The Finance (No. 2) Act, 1980--Explanatory notes on provisions relating to direct taxes - Income Tax - 281/1980

The Finance (No. 2) Act, 1980--Explanatory notes on provisions relating to direct taxes. Circular No. 281 Dated 22/9/1980 Introduction 1. The Finance (No. 2) Bill, 1980, as passed by Parliament, received the assent of the President on 21st August, 1980 and has been enacted as Act 44 of 1980. This circular explains the substance of the provisions relating to income-tax and other direct taxes contained in the Finance (No. 2) Act, 1980. 2. Provisions in brief - The provisions in the Finance (No. 2) Act, 1980 (hereinafter referred to as "the Finance Act") in the sphere of direct taxes relate to the following matters: 1. Prescribing the rates of income-tax (including surcharge thereon) on incomes liable to tax for the assessment year 1980-81, the rates at which income-tax will be deductible at source during the financial year 1980-81, 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 for the financial year 1980-81. 2. Amendment of the Income-tax Act, 1961 with a view to providing greater incentive for savings and investment; promoting research and development activities; plugging certain loopholes for tax avoidance through the medium of Hindu undivided family and private trusts; simplifying the assessment procedure for summary assessments; providing for tax relief in certain cases; overcoming the effect of certain court decisions resulting in unintended benefit in some cases; modifying the scheme of advance tax in the case of companies and providing for a few other matters. 3. Amendment of the Wealth-tax Act, 1957 with a view to raising the exemption limit; plugging loopholes for tax avoidance through the medium of Hindu undivided family and private trusts; discontinuing the levy of wealth-tax on agricultural property other than property comprised in tea, coffee, rubber or cardamom plantations and providing for a few other matters. 4. Amendment of the Gift-tax Act, 1958 with a view to plugging a loophole for tax avoidance through the medium of private trusts. 5. Amendment of the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974 with a view to exempting such deposits from wealth-tax; making the imposition of penalty f or failure to make requisite deposits discretionary; providing for appeal against penalty orders made by the Inspecting Assistant Commissioner exercising the powers of the Income-tax Officer and a few other matters. 6. Amendment of the Interest-tax Act, 1974 with a view to reviving the levy of interest-tax on interest received by scheduled banks; extending its scope to cover certain all-India industrial finance corporations and providing for a few other matters. 7. Amendment of the Finance (No. 2) Act, 1971 with a view to extending the period of exemption from tax of Housing and Urban Development Finance Corporation. RATE STRUCTURE Rates of income-tax for the assessment year 1980-81 3.1 The rates of income-tax for the assessment year 1980-81 in the case of all categories of assessees (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, 1979 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 tax payable in certain cases where accelerated assessments were required to be made during the financial year 1979-80. 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 1980-81 [vide section 2(2) of the Finance Act]. The mode of computation of net agricultural income in such cases is set out in Part IV of the First Schedule to the Finance Act. These provisions are the same as those contained in the Finance Act, 1979 except for certain minor modifications as explained in paragraph 5.5 of this circular. Rates for deduction of income-tax at source during the financial year 1980-81 from incomes other than "salaries" and "retirement annuities" 4. The rates for deduction of income-tax at source during the financial year 1980-81 from incomes other than "salaries" and "retirement annuities", payable to partners of registered firms engaged in specified professions, have been specified in Part 11 of the First Schedule to the Finance Act. These rates apply to income by Way of interest on securities, other categories of interest, dividends, insurance commission, winnings from lotteries and crossword puzzles, winnings from horse races and other categories of non-salary income of non-residents. As explained later in this circular, the rate of surcharge on income-tax in the case of non-corporate taxpayers has been reduced from 20 per cent to 10 per cent of the income-tax. Consequently, the rates for deduction of income-tax at source during the financial year 1980-81 differ from the rates specified in Part 11 of the First Schedule to the Finance Act, 1979 for purposes of deduction of tax at source from such incomes during the financial year 1979-80 in certain respects as explained below: 1. Payments to residents other than companies - (i) In the case of income by way of winnings from lotteries and crossword puzzles and income by way of winnings from horse races payable to resident taxpayers (other than companies) during the financial year 1980-81, tax will be deductible at the rate of 33 per cent made up of basic income-tax of 30 per cent and surcharge of 3 per cent (being 10 per cent of the income-tax). This is lower than the rate at which tax was deductible from such income during the financial year 1979-80 by 3 per cent. The reduction has been made in the context of the reduction in the rate of surcharge on income-tax in the case of non-corporate assessees as explained in paragraph 5.3 of this circular. (ii) In the case of income by way of "interest on securities" issued by the Central or a State Government (not being interest on a tax-free security) or interest on debentures or other securities issued by or on behalf of a local authority or a statutory corporation or interest on debentures issued by companies where such debentures are listed in a recognised stock exchange in India payable to resident assessees (other than companies) during the financial year 1980-81, tax will continue to be deducted at the rate of 10 percent. (iii) In the case of income by way of interest on securities, other than those mentioned in (ii) above, or dividends payable to resident assessees (other than companies) during the financial year 1980-81, income-tax will, however, be deductible at the rate of 23 per cent made up of basic income- tax of 21 per cent and surcharge of 2 per cent. This is lower than the rate at which tax was deductible from such income during the financial year 1979-80 by 1 per cent. In this connection, it may be noted that in the case of interest on debentures of companies which are not listed in a recognised stock exchange in India, income-tax will be deductible at source at the rate of 23 per cent (income-tax 21 per cent plus surcharge 2 per cent). 2. Payments to non-residents other than companies- In the case of income (other than interest on a tax-free security) payable to non-corporate non- resident persons during the financial year 1980-81, income-tax will be deductible at the minimum rate of 33 per cent made up of income-tax of 30 per cent and surcharge of 3 per cent (being 10 per cent of the income- tax). If the rate of income-tax and surcharge appropriate to such income, as specified in Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Finance Act, is higher than 33 per cent, tax will be deducted at such higher rate. In respect of interest on a tax-free security payable to a non-corporate non-resident assessee, the rate for deduction will be 16.5 per cent, made up of income-tax of 15 per cent and surcharge of 1.5 per cent (being 10 per cent of the income-tax). 3. Payments to domestic companies - In the case of income by way of interest other than "interest on securities" payable to domestic companies during the financial year 1980-81, income-tax will be deductible at the rate of 21.5 per cent, made up of income-tax of 20 per cent and surcharge of 1.5 per cent (being 7.5 per cent of the income-tax). Further in the case of any other income (excluding interest payable on a tax-free security). payable to domestic companies during the financial year 1980-8 1, tax will be deductible at the rate of 23 per cent, made up of income-tax of 21.5 per cent and surcharge of 1.5 per cent. It will be seen that the rate for the deduction of income-tax at source from dividends payable to domestic companies is the same as the rate at which income-tax is deductible at source from dividends payable to resident non-corporate assessees. 4. Payments to foreign companies - The rates for deduction of tax at source laid down in the Finance Act in respect of the various categories of income payable to foreign companies are the same as those prescribed for this purpose in Part II of the First Schedule to the Finance Act, 1979. 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 1980-81 5.1 The rates for deduction of income-tax at source from "salaries" in the case of individuals during the financial year 1980-81 and for computation of "advance tax' payable during that year in the case of all categories of assessees have been specified in Part IH of the First Schedule to the Finance Act. These rates are also applicable for deduction of income-tax at source during the financial year 1980-81 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 1980-81 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 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 those specified in Part I of the First Schedule to the Finance Act for the assessment of incomes liable to tax for the assessment year 1980-81, except for certain modifications. The modifications in the rate schedule, read with section 2 of the Finance Act, relate to the following matters: a. raising of the exemption limit from Rs.10,000 to Rs.12,000 in the case of individuals, Hindu undivided families, unregistered firms, etc.; b. reduction in the rate of surcharge in the case of all non-corporate assessees from 20 per cent to 10 per cent; c. increase in the rates of income-tax in the case of Hindu undivided families having one or more members with independent income exceeding the, exemption limit; d. modification of the provision for calculating income-tax in cases where the assessee has any net agricultural income in addition to total income. The modifications in regard to the above matters are explained in paragraphs 5.2 to 5.5 of this circular. 5.2 Raising of the exemption limit - The exemption limit in the case of individuals, Hindu undivided families, unregistered firms, associations of persons, bodies of individuals and artificial juridical persons has been raised from Rs. 10,000 to Rs. 12,000. It is relevant to note that although the rate schedule in the case of individuals, Hindu undivided families.(other than those liable to income-tax at higher rates), unregistered firms, etc.(including nil rate slab of income up to Rs. 8,000) has not been changed, a provision has been made in clause (i) of the proviso below Sub-Paragraph I of Paragraph A of Part IH of the First Schedule to the Finance Act to the effect that no income-tax will be payable in cases where the total income of the assessee does not exceed Rs. 12,000. In order to avoid hardship in cases where the total income of the assessee exceeds Rs. 12,000 by a small margin, a provision has been made in clause (ii) of the said proviso for the grant of marginal relief in such cases. Under this provision, where the total income of the assessee exceeds Rs. 12,000 but does not exceed Rs. 16,250, the income-tax excluding surcharge payable thereon shall not exceed 30 per cent of the amount by which the total income exceeds Rs. 12,000. In the case of Hindu undivided families having one or more members with independent taxable income exceeding Rs.12,000, although the rates of income-tax on various slabs of income have been stepped up as explained in paragraph 5.4 below, the nil rate slab of income has been retained at Rs.8,000 and a provision has been made in clause (i) of the proviso below Sub-Paragraph II of Paragraph A of Part III of the First Schedule to the Finance Act to the effect that no income-tax shall be payable in cases where the total income of the assessee does not exceed Rs. 12,000. A marginal provision has also been made in clause (ii) of the said proviso for the grant of marginal relief in cases where the total income of the Hindu undivided family exceeds Rs. 12,000 by a small margin. Under this provision, where the total income of the assessee exceeds Rs. 12,000, but does not exceed Rs. 17,610, the income-tax payable thereon shall not exceed 40 per cent of the amount by which the total income exceeds Rs. 12,000. 