The Finance Act, 1987-Explanatory Notes on the provisions relating to direct taxes - Income Tax - 495/1987

The Finance Act, 1987-Explanatory Notes on the provisions relating to direct taxes Circular No. 495 Dated 22/9/1987 INTRODUCTION 1. The Finance Bill, 1987, as passed by Parliament received the assent of the President on 12th May, 1987, and has been enacted as Act No. 11 of 1987. The Circular explains the substance of the provisions relating to direct taxes in the Finance Act, 1987. Changes made by the Finance Act, 1987: 2. The Finance Act, 1987 (hereinafter referred to as "Finance Act") has,- (i) amended sections 2, 10, 10A, 27, 32AB, 33AB, 36, 43AB, 45, 47, 49, 53, 54, 54B, 54D, 54E, 54F, 55, 56, 57, 70, 72, 80C, 80CC, 80G, 80-0, 80RRA, 80U, 155, 192, 194, 194A, 194D, 195, 199, 202, 203, 245B, 245C, 245D, 245E, 245F, 245H, 245HA, 245K, 273B and 293 and the Eleventh Schedule of the Income-tax Act; (ii) inserted sections 44BB, 44BBA, 54G, 80CCA, a new Chapter XIIB, sections 195A, 203A, 245BA to 245BD, 245HA, 272BB; (iii) substituted sections 48, 71, 74, 206, 245A; (iv) omitted sections 52, 80T, Chapters VIB, XI, sections 115, 245M, 280ZA, 285 and 286; (v) amended sections 2, 25, 35, 22B, to 22F, 22H, 22K, 31, 43 of the Wealth-tax Act, 1957; (vi) inserted sections 22BA to 22BD, 22HA of the Wealth-tax Act, 1957; (vii) substituted section 22A if the Wealth-tax Act, 1957; (viii) omitted section 22M of the Wealth-tax Act, 1957: (ix) amended sections 2 and 42 of the Gift-tax Act, 1958. PROVISIONS IN BRIEF 3. The provisions in the Finance Act, 1987, in the sphere of direct taxes relate to the following matters:- (i) Prescribing the rates of income-tax on incomes liable to tax for the assessment year 1987-88; the rates at which income-tax will be deductible at source during the financial year 1987-88 from interest (including interest on securities), dividends, salaries, insurance commission, winnings from lotteries and crossward 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 1987-88; (ii) Abolitation of provisions relating to additional income-tax on undistributed profits of certain companies; (iii) Amendment of the Income-tax Act, 1961, with a view to enlarging the meaning of "dividend" in respect of payments by way of advance or loan to a shareholder by a company not being a company in which the public are substantially interested; counteracting misuse of employees' contribution to any provident fund and superannuation fund, etc., by employers; exempting voluntary retirement benefits received by employes of public sector undertakings; widening the scope of "transfer"; enhancing relief to blind and physically handicapped; exempting donations to any Regimental Fund or Non-public fund for the welfare of armed forces; extending tax concession by three years in respect of investment in eligible issue of share capital; exempting interest payable by any public sector company on certain specified bonds and debentures; providing for deduction for investment in residential house property and in respect of investment in national savings scheme: extending the tax-holiday to units in the free trade zones to those who develop software or are engaged in processing or assembling also; enhancing deduction in respect of remuneration earned abroad which is brought into India; rationalising the meaning of "owner of house property"; rationalising taxation on capital gains; counteracting tax evasion by bringing to tax profits and gains on transfer of a capital asset by a partner to a firm or on distribution of assets on dissolution of a firm; levying minimum tax on book profits of companies; exempting totally any allowance received by a Member of Parliament under the Members of Parliament (Constitutency Allowance) Rules, 1986; allowing deduction on actual payment of tax or duty if liability is discharged on or before the date on which the return of income is due to be furnished; providing for determination of income at a flat rate in the case of non-residents engaged in the business of operation of aircraft and in the case of all assessees engaged in the business of exploration of mineral oil, etc.; rationalising the provisions relating to set off and carry forward of long-term capital losses; regulating the deduction in respect of royalties, etc.; modifying the scope of deduction of tax at source from salary; raising the monetary limit to Rs. 2,500 in respect of obligation to deduction of tax at source from dividends; facilitating computerised processing of data relating to tax collection by introduction of tax deduction account numbers; modifying the provisions relating to settlement of cases; providing that no suit shall lie in any civil court to set aside or modify any order made under the Income-tax Act; modifying the Eleventh Schedule to the Income-tax Act, 1961; (iv) Amendment to the Wealth-tax Act, 1957, with a view to providing that a building or part thereof shall be includible in the net wealth of a person who is deemed to be the owner as per the provisions of the Finance Act, 1987, relating to income-tax; exempting any deposit made under the national savings scheme; modifying the provisions relating to settlement of cases; empowering Commissioners of Wealth-tax to reduce or waive interest paid or payable on account of non-payment or delay in the payment of tax; barring the jurisdiction of civil courts in respect of any order passed under the Act; (v) Amendment of the Gift-tax Act, 1958, with a view to enlarging the meaning of "gift" to include transfer of property controlled by persons who are owners of house property as per the provisions of the Finance Act, 1987, relating to income-tax; barring the jurisdiction of civil courts in respect of any order under this Act. RATE STRUCTURE OF INCOME-TAX (i) Rates of income-tax in respect of income liable to tax for the assessment year 1987-88: 4. In respect of incomes of all categories of tax-payers (Corporate as well as non-corporate) liable to tax for the assessment year 1987-88, the rates of income-tax 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, 1986, for the purposes of computation of "advance tax", deduction of tax at source from "Salaries" and retirment annuities payable to partners of registered firms engaged in specified professions and computation of tax payable in certain cases during the financial year 1986-87. (ii) Rates for deduction of tax at source during the financial year 1987-88 from income other than "Salaries" and retirement annuities: 5. The rates for deduction of income-tax at source during the financial year 1987-88 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. (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 1987-88: 6. The rates for deduction of tax at source from "Salaries" in the case of individuals during the financial year 1987-88 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 1987-88 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 1987-88 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 1987-88, 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 incomes 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, HUFS, 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. 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 to the Finance Act, 1986. (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] Definition of dividend-Section 2(22)(e): 10.1 Sections 104 to 109 relate to levy of additional tax on certain closely-held companies (other than those in which the public are substantially interested) if they fail to distribute a specified percentage of their distributable profits as dividends. These provisions had lost much of their relevance with the reduction of the maximum marginal rate of personal tax to 50 per cent. Which is lower than the rate for corporation tax on closely-held companies. Sections 104 to 109 have, therefore, been omitted by the Finance Act, 1987. 10.2 With the deletion of sections 104 to 109 there was a likehood of closely-held companies not distributing their profits to shareholders by way of dividends but by way of loans or advances so that these are not taxed in the hands of the shareholders. To forestall his mainpulation, sub-clause (e) of clause (22) of section 2 has been suitably amended. Under the existing provisions, payments by way of loans or advances to shareholders having substantial interest in a company to the extent to which the company possesses accumulated profits is treated as dividend. The shareholders having substantial interest are those who have a shareholding carrying not less than 20 per cent. Voting power as per the provisions of clause (32) of section 2. The amendment of the definition extends its application to payments made (i) to a shareholders holding not less than 10 per cent. of the voting power, or (ii) to a concern in which the shareholder has substantial interest. "Concern" as per the newly inserted Explanation 3(a) to section 2 (22) means a HUF or a firm or an association of persons or a body of individuals or a company. A shareholders having a substantial interest in a concern as per part (b) of Explanation 3 is deemed to be one who is beneficially entitled to not less than 20 per cent. of the income of such concern. 10.3 The new provision would therefore, be applicable in a case where a shareholder has 10 per cent. or more of the equity capital. Further, deemed dividend would be taxed in the hands of a concern where all the following conditions are satisfied: (i) where the company makes the payment by way of loans or advances to a concern; (ii) where a member or a partner of the concern holds 10 per cent. of the voting power in the company; and (iii) where the member or partner of the concern is also beneficially entitled to 20 per cent. of the income of such concern. With a view to avoid the hardship in cases where advances or loans have already been given, the new provisions have been made applicable only in cases where loans or advances are given after 31st May, 1987. These amendments will apply in relation to assessment year 1988-89 and subsequent years. [Sections 3(a) and 41 of the Finance Act, 1987] Definition of "transfer" widened to include certain transactions : 11.1 The existing definition of the word "transfer" in section 2(47) does not include transfer of certain rights accuring to a purchaser, by way of becoming a member of or acquiring shares in a co-operative society, company, or association of persons or by way of any agreement or any arrangement whereby such person acquires any right in any building which is either being constructed or which is to be constructed. Transactions of the nature referred to above are not required to be registered under the Registration Act, 1908. Such arrangements confer the privileges of ownership without transfer of title in the building and are a common mode of acquiring flats particularly in multi-storeyed constructions in big cities. The definition also does not cover cases where possession is allowed to be taken or retained in part performance of a contract, of the nature referred to in section 53A of the Transfer of Property Act, 1882. New sub-clauses (v) (vi) have been inserted in section 2(47) to prevent avoidance of capital gains liability by recourse to transfer of rights in the manner referred to above. 