Explanatory Notes on the provisions thereof - Income Tax - 469/1986

Explanatory Notes on the provisions thereof Circular No.469 Dated 23/9/1986 INTRODUCTION 1. The Taxation Laws (Amendment and Miscellaneous Provision) Bill, 1986, as passed by Parliament, received the assent of the President on 10th September, 1986, and has been enacted as the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 (46 of 1986) - See (1986) 161 ITR (St) 111. 2. Object of the Act - The Taxation Laws (amendment and Miscellaneous Provisions) Act, 1986 (hereinafter referred to as "the amending Act") has amended the provisions of the Income-tax Act, 1961, the Wealth-tax Act, 1957, the Gift-tax Act, 1958, and has exempted the income and chargeable profits of the Housing and Urban Development Corporation Ltd. (HUDCO) from income-tax and surtax, respectively. These amendments are intended mainly to implement certain proposals included in the Long-Term Fiscal Policy, the Budget Speech for 1986-87 and certain announcements made by the Finance Minister in the Lok Sabha on 5th May, 1986. 3. Commencement - Section 1(2) of the Amending Act provides that save as otherwise provided in this Act, it shall come into force at once. AMENDMENTS TO THE INCOME-TAX ACT (i) Exemption by notification of allowances received by Members of Parliament and also by members of State Legislatures 4.1. Under the existing provisions of clause (17) of section 10 of the Income-tax Act, the following were exempted: (a) any daily allowance received by any person by reason of his Membership of Parliament or of any State Legislature or of any Committee thereof. (b) the allowance (initially Rs.500 per month but later increased to Rs.1,000 per month) which the Members of Parliament were entitled to receive, in lieu of additional facilities, under the Members of Parliament (Additional Facilities) rules, 1975. 4.2 In so far as (b) above is concerned, the Members of Parliament (Additional Facilities) Rules, 1975, have been repealed and have been replaced by the Members of Parliament (Constituency Allowance) Rules 1986, with effect from January 3, 1986, under which the Members of Parliament are entitled to a constituency allowance of Rs.1,250 per month. Since the existing provisions refer to the earlier rules which have been repealed, the Amending Act has conferred upon the Central Government the enabling power to exempt by notification, the Constituency allowance and other such allowances not exceeding Rs.1,250 per month in the aggregate received by a Member of Parliament. [The daily allowance received by them continues to be exempt]. It may be clarified that this provision relating to the exemption of the daily allowance and any other allowance received by the Members of Parliament will also apply in the case of Ministers who receive such allowances under the Salaries and Allowances of the Ministers Act, 1952. 4.3. The Amending Act has also extended the scope of exemption in respect of the allowances received by the members of any State Legislature. Under the existing provisions, only the daily allowance received by such Members of State Legislatures is exempt. As per the Amending Act, the allowances other than the daily allowance (which is otherwise exempt), not exceeding Rs.6000 per month in the aggregate received by such members of State Legislatures, which the Central Government may, by notification in the Official Gazette, specify in this behalf, shall also be exempt. 4.4. All the allowances received by the Members of Parliament which are exempt as per the existing provisions, shall continue to get the same benefit. The only effect of the amending Act is that instead of the exemption of Rs.1,000 per month received by MPs under the Members of Parliament (Additional Facilities) Rules, 1975, which have been repealed, the exemption will be allowed by the notification in respect of the Constituency Allowance of Rs.1,250 received under the Members of Parliament (Constituency Allowance) Rules, 1986, with effect from 3rd January, 1986. In addition, such allowances to the extent of Rs.600 per month received by the members of the State Legislatures, whose constituencies are much smaller than those of the Members of Parliament, will also be exempted on being notified. 4.5. The amendment shall come into force retrospectively with effect from 1st April, 1986, and will, accordingly, apply to the assessment year 1986-87 and subsequent years. [Section 3 of the amending Act] (ii) Liberalisation of the special provisions in respect of newly established industrial undertakings in free trade zones 5.1 Section 10A of the Income-tax Act provides for a complete tax exemption in respect of the profits and gains derived from an industrial undertaking set up in any free trade zone for a period of five initial assessment years. The tax exemption is granted with reference to the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce any article or thing and each of the four immediately succeeding assessment years. 5.2 As pointed out by various trade associations, such undertakings in the free trade zones do not always earn profit during all the five initial years. In such cases, they cannot avail of the full tax benefit. In order to get over the problem, the exemption for five assessment years has been permitted to be availed of within a longer time frame as per the amending Act by providing in sub-section (3) that a tax payer would be entitled to avail of the exemption, at his option, in respect of any five consecutive assessment years falling within a period of eight years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things. The proviso to this new sub-section stipulates that in no case shall the tax holiday extend beyond this period of eight years. Further, as per the Explanation at the end of this section, the expression "relevant assessment years" has been defined to mean the five or less consecutive assessment years, specified by the assessee at his option, within the period of eight years, commencing from the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things. Thus, in a case where the assessee exercises his option in the third assessment year relevant to the previous year counted from the year in which the industrial undertaking begins to manufacture or produce articles or things, the exemption can be availed of up to the seventh assessment year. In the case where the option in this behalf is exercised by the assessee in the sixth year, the exemption can be claimed up to the eighth year only. 5.3. The aforesaid provision takes effect from 1st April, 1987, and will, accordingly, apply in relation to the assessment year 1987-88 and subsequent years. (iii) New provisions for allowing depreciation in respect of blocks of assets 6.1. In his Budget Speech for the year 1986-87, the Finance Minister had announced as under: "96. As promised in the Long-Term Fiscal Policy Statement, I propose to introduce a system of allowing depreciation in respect of blocks of assets instead of the present system of depreciation on individual assets. Simultaneously, I propose to rationalise the rate structure by reducing the number of rates as also by providing for depreciation at higher rates so as to ensure that more than 80 per cent of the cost of the plant and machinery is written off in a period of 4 years or less. This will render replacement easier and help modernisation. Apart from those items which are eligible for 100 per cent depreciation in the initial year itself, there are at present different rates for plant and machinery. I propose to have only two rates of depreciation at 33-1/3 per cent and 50 per cent. Plant and machinery used as anti-pollution devices and those using indigenous know how are proposed to be placed in a block carrying the higher rate of depreciation of 50 per cent. Buildings meant for low-paid employees of industrial undertakings will be entitled to depreciation at 20 per cent. as against the general rate of 5 per cent for residential buildings and 10 per cent for non-residential buildings." 6.2 Pursuant to the above announcement, amendments have been made to section 2, 32A, 34, 35, 38, 41, 43, 50, 55, 57, 59, and 155 of the Income-tax Act. 6.3 As mentioned by the Economic Administration Reforms Commission (Report No.12, para 20), the existing system in this regard requires the calculation of depreciation in respect of each capital asset separately and not in respect of block of assets. This requires elaborate book-keeping and the process of checking by the assessing officer is time consuming. The greater differentiation in rates, according to the date of purchase, the type of asset, the intensity of use, etc., the more disaggregated has to be the record-keeping. Moreover, the practice of granting the terminal allowance as per section 32(1)(iii) or taxing the balancing charge as per section 41(2) of the Income-tax Act necessitate the keeping of records of depreciation already availed of by each asset eligible for depreciation. In order to simplify the existing cumbersome provisions, the Amending Act has introduced a system of allowing depreciation on block of assets. This will mean the calculation of lump sum amount of depreciation for the entire block of depreciable assets in each of the four classes of assets, namely, buildings, machinery, plant and furniture. 6.4. The amendments relating to depreciation allowance are as follows:- (a) A "block of assets" as defined in the new clause (11) inserted in section 2 of the Income-tax Act means a group of assets falling within a class of assets being buildings, machinery, plant and furniture in respect of which the same percentage of depreciation is prescribed. The necessary amendments to the Income-tax Rules prescribing the percentage of depreciation in regard to various blocks of assets will be made accordingly which will be effective from 2-4-1987, i.e., for the assessment year 1988-89 and onwards. It is proposed that the assets which are eligible for 100 per cent. depreciation in the initial year itself will continue to get this benefit. In addition, there will be only two rates of depreciation presently proposed at 33-1/3 per cent. and 50 per cent. in respect of plant and machinery. Further, the buildings meant for low paid employees of industrial undertakings will be entitled to depreciation at 20 per cent. as against the general rate of 5 per cent. for residential buildings and 10 per cent. for non-residential buildings. In view of these accelerated rates of depreciation, the extra shift allowance being allowed to some items of plant and machinery enumerated in Appendix I to the Income-tax Rules will cease to be admissible when the new rates come into force. (b) Under the existing provisions of section 32(1)(i), depreciation in the case of ocean-going ships is allowed at such percentage on the actual cost thereof as may be prescribed. Since the ocean-going ships are also to be included in a block of assets, depreciation will be allowable in regard to such ships not on the existing straight line method but on the reducing balance method, i.e., on the written down value of the block of the plant or machinery comprising such ship. As a consequence, the provisions of section 32(1)(i) have been omitted by the Amending Act. (c) Section 32(1)(ii) provides that depreciation will be allowed as a prescribed percentage of the written down value of buildings, machinery, plant and furniture. The Amending Act has provided that in the case of any block of assets, depreciation will be allowable at a prescribed percentage of the written down value thereof. (d) The provisions of clause (iia) in sub-section (1) of section 32 had been inserted by the Finance (No.2) Act, 1980, to provide for additional depreciation in respect of new plant or machinery installed before 1-4-1985 in certain cases. These provisions have lost their relevance as they were applicable for the limited period of the Sixth Five Year Plan. Hence, they have been omitted by the Amending Act. (e) The objective underlying the terminal adjustment is to ensure that the total depreciation in relation to any particular item of asset is limited to 100 per cent. This is achieved by the existing provisions of section 32(1)(iii) allowing a deduction for the shortfall in the year of sale, etc. Conversely section 41(2) of the Income-tax Act provides for taxing in the year of sale, etc. the excess depreciation allowed in the past. Because of the introduction of the system of allowing depreciation on blocks of assets at enhanced rates, both these provisions have lost their relevance and hence they have been omitted by the Amending Act. Under the new system the moneys payable in respect of the assets sold, discarded, demolished or destroyed will be reduced from the written down value of the block. (f) Section 32(1)(iv) of the Income-tax Act provides for initial depreciation allowance in certain cases for one year in respect of buildings erected after 31-3-1961. Further, section 32 (1)(v) of the Income-tax Act provides initial depreciation allowance in certain other cases in respect of buildings erected after 31-3-1967. Since as per the Amending Act and Rules to be framed thereunder, depreciation allowance is proposed to be allowed on block of assets at enhanced rates, these special concessions in the form of initial depreciation allowance have been rendered unnecessary. Hence, these provisions have been omitted. (g) As per the existing provisions of section 32 (1)(vi) of the Income-tax Act, initial depreciation allowance is admissible in respect of ship or aircraft acquired or machinery or plant installed after 31-5-1974 by certain industries for, inter alia, construction, manufacture