The Finance Act, 1984-Explanatory Notes on the provisions relating to direct taxes - Income Tax - 387/1984

The Finance Act, 1984-Explanatory Notes on the provisions relating to direct taxes Circular No. 387 Dated 6/7/1984 INTRODUCTION The Finance Bill, 1984, as passed by Parliament, received the assent of the President on 11th May, 1984, and has been enacted as Act, No. 21 of 1984. This circular explains the substance of the provisions relating to direct taxes in the Finance Act, 1984. Changes made by the Finance Act, 1984 2. The Finance Act, 1984 (hereinafter referred to as the Finance Act) has,- (i) amended sections 10, 11, 33B, 35, 35C, 36, 40, 40A, 80CC, 80E, 80L, 80M, 80N, 80-O, 80U, 161, 164, 193, 194, 246, 252, 269C, 269F, 269P, 269T, 281A and the Ninth Schedule to the Income-tax Act, 1961; (ii) inserted four new sections 44AB, 269SS, 271B and 276DD in the Income-tax Act, 1961; (iii) omitted section 80D of the Income-tax Act, 1961; (iv) amended sections 5 and 21A of the Wealth-tax Act, 1957; and (v) amended section 32 of the Unit Trust of India Act, 1963. PROVISIONS IN BRIEF 3. The provisions in the Finance Act, 1984, in the sphere of direct taxes relate to the following matters:- (i) Prescribing the rates of income-tax (including surcharge thereon) on incomes liable to tax for the assessment year 1984-85; the rates at which income-tax will be deductible at source during the financial year 1984-85 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 1984-85. (ii) Amendment of the Income-tax Act, 1961 with a view to providing for compulsory audit of accounts of certain persons carrying on business or profession; prohibition against taking or accepting certain loans and deposits in cash; tightening of provisions relating to furnishing of information in respect of properties held benami; imposition of restrictions on contribution by employers to non-statutory funds; levying of income-tax at maximum marginal rate in the case of charitable and religious trusts which forfeit tax exemption; taxing of business profits of private trusts at maximum marginal rate of income-tax; withdrawal or modification of certain tax concessions; incorporating in the Income-tax Act the separate exemption allowed under the Unit Trust of India Act in respect of income derived from units of the Unit Trust of India; placing interest on deposits under a notified National Deposit Scheme on a par with income from the said units for purposes of exemption under section 80L; providing a further special exemption in respect of interest on deposits under the said Scheme; relaxation of provisions relating to deduction of tax at source from interest on debentures and dividends up to specified limit; modification of provisions relating to acquisition of immovable properties; liberalisation of provisions relating to deductible managerial remuneration and some other matters. (iii) Amendment of the Wealth-tax Act, 1957 with a view to raising the exemption limit in respect of one residential house; enlarging the list of financial assets eligible for exemption; raising the monetary limit in respect of exemption of investment in specified assets; incorporating therein the separate exemption allowed under the Unit Trust of India Act in respect of units of the Unit Trust of India; and countering tax avoidance. (iv) Amendment of the Unit Trust of India Act, 1963 with a view to deleting certain provisions contained therein relating to income-tax and wealth-tax in consequence of the incorporation of these provisions in the Income-tax Act and the Wealth-tax Act. RATE STRUCTURE OF INCOME-TAX (i) Rates of Income-tax in respect of incomes liable to tax for the assessment year 1984-85. 4.1 In respect of incomes of all categories of taxpayers (corporate as well as non-corporate) liable to tax for the assessment year 1984-85, the rates of income-tax (including surcharge thereon) have been specified in Part I of the First Schedule to the Finance Act. These rates are the same as those laid down in Part III of the First Schedule to the Finance Act, 1983 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 during the financial year 1983-84. 4.2 It may be noted that in an Explanation below Paragraph E of Part III of the First Schedule to the Finance Act, 1983, an 'industrial company" was defined to mean a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the carriage, by road or inland waterways, of passengers or goods or in the construction of ships or in the execution of projects or in the manufacture or processing of goods or in mining. The said definition has now been incorporated in section 2(8)(c) of the Finance Act. 4.3 The Finance Act, 1983 had allowed companies required to pay advance tax during the financial year 1983-84 to make a deposit with the Industrial Development Bank of India in lieu of one-half of the amount of surcharge payable by them. The Finance Act, 1984 has made a provision that where a company has made a deposit during the financial year 1983-84 with the Industrial Development Bank of India under the Companies Deposit (Surcharge of Income-tax) Scheme, 1983 framed by the Central Government under section 2(7) of the Finance Act, 1983, and where the amount of deposit so made is equal to or exceeds one-half of the amount of surcharge on income-tax payable by it, the surcharge payable by it shall be reduced by one-half. Where the amount of deposit so made falls short of one-half of the amount of surcharge, the surcharge payable by the company shall be reduced by the amount of the deposit so made. (ii) Rates for deduction of tax at source during the financial year 1984-85 from income other than "Salaries" and retirement annuities. 5.1 The rates for deduction of income-tax at source during the financial year 1984-85 from incomes, other than "Salaries" and retirement annuities payable to partners of registered firms engaged in specified professions, have been specified in Part II of the Schedule to the Finance Act. These rates apply to income by way of interest on securities, other categories of interest, dividends, insurance commission, winnings from lotteries and cross-word puzzles, income by way of winnings from horse races; and other categories of non-salary income of non-residents. These rates are the same as those prescribed in this behalf by the Finance Act, 1983. (iii) Rates for deduction of tax at source from "Salaries", computation of "advance tax" and charging of income-tax in special cases during the financial year 1984-85. 6.1 The rates for deduction of tax at source from "Salaries" in the case of individuals during the financial year 1984-85 and for computation of "advance tax" payable during that year in the case of all categories of taxpayers have been specified in Part III of the First Schedule to the Finance Act. These rates are also applicable for deduction of tax at source during the financial year 1984-85 from retirement annuities payable to partners of registered firms engaged in certain professions (such as, chartered accountants, solicitors, lawyers, etc.) and for charging income-tax during the financial year 1984-85, on current incomes in cases where accelerated assessment have to be made, e.g., provisional assessment of shipping profits arising in India to non-residents, assessment of persons leaving India for good during the financial year 1984-85, assessment of persons who are likely to transfer property to avoid tax. (iv) Rates of tax applicable to individuals, Hindu undivided families, unregistered firms, etc. 6.2 The rates of income-tax in the case of individuals, Hindu undivided families (other than those having at least one member with independent total income exceeding Rs. 15,000), unregistered firms, associations of persons, bodies of individuals and artificial juridical persons have been specified in Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Finance Act. These rates are lower than the rates as specified in Sub-Paragraph I of Paragraph A of Part I of the First Schedule to the Finance Act. The Table below gives the comparative rates of income-tax (a) as specified in Sub-Paragraph I of Paragraph A of Part I of the First Schedule to the Act, and (b) as specified in Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Act on various slabs of income. COMPARATIVE RATES ON VARIOUS SLABS OF INCOME IN THE CASE OF INDIVIDUALS, ETC. Income slab Rates as specified in Part I of the First Schedule to the Finance Act (i.e., the old rates) Rates as specified in Part III of the First Schedule to the Finance Act (i.e., the new rates) Up to Rs.15,000 Nil Nil Rs. 15,001-20,000 25% 20% Rs. 20,001-25,000 30% 25% Rs. 25,001-30,000 35% 30% Rs. 30,001-40,000 40% 35% Rs. 40,001-50,000 40% 40% Rs. 50,001-60,000 50% 45% Rs 60,001-70,000 52.5% 45% Rs. 70,001-85,000 55% 50% Rs. 85,001-1,00,000 57.5% 50% Over Rs. 1,00,000 60% 55% 6.3 The income-tax calculated on the basis of the above rates will, in either case, be increased by a surcharge at the rate of 12.5% of such income-tax. 6.4 In the case of Hindu undivided families having one or more members with independent income exceeding the exemption limit, the rates of income-tax as also surcharge thereon remain unchanged. (vi) Rates of tax applicable to Co-operative societies, registered firms, local authorities and companies. 6.5 In the case of co-operative societies, registered firms, local authorities and companies, the rates of income-tax as also surcharge thereon, have, respectively, been specified in Paragraph B, Paragraph C, Paragraph D and Paragraph E of Part III of the First Schedule to the Finance Act. These rates are the same as those specified in the corresponding Paragraphs of Part I of the First Schedule. 