The Finance Act, 1978--Explanatory Notes on the provisions relating to direct taxes - Income Tax - 240/1978

The Finance Act, 1978--Explanatory Notes on the provisions relating to direct taxes Circular No. 240 Dated 17/5/1978 Introduction The Finance Bill, 1978, as passed by Parliament, received the assent of the President on 12th May, 1978, and has been enacted as Act No. 19 of 1978. This Circular explains the substance of the provisions relating to income-tax and other direct taxes contained in the Finance Act, 1978. 2. The provisions in the Finance Act, 1978 (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 incomes liable to tax for the assessment year 1978-79; the rates at which income-tax will be deductible at source during the financial year 1978-79, from interest (including interest on securities), dividends, salaries, insurance commission, winnings from lotteries and crossword puzzles, winnings from horse races and other categories of income liable to such deduction under the Income-tax Act; and the rates for computation of "advance tax" and charging of income-tax on current incomes in certain cases during the financial year 1978-79. (ii) Amendment of the Income-tax Act, 1961, with a view to widening the area of tax incentives for savings; providing greater tax incentive for savings in specified forms; liberalising the scope of certain concessions for promoting construction of houses, particularly for persons in the low and middle income brackets; placing a curb on extravagant and wasteful expenditure in businesses and professions; and a few other matters. (iii) Amendment of the Interest-tax Act, 1974, with a view to discontinuing the levy of interest-tax. (iv) Amendment of the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974, with a view to increasing the rates of compulsory deposit and making certain consequential changes. RATE STRUCTURE OF INCOME-TAX (i) Rates of income-tax for the assessment year 1978-79. 3.1 The rates of income-tax for the assessment year 1978-79, in the case of all categories of taxpayers (corporate as well as non-corporate) are specified in Part I of the Schedule to the Finance Act. These rates are the same as those specified in Part III of the First Schedule to the Finance (No. 2) Act, 1977, for the purposes of computation of "advance tax"; deduction of tax at source from "Salaries" and retirement annuities payable to partners of registered firms engaged in specified professions; and computation of the tax payable in certain cases where accelerated assessments were required to be made during the financial year 1977-78. 3.2 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 1978-79 [vide section 2(2) of the Finance Act]. The mode of computation of net agricultural income in such cases has been set out in Part IV of the Schedule to the Finance Act. These provisions are the same as those contained in the Finance (No. 2) Act, 1977, except for slight modifications as explained in paragraph 6 of this Circular. (ii) Rates for deduction of tax at source during the financial year 1978-79 from incomes other than "Salaries" and retirement annuities. 4.1 The rates for deduction of tax at source during the financial year 1978-79 from incomes, other than "Salaries" and retirement annuities payable to partners of registered firms engaged in specified professions, have been specified in Part II of the Schedule to the Finance Act. In the context of the provisions made in the Income-tax Act for deduction of tax at source from income by way of winnings from horse races, the Finance Act lays down the rates for deduction of income-tax not only from interest on securities, other categories of interest, dividends, insurance commission, winnings from lotteries, and crossword puzzles and other categories of non-salary income of non-residents, but also from income by way of winnings from horse races. Rates for deduction of tax at source laid down in the Finance Act in respect of the various categories of income which are already liable to such deduction are the same as those prescribed for this purpose in Part II of the First Schedule to the Finance (No. 2) Act, 1977. 4.2 In the case of incomes by way of winnings from horse races payable to resident taxpayers during the financial year 1978-79, tax will be deductible at the rate of 34.5 per cent. made up of basic income-tax of 30 per cent. and surcharge of 4.5 per cent. (being 15 per cent. of the income-tax). In view of a specific provision made in new section 194BB of the Income-tax Act, income-tax will be deductible at source only where the income by way of winnings from any horse race to be paid to a person exceeds Rs. 2,500. It is also provided in that section that no deduction will be made from such winnings where the payment is made before 1st June, 1978. 4.3 The provisions of the new section 194BB of the Income-tax Act have been explained in paragraph 25 of this Circular. (iii) Rates for deduction of tax at source from "Salaries", computation of "advance tax" and charging of income-tax in special cases during the financial year 1978-79. 5.1 The rates for deduction of tax at source from "Salaries" in the case of individuals during the financial year 1978-79, and for the computation of advance tax payable during that financial year in the case of all categories of taxpayers have been specified in Part III of the Schedule to the Finance Act. These rates are also applicable for deduction of income-tax at source during the financial year 1978-79 from retirement annuities payable to partners of registered firms which render professional service as chartered accountants, solicitors, lawyers, etc., and for charging income-tax during the financial year 1978-79 on current incomes in special cases where accelerated assessments have to be made. The special cases where accelerated assessments have to be made are cases of (i) calculation of income-tax on undisclosed income represented by seized assets [section 132(5)]; (ii) levy of tax on provisional basis on the income of non-residents from shipping of cargo or passengers from Indian ports [section 172(4)]; (iii) assessment of persons leaving India [section 174(2)]; (iv) assessment of persons likely to transfer property to avoid tax [section 175]; and (v) assessment of profits of a discontinued business or profession [section 176(2)]. These rates are the same as the rates specified in Part I of the Schedule to the Finance Act for the assessment year 1978-79. 5.2 As in the past, the Finance Act provides that in the case of individuals, Hindu undivided families, unregistered firms, etc., the net agricultural income will be taken into account for the purposes of computation of advance tax and charging income-tax in special cases where accelerated assessments have to be made during the financial year 1978-79. Modification in the rules for computation of net agricultural income. 6. The net agricultural income is to be computed in accordance with the rules contained in Part IV of the Schedule to the Finance Act. The mode of computation of the net agricultural income under these provisions is the same as in the relevant provisions of the Finance (No. 2) Act, 1977, except for the modification that the unabsorbed loss in agriculture incurred during the previous year relevant to the assessment year 1977-78, will also be set off against the agricultural income for the previous year relevant to the assessment year 1978-79. Further, any unabsorbed loss in respect of the previous year relevant to the assessment year 1978-79, will also be set off in determining the net agricultural income for the purposes of payment of advance tax during the financial year 1978-79. [Section 2 of, and the Schedule to, the Finance Act] AMENDMENTS TO THE INCOME-TAX ACT, 1961 7.1 Relaxation of the test of "residence" in India in the case of Indian citizens employed outside India--Section 6(1).--Clause (1) of section 6 of the Income-tax Act provides that an individual is said to be resident in India in any previous year, if- (a) he is in India in that year for a period or periods amounting in all to 182 days or more; or (b) he maintains or causes to be maintained for him a dwelling place in India for a period or periods amounting in all to 182 days or more in that year and has been in India for thirty days or more in that year; or (c) having within the four years preceding that year been in India for a period or periods amounting in all to 365 days or more, he is in India for a period or periods amounting in all to sixty days or more in that year. The Finance Act has inserted an Explanation below the said clause (1) to secure that, in the case of an Indian citizen, who is rendering service outside india and who is or has been in India on leave or vacation in the previous year, the period of "thirty days" and "sixty days" respectively referred to in (b) and (c) above would stand extended to ninety days. The effect of this provision will be that Indian citizens employed outside India would be able to stay on leave or vacation in India for eighty-nine days in a previous year without becoming resident in India in that year. 7.2 This amendment will take effect from 1st April, 1979, and will accordingly apply in relation to the assessment year 1979-80 and subsequent years. [Section 3 of the Finance Act] 8.1 Liberalisation of the "tax holiday" for newly constructed residential units--Section 23(1).--Income from a newly constructed house property, the erection of which is begun after 1st April, 1961, and completed after 31st March, 1970, which is let out on rent, is charged to tax on a concessional basis for an initial period of five years. During this period, the annual letting value of the house property is reduced by an amount up to Rs. 1,200 in respect of each residential unit for a total period of five years from the date of completion of the property. [vide clause (b) of the second proviso to sub-section (1) of section 23 read with the Explanation below sub-section (2) of that section.] With a view to encouraging the construction of houses particularly for persons in the low and middle income groups, the Finance Act has inserted a new clause (c) in the second proviso to section 23(1) of the Income-tax Act to provide that in the case of a house property comprising one or more residential units the erection of which is completed after 31st March, 1978, the annual letting value of the house property will be reduced by an amount up to Rs. 2,400 in respect of each residential unit for a total period of five years from the date of completion of the property. 