11.2 The newly inserted sub-clause (vi) of section 2(47) has brought into the ambit of "transfer", the practice of enjoyment of property rights through what is commonly known as Power of Attorney arrangements. The practice in such cases is adopted normally where transfer of ownership is legally not permitted. A person holding the power of attorney is authorised the powers of owner, including that of making construction. The legal ownership in such cases continues to be with the transferor. 11.3 These amendments shall come into force with effect from 1-4-1988 and will accordingly apply to the assessment year 1988-89 and subsequent years. [Section 3(g) of the Finance Act, 1987] Measures of pernalising employers who misutilise contributions to the provident fund or any fund set up under the provisions of the Employees' State Insurance Act, 1948, or any other fund for welfare of employees: 12.1 The existing provisions provide for a deduction in respect of any payment by way of contribution to a provident fund or superannuation fund or any other fund for welfare of employees in the year in which the liability is actually discharged (section 43B). The effect of the amendment brought about by the Finance Act, 1987, is that no deduction will be allowed in the assessment of the employer(s) unless such contribution is paid to the fund on or before the "due date". Due date means the date by which an employer is required to credit the "contribution" to the employee's account in the relevant fund under the provisions of any law or term of contract of service or otherwise. [Explanation to section 36(1)(va)] 12.2 In addition, contribution of the employees to the various funds which are deducted by the employer from the salaries or wages of the employees will be taxed as income [insertion of new sub-clause (x) in clause (24) of section 2] of the employer, if such contribution is not credited by employer in the account of the employee in the relevant fund by the "due date". Where such income is not chargeable to tax under the head "Profits and gains of business or profession", it will be assessed under the head "Income from other sources". 12.3 Payment by way of tax on duty, liability for which has accured in the previous year, will be allowed as a deduction if it is made by the due date of furnishing the return under section 139(1) in respect of the assessment year to which the aforementioned previous year relates. 12.4 These amendments will take effect from 1-4-1988 and will, accordingly, apply from the assessment year 1988-89 and subsequent years. [Sections 3(b), 9, 10, 26 and 27 of the Finance Act, 1987] New provisions relating to set off and carry forward of long-term capital losses: 13.1 Under the existing provisions, losses from the transfer of short-term capital assets are allowed to be set off against any capital gains, whether short-term or long-term or against income under any other head; losses arising from transfer of long-term capital assets are, however, allowed to be set off only against long-term capital gains. The rationable of this lies in the fact that long-term capital gains are subject to lower incidence of tax. The long-term capital losses can be carried forward separately for four years. In case of short-term capital loss, the carry forward is allowed for 8 years. 13.2 The distinction between short-term and long-term capital assets though conforming to the principle of equity of taxation has led to complications. To make the provisions simpler, this distniction has been done away with by insertion of sub-clauses (29A), (29B) and (42B) in section 2 of the Income-tax Act, 1961, substitution of sections 71 and 74 and amendment of sections 70 and 72. To ensure uniform treatment of capital losses and capital gains, losses arising on transfer of long-term capital assets (after they are scaled down by the same percentage of deduction as long-term capital gains) would be treated as any other losses so that they can be set off against income under any other head in the same year and if not fully set-off may be carried forward. The distniction between the carry forward of short-term capital losses and long-term capital losses and has also been removed and all capital losses would be carried forward for 8 succeeding years and set off only against capital gains, if any, in those years. 13.3 The above amendments to sections 2, 70, 71 and 74 of the Income-tax Act shall come into force with effect from 1-4-1988 and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years. 13.4 Transitory provisions with regard to carry forward of capital losses in relation to assessment year 1987-88 and earlier assessment years have been provided for in sub-section (3) of section 74. This provides that short-term capital losses computed in respect of assessment year 1987-88 or any earlier assessment year(s) shall be carried forward and set off under the head "Capital gains" assessable for assessment year 1988-89 or any subsequent assessment year(s). This short-term capital loss, however, would not be carried forward for more than 8 years succeeding the assessment year in which the loss was first computed. 13.5 In respect of long-term capital loss relating to the period to the date of coming into effect of the new section 74, this would be carried forward and set off against income under the head "Capital gains" assessable for that assessment year. Carry forward of loss would not be allowed beyond the 4th assessment year immediately succeeding the assessment year for which the loss was first computed. [Sections 3(c), 3(f), 28, 29, 30, 31 of the Finance Act, 1987] Tax incentive for investment in shares: 14.1 Under the existing provisions of section 2(42A) of the Income-tax Act, short-term capital asset means the capital asset held by the taxpayer for a period of 36 months of less, immediately proceeding the date of its transfer. With a view to providing tax incentive for investment in shares held in a company, the share shall be treated as a short-term capital asset if it is held by the assessee for 12 months or less immediately proceeding the date of its transfer. 14.2 This amendment will take effect from 1-4-1988 and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years. [Section 3 (e) of the Finance Act, 1987] Exemptions of compensation received by employees of public sector companies on voluntary retirement: 15.1 At present, under section 10(10B), any compensation received by a workman at the time of his retirement is exempted up to the amount calculated in accordance with section 25F of the Industrial Disputes Act or Rs. 50,000, whichever is less. The limit is, however, not applicable in respect of compensation received under certain schemes approved by the Central Government. 15.2 A number of public sector undertakings have formulated voluntary retirement schemes for their employees. With a view to extend relief of such employees, the Finance Act, 1987, by introducing new clause (10C) in section 10, provides exemptions in respect of any payment received by them at the time of their voluntary retirement in accordance with any scheme which the Central Government may approve having regard to the economic viability of the public sector company and other relevant circumstances. This exemption will be available to any employees whether a workman or an executive. 15.3 This 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 4(a) of the Finance Act, 1987] Modification in the nomenclature for exemption of income-tax on certain deposits with post office: 16.1 Section 10(15) of the Income-tax Act exempts within permissible limits interest earned by assessees on certain deposits made with the Post Office Savings Banks. The exemptions covers interest earned on deposits made in the- (i) Post Office Savings Banks under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959; and (ii) Public Account under the Post Office (Savings Bank) Rules, 1965. 16.2 The rules regarding the above two Post Office Savings Accounts Rules have been revised and as a consequence have been substituted by the Post Office (Cumulative Time Deposits) Rules, 1981, and the Post Office Savings Account Rules, 1981, respectively. The substitution has been made w.e.f. 1st April, 1982. 16.3 Section 10(15) as a consequence has been amended with retrospective effect. It now refers to the rules currently applicable for the rules which are now not legally in force. The interest on deposits made in the Post Office Savings Banks under these rules continue to qualify for exemption from income-tax. 16.4 The amendment is with the retrospective effect from 1st April, 1983, and will, accordingly, apply to the assessment year 1983-84 and subsequent years. Interest which may have accured after 1st April, 1982, on the deposits made under the revised rules would, therefore, be eligible for exemption. [Section 4(b)(i) of the Finance Act, 1987] Exemption of interest on bonds issued by certain public sector undertakings: 17.1 In his Budget Speech for the year 1986-87, the Finance Minister had announced that "the Government will introduce another series of Public Sector Bonds with a tax-free return". Pursuant to this announcement, certain public sector enterprises such as Mahanagar Telephone Nigam Limited, National Thermal Power Corporation and Indian Railway Finance Corporation had issued these tax-free bonds. 