5.3 Reduction in the rate of surcharge - The rate of surcharge on income-tax in the case of all categories of non-corporate assessees, including individuals, Hindu undivided families, unregistered firms, registered firms, cooperative societies, local authorities, etc., has been reduced from 20 per cent to 10 per cent of the income-tax. 5.4 Increase in the rates of income-tax in the case of Hindu undivided families, having one or more members with independent income exceeding the exemption limit - The rates of income-tax in the case of Hindu undivided families having one or more members with independent taxable income exceeding the exemption limit (which stands raised to Rs. 12,000) have been stepped up in the following manner, namely: Income slab Rate of income-tax specified in Sub- Paragraph II of Paragraph A of Part III of the First Schedule to the Finance Act, 1979 Rate of income-tax specified in Sub-Paragraph II of Paragraph A of Part III of the First Schedule to the Finance (No. 2) Act, 1980 Rupees Per cent Per cent Below 8,000 Nil Nil 8,001—15,000 18 22 15,001—20,000 25 27 20,001—25,000 30 35 25,001—30,000 40 40 30,001—50,000 50 50 50,001—70,000 55 60 Over 70,000 60 60 5.5 Modification of the provision for calculating income-tax in cases where the assessee has any net agricultural income in addition to total income - The net agricultural income is to be computed in accordance with the rules contained in Part IV of the First 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 Act, 1979, except for the following modifications, namely:- 1. The net agricultural income will be taken into account for determining the advance tax payable by an assessee or for determining the income-tax payable in cases where accelerated assessments are to be made during the financial year 1980-81 only if such net agricultural income exceeds Rs. 600. Where the net agricultural income exceeds Rs. 600, the whole of such net agricultural income shall be taken into account for the purpose. 2. The unabsorbed loss in agriculture incurred during the previous year relevant to the assessment year 1979-80 will also be set off against the agricultural income for the previous year relevant to the assessment year 19.80-81. 3. Any unabsorbed loss incurred during the previous year relevant to the assessment year 1980-81 will also be set off in determining the net agricultural income for the purposes of payment of advance tax during the financial year 1980-81. [Section 2 of, and the First Schedule to, the Finance Act] AMENDMENTS TO INCOME-TAX ACT Taxation of benefits or perquisites enjoyed by representative assessees and beneficiaries of trusts, etc. - Section 2(24) 6.1 A new sub-clause (iva) has been inserted in clause (24) of section 2 relating to definition of "income". The new sub-clause deems to be income- a. the value of any benefit or perquisite, whether convertible into money or not, obtained by any representative assessee mentioned in clause (iii) or clause (iv) of sub-section (1) of section 160 or by any person on whose behalf or for whose benefit any income is receivable by the representative assessee; and b. any sum paid by the representative assessee in respect of any obligation which, but for such payment, would have been payable by the beneficiary. For this purpose, "representative assessee" means the Court of Wards, the Administrator-General, the Official Trustee, any receiver or manager appointed by or under any order of a court or a trustee appointed under a trust declared by a duly executed instrument in writing, whether testamentary or otherwise (including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913) who receives or is entitled to receive any income on behalf or for the benefit of any person. The items covered by this sub-clause are taxable as income irrespective of the fact whether the recipient of the benefit is charged to income-tax under section 56 or the assessment is made on the representative assessee under section 161 or section 164. 6.2 This provision has come into force with effect from 1st April, 1980 and is accordingly applicable in relation to the assessment year 1980-81 and subsequent years. [Section 3 of the Finance Act] Exemption from Income-tax in the case of regimental funds, non-public funds, etc., set up by armed forces - New section 10(23AA) 7.1 There are several Regimental Funds and Non-Public Funds set up by the armed forces of India for the welfare of the ill present and past members and their dependents. These Funds include Benevolent Funds, Charitable Funds, Child Welfare Funds, Children's School Funds, etc. The Funds set up by the Army are generally known as Regimental Funds and those by the Navy and Air Force are called Non-Public Funds. A new clause (23AA) has been inserted in section 10 to provide for exemption from income-tax in respect of the income of the Regimental Funds or Non- Public Funds established by the armed forces of the Union for the welfare of the past and present members of such forces or their dependents. 7.2 This provision has been made with retrospective effect from 1st April, 1962, i.e., from the commencement of the Income-tax Act, 1961 and is accordingly applicable in relation to the assessment year 1962-63 and subsequent years. [Section 4 of the Finance Act] Extension of benefit of standard deduction to pensioners - Section 16(i) 8.1 Under section 16, a standard deduction in respect of expenditure incidental to employment is allowed in computing the income of an assessee under the head "Salaries". The standard deduction is allowed in an amount equal to 20 per cent of the salary up to Rs.10,000 and 10 per cent of the salary in excess thereof, subject to a maximum of Rs. 3,500. The standard deduction on this basis is allowed irrespective of whether any expenditure incidental to employment has actually been incurred by the employee or not. Hitherto, standard deduction was not admissible in computing the salary income of a pensioner. 8.2 The Finance Act has amended section 16 with a view to extending the benefit of standard deduction to pensioners as well. Under the amended provision, the standard deduction at the existing rates will be available in computing the income chargeable under the head "Salaries" in the case of all assessees deriving income under that head. 8.3 This provision will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. [Section 5 of the Finance Act] Additional depreciation in respect of new machinery or plant in certain cases - Sections 32, 34 and 38 9.1 Under section 32, an assessee carrying on business or profession is entitled to a deduction, in the computation of his taxable profits, in respect of depreciation of buildings, machinery, plant or furniture owned by him and used for the purpose of the business or profession. In the case of ships other than ships ordinarily plying on inland waters depreciation allowance is granted at the prescribed rates on the actual cost of such ships, i.e., the straight-line method. In the case of buildings, machinery, plant (other than ocean-going ships) or furniture, the depreciation allowance is granted at the prescribed rates on the written down value of such assets, ie., the declining-balance method. 9.2 At present, under the Income-tax Rules, 7 different rates of depreciation have been prescribed in respect of machinery or plant ranging from 5 per cent to 100 per cent. In addition to the normal depreciation allowance, an extra allowance up to one-half of the normal allowance is allowed where the concern works double shift and an extra allowance up to the amount of normal depreciation is allowed where the concern works triple shift. In the case. of approved hotels, an extra allowance of depreciation is made in an amount equal to one-half of the normal allowance in respect of machinery or plant installed in such hotels. 9.3 With a view to stimulating investment during the new Five-Year Plan period, the Finance Act has inserted a new clause (iia) in sub-section (1) of section 32 to provide for a further deduction in respect of additional depreciation in respect of new machinery or plant installed in certain cases. The main points to be noted in regard to this provision are as follows, namely: 1. Additional depreciation will be admissible in respect of new machinery or plant installed after 31 st March, 1980 but before 1st April, 1985. For this purpose, the expression "new machinery or plant" will have the same meaning as in clause (2) of the Explanation below clause (vi) of section 32(1) and will, accordingly, include second-hand machinery or plant imported from a foreign country if the following conditions are fulfilled, namely: a. such machinery or plant was not, at any time, prior to the date of its installation by the assessee, used in India; b. such machinery or plant is imported into India from any country outside India; and c. no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of the 1922 Act or the 1961 Act, in computing the total income of any person for any period prior to the date of installation of the machinery or plant by the assessee. 2. Additional depreciation will not be admissible in respect of ships, aircraft, road transport vehicles, office appliances or machinery or plant installed in any office premises or in any residential accommodation. For this purpose, "residential accommodation" includes accommodation in the nature of a guest house but does not include premises used as a hotel. Machinery or plant installed in hotels will, therefore, qualify for deduction on account of additional depreciation if other conditions laid down in this behalf are fulfilled. Additional depreciation will also not be admissible in respect of any machinery or plant the whole of the actual cost of which is allowed as deduction, whether by way, of depreciation or otherwise, in any one previous year. 3. Additional depreciation will be allowable only in respect of the previous year in which the machinery or plant is installed or, if the machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year. It should be carefully noted that additional depreciation will be admissible only in one year, i.e., in the year of installation or if the machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year. 4. Additional depreciation will be allowed in an amount equal to 50 per cent of the normal depreciation allowance (excluding extra shift allowance and the extra allowance in respect of machinery or plant installed in any premises used as a hotel). Thus, where the assessee is entitled to depreciation allowance at the rate of 10 per cent in respect of certain machinery or plant and also to extra shift allowance on account of double or multiple shift working of the machinery or plant, the additional depreciation allowance will be 5 per cent of the actual cost of the machinery or plant. 5. Additional depreciation allowance will be taken into account in determining the written down value of the machinery or plant for subsequent years, and, accordingly, additional depreciation will be taken into account in calculating the balancing charge for determining the profits under section 41(2). The aggregate of the additional depreciation and normal depreciation (including multiple shift allowance)over the years will also not exceed-the actual cost of the qualifying machinery or plant. 6. Additional depreciation will not be admissible if the machinery or plant is sold, discarded, demolished or destroyed in the previous year. 7. Where the machinery or plant is not exclusively used for the purposes of the business or profession, the additional depreciation, as in the case of normal depreciation, will be restricted to a fair proportionate part which the Income-tax Officer may determine having regard to the user of such machinery or plant for the purposes of the business or profession. The provisions of section 32(2) relating to set off and carry forward of depreciation allowance shall apply in relation to additional depreciation admissible under the new clause (iia) of section 32(1) as they apply in relation to normal or initial depreciation allowance admissible under clauses (i), (ii), (iv), (v) and (vi) of that section. 9.4 These provisions will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. [Section 6 of the Finance Act] Deduction of capital expenditure on scientific research - Section 35 10.1 The Finance Act has made a few amendments to section 35 relating to expenditure on scientific research. 10.2 Section 35(1)(iv) provides for deduction in respect of capital expenditure incurred on scientific research related to the assessee's business. Where such capital expenditure was incurred before 1st April, 1967, one-fifth of the capital expenditure was deductible in computing the business profits in the year in which the expenditure was incurred and the balance of the expenditure was allowed as deduction in equal instalments in each of the four immediately succeeding previous years. Where such capital expenditure has been incurred after 3 1st March, 1967, the whole of such expenditure qualifies for deduction in the previous year in which it is incurred. In view of this position, no deduction by way of depreciation is admissible in respect of any asset the cost whereof has been allowed as deduction under section 35 and a provision to that effect has been made in section 35(1)(iv). The appellate authorities have, however, taken the view in some cases that the existing provision in section 35(1)(iv) would apply only in relation to the year in which the expenditure is allowed as deduction under section 35 and in a case where the asset continues to be used for the purposes of scientific research in subsequent years, the assessee will be entitled to a further deduction by way of depreciation on the capital asset in such subsequent years. As this interpretation is contrary to the underlying intention, the Finance Act has amended section 35(1)(iv) with a view to clarifying that no depreciation will be admissible on any capital asset represented by expenditure which has been allowed as deduction under section 35 whether in the year in which deduction under section 35 was allowed or in any other previous year. This amendment has come into force with effect from 1st April, 1962, i.e., from the commencement of the Income-tax Act, 1961, and is accordingly applicable in relation to the assessment year 1962-63 and subsequent years. 