The Finance Act, 1986-Explanatory Notes on the provisions relating to direct taxes - Income Tax - 461/1986

The Finance Act, 1986-Explanatory Notes on the provisions relating to direct taxes Circular No.461 Dated 9/7/1986 INTRODUCTION The Finance Bill, 1986, as passed by Parliament received the assent of the President on 13th May, 1986, and has been enacted as Act No. 23 of 1986. This circular explains the substance of the provisions relating to direct taxes in the Finance Act, 1986. CHANGES MADE BY THE FINANCE ACT, 1986 2. The Finance Act, 1986 (hereinafter referred to as "Finance Act"), has,- (i) amended sections 10, 16, 23, 24, 32A, 43, 50, 54, 54E, 55, 58, 74, 74A, 80GG, 80HHA, 80L, 80T, 115A, 155, 193, 194B, 194BB and 204 of the Income-tax Act, 1961; (ii) inserted 6 new sections 32AB, 115BB, 133B, 269RR, 272AA, 276AB and also inserted a new Chapter XXC in the Income-tax Act, 1961; (iii) substituted section 80M of the Income-tax Act, 1961; (iv) omitted sections 80K, 80S, 80TT, 276AA and Twelfth Schedule to the Income-tax Act, 1961; (v) amended section 5 of the Wealth-tax Act, 1957; (vi) amended sections 3, 5, 18, 19A and Schedule to the Gift-tax Act, 1958; (vii) omitted section 6A of the Gift-tax Act, 1958; and (viii) amended section 4 of the Companies (Profits) Surtax Act, 1964. PROVISIONS IN BRIEF 3. The provisions in the Finance Act, 1986, in the sphere of direct taxes relate of the following matters:- (i) Prescribing the rates of income-tax on incomes liable to tax for the assessment year 1986-87; the rates at which income-tax will be deductible at source during the financial year 1986-87 from interest (including interest on securities), dividends, salaries, insurance commission, winnings from lotteries and crossword puzzles, horse races and other categories of income liable to such deduction under the Income-tax Act; rates for computation of "advance tax" and charging of income-tax on current incomes in certain cases for the financial year 1986-87. (ii) Abolition of surcharge on companies with immediate effect. (iii) Amendment of the Income-tax Act, 1961, with a view to granting relief to salaried taxpayers; exempting notional income from one self-occupied property; removing the disparity in the matter of liability to income-tax as between an employee getting house rent allowance and another provided with rent-free accommodation by the employer by enhancing the exemption for house rent allowance; simplifying and liberalising the taxation of capital gains; having a uniform and generally lower rate of tax on gross income from all royalties and fees for technical services; substituting the scheme of investment allowance with an investment deposit account scheme; empowering the income-tax authorities to collect prescribed information from potential and actual taxpayers; replacing the existing provisions relating to acquisition of properties by new provisions which will give the Government the pre-emptive right to purchase immovable property in certain cases; clarifying that interest in connection with the acquisition of an asset relatable to the period after such asset is first put to use shall not form part of "actual cost" of such asset for purposes of depreciation, etc.; levying a flat rate of tax of 40 per cent. on gross winnings from lotteries, crossword puzzles, horse races, etc.; discontinuing certain tax concessions; and certain other matters. (iv) Amendment of the Gift-tax Act, 1958, with a view to raising of the exemption limit, discontinuing the provisions relating to aggregation of gifts, withdrawal of exemption in respect of certain gifts, and levy of tax at a flat rate of 30 per cent. on the value of all taxable gifts. (v) Amendment of the Wealth-tax Act, 1957, with a view to exempting the bonds issued by a public sector company and enlarging the scope of exemption in respect of assets brought into India by persons of Indian origin. (vi) Amendment of the Companies (Profits) Surtax Act, 1964, with a view to discontinuing the levy of surtax with effect from the assessment year 1988-89. (vii) Subject to certain exemptions which have been indicated while dealing with the relevant provisions, the Finance Act follows the principle that changes in the rates of tax, as also in the provisions of the tax laws, should ordinarily be made operative prospectively in relation to current incomes and not in relation to income of past years. The provisions relating to deduction of tax at source have been generally made applicable with effect from 1st June, 1986. The substance of the main provisions in the Finance Act relating to direct taxes is explained in the following paragraphs. RATE STRUCTURE OF INCOME-TAX (i) Rates of income-tax in respect of incomes liable to tax for the assessment year 1986-87. 4.1 In respect of incomes of all categories of tax-payers (corporate as well as non-corporate) liable to tax for the assessment year 1986-87, 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, 1985, 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 1985-86. 4.2 The Finance Act, 1985, had allowed companies required to pay advance tax during the financial year 1985-86 to make a deposit with the Industrial Development Bank of India in lieu of the surcharge payable by them. The Finance Act, 1986, has accordingly made a provision that where a company has made a deposit during the financial year 1985-86 with the Industrial Development Bank of India under the Companies Deposits (Surcharge on Income-tax) Scheme, 1985, framed by the Central Government under section 2(7) of the Finance Act, 1985, 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 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. (ii) Rates for deduction of tax at source during the financial year 1986-87 from income other than "Salaries" and retirement annuities. 5. The rates for deduction of income-tax at source during the financial year 1986-87 from incomes, other than "salaries" and retirement annuities payable to partners of registered firms engaged in certain professions, have 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 crossword puzzles, income by way of winnings from horse races and income of non-residents (including non-resident Indians) other than salary income. There are certain changes in these rates as compared to the rates in force during the financial year 1985-86. In Part II of the Finance Act, 1985, the rates for deduction of tax at source in the case of non-corporate assessees on income by way of winnings from lotteries and crossword puzzles was 25 per cent. and that on income by way of winnings from horse races was 30 per cent. The rates for deduction in the aforesaid cases has been raised to 40 per cent. In the case of a company which is not a domestic company, the rates for deduction of tax during the financial year 1985-86 in respect of the income by way of royalty payable by the Government or an Indian concern under an approved agreement (other than royalty in respect of copyright in any book) made after 31st March, 1976, are 20 per cent. on lump sum royalty payment and 40 per cent. on the balance. The rate of deduction of tax on income by way of fees for technical services payable by the Government or an Indian concern under an approved agreement made after 31st March, 1976, is 40 per cent. The rate for deduction during the financial year 1986-87 in all the aforesaid cases will be 30 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 1986-87. 6. The rates for deduction of tax at source from "Salaries" in the case of individuals during the financial year 1986-87 and also for computation of "advance tax" payable during the 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 1986-87 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 1986-87 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 1986-87, assessment of persons who are likely to transfer property to avoid tax, where an order has to be passed in a case of search and seizure for calculating the amount of tax on the estimated undisclosed income, etc. (iv) Rates of tax applicable to individuals, Hindu undivided families, unregistered firms, etc., co-operative societies, registered firms and local authorities. 7. In the case of individuals, Hindu undivided families, unregistered firms, etc., the rates of income-tax have been specified in Paragraph A of Part III of the First Schedule to the Finance Act. 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. (v) Rates of tax applicable to companies. 8.1 In the case of companies, the rates of income-tax have been specified in Paragraph E of Part III of the First Schedule to the Finance Act. These rates are the same as specified in the corresponding Paragraph of Part I of the First Schedule. 8.2 Abolition of surcharge.-Surcharge on income-tax for purposes of the Union in the case of companies was hitherto levied at the rate of 5 per cent. of the income-tax. The levy of surcharge for the purposes of the Union has been abolished in the case of companies. (vi) Partially integrated taxation of non-agricultural income with income derived from agriculture. 9. As in the past, the Finance Act provides 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] AMENDMENTS TO INCOME-TAX (i) Receipts of casual and non-recurring nature-enhancement of exemption limit. 10. Under the existing provisions of section 10(3) of the Income-tax Act, any receipts which are of a casual and non-recurring nature, subject to certain exceptions, to the extent such receipts do not exceed 1,000 rupees in the aggregate, are not included in computing the total income of an assessee. The Finance Act has raised this exemption limit to Rs. 5,000 which will be applicable to the assessment year 1987-88 and subsequent years. [Section 3(a) of the Finance Act] (ii) Raising the exemption available in respect of house rent allowance. 11. Under section 10(13A), any special allowance granted by an employer to his employee to meet expenditure actually incurred on payment of rent for residential accommodation is exempt to such extent, not exceeding Rs. 400 per month, as may be prescribed by rules, having regard to the area or place in which such accommodation is situated. With a view to removing the disparity to the extent possible in the matter of liability to income-tax as between an employee getting house rent allowance and another provided with rent-free accommodation by the employer, the Finance Act has omitted the above ceiling of Rs. 400 per month. Consequently rule 2A of the Income-tax Rules, 1962, is being amended by a notification which is expected to be issued shortly. Under the proposed amendment, clause (d) of rule 2A and clause (iii) of the Explanation to the said rule will be omitted. Further, clause (c) of rule 2A will provide the limit of one-half of the amount of salary in the case of an assessee who is in receipt of house rent allowance in respect of a residential accommodation occupied by him which is situated at Bombay, Calcutta, Delhi or Madras and the limit of two-fifth of the amount of salary in respect of the accommodation situated at other places. This amendment will apply in relation to the assessment year 1987-88 and subsequent years. [Section 3(b) of the Finance Act] (iii) Modification of provisions relating to standard deduction in the case of salaried taxpayers. 