or production of one or more of the articles or things specified in the Ninth Schedule. Because of the reasons given in the preceding paragraph, and on the interest of simplicity, this provision has also been rendered unnecessary and hence it has been omitted by the Amending Act. Accordingly, the Ninth Schedule to the Income-tax Act has been omitted. (h) Section 32(1A) of the Income-tax Act provides for depreciation allowance in respect of any addition, renovation or extension of or improvement to a building which an assessee does not own but in respect of which he holds a lease or other right of occupancy. As a result of the switch over to the block concept, this provision has been omitted. By the newly inserted Explanation 1 after the second proviso to section 32(1)(iii) of the Income-tax Act, it has been provided that depreciation will be allowed in respect of such a structure or work as if it is a building owned by the assessee. (i) The existing sub-sections (1) and (2) of section 34 of the Income-tax Act provide that the depreciation shall be allowed only if the prescribed particulars for the purposes of clauses (i) and (ii) of section 32(1) of the Income-tax Act have been furnished in respect of the depreciable assets. Further, that the aggregate of all deductions in respect of depreciation on blocks of assets. (j) The existing provisions of sub-sections (2) and (2A) of section 41 of the Income-tax Act and the Explanation thereunder relating to balancing charge in respect of discarded assets have been omitted. Further, the existing Explanation below section 41(4) of the Income-tax Act has been substituted by another Explanation defining the expressions "moneys payable" and "sold". The former shall include any insurance, salvage or compensation moneys payable in respect of a discarded asset. The latter expression shall include a transfer by way of exchange or a compulsory acquisition under any law but it will not include a transfer of an asset by the amalgamating company to the amalgamated company in a scheme of amalgamation. (k) By an amendment to Explanation 1 to section 43 of the Income-tax Act, it has been provided that where an asset is used for the purposes of business after it ceases to be used for scientific research related to that business, the actual cost to the assessee for depreciation purposes shall be the actual cost to the assessee as reduced by any deduction allowed under section 35 (1)(iv). (l) By an amendment to Explanation 2 to section 43(1) of the Income-tax Act, it has been provided that where an asset is acquired by way of gift or inheritance, its actual cost shall be the actual cost to the previous owner as reduced in the first instance by the amount of depreciation which has been allowed on such asset in respect of any assessment year prior to the assessment year 1988-89, i.e., the year of transition to the system. The amount so arrived at shall be further reduced by the depreciation that would have been allowable to the assessee for the assessment year 1988-89 and subsequent years, as if the asset was the only asset in the relevant block on which depreciation is allowable. (m) The existing provisions of section 43(6) of the Income-tax Act define the expression "written down value". In this sub-section, after the proviso, a new sub-clause (c) has been inserted by the amending Act to define the written down value in the context of the block system. In the case of a block of assets in regard to the assessment year 1988-89, being the year of transition to the system of depreciation allowance on blocks of assets, the written down value shall be arrived at in the following manner: (i) The aggregate of the written down value of all the assets falling within that block at the beginning of the previous year shall first be calculated. (ii) The aggregate of the written down value arrived at as above, shall be increased by the actual cost of any asset falling in that block which was acquired by the assessee during the previous year. (iii) The sum to arrived at shall be reduced by the moneys receivable by the assessee together with the amount of the scrap value in regard to any asset falling within that block which is sold, discarded, demolished or destroyed during the previous year. (n) The written down value of any asset in relation to the assessment year 1989-90, and any subsequent assessment year shall be worked out as under in accordance with the newly inserted section 43(6)(c):- (i) The written down value of the block of assets in the immediately preceding previous year, shall be reduced by the depreciation actually allowed in respect of the block of assets in relation to the said preceding previous year. (ii) The sum arrived at as above shall be increased by the actual cost of any asset falling within that block which is acquired by the assessee during the previous year. (iii) The sum so arrived at shall be reduced by the sale proceeds and other amounts receivable by the assessee in regard to any asset falling within that block which is sold, discarded, demolished or destroyed during that previous year. (o) Under the new system, the written down value of any block of assets may be reduced to nil for any of the following reasons:- (A) the moneys receivable by the assessee in regard to the assets sold or otherwise transferred during the previous year together with the amount of scrap value may exceed the written down value at the beginning of the year as increased by the actual cost of any new asset acquired, or (B) All the assets in the relevant block may be transferred during the year. Section 50 of the Income-tax Act prescribing the manner in which the cost of acquisition in the case of depreciable assets may be computed for the purposes of determining the capital gains has been substituted by new provisions by the Amending Act to take care of both the above situations. The particulars of these provisions, overriding section 2(42A) of the Income-tax Act, are as under:- (A) The newly substituted section 50(1) provides that in a case where any block of assets does not cease to exist but the full value of the consideration received or accruing as a result of the transfer of the depreciable assets by the assessee during the previous year exceeds the aggregate of the following amounts, namely:- (i) expenditure incurred wholly or exclusively in connection with such transfer or transfers; (ii) the written down value of the block of assets at the beginning of the previous year; and (iii) the actual cost of any asset falling within the block of assets acquired during the previous year. Such excess shall be deemed to be short-term capital gains. (B) The newly substituted section 50(2) of the Income-tax Act deals with the cases where any block of assets ceases to exist for the reason that all the assets in that block are