17.2 By insertion of item (h) in sub-clause (iv) of clause (15) of section 10, the Amendment Act provides that interest payable by the public sector companies on certain specified bonds and debentures will not form part of total income, subject to the conditions which the Central Government may specify by notification, including the condition that the holder of such bonds or debentures registers his name and holding with that company. 17.3 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 4(b)(ii) of the Finance Act, 1987] Modification of provisions relating to exemption of allowances received by Members of Parliament: 18.1 The Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, conferred upon the Central Government enabling power to exempt by notification the constituency allowance and other such allowances of the Members of Parliament not exceeding Rs. 1,250 per month. The Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, also extended the exemption in respect of allowances received by a Member of any State Legislature up to Rs. 600 per month in the aggregate. The Central Government by notification in the Official Gazette specified the allowances. The daily allowance received both by the Members of Parliment and State Legislatures was also exempt. 18.2 The Finance Act, 1987, exempts any allowance received by Members of either House of Parliment under the Members of Parliment (Constituency Allowance) Rules, 1986. This deduction is not subject to any notification or any monetary limits. The provisions in relation to members of the State Legislatures or Committees thereof have not been altered. 18.3 The amendment shall come into force restrospectively from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 4(c) of the Finance Act, 1987] Clarify amendment to extend tax holiday to the units in Free Trade Zones: 19.1 Section 10A of the Income-tax Act provides a tax holiday to newly established industrial undertakings in free trade zones. The tax exemption is available for five consecutive assessment years out of the block of initial eight years. The section refers to units engaged in "manufactures or production of articles or things". There are several cases of units, set up in the free trade zones, which only assemble or process imported components for export, the benefit to the country being the value added. As an incentive for earning foreign exchange, section 10A has been amended w.e.f. 1st April, 1981, when it was first introduced, to clarify that units that merely assemble or process goods for export would also get the benefit of the tax holiday. The amendment also covers units which carry out recording of programmes on any disc, tape, perforated medial or other information sorage device. In this regard, the Board has already issued instruction in November, 1986. 19.2 The amendment will come into force retrospectively from 1st April, 1981, and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. [Section 5 of the Finance Act, 1987] Modification of provisions relating to investment deposit account: 20.1 The Finance Act, 1986, introduced section 32AB relating to investment deposit account. The provisions apply in relation to the assessment year 1987-88 and subsequent years. Under these provisions, and assessee is entitled to a deduction of an amount up to 20 per cent. of the profits of 'eligible business or profession', if the said amount is either deposited with the Development Bank within the period up to six months from the end of the previous year or before furnishing the return, whichever is earlier, or is utilised during the previous year for the purchase of a new ship, new aircraft, or new machinery or plant. 20.2 Under the provisions introduced by the Finance Act, 1986, the deduction under section 32AB is allowed after setting off business loss, if any, brought forward from earlier years. To remove hardship in cases where the assessee may not be able to avail of this benefit because of brought forward losses from earlier years, the Finance Act, 1987, now provides that the deduction will be allowed before setting off of brought forward losses. 20.3 The existing provisions could conceivably lead to an interpretation that the deduction is allowable both in the case of the firm and also in the case of the partners in respect of income derived from business carried on by a firm. This was never the intention of the provisions. It has, therefore, been clarified by the Amending Act that the deduction under section 32AB shall be allowed in the hands of the firm and not in the hands of the partners in respect of income derived from the business of the firm. 20.4 Under the existing provisions, as introduced by the Finance Act, 1986, profits of eligible business or profession, means profits as computed in accordance with the Sixth Schedule to the Companies Act, 1956, as reduced by depreciation computed under the provisions of section 32(1) and as increased by the depreciation, debited in the audited profit and loss account. The Finance Act, 1987, has introduced certain further adjustments for arriving at the amount of 'profits of eligible business or profession'. The amount arrived at above will have to be increased by provision for taxation and reserves, etc., and decreased by amount withdrawn from provisions or reserves if such amounts are credited to the profit and loss account. 20.5 By inserting a new sub-section (5A), the Amending Act also provides that the amount deposited with the Development Bank in accordance with the Scheme shall not be permitted to be withdrawn before the expiry of a period of 5 years from the date of deposit, except for the purposes specified in the Scheme and in the following circumstances:- (a) closure of business; (b) death of the taxpayer; (c) partition of a HUF; (d) dissolution of a firm; (e) liquidation of company. 20.6 The Investment Deposit Account Scheme permits withdrawals for some purposes which are even otherwise deductible under the Income-tax Act. In order to secure that such assessees are not allowed deduction twice in respect of the same expenditure, the Amending Act clarifies, that where any expenditure is made wholly or partly by utilising the amount credited to the taxpayer in the deposit account, in respect of which deduction is allowed under section 32AB(1), then such expenditure shall not be reduced under the other provisions of the Act. 20.7 Section 32AB(6) lays down that any amount withdrawn by an assessee from his account with the Development Bank but not utilised in accordance with the scheme during the previous year will be treated as income of the year during which the withdrawal was made. There may be a situation where an assessee withdraws the amount and utilises the same in accordance with the scheme for specified purposes within the period permitted by the scheme but a part of such period may fall in the next accounting year. In such cases, the effect of the existing provisions is that though an assessee has utilised the amount in accordance with the scheme, the amount will be added to the assessee's income in the year in which the withdrawl is made. To remove this anomaly, the Amending Act, 1987, has clarified [section 32AB(6)] that in a case where the amount withdrawn has been utilised for the specified purpose within the period specified in the scheme, such amount would not form part of the income of the assessee in the previous year in which the amount has been withdrawn. 20.8 The utilisation of the amount withdrawn is permitted in accordance with the provisions of section 32AB and the scheme framed thereunder for the purpose of purchasing a "new ship" or "new aircraft" or "new machinery or plant". These expressions have been defined in the Explanation to section 32(1)(vi) of the Income-tax Act which has been deleted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, with effect from 1-4-1988. As a consequence, the Amending Act has amended section 32AB by including the definition of the expressions "new ship", "new aircraft" and "new machinery or plant" in the section itself. 20.9 These amendments will come into force with effect from 1st April, 1987, and will, accordingly, apply to the assessment year 1987-88 and subsequent years. [Section 7 of the Finance Act, 1987] New provisions for computing of taxable income from activities connected with exploration of mineral oils: 21.1 A number of complications are involved in the computation of taxable income of a taxpayer engaged in the business of providing services and facilities in connection with or supply of plant and machinery on hire, used or to be used in the exploration for and exploitation of mineral oils. With a view of simplifying the provisions, the Amending Act has inserted a new section 44BB which provides for the determining of the income of such taxpayers at 10 per cent. of the aggregate of certain amounts which have been specified. This amount will include the amounts received or due to be received in India on account of such services or facilities or supply of plant and machinery. 21.2 The amendment will not apply to any income to which the provisions of sections 42, 44D, 115A or 239A of the Income-tax Act apply. 21.3 This amendment will come into force retrospectively from 1st April, 1983, and will, accordingly, apply in relation to the assessment year 1983-84 and subsequent years. [Section 11 of the Finance Act, 1987] Simplification in the computation of income in respect of foreign airlines: 22.1 Presently the income of a non-resident engaged in the business of operation of aircraft is computed after allowing deduction for certain expenses and statutory deductions. This involves complications in determining the income accuring or arising in India to such a person. 22.2 With a view to simplify the existing provisions, the Amending Act has inserted a new section 44BBA which provides that the income from such business shall be computed at a flat rate of 5 per cent. of the amount received or receivable by or on behalf of the taxpayer for carriage of persons, livestock, mail or goods from any place in India and the amount received or deemed to be received within India on account of such carriage from any place outside India. 