12. At present, the salaried tax-payers are entitled to a standard deduction of 25 per cent. of their salary or Rs. 6,000, whichever is less. The Finance Act has increased the limit of this deduction to 30 per cent. of the salary or Rs. 10,000, whichever is less. This enhanced limit will be applicable from the assessment year 1987-88. [Section 4 of the Finance Act] (iv) Exemption of income from one self-occupied house property. 13.1 Under the existing provisions of section 23(2) of the Income-tax Act, the annual value of a self-occupied property is first determined in the same manner as if the property had been let and it is reduced by one-half of such amount or Rs. 3,600, whichever is less. Where the sum so arrived at exceeds 10 per cent. of the total income of the owner of the property, computed without including the income from such property and without making any deduction under Chapter VI-A of the Income-tax Act, the excess is disregarded. Where the assessee is owner of more than one such house used for the purposes of his own residence, the above concessional treatment applies only in respect of one residential house, which the assessee may specify in this behalf. In respect of residential houses other than the one whose annual value is reduced as above, the annual value is determined as if such houses had been let. Further, where the owner has only one residential house and it cannot be occupied by him due to his employment, business or profession being carried on at some other place, and the owner resides in a building which does not belong to him at the other place; the annual value in such case is taken as "nil" provided certain conditions are satisfied. 13.2 The Finance Act has amended section 23, modifying the method of determining the annual value of a self-occupied house property. The annual value, accordingly, will be determined as under:- 13.3 House property consisting of a house or a part of the house in the occupation of the owner for residence from which no other benefit is being derived by him. Annual value ( a ) If the property is not let during any part of the previous year. Nil ( b ) If the property is let in parts during the previous year. The annual value of the entire property will be first determined as if it is let. Out of the above, the annual value of the self-occupied portion will be de ducted for the full year. Further, for the let out portion, the proportionate annual value for the period during which that part was self-occupied is to be excluded. The balance will be the tax able annual value. ( c ) If the property is let during any part of the previous year. The annual value will be determined as if the property had been let. Out of the above, the proportionate value for the period for which it is self-occupied will be excluded and the balance will be the taxable annual value. 13.4 Where more than one house property is in the occupation of the owner for his residence in respect of which the assessee may specify one of such properties, the annual value shall be determined in the same manner as discussed at (a), (b) and (c) of para 13.3. In respect of the remaining properties, the annual value will be determined as if such house or houses had been let. 13.5 As a consequential amendment, section 23(2A) has been omitted. 13.6 Section 23(3) which has been substituted provides that where a house property consists of one residential house only and it cannot be actually occupied by the owner owing to his employment, business or profession being carried on at any other place compelling him to reside at that place in a building not belonging to him, its annual value shall be taken to be nil, provided the house is not actually let and no other benefit therefrom is derived by the owner. 13.7 The above amendments to section 23 shall apply in relation to the assessment year 1987-88 and subsequent years. [Section 5 of the Finance Act] (v) Restriction on deduction from income from house property. 14.1 By an amendment of section 24 of the Income-tax Act, it has been provided that where the self-occupied house property is acquired with the help of borrowed funds, a deduction in respect of interest payable up to a maximum of Rs. 5,000 per annum on such borrowed funds will be allowed. 14.2 This provision will be applicable from the assessment year 1987-88 onwards. [Section 6 of the Finance Act] (vi) Modification of the definition of "small scale industrial undertaking". 15.1 Section 32A(2)(b)(ii) of the Income-tax Act provides that investment allowance is admissible in respect of any machinery or plant installed in a small scale industrial undertaking for the purposes of business of manufacture or production of any article or thing, including an article or thing specified in the Eleventh Schedule of the Income-tax Act. An assessee which does not fall under the category of small scale industrial undertaking is denied the benefit of investment allowance if it is engaged in the manufacture or production of an article or thing listed in the Eleventh Schedule. Further, under section 80HHA of the Income-tax Act, an assessee is entitled to a deduction in the computation of his taxable income of an amount equal to 20 per cent. of the profits and gains derived from a small scale industrial undertaking set up in a rural area for ten initial assessment years. Under section 80-I of the Income-tax Act, an assessee owning a small scale industrial undertaking is entitled to a deduction in the computation of his taxable income of an amount equal to 20 per cent. of the profits and gains (25 per cent. in the case of a company) derived from a small scale industrial undertaking which may be engaged in the manufacture or production of any article or thing, including an article or thing of low priority specified in the Eleventh Schedule to the Income-tax Act for eight initial assessment years (10 years in the case of a co-operative society). 15.2 For the purposes of the above mentioned tax concessions, a "small scale industrial undertaking" has been defined as an industrial undertaking in which the aggregate value of the machinery and plant installed, as on the last day of the previous year, does not exceed Rs. 20 lakhs. With a view to promoting the growth of the small scale sector, the limit of investment in a small scale industrial undertaking was increased from Rs. 20 lakhs to Rs. 35 lakhs by the Department of Industrial Development, vide their Notification dated 18th March, 1985. In view of the increase in the aforesaid qualifying monetary limit, the Finance Act has amended sections 32A and 80HHA of the Income-tax Act to provide that an industrial undertaking will be regarded as a small scale industrial undertaking if the aggregate value of the machinery and plant (other than tools, jigs, dies and moulds) installed therein, as on the last day of any previous year ending after the 17th March, 1985, does not exceed Rs. 35 lakhs. In view of the Explanation 3 to section 80-I(2), the amended definition will automatically apply for the purposes of that section also. 15.3 This amendment will have retrospective effect and will apply in relation to the assessment year 1985-86 and subsequent years. [Sections 7(a)(ii) and 18 of the Finance Act] (vii) Other amendments to section 32A of the Income-tax Act. 16.1 As one of the measures of corporate tax reform announced in the Long-Term Fiscal Policy, the scheme of investment allowance has been replaced by the scheme of investment deposit account. Under the existing provisions of clause (c) of sub-section (2) of section 32A of the Income-tax Act, in the case of approved Indian companies any new machinery or plant installed for the purposes of business of repairs to ocean-going vessels or other powered craft, is entitled to investment allowance. As per section 32A(8), the Central Government may by notification in the Official Gazette, direct that the deduction allowable under section 32A of the Act shall not be allowed in respect of any ship or aircraft acquired or any machinery or plant installed after such date, not being earlier than three years from the date of such notification, as may be specified. 16.2 Since the scheme of investment allowance is being replaced by the new scheme of investment deposit account, there has to be a consequential change in the modality of allowing deduction for encouraging investment in new plant and machinery. In order to facilitate the switch over from the old scheme, in section 32A(2)(c), for the date 1st April, 1988, the dated 1st April, 1987 has been substituted by the Finance Act. Similarly, section 32A(8) has been amended to secure that the requirement of three years after which the notification for withdrawing the investment allowance shall be effective, is not necessary. The notification in this regard has been made. 16.3 By inserting a new sub-section (8B) in section 32A, it has been provided that no deduction by way of investment allowance shall be allowed in the case of an assessee who has claimed deduction allowable under the new section 32AB (relating to the new scheme of investment deposit account). However, the benefit of set off of the unabsorbed investment allowance for an earlier year will not be denied. This amendment will apply in relation to the assessment year 1987-88 and subsequent years. [Section 7(a)(i), (b) (c) of the Finance Act] (viii) Substitution of the provisions relating to investment allowance by an investment deposit account scheme. 17.1 The 1985-86 Budget had initiated a process of reform of the corporation tax. It had been announced that the scope for further reform would be examined, along two alternative lines as under:- (i) A further reduction in the rate of tax by 5 per cent. for the next year and withdrawal of surcharge and surtax in the third year along with withdrawal of the investment allowance in the phased manner; or (ii) retention of the investment allowance with no further cut in rates. 17.2 An open debate was invited on the relative merits of these alternatives before taking any decision. On a consideration of the related issues, the surcharge on the companies has been abolished with immediate effect and it has not been postponed to the third year, as envisaged earlier as per para 5.12 of the LTFP. Keeping in view, the interest of revenue, the surtax has been discontinued with effect from the assessment year 1988-89. The scheme of investment allowance has been replaced by a new scheme of investment deposit account. 17.3 One of the reasons for our having a high capital output ratio in the industry is that the tax concessions have so far favoured investment in assets per se rather than output generated from those assets. By the new scheme relating to investment deposit account along with the proposed high depreciation rates announced by the F.M., the retained earnings and internal resources generation of the companies would improve. As mentioned in paras. 