Explanatory Notes on the provisions of the Income-tax (Amendment) Act, 1986 - Income Tax - 464/1986

Explanatory Notes on the provisions of the Income-tax (Amendment) Act, 1986 Circular No.464 Dated 18/7/1986 INTRODUCTION The Income-tax (Amendment) Bill, 1986, as passed by Parliament, received the assent of the President on 21st May, 1986, and has been enacted as the Income-tax (Amendment) Act, 1986 (26 of 1986). OBJECTS OF THE ACT 2. The Income-tax Act (Amendment) Act, 1986 (hereinafter referred to as the "Amending Act") has amended the provisions of section 36 and 80HHB of the Income-tax Act, besides inserting a new section 80D of the Act. These amendments have been made primarily in pursuance of the announcement made in the Budget Speech for 1986-87, as also the speech of the Finance Minister in the Lok Sabha on 24th April, 1986, while moving Government amendments to the Finance Bill, 1986. COMMENCEMENT 3. The Amending Act shall come into force on the 1st day of April, 1987, and hence will be applicable to the assessment year 1987-88 and subsequent years. AMENDMENTS BY THE AMENDING ACT Deduction in respect of the premium paid for insurance on health 4.1 In para 98 of the Budget speech for the year 1986-87, the Finance Minister had announced a proposal to provide relief to self-employed persons and salary earners other than those whose medical needs were taken care of by the employers in respect of medical expenses incurred by them by allowing a deduction out of their total income, subject to limits, for any premium on medical insurance policies taken by them with the General Insurance Corporation of India. 4.2 In pursuance of the above, the Amending Act has inserted a new clause (ib) in sub-section (1) of section 36 of the Income-tax Act, to allow a deduction to an employer in respect of premium paid by him by cheque for insurance on the health of his employees in accordance with a scheme framed in this behalf by the General Insurance Corporation of India and approved by the Central Government. This deduction will not have any monetary ceiling. The scheme is being finalised separately. 4.3 Further, the Amending Act has inserted a new section 80D in the Income-tax Act, to provide a deduction to an assessee upto Rs.3,000 a year in respect of premium paid by him by cheque for insurance,- (i) on his health or on the health of his spouse or dependent parents or dependent children, and (ii) in the case of a Hindu undivided family or association of persons or body of individuals consisting only of (in either case) husband and wife governed by the system of community of property in force in the Union territories of Dadra and Nagar Haveli, Goa, Daman and Diu, on the health of any member of such family, association or body of individuals Modification in respect of deduction on provisions for bad and doubtful debts made by the banks 5.1 Under the existing provisions of clause (viia) of sub-section (1) of section 36 of the Income-tax Act inserted by the Finance Act, 1979, provision for bad and doubtful debts made by a scheduled or a non-scheduled Indian bank is allowed as deduction within the prescribed limits. The limit prescribed is 10% of the total income or 2% of the aggregate average advances made by the rural branches of such banks, whichever is higher. It had been represented to the Government that the foreign banks were not entitled to any deduction under this provision and to that extent, they were being discriminated against. Further, it was felt that the existing ceiling in this regard, i.e., 10% of the total income or 2% of the aggregate average advances made by the rural branches of Indian banks, whichever is higher, should be modified. Accordingly, by the Amending Act, the deduction presently available under clause (viia) of sub-section (1) of section 36 of the Income-tax Act has been split into two separate provisions. One of these limits the deduction to an amount not exceeding 2% of the aggregate average advances made by the rural branches of the banks concerned. It may be clarified that foreign banks do not have rural branches and hence this amendment will not be relevant in the case of the foreign banks. The other provisions secures that a further deduction shall be allowed in respect of the provision for bad and doubtful debts made by all banks, not just the banks incorporated in India, limited to 5% of the total income (computed before making any deduction under this clause and Chapter VI-A). This will imply that all scheduled or non-scheduled banks having rural branches would be allowed the deduction upto 2% of the aggregate average advances made by such branches and a further deduction up to 5% of their total income in respect of provision for bad and doubtful debts. Enhancement of deduction in respect of profits and gains from projects outside India 6.1 As per the existing provisions of section 80HHB of the Income-tax Act, where the gross total income of an Indian company or a person (other than a company) who resides in India includes any profits or gains arising from the execution of projects outside India, a deduction from such profits or gains equal to 25% thereof is admissible. In order to encourage the activity of execution of projects outside India which is one of the sources of earning foreign exchange, section 80HHB has been amended to secure that the deduction will be admissible of an amount equal to 50% of such profits. S.C.Mishra Director (TPL) [F. No. 131/30/86-TPL]