The Finance Act, 1985-Explanatory Notes on the provisions relating to direct taxes - Income Tax - 421/1985

The Finance Act, 1985-Explanatory Notes on the provisions relating to direct taxes Circular No. 421 Dated 12/6/1985 INTRODUCTION The Finance Bill, 1985, as passed by Parliament, received the assent of the President on 24th May, 1985, and has been enacted as Act No. 32 of 1985. This circular explains the substance of the provisions relating to direct taxes in the Finance Act, 1985. Changes made by the Finance Act, 1985 2. The Finance Act, 1985 (hereinafter referred to as the Finance Act) has,- (i) amended sections 2, 10, 16, 17, 35CC, 36, 37, 40A, 44AB, 54, 58, 80CC, 80G, 80-I, 80QQA, 115, 115E, 136, 139, 208, 245D, 273A and 278A of the Income-tax Act, 1961; (ii) inserted new sections 33AB, 35AB and 180A in the Income-tax Act, 1961; (iii) substituted sections 80HHC and 167A of the Income-tax Act, 1961; (iv) omitted sections 80F, 80JJ, 80N, 80V and 80VV; (v) amended sections 5, 18B, 22D and Schedule I of the Wealth-tax Act, 1957; and (vi) amended section 6 of the Interest-tax Act, 1974. PROVISIONS IN BRIEF 3. The provisions of the Finance Act, 1985, 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 1985-86; the rates at which income-tax will be deductible at source during the financial year 1985-86 from interest (including interest on securities), dividends, salaries, insurance commission, winnings from lotteries and cross-word 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 1985-86. (ii) Amendment of the Income-tax Act, 1961, with a view to granting relief to salaried taxpayers; providing for deduction of contributions to special account with the National Bank for Agriculture Rural Development in the case of persons engaged in the business of growing and manufacturing tea in India; providing for deduction in respect of expenditure on know-how; providing for concessional taxation of consideration received for know-how; modification of the provisions relating to incentives for export; providing for charge of tax at the maximum marginal rate in cases where shares of members of an association of persons or even part of income are indeterminate or unknown; continuation of the tax concession in respect of profits and gains from new industrial undertakings, etc.; extension of the tax concession in respect of the income of authors of text books in Indian languages; providing for deduction in respect of provision made by certain banking companies for bad and doubtful debts; modification of provisions relating to deduction in respect of donations made to certain funds, charitable institutions, etc., with a view to providing a special dispensation in respect of donations to the Indira Gandhi Memorial Trust; extension of the exemption in respect of residents of Ladakh for a further period of 3 years; discontinuance of the provision for partial disallowance of certain items of business expenditure and interest paid by non-banking, non-financial companies on public deposits; withdrawal of certain tax concessions providing for submission of report of audit of cost accounts along with the return of income; modification of the provisions relating to reduction or waiver of penalty under section 273A in certain cases; amendment of the definition of a "company in which the public are substantially interested"; and some other matters. (iii) Amendment of Wealth-tax Act, 1957, with a view to providing for an overall exemption up to Rs. 5 lakhs in respect of the aggregate value of one residential house property and other specified assets; withdrawal of exemption from wealth-tax in respect of business assets of certain charitable and religious trusts; modification of the provisions relating to reduction or waiver or penalty in certain cases; reduction in the rates of wealth-tax and some other matters. (iv) Amendment of the Interest-tax Act, 1974, to provide that interest-tax will not be charged in respect of interest accruing or arising to scheduled banks after 31st March, 1985. RATE STRUCTURE OF INCOME-TAX (i) Rates of income-tax in respect of incomes liable to tax for the assessment year 1985-86. 4.1 In respect of incomes of all categories of taxpayers (corporate as well as non-corporate) liable to tax for the assessment year 1985-86, 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, 1984, for the purposes of the 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 1984-85. 4.2 The Finance Act, 1984, had allowed companies, which were required to pay advance tax during the financial year 1984-85, to make a deposit with the Industrial Development Bank of India in lieu of the surcharge on income-tax payable by them. The Finance Act, 1985, has accordingly made a provision that where a company has made a deposit during the financial year 1984-85 with the Industrial Development Bank of India under the Companies Deposits (Surcharge on Income-tax) Scheme, 1984, framed by the Central Government under section 2(7) of the Finance Act, 1984, and 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 nil. Where the amount of deposit so made falls short of the amount of the 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 1985-86 from income other than "Salaries" and retirement annuities. 5. The rates for deduction of income-tax at source during the financial year 1985-86 from incomes, other than "Salaries" and retirement annuities payable to partners of registered firms engaged in specified professions, has been specified in Part II 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 cross-word puzzles, income by way of winnings from horse races and income of non-residents (including non-resident Indians) other than salary income. These rates vary from the rates in force during the financial year 1984-85 in three respects. Firstly, in consequence of the proposed reduction in the maximum marginal rate of personal income-tax (referred to in para. 6.4 below) to 50 per cent., the rate of deduction of tax at source from winnings from lotteries has been reduced from 30 per cent. to 25 per cent. because under section 80TT of the Income-tax Act, a deduction is allowed from such winnings of a sum of Rs. 5,000 plus 50 per cent. of the winnings from lotteries in excess of Rs. 5,000. Secondly, in consequence of the proposed discontiunance of the levy of surcharge on income-tax in the case of non-corporate taxpayers (referred to in paragraph 6.3 below), the rates for deduction of tax at source from income of such taxpayers do not also provide for surcharge. Thirdly, in consequence of the proposed reduction in the rates of basic income-tax in the case of companies (referred to in paragraph 6.7 below), the general rate for deduction of tax at source in the case of foreign companies stands reduced from 70 per cent. to 65 per cent. and the rate of surcharge stands reduced consequentially from 3.50 per cent. to 3.25 per cent. (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 1985-86. 6.1 The rates for deduction of tax at source from "Salaries" in the case of individuals during the financial year 1985-86 and also for computation of "advance tax" payable during that year in the case of all categories of taxpayers have been specified in Part III of the First Schedule to the Finance Act. These rates are also applicable for deduction of tax at source during the financial year 1985-86 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 1985-86 on current incomes in cases where accelerated assessments 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 1985-86, assessment of persons who are likely to transfer property to avoid tax, etc. The salient features of the rates specified in the said Part III are indicated hereunder: Rates of tax applicable to individuals, Hindu undivided families, unregistered firms, etc. 6.2 Raising of exemption limit.-The exemption limit in the case of individuals, Hindu undivided families (other than those with one or more members having independent income exceeding the exemption limit), unregistered firms, associations of persons, etc., has been raised from Rs. 15,000 to Rs. 18,000. 6.3 Abolition of surcharge.-Surcharge on income-tax for purposes of the Union is currently levied at the rate of 12.5 per cent in the case of all categories of non-corporate taxpayers. The levy of surcharge for purposes of the Union has been abolished in the case of all taxpayers (other than companies). 6.4 Modification in the rates of income-tax.