5.12 to 5.18 of the LTFP, the investment allowance had tended to favour the larger and more established enterprises, partly because such concerns could set off investment allowance against profits of old established units without waiting for profits from fresh investments. The new scheme of investment deposit account will be neutral as between small and large companies and will also insulate the timing of investment decisions from tax considerations. This measure should help to reduce the premium on spending which taxation of business profit inevitably creates, and thus curb the conspicuous extravagance in the corporate sector. The new scheme should also help to neutralise the bias in favour of borrowing and needless capacity creation. The new scheme differs from the existing provisions of investment allowance as under:- (a) The existing provisions of the investment allowance apply to only those assessees- (i) who purchase a ship or aircraft, which is first put to use in the business of the assessee; or (ii) who install new machinery or plant in an industrial undertaking for the purposes only of business of construction, manufacture or production of any article or thing not specified in the Eleventh Schedule to the Income-tax Act. In the case of small scale industrial undertaking, this benefit is not denied even if such an undertaking produces a non-priority item listed in the Eleventh Schedule, like alcoholic spirits, tobacco preparations, cosmetics, etc. The new scheme is applicable to all existing types of assessees as also to the professionals and the leasing companies which have not leased out machinery to those industrial undertakings other than a small scale industrial undertaking, engaged in the manufacture or production of articles or things listed in the Eleventh Schedule to the Income-tax Act. In other words, the deduction is admissible to all the assessees who carry on "eligible business or profession", which as per section 32AB(2) means business or profession other than the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule (in case it is not a small scale industrial undertaking) and the business of leasing or hiring of machinery or plant to an industrial undertaking other than a small scale industrial undertaking engaged in the business of low priority items as specified in the list in the Eleventh Schedule. It may be clarified that the business of construction is an eligible business for the purposes of this provision. (b) In order to encourage a more productive use of capital leading to a low-cost economy, the benefits under the new investment deposit scheme shall be available only if there are profits in the eligible business or profession whereas the benefit of investment allowance is available even if there is no such profit, because the deduction is linked merely to the cost of the plant and machinery. (c) The acquisition of a ship or an aircraft or installation of plant and machinery, as the case may be, during the previous year is a condition precedent for availing of the benefit of the existing investment allowance, whereas the deduction under the new provisions can be availed of even before the ship or aircraft is acquired or the plant or machinery has been installed by making a deposit with the designated Development Bank. (d) The investment allowance is allowed at 25 per cent. of the actual cost of the plant, machinery, ship or aircraft to the assessee. As against this, under the new scheme, the entire cost of the ship or aircraft or plant or machinery will qualify for deduction, if the same is up to 20 per cent. of the profits of the eligible business or profession. (e) Under the new provisions, the deduction is not admissible unless the accounts of the business or profession of the assessee, other than a company or a co-operative society have been audited by an accountant and the assessee furnishes along with the return of his income, the report of such audit in the prescribed form, duly signed and verified by such an accountant. No such audit is required as a condition for availing of the benefit of the existing investment allowance. (f) Subject to the fulfilment of the required conditions, the benefit of investment allowance continues to be available if the sale or transfer of a ship or an aircraft or plant or machinery is made as per a scheme of amalgamation. Such deduction is not provided in the new scheme, because in the Indian context, amalgamations usually arise infrequently and that too only to take care of losing concerns or as a device for tax planning. 17.4 The other salient features of the scheme of the investment deposit account are as under: (a) Under section 32AB(1), it has been provided that deposits with the Development Bank or the purchase of a new ship, new aircraft, new machinery or plant should be out of income chargeable to tax under the head "Profits and gains of business or profession". However, for arriving at the book profit, a uniform system of accounting is yet to be enforced even in the organised sector. Hence, the term "profit of eligible business or profession" has been defined as per section 32AB(3) in order to ensure uniformity in determining the profits qualifying for deduction, as also to reduce uncertainty about the interpretation of this term. In terms of section 32AB(3)(a), it has been provided that the profits of eligible business or profession for the purposes of deduction under these provisions will mean, in a case where separate accounts in respect of such business or profession are maintained, an amount arrived at after deducting an amount equal to the depreciation computed in accordance with the provision of section 32(1) of the Income-tax Act from the amount of profits computed in accordance with the requirements of Parts II and III of the Sixth Schedule to the Companies Act, 1956, as increased by an amount equal to the depreciation, if any, debited in the audited profit and loss account. This implies that the profit has to computed, taking into account only the depreciation for the current year, as admissible under the Income-tax Act. Further, Part II of the Sixth Schedule to the Companies Act lays down the requirements as to profit and loss account. These requirements, as per the provisions of section 32AB(3) of the Income-tax Act, will be applicable in the cases of corporate as well as non-corporate assessees. 17.5 The requirements as per Part II of the Sixth Schedule to the Companies Act, include the following:- (i) The profit and loss account shall be so made out as clearly to disclose the result of the working of the company during the period covered by the account and shall disclose every material feature, including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of exceptional nature. (ii) The profit and loss account shall set out the various items relating to the income and expenditure under the most convenient heads; and in particular shall disclose the turnover, giving the amount of sales in respect of each class of goods dealt with by the company and indicating the quantities of such sales for each class separately. (iii) The commission, brokerage and discount on sales paid will be indicated. (iv) In the case of a manufacturing concern, the value of the raw material consumed, giving item-wise break-up and indicating the quantities thereof are to be indicated. The important basic raw material consumed, giving item-wise break-up and indicating the quantities thereof are to be indicated. The important basic raw materials should be shown as separate items as far as possible. The intermediates or components procured from other manufacturers may, if their list is too large to be included in the break-up, be grouped under suitable headings, without mentioning the quantities, provided all those items which in value individually account for 10 per cent. or more of the total value of raw material consumed, shall be shown as separate and distinct items with quantities thereof in the break-up. (v) The quantity and other particulars of green tea produced and processed by such companies separately should be disclosed together with the opening and closing stock thereof. If such tea is purchased from outside source, the value also of the tea purchased will be disclosed in addition to the quantity and other particulars. (vi) The opening and closing stock of goods produced or purchased may be given, disclosing the break-up in respect of each class of goods and indicating the quantities thereof. (vii) In the case of all concerns having work-in-progress, the amounts for which such works have been completed at the commencement and at the end of accounting year should be given. (viii) The amount provided for depreciation, renewals or diminution in the value of fixed assets should also be given. If such provision is not made by means of depreciation charge, the method adopted for such provision may be disclosed. If no provision is made for depreciation, this fact may be stated. The quantum of arrears of depreciation computed should be disclosed by way of a note. (ix) The amount of interest on debentures and other fixed loans, the charge for income-tax and other Indian taxation on profits, etc., should be disclosed. (x) The expenditure incurred on consumption of stores and spare parts, power and fuel, rent, repairs, salaries, wages and bonus, contribution to provident fund, etc., may be shown separately for each item. 17.6 The definitions as per Part III of the Sixth Schedule to the Companies Act are as under:- (i) The term provision means any amount written off or retained by way of providing for depreciation, renewals or diminution in value of asset or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy. (ii) The expression "reserve" shall not include any amount written off or retained by way of providing for depreciation, renewal or diminution in value of the assets or retained by way of providing for any known liability. (iii) The expression "capital reserve" shall not include any amount regarded as free for distribution through the profit and loss account. (iv) The expression "revenue reserve" shall mean any reserve other than the capital reserve. (v) The expression "liability" shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities. (b) In a case where in respect of eligible business or profession, no separate accounts are maintained or available, the profits of the eligible business or profession shall be such amount which bears to the total profits of the business or profession of the assessee after allowing depreciation under section 32(1), the same proportion as the total sales, turnover or gross receipts of the eligible business or profession bear to the total sales, turnover or gross receipts of the business or profession carried on by the assessee. For example, if the gross receipts of business are Rs. 100 which includes gross receipts of eligible business at Rs. 40 then, in case, the total profit is Rs. 10, the profits of eligible business qualifying for deduction will be Rs. 4. (c) To avail of the deduction under this provision, the deposit has to be made in a Development Bank before the expiry of six months from the end of the previous year or before furnishing the return of income whichever is earlier. (d) The Development Bank in the case of an assessee carrying on the business of growing and manufacturing tea in India means the National Bank for Agriculture and Rural Development. In the case of other assessees, Development Bank means the Industrial Development Bank of India and includes such bank or institution as may be specified in the scheme in this behalf. (e) The purpose of withdrawal from the Development Bank may be the purchase of any new ship, new aircraft, new machinery or plant or the repayment of "term loans" (as per scheme) utilised for such purchases. (f) No deduction shall be allowed in respect of any amount utilised for the purchase of (i) any machinery or plant to be installed in any office premises or residential accommodation including any accommodation in the nature of a guest house; (ii) any office appliances (not being computer); (iii) any road transport vehicle; and (iv) any machinery or plant the whole of the actual cost of which is allowed as a deduction whether by way of depreciation or otherwise in computing the income from business or profession of any one previous year. Computer for this purpose, is not a plant or a machinery. Hence in respect of any amount utilised for the purchase of a computer installed even in office premises, deduction will be admissible. (g) The term "computer" does not include calculation machines and calculating devices. (h) For getting the benefit under this provision, the deposit in the Development Bank or the purchase of any new ship, plant, etc., should be out of income from the eligible business or profession. There is an underlying reason for this pre-condition. As mentioned in the Long Term Fiscal Policy (Para. 5.14) since the benefit of investment allowance is related to the cost of plant and machinery irrespective of how it is financed, such a benefit had created a distortion in the profitability of companies depending on the extent to which they were able to find the resources internally or through borrowings to acquire the new ship, plant, etc. That being so, under the Investment Deposit Scheme, deduction will be admissible only if the deposit is made or the ship, plant, etc., is acquired out of income chargeable to tax under the head "Profits and gains of business or profession". 