10.3 With a view to encouraging development of indigenous technology, the Finance Act has extended the area of tax concessions for scientific research in the following directions: 1. Under sub-section (2A) of section 35, a weighted deduction in an amount equal to one and one-third times the expenditure actually incurred by an assessee on sponsored research in approved laboratories is allowed where such expenditure is incurred on a programme approved by the prescribed authority having regard to the social, economic and industrial needs of India. The Finance Act has amended the said sub-section (2A) so as to extend its scope to cover expenditure incurred on sponsored research carried out in the in-house research and development facilities of public sector companies. For this purpose, the expression 'public sector company" has the same meaning as in clause (1)) of the Explanation below sub-section (2B) of section 32A. In other words, "public sector company"means any corporation established by or under any Central or State or Provincial Act or a Government company as defined in section 617 of the Companies Act, 1956. The term "Government company as defined in the said section 617 means any company in which not less than 51 per cent of the paid-up share capital is held by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a Government company as thus defined. 2 A new sub-section (2B) has been inserted in section 35 under which a weighted deduction will be allowed in an amount equal to one and one- fourth times the expenditure incurred by an assessee on scientific research undertaken by him under a programme approved in this behalf by the prescribed authority having regard to the social, economic and industrial needs of India. The revenue expenditure and expenditure incurred on the purchase of machinery and equipment for carrying out the approved programme will qualify for the weighted deduction. It has been specifically provided that capital expenditure incurred on the acquisition of land or acquisition or construction of buildings will not be eligible for the weighted deduction. Further, the expenditure qualifying for the weighted deduction will be limited to the amount certified in this behalf by the prescribed authority. Where a deduction is allowed under new sub-section (2B) of section 35, no deduction in respect of the same expenditure will be allowed under section 35(1)(i) or section 35(2)(ia) for the same or any other previous year. Further, no depreciation win be allowed in respect of any asset represented by expenditure in respect of which a weighted deduction has been allowed under the new sub-section (2B) whether in the year in which the weighted deduction was allowed or in any other previous year. Section 41 has also been amended to provide that where such asset is ultimately sold, whether before or after being used in the business of the assessee, the sale proceeds will be included in the taxable income of the assessee. This position has been explained in paragraph 14 of this circular. In order to ensure that the concession is not misused, it has been provided that the assessee will be required to furnish a certificate of completion from the prescribed authority after the programme of scientific research has been implemented and if the assessee fails to furnish such certificate within one year of the period allowed by the prescribed authority for completion of the programme, the tax concession already allowed will be withdrawn. A suitable provision for enabling the withdrawal has been made in sub-section (5B) of section 155, as explained in paragraph 29 of this circular. 10.4 The provisions discussed in items (1) and (2) in the preceding paragraph will take effect from 1st September, 1980 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. [Section 7 of the Finance Act] Modification of the provisions relating to the export markets development allowance - Section 35B 11.1 Under section 35B, domestic companies and non-corporate assessees resident in India are entitled to a weighted deduction in the computation of their taxable profits at the rate of one and one-third times the amount of the qualifying expenditure incurred by them on the development of export markets. The weighted deduction under this provision is allowed with reference to expenditure on the following activities: 1. Advertisement or publicity outside India in respect of the goods, services or facilities dealt in or provided by the assessee in the course of his business. 2. Obtaining information regarding markets outside India for such goods, services or facilities. 3. Distribution, supply or provision outside India of such goods, services or facilities, where such expenditure is incurred before 1st April, 1978. [Expenditure incurred in India in connection with these activities 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 is not taken into account for determining the qualifying amount of expenditure under this category. Expenditure incurred by an assessee engaged in the business of operating any ship, aircraft, etc., or the carriage of or making arrangements for the carriage of, passengers, livestock, mail or goods, or in relation to such operations, carriage or arrangements, is not regarded as expenditure incurred by the assessee on the supply outside India of services or facilities for the purposes of this provision.] 4. Maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities. 5. Preparation and submission of tenders for the supply or provision outside India of such goods, services or facilities, and activities incidental thereto. 6. Furnishing to a person outside India samples or technical information for the promotion of the sale outside India of such goods, services or facilities. 7. Travelling outside India for the promotion of the sale outside India of such goods, services or facilities, including travelling outward from and return to India. 8. Performance of services outside India in connection with or incidental to the execution of any contract for the supply outside India of such goods, services or facilities. 9. Such other activities for the promotion of the sale outside India of such goods, services or facilities as may be prescribed. 11.2 The actual operation of this provision revealed considerable misuse of this important tax concession by claiming a weighted deduction in respect of expenditure incurred in India on activities which have no direct relation with the basic objective of development of export markets. The claim for weighted deduction in respect of several items had led to considerable protracted litigation and resulted in loss of revenue. 11.3 Having regard to the fact that the basic objective for the grant of a weighted deduction in respect of expenditure on development of export markets was primarily to provide an incentive for promoting exports on a continuing basis, the Finance Act has amended section 35B so as to limit the benefit of the weighted deduction only in respect of the following categories of expenditure, namely: 1. Advertisement or publicity outside India in respect of the goods, services or facilities which the assessee deals in or provides in the course of his business. 2. Maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities. 3. Travelling outside India for the promotion of the sale outside India of such goods, services or facilities, including travelling outward from and return to India. 4. Such other activities for the promotion of the sale outside India of such goods, services or facilities as may be prescribed in the Income-tax Rules. (No rules have so far been framed in this regard.) Sub-clauses (ii), (iii), (v) and (viii) of clause (b) of section 35B(1) have accordingly been omitted. 11.4 Further, the Finance Act has substituted another Explanation for Explanation 2 below clause (b) of section 35B(1) with a view to clarifying that any expenditure which, by its very nature, is debitable to the trading account or a manufacturing account of a business, such as, wages to labourers, purchase of raw materials, carriage inward, etc., will not qualify for the weighted deduction. 11.5 These amendments will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. [Section 8 of the Finance Act] Grant of weighted deduction to employers employing blind or physically handicapped persons - Section 36 12.1 In order to encourage employers to employ persons who are totally blind or physically handicapped, the Finance Act has inserted a new clause (iia) in section 36(1) to provide for a weighted deduction in an amount equal to one and one-third times the salary paid to such persons. The weighted deduction will be admissible only in respect of employees whose income chargeable under the head "Salaries" does not exceed Rs. 20,000 during the relevant previous year. For the purpose of this tax concession, whether "salary" will include the allowances, bonus or commission, whether payable monthly or otherwise. In order to qualify for this concession, the employer will have to produce before the Income-tax Officer, in respect of the first assessment year for which deduction is claimed under the new provision, a certificate as to the total blindness of the employee from a registered oculist and in the case of an employee who is suffering from a permanent physical disability a certificate from a registered medical practitioner, to the effect that the employee suffers from a permanent physical disability (other than blindness) which has the effect of reducing substantially his capacity to engage in a gainful employment or occupation. These provisions are similar to the provisions contained in section 80U. 12.2 This amendment will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. [Section 9 of the Finance Act] Discontinuance of provisions relating to the disallowance of a part of expenditure on advertisement, publicity and sales promotion - Section 37(3A) 13.1 Under sub-section (3A) of section 37, a part of the expenditure incurred in India on advertisement, publicity and sales promotion is in cases where the aggregate of such expenditure exceeds Rs.40,000. Sub-sections (3A), (3B), (3C) and (3D) also contain some related provisions. The Finance Act has repealed the aforesaid sub-sections (3A), (3B), (3C) and (3D) of section 37 and accordingly the expenditure on advertisement, publicity and sales promotion will now be admissible as deduction in computing the profits and gains of business or profession subject, however, to the fulfilment of requirements of sub-sections (1) and (3) of section 37 read with rule 6B of the Income-tax Rules. 13.2 This amendment will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. [Section 10 of the Finance Act] Balancing charge in respect of assets represented by capital expenditure eligible for weighted deduction under new sub-section (2B) of section 35 - Section 41 14.1 As explained in item (ii) of paragraph 10.3 of this circular, a new sub-section (2B) has been inserted in section 35 under which a weighted deduction will be allowed in an amount equal to one and one-fourth times the expenditure incurred by an assessee on scientific research undertaken by him under a programme approved in this behalf by, the prescribed authority having regard to the social, economic and industrial needs of India. Under this provision, capital expenditure incurred on the purchase of machinery and equipment would, in some cases, qualify for the weighted deduction. The Finance Act has made two consequential amendments in section 41. In a case where such machinery or equipment used for the purpose of business after it ceased to be used for the purpose of scientific research related to the business is sold, discarded, demolished or destroyed, moneys payable in respect of such machinery or equipment, together with the amount of scrap value, if any, shall become chargeable to income-tax to the extent such moneys do not exceed 125 per cent of the actual cost of such machinery or equipment. In a case where such machinery or equipment is sold, without having been used for other purposes, the sale price to the extent it does not exceed 125 per cent of the actual cost will be included in the income of the assessee for the previous year in which the sale takes place. 14.2 These amendments will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. [Section 11 of the Finance Act] Modification of the provisions relating to deduction in respect of inter-corporate dividends and similar deductions under Chapter VIA of the Income-tax Act - New sections 80AA and 80AB 15.1 The provisions relating to concessional tax treatment of inter-corporate dividends have been on the statute book in one form or the other since 1953. At present, full deduction is granted in respect of income by way of dividends received by a domestic company from an Indian company formed and registered under the Companies Act, 1956 after 28th February, 1975 and engaged exclusively or almost exclusively in the manufacture or production of any one or more of the following articles or things, namely: 1. Non-ferrous metals. 2. Ferro-alloys and special steels. 3. Steel castings and forgings. 4. Electric motors. 5. Industrial and agricultural machinery. 6. Earth-moving machinery. 7. Machine tools. 8. Fertilisers, namely, ammonium sulphate, ammonium sulphate nitrate (double salt), ammonium nitrate, calcium ammonium nitrate (nitro lime stone), ammonium chloride, super-phosphate, urea and complex fertilisers of synthetic origin containing both nitrogen and phosphorus, such as, ammonium phosphates, ammonium sulphate phosphate and ammonium nitrophosphate. 9. Soda ash. 10. Caustic soda. 11. Commercial vehicles. 12 Ships. 13. Tyres and tubes. 14. Paper, pulp and newsprint. 15. Cement. 16. Pesticides. 17. Inorganic heavy chemicals (other than soda ash and caustic soda mentioned in items 9 and 10, respectively). 