-The rate schedule applicable in the case of individuals, Hindu undivided families (other than those having at least one member with independent total income exceeding the exemption limit), unregistered firms, associations of persons, bodies of individuals and artificial juridicial persons and the rate schedule applicable in the case of Hindu undivided families with one or more members having independent income exceeding exemption limit have been restructured. Table 1 and Table 2 below give the rates of income-tax applicable to the aforesaid categories of taxpayers: (a) as specified in Part I of the First Schedule to the Finance Act, i.e., the existing rates; and (b) as specified in Part III of the First Schedule to the Finance Act, i.e., the new rates. TABLE 1 Slabs of income with rates in the case of individuals, Hindu undivided families (other than those covered by Table 2), unregistered firms, etc. Income slab Rates as specified in Part I of the First Schedule to the Finance Act (i.e., existing rates) Income slab Rates as specified in Part III of the First Schedule to the Finance Act(i.e., new rates) Up to Rs. 15,000 Nil Up to Rs. 18,000 Nil Rs. 15,001-20,000 20% Rs. 18,001-25,000 25% Rs. 20001-25,000 25% Rs. 25,001-50,000 30% Rs. 25,001-30,000 30% Rs. 50,001-1,00,000 40% Rs. 30,001-40,000 35% Over Rs. 1,00,000 50% Rs. 40,001-50,000 40% Rs. 50,001-70,000 45% Rs. 70,001-1,00,000 50% Over Rs. 1,00,000 55% TABLE 2 Slabs of income with rates in the case of Hindu undivided families, having one or more members with independent income exceeding the exemption limit Income slab Rates as specified in Part I of the First Schedule to the Finance Act (i.e., existing rates) Income slab Rates as specified in Part III of the First Schedule to the Finance Act(i.e., new rates) Up to Rs. 8,000 Nil Up to Rs. 12,000 Nil Rs. 8,001-15,000 22% Rs. 12,001-20,000 25% Rs. 15,001-20,000 27% Rs. 20,001-40,000 30% Rs. 20,001-25,000 35% Rs. 40,001-60,000 40% Rs. 25,001-30,000 40% Rs. 60,001-1,00,000 50% Rs. 30,001-50,000 50% Over Rs. 1,00,000 55% Over Rs. 50,000 60% 6.5 Table 3 and Table 4 below respectively show the comparative incidence of tax at selected levels of income in the case of the two aforesaid categories of tax payers at- (a) the rates applicable during the financial year 1984-85 for the purposes of computation of "advance tax" and deduction of tax at source from "Salaries" (which have been made applicable to incomes assessable for the assessment year 1985-86); and (b) the rates in the Finance Act for computation of "advance tax" and deduction of tax at source from "Salaries" during the financial year 1985-86. TABLE 3 Comparative incidence of tax at selected levels of income in the case of individuals, Hindu undivided families (other than those covered by Table 4), unregistered firms, etc. Income Income-tax (including surcharge at existing rates) Income-tax at new rates without surcharge(which has been abolished) Tax relief Tax relief as percen- tage of tax in Col. (2) (Rs.) (Rs.) (Rs.) (Rs.) (%) (1) (2) (3) (4) (5) 16,000 225 Nil 225 100 17,000 450 Nil 450 100 18,000 675 Nil 675 100 19,000 900 250 650 72.22 20,000 1,125 500 625 55.56 21,000 1,406 750 656 44.66 22,000 1,688 1,000 688 40.76 23,000 1,969 1,250 719 36.52 24,000 1,250 1,500 750 33.33 25,000 2,531 1,750 781 30.86 30,000 4,219 3,250 969 22.97 40,000 8,156 6,250 1,906 23.37 50,000 12,656 9,250 3,406 26.91 60,000 17,719 13,250 4,469 25.22 70,000 22,781 17,250 5,531 24.28 80,000 28,406 21,250 7,156 25.19 90,000 34,031 25,250 8,781 25.80 1,00,000 39,656 29,250 10,406 26.24 1,50,000 70,594 54,250 16,344 23.15 2,00,000 1,01,531 79,250 22,281 21.95 3,00,000 1,63,406 1,29,250 34,156 20.90 4,00,000 2,25,281 1,79,250 46,031 20.43 5,00,000 2,87,156 2,29,250 57,906 20.17 TABLE 4 Comparative incidence of tax at selected levels of income in the case of Hindu undivided families having one or more members with independent income exceeding the exemption limit Income Income-tax (including surcharge at existing rates) Income-tax at new rates without surcharge(which has been abolished) Tax relief Tax relief as percen- tage of tax in Col. (2) (Rs.) (Rs.) (Rs.) (Rs.) (%) (1) (2) (3) (4) (5) 13,000 450 250 200 44.44 14,000 900 500 400 44.44 15,000 1,350 750 600 44.44 16,000 1,800 1,000 800 44.44 17,000 2,520 1,250 1,000 44.44 18,000 2,644 1,500 1,144 43.27 19,000 2,948 1,750 1,198 40.64 20,000 3,251 2,000 1,251 38.48 21,000 3,645 2,300 1,345 36.90 22,000 4,039 2,600 1,439 35.63 23,000 4,433 2,900 1,533 34.58 24,000 4,826 3,200 1,626 33.69 25,000 5,220 3,500 1,720 32.95 30,000 7,470 5,000 2,470 33.07 40,000 13,095 8,000 5,095 38.91 50,000 18,720 12,000 6,720 35.90 60,000 25,470 16,000 9,470 37.18 70,000 32,220 21,000 11,220 34.82 80,000 38,970 26,000 12,970 33.28 90,000 45,720 31,000 14,720 32.20 1,00,000 52,470 36,000 16,470 31.39 1,50,000 86,220 63,500 22,720 26.35 2,00,000 1,19,970 91,000 28,970 24.15 3,00,000 1,87,470 1,46,000 41,470 22.12 4,00,000 2,54,970 2,01,000 53,970 21.17 5,00,000 3,22,470 2,56,000 66,470 20.61 Rates of tax applicable to co-operative societies, registered firms and local authorities. 6.6 In the case of co-operative societies, registered firms and local authorities, the rates of income-tax have respectively been specified in Paragraph B, Paragraph C and Paragraph D 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, except that the levy of surcharge on income-tax has been discontinued. Rates of tax applicable to companies. 6.7 Modification in the rates of income-tax.-The rates of income-tax on companies have been reduced. At present, closely-held domestic companies are classified into two categories, that is, (a) industrial companies and (b) other companies. This classification has been changed and closely-held companies are now being classified as (a) trading and investment companies; and (b) other companies. The rate of income-tax in the case of widely-held domestic companies has been reduced to 50 per cent. from 55 per cent. at present. In the case of a closely-held company, the rate of tax is 60 per cent. if the company is a trading company or an investment company, and 55 per cent. in the case of all other closely-held companies (including companies currently classified as "industrial companies"). In the case of a foreign company, the basic rate of income-tax has been reduced to 65 per cent. as against 70 per cent. at present. 6.8 The levy of surcharge at the rate of 5 per cent. of the income-tax payable by companies is being continued. However, companies will continue to have the option of making, in lieu of payment of surcharge, a deposit with the Industrial Development Bank of India under a scheme to be framed by the Central Government in this behalf. The deposit will have to be made before the due date for payment of the last instalment of advance tax in the case of the company. 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. Partially integrated taxation of non-agricultural income with income derived from agriculture. 6.9 As in the past, the Finance Act has provided that in the case of individuals, Hindu undivided families, unregistered firms, other associations of persons, etc., the net agricultural income will be taken into account for computation of "advance tax" and charging of income-tax. These provisions are broadly on the same lines as those in earlier years. [Section 2 and the First Schedule to the Finance Act] AMENDMENT TO INCOME-TAX ACT Amendment of the definition of "company in which the public are substantially interested". 7.1 The Finance Act, 1983, amended section 2(18) of the Income-tax Act which contains the definition of "company in which the public are substantially interested". The section as amended by that Act provides that where shares of a company are not listed on a recognised stock exchange in India, as on the last date of the relevant accounting year, the company will not be regarded as a company in which the public are substantially interested (i.e., a widely-held company) unless the shares of the company, not being shares entitled to a fixed rate of dividend carrying not less than fifty per cent. of the voting power have been allotted unconditionally to or acquired unconditionally by and were throughout the relevant previous year beneficially held by the Government or a statutory corporation or a widely-held company or a wholly-owned subsidiary of such company. If the requisite percentage of shares of the company are not so held, the company is regarded as a closely-held company even though fifty per cent. or more of its shares are held by the public generally. 7.2 The Finance Act has amended section 2(18) of the Income-tax Act to provide that a company which carries on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government under section 620A of the Companies Act to be a Nidhi or a Mutual Benefit Society shall be regarded as a company in which the public are substantially interested. 7.3 This amendment takes effect retrospectively from 1st April, 1984, that is, the date from which the definition was amended by the Finance Act, 1983 and will, accordingly, apply in relation to the assessment year 1984-85 and subsequent years. [Section 3 of the Finance Act] Modification of the provisions relating to retrenchment compensation received by a workman. 8.1 Under the existing provisions, retrenchment compensation received by a workman is exempt from income-tax subject to certain limits. The maximum amount of retrenchment compensation exempt is the sum calculated on the basis provided in section 25F(b) of the Industrial Disputes Act, or Rs. 20,000, whichever is less. 8.2 The Finance Act has raised the aforesaid monetary limit of Rs. 20,000 to Rs. 50,000. The Finance Act has also provided that the aforesaid limit shall not apply in cases where the compensation is paid under any scheme which is approved in this behalf by the Central Government, having regard to the need for extending special protection to the workmen in the undertaking to which the scheme applies and other relevant circumstances. 8.3 The amendments take effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 4(a) of the Finance Act] Exemption from income-tax in respect of interest payable to foreign banks performing central banking functions. 9.1 The Finance Act has inserted a new sub-clause (iiia) in clause (15) of section 10 of the Income-tax Act with a view to providing exemption from income-tax in respect of interest payable to any foreign bank performing central banking functions. This exemption will be available only where the interest is payable in respect of the deposits made by such bank with any scheduled bank in India with the approval of the Reserve Bank of India. 