17.7 As provided in section 32AB(10), no deduction shall be allowed under section 32AB(1) in the case of an assessee carrying on business of growing and manufacturing tea in India who has claimed the deduction under section 33AB relating to the tea development account. However, any excess deposit made by such an assessee under section 33AB(2) may not be treated as a bar to deposit further amount under section 32AB for the assessment year 1987-88, so long as the overall celling of 20 per cent. of eligible profits is not exceeded. As this problem is limited to only one year, no enabling provision in law is considered necessary for this purpose. 17.8 Consequential amendments have been made in section 80VVA and in the Eleventh Schedule to the Income-tax Act. 17.9 The new section will apply in relation to the assessment year 1987-88 and subsequent years. 17.10 A notification relating to the Investment Deposit Account Scheme, 1986, is being published separately in the Gazette. The Scheme shall provide that a depositor may utilise the amount deposited under the Scheme for the purposes of purchase of new ship or new aircraft or new machinery or plant for the purposes of his business or profession, or for the purpose of purchase of new computers or for repayment of principal amount of term loans contracted after 31st March, 1986, and taken for a period of 3 years or more from certain financial institutions or from scheduled banks or from other specified institutions. The Scheme shall also lay down the manner of deposit as well as the manner of withdrawals by the depositors. [Section 8, 39(b)(i) and (d) of the Finance Act] (ix) Modification in the definition of "Actual Cost" for the purposes of depreciation, investment allowance, etc. 18.1 Under the existing provisions of section 43(1) of the Income-tax Act, "actual cost" means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. It was found that certain tax-payers supported by some court decisions had resorted to a major change in accounting practice by capitalising the interest paid or payable in connection with acquisition of an asset relatable to the period after such asset is first put to use. This capitalisation implies inclusion of interest in the actual cost of the asset for the purposes of claiming depreciation, investment allowance, etc., under the Income-tax Act. 18.2 It is an accepted accounting principle that where an asset is acquired out of borrowed funds, the interest paid or payable on such funds constitutes the cost of borrowing and not the cost of the asset acquired with those funds. It is for this reason that as per the clear guidelines issued by the Institute of Chartered Accountants of India, the interest on moneys which are specifically borrowed for the purchase of a fixed asset may be capitalised only relating to the period prior to the asset coming into production, i.e., relating to the erection stage of the asset. However, once the production starts, no interest on borrowings for the purchase of such assets should be capitalised. In spite of these clear guidelines, as also the consistent view of the Department in this matter, some tax-payers had adopted a contrary stance and had capitalised such interest. The first decision in favour of this stance had been rendered on May 13, 1974, in the case of CIT v. J.K. Cotton Spinning and Weaving Mills Ltd. ([1975] 98 ITR 153. This decision as well as the subsequent decisions were contrary to the legislative intent. Hence, in order to enable the Government to collect the tax legitimately due to it for the earlier years, a clarificatory amendment to this provision has been made retrospectively from 1st April, 1974 and will, accordingly, apply in relation to the assessment year 1974-75 and subsequent years. [Section 9 of the Finance Act] (x) Liberalisation and rationalisation of the provision relating to capital gains. 19. The Government had announced its intention as per the LTFP (Paras 5.24 to 5.26) to liberalise the taxation of capital gains. Accordingly, the following amendments have been made: 20.1 Liberalisation of the provisions permitting tax-payers to substitute the actual cost of asset by its fair market value for purposes of computing capital gains. Section 55(2) of the Income-tax Act provides that where the capital asset is acquired before the first day of January, 1964, the tax-payer, at his option, may substitute the fair market value of the asset on that day in place of its actual cost of acquisition. Also, in a case where the capital asset became the property of the tax-payer by any of the modes of acquisition specified in section 49(1) of the Income-tax Act, as for example under a gift or will or by succession, etc., and such asset became the property of the previous owner before the first day of January, 1964, the tax-payer has the option of substituting the fair market value of the asset as on first January, 1964, in place of the cost of acquisition to the previous owner. With a view to obviating the practical difficulty in establishing the fair market value as on 1st January, 1964, the said date has been advanced to 1st April, 1974. This is the relevant date for the purpose of sections 50 and 55 of the Income-tax Act also. This will mitigate in a large measure the hardship arising from the taxation of such gains in so far as they are attributable to inflation. 20.2 The amendments will be applicable for the assessment year 1987-88 and subsequent years. [Sections 10 13 of the Finance Act] 21.1 Modification in the provisions relating to exemption of capital gains arising on the transfer of a residential house. Section 54 of the Income-tax Act provides that the long-term capital gains arising from the transfer of a residential house are exempt from income-tax if the assessee, within a period of one year before or after the date of transfer purchases or within a period of three years after the date of such transfer constructs a residential house. The exemption of capital gains is restricted to the amount of such gains utilised for the purchase or construction of the new residential house. Where the amount of capital gains is greater than the cost of the house so purchased or constructed, the balance amount of the capital gains is charged to tax. If, however, the amount of capital gains is equal to or less than the cost of the residential house so purchased or constructed, the amount of capital gains is totally exempted from income-tax. The process of selling or purchasing a residential house either to or from a private source or a Government agency or a co-operative society involves steps which in most cases require a longer time frame than one year. The assessees, therefore, would experience difficulty in complying with the time-limit of one year for purchasing a new house after the date of transfer of the residential house. Hence, by amending this provision, the period of one year has been extended to two years. Where the transfer is by way of compulsory acquisition and the compensation awarded is enhanced by any court, tribunal or other authority, the period of one year after the date of receipt of the additional compensation for purchase of a residential house has also been increased to two years. As a consequential amendment in sub-sections (8) and (8A) of section 155 of the Income-tax Act meant for amending the assessment order, the period of one year has similarly been raised to two years. 21.2 These amendments will apply in relation to the assessment year 1987-88 and subsequent years. [Sections 11 and 28 of the Finance Act] 22.1 Exemption in respect of "long-term capital gains" in cases where the net consideration received or accruing as a result of transfer is invested or deposited in specified financial assets. Under the provisions of section 54E of the Income-tax Act, capital gains arising from the transfer of a "long-term capital asset" are exempted from income-tax if the net consideration received as a result of the transfer is invested or deposited in specified financial assets within a period of six months from the date of the transfer. Where only a part of the consideration is so invested or deposited, the exemption from tax on capital gains is granted proportionately. Where the capital asset is compulsorily acquired by the Government and additional compensation is paid to the taxpayer in any subsequent year, the capital gain attributable to the additional compensation received is also exempted from the tax if the amount of the additional compensation is invested or deposited in the specified financial assets within a period of six months from the date on which such additional compensation is received. Under the existing provisions, the financial assets specified for the purpose are- (a) notified Central Government securities; (b) notified special series of units of the Unit Trust of India; (c) notified National Rural Development Bonds; and (d) notified debentures issued by the Housing and Urban Development Corporation Ltd. With a view to promoting investments in desired channels and to enlarge the option available to the assessees in this regard, notified bonds issued by public sector companies have been included as specified assets for this purpose. As per Explanation inserted "public sector company", for this purpose, means any corporation established by or under any Central, State or Provincial Act or a government company as defined in section 617 of the Companies Act, i.e., a company in which not less than fifty-one per cent. of the paid-up share capital is held by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a Government company. The holding of fifty-one per cent. or more of shares (equity or even preference shares carrying no voting rights) by the Central and/or any State Government-and not municipal and other local authorities or public corporations-makes a company, a Government company. 