6.6 The Finance Act has provided that a company may, in lieu of payment of the entire amount of surcharge on income-tax, make before the last instalment of advance tax is due in its case a deposit with the Industrial Development Bank of India under a scheme to be framed by the Central Government in this behalf and where the amount of the deposit so made is equal to or exceeds the amount of surcharge on income-tax payable by it, the surcharge payable by it shall be reduced to nil. Where the amount of deposit so made falls short of the amount of surcharge, the surcharge payable by the company shall be reduced by the amount of the deposit so made. (vii) Partially integrated taxation of non-agricultural income with income derived from agriculture. 6.7 As in the past, the Finance Act has provided that in the case of individuals, Hindu undivided families, unregistered firms or other associations of persons or bodies of individuals and artificial juridical persons, the net agricultural income will be taken into account for computation of "advance tax" and charging of income-tax on certain incomes in cases where accelerated assessments are required to be made during the financial year 1984-85. These provisions are broadly on the same lines as those contained in the Finance Act, 1983. [Section 2 and the First Schedule to the Finance Act] AMENDMENTS TO INCOME-TAX ACT (i) Enlargement of the scope of exemption in respect of subsidy received by persons engaged in the business of growing and manufacturing tea. 7.1 Under section 10(30) of the Income-tax Act, the amount of subsidy received by a person who carries on the business of growing and manufacturing tea in India, from or through the Tea Board, under a scheme for replacement or replantation of tea bushes specified by the Central Government in the Official Gazette, is exempt from income-tax. 7.2 The Finance Act has enlarged the scope of this concession to include any subsidy received from or through the Tea Board under a scheme for rejuvenation or consolidation of areas used for cultivation of tea. This exemption will apply only if such scheme is specified in this behalf by the Central Government in the Official Gazette. 7.3 The amendment takes effect from 1st April, 1985 and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 3 of the Finance Act] (ii) Modification of the provisions relating to investment of funds by charitable and religious trusts and institutions. 8.1 Section 11(5) of the Income-tax Act lays down the forms and modes of investing or depositing the funds of charitable and religious trusts. With a view to providing a wider choice for investment of trust funds and also opening a fresh avenue to the Industrial Development Bank of India for raising resources, deposits with the said Bank are being included in the list of eligible forms and modes of investment or deposit by charitable and religious trusts and institutions. 8.2 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 4 of the Finance Act] (iii) Withdrawal of rehabilitation allowance. 9.1 Section 33B of the Income-tax Act provides for a deduction by way of "rehabilitation allowance" for facilitating the re-establishment, re-construction or revival of the business of an industrial undertaking in India which is discontinued because of extensive damage to or destruction of its building, machinery, plant or furniture as a direct result of natural calamities (such as flood, cyclone, earthquake), riot or civil disturbance, accidental fire, explosion or enemy action. This deduction is allowed in cases where such business is re-established, re-constructed or revived by the assessee within a period of three years from the end of the year in which it was discontinued. The deduction is allowed, in the computation of the profits of the year in which the business is so re-established, re-constructed or revived, in a sum equal to 60 per cent. of the "terminal allowance" admissible to the assessee under section 32(1)(iii) of the Income-tax Act in respect of the damaged or destroyed assets of the assessee's business. The expression "terminal allowance" means the deduction allowable in the year in which the building, machinery, plant or furniture used in a business is sold, discarded, demolished or destroyed. The allowance is equal to the amount by which the salvage value or the insurance money receivable in respect of such assets falls short of their written down value. 9.2 Having regard to the fact that most of the industrial undertakings are adequately insured, the insurance money received by an assessee on the destruction of his industrial assets would ordinarily be more than their written down value. In such cases, no terminal allowance will be admissible to the assessee and he will, therefore, also not be entitled to any rehabilitation allowance under section 33B of the Income-tax Act. Besides, the deduction under section 33B can be availed of by an assessee only when he starts earning profits from the industrial undertaking after it has been re-established, re-constructed or revived. The cash benefit of this concession is, therefore, deferred until the industrial undertaking starts earning adequate profits. Thus, the provision in section 33B does not confer any significant benefit on the assessees. 9.3 In view of the aforesaid considerations and with a view to simplifying the tax law by reducing the number of tax concessions which are not essential, the Finance Act has inserted a proviso to section 33B of the Income-tax Act to the effect that no deduction will be allowed under the said section in relation to the assessment year 1985-86 and subsequent years. [Section 5 of the Finance Act] (iv) Capital expenditure on acquisition of land used for scientific research. 10.1 Under section 35(1)(iv) of the Income-tax Act read with section 35(2)(ia), any capital expenditure incurred by a taxpayer on scientific research related to the business carried on by him is allowed in full in computing the taxable profits of the business of the year in which such expenditure is incurred. Under the provision as worded, even the expenditure for acquisition of land to be used for scientific research has to be allowed as deduction in full in the year in which such expenditure is incurred. As land is not a depreciable asset, the Finance Act has inserted a proviso to section 35(2)(ia) to the effect that the aforesaid deduction will not be admissible in respect of capital expenditure incurred on the acquisition of any land after 29th February, 1984. This provision will apply irrespective of whether the land is acquired as such or as part of any property. 10.2 For the purposes of this provision, land would include any interest in land. It has also been specifically provided that acquisition of land by a person shall be deemed to have been made on the date on which the instrument of transfer of the land to him has been registered under the Registration Act, 1908, or where he has taken or retained possession of the land in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882, the date on which he has so taken or retained possession of the land. 10.3 The amendment takes effect from 1st April, 1984 and will, accordingly, apply in relation to the assessment year 1984-85 and subsequent years. As stated in paragraph 10.1 above, the new provision will apply only in respect of expenditure incurred on the acquisition of any land after 29th February, 1984. [Section 6(a) of the Finance Act] (v) Withdrawal of weighted deduction in respect of expenditure on scientific research. 11.1 Under section 35(2A) of the Income-tax Act, a weighted deduction equal to one and one-third times the sum paid by a taxpayer to a scientific research association, university, college or other institution approved for the purposes of section 35(1)(ii), or to a public sector company, is allowed in the computation of taxable profits. The weighted deduction is allowed only if the sum so paid is to be used for a scientific research programme approved by the prescribed authority in this behalf, having regard to the social, economic and industrial needs of the country. Under an amendment made by the Finance Act, 1983 with effect from 1st April, 1984, the deduction under this provision is to be allowed only if the sum is paid by the taxpayer with the specific direction that it shall not be used for acquisition of any land or building or construction of any building. 11.2 Under section 35(2B) of the Income-tax Act, where a taxpayer, incurs any expenditure on scientific research under a programme approved in this behalf by the prescribed authority, a weighted deduction of one and one-fourth times the amount of such expenditure is allowed in computing the taxable profits. Expenditure of a capital nature for acquisition of land or building or construction of any building is not eligible for this deduction. 11.3 Experience has shown that an expenditure-linked concession for weighted deduction leads to a tendency to inflate expenditure. On this consideration and with a view to simplifying the tax law, the Finance Act has discontinued the tax concession under section 35(2A) and (2B) of the Income-tax Act in relation to the sums paid or, as the case may be, the expenditure incurred after 29th February, 1984. 11.4 The relevant amendments take effect from 1st April, 1984, and will, accordingly, apply in relation to the assessment year 1984-85 and subsequent years. [Sections 6(b) and 6(c) of the Finance Act] (vi) Withdrawal of agricultural development allowance. 