8.2 This amendment will take effect from 1st April, 1979, and will accordingly apply in relation to the assessment year 1979-80 and subsequent years. [Section 4 of the Finance Act]. 9.1 Initial depreciation allowance in respect of buildings constructed for low-paid employees--Section 32(1)(iv).--Under section 32(1)(iv) of the Income-tax Act, initial depreciation allowance is granted in respect of any new building erected by a taxpayer which is solely used for the purposes of the residence of low paid employees of the taxpayer or which is mainly used for the welfare of such persons as a hospital, creche, school, canteen, library, recreational centre, shelter, rest-room or lunch-room. For the purposes of this provision, employees having income chargeable under the head "Salaries" up to Rs. 10,000 are regarded as low-paid employees. The initial depreciation allowance in respect of such buildings is allowed at the rate of 20 per cent. of the actual cost thereof. The Finance Act has raised the rate of initial depreciation allowance in respect of such buildings from 20 per cent. to 40 per cent. 9.2 This amendment will take effect from 1st April, 1979, and will accordingly, apply in relation to the assessment year 1979-80 and subsequent years. [Section 5 of the Finance Act] 10.1 Modification of the scheme of export markets development allowance--Section 35B.--Domestic companies and non-corporate taxpayers resident in India are entitled to a weighted deduction in respect of the expenditure incurred by them on development of export markets, in accordance with the provisions of section 35B of the Income-tax Act. The Finance Act has made three modifications in the scheme of export markets development allowance which are explained hereunder. 10.2 The first modification is that no deduction will be allowed under section 35B in relation to any expenditure incurred after March 31, 1978, unless the following conditions are fulfilled:- (i) The domestic company or, as the case may be, the non-corporate taxpayer resident in India is engaged in (a) the business of export of goods and is either a "small-scale exporter" or a holder of an "Export House Certificate"; or (b) the business of "provision of technical know-how", or the rendering of services in connection with the provision to technical know-how, to persons outside India. (ii) The expenditure on export markets development allowance in relation to which the weighted deduction has been claimed is incurred by the taxpayer wholly and exclusively for the purposes of the business referred to in (i) above. 10.3 For the purposes of this provision, the term "small-scale exporter" means a person who exports goods manufactured or produced in any "small-scale industrial undertaking" or undertakings owned by him provided that he does not own any industrial undertaking which is not a small-scale industrial undertaking. The expression "small-scale industrial undertaking", for this purpose, has the meaning assigned to it in clause (2) of the Explanation below section 32A(2) of the Income-tax Act. The expression "Export House Certificate" means a valid Export House Certificate issued by the Chief Controller of Imports and Exports, Government of India. The expression "provision of technical know-how" will have the meaning assigned to it in section 80MM(2) of the Income-tax Act. 10.4 At present, the weighted deduction under section 35B is allowed at the rate of one and one-half times the amount of the qualifying expenditure in the case of widely-held domestic companies and at the rate of one and one-third times the amount of such expenditure in the case of other taxpayers. The second modification made by the Finance Act is that, in relation to expenditure incurred after 31st March, 1978, the weighted deduction in the case of widely-held domestic companies will also be allowed at the lower rate of one and one-third times the amount of qualifying expenditure, as in the case of other categories of taxpayers. 10.5 The third modification made by the Finance Act is that expenditure incurred after 31st March, 1978, under two of the eight heads of expenditure qualifying for weighted deduction, namely, those specified in sub-clause (i) and sub-clause (iii) of clause (b) of section 35B(1) of the Income-tax Act, will not qualify for weighted deduction. These heads of expenditure are the following:- (a) advertisement or publicity outside India in respect of the goods, services or facilities dealt in or provided by the taxpayer in the course of his business; and (b) distribution, supply or provision outside India of such goods, services or facilities, not being expenditure incurred in India in connection therewith or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit. 10.6 These amendments take effect from 1st April, 1978. However, as stated in paragraph 10.2 above, the aforesaid modifications will apply only in relation to expenditure incurred after 31st March, 1978. [Section 6 of the Finance Act] 11.1 Deduction in respect of payments to associations and institutions for carrying out rural development programmes--Section 35CCA.--With a view to encouraging companies and co-operative societies to involve themselves in the work of rural welfare and uplift, the Finance (No. 2) Act, 1977, had introduced a new section 35CC in the Income-tax Act under which companies and co-operative societies are entitled to a deduction, in the computation of their taxable profits, of the expenditure incurred by them on any approved programme of rural development. The Finance Act has introduced a new section 35CCA to provide that sums paid by a taxpayer to any association or institution to be used for carrying out any programme of rural development will be allowed as a deduction in computing the taxable profits. For the purposes of this section, the expression "programme of rural development" will have the meaning assigned to it in the Explanation to section 35CC(1) of the Income-tax Act. 11.2 The deduction under new section 35CCA will not be allowed unless (a) the association or institution has as its object the undertaking of programmes of rural development; (b) the association or institution is for the time being approved in this behalf by the prescribed authority; and (c) the programme of rural development for which such sums are paid has been approved by the prescribed authority, to be notified by the Central Board of Direct Taxes. The prescribed authority will not grant approval to any association or institution for more than three years at a time. 11.3 Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure incurred towards payment of sums to any such association or institution as is referred to above, no deduction shall be allowed in respect of such expenditure under section 35C (Agricultural development allowance) or section 35CC (Rural development allowance) or section 80G (Deduction in respect of donations to certain funds, charitable institutions, etc.) or under any other provision of the Income-tax Act for the same or any other assessment year. 11.4 The new section 35CCA will take effect from 1st June, 1978, and will accordingly apply in relation to the assessment year 1979-80 and subsequent years. [Section 7 of the Finance Act] 12.1 Disallowance of a part of expenditure on advertisement, publicity and sales promotion--Section 37(3A) to (3D).--In order to place a curb on extravagant and socially wasteful expenditure on advertisement, publicity and sales promotion at the cost of the Exchequer, the Finance Act has inserted new sub-section (3A) in section 37 of the Income-tax Act for the disallowance of a part of such expenditure in the computation of taxable profits. The main features of the new sub-section (3A) read with related sub-sections (3B), (3C) and (3D) inserted in section 37 are as follows:- (a) The provision for the disallowance of a specified portion of such expenditure will apply only in relation to expenditure on advertisement, publicity and sales promotion in India. (b) Although this provision will apply to all categories of taxpayers carrying on any business or profession, no disallowance will be made in cases where the aggregate amount of such expenditure does not exceed Rs. 40,000. (c) Where a taxpayer has set up an industrial undertaking for the manufacture or production of any articles, no disallowance will be made under this provision in respect of expenditure on advertisement, publicity or sales promotion incurred by the taxpayer for the purposes of the business of such undertaking for three previous years, namely, the previous year in which such undertaking begins to manufacture or produce such articles and the two previous years immediately following that year. 12.2 The amount to be disallowed under this provision will be calculated as under:- i. where the aggregate expenditure on advertisement, publicity and sales promotion in India does not exceed ¼ per cent of the turnover or, as the case may be, gross receipts of the business or profession 10 per cent of the "adjusted expenditure"; and ii. where such aggregate expenditure exceeds ¼ per cent but does not exceed ½ per cent of the turnover or, as the case may be, gross receipts of the business or profession 12½ per cent of "adjusted expenditure"; and iii. where such aggregate expenditure exceeds ½ per cent of the turnover or, as the case may be, gross receipts of the business or profession 15 per cent of"adjusted expenditure". The expression "adjusted expenditure" has been defined to mean the aggregate expenditure incurred by a taxpayer on advertisement, publicity and sales promotion in India, as reduced by so much of such expenditure as is not allowed under section 37(1) and as further reduced by so much of such expenditure as is not allowed under section 37(3) of the Income-tax Act. The expressions "turnover" and "gross receipts" mean the turnover or gross receipts, as the case may be, as reduced by any discount or rebate allowed by the taxpayer. 