other categories of income liable to such deduction under the Income-tax Act; and the rates for the computation of "advance tax" and charging of income-tax on current incomes in certain cases where accelerated assessments are required to be made during the financial year 1976-77. (ii) Amendment of the Income-tax Act, 1961, with a view to providing greater incentive for savings and investment; providing for tax relief in certain cases; rationalisation of assessment of non-residents and a few other matters. (iii) Amendment of the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974, with a view to extending the requirement of making compulsory deposits for another year and modifying the rates of compulsory deposit. (iv) Amendment of the Companies (Profits) Surtax Act, 1964, with a view to raising the threshold for the levy of surtax and making a few other provisions. (v) Amendment of the Wealth-tax Act, 1957, with a view to lowering the rates of ordinary wealth-tax and dispensing with the levy of additional wealth-tax on urban lands and buildings; providing for greater incentive for construction of houses, especially for weaker sections, and for argumenting foreign exchange resources and making a few other provisions. (vi) Amendment of the Gift-tax Act, 1958, to provide for exemption from gift-tax in respect of donations to State Housing Boards, Slum Clearance Boards, etc. (vii) Amendment of the Interest-tax Act, 1974, with a view to excluding from the tax base interest received by scheduled banks on long-term loans advanced by them for the creation of capital assets in India. (viii) Amendment of the Unit Trust of India Act, 1963, with a view to withdrawing the additional tax concession available in respect of income from units in the case of Hindu undivided families having one or more members with independent income exceeding the exemption limit. (ix) Amendment of the Life Insurance Corporation Act, 1956, with a view to enabling the Life Insurance Corporation of India to receive income by way of dividends and interest on securities without deduction of income-tax at source. RATE STRUCTURE OF INCOME-TAX (i) Rates of income-tax for the assessment year 1976-77 3. The rates of income-tax for the assessment year 1976-77 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. These rates are the same as those specified in Part III of the First Schedule to the Finance Act, 1975, as modified by the Finance (Amendment) Act, 1975, 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 certain cases where accelerated assessments were required to be made during the financial year 1975-76. (ii) Rates for deduction of income-tax at source during the financial year 1976-77 on incomes other than "Salaries" and retirement annuities 4.1 The rates for deduction of income-tax at source during the financial year 1976-77 from incomes, other than "Salaries" and retirement annuities payable to partners of registered firms engaged in the specified professions, are set forth in Part II of the First Schedule to the Finance Act. As explained in paragraphs 26, 29, 30, 34 and 36 of this circular, the Finance Act has made several modifications in the scheme of taxation of income by way of dividends, royalties and technical service fees in the case of foreign companies. These modifications are reflected in the rate schedule for deduction of income-tax at source. The position in this regard is explained in paragraphs 5 to 7 of this circular. 4.2 The rates for deduction of income-tax at source (including surcharge on income-tax) in respect of other categories of income are the same as were prescribed for the purpose under the Finance Act, 1975. Deduction of income-tax from dividends paid by domestic companies to foreign companies 5. The rate for deduction of income-tax at source from dividends paid by a domestic company to a foreign company has been fixed at 25 per cent. as against 25.725 per cent. (income-tax 24.5 per cent. plus surcharge 1.225 per cent) under the Finance Act, 1975. Deduction of income-tax from royalties paid by Indian concerns to foreign companies 6. The rate for deduction of income-tax at source from royalties paid by Indian concerns to foreign companies will depend upon whether such royalties are payable under approved agreements or not, and where such royalties are payable under approved agreements, whether such agreements were made before the 1st April, 1976, or on or after that date. The rates specified in this behalf are as follows:- (a) Royalties payable under agreements [not being agreements referred to in (c) below] made on or after the 1st April, 1976, and approved by the Central Government. ( a ) lump sum consideration paid for the transfer outside India or, the imparting of information outside India in respect of, any data, documentation, drawings or specifications relating to any patent invention, model, design, secret formula or process or trade mark or similar property 20 per cent of the gross amount of such consideration ( b )royalties other than any portion there-of covered by ( a ) above 40 per cent of the gross amount of such royalties. (b) Royalties payable under agreements made before the 1st April, 1976, and approved by the Central Government. Income-tax will be deducted at source from royalties paid by Indian concerns to foreign companies under approved agreements made after the 31st March, 1961, but before the 1st April, 1976, on the same basis as was provided in the Finance Act, 1975. In other words, no income-tax will be deducted at source from any lump sum consideration paid for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawings or specifications relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if the payment is made outside India. Income-tax will be deducted at the rate of 52.5 per cent. (income-tax 50 per cent. plus surcharge 2.5 per cent.) from royalty income other than such lump sum consideration payable outside India. The deduction at the rate of 52.5 per cent. will be made with reference to the gross amount of such royalty unless the person responsible for payment of royalty has obtained a certificate under section 195(2) of the Income-tax Act, 1961, specifying the appropriate proportion of such royalty chargeable under that Act and, in that case, the above rate will be applied to the portion of the royalty income which is so chargeable. While determining the chargeable portion of the royalty income, the Income-tax Officer will have to keep in view the special provisions of new section 44D relating to computation of income by way of royalty, etc., in the case of foreign companies as explained in paragraph 26 of this circular. (c) Royalties payable under agreements made on or after the 1st April, 1976, in cases where agreements are made on the basis of proposals approved by the Central Government before that date. Under section 9(1)(vi) of the Income-tax Act, as inserted by section 4 of the Finance Act, an agreement made by a foreign company with an Indian concern on or after the 1st April, 1976, can, at the option of the foreign company, be regarded as an agreement made before that date if the agreement is made on the basis of proposals approved by the Central Government before that date. Where, by virtue of the aforesaid provision, an agreement made on or after the 1st April, 1976, is regarded as an agreement made before that date, the deduction of income-tax at source will be made on the same basis as in the case of royalties payable under agreements made before that date and explained in (b) above. (d) Royalties payable under agreements which have not been approved or which were made before the 1st April, 1961. From other royalties payable by Indian concerns to foreign companies, e.g., royalties payable under agreements which have not been approved by the Central Government or those which were made before the 1st April, 1961, income-tax will be deducted at the rate of 73.5 per cent. (income-tax 70 per cent. plus surcharge 3.5 per cent.). The deduction at this rate will be made with reference to the gross amount of such royalty unless the person responsible for payment of royalty has obtained a certificate under section 195(2) of the Income-tax Act, 1961, specifying the appropriate proportion of such royalties chargeable under that Act and in that case, the above rate will be applied to the portion of the royalty income which is so chargeable. While determining the chargeable portion of the royalty income, the Income-tax Officer will have to keep in view the provisions of section 44D as explained in paragraph 26 of this circular. It has also to be noted that whereas lump sum consideration received by a foreign company for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, etc., under an agreement made before the 1st April, 1976, and approved by the Central Government will not be deemed to accrue or arise in India, this exemption is not available in respect of such lump sum consideration received under an agreement which has not been approved by the Central Government. Deduction of income-tax from income by way of technical service fees. 7. The rate for deduction of tax at source from technical service fees paid by Indian concerns to foreign companies will depend upon whether the technical service fees are payable under approved agreements or not, and where such technical service fees are payable under approved agreements, whether such agreements were made before 1st April, 1976, or on or after that date. The rates specified in this behalf are as follows:- 1. From technical service fees payable under approved agreements made on or after 1-4-1976 40 per cent of the gross amount. 2. *From technical service fees payable under appproved agreements made after 29-2-1964 but before 1-4-1976 52.5 per cent (income- tax 50 per cent plus 2.5 per cent surcharge). 3. *From technical service fees payable under agreements which have not been approved by the Central Government or those which were made before1-3-1964 73.5 per cent (income- tax 70 per cent plus 3.5 per cent surcharge). * In either of these cases, the deduction at the specified rate will be made with reference to the gross amount of technical service fees unless the person responsible for paying such fees has obtained a certificate under section 195(2) of the Income-tax Act, 1961, specifying the appropriate proportion of such fees chargeable under that Act and, in that case, the specified rates will be applied to the portion of the fees which is so chargeable. Further, while determining the chargeable portion of the technical service fees the Income-tax Officer will have to keep in view the provisions of new section 44D as explained in paragraph 26 of this circular. (iii) 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 1976-77 8. Rates for deduction of income-tax at source from "Salaries" in the case of individuals during the financial year 1976-77, as 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. These rates are also applicable for deduction of income-tax at source during the financial year 1976-77, 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 1976-77, 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 likely to transfer property to avoid tax [section 175]; and assessment of profits of a discontinued business [section 176(2)]. 9.1 The rates specified in Part III of the First Schedule to the Finance Act 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 1976-77. The main differences are as follows:- (a) The rate schedule in the case of individuals, Hindu undivided families (other than those having at least one member with independent total income exceeding Rs.8,000), unregistered firms, associations of persons, bodies of individuals and artificial juridical persons has been completely recast. The Table below gives the comparative rates of income-tax on various slabs of income (a) as specified in Part I of the First Schedule to the Finance Act, and (b) as specified in Part III of the First Schedule to the Finance Act.1976 COMPARATIVE RATES ON VARIOUS SLABS OF INCOME IN THE CASE OF INDIVIDUALS, ETC. Income slab Rate as specified in Part I of the First Schedule to the Finance Act Per cent Rate as specified in Part III of the First Schedule to the Finance Act Per cent Up to Rs. 8,000 Nil Nil Rs. 8,001 - Rs.15,000 17 15 Rs.15,001 - Rs. 20,000 20 18 Rs. 20,001 - Rs. 25,000 30 25 Rs. 25,001 - Rs. 30,000 40 30 Rs. 30,001 - Rs. 50,000 50 40 Rs. 50,001 - Rs. 70,000 60 50 Rs. 70,001 - Rs. 1,00,000 70 55 Over Rs. 1,00,000 70 60 The income-tax calculated on the basis of the above rates will, in either case, be increased by a surcharge of 10% of such income-tax. (b) In the case of Hindu undivided families, having one or more members with independent income exceeding Rs.8,000, the rates of income-tax applicable in respect of various slabs of income are the same as those specified for the next higher slab in the case of individuals, other Hindu undivided families, unregistered firms, etc. (c) In the case of co-operative societies, registered firms and local authorities, the rates of income-tax remain at the existing levels. 9.2 No separate rate schedule has been specified in the case of Life Insurance Corporation of India. This is in view of the position that the basis of taxation of profits from life insurance business has been modified and the rate of income-tax to be charged on the profits and gains of the life insurance business determined on the modified basis has been laid down in new section 115B of the Income-tax Act. These changes have been explained in paragraphs 37 and 40 of this circular. 