12.1 Under section 35C of the Income-tax Act, a company or a co-operative society which uses the products of agriculture, animal husbandry or dairy or poultry farming as raw material or processes such products is eligible for a deduction of the amount of expenditure incurred, whether directly or through an approved association or body, in the provision of agricultural inputs and extension services to cultivators, growers or producers of such products. 12.2 As expenditure-linked tax concessions are liable to misuse, the Finance Act has discontinued the tax concession under section 35C of the Income-tax Act in respect of any expenditure incurred after the 29th February, 1984. 12.3 The amendment takes effect from 1st April, 1984, and will, accordingly, apply in relation to the assessment year 1984-85 and subsequent years. [Section 7 of the Finance Act] (vii) Withdrawal of weighted deduction in respect of salary paid to a physically handicapped employee. 13.1 Under section 36(1)(iia) of the Income-tax Act, in computing the taxable profits, a taxpayer is allowed a weighted deduction equal to one and one-third times the amount of the expenditure incurred on payment of any salary to an employee who is totaly blind or suffers from a permanent physical disability which has the effect of reducing substantially his capacity to engage in a gainful employment or occupation. The deduction is allowed only if the income of the employee concerned chargeable under the head "Salaries" does not exceed Rs. 20,000 and the taxpayer produces before the Income-tax Officer in respect of the first assessment year for which the deduction is claimed, in relation to such employee, a certificate as to his total blindness from a registered medical practitioner being an oculist or, as the case may be, a certificate as to the permanent physical disability from a registered medical practitioner. 13.2 On the consideration that expenditure-linked concessions for weighted deduction are liable to misuse and with a view to simplifying the tax law, the Finance Act has discontinued the tax concession contained in section 36(1)(iia) of the Income-tax Act in relation to any salary paid for any period of employment after 29th February, 1984. 13.3 The amendment takes effect from 1st April, 1984, and will, accordingly, apply in relation to the assessment year 1984-85 and subsequent years. [Section 8 of the Finance Act] (viii) Modification of provisions relating to managerial remuneration. 14.1 Under section 40(c) of the Income-tax Act, expenditure incurred by a company on the provision of any remuneration or benefit or amenity to a director or person who has a substantial interest in the company or to a relative of the director or of such person, and expenditure or allowance in respect of any assets of the company which are used by such person for his own purposes or benefit, is not allowable as a deduction in computing the taxable profits of the company, to the extent such expenditure or allowance is, in the opinion of the Income-tax Officer, excessive or unreasonable. The aggregate of such expenditure and allowance is further subject to an overall ceiling limit of Rs. 72,000 in a year, in respect of any one director or person who has a substantial interest in the company or a relative of the director or of such person. Where such expenditure or allowance relates to only a part of a year, the monetary ceiling is the amount calculated at the rate of Rs. 6,000 per month or part of a month comprised in the period to which the expenditure or allowance relates. 14.2 Having regard to the guidelines issued by the Company Law Board in regard to managerial remuneration, the Finance Act has raised the aforesaid monetary limit under section 40(c) of the Income-tax Act as under:- (i) the monthly ceiling limit of Rs. 6,000 has been raised to Rs. 8,500. (ii) the overall ceiling limit in respect of the aggregate expenditure and allowance during the year has been raised from Rs. 72,000 to Rs. 1,02,000. 14.3 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 9 of the Finance Act] 15.1 Section 40A(5) of the Income-tax Act also places certain ceiling limits on the deductible amount of expenditure incurred by a taxpayer on account of payment of salary to any employee or a former employee or in providing any perquisite, etc., to any such employee. Under this provision, expenditure incurred by a taxpayer on the payment of salary to an employee in respect of the period of his employment in India during the relevant year is not allowed as deduction in computing the taxable profits of the employer to the extent it exceeds an amount calculated at the rate of Rs. 5,000 for each month or part of a month. In addition, the aggregate of expenditure incurred by a taxpayer in providing any perquisites, whether convertible into money or not, to an employee and the amount of expenditure or allowance (such as depreciation allowance) in respect of assets of the taxpayer used by the employee for his own purposes or benefit, is not allowed as deduction in computing the income from business or profession, to the extent it exceeds 20% of the amount of salary payable or an amount calculated at the rate of Rs. 1,000 for each month or part thereof comprised in the period of employment in India during the relevant accounting year, whichever is less. In the case of a person who ceased to be an employee of the taxpayer, at any time during the twenty-four months immediately preceding the relevant year, the ceiling limit in respect of any expenditure by way of fees for services rendered is Rs. 60,000. Where the taxpayer has also incurred, in relation to such person, any expenditure by way of salary, the aggregate of such expenditure by way of fees and salary is also restricted to Rs. 60,000 per annum. 15.2 Having regard to the guidelines issued by the Company Law Board in regard to managerial remuneration, the Finance Act has raised the monetary limits contained in sections 40A(5) and 40A(6) of the Income-tax Act as under:- (i) The monetary ceiling under section 40A(5) in respect of expenditure or payment of salary has been raised from Rs. 5,000 to Rs. 7,500 per month, that is, Rs. 90,000 per annum. (ii) In the case of a former employee, who ceases or ceased to be an employee of the assessee during the relevant previous year or any earlier previous year, the annual ceiling in respect of allowable expenditure on payment of salary has been raised from Rs. 60,000 to Rs. 90,000. 15.3 Expenditure incurred on payment of any salary to a research worker engaged in scientific research during any one or more of the three years immediately preceding the commencement of business, which is deemed under section 35(1)(i) of the Income-tax Act to have been laid out or expended in the previous year in which the business is commenced, is allowed as deduction, by virtue of the proviso to section 40A(5)(c)(i), to the extent it does not exceed Rs. 5,000 for each month or part thereof comprised in the period of employment during the previous year in which the business is commenced and in the period of his employment during which he was engaged in scientific research during the three years immediately preceding that year. In consequence of the increase in deductible amount of remuneration from Rs. 5,000 to Rs. 7,500, the Finance Act has inserted another proviso to section 40A(5)(c)(i) to the effect that in relation to any such period of employment falling in the previous year relevant to the assessment year 1985-86 and any subsequent year, the ceiling in respect of deductible remuneration will be Rs. 7,500 per month, as against Rs. 5,000 at present. 15.4 These amendments take effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 10(a) and (b) of the Finance Act] (ix) Imposition of restrictions on contributions by employers to non-statutory funds. 16.1 Sums contributed by an employer to a recognised provident fund, an approved superannuation fund and an approved gratuity fund are deducted in computing his taxable profits. Expenditure actually incurred on the welfare of employees is also allowed as deduction. Instances have come to notice where certain employers have created irrecoverable trusts, ostensibly for the welfare of employees, and transferred to such trusts substantial amounts by way of contribution. Some of these trusts have been set up as discretionary trusts with absolute discretion to the trustees to utilise the trust property in such manner as they may think fit for the benefit of the employees without any scheme or safeguards for the proper disbursement of these funds. Investment of trust funds has also been left to the complete discretion of the trustees. Such trusts are, therefore, intended to be used as a vehicle for tax avoidance by claiming deduction in respect of such contributions, which may even flow back to the employer in the form of deposits or investment in shares, etc. 16.2 With a view to discouraging creation of such trusts, funds, companies, association of persons, societies, etc., the Finance Act has provided that no deduction shall be allowed in the computation of taxable profits in respect of any sums paid by the assessee as an employer towards the setting up or formation of or as contribution to any fund, trust, company, association of persons, body of individuals, or society or any other institution for any purpose, except where such sum is paid or contributed (within the limits laid down under the relevant provisions) to a recognised provident fund or an approved gratuity fund or an approved superannuation fund or for the purposes of and to the extent required by or under any other law. 16.3 With a view to avoiding litigation regarding the allowability of claims for deduction in respect of contributions made in recent years to such trusts, etc., the amendment has been made retrospectively