transferred during the previous year. In such a case, the cost of acquisition of the block of assets shall be the written down value of the block at the beginning of the previous year as increased by the actual cost of any asset falling within that block acquired by the assessee during the previous year. The income from such transfer or transfers shall be deemed to be short-term capital gains. (C) Amendments of a consequential nature have been made to clause (1) to the Explanation to section 32A(2), clauses (iv) and (v) of section 35(2), clause (c) of section 35(2B), section 38(2), section55(1), section 57(ii), sub-sections (2) and (3) and the Explanation to section 59 and the Explanation to section 155(4A) of the Income-tax Act. 6.5 The following examples illustrate as to how the amended provisions relating to allowance of depreciation will be applied:- Example 1:- Suppose a company "X" has financial year as its accounting year and has three items of plant and machinery in respect of which the prescribed percentage of depreciation for the assessment year 1987-88 is the general rate of fifteen per vent. Further that for the assessment year 1987-88, the written down value of these items of plant and machinery before allowing depreciation for that year was as follows: Rs. Item1 1,50,000 Item 2 2,00,000 Item 3 3,00,000 Total 6,50,000 The depreciation that will be allowable in respect of these items for the assessment year 1987-88 as also the written down value of these items at the beginning of the assessment year 1988-89 will be as follows : Depreciation WDV at the beginning of the assessment year 1988-89 Rs. Rs. Item 1 22,500.00 1,27,500.00 Item 2 30,000.00 1,70,000.00 Item 3 45,000.00 2,55,000.00 Aggregate WDV at the beginning of the as assessment year 1988-89 5,52,500.00 Since the items of plant and machinery which currently qualify for depreciation at the rate of 15 per cent. are proposed to be classified into a block of assets which will be entitled to depreciation at the rate of 33-1/3 per cent. for the assessment year 1988-89 and subsequent years, in this example the aggregate written down value of the block of assets at the beginning of the previous year will be Rs.5,52,500. Presuming that during the financial year 1987-88, the assessee sold item I for a consideration of Rs.2,00,000 and bought a new item (item 4) falling in the same block of assets during the said financial year for a consideration of Rs.2,50,000, the depreciation to be allowed in respect of the assessment year 1988-89 will be as follows:- Rs. Aggregate WDV of the block at the beginning of the previous year 5,52,500 The actual cost of the new asset acquired during the previous year 2,50,000 8,02,500 Less : Sale proceeds in respect of the assets sold 2,00,000 WDV of the block for the assessment year 1988-89 6,02,000 Depreciation for the assessment year 1988-89 at 331/3% of Rs. 6,02,000 2,00,667 WDV for the assessment year 1989-90 4,01,333 Example II:- Presuming that in the case of company "X", referred to in Example I, for the financial year 1988-89 (assessment year 1989-90):- (i) Items 2 and 3 of the machinery were sold for the consideration of Rs.5,00,000; (ii) expenditure wholly and exclusively relating to the sale amounted to Rs.5,000; and (iii) a new item (5) falling in the same block was purchased for Rs.25,000. In this case, the new provisions of section 50(1) of the Income-tax Act will apply as follows:- Rs. WDV of the block at the beginning of the year 4,01,333 Add : Actual cost of new assets acquired 25,000 4,26,333 Add : Expenses incurred wholly and exclusively for sale 5,000 4,31,333 Sale proceeds received in regard to assets sold 5,00,000 Hence, the deemed short-term capital gain will be equal to Rs. 68,667 (Rs. 5,00,000 - Rs. 4,31,333) Example III:- Suppose that in the case of the company "Y" having financial year 1988-89 as the previous year relevant to the assessment year 1989-90, the WDV of a block of assets consisting of factory buildings is Rs.10,00,000 at the beginning of the financial year 1988-89, (i.e. WDV for the financial year 1987-88 less depreciation allowed in respect of the said financial year), this company acquires a godown in May, 1988, for Rs.2,00,000 and then sells the factory building and the godown in December for Rs.9,00,000. If there is no asset in the left in the relevant block at the end of the year, the new provisions of section 50(2) of the Income-tax Act will apply as follows:- Rs. WDV at the beginning of the year 10,00,000 Add : Actual cost of new asset acquired 2,00,000 12,00,000 Less : Sale proceeds received in respect of all the assets from that block sold during the year 9,00,000 Loss deemed to be short-term capital loss under section 50(2) 3,00,000 6.6 The above amendments to sections 2, 32, 32A, 34, 35, 38, 41, 43, 50, 55, 57, 59, 155 of the Income-tax Act shall come into force with effect from the 1st April, 1988, and will, accordingly, apply to the assessment year 1988-89 and subsequent years. [Sections 2, 5, 6, 7, 8, 9, 31 and 32 of the Amending Act] (iv) Declaration of an area as a backward area for the purposes of tax holiday 7.1 As per the existing provisions of section 80HH of the Income-tax Act, all categories of taxpayers are entitled to a deduction equal to 20 per cent. of the profits derived by them from new industrial undertakings or hotels in backward areas. In terms of Explanation to this section, "backward area" means an area specified in the list of the Eighth Schedule. This list needs frequent updating in conformity with the notifications issued by the Ministry of Industry including or excluding an area as "No Industry District" or "Special Region District". As a result, there is a time lag between the notification made by the Ministry of Industry and the subsequent amendment to the Eighth Schedule to the Income-tax Act. In order to reduce this time lag, enabling powers have been acquired by the new sub-section (11), substituted in place of the existing Explanation below sub-section (10), by the Amending Act providing that "backward area" means such area as the Central Government may, having regard to the stage of development of that area, by notification in the Official Gazette, specify in this behalf. As per the proviso to this new sub-section, no notification may be issued so as to have retrospective effect to a date earlier than 1-4-1983. 