9.3 In the case of other companies, the rates of income-tax, as also surcharge thereon, have been specified in Paragraph E of Part III of the First Schedule to the Finance Act. These rates are the same as specified in Paragraph F of Part I of the First Schedule to the Finance Act. It may, however, be noted that royalties and technical service fees received by foreign companies under approved agreements will be charged to tax at the rate of 52.5 per cent. (income-tax 50 per cent. plus surcharge 2.5 per cent.) in case where such income is received under agreements made before the 1st April, 1976. Royalties received under agreements which, although made on or after that date, are regarded under section 9(1)(vi) as agreements made before that date will also be chargeable to income-tax at the rate of 52.5 per cent. [Royalties and technical service fees received under approved agreements made on or after the 1st April, 1976, will be chargeable to tax on gross basis at the rates specified in new section 115A of the Income-tax Act, as inserted under section 20 of the Finance Act. The position in this behalf has been explained in paragraph 36]. Deposits with IDBI in lieu of payment of surcharge on income-tax payable by companies. 10.1 Although the rates of income-tax and surcharge thereon in the case of companies have been maintained at the existing levels, the Finance Act has provided that a company may, in lieu of payment of surcharge on income-tax, make, before the last instalment of advance tax is due in its case, a deposit with the Industrial Development Bank of India under a scheme to be framed by the Central Government in this behalf and if it does so, the amount of surcharge payable by it shall be reduced by the amount of such deposit. It may be noted that in order to get the benefit of this provision, it will be necessary for the company to make the requisite deposit with the IDBI before the last instalment of advance tax is due in its case and, accordingly, where the last instalment of advance tax falls due on the 15th December, 1976, the deposit will have to be made on or before the 14th December, 1976, Similarly, where the last instalment is due on the 15th March, 1977, the deposit will be required to be made on or before the 14th March, 1977. The liability towards payment of surcharge on income-tax will stand reduced only to the extent of the deposit made within the time allowed and surcharge on income-tax will be payable to the extent of shortfall in the deposits, if any. In making an order under section 210 of the Income-tax Act for payment of advance tax, the Income-tax Officer will take into account the full amount of surcharge on income-tax payable by the company and where the company makes any deposit with the IDBI, the order made by the Income-tax Officer under section 210, as also the notice of demand issued in pursuance thereof, shall have effect as if the surcharge on income-tax specified therein had been reduced by the amount of deposit made by the company. Where the advance tax is paid by the company on the basis of its own estimate, the company will not be required to pay surcharge on income-tax to the extent of the deposit made by it with IDBI. 10.2 It has also been provided that a company may make a deposit with the IDBI under a scheme to be notified by the Central Government in this behalf at any time during the financial year 1976-77 and if it does so, the surcharge on income-tax payable by it for the assessment year 1977-78 shall be reduced by the amount of the deposit so made. In this connection, it may be noted that the abatement in the liability towards surcharge on income-tax will be limited to the amount of deposit made during the financial year 1976-77 and the company will not be able to make any further deposit after the expiry of the financial year 1976-77 in lieu of its liability towards surcharge on income-tax, whether such liability arises on self-assessment or is determined on assessment or in any subsequent proceedings by way of rectification, appeal or revision. (iv) Partially integrated taxation of non-agricultural income with income derived from agriculture 11. As in the past, the Finance Act provides 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 will be taken into account for determining the rates of income-tax on incomes liable to tax for the assessment year 1976-77 as also for computation of advance tax and charging of income-tax on current incomes in cases where accelerated assessments are required to be made during the financial year 1976-77. The mode of computation of net agricultural income in such cases will be the same as set forth in the relevant provisions of the Finance Act, 1975, except that the unabsorbed losses in agriculture incurred during the previous years relevant to the assessment years 1974-75 and 1975-76 could be set off against the agricultural income for purposes of payment of "advance tax" during the financial year 1976-77 [Section 2 and the First Schedule to the Finance Act]. AMENDMENTS TO THE INCOME-TAX ACT Definition of "interest" - Section 2(28A) 12.1 The term "interest" has been defined in new clause (28A) inserted in section 2 of the Income-tax Act with a view to removing doubts about the true character of fees or other charges paid in respect of moneys borrowed or in respect of the credit facilities which have not been utilised. The definition is very wide and covers interest payable in any manner in respect of loans, debts, deposits, claims and other similar rights or obligations. It also includes any service fees or other charges in respect of such loans, debts, deposits, etc., as also fees in the nature of commitment charges on unutilised portion of credit facilities. This definition will be applicable for all purposes of the Income-tax Act. 12.2 The aforesaid amendment has come into force with effect from the 1st June, 1976, and is accordingly applicable for the purpose of deduction of income-tax at source from income by way of interest paid on or after that date and for assessment of such income for the assessment year 1977-78 and subsequent years. [Section 3(a) of the Finance Act]. Definition of "rate or rates in force" or "rates in force" - Section 2(37A). 13.1 The definition of the expression "rate or rates in force" or "rates in force" in clause (37A) has been amended in the context of the special rates of income-tax specified in sections 115A and 115B for the purpose of taxation of income by way of dividends, royalty and technical service fees received by foreign companies under approved agreements made by such companies with Indian concerns on or after the 1st April, 1976, and for the purpose of taxation of profits and gains of life insurance business. The effect of this amendment will be that in computing the advance tax payable by foreign companies, the tax on income by way of dividends, royalty and technical service fees received by foreign companies under such agreements as also on profits and gains of the insurance business in the case of all categories of taxpayers will be calculated in accordance with the provisions of the new sections 115A and 115B of the Income-tax Act. 13.2 The aforesaid amendment has come into force with effect from the 1st June, 1976, and is applicable for the purposes of calculating advance tax payable during the financial year 1976-77 and subsequent years. [Section 3(b) of the Finance Act] Source rule for "interest" - Section 9(1)(i) (v). 14.1 A non-resident taxpayer is chargeable to tax in India in respect of income from whatever source derived which is received or is deemed to be received in India or which accrues or arises or is deemed to accrue or arise in India. Under section 9(1)(i) of the Income-tax Act, as it stood prior to its amendment by the Finance Act, any income accruing or arising "through or from any money lent at interest and brought into India in cash or in kind" was deemed to accrue or arise in India. It was judicially held that to satisfy the test of taxability, the lending of money abroad and the bringing of the same into India should be an integral part of a composite transaction and the bringing of money into India should be with the knowledge of the lender. Thus, interest on moneys borrowed abroad and brought without the knowledge of the lender was not chargeable to tax in India. 14.2 Section 9(1) has now been amended to replace the aforesaid provision by a simple and comprehensive source rule. Under the amended provision, interest income of the following types will be deemed to accrue or arise in India:- (a) Interest payable by the Central Government or any State Government; (b) Interest payable by a resident except in the following cases:- (i) Interest payable by a resident in respect of any debt incurred, or any moneys borrowed and used, for the purposes of a business or profession carried on by him outside India; and (ii) interest payable by a resident in respect of any debt incurred, or any moneys borrowed and used, for the purposes of making or earning any income from any source outside India. It may be noted that where moneys borrowed by a resident for the purposes of a business or profession carried on by him outside India are actually used for any other purpose, interest payable thereon will be deemed to accrue or arise in India. Similarly interest payable on moneys borrowed by a resident for the purposes of making or earning any income from any source outside India will be deemed to accrue or arise in India if the moneys are actually used for any purpose in India. (c) Interest payable by a non-resident in respect of any debt incurred, or money borrowed and used, for the purposes of a business or profession carried on by him in India. It may be noted that interest payable by a non-resident in respect of any debt incurred, or moneys borrowed and used, for the purposes of making or earning any income from any source, other than a business or profession carried on by him in India, will not be deemed to accrue or arise in India. Thus, if a non-resident 'A' borrows moneys from a non-resident 'B' and invests the same in share of an Indian company, interest payable by 'A' to 'B' will not be deemed to accrue or arise in India. Similarly, if a lead bank obtains loans outside India from a consortium of foreign banks and lends the same to an Indian concern, interest paid by the lead bank to the members of the consortium will not attract liability towards income-tax in India. 14.3 The aforesaid amendment has come into force with effect from the 1st June, 1976, and is accordingly applicable for the deduction of income-tax at source from income by way of interest paid on or after that date and for assessment of such income for the assessment year 1977-78 and subsequent years [Section 4(a) (b) (Part) of the Finance Act] Source rule for "royalty" - Section 9(1)(vi) 15.1 A non-resident taxpayer is chargeable to tax in India in respect of income by way of royalty which is received or is deemed to be received in India or which accrues or arises or is deemed to accrue or arise in India. The Income-tax Act, however, does not contain any definition of the term "royalty" not is there any clear-cut source rule specifying the circumstances in which royalty income can be regarded as accruing or arising in India. Further, lump sum payments made for the supply of know-how are not chargeable to tax where such know-how is supplied from abroad and the payment therefore is made outside India even though the know-how is used in India, if no part thereof is attributable to any services rendered in India. 15.2 The Finance Act has inserted a new clause (vi) in section 9(1) of the Income-tax Act clearly specifying the circumstances in which the royalty income will be deemed to accrue or arise in India and also defining the term "royalty" 15.3 Under the new provision, royalty income of the following types will be deemed to accrue or arise in India:- (a) Royalty payable by the Central Government or any State Government; (b) Royalty payable by a resident, except where the payment is relatable to a business or profession carried on by him outside India or to any other source of his income outside India; and (c) Royalty payable by a non-resident if the payment is relatable to a business or profession carried on by him in India or to any other source of his income in India. 