from 1st April, 1980. However, in order to avoid hardship in cases where such trusts, funds, etc., had before, 1st March, 1984, bona fide incurred expenditure (not being in the nature of capital expenditure) wholly and exclusively for the welfare of the employees of the assessee out of the sums contributed by him, such expenditure will be allowed as deduction in computing the taxable profits of the assessee in respect of the relevant accounting year in which such expenditure has been so incurred, as if such expenditure had been incurred by the assessee. The effect of the under-lined words will be that the deduction under this provision would be subject to the other provisions of the Act, as for instance, section 40A(5), which would operate to the same extent as they would have operated had such expenditure been incurred by the assessee directly. Deduction under this provision will be allowed only if no deduction has been allowed to the assessee in an earlier year in respect of the sum contributed by him to such trust, fund, etc. 16.4 The Finance Act has also provided that, notwithstanding anything contained in any other law for the time being in force or in the instrument creating the trust or fund, the assessee may, at his option, claim that the unexpended amount shall be returned to the assessee and, where such a claim is so made, such unexpended amount shall be returned by the trustee to the assessee as early as possible. The assessee may also claim that any asset being land, building, machinery, plant or furniture acquired or constructed by the fund, trust, company, association of persons, body of individuals, society or any other institution out of the sums paid by the assessee be transferred to him and where any such claim is so made such asset shall be transferred to the assessee as early as possible. 16.5 The aforesaid, provisions take effect retrospectively from 1st April, 1980, and will, accordingly, apply in relation to the assessment year 1980-81 and subsequent years. [Section 10(c) of the Finance Act] (x) Compulsory audit of accounts of certain persons carrying on business or profession. 17.1 Accounts maintained by companies are required to be audited under the Companies Act, 1956. Accounts maintained by co-operative societies are also required to be audited under the Co-operative Societies Act, 1912. There is, however, no obligation on other categories of taxpayers to get their accounts audited. 17.2 A proper audit for tax purposes would ensure that the books of account and other records are properly maintained, that they faithfully reflect the income of the taxpayer and claims for deduction are correctly made by him. Such audit would also help in checking fraudulent practices. It can also facilitate the administration of tax law laws by a proper presentation of the accounts before the tax authorities and considerably saving the time of assessing officers in carrying out routine verifications, like checking correctness of totals and verifying whether purchases and sales are properly vouched or not. The time of the assessing officers thus saved could be utilised for attending to more important investigational aspects of a case. 17.3 Having regard to the foregoing considerations, the Finance Act has inserted a new section 44AB in the Income-tax Act making it obligatory for a person carrying on business to get him accounts audited before the "specified date" by an "accountant" if the total sales, turnover or gross receipts in business for the previous year or years relevant to the assessment year 1985-86 or any subsequent assessment year exceed or exceeds forty lakh rupees. A person carrying on profession will also have to get his accounts audited before the "specified date", if his gross receipts in profession for a previous year or years relevant to any of the aforesaid assessment years exceed ten lakh rupees. The new provision also casts an obligation on such persons to obtain before the "specified date" a report of the audit in the prescribed form duly signed and verified by the "accountant" setting forth such particulars as may be prescribed by rules made in this behalf by the Central Board of Direct Taxes. 17.4 In cases where accounts are required to be audited by or under any other law (as in the case of companies and co-operative societies), it will suffice if the accounts are audited under such other law before the "specified date" and the assessee obtains before the said date the report of the audit as required under such other law, and also a report of the audit in the form to be prescribed by the Central Board of Direct Taxes. 17.5 For the purposes of the proposed provision, the term "accountant" will have the same meaning as in the Explanation below sub-section (2) of section 288 of the Income-tax Act. The expression "specified date", in relation to the accounts of any previous year or years relevant to an assessment year, means the date of the expiry of four months from the end of the previous year or, where the assessee has more than one previous year, from the end of the previous year which expired last before the commencement of that assessment year or the 30th June of that assessment year, whichever is later. 17.6 New section 271B inserted by the Finance Act provides that if any person fails, without reasonable cause, to get his accounts audited in respect of any previous year or years relevant to an assessment year or to obtain a report of such audit as required under the aforesaid provision, the Income-tax Officer may direct that such person shall pay, by way of penalty, a sum equal to one-half per cent. of the total sales, turnover or gross receipts, as the case may be, in the business, or the gross receipts in the profession, in such previous year or years subject to a maximum of one lakh rupees. 17.7 Under an amendment made in section 246 of the Income-tax Act, an appeal shall lie to the Commissioner (Appeals) against an order imposing penalty under section 271B. 17.8 The provisions will take effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Sections 11, 30 and 33(a) of the Finance Act] (xi) Modification of provision relating to deduction in respect of investment in certain new shares. 18.1 Under the existing provisions of section 80CC of the Income-tax Act, 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, Goa, Daman and Diu who acquire any equity shares forming part of the eligible issue of capital of new industrial companies or public housing finance companies are, entitled to a deduction, in the computation of their taxable income, of an amount equal to 50 per cent. of the cost of such shares, subject to a maximum amount of investment of Rs. 20,000. 18.2 The tax deduction under this section was allowed to stimulate investment in certain categories of new equity shares. The Finance Act has amended section 80CC to provide that the reduction under the said section will not be available in respect of shares offered for subscription by the company after 31st March, 1987. [Section 12 of the Finance Act]. (xii) Withdrawal of deduction in respect of medical treatment of handicapped dependants. 19.1 Section 80D of the Income-tax Act provides for the allowance of a deduction in the computation of total income of individuals and Hindu undivided families resident in India with reference to the expenditure incurred on medical treatment (including nursing) of handicapped dependants, suffering from a physical or mental disability which a registered medical practitioner certifies has the effect of reducing such person's capacity for normal work or engaging in gainful employment. Under the existing provisions, the maximum allowable deduction is Rs. 4,800 in cases of hospitalisation for 182 days or more and Rs. 1,200 in other cases. 19.2 The benefit allowed under this section is negligible and affords only a marginal relief to a few taxpayers. With a view to simplifying the tax law, the Finance Act has omitted this section from the Income-tax Act. 19.3 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 13 of the Finance Act] (xiii) Withdrawal of deduction in respect of payments for securing retirement annuities. 20.1 Under section 80E of the Income-tax Act, an Indian citizen resident in India, who is chargeable to tax in respect of his share in the income of a registered firm, which renders professional service as a chartered accountant, solicitor, lawyer or an architect or such other professional service as may be notified by the Central Government, is eligible for claiming a deduction for the sums paid for securing retirement annuities, up to a maximum of Rs. 5,000 or 10 per cent. of the gross total income, whichever is less. The deduction is not admissible to a taxpayer whose unearned income exceeds Rs. 10,000 or who is entitled to any pension or is participating in any pension scheme. 20.2 The aforesaid provision applies only to a small category of taxpayers. Besides, section 80C of the Income-tax Act provides for various modes of savings including premium paid for a contract for a deferred annuity. Such savings up to Rs. 40,000 by an individual taxpayer qualify for deduction under section 80C of the Act. In view of the large choice of approved savings qualifying for deduction under section 80C there is little need to continue the benefit for deduction allowed under section 80E to a select group of professionals. 20.3 Having regard to the foregoing considerations and with a view to simplifying the tax laws, the Finance Act has amended section 80E to secure that payments made after 29th February, 1984, will not qualify for deduction under the said section. 