12.3 The provisions of new sub-section (3A) will not apply in relation to any expenditure incurred by the taxpayer on the following, namely:- (i) advertisement in any small newspaper; (ii) advertisement in any newspaper for recruitment of personnel; (iii) the publication in any newspaper of any notice required to be published by or under any law; (iv) the maintenance of any office for the purposes of advertisement, publicity or sales promotion; (v) the payment of salary [as defined in clause (1) of section 17] to any employee engaged in advertisement, publicity or sales promotion; (vi) the holding of, or the participation in, any press conference, sales conference, trade convention, trade fair or exhibition; (vii) publication and distribution of journals, catalogues or price lists; (viii) such other items as may be prescribed by rules framed by the Central Board of Direct Taxes. For the purposes of this provision, a newspaper will be deemed to be a "small newspaper" if the average circulation of the newspaper in the calendar year in which such advertisement has been published is certified by the prescribed authority as not exceeding 15,000 copies. "Average circulation", in relation to any newspaper, will be taken to be the number arrived at by dividing the aggregate of the number of copies of such newspaper circulated during the calendar year by the total number of days on which such newspaper was published in that year. The term "newspaper" is not confined to a "daily" newspaper, but would also cover periodicals and journals. 12.4 As the terms "publicity" and "sales promotion" have a wide amplitude, expenditure incurred by taxpayers on fashion shows; beauty contests; consumer gift offers; and free samples or gifts will fall within the ambit of new sub-section (3A) of section 37 of the Income-tax Act. 12.5 For the removal of doubts, it has been clarified that nothing contained in new sub-section (3A) shall apply in relation to expenditure in the nature of entertainment expenditure incurred by a taxpayer in connection with advertisement, publicity or sales promotion and such expenditure shall be governed by sub-section (2A) of section 37 which lays down certain ceiling limits for the allowance of such expenditure. 12.6 These provisions will take effect from 1st April, 1979, and will accordingly apply in relation to the assessment year 1979-80 and subsequent years. [Section 8 of the Finance Act] 13.1 Relaxation of the provisions relating to taxation of capital gains on notional basis in certain cases--Section 52(2).--Sub-section (2) of section 52 of the Income-tax Act provides that if, in the opinion of the Income-tax Officer, the fair market value of the capital asset as on the date of its transfer exceeds the full value of the consideration as declared by the taxpayer, by an amount of not less than 15 per cent. of such declared consideration, the capital gain in respect of such asset shall be computed with reference to its fair market value as on that date. The proviso to the said sub-section lays down that the aforesaid provision will not apply in the following types of cases, namely:- (a) where the capital asset is transferred to the Central Government or any State Government; or (b) where the consideration for the transfer of the capital asset is determined or approved by the Central Government or the Reserve Bank of India" and the adequacy of the consideration so determined or approved is not questioned by the assessee". The effect of the above-quoted words is that the provisions of section 52(2) for computation of capital gains with reference to the fair market value of a capital asset can be invoked in cases where the taxpayer does not accept the consideration for the transfer of the capital asset determined or approved by the Central Government or the Reserve Bank of India. 13.2 As explained in paragraphs 23.1 to 23.4 of this Circular, the Finance Act has inserted a new sub-section (7A) in section 155 of the Income-tax Act, with retrospective effect from 1st April, 1974, for the recomputation of capital gains in cases where the compensation payable for the compulsory acquisition of the capital asset or, as the case may be, the consideration for the transfer of the capital asset determined or approved by the Central Government or the Reserve Bank of India, is enhanced or further enhanced by any court, tribunal or other authority. As the said sub-section (7A) empowers the Income-tax Officer to recompute the capital gains in such cases with reference to the compensation or, as the case may be, consideration as so enhanced or further enhanced, it is no longer necessary to invoke the provisions of section 52(2) of the Income-tax Act in cases where the taxpayer questions the adequacy of the consideration determined or approved by the Central Government or the Reserve Bank of India. In view thereof, the words" and the adequacy of the consideration so determined or approved is not questioned by the assessee" occurring in clause (b) of the proviso to section 52(2) of the Income-tax Act have been omitted retrospectively from 1st April, 1974. [Section 9 of the Finance Act] 14.1 Exemption of capital gain attributable to enhancement of compensation for compulsory acquisition of residential house property in certain circumstances--Section 54.--Section 54 of the Income-tax Act provides that where the capital gain arises from the transfer of a house property, which in the two years immediately preceding the date of transfer was being used by the assessee or a parent of his mainly for the purpose of his own or the parent's own residence (hereinafter referred to as the original asset), and the assessee has, within a period of one year before or after that date purchased, or within a period of two years after that date constructed, a house property for the purposes of his own residence (hereinafter referred to as the new asset), then, the capital gain will not be charged to tax, to the extent it has been utilised for the purchase or construction of the new asset. Where the amount of the capital gain exceeds the cost of the new asset, only the excess amount is chargeable to tax. 14.2 Where the new asset is transferred within a period of three years of its purchase or construction, then, for the purposes of determining the amount of capital gain arising from the transfer of the new asset (i) the cost of the new asset is taken at nil, if the amount of the capital gain arising from the transfer of the original asset exceeded the cost of the new asset; and (ii) the cost of the new asset is reduced by the amount of the capital gain arising from the transfer of the original asset. In the result, the exemption of capital gain on the purchase or construction of the new asset is forfeited. 14.3 The Finance Act has re-numbered section 54 of the Income-tax Act as sub-section (1) thereof and inserted a new sub-section (2) in the said section. As stated in paragraph 13.2 above, the Finance Act has inserted a new sub-section (7A) in section 155 of the Income-tax Act empowering the Income-tax Officer to recompute the capital gain in cases where the compensation awarded for the compulsory acquisition of a capital asset or, as the case may be, the consideration for the transfer of a capital asset determined or approved by the Central Government or the Reserve Bank of India is enhanced by any court, tribunal or other authority. The new sub-section (2) is being inserted in section 54 to provide assessees an opportunity to avail of the tax exemption under the said section in relation to the capital gain attributable to the enhancement of the compensation. 14.4 The new sub-section (2) provides that where the transfer of the original asset is by way of compulsory acquisition under any law and the compensation awarded for such acquisition is enhanced by any court, tribunal or other authority, and the assessee has, within a period of one year after the date of receipt of the "additional compensation" purchased, or within a period of two years after that date constructed, a house property for the purposes of his own residence (hereinafter referred to as the relevant asset), then, the "unadjusted capital gain" will not be charged to tax, to the extent it has been utilised for purchasing or, as the case may be, constructing, the relevant asset. Where the amount of the unadjusted capital gain exceeds the cost of purchase or construction of the relevant asset, only the excess amount will be chargeable to tax. 14.5 Where the assessee transfers the relevant asset within a period of three years from the date of its purchase or construction, then, for the purposes of determining the amount of capital gain arising from the transfer of the relevant asset (i) the cost of the relevant asset will be taken at nil, if the amount of the unadjusted capital gain exceeded the cost of the relevant asset; and (ii) the cost of the relevant asset will be reduced by the amount of the unadjusted capital gain, if such unadjusted capital gain was equal to or less than the cost of the relevant asset. In the result, the exemption of the unadjusted capital gain on the purchase or construction of the relevant asset would stand forfeited. 