15.4 In view of the aforesaid amendment, royalty income consisting of lump sum consideration for the transfer outside India in respect of, any data, documentation, drawings or specifications relating to any patent invention, model, design, secret formula or process or trade mark or similar property, will ordinarily become chargeable to tax in India. In order, however, to ensure that foreign suppliers of technical know-how who had entered into agreements or had finalised proposals for the receipt of such lump sum royalties with the approval of the Central Government on the understanding that such payment would be exempt from income-tax, it has been provided that such lump sum payments received under approved agreements made before 1st April, 1976, will not be deemed to accrue or arise in India, and for this purpose, an agreement made on or after 1st April, 1976, will be deemed to have been made before that date if the following conditions are fulfilled:- (i) in the case of a taxpayer other than a foreign company, if the agreement is made in accordance with proposals approved by the Central Government before that date; (ii) in the case of a foreign company, if the conditions referred to in (1) above is satisfied, and the foreign company exercises an option by furnishing a declaration in writing to the Income-tax Officer that the agreement may be regarded as having been made before the 1st April, 1976. The option in this behalf will have to be exercised before the expiry of the time allowed under section 139(1) or section 139(2) (whether fixed originally or on extension) for furnishing the return of income for the assessment year 1977-78 or the assessment year in which the royalty income first became chargeable to tax, whichever assessment year is later. The option so exercised will be final not only for the assessment year in relation to which it is made but also for every subsequent year. [The intention of giving an option to foreign companies to claim that agreements made on or after the 1st April, 1976, may be regarded as agreements made before the date is that where exemption from income-tax in respect of lump sum royalty is allowed, the balance of the royalty income should be charged to tax at the rates applicable in the case of such income derived under approved agreements made before that date. In other words, taxpayers exercising the option will be placed on a par with taxpayers deriving royalty income under approved agreements made before the 1st April, 1976, in all respects. This aspect has been explained in detail in paragraph 36.1 of the circular.] 15.5 For the purposes of the aforesaid source rule, "royalty" has been defined in Explanation 2 to section 9(1)(vi). It will be seen that the definition is wide enough to cover both industrial royalties as well as copyright royalties. Further, the definition specifically excludes income which would be chargeable to tax under the head "Capital gains" and accordingly such income will be charged to tax as capital gains on a net basis under the relevant provisions of the law. 15.6 The amendments referred to in this paragraph have come into force with effect from the 1st June, 1976, and will apply in relation to the assessment year 1977-78, and subsequent years. [Section 4(b)(Part) of the Finance Act]. Source rule for "fees for technical services" - Section 9(1)(vii). 16.1 As in the case of royalty, the Finance Act has amended the Income-tax Act cleary specifying the circumstances in which income by way of "fees for technical services" will be deemed to accrue or arise in India and also defining the expression "fees for technical services". For this purpose, a new clause (vii) has been inserted in section 9(1) of the Income-tax Act. 16.2 Under the new provision, income by way of "fees for technical services" of the following types will be deemed to accrue or arise in India:- (a) Fees for technical services payable by the Central Government or any State Government. (b) Fees for technical services payable by a resident, except where the payment is relatable to a business or profession carried on by him outside India or to any other source of his income outside India or to any other source of his income outside India; and (c) Fees for technical services payable by a non-resident if the payment is relatable to a business or profession carried on by him in India or to any other source of his income in India. 16.3 The expression fees for technical services" has been defined to mean any consideration (including any lump sum consideration) for the rendering of managerial, technical or consultancy services, including the provision of services of technical or other personnel). It, however, does not include fees of the following types, namely:- (i) Any consideration received for any construction, assembly, mining or like project undertaken by the recipient. Such consideration has been excluded from the definition on the ground that such activities virtually amount to carrying on business in India for which considerable expenditure will have to be incurred by a non-resident and accordingly it will not be fair to tax such consideration in the hands of a foreign company on gross basis or to restrict the expenditure incurred for earning the same to 20 per cent. of the gross amount as provided in new section 44D of that Act. Consideration for any construction, assembly, mining or like project will, therefore, be chargeable to tax on net basis, i.e., after allowing deduction in respect of costs and expenditure incurred for earning the same and charged to tax at the rates applicable to the ordinary income of the non-resident as specified in the relevant Finance Act. (ii) Consideration which will be chargeable to tax in the hands of the recipient under the head "Salaries" 16.4 The aforesaid amendment has come into force with effect from the 1st June, 1976, and will apply in relation to the assessment year 1977-78 and subsequent years. [Section 4(b)(Part) of the Finance Act] Exemption of remuneration received by employees of foreign Governments in connection with their training in India in certain cases-Section 10(6)(xi). 17.1 A new clause (xi) has been inserted in section 10(6) with a view to exempting from income-tax remuneration received by employees of foreign Governments deputed to India for training in Government establishments or public sector undertakings. For this purpose, public sector undertakings will be statutory corporations; companies wholly owned by the Central Governments or State Governments or jointly by the Central and State Governments and subsidiaries of such companies; societies registered under the Societies Registration Act, 1860, or any other similar law, which are wholly financed by the Central Government or State Governments or jointly by the Central Government and State Governments. 17.2 The aforesaid amendment has come into force with effect from the 1st April, 1976, and will accordingly apply in relation to the assessment year 1976-77, and subsequent years. [Section 5(a) of the Finance Act] Exemption from income-tax on interest payable by industrial undertakings on foreign loans-Section 10(15)(iv)(f) 18.1 Hitheto, interest paid by industrial undertakings in India to foreign lenders qualified for exemption from income-tax under section 10(15)(iv) of the Income-tax Act in the following cases:- (i) Interest payable by an industrial undertaking in India on moneys borrowed by it under a loan agreement entered into with any approved financial institution in a foreign country. [Section 10(15)(iv)(b)] (ii) Interest payable by an industrial undertaking in India on any moneys borrowed or debt incurred in a foreign country in respect of purchase outside India of raw materials or capital plant and machinery, to the extent such interest does not exceed the amount of interest calculated at the rate approved by the Central Government in this behalf. [Section 19(15)(iv)(c)] In order to enable our industrial undertakings to raise loans in foreign currency even for purposes not covered by the existing provisions, a new item (f) has been inserted in sub-clause (iv) of clause 15 of section 10 so as to provide for exemption from income-tax of interest payable by an industrial undertaking in India on any moneys borrowed by it in foreign currency from sources outside India. The exemption will be available only where moneys are borrowed under a loan agreement approved by the Central Government having regard to the need for industrial development in India and will be limited to only so much of the interest as does not exceed the amount of interest paid at the rate approved by the Central Government having regard to the terms of the loan and its repayment. 18.2 The proposed amendment has come into force with effect from the 1st June, 1976, and will apply in relation to the assessment years 1977-78, and subsequent years. [Section 5(b) of the Finance Act] Exemption from income-tax of Additional Facilities Allowance received by Members of Parliament - Section 10(17) 19.1 Under the Members of Parliament (Additional Facilities) Rules, 1975, members of Parliament are entitled to receive, in lieu of additional facilities, an allowance at the rate of Rs.500 per month. Section 10(17) of the Income-tax Act, has been amended in order to exempt from income-tax the allowance received under the aforesaid Rules. 19.2 This amendment has come into force with effect from the 1st April, 1976, and is accordingly applicable in relation to the assessment year 1976-77, and subsequent years. [Section 5(c) of the Finance Act] Mode for investing or depositing funds of charitable trusts, etc.-Section 13(5) 20.1 Under section 13(1)(d) of the Income-tax Act, charitable or religious trusts and institutions will be denied exemption from income-tax for the assessment year 1979-80 and subsequent years, if the funds of the trust or institution are invested or deposited (or continue to remain invested or deposited) during any previous year commencing on or after the 1st April, 1978, otherwise than in forms or modes specified in section 13(5) of that Act. The modes specified in that section include deposits with nationalised banks but not deposits with the State Bank of India or its subsidiaries. This being an unintended lacuna, the Finance Act has amended section 13(5)(a)(iii) in order to secure that deposits in any account with the State Bank of India or with any of its subsidiary banks will also be a proper mode for investing or depositing funds of charitable or religious trusts or institutions. 20.2 The aforesaid amendment will take effect from the 1st April, 1977. [Section 6 of Finance Act] Initial depreciation allowance in respect of residential houses for low-paid employees, etc.-Section 32(1)(iv). 21.1 Under section 32(1)(iv) of the Income-tax Act, a taxpayer is entitled to a deduction on account of initial depreciation allowance in respect of buildings newly erected by him which are solely used for the purposes of residence of his low-paid employees or are mainly used for the welfare of such employees as hospitals, creches, canteens, etc. The initial depreciation allowance in respect of such buildings is allowed at the rate of 20 per cent. of the actual cost thereof. For the purposes, of this concession, employees having incomes chargeable under the head "Salaries" up to Rs.7,500 were hitherto regarded as low-paid employees. The Finance Act has raised the aforesaid monetary limit to Rs.10,000. 21.2 The aforesaid amendment will take effect from 1st April, 1977, and will accordingly apply in relation to the assessment year 1977-78 and subsequent years. [Section 7(1) of the Finance Act] Initial depreciation allowance in respect of machinery or plant-Section 32(1)(vi) 22. The Finance Act has replaced the scheme of initial depreciation allowance by a scheme of "investment allowance". Section 32(1)(vi) has, therefore, been amended to ensure that no initial depreciation is allowed in respect of any ship or aircraft acquired after the 31st March, 1976, or any machinery or plant installed after that date. The other amendments to this section are consequential to the insertion of new section 32A in the Income-tax Act and the amendment of the Ninth Schedule to that Act as explained in later paragraphs. [Section 7(2) of the Finance Act] Investment allowance-Section 32A 23.1 As stated in the preceding paragraph, the Finance Act has replaced the scheme of initial depreciation allowance by a scheme of investment allowance. The new scheme is broadly on the lines of the development rebate scheme that was discontinued earlier. The main respects in which the new investment allowance scheme differs from the development rebate scheme are explained hereinbelow. 23.2 Whereas development rebate was allowed, at varying rates, in respect of ships and machinery or plant installed in all industries, investment allowance will be admissible at the uniform rate of 25 per cent., only in respect of the following assets:- (i) New ships and new aircraft acquired after the 31st March, 1976, by taxpayers engaged in the business of operation of ships or aircraft. For this purpose, second-hand ships will be regarded as new if the conditions specified in the Explanation to section 32(1)(vi) are fulfilled. It should be noted that new ships and aircraft will qualify for investment allowance only in the hands of taxpayers carrying on the business of operating ships or aircraft and the allowance will not be available in respect of ships or aircraft acquired by other taxpayers. (ii) New machinery or plant installed after the 31st March, 1976, for the purposes of business of generation or distribution of electricity or any other form of power. For this purpose, as also for the purposes of items (iii) and (iv) below, reconditioned machinery or plant imported from abroad will be regarded as new if the conditions specified in the Explanation to section 32(1)(vi) are fulfilled. (iii) New machinery or plant installed for the purposes of business of construction, manufacture or production of any one or more of the articles or things specified in the list in the Ninth Schedule to the Income-tax Act. The list in the Ninth Schedule has been amended to include the following further items:- 1. Carbon and graphite products. 2. Inorganic heavy chemicals other than soda ash and caustic soda. [Soda ash and caustic soda are already covered by items 12 and 13 of the list]. 3. Organic heavy chemicals. 4. Synthetic rubber and rubber chemicals (including carbon black). 