22.3 The amendment will come into force with effect from 1st April, 1988, and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years. [Section 12 of the Finance Act, 1987] Enlarging the meaning of ownership of house property: 23.1 The Amending Act has extended the meaning of the expression "ownership" for the purpose of computing income under the head "Income from house property". The expression "ownership" meaning legal ownership had the effect of excluding cases where an assessee possessed all rights to an immovable property except the husk of the title. 23.2 The practice of limited companies constructing multi-storeyed buildings and allotting or leasing flats to the shareholders is quite prevalent these days. In such a situation, though the limited company to whom the flats are allotted are the real owners who enjoy the income therefrom. In several States where the Apartment Act has not been introduced there is a legal hurdle in transferring the ownership of these flats to individual shareholders. Since the legal ownership remains with the company, the income therefrom is taxed in their hands under the head "Income from house property". At the same time, since the shareholder actually enjoys the income he is assessed under the head "Income from other sources". This has led to taxing the same income twice. There is another practice whereby property is transferred to the purchaser after receiving the consideration but without getting the sale registered under section 54 of the Transfer of Property Act. This is done by executing power of attorney in favour of a persons who by virtue of that power of attorney enjoys the property. In such cases, legally, the property remains with the registered owner but for all practical purposes the holder of the power of attorney is the owner. A similar situation arises where possession of any immovable property is allowed to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882. All these types of transactions have the effect to transferring the house property in fact, though not in law. With the extended definition of the expression "ownership", transactions covered by section 269UA of the Income-tax Act, 1961 (including transfer of property by power of attorney), shall be considered as having the effect of transfer of title. The Amending Act by insertion of sub-clauses (iii), (iiia) and (iiib) in section 27, covers all the transactions referred to above for the purpose of determining the ownership of the property for assessing income under the head" Income from house property." 23.3 For the sake of uniformity and consistency, consequential amendments in the Wealth-tax Act and Gift-tax Act have also been made as a similar situation exists in the allied statutes. [Section 2(m) of the Wealth-tax Act and section 2(xii) of the Gift-tax Act] 23.4 The Amending Act has shifted the liability to taxation, from the legal owner to the real owner in respect of some transfers by introducing deeming provisions. The question of taxing the legal owner, e.g., a builder of multi-storeyed flats under the head "Income from house property" would, consequently, not arise. 23.5 This amendment will come into force with effect from 1st April, 1988, and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years. [Sections 3(g), 6, 75 and 90 of the Finance Act, 1987] Capital gains on transfer of firms' assets to partners and vice versa and by way of compulsory acquisition: 24.1 One of the devices used by assessees to evade tax on capital gains is to convert an asset held individually into an asset of the firm in which the individual is a partner. The decision of the Supreme court in Kartikeya V. Sarabhai v. CIT [1985] 156 ITR 509 has set at rest the controversy as to whether such a conversion amounts to transfer. The court held that such conversion fell outside the scope of capital gain taxtion. The rationale advanced by the court is, that the consideration for the transfer of the personal asset is indeterminate, being the right which arises or accrues to the partner during the substistence of the partnership to get his share of the profits from time to time and on dissolution of the partnership to get his share of the profits from time to time and on dissolution of the partnership to get the value of his share from the net partnership assets. 24.2 With a view to blocking this escape route for avoiding capital gains tax, the Finance Act, 1987, has inserted new sub-section (3) in section 45. The effect of this amendment is that profits and gains arising from the transfer of a capital asset by a partner to a firm shall be chargeable as the partner's income of the previous year in which the transfer took place. For purposes of computing the capital gains, the value of the asset recorded in the books of the firm on the date of the transfer shall be deemed to be the full value of the consideration received or accured as a result of the transfer of the capital asset. 24.3 Conversion of partnership assets into individual assets on dissolution or otherwise also forms part of the same scheme of tax avoidance. Accordingly, the Finance Act, 1987, has inserted new sub-section (4) in section 45 of the Income-tax Act, 1961. The effect is that profits or gains arising from the transfer of a capital asset by a firm to a partner on dissolution or otherwise shall be chargeable as the firm's income in the previous year in which the transfer took place and for the purposes of computation of capital gains the fair market value of the asset on the date of transfer shall be deemed to be the full value of the consideration received or accured as a result of the transfer. 24.4 As a consequential measure, clause (ii) of section 47 has been omitted and sub-clause (b) of clause (iii) of section 49(1) has been amended. 24.5 Under the existing provisions where capital gains accure or arise by way of compulsory acquisition of assets, the additional compensation is taken into consideration for determining the capital gain for the year in which the transfer took place. To provide for rectification of assessment of the year in which the capital gain was originally assessed, section 155(7A) was introduced. The additional compensation is awarded in several stages by different appellate authorities and necessitates rectification of the original assessment at each stage. This causes great difficulty in carrying out the required rectification and in effecting the recovery of additional demand. Another difficulty which arises is in cases where the original transferor dies and the additional compensation is received by his legal heirs. In the latter type of cases, proceedings have to be initiated against the legal heirs. Repeated rectification of assessment on account of enhancement of compensation by different courts often results in mistakes of computation of tax. 24.6 With a view to removing these difficulties, the Finance Act, 1987, has inserted a new sub-section (5) in section 45 to provide for taxation of additional compensation in the year of receipt instead of in the year of transfer of the capital asset. The additional compensation will be deemed to be income in the hands of the recipient even if the actual recipient happens to be a person different from the original transferor by reason of death, etc. For this purpose, the cost of acquisition in the hands of the receiver of the additional compensation will be deemed to be nil. The compensation awarded in the first instance would continue to be chargeable as income under the head "Capital gains" in the previous year in which the transfer took place. 24.7 These amendments will come into force with effect from 1st April, 1988, and will, accordingly, apply from the assessment year 1988-89 and subsequent years. [Sections 13, 14, and 16 of the Finance Act, 1987] Modification in the provisions relating to computation of capital gains: 25.1 Under the existing provisions of section 48 of the Income-tax Act computation of capital gains resulting from the transfer of a capital asset is made by deducting the cost of acquisition, the cost of improvement and the expenditure incurred in connection with transfer from the consideration received on such transfer. In addition to the aforesaid deductions, section 80T provides for certain deductions in respect of long-term capital gains in the case of non-corporate taxpayers. In the case of corporate taxpayers, concessional treatment in respect of long-term capital gains is allowed not by way of deduction but through lower rates prescribed in section 115. 25.2 With the amendment, the statutory deductions or concessions available in sections 80T and 115 have been incorporated in section 48 itself. The present sections 80T and 115 have been omitted. 25.3 The new scheme provides for 100 per cent. deduction in all cases where the long-term capital gain does not exceed Rs. 10,000. Where it exceeds Rs. 10,000, the rates of deduction are as under:- Status of assessee Rates of deduction in respect of long-term capital gains relating to buildings or lands or any rights therein or gold, buillion or jewellery hereinafter called(Category I) Rates of deduction in respect of long-term capital gains relating to other capital assets hereinafter called(Category II) Rs. Rs. Company 10,000 + 10% of balance 10,000 + 30% of balance Any other assessee 10,000 + 50% of balance 10,000 + 60% of balance In a case where capital gains in relation to both the categories of assets referred to above (i.e., Category I and Category II) are chargeable under the head "Capital gains", the manner of allowing deduction of Rs. 10,000 has been prescribed in the first proviso to the newly introduced section 48. The deduction of Rs. 10,000 will be first allowed against the assets referred to above in Category I, and the balance, if any, against the assets referred to in Category II. 25.4 In cases of compulsory acquisition, the threshold deduction will be restricted to a total amount of Rs. 10,000 in relation to the initial compensation as well as additional compensation received in subsequent years. 25.5 The above deductions referred to in section 48(2) will be given after providing for the exemptions specified in sections 54, 54B, 54D, 54E, 54F and 54G. 25.6 The exemptions provided in sections 53, 54 and 54F in respect of capital gains which are hitherto allowed only to individuals has now been extended to Hindu undivided families also. 25.7 These amendments will take effect from 1st April, 1988, and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years. [Sections 15 and 18 of the Finance Act, 1987] New scheme for deposits in respect of exemption from capital gains: 26.1 Under the existing provisions of sections 54, 54B, 54D, and 54F, long-term capital gains arising from the transfer of any immovable property used for residence, land used for agricultural purposes, compulsory acquisition of lands and buildings and other capital assets within the time allowed for the purpose. The original assessment needs rectification whenever the taxpayer fails to acquire the corresponding new asset. 