20.4 The amendment takes effect from 1st April, 1984, and will accordingly, apply in relation to the assessment year 1984-85, and subsequent years. However, as stated above, deduction in respect of payments for securing retirement annuities will not be available in respect of payments made after 29th February, 1984. [Section 14 of the Finance Act] (xiv) Exemption in respect of income from specified financial assets. 21.1 Under section 80L of the Income-tax Act, income derived by a taxpayer from investments in specified categories of financial assets is exempt up to an aggregate amount of Rs. 7,000. The financial assets specified for this purpose include shares in Indian companies, units in the Unit Trust of India and deposits with banking companies. 21.2 In addition, under a separate provision contained in the Unit Trust of India Act, 1963, a further deduction up to Rs. 3,000 is allowed in respect of income received on units of the Unit Trust of India. 21.3 The Finance Act has enlarged the list of specified financial assets to include deposits under such National Deposit Scheme as may be framed by the Central Government and notified by it in this behalf in the Official Gazette. 21.4 In addition to deposits with banking companies, clause (via) of sub-section (1) of section 80L provides exemption in respect of deposits with any bank established by or under any law made by Parliament if the bank is approved by the Central Government for the purposes of the said provision. A notification has been issued on 29-2-1984 approving the Industrial Development Bank of India for the purpose of this concession. [Notification GSR No. 86 (F. No. 30/FB/84/TPL) dated 29-2-1984*]. 21.5 The Finance Act has inserted two provisos at the end of section 80L(1) of the Income-tax Act. Under the first proviso, a special exemption up to Rs. 3,000 in the aggregate has been allowed in respect of income on units of the Unit Trust of India and interest on deposits under any notified National Deposit Scheme. Hitherto, a special exemption up to Rs. 3,000 was allowed under section 32 of the Unit Trust of India Act, only in respect of income on units of the Unit Trust of India. As stated in paragraphs 37.1 and 37.2 of this circular. the relevant provisions of section 32 of the said Act have, in consequence, been omitted by the Finance Act. 21.6 Under the second proviso, a further exemption up to Rs. 2,000 has been allowed in respect of income by way of interest on deposits under any notified National Deposit Scheme. The effect of the amendments is illustrated by the following example:- Income exempt under section 80L Rs. Rs. (i) Income from dividend 8,000 7,000 (ii) Income from units of Unit Trust of India 4,000 3,000 (iii) Income from deposits under a notified National Deposit Scheme 4,000 2,000 16,000 12,000 21.7 The amendments take effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 15 of the Finance Act] (xv) Modification of provision relating to deduction in respect of certain inter-corporate dividends. 22.1 Under section 80M of the Income-tax Act, full deduction is granted in respect of income by way of dividends received by a domestic company from a 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 specified priority articles. In respect of other dividends received from a domestic company, deduction is allowed at the rate of 60% of such income. 22.2 On the consideration that there is little justification for continuing to provide complete exemption in respect of dividend income from certain companies as aforesaid, the Finance Act has amended section 80M to provide a uniform rate of deduction at 60% for all dividends received by a domestic company from another domestic company. 22.3 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Sections 16 and 33 of the Finance Act] (xvi) Modification of provision relating to deduction in respect of dividends received from certain foreign companies. 23.1 Section 80N of the Income-tax Act provides for a deduction in the computation of the total income of the whole of the income of an Indian company received by way of dividends on shares allotted to it in a foreign company in consideration for the provision of technical "know-how" or technical services rendered to such foreign company, subject to the fulfilment of the conditions specified in that section. 23.2 The aforesaid concession which has been on the statute book for nearly two decades was introduced primarily to stimulate the flow of technology from the country. As the flow of technology from the country now does not need fiscal support of this order, the Finance Act has amended section 80N to reduce the deduction from 100 per cent. to 50 per cent. of the dividend income. 23.3 This amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 17 of the Finance Act] (xvii) Modification of provision relating to deduction in respect of royalty, commission, etc., from certain foreign sources. 24.1 Section 80-O of the Income-tax Act provides for a deduction of the whole of the income of an Indian company received by way of royalty, commission, fees, or any similar payments from the Government of a foreign State or a foreign enterprise for the provision of technical know-how or technical services in the computation of taxable income subject to the fulfilment of certain conditions specified in that section. 24.2 The aforesaid concession which has been on the statute book for nearly two decades was introduced primarily to stimulate the flow of technology from the country. As the flow of technology from the country now does not need fiscal support of this order, the Finance Act has amended section 80-O to reduce the deduction from 100 per cent. to 50 per cent. of such income. 24.3 This amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 18 of the Finance Act] (xviii) Modification of provision relating to deduction in the case of totally blind or physically handicapped persons. 25.1 Under section 80U of the Income-tax Act, a resident individual who is either totally blind or is subject to or 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 allowed a deduction of Rs. 10,000 in the computation of his taxable income. In order to avail of this deduction, such individual has to produce before the Income-tax Officer, in the first assessment year for which the deduction is claimed, in a case of total blindness, a certificate from a registered medical practitioner being an oculist, and in the case of any other permanent physical disability, a certificate from a registered medical practitioner. 25.2 This concession has led to litigation as claims for deduction under this provision have been made by persons with a physical disability of a relatively minor nature. With a view to preventing disputes and litigation on this issue, the Finance Act has amended section 80U and empowered the Central Board of Direct Taxes to frame rules for specifying the various categories of permanent disabilities for the purposes of this section. A person who is suffering from one of the specified disabilities will alone be eligible for the tax concession under this provision. In specifying the categories of permanent physical disabilities, the Board will have to take into account the nature of such disability and the effect such disability is likely to have on the capacity of the person suffering therefrom to engage in gainful employment or occupation. 25.3 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 19 of the Finance Act] (xix) Taxation of business profits of private trusts at maximum marginal rate of income-tax. 26.1 Trustees of a private trust are ordinarily not expected to carry on any business because, implicit in the nature of business is the possibility of incurring loss and no prudent trustee would risk the trust's property in business venture. However, it has come to notice that taxpayers are increasingly conducting business through the medium of private trusts. Such arrangements are entered into for purposes of tax avoidance, the main object being to avoid payment of the registered firm's tax which would become payable if the business is carried on in partnership. 26.2 In order to counteract such attempts at tax avoidance, the Finance Act has inserted a new sub-section (1A) in section 161 of the Income-tax Act which provides that where any income in respect of which any person mentioned in clause (iv) of sub-section (1) of section 160 of the Income-tax Act (i.e., a trustee appointed under a trust declared by a duly executed instrument in writing, whether testamentary or otherwise, including a wakf deed) is liable as representative assessee consists of or includes profits and gains of business, income-tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate. "Maximum marginal rate", for this purpose, means the rate of income-tax (including surcharge) applicable in relation to the highest slab of income in the case of an individual or an association of persons as specified in the Finance Act of the relevant year. However, with a view to avoiding hardship in genuine cases, it has been specifically provided that the provision for charging the entire income of the trust at the maximum marginal rate of income-tax will not apply in a case where the profits and gains of business are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance and such trust is the only trust so declared by him. 26.3 It may be noted that as clarified by the Finance Minister in his speech moving the Finance Bill, 1984, for consideration in the Lok Sabha, the provisions of new sub-section 1(A) of section 161 are applicable only in the case of private trusts and not public charitable and religious trusts. 