5. Industrial explosives. 6. Basic drugs. 7. Industrial sewing machines. 8. Finished leather and leather goods, including footwear made wholly or mainly of leather. Besides, item 4 in the Ninth Schedule which read as "Steel castings and foreigns and malleable iron and steel castings" has been substituted by a new item, namely:- "Steel castings and forgings and alloy, malleable and S.G. iron castings." As a result of this change, alloy and S.G. iron casting will also qualify for investment allowance. (iv) New machinery or plant installed in a small scale industrial undertaking for the purposes of business of manufacture or production of any articles or things, including articles or things specified in the Ninth Schedule. For this purpose, an industrial undertaking will be regarded as a small scale industrial undertaking if the aggregate value of machinery or plant installed therein, as on the last date of the previous year, does not exceed Rs.10 lakhs (as against Rs. 7.5 lakhs for the purposes of initial depreciation allowance) and, in computing the value of such machinery for this purpose, the value of tools, jigs, dies and moulds will not be taken into account. 23.3 Development rebate was not admissible in respect of the following assets, namely:- (i) Machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house; (ii) Office appliances and road transport vehicles. Investment allowance will be inadmissable not only in respect of the assets referred to in (i) and (ii) above but also in respect of the following, namely:- (a) Machinery or plant the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the taxable income of any one previous year. Thus, no investment allowance will be admissible in respect of (i) any machinery or plant the actual cost whereof, being less than Rs.750, is allowed to be written off by way of depreciation allowance under the first proviso to section 32(1)(ii); (ii) any machinery or plant on which depreciation is admissible at the rate of 100 per cent. under the Income-tax Rules, 1962; or (iii) any machinery or plant the entire cost of which is allowed as deduction under section 35(2)(ia) by way of expenditure of a capital nature on scientific research. (b) Ships, machinery or plant in respect of which the deduction by way of development rebate is admissible under section 33 of the Income-tax Act, namely:- (i) ships acquired before January 1, 1977, if the contract for the purchase thereof had been entered into by the taxpayer with the builder or owner thereof before December 1, 1973 (vide section 16 of the Finance Act, 1974, as amended by section 30 of the Finance Act, 1975), and (ii) any machinery or plant, being coal-fired equipment or machinery or plant for converting oil-fired equipment into coal-fired equipment, installed by the taxpayer before the 1st June, 1977 [vide section 16(b) of the Finance Act, 1974]. 23.4 The deduction on account of development rebate was ordinarily admissible in the year in which the ship was acquired or the machinery or plant was installed. Where, however, the ship, machinery or plant was first put to use in the year immediately following the year in which it was acquired or installed, development rebate was allowed in such immediately following year. Further, where the total income (as computed before making any deduction in respect of development rebate under section 33 or development allowance under section 33A or any deduction under Chapter VIA of the Income-tax Act) for the assessment year relevant to the previous year in which the ship was acquired or the machinery or plant was installed, or the immediately following previous year, as the case may be, was nil or less than the full amount of development rebate otherwise admissible for that year, the sum to be allowed by way of development rebate for that assessment year was restricted to such amount as would have been sufficient to reduce the total income so computed to nil. The unabsorbed development rebate was allowed to be carried forward for a period of eight years to be set off against profits of subsequent years. In manner referred to above was a loss, no development rebate was admissible for that year and, in a case where such total income was less than the amount of development rebate otherwise admissible, the deduction was limited to such total income. The position in regard to investment allowance is broadly similar. The amount of total income with reference to which the admissibility of investment allowance has to be determined will, however, be the total income as computed after making deduction in respect of development rebate under section 33 and development allowance under section 33A but without making any deduction in respect of investment allowance or any deduction under Chapter VIA of the Income-tax Act. The combined effect of the provisions of sections 32, 32A, 33, 33A and 72 is that in a case where there are allowances in the nature of depreciation allowance, investment allowance, development rebate, development allowance and losses, such allowances and losses would be deductible in the order given below, in cases where the profits are insufficient to absorb all of them:- (i) Current depreciation [Section 32(1)]. (ii) Carried forward losses of earlier years [Section 72(1)]. (iii) Unabsorbed depreciation of earlier years [Section 32(2)]. (iv) Unabsorbed development rebate of earlier years [Section 33(2)(ii)]. (v) Current development rebate [Section 33(2)(i)]. (vi) Unabsorbed development allowance of earlier years [Section 33A(2)(ii)]. (vii) Current development allowance [Section 33A(2)(ii)]. (viii) Unabsorbed investment allowance of earlier years [Section 32A(3)(ii)]. (ix) Current investment allowance [Section 33A(3)(i)]. 23.5 Development rebate was admissible if the following conditions were fulfilled:- (i) The prescribed particulars had been furnished by the taxpayer in respect of the ship, machinery or plant. (ii) An amount equal to 75 per cent. (50 per cent. in the case of ships) of the development rebate to be actually allowed was debited to the profit and loss account of the relevant previous year and credited to a special reserve account. The reserve so created was required to be utilised for the purpose of the business of the undertaking for a period of eight years next following the year in which it was created, and during this period could not be used (a) for distribution by way of dividends or profit or (b) for remittances outside India as profits or for the creation of any asset outside India. The requirement of creation of reserve did not, however, apply to electricity companies licensed under the Electricity (Supply) Act, 1948. (iii) The ship or aircraft could not be sold or otherwise transferred during the period of eight years from the end of the year of acquisition or installation, except to the Government, a local authority, a statutory corporation or a Government company or in connection with amalgamation or succession covered by sub-sections (3) and (4) of section 33. The condition at (i) above regarding furnishing of prescribed particulars has been retained in respect of investment allowance as well. The condition at (ii) above regarding creation of a special reserve has been slightly modified inasmuch as the amount credited to the "Invest Allowance Reserve Account" will now be required to be utilised for acquiring new ships or new aircraft or new machinery or plant [other than machinery or plant referred to in clauses (a), (b) and (d) of the proviso to section 32A(1)] for the purposes of business of the undertaking during a period of ten previous years next following the previous year in which the ship or aircraft was acquired or the machinery or plant was installed. During the interregnum, the amount credited to the Investment Allowance Reserve Account could be utilised for any purposes of the business of the undertaking other than (a) for distribution by way of dividends or profits, or (b) for remittances outside India as profits or for creation of any asset outside India. Further, unlike the development rebate scheme, the requirement of creation of investment allowance reserve will apply even in the case of electricity companies licensed under the Electricity (Supply) Act, 1948. [As explained earlier, in a case where the total income (as computed before making any deduction in respect of development rebate under section 33 or development allowance under section 33A or under Chapter VIA of the Income-tax Act) was a loss, no development rebate was admissible for that year, and in a case where such total income was less than the amount of the development rebate otherwise admissible, the deduction on account of development rebate was limited to such total income. Since the obligation for creation of a statutory reserve was limited to 75 per cent. (50 per cent. in the case of ships) of the development rebate actually allowed, there was no obligation to create a statutory reserve in a year of loss. There was, however, some doubt regarding the correct legal position in this matter. The position has been clarified in relation to investment allowance in sub-section (4) of section 32A. A taxpayer will not, therefore, be required to create investment allowance reserve during the year of installation of machinery or plant if there is no income in that year and such reserve should be created in the year when there is income.] The condition at (iii) relating to restrictions on sale or transfer of ship, aircraft, machinery or plant has been retained in respect of investment allowance as well. 23.6 In the Board's Circular F.No.10/49/65-ITAI dated 14th October, 1965, inter alia, it was stated that where there was no deliberate contravention of the provision relating to creation of development rebate reserve, the Income-tax Officer may condone genuine deficiencies subject to the same being made good by the taxpayer through creation of adequate additional reserve in the current year's books in which the assessment is framed. This instruction has been put on a statutory basis in a slightly modified form in relation to investment allowance. It has been specifically provided that any deficiency in the amount transferred to the investment allowance reserve account may be allowed to be made up in cases where the amount transferred by the taxpayer to the Investment Allowance Reserve Account is not less than the amount required to be so transferred on the basis of the amount of investment allowance claimed in the return of income. For this purpose, the Income-tax Officer will be required to give a notice in writing giving the taxpayer an opportunity to transfer further amounts to the Investment Allowance Reserve Account either out of the profits of the previous year in which notice is served or out of the profits of the immediately preceding year if the accounts for that year have not been made up. If the taxpayer transfers the requisite further amount to such account within the time allowed by the Income-tax Officer, the amount so transferred will be regarded as having been transferred to the Investment Allowance Reserve Account of the previous year in which the deduction is admissible. Such transfer will, however, not be taken into account in determining the adequacy of the reserve required to be created by the taxpayer in respect of the previous year in which such further transfer is made. This provision will, however, not apply in a case where the difference in the total income returned by the taxpayer and the total income as proposed to be computed by the Income-tax Officer arises out of the application of the proviso to section 145(1) or section 145(2) or the concealment of income by the taxpayer. 23.7 Where any of the conditions subject to which investment allowance was admissible is contravened, the investment allowance will be withdrawn by amending, under new section 155(4A), the assessment for the year in which the allowance was made. In other words, if the ship, aircraft, machinery or plant is sold or otherwise transferred, before the expiry of a period of eight years in which the ship or aircraft was acquired or the machinery or plant was installed, in violation of the conditions referred to in paragraph 23.5, or if the taxpayer does not utilise the amount transferred to the Investment Allowance Reserve Account within a period of 10 years from the end of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed for the purposes of acquiring a new ship or an aircraft or machinery or plant [other than machinery or plant referred to in clauses (a), (b) and (d) of the proviso to section 32A(1)] or if he utilises, before the expiry of the period of ten years aforesaid, the amount credited to such reserve account for distribution by way of dividends or profits or for making remittances outside India, the investment allowance would be withdrawn by amending, under new section 155(4A), the assessment order under which the investment allowance was granted. 23.8. The provisions relating to continuance of investment allowance on amalgamation of companies or succession of a firm by a company are broadly on the lines of the scheme of development rebate. 