9.2 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(b) of the Finance Act] Exemption in respect of residents of Ladakh. 10.1 Under an existing provision, income accruing or arising to persons who were residents of the district of Ladakh in the accounting year relevant to the assessment year 1962-63 is exempt from income-tax up to the assessment year 1985-86, if such income is derived from any source in the district of Ladakh or outside India. 10.2 The Finance Act has extended this exemption for a further period of three years, that is, for the assessment years 1986-87 to 1988-89. [Section 4(c) of the Finance Act] Modification of provisions relating to standard deduction in the case of salaried taxpayers. 11.1 Under the existing provisions of the Income-tax Act, salaried taxpayers are entitled to a standard deduction in the computation of taxable salary. The deduction is allowed in an amount equal to 25 per cent. of the salary or Rs. 6,000, whichever is less. The standard deduction is, however, restricted to Rs. 1,000 in the following cases:- (i) where the employee is provided with a motor car, motor cycle, scooter or other moped by his employer for use otherwise than wholly and exclusively in the performance of his duties; or (ii) where the employee is allowed the use, otherwise than wholly and exclusively in the performance of his duties, of any one or more motor cars, out of a pool of motor cars owned or hired by the employer. 11.2 The Finance Act has inserted a new Explanation in the section to provide that, for the purposes of the aforesaid provision, the use of any vehicle provided by the employer for journey by the employee from his residence to his office or other place of work, or from such office or other place of work to his residence shall not be regarded as use of such vehicle otherwise than wholly and exclusively in the performance of his duties. 11.3 This amendment takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 5 of the Finance Act] Modification of the provisions relating to "perquisites". 12.1 Under the existing provisions, the value of any benefit or amenity granted or provided free of cost or at concessional rate by an employer to an employee (not being a director of the company or a person who has a substantial interest in the company) is not regarded as a perquisite received by the employee unless the employee's income under the head "Salaries" exclusive of the value of any benefits or amenities not provided for by way of monetary payment exceeds Rs. 18,000. In the context of the raising of the exemption limit, the Finance Act, 1985, has raised the said limit to Rs. 24,000. It has also been clarified that, in cases where salary is received from more than one employer, the aggregate salary from these employers, will have to be taken into account for the purposes of this provision. 12.2 The amendment takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 6(a) of the Finance Act] Discontinuance of the provision for taxation of perquisites represented by interest-free loans or loans at concessional rate of interest to employees. 13.1 Under sub-clause (vi) of clause (2) of section 17 of the Income-tax Act, inserted by the Taxation Laws (Amendment) Act, 1984, where the employer has advanced any loan to an employee for building a house or purchasing a site or a house and a site or for purchasing a motor car, and either no interest is charged by the employer on such loan or interest is charged at a rate which is lower than the rate of interest which the Central Government may specify in this behalf by notification in the Official Gazette, an amount calculated on the following basis is regarded as perquisite received by the employee and charged to tax accordingly:- (i) in a case where such loan is advanced without charging any interest, the amount of interest on such loan at the rate notified; (ii) in a case where such loan is advanced by charging interest, at a rate which is lower than the notified rate, the amount of the difference between the interest on such loan at the rate notified and the interest charged by the employer. 13.2 The provision does not apply to employees of the Central Government or any State Governments or an employee (not being a director of a company or a person who has a substantial interest in the company) whose income under the head "Salaries" (exclusive of all benefits and amenities not provided for by way of monetary payment) does not exceed Rs. 18,000. 13.3 As a measure of relief to salaried taxpayers, the Finance Act has omitted the aforesaid provision with effect from the date of its insertion, namely, 1st April, 1985. In consequence thereof, sub-clause (vi) of clause (b) in Explanation 2 to section 40A(5) of the Income-tax Act, which defines the term "perquisite" for the purposes of the said section to include the perquisite value represented by interest-free loans or loans at concessional rates of interest, has also been deleted. [Sections 6(b) and 12(a) of the Finance Act] Deduction of contributions to special account with the National Bank for Agriculture and Rural Development. 14.1 With a view to encouraging persons engaged in the business of growing and manufacturing tea in India to mobilise resources internally for specified purposes, the Finance Act has inserted a new section 33AB in the Income-tax Act. The section provides that where a person who carries on the business of growing and manufacturing tea in India has, during the previous year, deposited with the National Bank for Agriculture and Rural Development any amount in a special account maintained by such person with that Bank in accordance with the scheme approved in this behalf by the Tea Board, such person shall be allowed a deduction of the amount so deposited during the previous year or 20 per cent. of the profits from the business of growing and manufacturing tea in India (before making this deduction), whichever is less. Any excess deposit made in the previous year shall be treated as a deposit made by such person in the next following previous year. 14.2 Where any amount is withdrawn by such person from the speical account with the Bank, for acquiring any asset, being building, machinery, plant or furniture, the actual cost of such asset shall, for the purposes of the Income-tax Act, be reduced by the amount so utilised. Where the amount withdrawn from the special account is utilised for incurring any expenditure for the purposes of the business of growing or manufacturing tea in India, such expenditure shall be reduced by the amount so utilised and only the resultant sum, if any, shall be taken into account for the purpose of computation of income. 14.3 Where any amount released from the special account during any previous year by the Bank for being utilised by such person for the purpose of the business of growing and manufacturing tea in India, in accordance with the scheme, is not so utilised during that previous year, the unutilised amount shall be deemed to be the profits and gains from business and accordingly chargeable to income-tax as the income of such person of that previous year. 14.4 The deduction under section 33AB shall be subject to the provisions of section 80VVA relating to restriction on the aggregate amount to be allowed as deduction in the case of companies. 14.5 The new provision takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Sections 7 and 36(d)(i) of the Finance Act] Deduction in respect of expenditure on "know-how". 15.1 With a view to providing further encouragement for indigenous scientific research, the Finance Act has inserted a new section 35AB in the Income-tax Act. The section provides that any lump sum consideration paid by the taxpayer for acquiring any know-how for use for the purposes of his business will be allowed as deduction by spreading it over 6 years, namely, the year in which the lump sum consideration is paid and the five immediately succeeding years. Where the "know-how" is developed in a laboratory, university or institution, referred to sub-section (2B) of section 32A, the consideration shall be spread equally over 3 years. 15.2 For the purposes of this section, "know-how" means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other source of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto). 15.3 The new section will apply in relation to the assessment year 1986-87 and subsequent years. [Section 8 of the Finance Act] Withdrawal of deduction relating to rural development allowance. 16.1 Section 35CC of the Income-tax Act relating to rural development allowance provides that where a company or a co-operative society incurs any expenditure on any programme of rural development, the expenditure so incurred shall be deducted in computing the taxable profits. The deduction is to be allowed only if the approval of the prescribed authority has been obtained in respect of the programme before incurring the expenditure. 16.2 The concession is open to abuse as the correctness of claims in respect of expenditure incurred on rural development programmes is difficult to verify. The Finance Act has discontinued this concession, except in relation to programmes of rural development which have been approved by the prescribed authority before 17th March, 1985, by providing that no such programme shall be approved after 16th March, 1985. [Section 9 of the Finance Act] Deduction in respect of provisions made by banking companies for bad and doubtful debts. 