7.2 The existing Eighth Schedule to the Income-tax Act incorporated by the Direct Taxes (Amendment) Act, 1974, was amended last by the Finance Act, 1976. As per their notification 27-4-1983, the Ministry of Industry has classified the backward areas into three categories, namely, A, B and C, for the purposes of providing Central investment subsidy, transport subsidy and other concessional finances for the period 1-4-1983 to 31-3-1986. Category "A" districts, as notified from time to time, include "No Industry Districts" and "Special Region District" and they would normally be eligible for inclusion in the Eighty Schedule to the Income-tax Act. 7.3 This amendment has been made retrospectively to avoid hardship to the assessees and to solve administrative problems in respect of the earlier years, namely, the assessment years 1984-85, 1985-86 and 1986-87. For the subsequent assessment years, it is intended to make corresponding changes to the notifications under the Income-tax Act shortly after the notifications in this regard are issued by the Ministry of Industry. Thus, while additions to the list of notified backward areas could be made retrospective up to 1-4-1983, deletion of such areas will be done prospectively. 7.4 In view of the above amendment, the Eighth Schedule to the Income-tax Act has been omitted. 7.5 The amendments shall come into force with effect from 1st April, 1986, but as stated above the notifications to be issued under the amended section 80HH after 1-4-1986 could be given retrospective effect up to 1-4-1983 and, consequently, the assessment year affected will be the assessment year 1984-85 and onwards. [Sections 10 and 30 of the Amending Act] (v) Liberalisation of the provisions relating to deduction in respect of the profits retained for export business 8.1 Under the existing provisions of section 80HHC of the Income-tax Act, an assessee, being an Indian company or any other person resident in India, who exports outside India any goods or merchandise, excepting mineral oil and minerals and ores, is allowed deduction of an amount not exceeding 50 per cent. of the profits derived by him from the export of such goods or merchandise. Earlier to the assessment year 1986-87, the deduction allowed was an amount equal to one per cent. of the export turnover plus a further amount equal to five per cent. of the incremental export turnover. In the context of the low profitability of Indian exports, various exporters' organisations had been suggesting that a shift be made back to the deduction based on turnover on the ground that the new profit-based deduction operates harshly on exporters. A profit-based incentive is administratively simple and it awards greater efficiency. A turnover based incentive, on the other hand, takes care of the need of those exporters who, for various reasons, do not earn profit, but contribute in a significant measure to the foreign exchange earnings with their large turnover. The system of incentive on the basis of incremental turnover encourages growth. On a consideration of these factors, the incentive provided by the Amending Act is based on profit, as also the turnover to the extent it is reflected as net foreign exchange realisation. The new sub-section (1) of section 80HHC, accordingly, provides that the deduction would be equal to the aggregate of four per cent. of the net foreign exchange realisation and fifty per cent. of the remaining export profits subject to the condition that the aggregate deduction shall not exceed the export profits. To illustrate, in a case where the total free on board value of exports is Rs.1,000 and the aggregate of the cost, insurance and freight value of all categories of licences (to be issued by the Chief Controller of Imports and Exports) to which the assessee is entitled during the previous year either against export obligation or against exports as replenishments is Rs.400, the net foreign exchange realisation will be equal to Rs.600. Assuming that the export profits in this case amount to Rs.100, the deduction admissible as per the new provisions will be Rs.24 (4 per cent. of the net foreign exchange realisation) plus Rs.38 [150 per cent. of the remaining export profits, i.e. 50 per cent. of Rs.76 (Rs.100 - 24)], i.e., a total deduction of Rs.62. As per the existing provisions, the admissible deduction in this case would be Rs.50 only. 8.2. It would be noted from the above that the expression "net foreign exchange realisation" has been defined to mean, as per the newly inserted Explanation after clause (b) of the existing Explanation, the total free on board value of exports outside India of goods and merchandise to which this section applies as reduced by the aggregate of the cost, insurance and freight value of all categories of import licences, to be issued by the Chief Controller of Imports and Exports, Government of India, to which the assessee is entitled during the previous year, either against export obligation or against exports as replenishments. For example, the categories of such licences included as per para 276(1)(b) of the Import and Export Policy for the period April, 1985, to March, 1988, are the Imprest Advance, Special Imprest and Replenishment licences as also Import Export Pass Books, if any, issued during the relevant year or for which an exporter is eligible during these years. The import replenishment licence related to the free on board value of exports is issued to registered exporters to enable them to import inputs where domestic substitutes are not adequate in terms of price, quality or delivery dates. This is based on import content of the export production. The imprest licence issued to the trading houses is issued to the extent of hundred per cent of the value of replenishment licence earned against their own exports made during the previous year. Every imprest licence is subject to an export obligation. The duty free advance licences are also issued ex-ante, i.e., in anticipation of exports. The additional licences are issued to export houses and trading houses as a proportion of the free on board value of their exports from the small scale industrial sector and as a proportion of the net foreign exchange earnings from the non-small scale industrial sector. The Import and Export Pass Book Scheme is applicable only to registered manufacturer-exporters to provide duty-free access to imported inputs for export production. The need to apply repeatedly for advance/imprest and replenishment licences is eliminated with the issue of this pass book which serves as a single all purpose duty-free import licence. A separate pass book is issued for each export product indicating the value of items allowed for import as well as export obligation thereon. Each pass book will bear a suitable export obligation. The holder of this pass book will not be entitled for issue of any advance imprest licences for that export product admissible against its exports. 8.3 As per the new sub-section (4) inserted after sub-section (3) and before the Explanation, it has been provided that the deduction under sub-section (1) shall not be admissible unless the assessee furnishes in the prescribed form along with the return of income, the report of an accountant as defined in the Explanation below section 288(2) certifying that the deduction has been correctly claimed on the basis of the amount of the net foreign exchange realisation, as determined in accordance with the import and export policy of the Government of India for the relevant period. The form of report and the certificate thereunder will be prescribed in the rules to be framed shortly. 