18. Organic heavy chemicals. 19. Industrial explosives. In respect of other dividends received by a domestic company from any other domestic company, the deduction is allowed at the rate of 60 per cent of such dividend income. 15.2 The income by way of dividends is charged to tax under the head "Income from other sources" and is computed after making the deduction, firstly, in respect of any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purposes of realising such dividends on behalf of the company and, secondly, in respect of any other expenditure, not being capital expenditure, laid out or expended wholly or exclusively for the purpose of making or earning such income, e.g., interest paid on borrowings utilised for the purchase of shares, etc. 15.3 In computing the total income of the assessee, the deduction specified in section 80M is allowed from the "gross total income". For this purpose, "gross total income" means the total income computed in accordance with the provisions of the income-tax Act before making any deduction under Chapter VIA. The income by way of dividends computed in accordance with the provisions of the Income-tax Act, i.e., after allowing the necessary expenditure specified in the preceding paragraphs, forms part of the "gross total income" of the assessee. The departmental view has accordingly all along been that any deduction in respect of inter-corporate dividends has necessarily to be calculated with reference to the amount of dividend which forms part of the "gross total income". In other words, it has always been the intention to grant the deduction at the specified percentage on the net amount of such. dividends and not the gross amount thereof. 15.4 In Cloth Traders (P.) Ltd. vs. Addl. CIT [1979] 118 ITR 243,(SC) the Supreme Court has, however, held that the deduction admissible for the inter-corporate dividends has to be calculated with reference to the gross amount of dividends received by a domestic company from an Indian company and not with reference to the dividend income as computed in accordance with the provisions of the Income-tax Act, i.e., after making the deductions provided under the Act. 15.5 In order to get over the difficulty caused by the aforesaid ruling of the Supreme Court, the Finance Act has inserted a new section 80AA to provide that the deduction under section 80M in respect of inter-corporate dividend will be calculated with reference to the dividend income as computed in accordance with the provisions of the Income-tax Act (before making any deduction under Chapter VIA) and not with reference to the gross amount of such dividends. This provision has been inserted with retrospective effect from 1st April, 1968, i.e., the date of insertion of Chapter VIA in the Income-tax Act, and will, accordingly, apply in relation to the assessment year 1968-69 and subsequent years. 15.6 In order to preserve the sanctity of the ruling of the supreme Court, the Finance Act has made a saving provision in section 44 to provide that the provisions of new section 80AA will not apply to the assessment of an assessee for a particular assessment year where the Supreme Court has, on an appeal or reference in respect of the assessment of that assessee for that year, held before the 18th June, 1980, i.e., the date on which the Finance (No.2)Bill, 1980 was introduced in the Lok Sabha, that the deduction in respect of inter-corporate dividends should be allowed with reference to the full amount of dividends. This saving provision will apply only in relation to the particular year of assessment for which the Supreme Court has given a judgment adverse to the Revenue on an appeal or reference made to that Court. The saving provision will not, therefore, apply in relation to cases where neither the assessee nor the Commissioner of Income-tax had gone up in appeal or reference to the Supreme Court. Persons who entered only as interveners will not, therefore, be eligible to the benefit of the saving provision. Even in cases where the matter had gone up in appeal or reference to the Supreme Court, the deduction with reference to the gross amount of dividends will be allowed in computing the total income only in respect of the years for which the appeals or references were preferred. 15.7 Although the issue before the Supreme Court in Cloth Traders' case (supra) was in respect of concessional tax treatment of inter-corporate dividends only, the Supreme Court has specifically referred to the provisions of some of the other sections contained in Chapter VIA of the Income-tax Act. The Supreme Court has in respect of such other sections observed that on a plain reading of these sections, it appears that the deduction admissible is in respect of the gross amount of income received by the assessee and not in respect of the net income computed after making the deductions provided in the Income-tax Act. The Finance Act has, accordingly, inserted another section 80AB to provide that, for the purpose of calculating the deductions specified in sections 80HH to 80TT the net income as computed in accordance with the provisions of the Income-tax Act (before making any deduction under Chapter VIA)shall alone be regarded as the income which is received by the assessee and which is included in his gross total income. Accordingly, the deductions specified in the aforesaid sections will be calculated with reference to the net income as computed in accordance with the provisions of the Act (before making any deduction under Chapter VIA) and not with reference to the gross amount of such income, subject, however, to the other requirements of the respective sections. The new section 80AB will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. It should be carefully noted that the new section 80AB, unlike section 80AA, will not have any retrospective operation. [Sections 12 and 44 of the Finance Act] Modification of the provision relating to deduction in respect of long-term savings through life insurance, provident fund, etc. - Section 80C 16.1 Under section 80C, tax relief is allowed in respect of long-term savings effected by certain categories of assessees 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 an assessee being an association of persons or a body of individuals, consisting only of husband and wife governed by the system of community of property in force in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu, long-term savings through 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 or 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. The tax relief in all cases is allowed by deducting the whole of the first Rs. 5,000 of the qualifying savings plus 35 per cent of the next Rs. 5,000 plus 20 per cent of the balance of such savings, in computing the taxable income of the assessee. Long-term savings qualify for tax relief only to the extent such savings do not exceed the ceiling limits laid down in this behalf. In the case of individuals, Hindu undivided families and specified associations of persons, the ceiling limit applicable is 30 per cent of the "gross total income" or Rs. 30,000, 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 has been prescribed in the Income-tax Rules at 40 per cent of the professional income of the author, playwright, artist, musician and actor plus 30 per cent of the remaining part of the "gross total income" or Rs. 50,000, whichever is less. 16.2 With a view to providing further incentive for effecting long-term savings, the Finance Act has made the following modifications to the relevant provisions: 1. While the quantum of deduction in respect of tong-term savings for the first Rs. 5,000 of the qualifying savings has been retained at the existing level, the quantum of deduction in respect of the next Rs. 5,000 has been increased to 50 per cent as against 35 per cent and the quantum of deduction in respect of the balance has been increased to 40 per cent as against 20 per cent at present. 2. The higher ceiling limit over the qualifying amount of long-term savings applicable in the case of authors, playwrights, artists, musicians and actors has been extended to sportsmen and athletes, rule 11A of the Income-tax Rules is being amended to secure the objective. 16.3 The changes indicated in the preceding paragraph will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. [Section 13 of the Finance Act] Withdrawal of deduction in respect of expenses incurred by Indian citizens on higher education of dependants - Section 80FF 17.1 Under section 80FF, Indian citizens having a gross total income not exceeding Rs. 12,000 are entitled to a specified deduction in respect of expenses incurred on higher education of their dependants in certain cases. This provision has become redundant in view of the raising of the exemption limit of Rs. 12,000 and has, therefore, been omitted. 17.2 The omission of section 80FF will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1980-81 and subsequent years. [Section 14 of the Finance Act] Modification of the provision relating to deduction in respect of donations to certain funds, charitable institutions, etc. - Section 80G 18.1 Under section 80G, an assessee is entitled to a deduction, in the computation of his taxable income, of an amount equal to 50 per cent of the donations made by him to certain funds and charitable institutions, or for the repair or renovation of any temple, mosque, gurdwara, church or any other place which is notified by the Central Government for the purpose of that section to be of historic, archaeological or artistic importance or to be a place of public worship of renown throughout any State or States. Donations made to the Government or any local authority, institution or association as is approved in this behalf by the Central Government to be utilised for the purpose of promoting family planning are eligible for 100 per cent deduction. The amount of donations qualifying for deduction under section 80G is, however, limited to 10 per cent of the gross total income of the donor, subject to a further monetary limit of Rs. 5 lakhs. The aforesaid ceiling limits, however, do not apply in relation to the donations made to the National Defence Fund, the Jawaharlal Nehru Memorial Fund, the Prime Minister's Drought Relief Fund and the Prime Minister's National Relief Fund. 18.2 In Hyderabad Race Club v. Addl. CIT [1979] 120 ITR 185, (SC) the Andhra Pradesh High Court held that the ceiling limits prescribed in sub-section(4) of section 8OG apply with reference to the quantum of deduction admissible under that section and not with reference to the aggregate amount of qualifying donations referred to in that sub-section. With a view to bringing out clearly the intention underlying this provision, the Finance Act, has substituted a new sub-section for the existing sub-section(4) in order to clarify that the limits specified therein will apply with reference to the aggregate amount of the donations and not with reference to the quantum of deduction admissible thereunder. This amendment will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. 18.3 The Finance Act has further inserted a new sub-section (5A) in section 8OG in order to clarify that in a case where an assessee has claimed and has been allowed any deduction under this section in respect of any amount of donation, the same amount will not again qualify for deduction under any other provision of the Income-tax Act for the same or any other assessment year. For example, where an assessee claims a deduction under section 8OG in respect of any donation made to a scientific research association or a university or college or other institution to be used for scientific research, it will not be entitled to claim deduction in respect of the same donation under section 35. It will, however, be open to him to claim the deduction under section 35 instead of under section 8OG. This amendment has come into force with effect from 1st April, 1968, i.e., the date of insertion of Chapter VIA in the Income-tax, Act, and will, accordingly, apply in relation to the assessment year 1968-69 and subsequent years. [Section 15 of the Finance Act] Deduction in respect of profits and gains from industrial undertakings, etc., established after a certain date - New section 80-I 19.1 Under section 80J, a "tax holiday" is granted in respect of profits made by the assessees from any industrial undertaking (including a cold storage plant) newly set up in India. The concession is also available in relation to profits derived by an Indian company from the business of an approved hotel or from plying a ship. The "tax holiday" concession consists of exemption from income-tax up to a specified percentage of the capital employed in the undertaking, hotel or ship for specified number of assessment years. 19.2 This tax concession has been criticised on the ground that it is biased in favour of capital-intensive techniques and that it weighs heavily in favour of the existing concerns setting up new industrial units inasmuch as such concerns cannot only obtain the benefit of the "tax holiday" provisions immediately by setting off the loss, depreciation and investment allowance of the new units against profits of the other units, but also derive a larger benefit in some cases over the entire "tax holiday" period. 