26.4 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 20 of the Finance Act] 27.1 Under section 164(1) of the Income-tax Act, income received by trustees of discretionary trusts is charged to tax at the maximum marginal rate of income-tax. [A trust is regarded as a "discretionary trust" if the income or any part thereof is not specifically receivable by the trustee on behalf of 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 part is receivable are determinate or unknown.] However, the proviso to section 164(1) lays down that income received by discretionary trusts will not be charged to tax at the maximum marginal rate, but at the normal rates of tax applicable to individuals, association of persons, etc., in cases where any one of the following conditions is fulfilled, namely:- (i) none of the beneficiaries has any other income chargeable under the Income-tax Act exceeding the exemption limit or is a beneficiary under any other trust; (ii) the trust is declared by a person by will and such trust is the only trust so declared by him; (iii) the trust has been created before 1st March, 1970, by a non-testamentary instrument and the Income-tax Officer is satisfied that the trust was created bona fide exclusively for the benefit of the relatives of the settlor or where the settlor is a Hindu undivided family, exclusively for the benefit of the members of such family in circumstances where such relatives or members were mainly dependent on the settlor for their support and maintenance; (iv) the trust has been created bona fide by a person carrying on business or profession exclusively for the benefit of his employees. The Finance Act has inserted a second proviso to section 164(1) of the Income-tax Act to provide that in a case where the income derived by the trustees of a discretionary trust consists of, or includes, profits and gains of business, the provisions of the first proviso shall apply only if the profits and gains are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him. In other words, in such cases the income of the discretionary trust would be charged to tax at normal rates applicable to individuals and not at the maximum marginal rate of income-tax. 27.2 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and the subsequent years. [Section 21(a) of the Finance Act] (xx) Levy of income-tax at maximum marginal rate in the case of charitable and religious trusts which forfeit tax exemption. 28.1 Income derived by charitable or religious trusts is exempt from tax to the extent to which such income is applied to charitable or religious purposes or is accumulated or set apart, in accordance with the provisions of the Income-tax Act, for application to such purposes. Under an amendment made by the Finance Act, 1983, profits and gains of business derived by such trusts are not eligible for tax exemption, with certain exceptions. 28.2 Charitable or religious trusts, which may otherwise be eligible for tax exemption, are liable to forfeit this exemption in the following circumstances, namely:- (a) Where the trust is created after 31st March, 1962, and any part of the income of the trust ensures, under the terms of the trust deed, directly or indirectly, for the benefit of specified categories of persons, such as, the author of the trust, trustee or manager of the trust, substantial contributor to the trust and any relative of such author, trustee, etc. (b) Any part of the income or any property of the trust (whenever created) is used or applied during the relevant year, directly or indirectly for the benefit of specified categories of persons. (c) The trust funds (with certain exceptions), are invested in contravention of the investment pattern for such funds as laid down under the Income-tax Act. 28.3 Where the whole or any part of the income of a charitable or religious trust is not eligible for exemption or the trust forfeits tax exemption in the circumstances indicated at (a) to (c) of the preceding paragraph, tax is charged on such income under the rate schedule applicable to individuals, associations of persons, etc. As the initial slab of income up to Rs. 15,000 is exempt from tax under this Schedule a charitable or religious trust which forfeits tax exemption is not required to pay any tax if its income does not exceed Rs. 15,000. Even where the income exceeds Rs. 15,000 such excess is charged to tax at the graduated rates of tax applicable to individuals. 28.4 It has come to notice that attempts are being made to split certain large trusts into a number of smaller trusts in such a manner that the income of each such trust is either less than the exemption limit of Rs. 15,000 or the income falls for taxation only at the lower rates applicable to the initial slabs of income. As a result, forfeiture of tax exemption in the circumstances mentioned at (a) to (c) of paragraph 28.2 above does not have any deterrent effect in such cases. 28.5 With a view to ensuring that the income or property of charitable or religious trusts is not used or applied, directly or indirectly, for the private benefit of the specified categories of persons and that the trust funds are not invested in contravention of the investment pattern laid down in the Income-tax Act, the Finance Act has inserted a proviso to sub-section (2) of section 164 of the Income-tax Act which lays down that in a case where the relevant income is derived from property held under trust wholly for charitable or religious purposes and the whole or any part of such income forfeits tax exemption in the circumstances mentioned at (a) to (c) of paragraph 28.2 above, the trust shall be charged to tax at the maximum marginal rate, that is, the rate of income-tax (including surcharge) applicable to the highest slab of income in the case of individuals, associations of persons, etc. A similar provision has been made in the second proviso to sub-section (3) of section 164 in respect of cases where the relevant income is derived from property held under trust in part only for charitable or religious purposes. 28.6 It may be noted that new sub-section (1A) inserted in section 161 of the Income-tax Act, which provides for taxation of the entire income received by trusts at the maximum marginal rate is applicable only in the case of private trusts having profits and gains of business. So far as public charitable and religious trusts are concerned, their business profits are not exempt from tax, except in the cases falling under clause (a) or clause (b) of section 11(4A) of the Income-tax Act. As the maximum marginal rate of tax under the new proviso to section 164(2) applies to the whole or a part of the relevant income of a charitable or religious trust which forfeits exemption by virtue of the provisions of the Income-tax Act in regard to investment pattern or use of the trust property for the benefit of the settlor, etc., contained in section 13(1)(c) and (d) of that Act, the said rate will not apply to the business profits of such trusts which are otherwise chargeable to tax. In other words, where such a trust contravenes the provisions of section 13(1)(c) or (d) of the Act, the maximum marginal rate of income-tax will apply only to that part of the income which has forfeited exemption under the said provisions. 28.7 The amendments take effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 21(b) and (c) of the Finance Act] (xxi) Relaxation of provisions relating to deduction of tax at source from interest on debentures and dividends up to specified limit. 29.1 Under section 193 of the Income-tax Act, income-tax is deductible at source on payment of any income chargeable under the head "Interest on securities". Section 194 of the Income-tax Act also provides for deduction of tax at source from income by way of dividends paid by an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India. 29.2 The requirement of deduction of tax at source from such income is dispensed with in certain circumstances, subject to the fulfilment of certain conditions, including procedural formalities, laid down in the law. With a view to avoiding paper work and inconvenience to small investors, the Finance Act has made certain modifications in the relevant provisions of the Income-tax Act. The effect of the modifications is that it will not be necessary to deduct tax at source from any interest on debentures paid to an individual, who is resident in India if the following conditions are fulfilled, namely:- (i) the debentures have been issued by a company in which the public are substantially inserted; (ii) the debentures are listed in a recognised stock exchange in India; (iii) the interest is paid by the company by an account payee cheque; and (iv) the aggregate amount of interest paid or likely to be paid by the company to the holder of the debentures during the financial year does not exceed Rs. 1,000. 29.3 Similarly, it will not necessary to deduct tax from income by way of dividends paid by a company in which the public are substantially interested to a shareholder, being an individual who is resident in India, if:- (a) the dividends are paid by such company by an account payee cheque; and (b) the amount of such dividends, or, as the case may be, aggregate amount of such dividends distributed or paid, or likely to be distributed or paid, during the financial year by such company to the shareholder does not exceed Rs. 1,000. 29.4 The amendments take effect from 1st June, 1984, and will, accordingly, apply in respect of interest on securities and dividends paid on or after the said date. [Section 22 and 23 of the Finance Act] (xxii) Appointment of Senior Vice-President of Appellate Tribunal. 