17.1 Section 36(1)(vii) of the Income-tax Act provides for a deduction in the computation of taxable profits of the amount of any debt or part thereof which is established to have become a bad debt in the previous year. This allowance is subject to the fulfilment of the conditions specified in sub-section (2) of section 36. 17.2 Section 36(1)(viia) of the Income-tax Act provides for a deduction in respect of any provision for bad and doubtful debts made by a scheduled bank or a non-scheduled bank in relation to advances made by its rural branches, of any amount not exceeding 1-1/2 per cent. of the aggregate average advances made by such branches. 17.3 Having regard to the increasing social commitments of banks, section 36(1)(viia) has been amended to provide that in respect of any provision for bad and doubtful debts made by a scheduled bank [not being a bank approved by the Central Government for the purposes of section 36(1)(viiia) or a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank, an amount not exceeding ten per cent. of the total income (computed before making any deduction under the proposed new provision) or two per cent. of the aggregate average advances made by rural branches of such banks, whichever is higher, shall be allowed as a deduction in computing the taxable profits. 17.4 Section 36(1)(vii) of the Act has also been amended to provide that in the case of a bank to which section 36(1)(viia) applies, the amount of bad and doubtful debts shall be debited to the provision for bad doubtful debts account and that the deduction admissible under section 36(1)(vii) shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account. 17.5 Section 36(2) has been amended by insertion of a new clause (v) to provide that where a debt or a part of a debt considered bad or doubtful relates to advances made by a bank to which section 36(1)(viia) applies, no such deduction shall be allowed unless the bank has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under clause (viia) of section 36(1). [Sections 10(a)(i), (ii) and 10(b) of the Finance Act] Modification of the provisions relating to deductions in respect of reserves in the case of financial corporations, notified banks, etc. 18.1 Financial corporations engaged in providing long-term finance for industrial or agricultural development in India or public companies providing long-term finance for construction or purchase of houses in India for residential purposes, are entitled to a deduction, in the computation of their taxable profits, of an amount not exceeding 40 per cent. of the total income carried to a special reserve. Under the existing provisions, the total income for this purpose is the total income as computed before making any deduction under Chapter VI-A. The Finance Act provides that the deduction shall be of an amount not exceeding 40 per cent. of the total income as computed before making any deduction under the aforesaid provision and Chapter VI-A. 18.2 Under another provision, scheduled banks, other than foreign banks, which are engaged in banking operations outside India and approved by the Central Government in this behalf are also entitled to a deduction up to 40 per cent. of their total income computed before making any deduction under Chapter VI-A carried by them to a reserve account. The Finance Act provides that the deduction shall be of an amount not exceeding 40 per cent. of the total income as computed before making any deduction under the aforesaid provision and Chapter VI-A. 18.3 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 10(a)(iii) of the Finance Act] Withdrawal of provision for partial disallowance of certain items of business expenditure. 19.1 Section 37(3A) of the Income-tax Act provides that where the aggregate expenditure incurred by a taxpayer on any one or more of specified items of expenditure exceeds Rs. 1 lakh, twenty per cent. of such excess shall not be allowed as deduction in computing the taxable profits. The following items of expenditure have been specified for the purpose of this disallowance: (a) Advertisement, publicity and sales promotion. (b) Running and maintenance of aircraft and motor cars. (c) Payments made to hotels. 19.2 On a review of these provisions, it has been decided to discontinue this disallowance. The Finance Act has accordingly amended section 37 to achieve this objective. 19.3 This amendment takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 11 of the Finance Act] Withdrawal of provision for partial disallowance of interest paid by non-banking non-financial companies on public deposits. 20.1 Sub-section (8) of section 40A of the Income-tax Act provides for partial disallowance of interest paid by non-banking non-financial companies on deposits [other than those specifically excluded under clause (b) of the Explanation to the said sub-section] received by them. Under this provision, fifteen per cent. of the expenditure incurred by way of interest paid on such deposits is disallowed in computing the profits and gains of business in the case of a company other than a banking company or a financial company. 20.2 This provision was introduced in the context of the levy of interest-tax on the interest income of banks. As the levy of interest-tax is being discontinued under section 41 of the Finance Act, the aforesaid provision relating to disallowance of a portion of the interest paid by companies on their deposits has also been discontinued. As a consequence of omission of section 40A(8) of the Income-tax Act, the Tenth Schedule to the Act containing the list of institutions and bodies which are exempt from the operation of section 40A(8) has also been omitted by the Finance Act. 20.3 The Explanation to sections 269SS and 269T provide that, for the purposes of the respective sections, "banking company" shall have the meaning assigned to it in clause (a) of the Explanation to section 40A(8). With the omission of section 40A(8), the Finance Act has provided a definition of the term "banking company" on the same lines in section 269SS. This definition will also apply for the purposes of section 269T of the Act. 20.4 These amendments take effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Sections 12(b), 36(f), 36(g) and 36(h) of the Finance Act] Disallowance of expenditure incurred in connection with certain proceedings under the Income-tax Act. 21.1 Under section 80VV of the Income-tax Act, any expenditure incurred by an assessee in respect of any proceedings before any income-tax authority or the Appellate Tribunal or any court relating to the determination of any liability under the Income-tax Act by way of tax, penalty or interest is allowed as a deduction in the computation of the taxable income, subject to a ceiling of Rs. 5,000. The Finance Act has deleted the aforesaid provision and inserted a new sub-section (12) in section 40A of the Income-tax Act to provide that no deduction shall be allowed in excess of Rs. 10,000 for any assessment year in respect of any expenditure incurred by the assessee by way of fees or other remuneration paid to any person (other than an employee of the assessee)- (a) for services (not being services by way of preparation of return of income) in connection with any proceeding under the Income-tax Act before any income-tax authority or the Settlement Commission or the competent authority under Chapter XXA of the said Act or the Appellate Tribunal or any court; (b) for services in connection with any other proceeding before any court, being a proceeding relating to tax, penalty, interest or any other matter under the Income-tax Act; and (c) for any advice in connection with tax, penalty, interest or any other matter under the Income-tax Act. 21.2 The Finance Act has also inserted a new sub-clause (ia) in clause (a) of sub-section (1) of section 58 of the Income-tax Act to provide that any expenditure of the nature referred to in sub-section (12) of section 40A of the Income-tax Act shall not be allowed as deduction in computing the income chargeable under the head "Income from other sources". The effect of this amendment is that no part of the expenditure of the nature referred to in clauses (a) to (c) of sub-section (12) of section 40A will be allowed as a deduction in computing the income chargeable under the head "Income from other sources". This prohibition will apply even in cases where such expenditure is not in excess of Rs. 10,000. 21.3 These amendments take effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Sections 11(a), 12(c), 15, 25 and 36(a)(i) of the Finance Act.] Modification of the provisions relating to audit of accounts of certain persons carrying on business or profession. 22.1 Under the provisions of section 44AB inserted in the Income-tax Act by the Finance Act, 1984, every person carrying on business or profession is required to get his accounts audited by an "accountant" if his total sales, turnover or gross receipts in business or profession are in excess of certain limits. The proviso to the said section lays down that where such person is required by or under any other law to get his accounts audited by an "accountant", it shall be sufficient compliance with the provisions of the said section if such person gets the accounts of such business or profession audited under such other law and obtains the report of the audit as required under such other law and a further report in the form prescribed under the said section. An "accountant" for the purposes of section 44AB means a chartered accountant within the meaning of the Chartered Accountants Act, 1949, and includes in relation to any State any person who is entitled by virtue of section 226(2) of the Companies Act, 1956, to be appointed to act as an auditor of companies registered in that State. 