22.2 The amendment will be applicable for the assessment year 1987-88 and subsequent years. [Section 12 of the Finance Act] 23.1 Modification of the provisions relating to deduction in respect of long-term capital gains in the case of non-corporate tax payers. Under the provisions of section 80T read with Schedule XII to the Income-tax Act, in respect of long-term capital gains in the case of non-corporate tax-payers, an initial deduction of Rs. 5,000 is admissible and, in addition, a further deduction is admissible, depending upon whether the capital gains relate to buildings or lands or any rights therein on the one hand and other assets on the other, as also the number of years for which an asset has been held. With a view to rationalising the scheme of taxation of capital gains, the initial deduction has been raised from Rs. 5,000 to Rs. 10,000. In addition, if such gains relate to buildings or lands or any rights in buildings or lands, a deduction of an amount of 50 per cent. of the capital gains will be admissible. By another amendment, the deduction relating to the transfer of gold, bullion or jewellery will be treated on the same footing as buildings or lands or any rights in such assets. If the long-term capital gains relate to any other asset, the amount of deduction will be 60 per cent. Thus, the deduction will be allowed irrespective of the period for which the long-term capital gains has been held. In a case where the long-term capital gains relate to buildings or lands and rights in such assets as also to other capital assets, the initial deduction of Rs. 10,000 will be given first in respect of long-term capital gains relating to buildings or lands and then in respect of gold, bullion or jewellery and if the amount of such capital gains is less than Rs. 10,000, the balance will be deducted from long-term capital gains relating to any other capital asset. As a consequential measure, the Twelfth Schedule to the Income-tax Act has been omitted. 23.2 The amendments will apply in relation to the assessment year 1987-88 and subsequent years. [Sections 23 and 38 of the Finance Act] 24.1 Carry forward of long-term capital loss. As per the proviso to section 74(1)(a) of the Income-tax Act, where the net result of the computation under the head "Capital gains" is a loss in respect of any assessment year, the net loss relating to long-term capital assets in the case of assessees other than companies is not allowed to be carried forward unless it exceeds Rs. 5,000. Since the limit of initial deduction in respect of long-term capital gains has been raised from Rs. 5,000 to Rs. 10,000 as a consequential amendment, the limit under the proviso to section 74(1)(a) of the Income-tax Act has also been raised to Rs. 10,000. 24.2 The amendment will apply in relation to the assessment year 1987-88 and subsequent years. [Section 15 of the Finance Act] (xi) Withdrawal of certain tax concessions. 25.1 Deduction in respect of dividends attributable to profits and gains from new industrial undertakings or ships or hotel business. Under the existing provisions of section 80K of the Income-tax Act, any dividends paid by a company out of profits in respect of which the company is entitled to a deduction under section 80J are exempt from income-tax in the hands of the shareholders. However, the dividends distributed out of profits derived from industrial undertakings, hotels and ships which, respectively, went into production or started functioning or were put to use after 31st March, 1976, are not entitled to the aforesaid tax exemption. With a view to withdrawing concessions which are no longer relevant, the Finance Act has deleted section 80K of the Income-tax Act. As a consequential measure, sub-section (2) of section 80L, sub-section (2) of section 80M, clause (xxiv) of sub-section (1) of section 80VVA and sub-section (3) of section 197 of the Income-tax Act, have been deleted and amendment made in section 80A(3). 25.2 These amendments will take effect from 1st April, 1987, and will apply in relation to the assessment year 1987-88 and subsequent years. [Sections 19, 20(b), 21, 39(a)(i), (b)(ii) and (c)(ii) of the Finance Act] 26.1 Deduction in respect of compensation for termination of managing agency, etc., in the case of assessees other than companies. As per section 80S of the Income-tax Act, a non-corporate tax-payer is allowed a deduction of an amount equal to 25 per cent. of income by way of compensation for termination of managing agency of certain types subject to a maximum limit of deduction of Rs. 1 lakh. This provision applies to a very small number of taxpayers. Even in the case of those taxpayers, the relief available is only marginal unless the amount of compensation is very large. Besides, there was little justification for such a concession which was amenable to abuse in cases where the termination of managing agency was so arranged by the assessee as to reduce the liability for tax. Hence, this provision has been withdrawn by the Finance Act. A consequential amendment has been made in section 80A(3). 26.2 The amendment will apply in relation to the assessment year 1987-88 and subsequent years. [Sections 22 and 39(a)(ii) of the Finance Act] 27.1 Deduction in respect of winnings from lottery. Under section 80TT of the Income-tax Act, in computing the taxable income of a non-corporate entity, the whole of the income by way of winnings from any lottery is excluded from the taxable income in cases where the winnings do not exceed Rs. 5,000. Where the winnings exceed Rs. 5,000, 50 per cent. of such excess is allowed as a deduction. There has been a tremendous growth in the number of lotteries since 1972 when these provisions were first enacted. It has been found that in a large number of cases, lottery winnings have provided a medium to the assessees to camouflage their unaccounted income wealth. Under a separate amendment, income by way of winnings from lotteries will be taxed at a flat rate of 40 per cent. In line with the aforesaid amendment, the deduction under section 80TT has been discontinued. However, winnings up to Rs. 5,000 will be exempt as they can come under the general exemption under section 10(3) subject to there not being any other casual and non-recurring income. Consequential amendment has been made in section 80A(3). 27.2 The amendments will apply in relation to the assessment year 1987-88 and subsequent years. [Sections 24 and 39(a)(iii) of the Finance Act] (xii) Modification in the provisions relating to deduction of tax at source. 28. Winnings from lotteries or crossword puzzle. Under the existing provisions of section 194B of the Income-tax Act, any person responsible for paying to any other person any income by way of winnings from lotteries or crossword puzzles in excess of Rs. 1,000 is required to deduct income-tax on such payments at the rates in force. By an amendment, the aforesaid limit has been raised from Rs. 1,000 to Rs. 5,000. This amendment takes effect from 1-6-1986. [Section 30 of the Finance Act] 29. Winnings from horse races. As per the provisions of section 194BB of the Income-tax Act, a book-maker or a licencee for horse races in any race course or for arranging any wagering or betting in any race course responsible for paying to any person any income by way of winnings from any horse race in excess of Rs. 2,500 is required to deduct income-tax on such payments at the rates in force. The Finance Act has raised the aforesaid limit from Rs. 2,500 to Rs. 5,000. [Section 31 of the Finance Act] 30.1 Modification of the definition of the expression "person responsible for paying" for the purpose of deduction of tax at source from long-term capital gains in the case of a non-resident Indian. Under the provisions of section 195 of the Income-tax Act, any person responsible for paying to a non-resident any interest (other than "Interest on securities") or any other sum, not being dividends, which is chargeable under the Income-tax Act, is liable to deduct income-tax thereon at the rates in force. With a view to simplifying the procedure for the tax deduction at source and to avoid delay and inconvenience in the case of non-resident Indians wishing to remit the sale proceeds of "foreign exchange assets" [as defined in section 115C(b)], section 204 of the Income-tax Act which defines the expression "person responsible for paying" has been amended to provide that where the sum payable to a non-resident Indian represents consideration for the transfer by him of any foreign exchange asset (other than a short-term capital asset), the "authorised dealer" responsible for remitting such sum or crediting such sum to his Non-resident (External, Account, shall be the person responsible for the deduction of tax as provided for under section 195 of the Act. For this purpose, 'non-resident Indian' and 'foreign exchange asset' shall have the same meaning as in Chapter XII-A of the Income-tax Act. Further 'authorised dealer' shall have the same meaning as in section 2(b) of the Foreign Exchange Regulation Act, 1973. Under the said section 2(b) read with section 6 of the FERA, 'authorised dealer' means the bank authorised by the Reserve Bank to deal in foreign exchange. The authorised dealers have been performing the following functions:- (i) To deal in foreign currency; (ii) To approve application for purchase of foreign exchange; (iii) To maintain rupee account in the name of non-residents; (iv) To maintain foreign currency account in the name of non-residents and predominantly owned overseas bodies corporate. 30.2 This provision of making the authorised dealer responsible for deducting and paying tax to Government will also achieve the purpose of integrating the exchange control procedure with tax concessions. Accordingly, the Reserve Bank will issue necessary guidelines to the authorised dealers to enable them to permit remittance of such long-term capital gains subject to the deduction of tax at a rate of 20 per cent. thereon without production of a no objection certificate from the income-tax authorities. It will be the responsibility of the Reserve Bank to obtain a declaration from the seller of a specified asset [in the application under section 19(5) of the FERA or in the suitable form] that the asset sold by him is a capital asset and no stock-in-trade. Also that the capital asset was held by him for more than 36 months. In order to facilitate verification of this kind of statement, hereafter, when a foreign exchange asset is initially purchased by a non-resident Indian, a declaration may be obtained from him that the same is acquired as capital asset and not as stock-in-trade. 30.3 The amendment is effective from 1st June, 1986. [Section 32 of the Finance Act] (xiii) Provision of a flat rate of tax on winnings from lotteries, crossword puzzles, races, including horse races, etc. 31.1 Under the existing provisions, any income by way of winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever is chargeable to tax under the head "Income from other sources" along with the other income of an assessee. By inserting a new section 115BB in the Income-tax Act, it has been provided that any income of a casual and non-recurring nature of the type referred to above, shall be charged to income-tax at a flat rate of 40 per cent. This provision will, however, not apply to income from the activity of owning and maintaining race horses. For this purpose, a new sub-section has been added to section 58 to provide that no deduction shall be allowed in respect of any expenditure or allowance in computing the income from the aforesaid sources. What has to be borne in mind is that apart from the general exemption of Rs. 5,000 under section 10(3), no further allowances or deductions are admissible against the gross winnings except in cases where there is a diversion by overriding title as in the case of certain lotteries where a certain percentage has to be foregone to the Government/agency conducting the lotteries. Consequential amendment has also been made in section 197(1)(a) of the Income-tax Act. 31.2 These amendments will apply in relation to the assessment year 1987-88 and subsequent years. [Sections 14, 26 and 39(c)(i) of the Finance Act] (xiv) Modification of the provisions relating to losses from certain specified sources falling under the head "Income from other sources". 