14.6 The expression "unadjusted capital gain" means (i) the recomputed capital gain (i.e., the amount of capital gain computed by taking the enhanced compensation as the full value of the consideration, as reduced by the amount not charged to tax under sub-section (1) of section 54; or (ii) the capital gain attributable to the enhancement of the compensation, whichever is less. This may be illustrated by the following examples:- Example I Rs. 1. Capital gain as computed with reference to the compensation which would have been payable if the enhancement had not been made 50,000 2. Capital gain as recomputed with reference to the enhanced compensation 1,50,000 3. Capital gain attributable to the enhancement of the compensation (Rs. 1,50,000—Rs. 50,000) 1,00,000 4. Cost of the new asset 1,20,000 In this case, the capital gain of Rs. 50,000 at (1) above would not have been charged to tax under sub-section (1) of section 54 because the cost of the new asset (Rs. 1,20,000) exceeded the amount of the capital gain. When the capital gain is re-computed, an amount equal to the cost of the new asset, i.e., Rs. 1,20,000, will not be charged to income-tax under sub-section (1) of section 54 of the Income-tax Act. Hence, although the capital gain attributable to the enhancement of the compensation in this case is Rs. 1,00,000 the unadjusted capital gain will be only Rs. 30,000 (i.e., Rs. 1,50,000 minus Rs. 1,20,000) as it is less than the capital gain attributable to the enhancement of the compensation. Example II Rs. 1. Capital gain as computed with reference to the compensation which would have been payable if the enhancement had not been made 50,000 2. Capital gain as recomputed with reference to the enhanced compensation 1,50,000 3. Capital gain attributable to the enhancement of the compensation (Rs. 1,50,000—Rs. 50,000) 1,00,000 4. Cost of the new asset 40,000 In this case, Rs. 40,000 would not have been charged to tax under sub-section (1) of section 54. Hence, although the recomputed capital gain of Rs. 1,50,000 at (2) above as reduced by the amount not charged to tax under sub-section (1) of section 54 is (Rs. 1,50,000--Rs. 40,000) Rs. 1,10,000, the unadjusted capital gain in this case will be the capital gain attributable to the enhancement of the compensation, i.e., Rs. 1,00,000 only. 14.7 The "capital gain attributable to the enhancement of the compensation" is to be computed in accordance with clause (2) of the Explanation to new sub-section (2) of section 54. The said clause (2) provides that in a case where the computation of capital gain, made with reference to the compensation which would have been payable had such enhancement not been made, results in a loss or does not result in any profits or gains chargeable to income-tax under the head "Capital gains", the capital gain attributable to the enhancement of the compensation will be the capital gain computed with reference to the enhanced compensation. In other cases, the capital gain attributable to the enhancement of the compensation will be the difference between (i) the capital gain as recomputed with reference to the enhanced compensation; and (ii) the capital gain computed with reference to the compensation which would have been payable if the enhancement had not been made. This may be illustrated by the following examples:- Example I Rs. Capital gain computed with reference to the compensation originally awarded (-)20,000 Recomputed capital gain 50,000 Hence, capital gain attributable to the enhancement of the compensation 50,000 Example II Rs. Capital gain computed with reference to the compensation originally awarded 20,000 Recomputed capital gain 50,000 Capital gain attributable to the enhancement of the compensation (i.e., Rs. 50,000 minus Rs. 20,000). 30,000 14.8 In relation to the transfer of any capital asset by way of compulsory acquisition under any law, the term "additional compensation" referred to in paragraph 14.4 above has been defined in clause (1) of the Explanation below sub-section (2) of section 54 to mean the difference between the compensation for the acquisition of such asset as enhanced by any court, tribunal, or other authority and the compensation which would have been payable if such enhancement had not been made. 14.9 The above changes have been made with retrospective effect from 1st April, 1974, and will accordingly apply in relation to the assessment year 1974-75 and subsequent years. [Section 10 of the Finance Act] 15.1 Exemption of capital gain attributable to enhancement of compensation for compulsory acquisition of agricultural land in certain circumstances--Section 54B.--Section 54B of the Income-tax Act provides that where the capital gain arises from the transfer of land which in the two years immediately preceding the date of transfer was being used by the assessee or a parent of his for agricultural purposes (hereinafter referred to as the original asset), and the assessee has, within a period of two years after that date purchased any other land for being used for agricultural purposes (hereinafter referred to as the new asset), then, the capital gain will not be charged to tax to the extent it has been utilised for acquiring the new asset. Where the amount of the capital gain exceeds the cost of acquisition of the new asset, only the excess is charged to tax. The exemption is, however forfeited (in the manner explained in paragraph 14.2 of this Circular) if the assessee transfers the new asset within a period of three years from the date of its purchase. 15.2 The Finance Act has re-numbered section 54B of the Income-tax Act as sub-section (1) thereof and inserted a new sub-section (2) in the said section. The new sub-section (2) provides that where the transfer of the original asset is by way of compulsory acquisition under any law and the compensation awarded for such acquisition is enhanced by any court, tribunal or other authority, and the assessee has, within a period of two years after the date of receipt of the "additional compensation" purchased any land for being used for agricultural purposes (hereinafter referred to as the relevant asset), then, the "unadjusted capital gain" will not be charged to tax, to the extent it has been utilised for purchasing the relevant asset. Where the amount of the unadjusted capital gain exceeds the cost of purchase of the relevant asset, only the excess amount will be chargeable to tax. 15.3 The provisions relating to forfeiture of the exemption in cases where the relevant asset is transferred by the assessee within a period of three years from the date of its purchase are in pari materia with the corresponding provisions in section 54(2), explained in paragraph 14.5 of this Circular. The terms "additional compensation", "unadjusted capital gain" and "capital gain attributable to the enhancement of the compensation" also have the same meaning as explained in paragraphs 14.6 to 14.8 of this Circular. 15.4 The above changes have been made with retrospective effect from 1st April, 1974, and will accordingly apply in relation to the assessment year 1974-75 and subsequent years. [Section 11 of the Finance Act] 16.1 Exemption of capital gain attributable to enhancement of compensation for compulsory acquisition of lands and buildings forming part of industrial undertaking in certain circumstances--Section 54D.-- Section 54D of the Income-tax Act provides exemption from tax in the case of persons owning industrial undertakings in respect of capital gain arising on compulsory acquisition of any land or building used by them for the purposes of the business of the undertaking. The relief is available in cases where the land or building which is acquired was used by the assessee for the purposes of the business of the industrial undertaking during the two years immediately preceding the date of compulsory acquisition and the assessee purchases any other land or building or constructs any other building, within three years from the date of compulsory acquisition, for the purposes of shifting or re-establishing the industrial undertaking or setting up another industrial undertaking. In such cases, the capital gain is not charged to tax to the extent it is utilised for purchasing or, as the case may be, constructing the new asset. Where the amount of the capital gain exceeds the cost of purchase or construction, only the excess amount is charged to tax. The exemption is, however, forfeited (in the manner explained in paragraph 14.2 of this Circular) if the new asset is transferred within a period of three years of its purchase or construction. 16.2 The Finance Act has re-numbered section 54D of the Income-tax Act as sub-section (1) thereof and inserted a new sub-section (2) in the said section. The new sub-section (2) provides that where the compensation awarded for the compulsory acquisition of the original asset is enhanced by any court, tribunal or other authority, and the assessee has, within a period of three years after the date of receipt of the "additional compensation", purchased any land or building or constructed any other building for the purposes of shifting or re-establishing the industrial undertaking or setting up another industrial undertaking (hereinafter referred to as the relevant asset), then, the "unadjusted capital gain" will not be charged to tax, to the extent it has been utilised for purchasing or, as the case may be, constructing the relevant asset. Where the amount of the unadjusted capital gain exceeds the cost of purchase or construction of the relevant asset, only the excess amount will be chargeable to tax. 16.3 The provisions relating to forfeiture of the exemption in cases where the assessee transfers the relevant asset within a period of three years from the date of its purchase or construction are in pari materia with the corresponding provisions in section 54(2), explained in paragraph 14.5 of this Circular. The terms "unadjusted capital gain", "additional compensation" and "capital gain attributable to the enhancement of the compensation" have the same meaning as explained in paragraphs 14.6 to 14.8 of this Circular. 16.4 The above changes have been made with retrospective effect from 1st April, 1974, and will accordingly apply in relation to the assessment year 1974-75 and subsequent years. [Section 12 of the Finance Act] 17.1 Modification of the provisions relating to exemption of "long-term capital gains" in cases where the consideration received or accruing as a result of the transfer is invested or deposited in specified assets--Section 54E.--Section 54E of the Income-tax Act provides exemption from income-tax in respect of capital gains arising from the transfer of any capital asset (not being a short-term capital asset) in cases where the full value of the consideration received or accruing as a result of the transfer is invested or deposited by the assessee in specified assets within a period of six months after the date of the transfer. Where only a part of the consideration is so invested or deposited a proportionate part of the capital gain is exempted from income-tax. The Finance Act has made certain modifications in section 54E which are explained hereunder. 17.2 Modifications in the list of specified assets.