19.3 The existing "tax holiday" provisions will apply in relation to new industrial undertakings which go into production before 1st April, 1981 or approved hotels which start functioning before that date or new ships which are brought into use on or before that date. The Finance Act has inserted a new section 80-I which will apply in relation to new industrial undertakings (including cold storage plants) which are set up after 31st March, 1981 or approved hotels which start functioning after that date or ships which are brought into use after 1st April, 1981. The "tax holiday" under the new provision will be available in respect of new industrial undertakings set up before 1st April, 1985 or approved hotels which start functioning before that date or new ships which are acquired on or before that date. 19.4 The new "tax holiday" scheme differs from the existing scheme in the following respects, namely: 1. The basis of computing the "tax holiday" profits has been changed from capital employed to a percentage of the taxable income derived from the new industrial unit, ship or approved hotel. In the case of companies, 25 per cent of the profits derived from new industrial undertakings, etc., will be exempted from tax for a period of eight years and in the case of other taxable entities, 20 per cent of such profits will be exempted for a like period. In the case of cooperative societies, however, the exemption will be allowed for a period of ten years instead of eight years. 2. The benefit of "tax holiday" under the new scheme would be admissible to all small-scale industrial undertakings even if they are engaged in the production of articles listed in the Eleventh Schedule to the Income-tax Act. In the case of other industrial undertakings, however, the deduction will be available as at present, where the undertakings are engaged in the production of articles other than articles listed in the said Schedule. 3. In computing the quantum of "tax holiday" profits in all cases, taxable income derived from the new industrial units, etc., will be determined as if such units were an independent unit owned by an assessee who does not have any other source of income. In the result, the losses, depreciation and investment allowance of earlier years in respect of the new industrial undertaking, ship or approved hotel will be taken into account in determining the quantum of deduction admissible under the new section 80-I even though they may actually have been set off against the profits of the assessee from other sources. 19.5 The other provisions relating to the existing "tax holiday" scheme in section 80J will, mutatis mutandis, apply in relation to the new "tax holiday" scheme in section 80-I. 19.6 The new section 80-I will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. [Section 16 of the Finance Act] Modification of the existing "tax holiday" provisions - Section 80J 20.1 Under section 80J, a "tax holiday" concession is granted in respect of profits derived by an assessee from an industrial undertaking (including a cold storage plant) newly set up in India. The concession is also available in relation to profits derived by an Indian company from the business of an approved hotel satisfying certain conditions or from plying the ships. The "tax holiday" concession consists of exemption from income-tax of the profits up to 6 per cent per annum (7.5 per cent per annum in the case of a company) of the capital employed in the undertaking, hotel or ship for five successive assessment years commencing from the assessment year relevant to the previous year in which the undertaking goes into production or starts operation of the cold storage plant or the hotel starts functioning or the ship is first put to use. In the case of a company, deriving profits from an industrial undertaking (including a cold storage plant) newly set up in India before 1st April, 1976 or from a ship which was first brought into use before that date or from the business of a hotel which started functioning before that date, the exemption from income-tax is limited to 6 per cent per annum, In the case of cooperative societies, the "tax holiday" period extends to seven years as against five years in the case of other categories of assessees. The benefit of this tax concession will be available in respect of industries which go into- production before 1st April, 1981, or hotels which start functioning before that date and ships which are brought into use on or before that date, however, an industrial undertaking which begins to manufacture or produce any article specified in the list in the Eleventh Schedule to the Income-tax Act after 31st March, 1979 is not eligible for this tax concession. 20.2 The capital employed in the industrial undertaking or the ship or the hotel is computed on the basis laid down in the Income-tax Rules. Speaking generally, rule 19A provides that the capital employed should be calculated on the basis of the owned capital and reserves only, i.e., with reference to the value of the total assets of the assessee as reduced by the liabilities including long-term borrowings. Some High Courts have taken the view that the rule is ultra vires the provisions of section 80J and the borrowings should also form part of the capital employed. In this connection, it may be mentioned that the "tax holiday" provisions have been on the statute book in one form or the other from 1949 and the basis for computation of capital employed has always been prescribed in the rules. The relevant rule from 1949 to 1968 provided for the computation of the capital employed on the basis of owned capital only. An amendment made in 1968 extended the definition of "capital employed" so as to include long-term borrowings from specified sources as well. This position was, however, reversed in 1971 and the status quo ante was restored on the consideration that there is no justification for including the long-term borrowings in the capital base as interest paid on such borrowings was allowed as deduction in computing the taxable income. 20.3 As the interpretation placed by some of the High Courts was contrary to the underlying intention, the Finance Act has transferred rule 19.4 of sub-section (1A) of section 80J "with some minor modifications. These minor modifications have become necessary in view of the position that new sub-section (1A) has come into force retrospectively from 1st April, 1972 and has to take into account some of the changes made in rule 19A as a result of amendments made to section 80J through the Finance Act, 1975. It may be noted that Explanation 2 under sub-rule (2) of rule 19A has not been incorporated in the new sub-section (1A). This Explanation provided that the value of any building, machinery or plant or any part thereof as is referred to in clause (a) or clause (b) of the Explanation at the end of sub-section (6) of section 80J shall not be taken into account in computing the capital employed in the industrial undertaking or, as the case may be, the business of the hotel. The position under new sub-section (1A), however, remains the same as in clause (1) of that sub-section which in terms provides that the computation under that sub-section will be made except as otherwise expressly provided in that section. The effect, therefore, would be that the value of the following assets shall not be taken into account in computing the capital employed in the industrial undertaking or, as the case may be, the business of the hotel: 1. In relation to the assessments for the assessment years prior to the assessment year 1976-77. Where, in the case of an industrial undertaking, any building, machinery or plant previously used for any purpose was transferred to a new business, and the total value of the building, machinery or plant so transferred did not exceed 20 per cent of the total value of the building, machinery or plant used in the business, the total value of the building, machinery or plant so transferred shall not be taken into account in computing the capital employed in the industrial undertaking. 2. Where in the case of the business of a hotel, any building previously used as a hotel, or any machinery or plant previously used for any purpose is transferred to a new business and the total value of the building, machinery or plant so transferred does not exceed 20 per cent of the total value of building, machinery or plant used in the business, then, the total value of the building, machinery or plant so transferred shall not be taken into account in computing the capital employed in the business of the hotel. In relation to the assessment year 1976-77 and subsequent years - 1. Where, in the case of an industrial undertaking, the total value of the machinery or plant transferred to the new business does not exceed 20 per cent of the total value of the machinery or plant used in that business, the total value of the machinery or plant so transferred shall not be taken into account in computing the capital employed in the industrial undertaking. Further, where any building previously used for any purpose is transferred to the business of the industrial undertaking, the value of the building so transferred shall not be taken into account in computing the capital employed in the industrial undertaking. 2. Where, in the case of the business of a hotel, any building previously used as a hotel, or any machinery or plant previously used for any purpose is transferred to a new business and the total value of the building, machinery or plant so transferred does not exceed 20 per cent of the total value of building, machinery or plant used in the business, then, the total value of the building, machinery or plant so transferred shall not be taken into account in computing the capital employed in the business of the hotel. In brief, the effect would, therefore, be that the capital employed in the industrial undertaking or ship or the business of the hotel for any assessment year will be computed in accordance with the provisions of rule 19A as it existed on the first day of the relevant assessment year. 20.4 These amendments have come into force "with effect from 1st April, 1972 and will, accordingly, apply in relation to the assessment year 1972-73 and subsequent years. [Section 17 of the Finance Act] Tax treatment of income derived from the business of livestock breeding or poultry or dairy farming - Section 80JJ 21.1 Under section 80JJ, an assessee deriving income from a business of livestock breeding or poultry or dairy farming is entitled to a deduction, in the computation of his total income, of an amount equal to one-third of the aggregate of the income derived from these sources or Rs.10,000, which-ever is higher. Where the aggregate of such income does not exceed Rs.10,000, the whole of such income is exempt from tax. 21.2 The Finance Act has amended section 80JJ to provide that an assessee deriving income from the business of livestock breeding or poultry or dairy farming would be entitled to a deduction, in the computation of his total income, of an amount equal to one-fifth of the aggregate of the income derived from these sources or Rs. 15,000, whichever is higher. Where the aggregate of such income does not exceed Rs. 15,000, the whole of such income will be exempt from tax. In computing the deduction under this section in a case where the profit derived from the business Of poultry farming exceeds Rs. 75,000, the excess will be ignored. In other words, the deduction in respect of profits and gains from the business of poultry farming will not exceed Rs. 15,000 (i.e., one-fifth of Rs.75,000). To illustrate in a case where the profits and gains derived by an assessee from the business of poultry farming amount to Rs.1 lakh and profits and gains derived from the business of livestock breeding or dairy farming amount to Rs.50,000, the deduction will be limited to 20 per cent of Rs.1,25,000 (Rs.75,000 from poultry farming plus Rs.50,000 from other qualifying sources). 21.3 This amendment will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. [Section 18 of the Finance Act] Deduction in respect of interest on deposits with public housing finance companies - Section 80L 22.1 Under section 80L, individuals, Hindu undivided families and associations of persons or bodies of individuals consisting only of husband and wife governed by the system of community of property in force in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu are entitled to a deduction up to Rs. 3,000 in the computation of their taxable income, in respect of income from investments in certain specified financial assets. The financial assets specified in this behalf include deposits with financial corporations engaged in providing long-term finance for industrial development in India and approved by the Central Government for the purposes of section 36(1)(viii). Under section 36(1)(viii) approved financial corporations engaged in providing long-term finance for industrial or agricultural developments in India are entitled to a deduction in the computation of their taxable profits, up to 40 per cent of their total income carried to a special reserve account. The Finance Act,.1979 extended the benefit of the provisions of section 36(1)(viii) to approved public companies formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes. The Finance Act has amended section 80L to include deposits with such approved companies engaged in providing housing finance in the category of financial assets income wherefrom qualifies for deduction, in the computation of total income, up to Rs. 3,000. It may be noted that deposits with financial corporations engaged in providing long-term finance for agricultural development in India continue to be excluded from the category of incomes qualifying for the deduction under section 80L. 22.2 This amendment will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. [Section 19 of the Finance Act] Extension of the benefit of deduction in respect of professional income from foreign sources to sportsmen and athletes - Section 80RR 23.1 Under section 80RR, a resident individual being an author, playwright, artist, musician or actor, who derives income in the exercise of his profession from foreign sources and receives such income in India or brings it into India in foreign exchange, is entitled to deduct 25 per cent of the income so received or brought into India in computing his total income. This provision is designed to encourage authors, playwrights, artists, musicians and actors in our country to project their activities outside India with a view to contributing to greater understanding of our country and its culture abroad and also for augmenting our foreign exchange resources. With a view to encouraging our sportsmen and athletes to compete in international events, the Finance Act has amended section 80RR to include them in the category of persons entitled to the benefit of that section. 