23.9. The aforesaid amendments have come into force with effect from the 1st April, 1976, and will accordingly apply in relation to the assessment year 1976-77 and subsequent years. It may be noted that since investment allowance will not be admissible in respect of a ship or an aircraft acquired before the 1st April, 1976, or machinery or plant installed before that date, the provision will, in so far as it relates to the assessment year 1976-77, covers cases of acquisition of ships or aircraft or installation of machinery or plant after 31st March, 1976, in cases where the previous year relevant for that assessment year expires after that date, e.g., Ramnaumi year, Baisakhi year. [Section 8 of the Finance Act]. Deduction in respect of entertainment expenditure - Section 37(2A). 24.1. Hitherto, no deduction in respect of any entertainment expenditure incurred within India was admissible in computing the taxable profits from a business or profession. Such expenditure incurred outside India was, however, allowed as deduction, subject to the following limits:- (a) on the first Rs. 10,00,000 of profits and gains of the business or profession (computed before making any allowance for development rebate or development allowance or in respect of entertainment expenditure) ½ per cent or Rs. 5,000, which ever is higher ( b ) on the next Rs. 40,00,000 of such profits and gains ¼ per cent ( c ) on the next Rs. 1,20,00,000 1/8 per cent ( d ) on the balance of such profits and gains Nil. 24.2 The Finance Act has amended section 37 of the Income-tax Act in order to provide for deduction in respect of entertainment expenditure whether within or outside India within the existing ceiling limits applicable in respect of entertainment expenditure incurred outside India. The percentage limits will, however, be calculated with reference to the quantum of profits and gains of the business or profession as reduced by not only development rebate, development allowance and entertainment expenditure but also by investment allowance admissible under the new section 32A. 24.3. This amendment will take effect from the 1st April, 1977, and will accordingly be applicable in relation to the assessment year 1977-78 and subsequent years. Ceiling limit in respect of head office expenses in the case of non-residents-New Section 44C. 25.1. Non-residents carrying on any business or profession in India through their branches are entitled to a deduction, in computing the taxable profits, in respect of general administrative expenses incurred by the foreign head offices in so far as such expenses can be related to their business or profession in India. It is extremely difficult to scrutinise and verify claims in respect of such expenses, particularly in the absence of account books of the head office which are kept outside India. Foreign companies operating through branches in India sometimes try to reduce the incidence of tax in India by inflating their claims in respect of head office expenses. With a view to getting over these difficulties, the Finance Act has inserted a new section 44C in the Income-tax Act laying down certain ceiling limits for the deduction of head office expenses in computing the taxable profits in the case of non-resident taxpayers. Under this provision, the deduction in respect of head office expenses will be limited to- (i) an amount equal to 5 per cent. of the adjusted total income of the taxpayer for the relevant year; or (ii) the annual average of the head office expenditure allowed during a base period of three previous years, namely, the previous years relevant to the assessment years 1974-75 to 1976-77; or (iii) the actual amount of head office expenditure attributable to the business in India, whichever is the least. In cases where the adjusted total income of the resident for the current year is a loss, the rate of 5 per cent. referred to at (i) above will be applied with reference to the average adjusted total income of the non-resident for the three previous years immediately preceding the relevant assessment year. 25.2 The term "head office expenditure", as defined for the purposes of this provision, means executive and general administration expenditure incurred by the non-resident taxpayer outside India, including expenditure in respect of- (a) rent, rates, taxes, repairs or insurance of any premises outside India used for the purposes of the business or profession; (b) salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profits in lieu of or in addition to salary, which are paid to any employee or other person employed in, or managing the affairs of, any office outside India; (c) travelling by any such employee or other person outside India; (d) such other matters connected with executive and general administration as may be prescribed by the Board. The expression "adjusted total income", "average adjusted total income" and "average head office expenditure" have been defined in the Explanation to the new section. 25.3 The aforesaid amendments have come into force with effect from 1st June, 1976, and will apply in relation to the assessment year 1977-78 and subsequent years. [Section 10(Part) of the Finance Act]. Special provision for computing income by way of royalties and technical service fees in the case of foreign companies-New Section 44D. 26.1 Hitherto, income by way of royalties received under agreements made after the 31st March, 1961, and approved by the Central Government was taxed in the hands of foreign companies at the rate of 52.5 per cent. (income-tax 50 per cent. plus surcharge 2.5 per cent.). Income by way of technical service fees received under agreements made after the 29th February, 1964, and approved by the Central Government was also taxed at the same rate. In either case, the taxable income was determined on net basis, i.e., after allowing deduction in respect of costs and expenses incurred for earning the income. 26.2 The Finance Act has inserted a new section 44D in the Income-tax Act, 1961, which lays down special provisions for computing income by way of royalties and fees for technical services received by foreign companies from Indian concerns. Where such income is received under agreements made before the 1st April, 1976, the deduction in respect of expenses incurred for earning such income will be subject to a ceiling limit of 20 per cent. of the gross amount of such income, as reduced by the amount, if any, of so much of the royalty income as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property. The aforesaid ceiling limit will be applicable in relation to all royalties and technical service fees received by foreign companies from Indian concerns, irrespective of whether such royalties or technical service fees are received under agreements which have been approved by the Central Government or not. For this purpose, an agreement made by a foreign company with an Indian concern on or after the 1st April, 1976, will be regarded as agreement made before that date if such agreement is made on the basis of proposals approved by the Central Government before that date and the foreign company has exercised an option in this behalf under section 9(1)(vi). 26.3 As regards royalties and technical service fees received under agreements made on or after the 1st April, 1976 (other than agreements which though made on or after that date or regarded as having been made before that date as explained in paragraph 26.2) no deduction will be allowed in computing the income from the aforesaid sources, regardless of whether the agreement has been approved by the Central Government or not. Such royalties and technical service fees will, if payable under agreements which have been approved by the Central Government, be charged to tax at the flat rates specified in new section 115A of the Income-tax Act. 26.4 These amendments have come into force with effect from the 1st June, 1976, and will apply in relation to the assessment year 1977-78 and subsequent years. [Section 10(Part) of the Finance Act]. Tax exemption in respect of capital gains arising on transfer of works of art, etc.-Section 47. 27.1 The Finance Act has inserted a new clause (ix) in section 47 of the Income-tax Act with a view to exempting from income-tax capital gains arising from the transfer of a capital asset, being any work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting, photograph or print, in cases where such asset is transferred by the taxpayer to the Government or a University established or incorporated by or under a Central, State or Provincial Act (including an institution declared under section 3 of the University Grants Commission Act, 1956, to be a University for the purposes of that Act) or the National Museum, National Art Gallery or National Archives. The provision will also apply in relation to capital gains arising from the transfer of works of art, etc., to any such public museum or institution as may be notified by the Central Government in the Official Gazette to be of national importance or to be of renown throughout any State or States. 27.2 The aforesaid amendment will come into force with effect from the 1st April, 1977, and will accordingly apply in relation to the assessment year 1977-78 and subsequent years. [Section 11 of the Finance Act] Withdrawal of exemption in respect of capital gains arising on transfer of personal jewellery in certain cases-Section 54C. 28.1 Hitherto, under section 54C of the Income-tax Act, capital gains arising from the transfer of personal jewellery were exempted from tax if the whole of the full value of the consideration received for the transfer of the jewellery was utilised for acquiring new jewellery within six months of the transfer. Where only a part of this consideration was used in acquiring new jewellery proportionate part of the capital gains was exempted from tax. This exemption, not being in conformity with the Government objective of channelising investment from unproductive to productive assets, has been withdrawn and section 54C has been omitted. 28.2 This amendment has come into force with effect from 1st April, 1976, and will, therefore, apply in relation to the assessment year 1976-77 and subsequent years. [Sections 12 and 26(a) of the Finance Act]. Special provision for computing income by way of dividends in the case of foreign companies-Section 57. 29.1 Hitherto, income by way of dividends received by a foreign company was taxed on net basis, i.e., after allowing a deduction in respect of expenses incurred by the company in earning such income. Foreign companies were also entitled to a deduction equal to 65 per cent. of the dividend income received from domestic companies. In the result only 35 per cent. of the net dividend income was charged to tax at the rate of 73.5 per cent. applicable in the case of foreign companies which gave an effective rate of 25.725 per cent. on the dividend income included in the taxable income. 29.2 The Finance Act has amended section 57 of the Income-tax Act so as to specifically provide that no deduction will be allowed in computing income by way of dividends received by a foreign company. The gross amount of dividends will, however, be charged to tax at the rate of 25 per cent. as provided in new section 115A of the Income-tax Act. 29.3 This amendment has come into force with effect from the 1st June, 1976, and will apply in relation to the assessment year 1977-78 and subsequent years. [Section 13 of the Finance Act]. Special provision for computing income by way of royalties and technical service fees chargeable to tax under the head "Income from other sources" in the case of foreign companies-Section 58. 30.1 As explained in paragraph 26 of this circular, new section 44D of the Income-tax Act has placed a ceiling limit over the deductible amount of expenditure incurred by foreign companies in earning income by way of royalties and technical service fees. The provisions of the aforesaid section will apply where income by way of royalties or technical service fees is chargeable under the head "Profits and gains of business or profession." The Finance Act has amended section 58 of the Income-tax Act to secure that the aforesaid ceiling limit is attracted even in cases where income by way of royalties or technical service fees received under approved agreements is charged to tax in the hands of a foreign company under the head "Income from other sources." 30.2 This amendment has come into force with effect from the 1st June, 1976, and will apply in relation to the assessment year 1977-78 and subsequent years. [Section 14 of the Income-tax Act]. Withdrawal of certain concessions in the case of certain Hindu undivided families-Section 80A. 31.1 The Finance Act has amended section 80A of the Income-tax Act with a view to withdrawing the following concessions in the case of Hindu undivided families having at least one member with independent total income exceeding the exemption limit:- (i) Deduction in respect of donations to certain funds, charitable institutions, etc. [Section 80G] (ii) Deduction in respect of rent-paid for residential accommodation. [Section 80GG] (iii) Tax concessions in respect of industrial undertakings established in backward areas. [Section 80HH] (iv) Tax holiday profits of new industrial undertakings. [Section 80J] (v) Deduction in respect of income from dividends, interest on securities, bank deposits, etc., up to maximum of Rs.3,000. [Section 80L] [As explained in paragraph 54.1, the additional deduction up to Rs.2,000 in respect of income from units in the Unit Trust of India has also been withdrawn in the case of Hindu undivided families having at least one member with independent total income exceeding the exemption limit]. (vi) Deduction in respect of profits and gains from the business of publication of books [Section 80QQ] 31.2 This amendment will take effect from the 1st April, 1977, and will accordingly apply in relation to the assessment year 1977-78 and subsequent years. [Section 15 of the Finance Act] Raising of the monetary ceiling limit in respect of contributions to recognised provident funds-Section 80C 32.1 Under section 80C of the Income-tax Act, certain categories of taxpayers are entitled to a deduction, in the computation of their taxable income, in respect of long-term savings made by them through specified media, e.g., life insurance, provident funds, etc. Savings through these media qualify for deduction within certain overall ceiling limits specified in this behalf in sub-section(4). Apart from these overall ceiling limits, there is an internal ceiling limit specified in section 80C(2)(d) in relation to contributions made by an employee to his account in a recognised provident fund which restricts the qualifying amount of such contributions to one-fifth of the salary, or Rs.8,000, whichever is less. The Finance Act has amended section 80C(2)(d) in order to raise the aforesaid monetary ceiling limit of Rs.8,000 to Rs.10,000. 