--The Finance Act has made two modifications in the list of "specified assets". The first modification is in respect of clause (v) of Explanation 1 below sub-section (1) of section 54E, whereunder shares in any Indian company, which are issued to the public or are listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956, and any rules made thereunder, have been included as a "specified asset" for the purposes of that section. The Finance Act has amended the aforesaid clause (v) and inserted a new clause (va) to secure that investment in shares made after 28th February, 1978, will qualify for the purposes of exemption under section 54E only if the following conditions are fulfilled:- (a) the investment is made in equity shares; (b) such equity shares form part of an eligible issue of capital" as defined in sub-section (3) of new section 80CC, inserted in the Income-tax Act by section 17 of the Finance Act; (c) the assessee has subscribed to or purchased the shares in the manner specified in sub-section (4) of new section 80CC. The aforesaid provisions of section 80CC have been explained in paragraphs 21.3 and 21.4 of this Circular. 17.3 Where the cost of the equity shares referred to above is taken into account for the purposes of exemption of capital gain under section 54E, a deduction with reference to such cost will not be allowed under section 80CC of the Income-tax Act. 17.4 The second modification made by the Finance Act is in respect of clause (vi) of Explanation 1 below sub-section (1) of section 54E whereunder fixed deposits for a period of not less than three years with the State Bank of India and its subsidiary banks, nationalised banks and co-operative societies engaged in carrying on the business of banking (including co-operative land mortgage banks and co-operative land development banks) have been included as a specified asset. The Finance Act has inserted a new sub-section (1A) in section 54E to provide that fixed deposits made after 27th April, 1978 (i.e., the date on which the Finance Bill, 1978, was taken up for consideration by the Lok Sabha) will not qualify for purposes of exemption under that section unless the following conditions are fulfilled, namely:- (a) The assessee furnishes, along with the deposit, a declaration in writing to the bank or co-operative society with which such deposit is made to the effect that he will not take any loan or advance on the security of such deposit during a period of three years from the date on which the deposit is made. (b) The assessee furnishes, along with the return of income for the assessment year relevant to the previous year in which the transfer of the original asset was effected or within such further time as may be allowed by the Income-tax Officer, a copy of the declaration referred to in (a) above, duly attested by an officer not below the rank of sub-agent, agent or manager of such bank or an officer of corresponding rank of the co-operative society. Where exemption under section 54E is allowed to an assessee on the fulfilment of the aforesaid conditions, the assessee will have to furnish to the Income-tax Officer, within ninety days from the expiry of the aforesaid period of three years, a certificate from the officer of the bank or co-operative society referred to in (b) above to the effect that the assessee has not taken any loan or advance on the security of such deposit during the said period of three years. 17.5 Sub-section (2) of section 54E provides for the forfeiture of exemption of capital gains in cases where the specified asset is transferred, or converted (otherwise than by transfer), into money within a period of three years from the date of its acquisition. The Finance Act has inserted a new Explanation to the said sub-section to the effect that where an assessee, who has made any deposit after 27th April, 1978, with any bank or co-operative society, takes any loan or advance on the security of such deposit, he shall be deemed to have converted (otherwise than by transfer) such deposit into money on the date on which such loan or advance is taken. 17.6 Exemption of long-term capital gains attributable to enhancement of compensation or consideration in certain circumstances.--The Finance Act has inserted a new sub-section (3) in section 54E to provide that where the transfer of the original asset is by way of compulsory acquisition under any law, or where the consideration for the transfer of the original asset is determined or approved by the Central Government or the Reserve Bank of India, and the compensation or, as the case may be, consideration for such transfer is enhanced by any court, tribunal or other authority, and the assessee has, within a period of six months after the date of receipt of the "additional compensation" or "additional consideration", invested or deposited the entire additional compensation or consideration in any specified asset (hereinafter referred to as the relevant asset), then, the "unadjusted capital gain" will not be charged to tax. However, where only a part of such additional compensation or consideration is invested or deposited in any specified asset, only a proportionate part of the "unadjusted capital gain" will be exempted from income-tax. 17.7 For the purposes of this provision, the expression "unadjusted capital gain" means so much of the recomputed capital gain (i.e., the capital gain computed with reference to the enhanced compensation or consideration) as bears to the whole of the recomputed capital gain the same proportion as the amount of additional compensation or consideration bears to the enhanced compensation or consideration. The expression "additional compensation", for this purpose, will have the meaning assigned to it in clause (1) of the Explanation to section 54(2) of the Income-tax Act, which has been explained in paragraph 14.8 of this Circular. The expression "additional consideration", in relation to the transfer of any capital asset the consideration for which was determined or approved by the Central Government or the Reserve Bank of India, means the difference between the amount of consideration for such transfer as enhanced by any court, tribunal or other authority and the amount of consideration which would have been payable if such enhancement had not been made. 17.8 New sub-section (4) inserted in section 54E provides for the forfeiture of exemption of the unadjusted capital gain in cases where the relevant asset is transferred, or converted (otherwise than by transfer) into money, within a period of three years from the date of its acquisition. For this purpose, the amount of capital gain exempted from tax by reason of the amount invested or deposited by the assessee in the relevant asset which is so transferred or converted will be deemed to be income by way of long-term capital gains of the previous year in which the relevant asset is so transferred or converted. Where only some of the relevant assets are so transferred or converted by the assessee, only a proportionate part of the capital gains which had been exempted from tax by reason of the amount invested or deposited therein will be charged to tax under this provision. 17.9 The provisions referred to in paragraphs 17.1 to 17.8 take effect from 1st April, 1978. [Section 13 of the Finance Act] 18.1 Modification of the provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in certain cases of amalgamation--Section 72A.--The Finance (No.2) Act, 1977, had introduced a new section 72A in the Income-tax Act relaxing the provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in certain cases of amalgamation. The provisions of section 72A apply in cases where there has been an amalgamation of a company owning an industrial undertaking or a ship with another company and the Central Government, on the recommendation of the "specified authority", is satisfied that the amalgamation is in the public interest and that certain conditions laid down in the law in this behalf are fulfilled. Where the Central Government is so satisfied, it may make a declaration to that effect and thereupon, notwithstanding anything contained in any other provision of the Income-tax Act, the accumulated loss and unabsorbed depreciation of the amalgamating company is deemed to be the loss or, as the case may be, depreciation allowance, of the amalgamated company, for the previous year in which the amalgamation is effected and can be carried forward and set off by it accordingly. 18.2 Under the existing provisions, the "specified authority" can make a recommendation to the Central Government under section 72A only after the company having the accumulated loss and unabsorbed depreciation allowance has amalgamated with the other company. The Finance Act has inserted a new sub-section (3) in section 72A to enable such companies to obtain an "advance ruling" in this regard from the specified authority. Under the new sub-section, where a company owning an industrial undertaking or a ship is proposed to be amalgamated with any other company, such other company may submit the proposed scheme of amalgamation to the specified authority. The specified authority would then examine the scheme and take into account all relevant facts to satisfy itself whether the conditions referred to in section 72A would be fulfilled if such amalgamation is effected in accordance with such scheme. The specified authority is also being authorised to indicate such modifications in the proposed scheme of amalgamation as it considers necessary. Where, after examining the scheme and taking into account all relevant facts, the specified authority is satisfied that the conditions referred to in section 72A will be fulfilled if such amalgamation is effected in accordance with such scheme (or in accordance with such scheme as modified in the manner indicated by it), the said authority would intimate to the company which has submitted the scheme of amalgamation that, after the amalgamation is so effected, it would make (unless there is any material change in the relevant facts) a recommendation to the Central Government under section 72A of the Income-tax Act. 18.3 The aforesaid provision takes effect from 1st April, 1978. [Section 14 of the Finance Act] 19.1 Restoration of some concessions earlier withdrawn in the case of certain Hindu undivided families--Section 80A(4).