22.2 As the accounts in certain cases may be required to be audited by or under any other law by an auditor who may not be an "accountant" within the meaning of the term as defined for the purposes of section 44AB, the Finance Act has amended the existing provisions to secure that, in a case where the accounts of an assessee are required to be audited by or under any other law, it will suffice if the assessee gets his accounts audited under such other law, even though the person auditing the accounts under that law may not be an "accountant" within the meaning of the term, as defined for the purposes of section 44AB, and obtains the report of the audit under such other law and a further report from the same person or from an "accountant" as defined for the purposes of the said section in the form prescribed under the said section. 22.3 This amendment takes effect from 1st April, 1985, i.e., from the date the provisions of section 44AB came into force under the amendment made by the Finance Act, 1984. [Section 13 of the Finance Act] Consequential amendment in the provisions relating to exemption of capital gains from a residential house. 23.1 Section 53 of the Income-tax Act as amended by the Taxation Laws (Amendment) Act, 1984, with effect from 1st April, 1985, provides for complete exemption of long-term capital gain arising from transfer of a residential house in cases where the consideration for the transfer does not exceed Rs. 2 lakhs. In cases where the consideration exceeds Rs. 2 lakhs, the capital gain is exempted proportionately. Section 54 of the Income-tax Act provides for exemption of long-term capital gain arising from the sale of a residential house, in a case where the capital gain is used for construction or purchase of another residential house. Section 54 in terms provides that the provisions of the said section shall apply to a long-term capital asset "to which the provisions of section 53 are not applicable". 23.2 The above-quoted words in section 54 have been omitted by the Finance Act. The effect of this omission will be that exemption under the said section shall not be denied in cases where a part of the capital gain arising from transfer of a house property is exempt under section 53 of the Income-tax Act. 23.3 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 14 of the Finance Act] Modification of provision relating to deduction in respect of investment in certain new shares. 24.1 Under the existing provisions of section 80CC of the Income-tax Act, a taxpayer subscribing to new equity shares is allowed a deduction in the computation of his taxable income of an amount equal to 50 per cent. of the amount invested by him. If the amount invested in a year exceeds Rs. 20,000, the deduction is allowed with reference to an investment of Rs. 20,000 only. The tax concession is available only in respect of subscriptions to an "eligible issue of capital". 24.2 For the purposes of this provision, eligible issue of capital means an issue of equity shares which satisfies certain conditions. One of the conditions specified in clause (a) of sub-section (3) of section 80CC is that the issue is made by a public company with the main object of carrying on the business of- (i) construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule, or (ii) providing long-term finance for construction or purchase of houses in India for residential purposes. 24.3 The Finance Act has modified the aforesaid clause to provide that to be regarded as an eligible issue, such issue should have been made by a public company formed and registered in India and the issue should have been wholly and exclusively for the purpose of carrying on the business referred to in item (i) or item (ii) of the preceding paragraph. 24.4 This amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 16 of the Finance Act] Deduction in respect of educational expenses in certain cases. 25.1 Section 80F of the Income-tax Act provides for the deduction of expenses incurred by a resident, who is not a citizen of India, on the education of his dependent children outside India. The total amount of deduction allowed is Rs. 1,500 per child, subject to a maximum of Rs. 3,000. In the context of the policy of reducing tax rates and removing concessions which are not considered to be necessary, this concession has been discontinued. 25.2 This amendment takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 17 of the Finance Act] Modification of provision relating to deduction in respect of donations to certain funds, charitable institutions, etc. 26.1 Under section 80G of the Income-tax Act, a taxpayer is entitled to a deduction in the computation of his taxable income of a sum 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 this purpose 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 approved local authority, institution or association to be utilised for the purpose of promoting family planning are eligile for hundred per cent. deduction. The amount of the donations qualifying for deduction under section 80G is, however, limited to ten per cent. of the gross total income of the donor, subject to a monetary limit of Rs. 5 lakhs. The aforesaid ceiling limit, however, does not apply in relation to donations made to the National Defence Fund, the Jawaharlal Nehru Memorial Fund, the Prime Minister's Drought Relief Fund, the Prime Minister's National Relief Fund and the National Children's Fund. 26.2 Under one of the amendments made by the Finance Act to section 80G, donations to the Prime Minister's National Relief Fund will be eligible for hundred per cent. deduction. Under another amendment, donations to the Indira Gandhi Memorial Trust will be placed at par with donations to other funds of national importance and, therefore, eligible for deduction under section 80G without any ceiling on the amount of donations qualifying for deduction. 26.3 The first amendment takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. The second amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. Thus, donations made to the Indira Gandhi Memorial Trust at any time during the accounting year relevant to the assessment year 1985-86, will qualify for deduction under section 80G of the Income-tax Act. [Section 18 of the Finance Act] Modification of the provisions relating to incentive for export. 27.1 Under section 80HHC of the Income-tax Act, an assessee, being an Indian company or a person (other than a company) who is resident in India, is entitled to a deduction in the computation of the taxable income, of an amount equal to 1 per cent. of the export turnover plus a further amount equal to 5 per cent. of the incremental export turnover. 27.2 With a view to providing exporters with requisite resources for modernisation, technological upgradation, product development and other activities and raising their efficiency and productivity, not only in the export sector but also in the economy as a whole, the Finance Act has substituted section 80HHC to provide that an assessee, being an Indian company or a person (other than a company) who is resident in India exports out of India during the previous year, any goods or merchandise to which this section applies, will be allowed deduction of an amount, not exceeding 50 per cent. of the profits derived by the assessee from the export of such goods or merchandise. The provision to new section 80HHC(1) lays down that an amount equal to the amount of the deduction claimed should be debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilised for the purposes of the business of the assessee. The provisions of the new section will apply to all goods or merchandise (other than mineral oil and minerals and ores) if the sale proceeds of such goods or merchandise exported out of India are receivable by the assessee in convertible foreign exchange. 27.3 In a case, where the business carried on by the assessee consists exclusively of export out of India of the goods or merchandise to which the provisions of this section apply, the profits derived from the export of goods or merchandise for the purposes of the proposed concession shall be the profits of the business as computed under the head "Profits and gains of business or profession". In a case, where the business carried on by the assessee does not consist exclusively of export out of India of the goods or merchandise to which the provisions of this section apply, the profits derived from the export of the goods or merchandise shall be the amount which bears to the profits of the assessee as computed under the head "Profits and gains of business or profession" the same proportion as the amount of the export turnover bears to the total turnover of the business carried on by the assessee. 