8.4 The amendment shall come into force with effect from 1st April, 1987, and will, accordingly, apply to the assessment year 1987-88 and subsequent years. [Section 11 of the Amending Act] (vi) Providing the date by which a return showing loss is to be furnished and treatment of returns below taxable limit 9.1 Under the existing provisions of section 139(3) of the Income-tax Act, as amended by the Taxation Laws (Amendment) Act, 1970, the Income-tax Officer on an application made to him for this purpose is empowered to extend, in his discretion, the time for furnishing a return of loss. By the Amending Act, this power of the Income-tax Officer has been withdrawn. Accordingly, as per the amended provision, if the assessee is to get the benefit of the determination of the loss or any part thereof and for its carry forward under section 72(1) or section 73(2) or section 74(1) or section 74A(3) of the Income-tax Act, he should file the return voluntarily within the period specified in section 139(1) or by the 31st day of July of the assessment year relevant to the previous year during which the loss was sustained. Further, as per clause (d) of the proviso to the newly inserted sub-section (10) to section 139 of the Income-tax Act, which overrides anything contained in any other provision of the Income-tax Act, a return of loss which has been furnished after the thirty first day of July of the assessment year during which the loss was sustained, shall be deemed never to have been furnished. 9.2 The above amendment shall come into force with effect from 1st April, 1987, and will, accordingly, apply to the assessment year 1987-88 and subsequent years. 9.3 Section 139(1) of the Income-tax Act provides that every person, if his total income or the total income of any other person in respect of which he is assessable during the previous year exceeded the maximum amount which is not chargeable to income-tax, shall furnish a return of his income or the income of such other person in the prescribed form and verified in the prescribed manner. This return has to be furnished within the specified period. It was held by the Supreme Court in the case of C.I.T. v. Ranchhoddas Karsondas (36 ITR 369) (SC), that a return disclosing income below taxable limit submitted voluntarily under section 22(1) of the Indian Income-tax Act, 1922 [corresponding to section 139(1) of the Income-tax Act, 1961], is a good return and such a return voluntarily made before the assessment cannot be ignored by the Income-tax Officer. This decision has been superseded by the Amending Act by inserting sub-section (10) after sub-section (9) of section 139. The new sub-section (10) provides that notwithstanding anything contained in any other provisions of this Act, a return of income which shows the total income below the maximum amount which is not chargeable to tax shall be deemed never to have been furnished. As per the proviso to this sub-section, a return of income below taxable limit shall not be treated as non est in the following circumstances: (a) a return furnished in response to a notice under section 148(2); (b) a return of a partner of a firm; (c) a return of a person who has claimed exemption of income from property held for charitable or religious purposes; (d) a return of loss which has been furnished before the 31st day of July of the assessment year relevant to the previous year during which the loss was sustained; (e) a return furnished under sub-section (4B) in respect of a political party; (f) a return furnished in support of a claim for refund under section 237. 9.4 These amendments shall come into force with effect from 1st April, 1986, and will be applicable to the assessment year 1986-87 and subsequent years. 9.5. It may be clarified that the assessments already completed before the enactment of the Amending Act will not be rectified. further, keeping in view, the fact that the new sub-section (3) comes into force with effect from 1st April, 1987, a return of loss filed for the assessment year 1986-87 or earlier years within the prescribed period as per the existing provisions will not be denied the benefit of the carry forward of loss. [Section 12 of the amending Act] (vii) amendments to the provisions relating to the reduction or waiver of interest 10.1. section 220(2A) of the Income-tax Act empowers the Central Board of Direct Tax to reduce or waive the amount of interest payable by a taxpayer on account of non-payment or late payment of any tax (except advance tax), interest, penalty, fine or any other sum. This is subject to the fulfilment of the required conditions. Under the existing provisions, only the amount of interest payable - and not interest paid - can be reduced or waived as per one interpretation. such an interpretation put a defaulter in a better position than the person who manages somehow to pay the interest even though it has caused him considerable hardship. The Amending Act has removed this anomaly by providing that the provisions will apply whether the interest is paid or is payable by an assessee. 10.2. The amendment shall come into force retrospectively with effect from 1st October, 1984, that is, the date on which sub-section (2A) of section 220 of the Income-tax Act came into force. 10.3. Further, in cases where the amount of interest under the above provisions is small, the assessees are inhibited from filing a petition to the Central Board of Direct Taxes for reduction or waiver. The interest leviable for other default under the Income-tax Act, such as, for late filing of return can be reduced or waived by the officers in the field formations irrespective of the amount involved. Hence, by the Amending Act, the power to reduce or waive the interest paid or payable under section 220 has been conferred on the Commissioner of Income-tax. 10.4 This amendment shall come into force with effect from 1-4-1987. [Section 13 of the Amending Act] (viii) Amendments to Reorganise the Settlement Commission 11.1 As per the provisions of section 245B(2) of the Income-tax Act, the Settlement Commission consists of a Chairman and two other members. In view of the heavy workload of the Settlement commission and in the interest of early finalisation of cases, it has been provided by the Amending Act that the Settlement Commission shall consist of a Chairman and as many vice-Chairmen and other members as the Central Government thinks fit. Section 245B(1A) providing for the contingency when the post of one or the other member of the settlement commission as presently constituted, is vacant has become irrelevant and hence has been omitted. Similarly, section 245D(5) being a provision subject to section 245B(2A) has also been omitted. In section 245B(3) which provides for the appointment of the Chairman and members of the Commission, the Amending Act has included Vice-Chairman and members of the Commission, the Amending Act has included Vice-Chairman also for this purpose. Further, the second proviso in section 245B(3) enabling any two members of the Central Board of Direct Taxes to serve as members of the Settlement Commission has now become irrelevant and has been omitted. 