23.2 This amendment has come into force with effect from 1st April, 1980 and will, accordingly, apply in relation to the assessment year 1980-81 and subsequent years. [Section 20 of the Finance Act] Modification of the provision relating to deduction in respect of long-term capital gains In the case of non-corporate assessees - Section 80T 24.1 Under section 8OT(a), long-term capital gains derived by non-corporate assessees are excluded from the taxable income in the cases where the gross total income does not exceed Rs.10,000 or the long-term capital gains do not exceed Rs. 5,000. 24.2 In the context of raising of the exemption limit in respect of personal incomes to Rs. 12,000, the Finance Act has amended section 8OT(a) to exclude reference to cases where the gross total income does not exceed Rs. 10,000. This amendment is thus only consequential to the raising of the exemption limit in respect of personal incomes to Rs. 12,000. 24.3 This amendment will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. [Section 21 of the Finance Act] Modification of the provisions relating to deduction in respect of winnings from lotteries - Section 80TT 25.1 Under section 80TT, winnings from lotteries in the case of non-corporate assessees are excluded from the taxable income in cases where the gross total income does not exceed Rs. 10,000 or the wages do not exceed Rs. 5,000 25.2 In the context of raising of the exemption limit in respect of personal incomes to Rs. 12,000, the Finance Act has amended section 80TT to exclude reference to cases where the gross total income does not exceed Rs. 10,000. This amendment is thus only consequential to the raising of the exemption limit in respect of personal incomes to Rs. 12,000. 25.3 This amendment will take effect from 1st April, 1981 and win, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. [Section 22 of the Finance Act] Increase in the amount of deduction in the case of totally blind or physically handicapped resident persons - Section 80U 26.1 Under section 80U, a resident individual who is totally blind or who suffers from a permanent physical disability (other than blindness) which has the effect of reducing substantially his capacity for engaging in a gainful employment or occupation is entitled to a deduction of Rs. 5,000 in the computation of his taxable income. In order to avail of the deduction, such an assessee is required to furnish, in respect of the first assessment year for which the deduction is claimed in a case of total blindness, a certificate from a registered oculist, and in a case of other physical disability, a certificate from a registered medical practitioner. 26.2 he Finance Act has amended section 80 with a view to raising the quantum of deduction admissible to an assessee who is totally blind or who suffers from a permanent physical disability from Rs.5,000 to Rs.10,000. 26.3 his amendment wig take effect from 1st April, 1981 and will, accordingly, applying relation to the assessment year 1981-82 and subsequent years. [Section 23 of the Finance Act] Modification of the provision relating to returns of income - Section 139 27.1 Under section 143(1) an Income-tax Officer may make a regular assessment without requiring the presence of the assessee or the production by him of any evidence in support of the return, and without being satisfied that the return was correct and complete in all respects. In making such a summary assessment", the Income-tax Officer has the authority to make certain adjustments to the income or loss declared in the returns. These adjustments are by way of- i. rectifying any arithmetical error in the return and accounts and documents, if any, accompanying it; ii. allowing any deduction, allowance or relief which, on the basis of information available in such return, accounts and documents is prima facie, admissible though not claimed in the return; iii disallowing any deduction, allowance or relief claimed in the return which, on the basis of the information available in such return, accounts and documents is prima facie, inadmissible; and iv. giving due effect to the deductions and allowances brought forward from earlier years, namely, unabsorbed depreciation [section 32(2)]; unabsorbed investment allowance [section 32A(3)(ii)]; unabsorbed development rebate [section 33(2)(ii)]; unabsorbed development allowance [section 33A(2)(ii)]; unabsorbed amount of capital expenditure incurred on scientific research [section 35(2)(i)]; capital expenditure on acquisition of patent rights and copyrights [section 35A(1)]; unabsorbed amount of certain preliminary expenses which are amortisable against profits [section 35D(1)]; expenditure on prospecting for or development of specified minerals amortisable against profits [section 35E(1)]; capital expenditure on family planning incurred by an Indian company [section 36(1)(ix), first proviso]; unabsorbed losses brought forward from earlier years which are admissible as set off [sections 72(1), 73(2), 74(1) and 74A(3)]; and the deficiency in tax holiday profits which is eligible for set off [section 80J(3)]. The adjustments to be made in the summary assessment in regard to items specified in (iv) above are to be based on the computation made in the regular assessment, if any, for the earlier assessment year or years. 27.2 The assessment made under the summary assessment scheme in the aforesaid manner is final except where the proceedings are initiated for making a fresh assessment. Where an assessee objects to the summary assessment made by the Income-tax Officer by making an application within the specified period of one month, it is incumbent on the Income-tax Officer to reopen the assessment by issuing the necessary notice calling upon the assessee to produce the books of account and other evidence in support of the return. The Income-tax Officer is also empowered to issue a notice in cases where an assessment has been completed under section 143(1). However the issue of a notice in such cases is subject to the requirement that prior approval of the Inspecting Assistant Commissioner has been obtained. The basis for the issue of such a notice is that the Income-tax Officer considers it necessary or expedient to verify the correctness and completeness of the return by requiring the presence of the assessee or the production of evidence in this behalf. 27.3 The revised procedure of assessment known as "summary assessment scheme" has been in operation for the last one decade. It was felt that the objective of making the assessment without requiring the presence of the assessee to produce the books of account and other evidence in support of the return of income and thereby ensuring expeditious completion of the bulk of assessment has not been fully realised. This call be ascribed to two main reasons, namely - 1. In some cases, returns of income are not properly filled in and are not accompanied by all documents necessary for the completion of assessments. 2. Considerable time is taken in determining whether adjustments of the nature referred to in items (i) to (iv) of paragraph 27.1 are required to be made. In order to speed up the completion of assessments, the Finance Act has amended section 139 and section 143. The amendment to section 143(1) is discussed in paragraph 28. 27.4 The Finance Act has inserted a new sub-section (9) in section 139 with a view to empowering the Income-tax Officer to call upon the assessee to rectify a defective return. For the purposes of this sub-section, a return of income shall be regarded as defective unless all the following conditions are fulfilled, namely: a. The annexures, statements and columns in the return of income relating to co inputation of income chargeable under each head of income, computation of gross total income and total income have been duly filled in.. b. The return of income is accompanied by the following, namely: i. a statement showing the computation of the tax payable on the basis of the return; ii. the proof the tax, if any, claimed to have been deducted at source and the advance tax and tax on self-assessment, if any, claimed to have been paid; iii. the proof the amount of compulsory deposit, if any, claimed to have been made under the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974; iv. where regular books of account are maintained by an assessee,- 1. copies of manufacturing account, trading account, profit and loss account, on, income and expenditure account, or any other similar account and balance sheet; 2. in the case of a proprietary business or profession, the personal account of the proprietor; in the case of a firm, association of persons or body of individuals, personal accounts of the partners or members; and in the case of partner or member of a firm, association of persons or body of individuals, also his personal account in the firm, association of persons or body of individuals; where the accounts of the assessee have been audited, copies of the audited profit and loss account and balance sheet and a copy of the auditor's report; vi. where regular books of account are not maintained by the assessee, a statement indicating the amounts of turnover or gross receipts, gross profit, expenses and net profit of the business or profession and the basis on which such amounts have been computed, as also of the amounts of total sundry debtors, sundry creditors, stock-in-trade and cash balance as at the end of the previous year. 27.5 Where the Income-tax Officer considers that the return of income furnished by the assessee is defective, he is given the discretion to intimate the defect to the assessee and give him an opportunity to rectify the defect within a period of fifteen days from the date of intimation or within such further extended time as the Income-tax Officer may allow. If the defect is not rectified within the period of fifteen days or such further extended period, then, the Income-tax Officer shall treat the return as an invalid return and other provisions of the Income-tax Act shall apply as if the assessee had failed to furnish the return. Where, however, the assessee rectifies the defect after the expiry of the period of fifteen days or the further extended period, but before assessment is made, the Income-tax Officer has been empowered to condone the delay and treat the return as a valid return. 27.6 This amendment has come into force from 1st September, 1980 and is accordingly applicable in relation to the returns of income filed on or after that date. 27.7 The following points may be carefully noted in regard to the new provision in section 139(9): 1. The new provision will apply in relation to returns of income which are filed on or after 1st September, 1980, whether for the assessment year 1980-81 or any earlier or later assessment year. The provision will also cover returns filed on or after that date in response to notices under section 148. 2. A return of income is to be regarded as defective only if it contains any of the defects referred to in the Explanation to section 139(9). In other words, the provision in section 139(9) will not be applicable in the case of returns which do not contain any of these specified defects. 3. The provision makes a distinction between a defective return and an invalid return. A defective return is not ipso facto to be regarded as an invalid return. It is only when a return contains any of the specified defects and the Income-tax Officer, in his discretion, intimates the defect to the assessee and the assessee fails to rectify the same within the specified period of 15 days or such further period as the Income-tax Officer may, on an application made in this behalf, allow that the return shall be treated as an invalid return. In this connection, a reference may be made to section 292B which, inter alia, provides that no return of income shall be invalid merely by reason of mistake, defect or omission in such return of income. The provision in section 139(9), however, overrides other provisions of the Income-tax Act (including section 292B) in this regard and in a case where any of the specified defects is not removed within the time allowed, the return shall be treated as invalid return and the provisions of the Income-tax Act shall apply as if the assessee had failed to furnish the return. 4. The defect intimated by the Income-tax Officer is ordinarily required to be rectified by the assessee within a period of 15 days from the date of intimation. Where the Income-tax Officer sends a written communication to the assessee by post or through notice server, the period of 15 days will have to be reckoned from the date on which the communication is served on the assessee. 