26.2 With a view to dispense with such rectifications of assessments, the amendments made to sections 54, 54B, 54D and 54F provide for a new scheme for deposit of amounts meant for reinvestment in the new asset. After the aforementioned amendments, where the amount of capital gains or the net consideration, as the case may be, is not appropriated or utilised by the taxpayers for acquisition of the new asset before the date for furnishing the return of income, it shall be deposited by him on or before the due date of furnishing the return of income, under section 139(1) in an account with a bank or institution and utilised in accordance with a scheme framed by the Central Government in this regard. The amount already utilised together with the amounts of deposit shall be deemed to be the amount utilised for the acqusition of the new asset. If the amount deposited is not utilised fully for acquiring the new asset within the period stipulated, the capital gain relatable to the unutilised amount shall be treated as the capital gain of the previous year in which the period specified in these provisions expires. In such cases, the threshold deduction of ten thousand rupees as well as the deduction under section 53 will not be admissible. Further, the taxpayer shall be entitled to withdraw such amount in accordance with this scheme. This scheme will be applicable in relation to the new section 54G also. 26.3 The following examples illustrate as to how the amended provisions relating to the new sections for deposit will be applied: Computation of capital gains Rs. ( in lakhs ) 1. Sale consideration (date of sale 2-6-1987) 10 2 . Cost of acquisition (date 1-5-1983) 3 3 . Investment in construction of the new property by due date of filing the return for the assessment year 1988-89 4 Capital gain 7 SITUATION 1 : Where no deposit in accordance with the scheme is made by the taxpayer - Sale consideration 10 - Cost of acquisition [to be allowed under section 48(1)( a )] 3 Balance 7 - Deduction under section 54(1)( i ) 4 Balance 3 - Deduction under section 53 : 7 × 2/10 1.4 Balance 1.60 - Deduction under section 48(2) : Rs. 10,000 + Rs. 75,000 0.85 Net capital gain liable to tax in the assessment year 1988-89 0.75 SITUATION 2: Amount deposited as per scheme by the due date of filing the return for the assessment year 1988-89 3 Hence, amount deemed utilised for the acquisition of new asset 7 Capital gain liable for tax for the year 1988-89 : ( i ) If the amount of Rs. 3 lakhs is utilised in the construction by 2-6-1990, capital gain in the assessment year 1991-92 Nil ( ii ) If the amount of Rs. 3 lakhs not utilised in the construction of the property, capital gain for the assessment year 1991-92 Nil Amount of deposit 3 Less : Deduction under section 48(2) (initial deduction of Rs. 10,000 not being allowed), 50% of the amount 1.5 Net capital gain charged to tax in the year 1991-92 1.5 1.5 " 26.4 These amendments will take effect from 1st April, 1988, and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years. [Sections 19, 20, 21 and 23 of the Finance Act, 1987] Exemption of capital gains on shifting of industrial undertakings from urban areas: 27.1 Under section 280ZA, if a company owning an industrial undertaking shifts the undertaking from an urban area, it qualifies to receive a tax credit certificate in respect of capital gains arising from the transfer of plant, machinery, etc. This provision has been omitted with effect from 1-4-1988 by the Finance Act, 1987. 27.2 With an intent to promote decongestion of urban areas as also balanced regional growth, the newly inserted section 54G exempts capital gains on transfer of plant, machinery, land, building, etc., used for the purposes of the business of industrial undertaking. The transfer must be effected in the course of, or in consequence of, shifting of the industrial undertaking from an urban to a non-urban area. Capital gains would be exempt, to the extent it is utilised within a period of one year before or three years after the date of transfer in- (i) acquiring new plant, machinery, land, building, etc., for the purposes of the business of the undertaking in the area to which it is shifted; and (ii) incurring expenses in the purchase of a new plant and machinery, etc., and in the shifting of the establishment of the undertaking; and (iii) incurring other expenses as would be specified in a scheme to be drawn up by the Central Government. The exemption on capital gains will be available only if the industrial undertaking is shifted to a non-urban area within a period of one year before or three years after the date of transfer of the plant, machinery, etc., referred to above. 27.3 The new scheme for deposit of amounts for reinvestment of capital gains within the specified period will also be applicable to gains arising from the transfer of plant, machinery, etc., effected in the course of, or in consequence of the shifting of industrial undertaking from urban to non-urban areas. 27.4 The benefit of exemption under section 54G will be available for shifting of intergrated independent units of the industrial undertaking, from an urban to a non-urban area. For example, in the textile industry, if a distinct part of the industrial undertaking like a spinning unit is shifted from an urban to non-urban area, without shifting the weaving unit, the exemption provided for in section 54G will still be allowable. 27.5 These amendments will take effect from 1st April, 1988, and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years. [Section 24 of the Finance Act, 1987] Capital gains arising on transfer of goodwill: 28.1 In principle, the gains arising on transfer of good will amount to capital gains liable to tax. The judicial view, however, has been that it is only where an asset costs something to an assessee in terms of money, that the provisions relating to levy of capital gains tax can apply. Good will being a self-generated asset, not costing anything in terms of money, has been held to be outside the purview of capital gains tax [CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC)]. Even in a case where an assessee transferred goodwill which he had acquired earlier on payment of a price, the gain from such transfer was held by a High Court to be not taxable, on the ground that the cost of improvement in respect of this asset could not be ascertained in terms of money. 28.2 The Finance Act, 1987, by amending section 55 has provided for the method of computing the cost of acquisition as well as the cost of improvement, where goodwill is transferred. Where goodwill is purchased by the transferor the cost of acquisition will be taken to be the purchase price and in all other cases it shall be taken to be nil. The cost of improvement in either case would be taken to be nil. 28.3 The intention in bringing to tax the capital gains on transfer of goodwill is only to cover those cases where goodwill is actually transferred. Those cases where the transfer is notional, for example, when a new partner is admitted to a firm, would not be covered by the amendment. The new provisions will also not apply to professional firms. 28.4 The amendment shall come into force with effect from 1st April, 1988, and will, accordingly, apply to the assessment year 1988-89 and subsequent years. [Section 25 of the Finance Act, 1987] Modification of the provisions relating to deduction in respect of certain payments: 29.1 With a view to providing an incentive for construction and purchase of new residential houses, the provisions of section 80C have been amended on the following lines: (i) Subject to overall qualifying limit of Rs. 40,000 a deduction will be allowed in respect of any payment made towards the cost of any new residential property, construction of which is completed after 31-3-1987; (ii) the qualifying amount in this mode of payment will be limited to an amount of Rs. 10,000; (iii) the payment towards cost will include:- (a) any instalment or part payment made under a self-financing or any other scheme of any development authority, housing board or any authority engaged in the construction and sale of residential accommodation on ownership basis; (b) any instalment or part payment of the amount due to any company or a co-operative society of which the assessee is a shareholder or member towards the cost of the house property allotted to him; (c) any repayment of loans borrowed by taxpayer from the Government or any Bank of Life Insurance Corporation of India and certain categories of public companies, co-operative societies and institutions engaged in the business of providing long-term finance for construction or purchase of houses in India; (d) any repayment of loan borrowed from the employer if the employer happens to be a public company or a public sector company as per definition newly inserted by Amending Act [Section 2(36A)]; (e) stamp duty, registration fee and other expenses incurred for the purpose of the purchase of house, etc.; (iv) the following payments, however, do not qualify for deduction:- (a) cost of share or initial deposit for the cost of land (except where the consideration for the purchase of house property is a composite amount and the cost of land cannot be separately ascertained) or the cost of any addition or alteration; (b) any expenditure in respect of which a deduction is allowable under section 24; (v) If, for any reason, any instalment or part payment made in advance in respect of which deduction has been claimed is refunded, the deduction already allowed will be deemed to be the income of the assessee chargeable to tax under the head "Income from other sources" of the year in which the money was received back. In addition, no deduction would be allowed in respect of any payment made during that year; (vi) it is necessary for the assessee to hold the property for a minimum period of 5 years from the end of the year in which the possession was taken. In case of transfer of such property before the period of 5 years the total amount of the deduction allowed to him under these provisions will be deemed to be the assessee's income of the year in which the property is transferred and shall be chargeable to tax under the head "Income from other sources". 