27.4 Clause (a) of the Explanation to section 80HHC defines the term "convertible foreign exchange" as foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange, for the purposes of the Foreign Exchange Regulation Act, 1973, and any rules made thereunder. The definition of convertible foreign exchange is the same as contained in section 80-O of the Income-tax Act. Government have issued a Press Note on 21-6-1983 clarifying that receipt of sale proceeds in non-convertible rupees from bilateral account countries (e.g., Russian Roubles) will be treated on par with sale proceeds received in other convertible foreign exchange for the purposes of section 80HHC of the Income-tax Act. 27.5 The amendment takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 19 of the Finance Act] Deduction in respect of profits and gains from industrial undertakings, etc. 28.1 Under section 80-I of the Income-tax Act, a "tax holiday" is granted, inter alia, to new industrial undertakings (including cold storage plants) which commence production within the period of four years next following March 31, 1981, or ships which are brought into use within the period of four years next following April 1, 1981, or hotels which start functioning after March 31, 1981, but before April 1, 1985. Under the existing provisions, 20 per cent. of the profits and gains (25 per cent. in the case of companies) derived from such industrial undertakings or a ship or the business of a hotel are allowed as a deduction in computation of the total income of the assessee for certain initial years. 28.2 The provisions relating to tax holiday are intended to provide an incentive for investment in certain desired directions and promote industrialisation. In view of the continued need to provide this incentive, the Finance Act has extended this concession by another five years, that is, in relation to new industrial undertakings which commence production before April 1, 1990; ships which are brought into use on or before the said date and hotels which start functioning before the said date. [Section 20 of the Finance Act] Deduction in respect of profits and gains from business of livestock breeding or poultry or dairy farming. 29.1 Under the provisions of section 80JJ of the Income-tax Act, a taxpayer deriving income from the 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 fifteen per cent. of the aggregate profits and gains derived from these sources or Rs. 15,000, whichever is higher. Where the aggregate amount of such profits and gains does not exceed Rs. 15,000, the entire amount is exempt from tax. In computing the deduction in relation to profits and gains derived from the business of poultry farming, profits and gains in excess of Rs. 1 lakh are ignored. 29.2 In the context of the raising of the exemption limit, reduction in tax rates and the fact that this concession is open to abuse, the Finance Act has discontinued the tax concession under section 80JJ of the Income-tax Act. 29.3 This amendment takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Sections 21 and 36(a)(ii), (c) and (d)(ii) of the Finance Act] Deduction in respect of dividends received from certain foreign companies. 30.1 Section 80N of the Income-tax Act provides for a deduction in the computation of the total income of fifty per cent. of the income by way of dividends received by an Indian company on shares allotted to it in a foreign company in consideration of any patent, invention, design, technical "know-how", etc., made available or technical services rendered to the foreign company. 30.2 With the reduction in the rates of corporation tax and the limited utility of this concession at present, the Finance Act, has discontinued the concession under section 80N of the Income-tax Act. 30.3 This amendment takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Sections 22, 36(b), 36(d)(iii) and 36(e) of the Finance Act] Extension of tax concession in respect of income of authors of text-books in Indian languages. 31.1 Section 80QQA of the Income-tax Act provides for a deduction, in the computation of the total income of an author, of an amount equal to 25 per cent. of his income derived from text books, etc., in Hindi and other Indian languages. The deduction is available in respect of any lumpsum consideration for the assignment or grant of any of his interests in the copyright of any such books or of royalties or copyright fees, whether receivable in lump sum or otherwise. The deduction is allowed only where the following conditions are fulfilled:- (i) the book has been prescribed or recommended as a text book by any University for a degree or a post-graduate course or is a dictionary, thesaurus or encyclopaedia; (ii) the book, dictionary, thesaurus or encyclopaedia is written in a language specified in the Eighth Schedule to the Constitution. The deduction is admissible for the assessment years 1980-81 to 1984-85 (both inclusive). 31.2 In order to encourage the writing of such books, the Finance Act has extended the tax concession in section 80QQA for a further period of 5 years, i.e., for the assessment years 1985-86 to 1989-90 (both inclusive). [Section 23 of the Finance Act] Deduction of interest on monies borrowed to pay taxes. 32.1 Section 80V of the Income-tax Act provides for a deduction in respect of interest paid by the taxpayer on moneys borrowed for payment of income-tax. In the context of the policy of reducing the tax rates and removing concessions which are not considered to be necessary, the Finance Act has deleted this provision. 32.2 This amendment takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 24 of the Finance Act] Modification of the provisions relating to long-term capital gains in the case of companies . 33.1 Under the existing provisions in section 115 of the Income-tax Act, long-term capital gains relating to buildings or lands or any rights in buildings or lands are taxed at the rate of 40 per cent. in a case where the assessee is a company in which the public are substantially interested and the total income of the company (exclusive of long-term capital gains) does not exceed Rs. 1 lakh. In the case of other companies, the long-term capital gains relating to buildings or lands or any rights in buildings or lands are subjected to tax at the higher rate of 50 per cent. 33.2 As differential rates of income-tax with reference to the quantum of taxable income of companies have been discontinued by the Finance Act, 1983, this differential in rates in relation to such capital gains has also been discontinued by the Finance Act by amending section 115 of the Income-tax Act. Under the amended provision, long-term capital gains relating to buildings or lands or any rights therein will be chargeable to tax at a uniform rate of 50 per cent. in the case of all companies. 33.3 The amendment applies in relation to the assessment year 1986-87 and subsequent years. [Section 26 of the Finance Act] Modification of the provisions relating to certain incomes of non-residents. 34.1 Under the existing provisions of section 115E of the Income-tax Act, in the case of a "non-resident Indian", income-tax is payable at the rate of twenty per cent. of the "investment income" and income by way of long-term capital gains. The income-tax so calculated is increased by a surcharge at the rate of twelve and a half per cent. of such income-tax. 34.2 In view of the abolition of surcharge on income-tax in respect of all categories of non-corporate taxpayers, the Finance Act had deleted the requirement of payment of surcharge on income-tax by non-resident Indians under the aforesaid provision. 34.3 The amendment takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 27 of the Finance Act] Modification of the provisions relating to proceedings before income-tax authorities. 35.1 Under section 136 of the Income-tax Act, proceedings before an income-tax authority are deemed to be judicial proceedings within the meaning of sections 193 and 228 and for the purposes of section 196 of the Indian Penal Code. The Finance Act has amended the said section to also provide that an income-tax authority shall be deemed to be a Civil Court for the purposes of section 195, but not for the purposes of Chapter XXVI, of the Code of Criminal Procedure, 1973. This amendment is intended to secure that prosecution proceedings for offences under the relevant provisions of the Indian Penal Code may be launched on the complaint of the concerned income-tax authority. 35.2 The amendment takes effect from 1st April, 1974, that is, the date from which the Code of Criminal Procedure, 1973, came into force. [Section 28 of the Finance Act] Modification of the provisions relating to return of income. 36.1 Under section 139(1A) of the Income-tax Act, a person whose income chargeable under the head "Salaries" (exclusive of the value of all benefits or amenities not provided for by way of monetary payment) does not exceed Rs. 18,000 is not required to furnish a voluntary return of income, if certain conditions specified in this regard are fulfilled. In the context of the raising of the exemption limit, the Finance Act has raised the aforesaid limit of Rs. 18,000 to Rs. 24,000. 36.2 The amendment takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 29(a) of the Finance Act] Submission of report of audit of cost accounts. 37.1 Under section 139(9) of the Income-tax Act, a return of income is considered defective if certain conditions specified in this behalf are not fulfilled. One of the conditions is that where the accounts of the assessee have been audited, the return shall be accompanied by copies of the audited profit and loss account, balance-sheet and the auditor's report 37.2 With a view to facilitating scrutiny of accounts, the Finance Act has amended section 139(9) to also provide that where the cost accounts of an assessee have been audited under section 233B of the Companies Act, 1956, the return shall be treated as defective unless it is also accompanied by the report under that section. 