--The Finance Act, 1976, inserted a new sub-section (4) in section 80A of the Income-tax Act withdrawing the following concessions in the case of Hindu undivided families having at least one member with independent income exceeding the exemption limit:- (i) Deduction in respect of donations to certain funds, charitable institutions, etc. (Section 80G) (ii) Deduction in respect of rents paid for residential accommodation in excess of 10 per cent. of the taxable income. (Section 80GG) (iii) Tax concession in respect of industrial undertakings established in backward areas. (Section 80HH) (iv) Tax holiday profits of new industrial undertakings. (Section 80J) (v) Exemption from income-tax of income by way of dividends, interest on securities, interest on bank deposits, etc., up to a maximum of Rs. 3,000. (Section 80L) (vi) Deduction in respect of profits and gains from the business of publication of books. (Section 80QQ) The Finance Act has deleted the said sub-section (4) and has thus restored the position as it obtained prior to the amendment made by the Finance Act, 1976 19.2 This amendment will take effect from 1st April, 1979, and will accordingly apply in relation to the assessment year 1979-80 and subsequent years. [Section 15 of the Finance Act] 20.1 Liberalisation of the provision relating to deduction in respect of long-term savings in specified media--Section 80C.--Under section 80C of the Income-tax Act, tax relief is allowed in respect of long-term savings effected by certain categories of taxpayers out of their income chargeable to tax. In the case of an individual, long-term savings through life insurance or deferred annuity policies (without cash option) on the life of the individual, his spouse or child; certain provident funds and superannuation funds; Unit-linked Insurance Plan and 10-Year and 15-Year Cumulative Time Deposit Accounts, qualify for tax relief. In the case of Hindu undivided families, long-term savings effected through insurance policies on the life of any member of the family qualify for tax relief. In the case of a taxpayer, being an association of persons or a body of individuals, consisting only of husband and wife governed by the system of community of property in force in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu, long-term savings through life insurance or deferred annuity policies (without cash option) on the life of any member of such association or body or on the life of any child of either member, as also through the Public Provident Fund, Unit-linked Insurance Plan and 10-Year and 15-Year Cumulative Time Deposit Accounts qualify for tax relief. 20.2 The tax relief, in all cases, is allowed by deducting the whole of the first Rs. 4,000 of the qualifying savings plus 50 per cent. of the next Rs. 6,000 plus 40 per cent. of the balance of such savings, in computing the taxable income of the taxpayer. Long-term savings qualify for the tax relief only to the extent that such savings do not exceed the ceiling limits laid down in this behalf. In the case of individuals, the ceiling limit applicable in the generality of cases is 30 per cent. of the "gross total income" or Rs. 20,000, whichever is less. A higher ceiling limit is laid down in the case of authors, playwrights, artists, musicians and actors. The ceiling limit in their case is 40 per cent. of the professional income of the author, playwright, artist, musician or actor plus 30 per cent. of the remaining part of the "gross total income" or Rs. 50,000, whichever is less. In the case of a married couple governed by the system of community of property in force in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu, the ceiling limit is the same as in the case of individuals generally. In the case of Hindu undivided families, the ceiling limit is 30 per cent. of the "gross total income" or Rs. 30,000, whichever is less. 20.3 With a view to providing a further incentive for effecting long-term savings, the Finance Act has made the following modifications in the relevant provisions:- (i) The quantum of deduction in respect of long-term savings has been increased so as to allow a deduction of the whole of the first Rs. 5,000 of the qualifying savings, as against Rs. 4,000 at present. The quantum of deduction in respect of the next Rs. 5,000 will continue at the existing rate of 50 per cent., and in respect of the balance, at the rate of 40 per cent. (ii) The monetary limit of the savings qualifying for the deduction has been increased from Rs. 20,000 to Rs. 30,000 in the case of individuals, as also married couples governed by the system of community of property in force in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu. [The monetary limit of Rs. 30,000 currently applicable to the qualifying savings by Hindu undivided families will remain unchanged.] 20.4 The changes indicated in the preceding paragraph will take effect from 1st April, 1979, and will accordingly apply for the assessment year 1979-80 and subsequent years. [Section 16 of the Finance Act] 21.1 Deduction in respect of investment in equity shares of new industrial companies--New section 80CC.--With a view to stimulating investment in equity shares of new industrial companies, the Finance Act has inserted a new section 80CC in the Income-tax Act which provides for the grant of a tax concession in the case of (a) individuals; (b) Hindu undivided families; and (c) associations of persons or bodies of individuals consisting only of husband and wife governed by the system of community of property in force in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu, who acquire any equity shares forming part of an "eligible issue of capital". Under this provision, such taxpayers will be entitled to a deduction, in the computation of their taxable income, of an amount equal to 50 per cent. of the cost of such shares to them. 21.2 The maximum amount of investment qualifying for deduction in a year will be limited to Rs. 10,000. Hence, where the aggregate cost of the shares purchased by a taxpayer in the previous year exceeds Rs. 10,000, the deduction will be allowed only with reference to the cost of such of the shares (the aggregate cost whereof does not exceed Rs. 10,000) as are specified by the taxpayer in this behalf. Where a taxpayer who has acquired certain shares in any previous year, pays the whole or a part of the amount, if any, remaining unpaid on such shares, within a period of six months from the end of that previous year, the amount so paid by him will be regarded as having been paid by the taxpayer towards the cost of such shares in the previous year in which the shares were acquired by him. 21.3 For the purposes of this provision, an "eligible issue of capital" means an issue of equity shares which satisfies the following conditions:- (a) The issue is made by a public company formed and registered in India with the main object of carrying on the business of (i) construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule to the Income-tax Act; or (ii) providing long-term finance for construction or purchase of houses in India for residential purposes. Shares issued by a public company formed and registered in India with the main object of carrying on the business referred to in (ii) above will not be regarded as an eligible issue of capital unless such company is approved by the Central Government for the purposes of new section 80CC. (b) The issue is an capital made by the company for the first time. (c) The shares forming part of the issue are offered for public subscription. (d) Such other conditions as may be prescribed under rules framed by the Central Board of Direct Taxes. In the case of a company which had originally been incorporated as a private company but has become a public company under the provisions of the Companies Act, 1956, an issue of equity shares made by it for the first time after it has become a public company will not be regarded as an eligible issue of capital, if- (i) such company had declared, distributed or paid any dividend when it was a private company; or (ii) any of the shares forming part of such issue are offered for subscription at a premium. In case any question arises as to whether any issue of equity shares would constitute an "eligible issue of capital" for the purposes of the proposed concession, the question shall be referred to the Central Government whose decision in the matter would be final. 21.4 This tax concession will not be available unless the taxpayer has subscribed to or purchased the shares in the manner specified hereunder:- (a) the taxpayer should have subscribed to the shares in pursuance of an offer for public subscription made by the company or in pursuance of a reservation or an option made in his favour by reason of his being a promoter of the company; or (b) the taxpayer should have purchased the shares from a person who is specified as an "underwriter" in respect of the issue of such shares in pursuance of clause 11 of Part I of Schedule II to the Companies Act, 1956, and who has acquired such shares by virtue of his obligation as such underwriter. 21.5 The deduction allowed under this provision will be forfeited if the taxpayer sells or otherwise transfers these shares to any person within a period of five years from the date of their acquisition. In such cases, an amount equal to 50 per cent. of the cost of such shares shall be deemed to be the income of the taxpayer of the year in which the shares are so sold or transferred and charged to tax accordingly. For the purposes of the aforesaid provision, a taxpayer shall be regarded as having acquired any shares on the date on which his name is entered in relation to those shares in the register of members of the company. 21.6 Where a deduction is claimed and allowed to a taxpayer under this section with reference to the cost of any equity shares, the cost of such shares will not be taken into account for the purposes of exemption of capital gains under section 54E of the Income-tax Act. 21.7 Although this provision takes effect from 1st April, 1978, it has been specifically provided that only investment made in any previous year relevant to the assessment year 1979-80 or any subsequent assessment year will qualify for the purposes of this concession. [Section 17 of the Finance Act] 22.1 Exemption from tax of co-operative societies engaged in supplying milk--Section 80P(2).