11.2 The Amending Act has further substituted new sub-sections (5), (6) and (7) in section 245F of the Income-tax Act. It has been provided that the powers and functions of the Settlement Commission may be exercised or discharged by Benches constituted by the Chairman of the Settlement Commission from amongst the members thereof. Such a Bench shall consist of three members one of whom shall be the Chairman or a Vice-Chairman. The Settlement Commission shall have power to regulate its own procedure and the procedure of Benches thereof in all matters arising out of the exercise of its powers or of the discharge of its functions including the places at which the Benches shall hold their sittings. Necessary amendments to the Settlement Commission Procedure Rules will be made accordingly. 11.3 These provisions shall come into force with immediate effect. [Sections 15, 16 and 17 of the Amending Act] (ix) Amendments to provisions relating to penalties and prosecutions for shifting the burden of proof 12.1 Chapter XXI of the Income-tax Act contains provisions relating to penalties impossible for various defaults under the Act. Chapter XXII of the Income-tax Act contains provision relating to offences and prosecutions under the Act. One of the reasons for the unsatisfactory performance of the Income-tax Department in the matter of successfully levying penalty and of prosecuting the defaulters is that invariably appellate authorities and the courts have cast upon the Department the near impossible burden of proving the existence of a culpable state of mind on the part of the defaulters. 12.2 On a consideration of the relevant factors in this regard, it was announced by the Long Term Fiscal Policy [para 5.31(ii)] that in order to effectively tackle the problem of tax evasion, the Income-tax Department will implement a strategy consisting, inter alia, of removing weaknesses in the law which hinder effective prosecution of tax evaders and that it was intended to incorporate certain provisions in the direct tax laws similar to those which already exist in the Customs Act and the Gold (Control) Act. For example, under section 123(1) of the Customs Act, 1962, when any gold, diamonds, or any other class of specified goods are seized in the reasonable belief that they are smuggled goods, the burden of proving that they are not smuggled goods shall be on the person from whose possession the goods were seized and any person claiming to be the owner of such seized goods. Similarly, under section 98B of the Gold (Control) Act 6, 1968, in any prosecution for an offence under that Act which requires a culpable mental state on the part of the accused, the court shall presume the existence of such mental state but it shall be open to the accused to prove the fact that he had no such mental state with respect to the offence. Accordingly, the intention of the Government was announced by the LTFP to amend the direct tax laws also to provide similar provisions so that once evasion is proved, the intention to evade need not be proved by the Department. 12.3 Apart from the above, in the context of the existing scheme of accepting returns with incomes up to Rs.1 lakh without scrutiny, which is based on trust, it is only logical that the burden should be cast on the assessee to prove his innocence if he has concealed the particulars of his income or to prove the existence of reasonable cause if he has committed any other default under the direct tax laws. 12.4 The salient features of the amendments made to the provisions relating to penalty are as under: (a) Under section 221 of the Income-tax Act, penalty is payable when an assesse is in default or is deemed to be in default in making the payment of tax. However, no penalty is to be levied, as per the second proviso to section 221(1) if the Income-tax Officer is satisfied that the default was for good and sufficient reasons. This proviso has been substituted to secure that the burden of proving the existence of reasonable cause for default, to the satisfaction of the Income-tax Officer is case specifically on the assessee. (b) Under the existing provisions, penalty is leviable under section 270 for failure to furnish information regarding securities, under section 271(1)(a) for delay in filing return of income without reasonable cause, under section 271(1)(b) for non-compliance of notice under section 143(2) or 142(1) or 142(2A), under section 271A for failure to maintain books of account, under section 271B for failure to get accounts audited, under section 272A(2) for failure to answer queries, under section 272AA for failure to comply with the provisions of section 133B, under section 272B for non-compliance with the provisions of section 139A, under section 273(1)(b) for failure to furnish a statement of advance tax, under section 273(2)(b) for failure to furnish estimate of advance tax and under section 273(2)(c) of the Income-tax Act for failure to furnish higher estimate of advance tax. Penalty is leviable under these provisions if the above defaults are committed without reasonable cause for (or excuse under section 270). By omitting the words "without reasonable cause" from these provisions ("without reasonable excuse" from section 270) it has been provided that the default by itself will attract penalty. At the same time, it has been provided by a new section 273B, inserted by the Amending Act, that notwithstanding anything contained in the provisions of section 270, clause (a) or clause (b) of sub-section (1) of section 271, section 271A, section 271B, sub-section (2) of section 272A, sub-section (1) of section 272AA, sub-section (1) of section 272B or clause (b) of sub-section (1), or clauses (b) and (c) of sub-section (2) of section 273, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause for the said failure. By this amendment, the onus of proving the existence of reasonable cause for the defaults referred to in these provisions has been cast on the taxpayer. In this context, reference may be made to section 123(1) of the Customs Act, 1962, as discussed in para 12.2 above. (c) (A) Section 271(1)(c) of the Income-tax Act provides that penalty shall be leviable in the case of an assesse who has concealed the