29.2 This amendment comes into force with effect from 1st April, 1988, and will, accordingly, apply to the assessment year 1988-89 and subsequent years. [Section 32 of the Finance Act, 1987] Tax incentive for investment in certain new shares: 30.1 Under the existing provisions of section 80CC of the Income-tax Act, deduction is allowable within limits, in respect of acquisition of certain shares offered for subscription to the public before 1st April, 1987. 30.2 With a view to provide tax incentive for investment in such shares, the concession has been extended by 3 years. Deduction will be allowable subject to the satisfaction of certain conditions in respect of investment in shares offered for subscription before 1st April, 1990. The condition in respect of holding period as mentioned in section 80CC(5) has been reduced from 5 years to 3 years. 30.3 This amendment will take effect from 1st April, 1987. [Section 33 of the Finance Act, 1987] New provisions relating to the national savings scheme to augment savings: 31.1 The Finance Act, 1987, has inserted a new section 80CCA. Under the new provisions, deduction will be allowed to an individual, a Hindu undivided family and certain categories of associations of persons or bodies of individuals in respect of the deposits made in the National Savings Scheme [See Annexure I*]. The deduction will be restricted to 50% of the amount deposited, as does not exceed Rs. 20,000 in a previous year. In case the depositor makes any withdrawals from the amount standing to his credit in the National Savings Scheme together with the interest accured thereon, an amount equal to 50% of the amount so withdrawn shall be deemed to be the income of the taxpayer for the previous year in which such withdrawal is made. Interest on the deposits made under the National Savings Scheme will be taxable only in the year of withdrawal and to the extent of fifty per cent. thereof. The deposits in the account will qualify for exemption under the Wealth-tax Act, along with other specific assets, subject to the overall limit of Rs. 5 lakhs. 31.2 This amendment will come into force with effect from 1st April, 1988, and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years. [Section 34 and 76 of the Finance Act, 1987] Modification of the provisions relating to deduction in respect of donations to certain funds, etc.: 32.1 Under section 80G of the Income-tax Act, the taxpayer is entitled to a deduction, in computing his taxable income, of a sum equal to 50% of the donation made to certain funds, institutions, etc. The amount of deduction which qualifies for deduction is limited to 10% of the gross total income of the donor, subject to a monetary limit of Rs. 5 lakhs. With the amendment of section 80G by the Finance Act, 1987, donations to any Regimental Fund (Funds set up by the Army) or Non-Public Fund (Funds set up by the Navy and Air Force), established by the Armed Forces of the Union, for the welfare of the past and present members of such forces or their dependants, shall also qualify for deduction subject to the limit and conditions laid down in section 80G. 32.2 This amendment will come into force with effect from 1st April, 1988, and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years. [Section 35 of the Finance Act, 1987] Modification in the provisions relating to deduction in respect of royalties, etc., from certain foreign enterprises: 33.1 Under the existing provisions of section 80-O of the Income-tax Act, an Indian company is entitled to a deduction, of an amount equal to 50 per cent. of the income, by way of royalty, commission, fees and similar payments, received from the Government of a foreign State or a foreign enterprise for consideration for the use outside India of any patent, invention, model, etc. Such income has either to be received in India in convertible foreign exchange or having been received in foreign exchange outside India is brought into India. Explanation (ii) to section 80-O, however, provides that if out of any such income, any sum is utilised by the Indian company outside India in the manner permitted by the Reserve Bank of India, the same would be deemed to have been brought into the country and a deduction shall be allowed in respect of such amount. The basic purpose of this incentive provision is to earn foreign exchange for the country. This can be done effectively only by ensuring inward remittance of foreign exchange within a responsible period. Therefore, Explanation (ii) to section 80-O as it stood earlier has been deleted and a third proviso has been inserted in section 80-O, laying down that a deduction will be allowed under that section only in respect of income which is received in India in convertible foreign exchange or has been brought into India within a period of six months. However, where the Commissioner is satisfied (for reasons to be recorded in writing) that the assessee is unable to do so within the time specified above, because of reasons beyond his control, he may allow such further time as may be considered necessary. 33.2 It was held by the Bombay High Court that a branch abroad of a company resident in India would be a "foreign enterprise", within the meaning of section 80-O. As this was not the intention of the law, a new clause (ii) has been inserted in Explanation to section 80-O to clarify that a "foreign enterprise" means a person who is a non-resident. 33.3 Where the deduction under section 80-O is not allowed on the ground that the qualifying amount of income has not been brought into India in the relevant year but has been received or brought into India in a subsequent year, the assessment order in respect of the deduction under section 80-O was rectified under section 154 within a period of 4 years from the date on which such income was either received in India or brought into India. The power to make such an amendment is derived from section 155(12). Consequent to the introduction of the proviso referred to in para. 33.2 above, the provisions of section 155(12) were no longer necessary and have, therefore, been deleted. 33.4 The deletion of the words "or having.......dealing in foreign exchange" has been done only to simplify the section. It does not, in any manner, reduce or narrow down the scope of application of the section itself. In other words, as long as the payment made by the foreign State or foreign enterprise in convertible foreign exchange is received within the specified period in India by or on behalf of the assessee in accordance with the law in this regard (Foreign Exchange Regulation Act, 1973), the assessee would be entitled to the deduction under this section, if the other requirements in this regard are satisfied. 33.5 These amendments will come into force with effect from 1st April, 1988, and, will, accordingly, apply to the assessment year 1988-89 and subsequent years. [Sections 36 and 44 of the Finance Act, 1987] Modification of provisions in respect of remuneration received for services rendered outside India : 34.1 Presently section 80RRA of the Income-tax Act provides for deduction of an amount equal to 50 per cent. of any remuneration received by an individual who is a citizen of India, if such remuneration is received by him in foreign exchange from an employer for any service rendered by him outside India. 34.2 To provide an incentive for brining foreign exchange into India, the Amending Act has enlarged the benefit of deduction to- (i) 50 per cent. of the remuneration received by the taxpayer; or (ii) 75 per cent. of such remuneration as is brought into India by or on behalf of the taxpayer in accordance with the Foreign Exchange Regulation Act, 1973; whichever is higher. 34.3 This amendment will come into force with effect from 1st April, 1988, and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years. [Section 37 of the Finance Act, 1987] Enhancing deduction in the case of totally blind or physically handicapped persons: 35.1 Section 80U of the Income-tax Act provides for deduction of an amount of rupees ten thousand in computing the income of a resident individual who is totally blind or suffers from any of the specified permanent physical disabilities. With a view to providing relief to these categories of persons the Amending Act has enhanced the amount of deduction from ten thousand rupees to fifteen thousand rupees. 35.2 The amendment will take effect from 1st April, 1988, and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years. [Section 39 of the Finance Act, 1987] New provisions to levy minimum tax on "book profit" of certain companies: 36.1 It is an accepted canon of taxation to levy tax on the basis of ability to pay. However, as a result of various tax concessions and incentives certain companies making huge profits and also declaring substantial dividends, have been managing their affairs in such a way as to avoid payment of income-tax. 36.2 Accordingly, as a measure of equity, section 115J has been introduced by the Finance Act. By virtue of the new provisions, in the case of a company whose total income as computed under the provisions of the Income-tax Act is less than 30 per cent. of the book profit computed under the section, the total income chargeable to tax will be 30 per cent. of the book profit as computed. For the purposes of section 115J, book profits will be the net profit as shown in the profit and loss account prepared in accordance with the provisions of Schedule VI to the Companies Act, 1956, after certain adjustments. The net profit as above will be increased by income-tax paid or payable or the provision thereof, amount carried to any reserve, provision made for liabilities other than ascertained liabilities, provision for losses of subsidiary companies, etc., if the amount are debited to the profit and loss account. Liabilities relating to expenditure which has been incurred or which has accrued in respect of expenses which are otherwise deductible in computing income will not be added back. The amount so arrived at is to be reduced