--Profits derived by a primary co-operative society from the supply of milk raised by its members to a federal milk co-operative society are exempt from income-tax under clause (b) of sub-section (2) of section 80P of the Income-tax Act. The Finance Act has substituted the said clause (b) by a new clause with a view to extending the scope of the existing exemption to primary co-operative societies which are engaged in the supply of milk raised by their members to (i) the Government or a local authority; or (ii) a Government company as defined in section 617 of the Companies Act, 1956, or a statutory corporation, where such company or corporation is engaged in supplying milk to the public. 22.2 The amendment will take effect from 1st April, 1979, and will accordingly apply in relation to the assessment year 1979-80 and subsequent year. [Section 18 of the Finance Act] 23.1 Recomputation of capital gains on receipt of additional compensation or consideration--Section 155(7A).--Under the existing provisions of the Income-tax Act, the capital gain arising from the transfer of a capital asset is charged to tax in the previous year in which the asset is transferred. The capital gain is computed by deducting from the full value of the consideration received or accruing as a result of the transfer (i) the cost of acquisition of the asset as increased by the cost of improvements thereto; and (ii) the expenditure incurred in connection with the transfer. Where the transfer of the capital asset is by way of compulsory acquisition under any law, the capital gain has to be computed by taking the compensation awarded by the Government as the full value of the consideration, eventhough the adequacy of the compensation may be questioned by the assessee. On additional compensation being awarded to the assessee, the earlier computation can be revised within four years from the end of the assessment year, by taking the enhanced compensation as the full value of the consideration received or accruing as a result of the transfer. This is, however, not feasible in most cases because the claim for additional compensation usually gets settled after many years, when the statutory period of limitation for revising the earlier computation of capital gains would have expired. 23.2 With a view to removing this difficulty, the Finance Act has inserted a new sub-section (7A) in section 155 of the Income-tax Act to enable recomputation of capital gains in cases where the transfer of the capital asset is by way of compulsory acquisition under any law or where the consideration for the transfer is determined or approved by the Central Government or the Reserve Bank of India and the compensation or, as the case may be, consideration for such transfer is enhanced or further enhanced by any court, tribunal or other authority. 23.3 The new sub-section (7A) provides that, in such cases, the computation or, as the case may be, computations made earlier shall be deemed to have been wrongly made and the Income-tax Officer shall recompute the capital gain arising from such transfer by taking the compensation or consideration as enhanced or further enhanced to be the full value of the consideration received or accruing as a result of the transfer, and shall make the necessary amendment. The period of limitation of four years for amending the assessment order laid down in the Income-tax Act will, in such cases, run from the end of the previous year in which the additional compensation or consideration was received by the assessee. 23.4 The new sub-section (7A) takes effect retrospectively from 1st April, 1974, and will accordingly, apply in relation to the assessment year 1974-75 and subsequent years. 23.5 Recomputation of capital gain for providing exemption with reference to the cost of relevant asset--Section 155(8A), (9A), (10)(b) and (10B).--Income-tax Officers may sometimes recompute the capital gain under new sub-section (7A) of section 155 even before the expiry of the time provided to the assessee under section 54, 54B, 54D or 54E for acquiring a corresponding relevant asset. However, if the assessee acquires a corresponding relevant asset within the specified period, it is but fair that the benefit of the exemption provided under the aforesaid sections should be allowed to him by again recomputing the capital gains and amending the assessment order. 23.6 Accordingly, the Finance Act has amended section 155 of the Income-tax Act to provide that, in such cases, the Income-tax Officer will amend the earlier order so as to exclude the amount of the unadjusted capital gain not chargeable to tax in accordance with the provisions of sections 54, 54B, 54D and 54E as amended by the Finance Act. The period of limitation of four years for amending an assessment order laid down in the Income-tax Act will, in such cases, run from the end of the previous year in which the additional compensation or, as the case may be, consideration was received by the assessee. The relevant provisions made in this behalf in section 155 of the Income-tax Act are the following:- (i) New sub-section (8A) for recomputation of capital gain in cases falling under section 54. (ii) New sub-section (9A) for recomputation of capital gain in cases falling under section 54B. (iii) New clause (b) inserted in sub-section (10) for recomputation of capital gain in cases falling under section 54D. (iv) New sub-section (10B) for recomputation of capital gain in cases falling under section 54E. 23.7 The new sub-sections (8A), (9A) and (10)(b) will take effect retrospectively from 1st April, 1974, and will accordingly apply in relation to the assessment year 1974-75 and subsequent years. The new sub-section (10B) relating to recomputation of capital gain in cases falling under section 54E will take effect from 1st April, 1978, and will accordingly apply in relation to the assessment year 1978-79 and subsequent years. [Section 19 of the Finance Act] 24.1 Exemption of interest on National Development Bonds from deduction of income-tax at source--Section 193.--With a view to channelising savings of workers and other employees into the national development effort, Government had last year insured the National Development Bonds. In order to avoid hardship to industrial workers and other employees in the lower income brackets from deduction of tax at source from the interest payable on these Bonds, the Finance Act has inserted a new clause (ib) in the proviso to section 193 of the Income-tax Act exempting such interest from the requirement of deduction of income-tax at source. 24.2 The amendment takes effect from 1st April, 1978. [Section 20 of the Finance Act] 25.1 Deduction of tax at source from income by way of winnings from horse races--Section 194BB.--The Finance Act has inserted a new section 194BB in the Income-tax Act to provide for deduction of tax at source from income by way of winnings from horse races at such rates as may be prescribed in the Finance Act of the relevant year. The main features of this provision are explained below:- (a) The obligation to deduct tax at source will apply only where such winnings are paid by a bookmaker or a person to whom a licence has been granted by the Government under any law for the time being in force for horse racing in any race course or for arranging for wagering or betting in any race course. (b) No tax will be deducted at source where the income by way of winnings from any horse race to be paid to a person is Rs. 2,500 or less, or where the payment is made before 1st June, 1978. (c) The term "winnings", in common parlance, means the amount received by the punter in excess of the bet laid by him on the horse or horses which have won in the particular race. Where a punter places bets on more than one horse in a particular race, the expression "winnings" will connote the amount won by the punter in that horse race as reduced by the amount invested by way of bet on the particular horse or horses which won the race, and not by the amount invested on the horse or horses which lost in that race. Hence, where a punter investes Rs. 100 each on two horses--horse 'A' and horse 'B'--in a particular horse race, and he wins Rs. 500 on the bet placed on horse 'A' but loses the bet on horse 'B', the winnings of the punter from this horse race would be Rs. 400 (Rs. 500--Rs. 100) and not Rs. 300 (Rs. 500--Rs. 200). (d) Where the income by way of winnings from a horse race payable to a person exceeds Rs. 2,500, tax will have to be deducted at source from such winnings even though the winnings may be paid to the person in instalments of less than Rs. 2,500. Similarly, where the bookmaker or other person responsible for paying the winnings from horse races credits such winnings and debits the losses to the individual account of the punter, the set-off of the losses against the income would constitute constructive payment of such income. Hence, where the income by way of winnings from a horse race credited to the individual account of the punter exceeds Rs. 2,500, tax will have to be deducted at source at the time of payment of such winnings, even though the net amount payable to the punter after adjustment of the losses debited to his individual account may be less than Rs. 2,500. (e) The expression "any horse race" occurring in section 194BB would, where the context so requires, include more than one horse race. In view thereof, winnings by way of jackpot and trebel pool would fall within the ambit of section 194BB. (f) The provisions for deduction of tax at source will, however, not apply to income by way of stake money. This is because "stake money", in common parlance, is not regarded as winnings from a horse race, but really constitutes the "prize money" received on a horse race by the owner thereof on account of the fact that the horse wins the race or stands second or in any lower position. (g) Part II of the Schedule to the Finance Act provides for the deduction of tax at source from such winnings at the rate of 34.5 per cent. (income-tax 30 per cent. plus surcharge 4.5 per cent.) in the case of resident non-corporate taxpayers. In the case of non-resident non-corporate taxpayers, tax will be deductible on the same basis as is currently applicable to income other than interest payable on a tax-free security, i.e., at the rate of 34.5 per cent. or the higher appropriate rate applicable to the winnings from horse races if such winnings were the total income of the person. 25.2 Consequential changes have also been made in sections 197, 198, 199, 200, 202, 203, 204 and 205 of the Income-tax Act with a view to placing the tax deducted at source from horse race winnings on a par with the tax deducted at source from other categories of income. 