32.1 As mentioned above, winnings from lotteries, crossword puzzles, races including horse races, card games, other games or from gambling or betting is chargeable to tax under the head "Income from other sources". Section 74A(1) provides that the losses from the aforesaid sources will be allowed to be set off only against income from the same source and the losses not so set off relating to these sources incurred during a year are not allowed to be carried forward for set off against any income of a subsequent year. Under the provisions of section 74A(3) of the Act, however, losses arising from the activity of owning or maintaining race horses for running in horse races are entitled to be carried forward and set off against the income from the source including horse races, in a subsequent year. The benefit of carry forward and set off of such losses is allowed for four assessment years next following the assessment years for which the loss was first computed. In view of the insertion of a new section 115BB in the Act levying a flat rate of tax on winnings from lotteries, crossword puzzles, races including horse races, etc., sub-sections (1) and (2) of section 74A of the Act have been deleted. Sub-section (3) has been amended to provide that in the case of a tax-payer, being the owner of horses maintained by him for running in horse races, the amount of loss incurred in the activity of owning or maintaining such race horses in any assessment year shall not be set off against income, if any, from any other source and shall be allowed to be carried forward to the four assessment years next following the assessment year for which such loss was first computed for being set off against income, if any, from the same activity. 32.2 These amendments will apply in relation to the assessment year 1987-88 and subsequent years. [Section 16 of the Finance Act] (xv) Modification relating to limit of deduction in respect of rent paid. 33.1 Under the provisions of section 80GG of the Income-tax Act, any expenditure incurred by an assessee, other than those covered under section 10(13A) of the Income-tax Act, in excess of 10 per cent. of his total income towards payment of rent is allowed as deduction in computing his total income. The amount of deduction is subject to a ceiling of Rs. 400 per month or 15 per cent. of his total income of the year whichever is less. With a view to liberalising the provisions of this section, by an amendment brought about by the Finance Act, the monetary ceiling of deduction has been raised from Rs. 400 per month to Rs. 1,000 per month. The ceiling of deduction in terms of percentage of total income has been raised from fifteen per cent. to twenty-five per cent. The lower of the two ceilings now stipulated will be admissible as deduction as at present. 33.2 The amendment will be applicable in relation to the assessment year 1987-88 and subsequent years. [Section 17 of the Finance Act] (xvi) Uniform rate of tax on royalty and fees for technical services in the case of foreign companies. 34.1 Under the existing provisions of section 115A of the Income-tax Act, the amount of income-tax payable on the gross amount of income by way of royalty or fees for technical services received by a foreign company from an Indian concern or from Government is as under:- (i) Twenty per cent. of such income as consists of lump sum consideration for the transfer outside India of the technical know-how; (ii) Forty per cent. on the balance of such income. 34.2 The basis for the aforesaid flat rate of tax on royalty and fees for technical services was a sample study made by the Income-tax Department, prior to the enactment of these provisions with effect from 1st June, 1976, which showed that the expenses claimed against royalty income (then being taxed at the rate of fifty per cent. on net basis) were around twenty per cent. and hence the flat rate of tax at forty per cent. was determined. In view of the position that the lump sum consideration paid to foreign companies for the supply of technical know-how, drawings, designs and documentations, etc., abroad were not taxable prior to 1976, it was decided that such lump sum amount should be taxed at the concessional rate of twenty per cent. of the gross amount of such payments. 34.3 It may be mentioned that when the provisions of section 115A of the Income-tax Act were enacted, it was felt that it might be difficult to segregate the royalty payment relating to the supply of know-how simpliciter from the payment relatable to the technical service. This is because of the fact that a number of our technical collaboration agreements envisage composite situations where the collaborator tenders various types of services of technical nature apart from making available patents and know-how. It had been apprehended at that time that a higher rate of tax on royalty might result in inflating fees for technical services. Hence a uniform rate of tax of forty per cent. for both royalty and technical services fees was prescribed. It may appear to be ironical that with the passage of time, the lower rate of tax at 20 per cent. applicable to lump sum payments for supply of technical know-how abroad has given rise to the problems which had been apprehended relating to royalty vis-a-vis fees for technical services. It has been found that the foreign collaborators tend to take more by way of lump sum which attracts lower rate of tax than by way of royalty and in some cases payments for grant of licence for use in India of technical process are camouflaged as lump sum payments abroad. This is also not in the interest of absorption and adaptation of imported technology. An agreement for transfer of technology in India is more conducive, when compared to an agreement for lump sum payment, to self-reliance in our industrial production. Further, the differential rates of tax have been found to be open to abuse and have also given rise to litigation. Hence, by an amendment of section 115A of the Income-tax Act, the tax rate on lump sum payments has been increased from twenty per cent. to thirty per cent. and the tax rate on royalty payments and fees for technical services has been reduced from forty per cent. to thirty per cent. This will result also in reducing the cost of technology to Indian concerns thus enabling them to opt for the latest rather than intermediate technology and will encourage the absorption and adaptation of imported technology. 34.4 The amendment will apply in relation to the assessment year 1987-88 and subsequent years. [Section 25 of the Finance Act] (xvii) Extension of power of survey. 35.1 It was announced in the long-term fiscal policy (paras. 4.4 and 4.5) that an important objective of the said policy must be to ensure that income-tax makes a larger contribution to revenue and that the decline in the share of direct taxes has to be reversed. This is possible only if the tax base is broadened so that the number of taxpayers increases automatically with the growth of the economy. In order to achieve this objective, the Department has necessarily to obtain information about the incomes of such people who are liable to tax but are not filing their returns of income. Information is also needed for detection of evasion of taxes in respect of taxpayers who are filing returns of income. For this purpose, the Department has quite often to launch, door-to-door survey in specified business localities in order to identify persons who are earning taxable income but are not filing any return of income. Hence, by insertion of a new section 133B in the Income-tax Act, an income-tax authority has been authorised to enter any business premises for obtaining such information as may be prescribed. Further, at present, under section 133A(1) of the Income-tax Act, an Inspector of Income-tax has to get separate authorisation from an I.T.O. with respect to each place or business premises to be surveyed. This generates tremendous workload and results in delaying the survey operations. In order to overcome this difficulty, an I.T.O. has been empowered under the new section to authorise an Inspector of Income-tax with respect to a specified locality. The power of the income-tax authorities to collect the prescribed information has been restricted to business premises only for the present. The prescribed information will relate, inter alia, to the sources of income of the occupant of a business premises, the nature of business/profession, the details regarding the account books, bank accounts and stock-in-trade, etc. 35.2 The new section 272AA provides for penalty extending up to Rs. 1,000 for failure to comply with the provisions of section 133B. 35.3 These provisions are effective from 13th May, 1986. [Sections 27 and 35 of the Finance Act] (xviii) Measures for raising resources for the public sector. 36.1 Under the existing provisions of section 80L of the Income-tax Act, interest on such debentures issued by any co-operative society (including a co-operative land mortgage bank or a co-operative land development bank) or any other institution or authority, as notified by the Central Government is allowed as a deduction within specified limits. Under the provisions of section 193 of the Income-tax Act, no tax is deductible at the time of payment of any interest on such debenture. 36.2 With a view to tapping rural savings for the benefit of public sector, section 80L(1)(ii) of the Income-tax Act has been amended so as to include also the interest on debentures issued by a public sector company as an item qualifying for deduction. With a view to avoiding inconvenience to those who may wish to subscribed to these debentures, section 193(iib) has been amended so as to exclude the interest payable on such debentures from the requirement of deduction of tax at source. 36.3 The amendment to section 80L will apply in relation to the assessment year 1987-88 and subsequent years. 36.4 The amendment to section 193 will take effect from 1st June, 1986. [Sections 20(a) and 29 of the Finance Act] (xix) Purchase by Central Government of immovable properties in certain cases of transfer. 37.1 The Finance Act has inserted a new Chapter XXC in the Income-tax Act relating to purchase by the Central Government of immovable properties in certain cases of transfer. The provisions of this new Chapter shall come into force on such dates as the Central Government may, by notification, appoint and different dates may be appointed for different areas. Accordingly, as per the notification being made in this regard, these provisions will come into force with effect from 1st October, 1986, in the metropolitan cites of Bombay, Calcutta, Delhi and Madras. 37.2 It may be clarified that the provisions in this new Chapter do not provide for compulsory acquisition of immovable property but merely enable the Central Government to purchase a property which has already been offered for sale. Since the transferee does not suffer any inconvenience in this process, there is no provision for a solatium. 