37.3 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 29(b) of the Finance Act] Modification of the provisions relating to taxation of associations of persons where shares of members are indeterminate or unknown. 38.1 Section 167A(2) of the Income-tax Act provides that where the individual shares of the members of an association of persons in any part of the income of such association are indeterminate or unknown, the income-tax payable shall be the aggregate of the amount of income-tax on such part of the total income at the maximum marginal rate and the amount of income-tax which would have been chargeable if the remaining part of the total income were its total income. 38.2 The existing provisions are being misused by some taxpayers for tax avoidance. A large number of associations of persons are formed without specifying the shares of members in a small part of the income, with the result that such part gets taxed at the maximum marginal rate while the major portion of the income gets taxed at low rates of tax depending upon the size of the income. With a view to countering tax avoidance through this method, the Finance Act has amended section 167A to secure that, where the individual shares of the members of an association of persons in the whole or any part of the income of such association are indeterminate or unknown, income-tax will be charged on the whole of the total income of the association at the maximum marginal rate. 38.3 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 30 of the Finance Act] Provision for concessional taxation of consideration for know-how. 39.1 With a view to encouraging the development of indigenuous know-how, the Finance Act has made a special provision for taxation of lump sum consideration received or receivable for know-how. 39.2 The new section provides that where the time taken by an individual who is resident in India for developing any know-how is more than twelve months, he may elect that the gross amount of the lump sum consideration received or receivable by him during the previous year for allowing the use of such know-how, be spread equally over three years, namely, the year in which such amount is received or is receivable and the two immediately preceding years and charged to tax accordingly. On his exercising such an option, the assessments for the two preceding years, if already made, would be rectified under section 154 of the Income-tax Act and, for this purpose, the period of four years specified in sub-section (7) of section 154 for rectifying the assessment order shall be reckoned from the end of the financial year in which the assessment relating to the previous year in which the lump sum consideration is received or receivable by such individual is made. 39.3 For the purposes of this section, the expression "know-how" has the meaning assigned to it in new section 35AB inserted in the Income-tax Act by section 8 of the Finance Act. [Para. 15.2] 39.4 The new section will apply in relation to the assessment year 1986-87 and subsequent years. [Section 31 of the Finance Act] Raising of threshold for payment of advance tax in certain cases. 40.1 Income-tax is required to be paid in advance during every financial year in three instalments by specified dates on the assessee's current income (other than capital gains or income by way of winnings from lotteries, race winnings, etc.) liable to tax for the assessment year next following the said financial year. Advance tax is payable only where the income of the assessee subject to advance tax exceeds the specified limit. Under the existing provisions, the monetary limit specified in this behalf in the case of an assessee, other than a company, a local authority, a registered firm and a Hindu undivided family having at least one member whose total income of the previous year exceeds the exemption limit, is Rs. 15,000. 40.2 With the raising of the exemption limit in the case of individuals, Hindu undivided families (other than those having at least one member whose independent total income exceeds the exemption limit), associations of persons, unregistered firm, etc. from Rs. 15,000 to Rs. 18,000, the monetary limit specified for the purpose of payment of advance tax in respect of such assessees has been raised from Rs. 15,000 to Rs. 18,000 to coincide with the exemption limit in their case. A Hindu undivided family which has one or more members with taxable income exceeding Rs. 15,000 is required to pay advance tax if its income (exclusive of capital gains, etc.) exceeds Rs. 12,000. With the raising of the exemption limit, the aforesaid limit of Rs. 15,000 is also being raised to Rs. 18,000. 40.3 The amendments take effect from May 24, 1985, that is, the date on which the Finance Bill received the assent of the President and will, accordingly, apply in relation to advance tax payable during the financial year 1985-86 and subsequent years. [Section 32 of the Finance Act] Clarification regarding payment of income-tax in case of application to the Settlement Commission 41. Under the provisions of sub-section (2A) of section 245D, as inserted by the Taxation Laws (Amendment) Act, 1984, the applicant is required to pay the additional amount of income-tax payable on the income disclosed in the application within 35 days of the receipt of a copy of the order passed by the Settlement Commission. The relevant provision has been amended by the Finance Act to clarify that the assessee shall be required to pay the additional amount of income-tax payable on the income disclosed in the application to the Settlement Commission only if the Settlement Commission passes an order under sub-section (1) of section 245D allowing the application for settlement to be proceeded with. The amended provision takes effect retrospectively from October 1, 1984, that is, from the date the said sub-section was inserted by the Taxation Laws (Amendment) Act, 1984. [Section 33 of the Finance Act] Modification of the provisions relating to reduction or waiver of penalty under section 273A in certain cases. 42.1 Under the provisions of section 273A of the Income-tax Act, the Commissioner of Income-tax is empowered to reduce or waive the amount of penalty imposed or imposable on any assessee for, inter alia, concealment of particulars of income or for furnishing of inaccurate particulars of income. This power can be exercised in a case where the assessee makes voluntarily and in good faith, a full and true disclosure of his income prior to the detection by the Income-tax Officer of the concealment of the particulars of income or of inaccuracy of the particulars of income furnished by the assessee. 42.2 The Taxation Laws (Amendment) Act, 1984, inserted a new Explanation 2 in section 273A(1) of the Income-tax Act to provide that where books of account, cash, jewellery, etc., belonging to a person are seized during a search carried out under section 132 of the Income-tax Act, and within 15 days of such seizure, the person makes a full and true disclosure of his income to the Commissioner, such person shall be deemed to have made, for the purposes of section 273A(1)(b) of the Income-tax Act, full and true disclosure prior to the detection by the Income-tax Officer of the concealment of particulars of income or of the inaccuracy of particulars furnished in respect of such income. 42.3 In the context of the need to bring tax evaders to book, the grant of any immunity to persons who choose to come forward to declare their concealed income only after incriminating evidence has been found in their possession, will not be proper or justificable. The Finance Act has accordingly deleted the aforesaid Explanation. 42.4 The amendment takes effect from May 24, 1985, that is, the date on which the Finance Bill received the assent of the President and has been enacted into law. [Section 34 of the Finance Act] Amendment of provision relating to punishment for second and subsequent offences. 43.1 Section 278A of the Income-tax Act provides that where a person who has been convicted on an offence specified in that section is again convicted for the same offence, he shall be punishable for the second and every subsequent offence with rigorous imprisonment for a minimum term of six months and a maximum term of seven years with fine. 43.2 Section 269SS of the Income-tax Act debars persons from taking or accepting after June 30, 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. Section 276DD provides that if a person without reasonable cause or excuse, takes or accepts any loan or deposit in contravention of the aforesaid provision, he shall be punishable with imprisonment for a term which may extend to two years and shall also be liable to fine equal to the amount of such loan or deposit. 43.3 The Finance Act has amended section 278A of the Income-tax Act so as to also include an offence under section 276DD within the scope of section 278A. The effect of this amendment will be that a person convicted of an offence under section 276DD for the second and every subsequent time shall be punishable with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine. [Section 35 of the Finance Act] AMENDMENTS TO WEALTH-TAX ACT Withdrawal of exemption from wealth-tax in respect of business assets of charitable and religious trusts . 44.1 Under section 5(1)(i) of the Wealth-tax Act, any property held by an assessee under trust or other legal obligation for any public purpose of a charitable or religious nature in India is not included in the net wealth of the assessee. 