32.2 This amendment will take effect from the 1st April, 1977, and will accordingly apply in relation to the assessment year 1977-78 and subsequent years. [Section 16 of the Finance Act] Tax concession in respect of donations made to State Housing Boards, Slum Clearance Boards, etc., and for family planning work-Section 80G. 33.1 The Finance Act has made the following amendments to section 80G of the Income-tax Act:- (i) At present an amount equal to 50 per cent. of the qualifying amount of donations made by a taxpayer to certain funds and charitable institutions is deductible in computing the taxable income of the donor. With a view to encouraging more liberal donations for the purposes of promoting family planning, an amendment has been made raising the deduction in respect of donations made to the Central Government or any State Government or to any such local authority, institution or association as is approved in this behalf by the Central Government from 50 per cent. to 100 per cent. of the qualifying amount of such donations where such donations are to be utilised by the recipient for the purpose of promoting family planning. It should be noted that whereas the percentage deduction in respect of such donations has been raised from 50 per cent. to 100 per cent. of the qualifying amount, the qualifying amount itself will be subject to the existing overall ceiling limits specified in sub-section (4) of section 80G in respect of donations other than those made to the National Defence Fund, the Jawaharlal Nehru Memorial Fund and the Prime Minister's Drought Relief Fund. (ii) With a view to encouraging donations to State Housing Boards, Slum Clearance Boards, etc., an amendment has been made to secure that donations made by taxpayers to such authorities qualify for tax concession under section 80G of the Income-tax Act in the same manner as donations to charitable institutions generally. Donations made to authorities referred to in section 10(20A), namely, those which are constituted in India by or under any law enacted either for the purpose of dealing and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, will qualify for this tax concession within the existing overall ceiling limits prescribed in sub-section (4) of section 80G in respect of donations other than those made to the National Defence Fund, Jawaharlal Nehru Memorial Fund and the Prime Minister's Drought Relief Fund. (iii) The deduction under section 80G is available in respect of "sums" paid by the taxpayer to certain funds, charitable institutions, etc., referred to in that section and not to donations in kind. The relevant provision has, however, been interpreted in certain judicial pronouncements to include even donations in kind. As donations in kind were not intended to qualify for this concession, a new Explanation 5 has been added in section 80G in order to clarify that no deduction will be allowed under that section unless the donation is of a sum of money, that is to say, it is made in cash (or by cheque, bank draft, etc.) and not in kind. 33.2 The amendments referred to at (i) and (ii) and above will take effect from the 1st April, 1977, and will accordingly apply in relation to the assessment year 1977-78, and subsequent years. The amendment referred to at (iii) has come into force with effect from the 1st April, 1976, and is applicable in relation to the assessment year 1976-77 and subsequent years. [Section 17 of the Finance Act] Deduction in respect of inter-corporate dividends-Section 80M. 34.1 As explained in paragraph 29.2 of this circular, income by way of dividends received by a foreign company will now be charged to tax on gross basis, i.e., without allowing any deduction whatsoever in respect of expenditure incurred for earning such income. The deduction currently available under section 80M of the Income-tax Act in respect of 65 per cent. of the dividend income derived from domestic companies is also being discontinued. Section 80M has been amended accordingly. 34.2 Under the existing law, income by way of dividends derived by domestic companies from new companies engaged in the manufacture of fertilisers, pesticides, paper, pulp and newsprint and cement is exempt from income-tax. The Finance Act has enlarged the area of this concession to include industries engaged in the manufacture of non-ferrous metals, ferro-alloys and special steels; steel castings and forgings; electric motors; industrial and agricultural machinery; earth moving machinery; machine tools; commercial vehicles; ships; tyres and tubes; heavy chemicals (including soda ash and caustic soda) and industrial explosives. 34.3 The above amendments will take effect from the 1st April, 1977, and will accordingly apply in relation to the assessment year 1977-78 and subsequent years. [Section 18 of the Finance Act]. Modification of rates of capital gains tax in the case of companies-Section 115. 35.1 Under the Income-tax Act, capital gains relating to long-term capital assets, i.e., assets which are held by a taxpayer for a period exceeding 60 months before their transfer, are charged to tax on a concessional basis. In the case of companies, long-term capital gains relating to buildings and lands or any rights therein are charged to tax at the rate of 47 per cent. in the case of widely-held companies having total income not exceeding Rs.1 lakh and at the rate of 55 per cent. in the case of other companies. Long-term capital gains relating to other assets are charged to tax at the rate of 45 per cent. in the case of all classes of companies. 35.2 The Finance Act has reduced the rates of income-tax on long-term capital gains in the case of companies. Long-term capital gains relating to buildings and lands or any rights therein will be charged to tax at the rate of 40 per cent., (as against 47 per cent. at present) in the case of widely-held companies having total income not exceeding Rs.1 lakh and at the rate of 50 per cent. (as against 55 per cent. at present) in the case of other companies. Long-term capital gains relating to other assets will be charged to tax at the rate of 40 per cent. (as against 45 per cent. at present) in the case of all classes of companies. 35.3 The aforesaid amendment will take effect from the 1st April, 1977, and will accordingly apply in relation to the assessment year 1977-78 and subsequent years. [Section 19 of the Finance Act] Rates of income-tax on dividends, royalty and technical service fees in the case of foreign companies-New section 115A. 36.1 Dividends received by foreign companies, as also income by way of royalty or fees for technical services received by them from Indian concerns in pursuance of approved agreements made on or after the 1st April, 1976, will now be charged to tax at flat rates applicable on the gross amount of such income. The rates of income-tax to be applied in respect of such income have been specified in new section 115A of the Income-tax Act and are as follows:- (i) Income by way of dividends will be charged to tax in the hands of the foreign company at the rate of 25 per cent. on gross basis. (ii) Income by way of royalties received under approved agreements made on or after the 1st April, 1976, will be charged to tax at 40 per cent. on gross basis, except that so much of such income as represent lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property will be charged to tax at the rate of 20 per cent. of the gross amount of such lump sum consideration. (iii) Income by way of fees for technical services received by a foreign company from an Indian concern in pursuance of an approved agreement made on or after the 1st April, 1976, will be charged to tax at the rate of 40 per cent. on the gross amount of such fees. The flat rates specified above will, however, not be applicable in relation to royalties received by a foreign company from an Indian concern in pursuance of an approved agreement made on or after the 1st April, 1976, if such agreement is regarded as an agreement made before the said date under section 9(1)(vi) of the Income-tax Act. Such royalties will be charged to tax on a net basis at the rates specified in the annual Finance Act in respect of income by way of royalties and technical service fees received by foreign companies from Indian concerns under approved agreements made before the 1st April, 1976. The deduction on account of expenses incurred for earning such royalties will, however, be limited to 20 per cent. of the gross amount of such income as explained in paragraph 26.2. 36.2 This amendment has come into force with effect from the 1st June, 1976, and will apply in relation to the assessment year 1977-78 and subsequent years. [Section 20 (Part) of the Finance Act] Rate of tax on profits and gains of life insurance business-New section 115B. 37.1 As explained in paragraph 40 of this circular, the Finance Act has substantially modified the basis for determining profits and gains of life insurance business. The rate of income-tax to be charged on the profits and gains of the life insurance business determined on the modified basis has been laid down in new section 115B of the Income-tax Act. Under the new provision, in the case of a taxpayer having income from life insurance business, the income-tax payable on the profits and gains of the life insurance business will be calculated at the rate of 12 1/2 per cent. of such profits and gains and the remaining income, if any, will be charged to tax at the rates specified in the annual Finance Act. 37.2 This amendment has come into force with effect from the 1st June, 1976, and will apply in relation to the assessment year 1977-78 and subsequent years. [Section 20 (Part) of the Finance Act] Withdrawal of investment allowance where prescribed conditions are contravened-New section 155(4A). 38.1 As explained in paragraph 23.7 of this circular, the investment allowance granted in respect of any assessment year will be withdrawn if any of the conditions subject to which the investment allowance was allowed is contravened. Section 155 of the Income-tax Act has been amended to provide the machinery for rectification of assessment in such cases. Where the ship, aircraft, machinery or plant is sold or otherwise transferred before the expiry of eight years from the end of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed to any person other than the Government, a local authority, a statutory corporation or a Government company or in connection with any amalgamation or succession covered by sub-sections (6) and (7) of section 32A it will be open to the Income-tax Officer to amend the relevant assessment order at any time before the expiry of a period of 4 years from the end of the previous year in which the sale or transfer took place. Where the taxpayer does not utilise the amount credited to the Investment Allowance Reserve Account within a period of ten years from the end of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed for the purposes of acquiring a new ship or aircraft or machinery or plant [other than machinery or plant referred to in clauses (a), (b) and (d) of the proviso to section 32A(1)], the rectification of the original assessment order will be permissible within a period of four years from the end of the 10 years aforesaid. Where the taxpayer utilises, before the expiry of the aforesaid period of ten years, the amount credited to the Investment Allowance Reserve Account for distribution by way of dividends or profits or for making remittance outside India as profits or for any purpose other than a purpose of the business of the undertaking, the rectification of the original assessment order will be permissible within a period of 4 years from the end of the previous year in which the amount is so utilised. 38.2 This amendment has come into force with effect from the 1st April, 1976. [Section 21 of the Finance Act] Deduction of income-tax at source from taxable component of interest income paid to non-residents-Section 195. 