30.1 The Finance Act has empowered the Central Government to appoint one of the Vice-Presidents of the Income-tax Appellate Tribunal to be its Senior Vice-President. It has also provided that the Senior Vice-President of the Appellate Tribunal shall exercise such of the powers and perform such of the functions of the President of the Appellate Tribunal as may be delegated to him by the President by a general or special order in writing. 30.2 The amendment takes effect from 1st April, 1984. [Section 24 of the Finance Act] (xxiii) Modification of provisions relating to acquisition of immovable properties. 31.1 Under section 269C of the Income-tax Act, the Central Government is empowered subject to the fulfilment of certain conditions, to acquire any immovable property having a fair market value exceeding Rs. 25,000 in cases where the declared consideration for the transfer of the property is less than the fair market value of the property on the date of transfer. 31.2 With a view to eliminating unproductive work in handling a large number of relatively smaller cases, the Finance Act has amended section 269C to raise the aforesaid monetary limit to Rs. 1,00,000. 31.3 Section 269F of the Income-tax Act lays down the procedure for hearing of objections by the competent authority before an order of acquisition may be made by him. One of the conditions to be fulfilled before any such order is made is that the competent authority must be satisfied that the fair market value of the immovable property to which the proceedings relate exceeds Rs. 25,000. As a logical corollary to the amendment of section 269C, the Finance Act has also raised the aforesaid monetary limit in section 269F to Rs. 1,00,000. 31.4 Under section 269P of the Income-tax Act, any person presenting a document for transferring any immovable property for an apparent consideration exceeding Rs. 10,000 is required to furnish to the registering officer a statement in the prescribed form in duplicate in respect of such transfer. With a view to eliminating unproductive work in handling a large number of relatively smaller cases, the Finance Act has amended section 269P to raise the aforesaid monetary limit to Rs. 50,000. 31.5 These amendments take effect from 1st June, 1984. [Sections 25, 26 and 27 of the Finance Act] (xxiv) Prohibition against taking or accepting certain loans and deposits in cash. 32.1 Unaccounted cash found in the course of searches carried out by the Income-tax Department is often explained by taxpayers as representing loans taken from or deposits made by various persons. Unaccounted income is also brought into the books of account in the form of such loans and deposits, and taxpayers are also able to get confirmatory letters from such persons in support of their explanation. 32.2 With a view to countering this device, which enables taxpayers to explain away unaccounted cash or unaccounted deposits, the Finance Act has inserted a new section 269SS in the Income-tax Act debarring persons from taking or accepting, after 30th June, 1984, from any other person any loan or deposit otherwise than by an account payee cheque or account payee bank draft if the amount of such loan or deposit or the aggregate amount of such loan and deposit is Rs. 10,000 or more. This prohibition will also apply in cases where on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment has fallen due or not), and the amount or the aggregate amount remaining unpaid is Rs. 10,000 or more. The prohibition will also apply in cases where the amount of such loan or deposit, together with the aggregate amount remaining unpaid on the date on which such loan or deposit is proposed to be taken is Rs. 10,000 or more. 32.3 The prohibition will, however, not apply to any loan or deposit taken or accepted from, or any loan or deposit taken or accepted by, the following, namely:- (a) Government; (b) any banking company, post office savings bank or any co-operative bank; (c) any corporation established by a Central, State or Provincial Act; (d) any Government company a defined in section 617 of the Companies Act, 1956; (e) such other institution, association or body or class of institutions, associations or bodies which the Central Government, may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette. 32.4 For the purposes of the provision, the expression "banking company" shall have the meaning assigned to it in clause (a) of the Explanation to section 40A(8) of the Income-tax Act and the expression "co-operative bank" shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949. The expression "loan or deposit" for the purposes of this provision, would mean loan or deposit of money. 32.5 Fears have been expressed in certain quarters that the provision will adversely affect the rural sector and farmers who bring produce to mandies for sale. The prohibition contained in section 269SS is confined to loans and deposits only and does not extend to purchase/sale transactions. 32.6 Section 276DD inserted in the Income-tax Act by the Finance Act, provides that if a person, without reasonable cause or excuse, takes or accepts any loan or deposit in contravention of the aforesaid provisions, he shall be punishable with imprisonment for a term which may extend to two years and shall also be liable to a fine equal to the amount of such loan or deposit. 32.7 The provisions take effect from 1st April, 1984, but as stated above, the prohibition contained therein will apply only in relation to any loan or deposit taken or accepted after 30th June, 1984. [Sections 28, 29 and 31 of the Finance Act] (xxv) Modification of provisions relating to effect of failure to furnish information in respect of properties held benami. 33.1 Under section 281A of the Income-tax Act, the real owner of any property held benami or any person acting on his behalf is debarred from instituting any suit in any court to enforce any right in respect of any property held benami unless the income from such property or the property itself has been disclosed in any return of income or net wealth furnished by the claimant or a notice in the prescribed form and containing the prescribed particulars in respect of the property has been given by him to the Income-tax Officer. The existing provisions do not lay down any time-limit for such disclosure in the return of income or net wealth or for such notice to the Income-tax Officer. As such, the required disclosure in the return of income or net wealth and the required notice can be given by the real owner at any time before the suit is instituted. 33.2 With a view to curbing the wide-spread practice of benami holding of property, the Finance Act has tightened the existing provision by laying down time-limit within which the benami acquisition of property must be brought to the notice of the tax authorities by the real owner. 33.3 Hence, instead of the existing option of making a disclosure in the return of income or net wealth or giving a notice to the Income-tax Officer at any time, the new provision requires the real owner of the property, in all cases, to give a notice in the prescribed form and containing the prescribed particulars in respect of the property acquired benami, within a period of one year from the date of acquisition of the property, to the Commissioner of Income-tax. The information thus received by the Commissioner of Income-tax will enable the Income-tax Officer to take appropriate action under the provisions of the Income-tax Act and the Wealth-tax Act in respect of such benami acquisition of property well before the limitation for such action expires. Failure to comply with this requirement will result in the real owner forfeiting his right to institute a suit in respect of such property. 33.4 In cases where the benami acquisition of property is made before 1st March, 1984, the aforesaid requirement will be deemed to have been fulfilled if notice in the prescribed form and containing the prescribed particulars in respect of the property is given by the claimant within a period of one year from the said date, that is, by 1st March, 1985, to the Commissioner of Income-tax. 33.5 The aforesaid time-limit for giving notice to the Commissioner of Income-tax will not apply in cases where the value of any suit relating to any immovable property does not exceed Rs. 50,000. In such cases, it will suffice if, at any time before the suit is instituted, notice in the prescribed form and containing the prescribed particulars in respect of the property is given by the claimant to the Commissioner of Income-tax. 33.6 The new provision enables the real owner of the property to obtain a certified copy of the notice given by him to the Commissioner of Income-tax. It has, accordingly, been provided that the Commissioner of Income-tax shall, on an application being made in the prescribed manner by the claimant or any person acting on his behalf or claiming under him, and on payment of the prescribed fees, issue for the purposes of a suit, a certified copy of any notice given by the claimant to the Commissioner of Income-tax. It will be obligatory for the Commissioner to given the certified copy within 14 days from the receipt of the application. 33.7 The amendments take effect from 1st April, 1984. [Section 32 of the Finance Act] AMENDMENTS TO THE WEALTH-TAX ACT (i) Enlargement of the scope of exemption in respect of one house. 34.1 Under section 5(1)(iv) of the Wealth-tax Act, the value of one house (or part of a house) belonging to the assessee is exempt from wealth-tax up to Rs. 1 lakh. The Finance Act has amended the provision to raise this exemption to Rs. 2 lakhs. 34.2 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 34(a)(i)(1) of the Finance Act] (ii) Modification of provisions relating to exemption from wealth-tax in respect of certain financial assets. 