particulars of his income or furnished inaccurate particulars thereof. In a series of decisions beginning with the judgment in 1970, in the case of CIT vs. Anwar Ali [1970] 76 ITR 696, (SC) based on the law as it stood prior to 1-4-1964, the Supreme Court laid down the following basic principles for levying penalty under these provisions: (i) an order imposing a penalty is the result of quasi-criminal proceedings and the burden lay with the Income-tax Department to establish that the disputed amount represented his income; and (ii) the Department has to prove that the assessee had consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars thereof. The inadequacy of the Explanation added by the Finance Act, 1964, led to the substitution by the Taxation Laws (Amendment) Act, 1975, of four Explanations. The existing Explanation 1 to section 271(1) provides for the situation where no explanation for the failure is offered by the assessee or where the explanation that has been offered is found to be false or where the assessee is not able to substantiate the explanation offered by him. In all these cases, the amount added or disallowed in computing the total income of such person shall be deemed to represent the income in respect of which particulars have been concealed. As per the proviso to this Explanation, the onus to establish that the explanation offered was bona fide and all facts relating to the same and material to the computation of his income have been disclosed by him will be on the person charged for concealment. However, the fact that the explanation offered was not substantiated will have to be established by the Income-tax Department. Further, under the existing provisions, mere failure on the part of the assessee to substantiate his explanation is not enough to warrant penalty if such explanation is bona fide and all facts relating to the same are disclosed by him. The Amending Act in clause (B) of this Explanation has substituted for the words "not able to substantiate", the words " not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him". Further, the proviso making the existing Explanation in applicable to a case where in respect of any amount added or disallowed as a result of the rejection of any explanation offered by such person if the explanation is bona fide and all the facts relating to the same and material to the computation of his total income have been disclosed by him, has been cast on the person who has committed the default. (c)(B) As per the existing Explanation 5 to section 271(1) of the Income-tax Act, if at the time of search, assets which are not recorded in the books of account are found, a taxpayer is liable to penalty for concealment even if he declares the full value of those assets as his income in the return filed after the search. This provisions has been found to operate even in cases where the assessee has no intention to fabricate any evidence and he includes in his return the income out of which such assets have been acquired. Hence, by the Amending Act, it has been provided that if an assessee in such cases makes a statement during the course of the search admitting that the assets found at his premises or under his control have been acquired out of his income which has not been disclosed so far in his return of income to be furnished before the expiry of time prescribed in clause (a) or (b) of section 139(1) and specifies in the statement the manner in which such income has been derived and pays the taxes that are due thereon, no penalty shall be leviable. (d) Under the existing provisions, prosecution has been provided under section 276A(i) for non-compliance with the provisions of section 178 (1), under section 276A(ii) and (iii) for non-compliance with the provisions of section 178(3), under section 276AA for non-compliance of the provisions of section 269AB or 269-I, under section 276AB for non-compliance with the provisions of sections 269UC, 269UE(2) and 269UL(2), under section 276B for failure to deduct or pay tax as per Chapter XVIIB, etc., under section 276DD for non-compliance with the provisions of section 269SS, and under section 276E for non-compliance with the provisions of section 269T if the failure is without reasonable cause or excuse. From the above provisions, the words "without reasonable cause or excuse" have been omitted. This will mean that committing of the actus reus of the particulars offence by itself will attract prosecution. At the same time by inserting a new section 278AA, the Amending Act has provided that notwithstanding anything contained in the provisions of section 276A, 276AA, 276AB, 276B, 276DD or 276E, no person shall be punishable for any failure referred to in these provisions if he proves that there was reasonable cause for such failure. By this amendment, it has been secured that the assessee has to prove the existence of a reasonable cause for the failure as specified above. (e) By inserting a new section 278E, it has been provided that in any prosecution for any offence under this Act which requires a culpable mental state on the part of the accused, the court shall presume the existence of such mental state but it shall be a defence for the accused to prove the fact that he had no such mental state with respect to the act charged as an offence in that prosecution. The Explanation provides that "culpable mental state" includes intention, motive or knowledge of a fact or belief in, or reason to believe a fact. Further, that a fact is said to be proved only when the court believes it to exist beyond a reasonable doubt and not merely when its existence is established by a preponderance of probability. By this amendment, a court has to presume the existence of a criminal mental state on the part of the accused in any prosecution requiring such a mental state. However, this presumption can be rebutted by the accused to prove that there was no intention, motive or knowledge of a fact or belief in or reason to believe a fact in respect of the act charged as an offence in that prosecution. As regards the degree or proving the absence of a culpable mental state, it has been provided that a fact is said to be proved only when the court believes it to exist beyond a reasonable doubt and not merely when its existence is established by a preponderance of probability. This provision is based on the provisions contained in several other enactments dealing with economic offences such as section 138A of the Customs Act, 1962, section 9C of the Central Excise and Salt Act, 1944, section 98B of the Gold (Control) Act, 1968, and section 59 of the Foreign Exchange Regulation Act, 1973. 12.5. The above provisions will come into effect immediately and will accordingly apply in respect of all defaults or offences committed hereafter. [Sections 14 and 18 to 29 of the Amending Act]