by- (i) amounts withdrawn from reserves if any, such amount is credited to the profit and loss account; (ii) the amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the profit and loss account; and (iii) the amount of any brought forward losses or unabsorbed depreciation whichever is less as computed under the provisions of section 205(1)(b) of the Companies Act, 1956, for the purposes of declaration of dividends. Section 205 of the Companies Act requires every company desirous of declaring dividend to provide for depreciation for the relevant accounting year. Further, the company is required under section 205 to set off against the profit of the relevant accounting year, the depreciation debited to the profit and loss account of any earlier year(s) or loss whichever is less. 36.3 Section 115J, therefore, involves two processes. Firstly, an assessing authority has to determine the income of the company under the provisions of the Income-tax Act. Secondly, the book profit is to be worked out in accordance with the Explanation to section 115J(1) would be invoked if the income determined under the first process is less than 30 per cent. of the book profit. The Explanation to sub-section (1) of section 115J gives the definition of the "book profit" by incorporating the requirement of section 205 of the Companies Act in the computation of the book profit. Brought forward losses or unabsorbed depreciation whichever is less would be reduced in arriving at the book profits. Sub-section (2), however, provides that the application of this provision would not affect the carry forward of unabsorbed depreciation, unabsorbed investment allowance, business losses to the extent not set off, and deduction under section 80J, to the extent not set off as computed under the Income-tax Act. 36.4 In the case of a tea company where income is derived from the sale of tea grown and manufactured by the seller, only 40 per cent. of such income is liable to tax under rule 8 of the Income-tax Rules, 1962. 60 per cent. of the income, which is disregarded for the purposes of taxation is considered to be agricultural income and is, therefore, exempt under the provisions of Chapter III. The net profit determined in accordance with Schedule VI to the Companies Act, 1956, has to be adjusted, inter alia, in accordance with clause (f) and sub-clause (ii) of the Explanation to section 115J(1). In the case of the tea companies, the book profit should be computed by making all the adjustments referred to in the Explanation. However, no adjustments referred to in the Explanation. However, no adjustment in respect of clause (f) and sub-clause (ii) of the Explanation is to be made for the agricultural income earned by tea companies from tea business. 40 per cent. of the adjusted amount arrived at in this manner will be the book profit of the tea company in accordance with rule 8 of the Income-tax Rules. 36.5 The following examples illustrate how the amended provisions relating to the new section will be applied:- New Companies Book profits for the purposes of the Companies Act, 1956 Profit under the Income-tax Act Year 1984 Rs. Rs. Loss excluding Loss excluding depreciation 3,00,000 depreciation 80,000 Depreciation 1,00,000 Depreciation 4,00,000 Year 1985 Profit before Profit before depreciation 5,00,000 depreciation 5,00,000 Less : Depreciation as per books 2,00,000 Less : Depreciation 4,00,000 3,00,000 1,00,000 Less : Deduction Less : Business loss for under section205(2) for the year 1984 1,00,000 2,00,000 1984 80,000 20,000 C.F. Business loss 1984 3,00,000 Less : Unabsorbed depreciation 20,000 Nil C.F. unabsorbed depreciation 1985 3,80,000 Year 1986 Net loss as per Business loss (—) 10,00,000 books before (—) 10,00,000 Add : Depreciation as depreciation per Income-tax Depreciation 2,00,000 Rules (—) 4,00,000 Business loss to be carried forward (—) 10,00,000 Unabsorbed depreciation to be carried forward (—) 2,00,000 Year 1987 Net profit 10,00,000 Profit before depreciation 10,00,000 Book depreciation 2,00,000 Less : Depreciation as per Income-tax Rules 8,00,000 2,00,000 Less : Carried forward business loss for 1986 to the extent adjusted 2,00,000 Assessed income Nil Application of section 115J Rs. Profit before depreciation 10,00,000 Less : Book depreciation 2,00,000 8,00,000 Less : Deduction under section 205(2) 2,00,000 6,00,000 Out of the amount whichever is less: - 1984 : Business loss 3,00,000 - 1986 : Business loss 10,00,000 Total loss 13,00,000 1986 : Depreciation 2,00,000 Assessable income 30% of Rs. 6 lakhs, i.e., Rs. 1.8 lakhs Amount to be carried forward as per sub-section (2) of section 115J -1984 : Unabsorbed depreciation 3,80,000 -1986 : Business loss 8,00,000 Unabsorbed depreciation 4,00,000 36.6 These amendments will come into force with effect from 1st April, 1988, and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years. [Section 43 of the Finance Act, 1987] Modification of the scope of deduction of tax at source from salaries: 37.1 Under the existing provisions of section 192 of the Income-tax Act, tax has to be deducted at source by any person responsible for paying any income chargeable under the head "Salaries". 37.2 There are cases where an employee renders service with more than one employer and the details of salaries drawn from earlier employer are required for working out the rate at which the tax is to be deducted at source in respect of the salary paid by the present employer. There are also cases where an employee does not disclose such other salary to the employer. In such cases, the employer normally cannot be held liable for not making adequate deductions. With a view to simplify the provisions of deduction of tax at source in such cases and also to check avoidance of tax on salary received by an employee from more than one employer, section 192 has been amended. 37.3 The new sub-section (2) inserted in section 192 provides for deduction of tax at source by such employer (as the taxpayer may choose) from the aggregate salary of the employee who is or has been in receipt of salary from more than one employer. The employee is now required to furnish to the present employer details of the income under the head "Salaries" due or received from the former/other employer and also tax deducted at source therefrom, in writing and duly verified, by him and by the former/other employer. The present employer will be required to deduct tax at source on the aggregate amount of salary (including salary received from former or other employer). 37.4 Under the existing provisions of section 89(1), it is the Income-tax Officer who is empowered to give relief from the incidence of tax at a higher rate in a case where an employee receives salary in arrears or in advance. The Amending Act by inserting sub-section (2A) in section 192 provides that in respect of salary payment of employees of Government or public sector undertakings, deduction of tax at source may be made after allowing relief under section 89(1). 37.5 Presently the person making payment of salary cannot take into account other incomes of the employee for the purpose of deduction of tax at source. The Amending Act by inserting sub-section (2B) enables a taxpayer to furnish particulars of income other than salaries to his employer who shall deduct out of the salary payment, the tax due on the total income subject to the condition that the total amount of tax deducted shall not be less than the amount deductible from income from salaries only. 37.6 These amendments will come into force with effect from 1st June, 1987. [Section 45 of the Finance Act, 1987] Modification of the provisions relating to tax deduction at source: 38.1 With a view to rationalise the provisions of sections 194, 194A and 194D, the limits up to which no tax is to be deducted have been raised as under: Sl. No. Type of payment Present limit up to which no tax is deductible Amended limit Rs. Rs. 1. Dividend [section 194] 1,000 2,500 2. Interest other than interest on securities [section 194A] 1,000 2,500 3. Insurance commission[section 194D] Nil 5,000 38.2 Under the existing provisions, deduction of tax at source from interest is to be made at the time of payment or credit to the account of the payee. With a view to prevent postponement of liability relating to such deduction of tax at source, section 194A has been amended to provide that tax will be deducted at source, on actual of interest at the end of the accounting year or at the time of credit to the account of a payee or at the time of payment, whichever is earlier. Similarly, section 195 has been amended to ensure that deduction of tax at source from payments to non-residents will have to be made at the time of payment or at the time of giving credit to the account of the non-resident, whichever is earlier. Any sum credited to "suspense account" or "interest payable account" shall be deemed to be credited for the purpose of tax deduction at source. 38.3 Enabling powers have been conferred on the Central Board of Direct Taxes under section 197 to make rules for prescribing procedure in relation to the issue of certificates by the assessing officer for authorising non-deduction of tax at source or for deduction at a lower rate. 38.4 The provisions relating to furnishing of annual return in respect of tax deduction at source incorporated presently in sections 285 and 286 have been by the Amending Act inserted in section 206. Consequently sections 285 and 286 have been omitted. 38.5 The Amending Act has introduced a new section 195A which lays down the method of calculation of tax deductible at source in cases where payments are made tax free. Under clause (6A) of section 10, the tax before by an Indian resident on royalty, etc., paid to foreign companies is not treated as part of the income of the foreign recipients. Section 195A provides for grossing up of the tax only if it forms part of the income. Since tax exempted under section 10(6A) does not form part of the total income, there would be no grossing up of such tax for the purposes of tax deduction at source. Similarly, the tax borne by the employer, to the extent it is exempt under section 10(6)(viia), shall not be grossed up for purposes of tax deduction at source. 