25.3 The aforesaid provisions take effect from 1st April, 1978. However, as stated above, deduction of tax at source will not be made in cases where such winnings are paid before 1st June, 1978. [Sections 21 and 32 of, and the Schedule to, the Finance Act] 26.1 Computation and payment of advance tax by assessees on a voluntary basis--New section 209A.--At present, a person who has been assessed by way of regular assessment is required to pay advance tax only on the receipt of an order in this behalf made by the Income-tax Officer under section 210 of the Income-tax Act. On the other hand, a person who has not previously been assessed by way of regular assessment is required to pay advance tax voluntarily on the basis of his current income as estimated by him. The existing legal position is unsatisfactory inasmuch as a taxpayer who is being regularly assessed to income-tax will have no liability to pay advance tax if an advance tax notice is not served on him. Besides, if new taxpayers who may not be familiar with the income-tax law are called upon to pay advance tax voluntarily, it is only appropriate that taxpayers who are being regularly assessed to income-tax should also be required to pay advance tax on a voluntary basis. 26.2 In view of these considerations, the Finance Act has introduced a new section 209A in the Income-tax Act to secure that every person irrespective of whether he has been assessed to income-tax or not, pays advance tax on a voluntary basis, if his current income for the relevant year is likely to exceed the amount specified in section 208(2) of the Income-tax Act. The main features of the new provision are indicated hereunder:- (a) A taxpayer who has been previously assessed by way of regular assessment under the Income-tax Act will be required to send a statement of advance tax payable by him to the Income-tax Officer. The advance tax payable in such cases will have to be computed in the manner laid down in section 209(1)(a) or, as the case may be, s. 209(1)(d)(i), that is, with reference to the last assessed income of the taxpayer, or the income returned by him for a later year on the basis of which self assessment tax has been paid by him under section 140A, if such returned income is higher. However, the taxpayer will have the option to pay a lower amount of advance tax if his current income, according to his own estimate, would be lower. In such cases, the taxpayer may, instead of sending a statement, send an estimate in lieu of such statement, giving an estimate of his current income and the advance tax payable thereon. A taxpayer who has not previously been assessed by way of regular assessment will have to send, as at present, an estimate of the advance tax payable by him with reference to his current income. (b) In the case of a taxpayer who has been previously assessed by way of regular assessment under the Income-tax Act, the statement or, as the case may be, estimate in lieu of statement referred to in (a) above will have to be sent to the Income-tax Officer before the date on which the first instalment of advance tax is due in the case of the taxpayer. In the case of a person who has not previously been assessed by way of regular assessment under the said Act, the estimate of advance tax referred to in (a) above may be sent at any time before the date on which the last instalment of advance tax is due in his case. The estimated amount of advance tax is to be paid in such cases in one instalment on the date specified in section 211 or, as the case may be, in equal instalments on such specified dates, if more than one, falling after the date on which the estimate is sent by the taxpayer. (c) A taxpayer will have the option to revise the statement or estimate (including estimate in lieu of statement) sent by him, if his current income, according to his own estimate, would be lower than that shown in the statement or estimate or for any other reason the advance tax payable by him would be lower than that shown in the statement or estimate. Conversely, it will be obligatory on a person to pay a higher amount of advance tax if the advance tax computed on his estimated current income exceeds the amount of advance tax payable according to the statement or estimate by more than 33-1/3 per cent. of the latter. (d) Every statement and estimate, including an estimate in lieu of statement, will have to be made in the prescribed form and verified in the prescribed manner. (e) Although every person will be required to pay advance tax voluntarily, the Income-tax Officer will continue to have the power to issue a notice for payment of advance tax in individual cases under section 210 of the Income-tax Act. 26.3 Consequential changes have also been made in sections 208, 209, 211, 212, 215, 216, 217 and 218 of the Income-tax Act. These amendments are intended to secure that the provisions of the said sections apply in relation to computation and payment of advance tax on a voluntary basis under section 209A as they apply in relation to payment of advance tax under the existing provisions of the Income-tax Act. 26.4 The Finance Act has also amended section 273 of the Income-tax Act relating to false estimate of, or failure to pay, advance tax. Section 273(1) as amended provides, inter alia, for the levy of penalty in cases where- (a) the assessee has furnished a statement of advance tax under section 209A(1)(a) which he knew or had reason to believe to be untrue; or (b) the assessee has without reasonable cause failed to furnish a statement of the advance tax payable by him in accordance with the provisions of section 209A(1)(a). In the cases referred to in (a) above, the penalty shall not be less than 10 per cent. but shall not exceed one and half times the amount by which the advance tax actually paid during the financial year immediately preceding the assessment year falls short of (i) 75 per cent. of the assessed tax as defined in section 215(5) or (ii) the amount which would have been payable by way of advance tax if the assessee had furnished a correct and complete statement in accordance with the provisions of section 209A(1)(a), whichever is less. In the cases referred to in (b) above, the penalty shall not be less than 10 per cent., but shall not exceed one and a half times of 75 per cent. of the assessed tax as defined in section 215(5). 26.5 The Finance Act has also made certain consequential changes in section 273 of the Income-tax Act to provide for levy of penalty under that section in cases where a person furnishes an estimate of advance tax payable by him under section 209A which he knew or had reason to believe to be untrue or where a person fails without reasonable cause to furnish an estimate of advance tax in accordance with the provisions of section 209A. The provisions as amended provide for the imposition of penalty in such cases on the same basis and to the same extent as in relation to defaults under the corresponding provisions of section 212 of the Income-tax Act. 26.6 The aforesaid provisions will take effect from 1st June, 1978, and will accordingly, apply in relation to advance tax payable during the financial year 1978-79 and subsequent years. [Section 22 to 31 of the Finance Act] AMENDMENT TO THE INTEREST-TAX ACT, 1974 27.1 The Interest-tax Act, 1974, provides for the levy of a tax at the rate of 7 per cent. on the gross amount of interest received by scheduled banks on loans and advances made in India. Banks were expected to adjust their functioning to this tax and reimburse themselves to the extent necessary by making proper adjustments in the interest rates charged by them from their borrowers. The interest-tax has, therefore, had the effect of increasing, on an average, the cost of borrowings from scheduled banks by about 1 per cent. 27.2 As a step towards re-alignment of interest rates, the Finance Act has discontinued the levy of interest-tax in relation to interest accruing or arising to scheduled banks after 28th February, 1978. 27.3 The amendment takes effect from 1st April, 1978. It is, however, relevant to note that as the calendar year is the previous year in the case of scheduled banks, interest which has accrued or arisen in the months of January and February, 1978, will be chargeable to interest-tax in their case for the assessment year 1979-80. [Section 33 of the Finance Act] AMENDMENTS TO THE COMPULSORY DEPOSIT SCHEME (INCOME-TAX PAYERS) ACT, 1974 28.1 Increase in the rates of compulsory deposit.--Under the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974, individuals who are citizens of India, Hindu undivided families and trustees of discretionary trusts are required to make compulsory deposits if their "current income" exceeds Rs. 15,000. In order to mobilise additional resources in the form of savings, the Finance Act has raised the rates of compulsory deposit. 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, 10 per cent.; and on the slab over Rs. 70,000, 12 per cent. The Finance Act has raised the rate of compulsory deposit on the initial slab of Rs. 25,000, from 4 per cent. to 4-1/2 per cent. The existing slab of Rs. 25,001--70,000 has been split into two. While the rate on the new slab of Rs. 25,001--35,000 will be 11 per cent., the rate on the next slab of Rs. 35,001--70,000 will be 12-1/2 per cent. On the slab over Rs. 70,000, the rate has been raised from 12 per cent. to 15 per cent. 28.2 Amendment consequential to insertion of new section 209A.--The Finance Act has also made certain amendments in section 4(3) of the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974, relating to the definition of the term "current income" and section 5 of the said Act relating to time for making compulsory deposit. These amendments are consequential to the insertion of new section 209A in the Income-tax Act. 28.3 Although the amendments to the Compulsory Deposit Scheme (Income-tax Payers) Act take effect from 1st April, 1978, it has been specifically provided that the modification in the rates of compulsory deposit will apply only in relation to compulsory deposits for the assessment year 1979-80 required to be made during the financial year 1978-79. [Section 40 of the Finance Act] (Sd.) O.P. Bhardwaj, Director Central Board of Direct Taxes.