39.1 Hitherto, income-tax was required to be deducted at source from the amount of interest paid to non-residents and the person responsible for paying such interest could not obtain an order from the Income-tax Officer determining the appropriate portion of such interest chargeable to tax. This position created difficulties in cases where the net amount of interest income chargeable in the hands of a non-resident might have been only a small part of his gross interest income. The Finance Act has amended section 195 of the Income-tax Act. In order to enable the person responsible for paying any interest to a non-resident to obtain an order from the Income-tax Officer determining the appropriate proportion of such interest chargeable to tax so that deduction of income-tax at source is made only from the sum so determined by the Income-tax Officer. 39.2 This amendment has come into force with effect from the 1st June, 1976. [Section 22 of the Finance Act] Revised basis for computation of profits of life insurance business-First Schedule. 40.1 The Finance Act has amended the First Schedule to the Income-tax Act with a view to simplifying the determination of profits from life insurance business. Broadly, the profits and gains of a life insurance business are computed at the higher of the two following figures.- (a) the gross external incomings of the nature of rent, interest, etc., of the previous year (but exclusive of premiums received from the policy-holders and interest and dividends on any annuity fund) less the management expenses of that year; (b) the annual average of the valuation surplus disclosed by the last valuation made under the Insurance Act, 1938, after excluding from it any surplus or deficit relating to any earlier inter-valuation period and deducting 80 per cent. of the amount paid to or reserved for or expended on behalf of the policy-holders. The figure so arrived at is increased by the amount of expenditure and allowances which are not deductible under the provisions of sections 30 to 43A in computing income chargeable under the head "Profits and gains of business or profession". 40.2 Under the amendment made by the Finance Act, the method of determining the profits on the basis of gross external incomings, as stated at (i) in the preceding paragraph has been dropped and the profits and gains of a life insurance business will, in all cases, be taken to be the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act in respect of the last inter-valuation period ending before the commencement of the assessment year, so as to exclude therefrom any surplus or deficit which was made in any earlier inter-valuation period. No further adjustment to the annual average of the surplus so arrived at will be made. In other words, no further deduction will be allowed in respect of any portion of the amount paid or reserved or expended on behalf of the policy-holders nor will the expenditure and allowances which are not deductible under the provisions of sections 30 to 43A be added back. The profits and gains of life insurance business so arrived at will be charged to tax at the rate of 12 1/2 per cent. as explained in paragraph 37. 40.3 This amendment will come into force with effect from the 1st April, 1977, and will accordingly apply in relation to the assessment year 1977-78 and subsequent years. [Section 23 of the Finance Act] Extension of the list of backward areas--Eighth Schedule. 41.1 Under section 80HH of the Income-tax Act, all categories of taxpayers are entitled to a deduction equal to 20 per cent. of the profits derived by them from newly established industrial undertakings (other than those engaged in mining) and approved hotels set up in backward areas specified in the Eighth Schedule to that Act. The deduction is allowed in respect of each of the ten assessment years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or, as the case may be, the hotel starts functioning. Backward areas specified in the list in the Eighth Schedule are broadly the same as have been selected as industrially backward areas for the purposes of concessional finance by financial institutions. 41.2 In view of the position that a few districts in the State of Bihar, Punjab and Uttar Pradesh and the whole of the State of Sikkim have been added to the list of backward areas for the grant of concessional finance by financial institutions, the Finance Act has extended the list of backward areas for the purposes of the tax concession under the Income-tax Act as well. The new districts added to the list of backward areas are as follows: State Districts Bihar : New districts of Aurangabad, Begusarai, Bhojpur, Gaya, Monghyr, Nalanda and Nawadah. Punjab : Ferozepur. Uttar Pradesh : Rampur. Sikkim : The whole of the territory of the State of Sikkim. 41.3 The above amendment has come into force with effect from the 1st April, 1976, and will accordingly apply in relation to the assessment year 1976-77 and subsequent years. In this connection, it may be noted that industrial undertakings and hotels set up in the areas which have now been included in the Eighth Schedule will qualify for the deduction under section 80HH for the assessment year 1976-77 and subsequent years even if these were set up before the commencement of the previous year relevant to the assessment year 1976-77 provided other conditions specified in section 80HH are fulfilled. In the case of industrial undertakings which began to manufacture or produce articles during the previous year relevant to the assessment year 1976-77 as also in the case of hotels which started functioning during such previous year, the deduction will be admissible for a period of ten years. Where, however, the industrial undertaking began to manufacture or produce articles, or, as the case may be, the hotel started functioning before the commencement of the previous year relevant to the assessment year 1976-77, the deduction will be admissible for the unexpired period of ten years reckoned from the previous year in which the industrial undertaking began to manufacture or produce articles or the hotel started functioning. Thus, where the industrial undertaking was set up in the previous year relevant to the assessment year 1974-75, the deduction will be available for the assessment year 1976-77 and seven assessment years immediately following. [Section 24 of the Finance Act]. Amendment to the Ninth Schedule 42.1 The Ninth Schedule to the Income-tax Act has been amended and the effect of the amendments thereto, in so far as the provisions relating to investment allowance are concerned, has been explained in paragraph 23.2 of this circular. Another effect of the amendment will be that machinery or plant installed, during the previous year relevant to the assessment year 1976-77 but before the 1st April, 1976, for the purposes of business of manufacture of alloy and S.G. Iron castings will qualify for initial depreciation under section 32(1)(vi) of the Income-tax Act. 42.2 This amendment has come into force with effect from the 1st April, 1976, and will accordingly apply in relation to the assessment year 1976-77 and subsequent years. [Section 25 of the Finance Act]. AMENDMENTS TO THE COMPULSORY DEPOSIT SCHEME (INCOME-TAX PAYERS) ACT, 1974 Continuation of the Compulsory Deposit Scheme for another year and modifications in the rates of compulsory deposits. 43.1 Under the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974, individuals who are citizens of India, Hindu undivided families and trustees of discretionary trusts were required to make compulsory deposits for the assessment years 1975-76 and 1976-77 if their "current income" exceeded Rs. 15,000. In order to ensure that a part of the tax benefit resulting to taxpayers from the reduction of tax rates on personal incomes becomes available for our developmental effort, the Finance Act has amended the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974, with a view to continuing the compulsory deposit scheme in the case of income-tax payers for another year with certain modifications in rates. Hitherto, the rate of compulsory deposit on the initial slab of Rs. 25,000 of current income was 4 per cent.; on the slab of Rs. 25,001-70,000, 6 per cent. and on the slab over Rs. 70,000, 8 per cent. The rate of compulsory deposit for the assessment year 1977-78 on the initial slab of Rs. 25,000 has been retained at the existing level and the rate on the slab of Rs.25,001 - 70,000 has been raised from 6 per cent. to 10 per cent. and on the slab over Rs. 70,000 from 8 per cent. to 12 per cent. 43.2 This amendment has come into force with effect from the 1st April, 1976. [Section 43 of the Finance Act]. AMENDMENTS TO THE COMPANIES (PROFITS) SURTAX ACT, 1964 Raising of threshold for charging surtax 44.1 The Companies (Profits) Surtax Act, 1964, provides for the levy of a special tax called "surtax" on "chargeable profits" of companies in excess of the "statutory deduction". For this purpose, the chargeable profits broadly comprise the profits as computed for the purposes of income-tax as reduced by the income-tax payable thereon. At present, the statutory deduction is Rs.2 lakhs, or 10 per cent. of the capital of the company, whichever is higher. The capital of the company is the aggregate of the following amounts :- (i) Paid-up share capital. (ii) Development Rebate Reserve. (iii) Other reserves, excluding such amounts credited thereto as have been allowed as deduction in computing the taxable income. (iv) Debentures. (v) Long-term borrowings from Government, IFCI, ICICI, banking institutions, other approved financial institutions, as well as loans raised in foreign countries. Since debentures and long-term borrowings are included in the capital base, the chargeable profits are correspondingly increased by the amount of interest paid on such debentures and borrowings. 44.2 As a result of increase in interest rates in recent years, the return on safe investments has considerably increased. In order to make risk bearing investment in shares of companies more remunerative, the Finance Act has raised the threshold for the determination of chargeable profits from 10 per cent. to 15 per cent. of the capital of the company. No change has, however, been made in the alternative limit of Rs. 2 lakhs. The new threshold will be reckoned with reference to the owned capital of the company. In other words, while development rebate reserve, investment allowance reserve and other reserves will form part of the capital, long-term borrowings and debentures will be excluded from the capital base. As a logical consequence, the interest paid on long-term borrowings and debentures will also not be added back in computing the chargeable profits. 44.3 The aforesaid amendment will take effect from the 1st April, 1977, and will, accordingly, apply in relation to the assessment year 1977-78 and subsequent years. [Section 29 (Part) of the Finance Act]. Treatment of provisions for taxation and proposed dividends. 45.1 Although provisions for taxation and proposed dividends do not qualify for inclusion in the capital base, it was noticed that some of the companies were not showing provisions for taxation or proposed dividends in the balance-sheet with a view to artificially inflating the capital base for the purpose of surtax. In order to put a curb on tax avoidance through this device, the Finance Act has inserted a new rule 1A in the Second Schedule to the Companies (Profits) Surtax Act to provide that in a case where the company has not made any credit in any account in its books in respect of provisions for taxation or proposed dividends, or where the Income-tax Officer is of opinion that the amount credited in the accounts in respect of such provisions falls short of the amount which should have been reasonably credited, the amount of the capital of the company will be reduced by the amount which has not been so credited, or as the case may be, the amount of such shortfall. For this purpose, where a provision for proposed dividends has not been made or where the provision made falls short of the amount of dividends declared or paid by the company for the previous year immediately preceding the previous year relevant to the assessment year, the reasonable credit to the "proposed dividend" account will be taken to be the amount of dividend declared or paid in relation to that previous year. Any interim dividend which has been paid before the commencement of the relevant previous year will, however, not be taken into account for this purpose. 45.2 This amendment has come into force with effect from the 1st April, 1975, and will, accordingly, apply in relation to the assessment year 1975-76 and subsequent years. [Section 29 (Part) of the Finance Act] AMENDMENT TO THE WEALTH-TAX ACT Exemption in respect of newly constructed small dwelling units-New section 5(1)(ivc) 46.1 The Finance Act has inserted a new clause (ivc) in section 5(1) of the Wealth-tax Act with a view to exempting from wealth-tax the value of small dwelling units the construction of which is begun on or after the 1st April, 1976. The exemption will be available in cases where the plinth area of the unit does not exceed 80 square metres and will also apply in relation to the value of the land appurtenant to the dwelling unit. The exemption will be available for a period of five successive assessment years next following the date on which the construction of the dwelling unit or units is completed. The expression "dwelling unit" and "land appurtenant" have been defined in the new clause. It may be noted that the exemption is not limited to any specified number of dwelling units but will be available in respect of any number of such units which fulfil the aforesaid conditions. 