38.6 These amendments will come into force from 1st June, 1987. [Sections 46, 47, 48, 49, 50, 51, 56 and 71 of the Finance Act, 1987] Amendment of provisions relating to issue of certificate for tax deduction: 39.1 Under the provisions of section 203 of the Income-tax Act any person responsible for deduction of tax at source is required, at the time of credit or payment of the amount, etc., to issue a certificate that tax has been deducted and to specify the amount deducted. The amount deducted at source has to be deposited within a certain period of time from the date on which the said amount was deducted. As the certificate for tax deduction has to be issued at the time of credit or payment of the amount, in most of the cases it cannot be ascertained that the amount deducted at source has been credited to the Government account. Section 203 has been amended so as to provide that the certificate for deduction of tax shall be issued, within such time, as may be prescribed. 39.2 This amendment will come into force from 1st June, 1987. [Section 54 of the Finance Act, 1987] New provisions relating to allotment of tax deduction account number: 40.1 For better monitoring of deduction of tax at source and its deposit in the Government account, the Amending Act has inserted a new section 203A in the Income-tax Act. Every person deducting tax at source in respect of any payment made and who has not been allotted a tax deduction account number will make an application for allotment of such a number to the income-tax authority. This number will be quoted in all the challans for payment of any tax deducted at source, in all certificates for tax deducted, in all the prescribed returns filed by persons paying salary and interest to residents and in all other documents pertaining to such transactions which the Central Board of Direct Taxes may prescribe. 40.2 A person who fails to comply with the provisions of section 203A will be liable to penalty under the newly inserted section 272BB. The penalty may extend up to a sum of Rs. 5,000. A reference to section 272BB has been made by the Amending Act in section 273B which provides that no penalty would be levied if a reasonable cause for failure is put forth by the person defaulting in terms of section 203A 40.3 These amendments will come into force from 1st June, 1987. [Sections 55, 68 and 69 of the Finance Act, 1987] Modification of provisions relating to settlement of cases: 41.1 Chapter XIXA of the Income-tax Act deals with the entire scheme for settlement of cases. With a view to ensure the functioning of a Bench in certain situations which have so far prevented it from discharging its powers, the Amending Act has introduced new sections 245BA, 245BB and 245BC. In case the Chairman, Voice Chairman or any of the Members of a Bench is unable to discharge his functions, for whatever reasons, the remaining two persons will now be comptetent to constitute a Bench and pass orders on matters covered by applications for settlement. In such a situation, the Senior Member will preside over the Bench. Where a presiding officer, looking to the nature of a case, considers that it should be heard by a Bench consisting of 3 members, he may make a reference in this regard to the Chairman for transfer to such Bench as the Chairman deems fit. Where there is a difference of opinion between the Members of a Bench, the majority decisions will prevail. Where the Members are equally divided, they will refer the points or refer the point(s), for hearing by one or more of the other Members of the Settlement Commission. The Amending Act has conferred powers on the Central Government to authorise a Voice Chairman to act as Chairman in certain situations. 41.2 The experience of the Department has been, that when evasion of tax is detected in a case, the assessee deliberately omits to file tax returns and makes an application to the Settlement Commission, so as to escape penalty for concealment. Proviso to section 245C(1) has, therefore, been amended so that no application can be made to the Settlement Commission unless the assessee furnishes the return required to be filed under the Act. 41.3 The Amending Act has rationalised the mode of computation of additional amount of income-tax payable, in relation to the income disclosed in the application for settlement. Under the existing provisions of sub-clause (iii) of clause (1B) of section 245C, where an assessment has been completed, the additional amount of tax payable is calculated by aggregating the tax assessed and tax on disclosed income. The Amending Act provides that, in such a situation, the additional amount of tax payable will be worked out on the returned income plus the income disclosed before the Settlement Commission. This gets over a situation, where for example, the returned income is Rs. 1 lakhs, the assessed income is Rs. 10 lakhs and disclosed income is Rs. 5 lakhs. In a case like this, as per the existing provisions, the assessee would have to pay tax on total income of Rs. 15 lakhs (Rs. 10 lakhs as assessed + Rs. 5 lakhs as disclosed before the Settlement (Commission). The Amending Act provides that the assessee will have to pay tax on Rs. 6 lakhs only. 41.4 Presently, the Settlement Commission has absolute powers of granting immunity to any person from being prosecuted. The Amending Act by inserting proviso to section 245H(1), precludes the Commission from granting immunity in cases where prosecution has been launched, prior to the date of receipt of application for settlement. By inserting a new sub-section (1A) in section 245H, it has also been provided that any immunity granted by the Commission to any person, shall stand withdrawn on failure of such person to pay taxes, etc., within the time allowed as per the order of settlement or on failure of such a person to comply with any other condition subject to which the immunity is granted. 41.5 As a measure of further rationalisation, the Amending Act empowers the Settlement Commission to reopen past assessments up to a period of 10 years as against 8 years under the existing provisions. The Commission has also been invested with the powers to send a case back to the Income-tax Officer if the assessee does not co-operate. In such cases, the Income-tax Officer will dispose of the case in accordance with the provisions of the Act, as if no application under section 245C had been made. 41.6 Corresponding amendments in Chapter V-A (sections 22A to 22M) of the Wealth-tax Act, dealing with settlement of cases in respect of wealth-tax have also been effected. 41.7 These amendments will come into force with effect from 1st June, 1987. [Sections 57 to 67 and 77 to 87 of the Finance Act, 1987] Bar of suits in civil courts to set aside or modify any order passed: 42.1 Under the existing provisions of section 239, no suit can be brought in any civil court to set aside or modify any assessment order made under the Income-tax Act and no prosecution, suit or other proceedings shall lie against the Government or any officer of the Government for anything done in good faith or intended to be done under the Act. Similar provisions are contained in section 43 of the Wealth-tax Act, 1957, and section 42 of the Gift-tax Act, 1958. These provisions have been interpreted to mean that the bar of suits in civil courts is confined to assessment orders only and not to other orders under the Income-tax, Wealth-tax and Gift-tax Acts. 42.2 Direct tax laws contain very detailed provisions relating to appeals against orders passed by various authorities. They are self-contained codes. It is, therefore, not appropriate for civil courts to assume jurisdiction in respect of orders made under the Act. Section 293 of the Income-tax Act and the corresponding provisions of the Wealth-tax Act and the Gift-tax Act have been amended to provide that no suit shall be brought in any civil court to set aside or modify any order made under the said Acts. 42.3 These amendments will come into force with effect from 1st March, 1987. [Sections 72, 89 and 91 of the Finance Act, 1987] Amendment of the Eleventh Schedule to the Income-tax Act: 43.1 The Eleventh Schedule to the Income-tax Act lists non-priority products. The manufacturers of these products are denied tax concessions under section 32AB and other sections of the Act. Item No. 5 of the Eleventh Schedule relates to "aerated waters" in the manufacture of which "blended flavouring concentrates in any form are used". It has been found that certain persons manufacturing aerated waters are using synthetic essence and are claiming the benefit on the ground that synthetic essence cannot be included in the expression "blended flavouring concentrates in any form". As this was not the intention of the legislature, the Amending Act has inserted an Explanation to item 5 of the Eleventh Schedule which clarifies that blended flavouring concentrates would include the synthetic essences in any form. 43.2 Item No. 22 of the Eleventh Schedule has been amended to exclude computers from the list of non-priority items. Office machines and apparatus used for transmission and reception of messages have also been excluded from the non-priority list of articles or things as contained in this item of the Eleventh Schedule. 43.3 This amendment will come into force from 1st April, 1988, and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years. [Section 73 of the Finance Act, 1987] Modifications in the provisions relating to waiver of interest under the Wealth-tax Act: 44.1 At present, the Board is empowered to reduce or waive the amount of interest payable for non-payment or late payment of wealth-tax under section 31(2A) of the Wealth-tax Act. This power is exercised on the basis of recommendations made by the Commissioner subject to satisfaction of certain conditions. The power to waive the amount of interest is only in respect of the amount which is outstanding. A defaulter is, therefore, placed in a better position than a person who has managed to pay interest in spite of considerable hardship. 44.2 To mitigate the hardship caused in such cases, the Amending Act provides that the interest can be reduced or waived even in those cases where it has been paid, subject to the satisfaction of other conditions. Further, the power of the Board to reduce or waive interest has been delegated to the Commissioners. 44.3 This amendment will come into force with effect from 1st April, 1987. [Section 88 of the Finance Act, 1987] (Sd.) Vijay Mathur O.S.D. (TPL-II)