5. Where there is a default in rectifying the defect intimated by the Income-tax Officer, the return of income has to be treated as an invalid return and further proceedings shall have to be taken on the footing that the assessee had failed to furnish the return. Thus, in a case where the return is furnished voluntarily under section 139(1),the Income-tax Officer cannot proceed to make an ex parte assessment under section 144 without serving a notice under section 139(2) or, as the case may be, under section 148. Where, however, the defective return was filed in response to a notice under section 139(2) or section 148, the Income-tax Officer may straightaway proceed to complete the assessment ex part under section 144 or issue a notice under section 142(1). 6. The position stated in item (5) above, however, is subject to the proviso that in a case where the assessee rectifies the defect after the expiry of the prescribed period of 15 days or the further period allowed by the Income-tax Officer, but before the assessment is made, the Income-tax Officer may condone the delay and treat the return as a valid return. Thus, in a case where the defect is not rectified within the time allowed but the assessee rectifies the same before the Income-tax Officer has completed the assessment, it will not be open to the assessee to question the validity of the assessment made by the Income-tax Officer on the ground that the defect had not been rectified within the time allowed and accordingly the return filed by him was invalid. [Section 24 of the Finance Act] Amendment of section 143(1) 28.1 As stated in paragraph 27.3, one of the main reasons for the inadequate success of the "summary assessment scheme" is that considerable time is taken in determining whether adjustments of the nature referred to in sub-clauses (i) to (iv) of clause (b) of section 143(1) are required to be made. Experience has also shown that while there are a number of cases which require rectification of arithmetical errors in the return or the proper adjustment of brought forward allowances or losses, only in a very few cases, the deductions admissible to the assessee were not claimed or that incorrect deductions or allowances were claimed. The Finance Act has omitted the requirement of making adjustments under sub-clauses (ii) and (iii) of clause (b) of section 143(1). It will, therefore, not be open to the Income-tax Officer to make adjustments in respect of any deduction, allowance or relief which, although admissible, is not claimed or having been claimed is, in fact, not admissible. The existing provisions in sub-clauses (i) and (iv) of the said clause (b) requiring rectification of arithmetical errors in the return and accompanying documents, as also the provisions in regard to proper deduction of brought forward losses and allowances have, however, been retained. 28.2 This amendment has come into force with effect from 1st April, 1980 and will, accordingly, apply in relation to the assessment year 1980-81 and subsequent years. These provisions will also apply in relation to the assessments for the assessment year 1979-80, and earlier years where the return of income is made on or after 1-4-1980, as also where the return has been made before that date but no notice under section 143(2) has been issued. [Section 25 of the Finance Act] Amendment of assessment in cases where certificate of completion of approved programme of scientific research is not furnished within the time allowed - Section 155(5B) 29.1 As stated in paragraph 10.3, the Finance Act has inserted a new sub-section (2B) in section 35 under which a weighted deduction will be allowed in an amount equal to one and one-fourth times the expenditure incurred by an assessee on scientific research undertaken by him under a programme approved in this behalf by the prescribed authority having regard to the social, economic and industrial needs of India. The said sub-section (2B), inter alia, provides that the assessee must furnish a certificate of completion of the approved programme from the prescribed authority after the programme of scientific research has been implemented and if he fails to furnish such certificate within one year of the period allowed by the prescribed authority for the completion of the programme, the tax concession already allowed will be withdrawn. 29.2 In order to enable the Income-tax Officer to amend the original assessment in such cases, the Finance Act has inserted a new sub-section (5B) in section 155. This sub-section provides that in case of failure on the part of the assessee to furnish the certificate of completion within one year of the period allowed for the completion of the programme, the deduction originally made in excess of the expenditure actually incurred shall be deemed to have been wrongly made and the Income-tax Officer may recompute the total income of the assessee for the relevant previous year and make the necessary amendment. The amendment under new sub-section (5B) of section 155 will be required to be made within a period of four years from the end of the previous year in which the period allowed for the completion of the programme by the prescribed authority expired. It should be noted that in a case where the certificate of completion is not furnished within the prescribed time, the assessee will continue to be entitled to the deduction in an amount equal to the expenditure actually incurred by him and it is only the amount allowed in excess of such expenditure that wig be added back to the profits computed in the original assessment. 29.3 This amendment will take effect from 1st April, 1981. [Section 26 of the Finance Act] Measures to plug loopholes for tax avoidance through the medium of private trusts - Section 164 30.1 Under section 164, the income received by the trustees of a discretionary trust is chargeable to income-tax at the rate of 65 per cent, or the rate which would be applicable if such income were the total income of an association of persons, whichever course is more beneficial to the revenue. This section applies in the case of representative assessee referred to in clause (iii) or clause (iv) of sub-section (1) of section 160 in a case where any income or part thereof is not specifically receivable on behalf or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown. The representative assessees referred to in the aforesaid sub-clauses (iii) and (iv) of sub-section (1) of section 160 are the court of wards, the administrator-general, the official trustee or any receiver or manager (including any person, whatever his designation, who, in fact, manages property on behalf of another) appointed by or under any order of a court and a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise (including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913). 30.2 With a view to obviating hardship in genuine cases where the circumstances are such that tax evasion could not be considered to be the main purpose of creating a trust, certain exceptions have been specified where the flat rate of 65 per cent does not apply. The main exceptions are as under: i where none of the beneficiaries of the trust has any other income chargeable to income-tax;ii where the trust is created under a will; and iii where a non-testamentary trust was created before 1st March, 1970 bona fide exclusively for the benefit of the dependent relatives of the settlor. 30.3 It was felt that the provisions of section 164, even after their amendment in 1970, had not been fully effective in curbing the use of private trusts for avoiding proper tax liability. The Finance Act has, therefore, made the following amendments to section 164 with a view to curbing tax avoidance through the medium of such trusts: 1. A discretionary trust will be liable to tax at the maximum marginal rate of income-tax on their entire income. As a result, the entire income of a discretionary trust will be liable to tax at the maximum marginal rate of income-tax (including surcharge) applicable to the Finance Act of the relevant year to the highest slab of income in the case of an association of persons. Thus, for the assessment year 1980-81, the entire income of a discretionary trust will be charged to tax at the rate of 72 per cent (income-tax 60 per cent plus surcharge 12 per cent) and for the assessment year 1981-82 at the rate of 66 per cent (income-tax 60 per cent plus surcharge 6 per cent). 2. As already stated, under the provisions as they existed prior to the amendment made by the Finance Act, the average rate of 65 per cent did not apply in a case where none of the beneficiaries of the trust had other income chargeable to income-tax. This special dispensation was misused in some cases by the creation of a large number of discretionary trusts, the beneficiaries of which did not have any other income chargeable to income-tax. With a view to ensuring that the provision is not misused in this manner, the Finance Act has amended the relevant provision to provide that a discretionary trust would be liable to tax at the maximum marginal rate unless none of the beneficiaries had any other income chargeable to tax nor is he a beneficiary under any other private trust. It has also been clarified that, in this context, income chargeable to tax would mean total income above the exemption limit for the relevant year. As a result, the income of a discretionary trust will be chargeable to tax at the maximum marginal rate in cases where any of the beneficiaries has any other taxable income exceeding the exemption limit or if any of the beneficiaries is a beneficiary under any other private trust. 3. Under the provisions as they existed prior to the amendment made by the Finance Act, in a case where a discretionary trust was created under a will, the income of the discretionary trust was chargeable to tax at the rates applicable to an association of persons and not at the flat rate of 65 per cent. This provision was originally made with a view to relieving hardship in a case where a person genuinely created one discretionary trust by will for the benefit of his near relations. Experience, however, showed that this provision had been misused to a large extent by persons creating a number of discretionary trusts by will. The Finance Act has amended the relevant provision so as to restrict the benefit of concessional tax treatment only to cases where a person has made only one discretionary trust by will. 4. Under the provisions as they existed prior to the amendments made by the Finance Act, the flat rate of 65 per cent was not applicable where the beneficiaries and their shares are known in the previous year although such beneficiaries or their shares have not been specified in the relevant instrument of trust, order of the court or wakf deed. This provision was misused in some cases by giving discretion to the trustees to decide the allocation of income every year and in several other ways. In such a situation, the trustees and beneficiaries were able to manipulate the arrangements in such a manner that a discretionary trust was converted into a specific trust whenever it suited them tax-wise. In order to prevent such manipulation, the Finance Act has inserted Explanation 1 in section 164 to provide as under: a. any income in respect of which the court of wards, the administrator general, the official trustee, receiver, manager, trustee or mutawalli appointed under a wakf deed is liable as a representative assessee or any part thereof shall be regarded as not being specifically receivable on behalf or for the benefit of any one person unless the person on whose behalf or for whose benefit such income or such part thereof is receivable during the previous year is expressly stated in the order of the court or the instrument of trust or wakf deed, as the case may be, and is identifiable as such on the date of such order, instrument or deed. [For this purpose, it is not necessary that the beneficiary in the relevant previous year should be actually named in the order of the court or the instrument of trust or wakf deed, all that is necessary is that the beneficiary should be identifiable with reference to the order of the court or the instrument of trust or wakf deed on the date of such order, instrument or deed;] b. the individual shares of the persons on whose behalf or for whose benefit such income or part thereof is receivable will be regarded as indeterminate or unknown unless the individual shares of such persons are expressly stated in the order of the court or the instrument of trust or wakf deed, as the case may be, and are ascertainable as such on the date of such order, instrument or deed. As a result of the insertion of the above Explanation, trust under which a discretion is given to the trustee to decide the allocation of the income every year or a right is given to the beneficiary to exercise the option to receive the income or not each year will all be regarded as discretionary trusts and assessed accordingly. 