44.2 By an amendment made in the Income-tax Act by the Finance Act, 1983, exemption from income-tax in respect of profits and gains of business of public charitable or religious trusts was withdrawn except in the case of trusts falling in specified categories. Conformably with the said provision, the Finance Act has amended the provisions of the Wealth-tax Act so as to withdraw the exemption from wealth-tax in respect of business assets of public charitable or religious trusts and institutions. However, in line with the provisions contained in the Income-tax Act, the assets held in business will continue to be exempt from wealth-tax in the following cases: (a) where the business is carried on by a trust wholly for public religious purposes and the business consists of printing and publication of books or publication of books or the business is of a kind notified by the Central Government in this behalf in the Official Gazette; (b) the business is carried on by an institution wholly for charitable purposes and the work in connection with the business is mainly carried on by the beneficiaries of the institution. 44.3 The amendment takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 37(a)(i) of the Finance Act] Modification of the provisions relating to exemption from wealth-tax in respect of certain assets. 45.1 Under the Wealth-tax Act, one house belonging to the taxpayer upto the value of Rs. 2 lakhs is exempt from wealth-tax. The value of specified assets held by the taxpayer upto Rs. 2,65,000 and the value of units in the Unit Trust of India or deposits under the National Deposit Scheme or both, up to an aggregate amount of Rs. 35,000, is also exempt from wealth-tax. The aggregate exemption under these provisions works out to Rs. 5 lakhs. 45.2 With a view to providing taxpayers with a wider choice of investing in tax-exempt assets, the Finance Act has deleted the separate ceiling limits in respect of the exemption of the aforesaid assets and provided an overall exemption up to Rs. 5 lakhs in respect of the aggregate value of these assets. However, the additional exemption upto Rs. 25,000 exclusively provided in respect of deposits under the National Deposit Scheme will continue to be available. 45.3 The amendment takes effect from 1st April, 1986, and will, accordingly, apply, in relation to the assessment year 1986-87 and subsequent years. 45.4 Under an existing provision exemption from wealth-tax in respect of deposits under the National Deposit Scheme is allowed only if the deposit is held by the taxpayer for a period of at least six months ending with the relevant valuation date. The Finance Act has removed the said restriction of period of holding in the case of deposits under the National Deposit Scheme. 45.5 The aforesaid amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 37(a)(ii) and 37(b) and (c) of the Finance Act] Modification of the provisions relating to reduction or waiver of penalty in certain cases. 46.1 Under the existing provisions of section 18B of the Wealth-tax Act, the Commissioner of Wealth-tax is empowered to reduce or waive the amount of penalty imposed or imposable on a person who has concealed the particulars of any asset or has furnished inaccurate particulars of any assets or debts. This power can be exercised in a case where the assessee makes, voluntarily and in good faith, a full and true disclosure of his assets prior to the detection by the Wealth-tax Officer of the concealment of particulars of assets or of the inaccuracy of the particulars furnished in respect of any asset or debt. 46.2 The Taxation Laws (Amendment) Act, 1984, inserted a new Explanation 2 to sub-section (1) of section 18B of the Wealth-tax Act to provide that where any books of account or other documents belonging to a person are seized under section 37A of the Wealth-tax Act and, within 15 days of such seizure, the person makes a full and true disclosure of his net wealth, such person shall be deemed to have made a full and true disclosure of his concealed wealth prior to detection by the Wealth-tax Officer. 46.3 In the context of the need to bring tax evaders to book, the immunity provided to persons who choose to come forward to declare their concealed wealth only after incriminating evidence has been found in their possession, is not regarded as proper or justifiable. The Finance Act has, accordingly, deleted the provisions providing immunity in such cases. 46.4 The amendment takes effect from 24th May, 1985, that is, the date on which the Finance Bill received the assent of the President and has been enacted into law. [Section 38 of the Finance Act] Clarification regarding payment of wealth-tax in case of application to the Settlement Commission. 47. Under the provisions of sub-section (2A) of section 22D, as inserted by the Taxation Laws (Amendment) Act, 1984, the applicant is required to pay the additional amount of wealth-tax payable on the wealth disclosed in the application within 35 days of the receipt of a copy of the order passed by the Settlement Commission. The Finance Act has amended the relevant provision to clarify that the assessee shall pay the additional amount of wealth-tax payable on the wealth disclosed in the application to the Settlement Commission only if the Settlement Commission passes an order under sub-section (1) of section 22D allowing the application for settlement to be proceeded with. The amended provision will take effect retrospectively from 1st October, 1984, that is, from the date the said sub-section was inserted by the Taxation Laws (Amendment) Act, 1984. [Section 39 of the Finance Act] Reduction in the rates of wealth-tax. 48. The rates of wealth tax applicable in the case of individuals and Hindu undivided families are laid down in Part I of Schedule I to the Wealth-tax Act. The said rate schedule has been substituted by a new rate schedule. The new rate schedule has been substituted by a new rate schedule. The new rate schedule also raises the exemption limit for wealth-tax from Rs. 1,50,000 to Rs. 2,50,000. Whereas the existing rate schedule did not provide for a nil rate slab, the new rate schedule has a nil rate slab up to Rs. 2,50,000. The existing rates of wealth-tax and the new rates of wealth-tax applicable in the case of an individual or Hindu undivided family (other than a Hindu undivided family with one or more members whose net wealth exceeds the exemption limit) are indicated in the Table below:- Table Existing rates New rates (a) Up to Rs. 2,50,000 1/2% (a) Up to Rs. 2,50,000 nil (b) Rs. 2,50,001 - 5,00,000 1% (b) Rs. 2,50,001 - 10,00,000 1/2% (c) Rs. 5,00,001 - 10,00,000 2% (c) Rs. 10,00,001 - 20,00,000 1% (d) Rs. 10,00,001 - 15,00,000 3% (d) Over Rs. 20,00,000 2% (e) Over Rs. 15,00,000 5% 49. Comparative incidence of wealth-tax at selected levels of net wealth in the case of individuals and Hindu undivided families (other than those having one or more members with independent net wealth exceeding the exemption limit) at the existing rates and new rates is indicated in the Table below:- Table Wealth Wealth-tax at existing rates Wealth-tax at new rates Tax relief Tax relief as percentage of tax in Col. (2) (1) (2) (3) (4) (5) (Rs.) (Rs.) (Rs.) (Rs.) (%) 2,50,000 1,250 Nil 1,250 100 5,00,000 3,750 1,250 2,500 66.67 10,00,000 13,750 3,750 10,000 72.73 15,00,000 28,750 8,750 20,000 69.57 20,00,000 53,750 13,750 40,000 74.42 25,00,000 78,750 23,750 55,000 69.84 50,00,000 2,03,750 73,750 1,30,000 63.80 50. The rates of wealth-tax applicable in the case of a Hindu undivided family with one or more members having net wealth exceeding the exemption limit have also been revised. Whereas the existing rate schedule did not provide for a nil rate slab, the new rate schedule provides a nil rate slab up to Rs. 1,50,000. The exemption limit for such Hindu undivided families, however, remains unchanged at Rs. 1,50,000. The existing rates of wealth-tax and the new rates of wealth-tax applicable in the case of such Hindu undivided families are indicated in the table below: Table Existing rates New rates (a) Up to Rs. 2,50,000 1½% (a) Up to Rs. 1,50,000 Nil (b) Rs. 2,50,001 - 5,00,000 2% (b) Rs. 1,50,001 - 5,00,000 1% (c) Rs. 5,00,001 - 10,00,000 3% (c) Rs. 5,00,001 - 10,00,000 2% (d) Over Rs. 10,00,000 5% (d) Over Rs. 10,00,000 3% 51. Comparative incidence of wealth-tax at selected levels of net wealth in the case of such Hindu undivided families is indicated in the Table below: Table Wealth Wealth-tax at existing rates Wealth-tax at new rates Tax relief Tax relief as percentage of tax in Col. (2) (1) (2) (3) (4) (5) (Rs.) (Rs.) (Rs.) (Rs.) (%) 2,50,000 3,750 1,000 2,750 73.33 5,00,000 8,750 3,500 5,250 60.00 10,00,000 23,750 13,500 10,250 43.16 15,00,000 48,750 28,500 20,250 41.54 20,00,000 73,750 43,500 30,250 41.02 25,00,000 98,750 58,500 40,250 40.76 50,00,000 2,23,750 1,33,500 90,250 40.34 52. The new rate schedules take effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 40 of the Finance Act] AMENDMENT TO INTEREST-TAX ACT 53.1 The Interest-tax Act, 1974, which was enacted as an anti-inflationary measure provides for the levy of a tax on the gross amount of interest received by scheduled banks on loans and advances made in India. 53.2 With a view to providing larger internal funds with banks for meeting their increasing social commitments, the Finance Act has provided that interest-tax will not be charged in respect of interest accruing or arising to scheduled banks after 31st March, 1985. [Section 41 of the Finance Act]