37.3 As regards the value of property which is to be purchased, under these provisions, it had been announced by the LTFP that "the scope of such a provision may be limited initially to the metropolitan cites and also to properties worth more than Rs. 10 lakhs" (para. 5.30). In the Budget speech 1986-87 also, it has been stated that "to begin with, this provision will apply to properties valued at Rs. 10 lakhs located in metropolitan cites" (para. 33). Accordingly, the new section 269UC(1) provides that no transfer of any immovable property of such value exceeding Rs. 5 lakhs as may be prescribed shall be effected except after an agreement for transfer is entered into between the transferor and the transferee at least three months before the intended date of transfer. Such agreement shall be reduced in writing in the form of a statement by each of the parties to such transfer in the prescribed manner and shall be furnished to the appropriate authority' within the prescribed period. To begin with, it is proposed to issue a notification making this provision applicable to metropolitan cites and to transactions of the value of Rs. 10 lakhs and above. 37.4 The cases coming under this Chapter will not involve deprivation of property or any rights therein but will only imply a restriction on the contractual rights of the parties. This restriction is just, fair and reasonable having regard to the object sought to be achieved. 37.5 It is a known fact that proliferation of black money is evident in the transfer of immovable properties. As mentioned in the LTFP (para. 5.30), one way of tackling the problem of tax evasion is to confer on the Government the pre-emptive right to acquire any immovable property undergoing a transfer for consideration above a certain value. The assumption of the powers by the Central Government to purchase immovable properties in certain cases of transfer thus has the object of including the transferors and the transferees to declare the full amount of consideration in the agreement for transfer. 37.6 On receipt of the statement by each of the parties to such transfers as are within the purview of section 269UC, the appropriate authority may make an order under section 269UD after recording the reasons in writing for the purchase of the immovable property at an amount equal to the amount of apparent consideration. This order has to be made within a period of two months from the end of the month in which the statement in respect of such immovable property is received by the appropriate authority. It may be mentioned that it would not be all properties beyond a certain value that would be purchased by the Government but the recognised statistical method of random sampling will be applied for identifying the properties which, are to be purchased for "the reasons to be recorded in writing". 37.7 The property in respect of which an order is passed under section 269UD(1) shall vest in the Central Government free from all encumbrances. Where an order under section 269UD(1) has been made in respect of an immovable property, being any rights in, or with respect to, any land or building or part of a building (whether or not including any machinery, plant, furniture, fittings or other things therein), which has been constructed or which is to be constructed, accruing or arising from any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons, or by way of any agreement or any arrangement of whatsoever nature), such order shall have the effect of vesting such right in the Central Government and place the Central Government in the same position in relation to such right as the person in whom such right would have continued to vest, if such order had not been made. This implies that the rights of the tenant are extinguished when the property so vests in the Central Government. It is implied that while deciding whether a particular property is to be purchased by the Central Government, the appropriate authority may consider the adequacy of apparent consideration in the context of the tenancy rights also. However, a provision for such vesting in the Central Government subject to the rights of tenants would have been open to abuse because immediately before the transfer, a transferor might have entered into a collusive agreement with a tenant in order to defeat the purpose of this provision. This is the main reason for vesting of property in the Central Government, as per these provisions, free from all encumbrances. 37.8 As per section 269UK, no person entering into an agreement for the transfer of immovable property in respect of which a statement has been furnished, shall revoke or alter such an agreement for transfer of such property unless the appropriate authority has not made an order for purchase of the said property by the Central Government under section 269UD and the period specified for making such order has expired or the order of the appropriate authority stands abrogated under the provisions of section 269UH. Any transfer of any immovable property in contravention of these provisions shall be void. 37.9 As per a further condition under section 269UL, a registering officer under the Registration Act, 1908, has been barred from registering any document purporting to transfer any immovable property, exceeding the value prescribed unless the appropriate authority certifies that it has no objection to such a transfer. Further no person shall do anything or omit to do anything which will have the effect of transfer of any immovable property unless the appropriate authority certifies that it has no objection to such a transfer. 37.10 As per section 269UO, the provisions of this Chapter shall not apply to or in relation to any immovable property where the agreement for transfer of such property is made by a person to his relative on account of natural love and affection, if a recital to that effect is made in the agreement for transfer. 37.11 As per section 269UF where an order for the purchase of any immovable property is made, the Central Government shall pay by way of consideration for the purchase of immovable property, an amount equal to the amount of apperent consideration. The said amount would be tendered to the person or persons entitled thereto within a period of one month from the end of the month in which the immovable property concerned becomes vested in the Central Government. If the Central Government fails to tender such amount to the person interested or to deposit the same with the appropriate authority within that specified period, the order to purchase the immovable property by the Central Government shall stand abrogated and the immovable property shall stand revested in the owner of that property after the expiry of the period in question. 37.12 Section 276AB provides that any person who fails to comply with the provisions of section 269UC or fails to surrender or deliver possession of the property under section 269UE(2) or contravences the provisions of section 269UL(2) shall be punishable with rigorous imprisonment extending up to 2 years and shall also be liable to fine. In the absence of special and adequate reasons to the contrary to be recorded in the judgment, such imprisonment shall not be for a period of less than 6 months. [Sections 34 36 of the Finance Act] (xx) Discontinuance of the provisions relating to acquisition of immovable property. 38.1 The existing provisions of Chapter XXA envisage acquisition by the Central Government of immovable properties, etc., on payment of the consideration shown in the instrument of transfer and 15 per cent. of the said amount. Before these provisions can be invoked, it has to be proved that the consideration for transfer of an immovable property as agreed to between the parties has not been truly stated in the instrument of transfer with the object of facilitating the reduction or evasion of the liability of the transferor to pay tax in respect of any income arising from the transfer or concealing of any income or any moneys or other assets not disclosed by the transferee for the purposes of income-tax or wealth-tax. 38.2 As mentioned in the LTFP (para. 5.29) these provisions have not proved to be effective and have generated a great deal of litigation, etc. Further, it is essential to find ways in which taxpayers could be induced to disclose the true value of their properties. In order to achieve this purpose, the new Chapter XXC conferring on the Central Government a pre-emptive right to purchase an immovable property has been inserted in the Income-tax Act and at the same time by a new section 269RR, it has been provided that the provisions of Chapter XXA of the Income-tax shall not apply to or in relation to the transfer of any immovable property made after the 30th day of September, 1986. 38.3 As a consequential measure, section 276AA of the Income-tax Act providing for punishment with rigorous imprisonment up to two years and also for liability to fine for failure to comply without reasonable cause or excuse with the provisions of section 269AB or with any direction issued under sub-section (5) of section 269-I of the Income-tax Act has been omitted with effect from 1-10-1986. [Sections 33 and 37 of the Finance Act] AMENDMENTS TO THE WEALTH-TAX ACT 39.1 Exemption of debentures issued by public sector companies. With a view to tapping rural savings and mobilising resources for the public sector, the Finance Act has inserted a new clause (xvie) in section 5(1) of the Wealth-tax Act. As per this clause notified debentures issued by a public sector company shall be exempt from wealth-tax without any monetary limit in the case of an individual or a Hindu undivided family. For being entitled to this exemption, the assessee should also satisfy the conditions mentioned in section 5(3) of the Wealth-tax Act that he has owned the debentures from the date on which they were subscribed to or for a period of at least 6 months ending with the relevant valuation date, whichever is shorter. This condition is at present applicable to the exemption in respect of certain other assets such as Capital Investment Bonds, etc. 39.2 These amendments will take effect from 1st April, 1986. [Section 40(a)(i) (b) of the Finance Act] 40.1 Enlarging the scope of exemption in respect of assets brought into India by persons of Indian origin. Under the existing provisions of clause (xxxiii) of section 5(1) of the Wealth-tax Act, in the case of an assessee, being a person of Indian origin or a citizen of India who has returned to India with the intention of permanently residing in India, moneys and the value of assets brought by him into India and the value of assets acquired out of such moneys are exempt. The exemption is available for seven assessment years commencing with the assessment year next following the date on which such person returns to India. With a view to providing further incentive, in the case of such persons, the moneys and the value of assets brought by him into India and the value of assets acquired by him out of such moneys within one year immediately preceding the date of his return and any time thereafter, will henceforth qualify for exemption and will not be included in the net wealth of such a person as per an amendment of the above provision of the Wealth-tax Act. The exemption will, however, be limited to the period of seven successive assessment years commencing with the assessment year next following the date on which such persons returned to India as at present. 