46.2 This amendment will come into force with effect from the 1st April, 1977, and will, accordingly, apply in relation to the assessment year 1977-78 and subsequent years. [Section 27(2)(a) of the Finance Act] Exemption of outstanding fees in the case of lawyers, solicitors, etc. 47.1 Outstanding fees in the case of pleading advocates and senior advocates who are briefed by junior advocates are not legally recoverable and, as such, cannot be regarded as "assets" for the purposes of the Wealth-tax Act. The ascertainment of the correct amount of outstanding fees of advocates and solicitors also presents practical difficulties. In view of this position, the Finance Act has inserted a new clause (xa) in section 5(1) of the Wealth-tax Act to provide for complete exemption from wealth-tax of the value of outstanding fees due to a person in respect of services rendered by him as a legal practitioner within the meaning of the Advocates Act, 1961. It may be noted that the exemption is not available in respect of fees due to other professionals even though they may be maintaining the books of account on cash basis. 47.2 This amendment has come into force with effect from the 1st April, 1975, and will, accordingly, apply in relation to the assessment year 1975-76 and subsequent years. [Section 27(2)(b) of the Finance Act] Exemption of houses built for low-paid employees-New section 5(1)(xxxa). 48.1 With a view to encouraging the construction of residential houses for low-paid employees, the Finance Act has inserted a new clause (xxxa) in section 5(1) of the Wealth-tax Act to provide for exemption from wealth-tax in respect of the value of buildings used solely for the purposes of residence of low-paid employees of the taxpayer employed in any plantation or industrial undertaking belonging to the taxpayer. For this purpose, employees having income chargeable under the head "Salaries" up to Rs.10,000 will be regarded as low-paid employees and the expression "industrial undertaking" will have the same meaning as in the Explanation to section 5(1)(xxxi). 48.2 This amendment has come into force with effect from the 1st April, 1976, and will, accordingly, apply in relation to the assessment year 1976-77 and subsequent years. [Section 27(2)(c) and (d)(i) of the Finance Act] Exemption in respect of assets, etc., brought into India by persons of Indian origin-New section 5(1)(xxxiii). 49.1 The Finance Act has inserted a new section (xxxiii) in section 5(1) of the Wealth-tax Act to provide for exemption from wealth-tax of the moneys and value of assets brought into India by persons of Indian origin who are ordinarily residing in foreign countries in cases where such persons returned to India with the intention of permanently residing therein. The value of assets acquired by them out of the moneys brought into India will also qualify for this exemption. The exemption will be available only for seven assessment years commencing with the assessment year next following the date on which such person returns to India. For this purpose, a person shall be deemed to be of Indian origin if he, or either of his parents or any of his grandparents, was born in undivided India. 49.2 This amendment will take effect from the 1st April, 1977, and will, accordingly, apply in relation to the assessment year 1977-78 and subsequent years. [Section 27(2)(e) (Part) of the Finance Act] Exemption of investment by non-resident Indian citizen in equity shares in certain priority industries-New section 5(1)(xxxiv). 50.1 With a view to providing incentives to non-resident Indian citizens to invest in equity shares of companies in the priority sector, the Finance Act has inserted a new clause (xxxiv) in section 5(1) of the Wealth-tax Act to provide for exemption from wealth-tax in respect of their investment in equity shares of the companies engaged in the business of manufacture or production of articles or things specified in the list in the new Schedule II to the Wealth-tax Act, as also in equity shares of companies which are certified by the prescribed authority to have undertaken to export the required percentage of their total production. The exemption will be available only where such shares form part of the initial issue of equity capital made by the company after the 31st March, 1976 or, where such shares are issued by existing companies, the issue of share capital is certified by the prescribed authority to have been made by the company after the said date for the purposes of expansion or diversification of its industrial undertaking. 50.2 This amendment will take effect from the 1st April, 1977, and will, accordingly, apply in relation to the assessment year 1977-78 and subsequent years. [Section 27(1), (2)(d)(ii), (e) (Part) (4), (5) and (6)(b) of the Finance Act] Special provision for valuation of self-occupied house property-Section 7. 51.1 For the purposes of levy of wealth-tax, the value of any asset owned by a taxpayer is ordinarily taken to be the price which, in the opinion of the Wealth-tax Officer, it would fetch if sold in the open market on the relevant valuation date. This involves the valuation of all the assets owned by a taxpayer on each valuation date year after year. The valuation of self-occupied house properties from year to year results in certain practical difficulties and inconvenience to taxpayers. With a view to getting over these difficulties, the Finance Act has amended section 7 of the Wealth-tax Act in order to freeze the valuation of such property as on a particular date ignoring subsequent variations in its real value. Under the amendment, the value of one house belonging to the taxpayer and exclusively used by him for residential purposes may, at the option of the taxpayer, be taken to be the price which, in the opinion of the Wealth-tax Officer, it would fetch if sold in the open market on the valuation date next following the date on which he became the owner of the house, or on the valuation date relevant to the assessment year 1971-72, whichever is later. This concession will be available for an assessment year only where the house has been used by the taxpayer for residential purposes throughout the period of 12 months immediately preceding the valuation date relevant to the assessment year. If more than one house belonging to the taxpayer is used by him for residential purposes, he will have the option to specify one of such houses in his return of net wealth for the purpose. A part of a house comprising an independent residential unit will also be regarded as a house for the purposes of the new provision. 51.2 This amendment has come into force with effect from the 1st April, 1976, and will be applicable in relation to the assessment year 1976-77 and subsequent years. [Section 27(3) of the Finance Act] Reduction in the rates of wealth-tax in the case of individuals and Hindu undivided families-Schedule I. 52.1 At present, wealth-tax is charged 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) at the rate of 1 per cent. on the first slab of net wealth up to Rs.5,00,000; 3 per cent. on the next slab of Rs.5,00,001-10,00,000; 4 per cent. on the next slab of Rs.10,00,001-15,00,000; and 8 per cent. on the net wealth in excess of Rs.15,00,000. In the case of Hindu undivided families having one or more members with independent net wealth exceeding Rs.1,00,000, wealth-tax is charged at the rate of 3 per cent. on the first slab of net wealth up to Rs.5,00,000; 4 per cent. on the next slab of Rs.5,00,001-10,00,000 and 8 per cent. on the slab of net wealth over Rs.10,00,000. No wealth-tax is payable in the case of Hindu undivided families, if their net wealth does not exceed Rs.2 lakhs. In the case of individuals, no wealth-tax is payable where net wealth does not exceed Rs. 1 lakh. In addition to the ordinary wealth-tax at the aforesaid rates, an additional wealth-tax is levied on the net value of lands and buildings situated in "urban areas" and included in the net wealth of the individual or the Hindu undivided family. 52.2 The Finance Act has made the following amendments in the rates of wealth-tax:- (i) 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 first slab of net wealth up to Rs.5,00,000 has been reduced from 1 per cent. to 1/2 per cent.; the rate on the next slab of Rs.5,00,001-10,00,000 has been reduced from 3 per cent. to 1 1/2 per cent.; on the slab of Rs.10,00,001-15,00,000 from 4 per cent. to 2 per cent.; and on the slab of net wealth over Rs.15,00,000, from 8 per cent. to 2 1/2 per cent. In the case of Hindu undivided families having one or more members with independent net wealth exceeding Rs.1,00,000, the existing rate of 3 per cent. has been reduced to 1 1/2 per cent.; the existing rate of 4 per cent. has been reduced to 2 per cent. and the existing rate of 8 per cent. has been reduced to 2 1/2 per cent. (ii) The higher exemption limit of Rs.2 lakhs in the case of Hindu undivided families has been done away with, so that a uniform exemption limit of Rs. 1 lakh will apply in the case of both individuals as well as Hindu undivided families. (iii) The additional wealth-tax leviable on lands and buildings situated in "urban areas" has been discontinued. 52.3 The aforesaid amendments will take effect from the 1st April, 1977, and will, accordingly, apply in relation to the assessment year 1977-78 and subsequent years. [Section 27(6)(a) of the Finance Act.] AMENDMENT TO THE GIFT-TAX ACT Exemption in respect of donations made to State Housing Boards, Slum Clearance Boards, etc. 53.1 As explained in paragraph 33.1 of this circular, the Finance Act has amended section 80G of the Income-tax Act to secure that donations made by taxpayers to State Housing Boards, Slum Clearance Boards and other statutory authorities set up for framing and execution of housing and other development schemes qualify for tax concession in the same manner as donations to charitable institutions, etc. A corresponding amendment has been made in section 5 of the Gift-tax Act to secure that donations made to such State Housing Boards, etc., are not charged to gift-tax under that Act. 53.2 This amendment will take effect from the 1st April, 1977, and will, accordingly, apply in relation to the assessment year 1977-78 and subsequent years. [Section 28 of the Finance Act] AMENDMENT TO THE INTEREST-TAX ACT, 1974 Exemption of interest on term loans. 54.1 The Interest-tax Act, 1974, imposes a special tax on the gross amount of interest received by scheduled banks on loans and advances made in India. As the incidence of this tax is passed on by the banks to the borrowers, this levy has the effect of raising the cost of borrowed funds from banks. In order to mitigate the effect of this tax on long-term borrowings for purposes of investment in industrial and agricultural sectors, the Finance Act has amended the definition of "interest" in section 2(7) of the Interest-tax Act so as to exclude from its purview interest payable on moneys lent for the creation of a capital asset in India where the agreement under which the moneys are lent provides for the repayment thereof during a period of not less than seven years. 54.2 This amendment will take effect from the 1st April, 1977, and will, accordingly, apply in relation to the assessment year 1977-78 and subsequent years. [Section 30 of the Finance Act] AMENDMENT TO THE UNIT TRUST OF INDIA ACT, 1963 Withdrawal of special tax concession in respect of income from units in the Unit Trust of India in the case of certain Hindu undivided families . 55.1 Under the existing provisions in the Unit Trust of India Act, 1963, income in respect of units received from the Unit Trust of India is exempt from income-tax up to Rs.2,000. This exemption is in addition to the exemption provided under section 80L of the Income-tax Act in respect of income from specified financial assets, including income in respect of units received from the Unit Trust of India, up to an aggregate amount of Rs.3,000. The special exemption under the Unit Trust of India Act is also available to Hindu undivided families. As certain concessions available under the Income-tax Act to Hindu undivided families having one or more members with taxable income exceeding the exemption limit have been withdrawn as explained in paragraph 31.1, the Unit Trust of India Act has been amended to withdraw this concession as well from such Hindu undivided families. 55.2 This amendment will take effect from the 1st April, 1977, and will, accordingly, apply in relation to the assessment year 1977-78 and subsequent years. [Section 42 of the Finance Act] AMENDMENT TO THE LIFE INSURANCE CORPORATION ACT, 1956 Waiving of deduction of income-tax at source from interest on securities and dividends paid to Life Insurance Corporation of India . 56.1 Under the existing provisions of the Income-tax Act, tax is required to be deducted at source from income by way of interest on securities and dividends payable to the Life Insurance Corporation of India. No deduction is, however, required to be made from interest, other than interest on securities, paid to the Corporation. The Finance Act has inserted a new section 43A in the Life Insurance Corporation Act, 1956, to provide that, notwithstanding anything contained in the Income-tax Act, income-tax will not be deducted from any interest on securities or dividends payable to the Corporation. 56.2 This amendment has come into force with effect from the 1st June, 1976. [Section 41 of the Finance Act] (Sd.) R.R. KHOSLA, Director, Central Board of Direct Taxes.