30.4 The aforesaid amendments to section 164 come into force with effect from 1st April, 1980 and will, accordingly, apply in relation to the assessment year 1980-81 and subsequent years. It may be specifically noted that the new provisions will apply in respect of all discretionary trusts whether created before or on or after 1st April, 1980. [Section 27 of the Finance Act] Modification of the provision relating to partial partition of Hindu undivided families - Section 171 31.1 Under the Hindu law, a Hindu undivided family is entitled to effect a partition which may be total or partial. Where a Hindu undivided family undergoes a total partition, the entire joint family property is divided among all coparceners and the family ceases to exist as an undivided family. A partial partition, on the other hand, may be partial as regards the persons constituting the joint family or as regards the properties belonging to the joint family or both. In a partial partition as regards the persons constituting the family one or more coparceners may separate from others and the remaining coparceners may continue to be joint. In a partial partition as regards the property, a joint family may make a division and severance of interest in respect of a part of the joint estate while retaining their status as a joint family and holding the rest of the properties as joint and undivided property. 31.2 While under the Hindu law, a joint family may make a division and severance of interest in respect of the joint estate while retaining their status as a joint family, the Income-tax Act does not recognise a partial partition in status alone and where a Hindu undivided family had been assessed to income as such, it continues to be regarded as a Hindu undivided family unless the property has been partitioned by metes and bounds. These provisions are contained in section 171 and apply equally in the case of total as well as partial partition. In spite of the measures taken in recent years, a Hindu undivided family continues to be used as a medium for reduction of proper tax liability. This appears to be specially true in cases where multiple Hindu undivided families are created by effecting partial partitions as regards persons constituting the joint family or as regards the properties, belonging to a joint family or both. 31.3 With a view to curbing the practice of creating multiple Hindu undivided families by making partial partitions, the Finance Act has inserted a new sub-section (9) in section 171 whereunder partial partitions of Hindu undivided families effected after 31st December, 1978 will not be recognised for tax purposes. The new sub-section (9) which will apply in the cases of Hindu undivided families which have hitherto been assessed in the status of Hindu undivided family, has made the following provisions in this regard: 1. In a case where a partial partition of a Hindu undivided family has taken place after 31st December, 1978, no claim that such partial partition had actually taken place will be enquired into under sub-section (2) of section 171 and the Income-tax Officer shall not record a finding as to whether there has been a total partition of the joint family property under sub- section (3) of that section. Further, any finding regarding partial partition recorded under the said sub- section (3) shall be null and void and of no legal effect. 2. Such family shall continue to be assessed as if no such partial partition has taken place, i.e., the property or source of income shall be deemed to continue to belong to the Hindu undivided family and no member shall be deemed to have separated from the family. 3. Each member or group of members of such family immediately before such partial partition and the family shall be jointly and severally liable for any tax, penalty, interest, fine or other sum payable under the Income-tax Act by the family in respect of any period, whether before or after such partial partition. The several liability of any member or group of members of such family shall be computed according to the proportion of the joint family property allotted to him or it on such partial partition. 31.4 This amendment has come into force with effect from 1st April, 1980 and is accordingly applicable in relation to the assessment year 1980-81 and subsequent years. [Section 28 of the Finance Act] Raising of threshold for payment of advance tax in certain cases - Section 208 32.1 Income-tax is required to be paid in advance during every financial year in three equal instalments on specified dates on the assessees current income (other than capital gains or income by way of winnings from lotteries, crossword puzzles, races, card games, etc.) liable to tax for the assessment year next following the financial year. Under section 208, advance tax is payable only where the income of the assessee subject to advance tax exceeds the limits specified below: (i) in the case of a company or a local authority, Rs. 2,500; (ii) in the case of a registered firm Rs.20,000; iii in the case of other categories of assessee Rs.10,000; 32.2 With the raising of the exemption limit to Rs. 12,000 the aforesaid limit of Rs. 10,000 in the case of other categories of assessees, such as individuals, Hindu undivided families, associations of persons, unregistered firms, etc., has been increased to Rs. 12,000. The Finance Act has amended section 208 of the Income-tax Act to achieve this objective. 32.3 This amendment has come into force with effect from 1st September, 1980. [Section 29 of the Finance Act] Modification of the provisions relating to payment of advance tax and other related matters In the case of companies - Sections 209A, 212, 215 and 273 33.1 Under section 209A(4), an assessee is required to revise upward the advance tax payable by him if the tax on his current income is likely to exceed the advance-tax shown by him in the statement/estimate furnished under sub-section (1) or sub-section (2) or sub-section (3) of section 209A by more than 33-1/3 per cent of the tax so shown. Similarly, under section 212(3A), an assessee who is required to pay advance tax by an order under section 210 is required to revise upward the advance tax payable by him if the tax on his current income is likely to exceed the advance tax required to be paid by him in terms of the notice by more than 33-1/3 per cent. 33.2 Since this margin of 33-1/3 per cent is fairly large, especially in the case of companies which are assessed to tax at flat rates, the Finance Act has reduced the permissible margin for payment of advance tax in the case of companies from the existing level of 33-1/3 per cent of the estimated tax to 20 per cent. In other words, companies will be required to make an upward revision of the estimate of advance tax payable by them where the tax payable on their current income is likely to exceed the tax payable on the basis of their statement/estimate by more than 20 per cent. Sections 209A(4) and 212(3A) have been amended to achieve this objective. 33.3 Under section 215, where the advance tax paid by an assessee during any financial year is found to be less than 75 per cent of the assessed tax, he is required to pay interest at the rate of 12 per cent per annum from 1st April of the relevant assessment year till the date of the regular assessment on the amount of the difference between the assessed tax and the advance tax paid. The Finance Act has inserted a proviso in sub-section (1) of section 215 to provide that the provisions of section 215 would apply in the case of a company where the advance tax paid by such company during the financial year is found to be less than 83-1/3 per cent (that is, five-sixths) of the assessed tax. This amendment is consequential to the amendments made to sections 209A(4) and 212(3A) discussed in paragraph 33.2. 33.4 Under section 273(1), an assessee is liable to penalty in the following circumstances, namely:a. where the assessee has furnished under section 209A(1)(a) a statement of advance tax which he knew or had reason to believe to be untrue; orb. where the assessee has, without reasonable cause, failed to furnish a statement of advance tax payable by him in accordance with the provisions of section 209A(1)(a). In a case referred to at (a) above, the penalty leviable is not less than 10 per cent but does not exceed one and a 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, 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 case referred to in (b) above, the penalty is not less than 10 per cent but does not exceed one and a half times of 75 per cent of the assessed tax. The Finance Act has inserted a proviso in sub-section (1) of section 273 to provide that in the case of companies, the penalty will be leviable where the advance tax paid falls short of 83-1/3 per cent (that is, five-sixths) of the assessed tax. 33.5 Section 273(2) lays down the scale of penalty reviable for furnishing a false estimate of advance tax or for failure to furnish an estimate of advance tax in certain circumstances. Where an assessee had filed a false estimate of advance tax payable by him, he is liable to a penalty of not less than 10 per cent but not exceeding one and a half times the amount by which the advance tax actually paid during the financial year immediately preceding the assessment year falls short of - a. 75 per cent of the assessed tax, or by the amount payable by him in accordance with a statement furnished by him or, as the case may be, in accordance with a notice issued to him by the Income-tax officer, whichever is less. Further, where the assessee has furnished under section 209A(4) or section 212(3A) a false estimate of the higher amount of advance tax payable by him, he is liable to pay penalty in an amount which is not less than 10 per cent but which does not exceed one, and a half nines the amount by which the advance tax actually paid by him falls short of 75 per cent of the assessed tax. Where an assessee who has not hitherto been assessed by way of regular assessment has, without reasonable cause, failed to furnish an estimate of advance tax payable by him, he is liable to pay a penalty in an amount which is not less than 10 per cent but which does not exceed one and a half times of 75 per cent of the assessed tax. An assessee who has failed to furnish under section 209A(4) or section 212(3A) the higher estimate of advance tax payable by him is liable to penalty in an amount which is not less than 10 per cent but which does not exceed one and a half times the amount by which -a.the tax payable in accordance with a statement or an estimate in lieu of a statement; or b. the advance tax payable in pursuance of a notice issued to him by the Income-tax Officer, falls short of 75 per cent of the assessed tax. The Finance Act has inserted a proviso in sub-section (2) pf section 273 to provide that in the case of a company, the shortfall referred to in sub-section (2) will be reckoned with reference to 83-1/3 per cent (that is, five-sixths) of the assessed tax. 33.6 These amendments have come into force with effect from 1st September, 1980 and will, accordingly, apply in relation to the defaults made on or after that date. [Sections 30, 3 1, 3 2 and 33 of the Finance Act] Exemption of interest credited on the balance to the credit of an employee in a recognised provident fund - Rule 6 of Part A of the Fourth Schedule 34.1 Under section 15, a salaried employee is charged to tax in respect of the salary due to him from an employer or a former employer in the previous year whether it is paid to him or not. For this purpose, salary includes the annual accretion to the balance at the credit of an employee participating in a recognised provident fund to the extent it is chargeable to tax under rule 6 of Part A of the Fourth Schedule. Under the aforesaid rule, the contribution made by the employer to the credit of an employee participating in a recognised provident fund in excess of I 0 per cent of the salary of the employee is included in his salary income. Further, any interest credited on the balance to the credit of the employee insofar as it exceeds one-third of the salary or is allowed at a rate in excess of the notified rate is deemed to be the income received by the employee in the previous year and is charged to tax accordingly. The notified rate of interest at present is 8-¼ per cent. 34.2 The Finance Act has amended rule 6 of Part A of the Fourth Schedule so as to omit the provision relating to the taxation of interest credited to the account of an employee where it exceeds one-third of his salary. Accordingly, while interest credited to the account of the employee in excess of the notified rate of interest will continue to be chargeable to tax, the alternative ceiling limit on the exempt amount of interest which restricts the exemption to one-third of the salary will no longer be applicable. 34.3 This amendment will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. [Section 34 of the Finance Act] AMENDMENT TO FINANCE (NO.2) ACT, 1971 Tax exemption in the case of Housing and Urban Development Finance Corporation Ltd. 35. The Housing and Urban Development Finance Corporation Ltd. is registered as a company under the Companies Act, 1956 and is wholly-owned by the Government. The primary objective of the Corporation is to provide finances to State Housing Boards, etc., for accelerating housing and urban development programmes. The Corporation has concentrated on the financing of programmes intended for housing the weaker sections of the community and thus meets a pressing social need. With a view to enabling the Corporation to perform these functions effectively and to build up its resources, the Corporation was exempted from income-tax and surtax by section 54 of the Finance (No. 2) Act, 1971, initially for a 10 year period covering assessment years 1971-72 to 1980-81 (both inclusive). With a view to enabling the Corporation to finance programmes of housing facilities to the economically weaker sections and the low income groups, the Finance Act has continued the exemption of the Corporation from income-tax and surtax for a further period of 5 years, namely, the assessment years 1981-82 to 1985-86 (both inclusive). [Section 52 of the Finance Act]