40.2 This amendment will apply in relation to the assessment year 1987-88 and subsequent years. 40.3 Certain representations had been received by the CBDT mentioning that it was not clear as to whether the exemption was available under the above provisions in respect of moneys or assets which were not brought into the country at the time when the person returned to India but were brought before or after the person's return. It has been clarified by the CBDT as per Circular No. 411 (F. No. 317/5/85-WT dated 26-2-1985*) that the moneys which are deposited in the Non-Resident (External) Account shall continue to qualify for exemption under the Wealth-tax Act even after the person returns to the country and the moneys in the above account are converted into any other assets. In response to further representations, a clarificatory amendment has been made by the Finance Act by inserting Explanation 2 in clause (xxxiii) of section 5(1) of the Wealth-tax Act. This explanation clarifies that the moneys standing to the credit of a person in a Non-Resident (External) Account in any bank in India in accordance with the Foreign Exchange Regulation Act, 1973, on the date of his return shall be deemed to be moneys brought by him into India for the purposes of the said clause on that date. Since section 5(1)(xxxiii) had been inserted by the Finance Act, 1976, with effect from 1-4-1977, the amendment has been given retrospective effect and will apply in relation to the assessment year 1977-78 and subsequent years. [Section 40(a)(ii) of the Finance Act] AMENDMENT TO THE GIFT-TAX ACT 41.1 Levy of a flat rate of tax on taxable gifts. Under the existing provisions of section 3 of the Gift-tax Act read with the Schedule to the Act, gift-tax is charged for every assessment year commencing on and from the first day of April, 1958, in respect of the gifts made by a person during the previous year at the rates specified in the Schedule to the Act. The existing rate structure was designed keeping in view the avoidance of estate duty. Hence, the incidence of gift-tax and estate duty had been kept more or less at the same level. For the gift-tax, the lowest slab is 5 per cent. applicable in respect of taxable gifts up to Rs. 20,000 and it goes up to a maximum of 75 per cent. in respect of taxable gifts exceeding Rs. 20 lakhs in value. For the estate duty the lowest slab was 10 per cent. on the first Rs. 50,000 which goes up to 75 per cent. if the value of the estate exceeds Rs. 20 lakhs. Now when the estate duty has been abolished, the rate structure for levying gift-tax had to be designed in a manner which will act as a disincentive to the avoidance of income-tax and wealth-tax. In order to make the practice of avoidance through gifts unremunerative, the loss to the taxpayers in the form of payment of gift tax has to exceed the gain arising to him in the matter of income-tax/wealth-tax through diversion of income/asset. Whereas gift-tax is a one time tax, the benefit arising in income-tax/wealth-tax is of a recurring nature. If not wholly, at least a part of the present worth of future income-tax/wealth-tax has to be built into the gift-tax rates. Keeping in view the above factors, by an amendment of section 3 of the Gift-tax Act, it has been provided that in respect of all taxable gifts made by a person, the rates of gift-tax will be as under: (a) For every assessment year commencing on and from 1-4-1958 but before 1-4-1987, the rates specified in the Schedule to the Gift-tax Act. (b) For every assessment year commencing on and after 1-4-1987, at the rate of thirty per cent. 41.2 Consequential amendments have been made in sections 18 and 19 and Schedule to the Gift-tax Act. 41.3 These amendments will apply in relation to the assessment year 1987-88 and subsequent years. [Sections 41, 44, 45 46 of the Finance Act] 42.1 Withdrawal of exemptions in respect of certain gifts. Under the provisions of section 5(1)(iiia) of the Gift-tax Act, gift of National Defence Gold Bonds, 1980, not exceeding the value of such bonds for an aggregate weight of 5 kg. of gold in any previous year is exempt. These Bonds matured in 1980 and hence there is no likelihood of gift of such bonds now. This provision has thus become redundant and hence has been deleted by the Finance Act. 42.2 As per clause (vi) of sub-section (1) of section 5 of the Gift-tax Act, gifts for charitable purpose (other than gifts to an institution or fund to which section 80G of the Income-tax Act applies) are exempt, subject to a limit of Rs. 100 for each gift and Rs. 500 in the aggregate to the same donee within the same previous year. The gifts for charitable purpose to institutions or funds covered by section 80G of the Income-tax Act are separately exempt under clause (v) of sub-section (1) of section 5 of the Gift-tax Act. This exemption continues and takes care of gifts to bona fide charitable institutions [sub-section (2) of section 80G of the Income-tax Act] whose genuineness is tested by conditions laid down in sub-section (5) of section 80G of the Income-tax Act. Hence, there is no justification in retaining exemptions in respect of gifts to others, firstly, because it involved judgment about charitable nature and, secondly, because the small amounts exempted will be taken care of by another amendment by the Finance Act raising the basic exemption from gift-tax to Rs. 20,000. Hence, the provisions of clause (vi) have been deleted. 42.3 Under the provisions of clause (viii) of sub-section (1) of section 5 of the Gift-tax Act, gift to spouse subject to a maximum of Rs. 50,000 in one or more years is exempt. This has been one of the prevalent modes of tax avoidance whereby taxable income is diverted by gifts of properties to spouse. In most of the cases, the money remains under the control of the donor. Even though the income from such transferred assets is deemed to be the income of the transferor (section 64 of the I.T. Act), the income generated out of the investment of the return/yield from the gifted amount is outside the purview of section 64 of the Income-tax Act. Genuine gifts of this nature can now well be converted by the enhanced limit of basic exemption for the purposes of gift-tax. Hence, the above provision has been deleted. 42.4 As per the provisions of clause (ix) of sub-section (1) of section 5 of the Gift-tax Act, any gift of policies of insurance or annuities to a dependent person (other than wife) up to a limit of Rs. 10,000 in one or more years to each donee is exempt. Separate exemptions are provided in respect of gifts for benefit of dependents, as per example, gifts on the occasion of marriage [clause (vii) of sub-section (1) of section 5 of the Act] gifts for education [clause (xii)]. Hence, there is no justification for the additional concession in respect of gifts of policies of insurance, etc. Accordingly, the provision has been deleted. 42.5 As per clause (xiv) of sub-section (1) of section 5 of the Gift-tax Act, gifts to the extent considered to have been made bona fide in the course of carrying on a business, profession or vocation for the purpose of such business, profession or vocation is exempt. The condition relating to the satisfaction of the officer regarding the bona fide nature of gifts in relation to carrying on of business has given rise to litigation and interpretations by the courts which were not in conformity with the legislative intent. For example, even gift of 25 per cent. of the share of a senior partner to a young lawyer partner has been held to be exempt, under this clause. (V.O. Markose v. CGT [1975] 98 ITR 504). Even otherwise, this provision does not appear to serve any purpose and hence it has been deleted, keeping in view the higher exemption limit now provided. 42.6 Under clause (xvi) of sub-section (1) of section 5 of the Gift-tax Act, gift to any person up to a maximum of rupees five hundred in any previous year is exempt. This clause was inserted with effect from 1-4-1985. With the enhancement of the basic exemption limit as per the Finance Act, this exemption will cease to have any purpose and hence the provision has been deleted. 42.7 Consequent upon the deletion of the aforesaid provisions, certain consequential amendments have also been made. 42.8 The amendments at paras 43.1 to 43.7 above, will be applicable in relation to the assessment year 1987-88 and subsequent years. [Section 42(a), (b) and (d) of the Finance Act] 43. Raising of basic exemption limit. Under the existing provisions of section 5(2) of the Gift-tax Act, tax is not charged in respect of gifts made up to a maximum of Rs. 5,000 during any previous year. Considering the impact of the inflation since the present limit had been fixed as also the withdrawal of exemption in respect of certain smaller gifts, as discussed above, the Finance Act has raised the basic exemption limit to Rs. 20,000. This amendment is applicable in relation to the assessment year 1987-88 and subsequent years. [Section 42(c) of the Finance Act] 44. Discontinuance of the provision relating to aggregation of gifts made during a certain period. Section 6A of the Gift-tax Act provides that where an assessee has made taxable gifts during any previous year (not being gifts made before the 1st June, 1973), and has also made taxable gifts during any one or more of the four previous years immediately preceding such previous year, the taxable gift is charged to tax after aggregating it with taxable gifts, if any, made within the preceding four previous years. This provision was initially intended to frustrate schemes of tax avoidance whereby gifts were spread over different years to get the benefit of lower rates. It has, however, been found in practice that the aggregation of gifts involves linking of the assessment records of the preceding four years requiring manhours disproportionate to revenue results. Moreover, unlike income-tax, gift-tax is not an annual feature. The question of assessment would, therefore, arise only when a gift is made. It becomes difficult to maintain a regular file of an assessee and to keep it alive even in the years when no gifts are made. Apart from this practical difficulty, the provision loses much of its significance when viewed in the context of the proposed levy of tax at a flat rate of 30 per cent. Hence, the provision has been deleted. Consequently, section 18 of the Gift-tax Act has also been amended. This amendment will be applicable in relation to the assessment year 1987-88 and subsequent years. [Section 43 and 44 of the Finance Act] AMENDMENT TO THE COMPANIES (PROFITS) SURTAX ACT 45. The Companies (Profits) Surtax Act, 1964, was enacted to "impose a special tax on the profits of certain companies" as a substitute for the Super Profits Tax Act, 1963. As per section 4 of the Act, surtax is charged in respect of so much of the "chargeable profits" of the previous year of an assessee as exceed the "statutory deduction" at the rates specified in the Third Schedule to the Act, for every assessment year commencing on or after 1st April, 1964. As a measure of phased reform of corporation tax, the Finance Act has amended section 4 of the Companies (Profits) Surtax Act, 1964, to provide for discontinuance of the levy of surtax. This amendment will be applicable in relation to the assessment year 1988-89 and subsequent years. [Section 47 of the Finance Act] (Sd.) S.C. Mishra Director (TPL).