35.1 Under section 5 of the Wealth-tax Act, the value of specified assets, such as shares in Indian companies, units in the Unit Trust of India and deposits with banking companies is exempt from the levy of wealth-tax up to an aggregate amount of Rs. 1,65,000. With a view to providing a further stimulus for investment in such assets, the Finance Act has raised the amount of exemption under this provision to Rs. 2,65,000. 35.2 The Finance Act has also included in the list of assets qualifying for this exemption, the following assets, namely:- (a) deposits with the Industrial Development Bank of India; and (b) deposits under such National Deposits Scheme as may be framed by the Central Government and notified by it in this behalf in the Official Gazette. As in the case of other financial assets, exemption in respect of the aforesaid assets will be available only where such assets have been held by the assessee for a period at least six months* ending with the relevant valuation date. 35.3 The Finance Act has inserted two new provisos to sub-section (1A) of section 5 of the Wealth-tax Act. Under the first proviso, a special exemption up to Rs. 35,000 in the aggregate has been allowed in respect of deposits under the National Deposits Scheme referred to in the preceding paragraph and units of the Unit Trust of India. Hitherto, a special exemption up to Rs. 35,000 was allowed under section 32(1)(ba) of the Unit Trust of India Act, 1963, in respect of the units of the Unit Trust of India. As stated in paragraphs 37.1 and 37.2 of this circular, the relevant provisos of section 32 of the said Act have, in consequence, been omitted by the Finance Act. 35.4 Under the second proviso, a further exemption up to Rs. 25,000 has been allowed in respect of deposits in such National Deposits Scheme as may be framed by the Central Government and notified by it in this behalf in the Official Gazette. 35.5 The effect of the aforesaid amendments made may be illustrated as follows:- Item Value on valuation date Exemption available Rs. Rs. I. Shares in Indian companies 2,00,000 2,00,000 Units of the Unit Trust of India 50,000 50,000 Deposits under National Deposit Scheme 20,000 20,000 2,70,000 2,70,000 II. Shares in Indian companies 3,00,000 2,65,000 Units of the Unit Trust of India 50,000 35,000 Deposits under National Deposit Scheme 20,000 20,000 3,70,000 3,20,000 III. Shares in Indian companies 3,00,000 2,65,000 Units of the Unit Trust of India 1,00,000 35,000 Deposits under National Deposit Scheme 1,00,000 25,000 5,00,000 3,25,000 35.6 The amendments take effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 34(a)(i)(2) and (3), (ii) and (iii) of the Finance Act] (iii) Levy of wealth-tax at maximum marginal rate in the case of charitable and religious trusts which forfeit tax exemption. 36.1 Under section 5(1)(i) of the Wealth-tax Act, any property held under trust or any other legal obligation for any public purpose of a charitable or religious nature in India is exempt from wealth-tax. However, section 21A of the Wealth-tax Act provides that the exemption from wealth-tax is forfeited if,- (a) any part of the trust property or any income of the trust, including income by way of voluntary contributions, is used or applied directly or indirectly, for the benefit of specified categories of persons, such as, the author of the trust, trustee or manager of the trust, substantial contributor to the trust and any relative of such author, trustee, etc.; (b) any part of the income (including voluntary contributions) of a trust created on or after 1st April, 1962, enures directly or indirectly, for the benefit of the specified categories of persons mentioned at (a) above. 36.2 Where a charitable or religious trust forfeits tax exemption in the circumstances indicated above, wealth-tax is leviable upon and recoverable from the trustee in like manner and to the same extent as if the property were held by an individual who is a citizen of India and resident in India and at the rates specified in Part II of Schedule I to the Wealth-tax Act in the case of an individual, or at the rate of 1.5 per cent. whichever is more beneficial to the revenue. 36.3 With a view to ensuring that trust funds are not invested in contravention of the investment pattern laid down in the Income-tax Act, the Finance Act has amended section 21A of the Wealth-tax Act to secure that, in addition to the two circumstances mentioned in paragraph 36.1 above, a charitable or religious trust will also forfeit tax exemption in cases where the funds of the trust are not invested in accordance with the investment pattern laid down under the Income-tax Act. 36.4 As explained in paragraph 28.5 above, charitable and religious trusts which forfeit exemption under the Income-tax Act will be charged to tax at the maximum marginal rate of income-tax. In conformity therewith, the Finance Act has further amended section 21A to provide that the net wealth of charitable and religious trusts which forfeit exemption under the aforesaid provisions of the Wealth-tax Act would also be charged to wealth-tax at the maximum marginal rate of wealth-tax applicable in the case of an individual who is citizen of India and resident in India, which is 5% at present. It has also been provided that the net wealth in such cases will be computed without excluding the value of any asset under sub-section (1) of section 5 of the Wealth-tax Act. 36.5 Under section 10(21) of the Income-tax Act, income of a scientific research association for the time being approved for the purposes of section 35(1)(ii) of the Income-tax Act, which is applied solely for the purposes of the association is exempt from income-tax. The Finance Act, 1983, amended this provision to provide that this exemption will not be available if any income by way of contributions received by the association are invested or deposited after 29th February, 1983, otherwise than in one or more of the forms or modes specified in section 11(5) of the Income-tax Act in relation to investment or deposit of moneys by charitable or religious trusts and institutions. Exemption from income-tax is also denied if any funds of the association, invested or deposited before 1st March, 1983 (otherwise than in the forms or modes referred to above), continue to remain so invested or deposited after 30th November, 1983. Further, tax exemption is also denied to such associations in cases where they hold any shares in any company (not being a Government company as defined in section 617 of the Companies Act, 1956) or a statutory corporation after 30th November, 1983. 36.6 With a view to bringing the provisions of the Wealth-tax Act in this regard in line with the provisions of section 10(21) of the Income-tax Act, the Finance Act has amended section 21A of the Wealth-tax Act to secure that a scientific research association referred to in section 10(21) of the Income-tax Act will forfeit exemption from wealth-tax if it invests its funds in contravention of the provisions of the said section 10(21), and on forfeiture of such exemption, wealth-tax shall be charged in such cases at the rates specified in the case of an individual in Part I of Schedule I to the Wealth-tax Act. 36.7 Under the Income-tax Act, a distinction is made between public charitable and religious trusts which are entitled to exemption under section 11 of that Act and other religious and charitable trusts, funds, institutions, etc., which are entitled to exemption under section 10 of that Act. The distinction is that whereas trusts which seek exemption under section 11 have to fulfil various conditions (including the condition relating to investment of funds in specified modes) the trusts, institutions, etc., falling under certain clauses of section 10 enjoy complete exemption without any obligation to comply with the conditions applicable to trusts covered by section 11 of the Act. The Finance Act has provided that the provisions relating to forfeiture of exemption contained in section 21A of the Wealth-tax Act will not apply to trusts, institutions, etc., which are entitled to tax exemption under clause (22), clause (22A), clause (23B) or clause (23C) of section 10 of the Income-tax Act. 36.8 These amendments take effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 34(b) of the Finance Act] AMENDMENTS TO THE UNIT TRUST OF INDIA ACT 37.1 Section 32(1)(b) of the Unit Trust of India Act provides for a separate exemption of Rs. 3,000 in respect of any income received by a taxpayer from units of the Unit Trust of India in addition to the exemption up to Rs. 7,000 allowed under section 80L of the Income-tax Act, in respect of income from specified financial assets, including such units. Section 32(1)(ba) of the Unit Trust of India Act similarly provides a separate exemption from wealth-tax up to Rs. 35,000 in respect of the value of units, in addition to the exemption allowed under section 5 of the Wealth-tax Act. 37.2 As explained in paragraphs 21.5 and 35.3 above, deposits under the National Deposits Scheme have been placed on part with the units of the Unit Trust of India for the purposes of tax exemption and appropriate provisions in this regard have been made in the Income-tax Act and the Wealth-tax Act. In consequence thereof, the special provisions contained in section 32 of the Unit Trust of India Act, referred in the preceding paragraph have been deleted. 37.3 The amendments take effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 54 of the Finance Act] * See Circular No. 401, dated 30-10-84. Where this condition has been relaxed (infra p. 28)-Ed.