Explanatory Notes on the provisions of the Direct Tax Laws (Second Amendment) Act, 1989 - Income Tax - 554/1990

Explanatory Notes on the provisions of the Direct Tax Laws (Second Amendment) Act, 1989 Circular No. 554 Dated 13/2/1990 Introduction The Direct Tax Laws (Second Amendment) Bill, 1989, as passed by Parliament, received the assent of the President on 20th October, 1989, and has been enacted as the Direct Tax Laws (Second Amendment) Act, 1989 (36 of 1989) (hereinafter referred to as "the Second Amending Act, 1989"). This circular explains the substance of the amendments made to the Income-tax Act, 1961, the Wealth-tax Act, 1957, and the Gift-tax Act, 1958 (hereinafter referred to as "the Income- tax Act, 1961, the Wealth-tax Act and the Gift-tax Act respectively), through the aforesaid Act. Changes made by the Second Amending Act, 1989 2. The Second Amending Act, 1989, has,-- (i) amended sections 2, 6, 10 ,48, 80C, 80CC, 80L, 115D, 115J, 139, 140A, 142, 143, 144, 149, 184, 185, 186, 195, 198 to 200, 202 to 205 and 275 of the Income-tax Act; (ii) inserted sections 33AC, 115BBA and 194E in the Income- tax Act; (iii) substituted section 241 of the Income-tax Act; (iv) amended sections 15B, 16, 34A and Schedule III of the Wealth-tax Act, and (v) amended sections 14B, 15 and 33A of the Gift-tax Act. Objects of the Act 3. The main objective of the Second Amending Act is to help the taxpayers by removing the difficulties and anomalies relating to the new assessment procedure as also to grant certain tax concessions so that the taxpayers can avail of them during the current financial year. It also incorporates provisions which are meant to reduce litigation and to withdraw a few unintended tax benefits. Thus, this Act contains provisions to,-- (i) remove certain anomalies and difficulties relating to the new assessment procedure which has come into force from 1st April, 1989; (ii) insert definition of the term 'security' in order to resolve problems of interpretation of the said term and to regularise the tax concessions hitherto enjoyed by the National Savings Certificates VI and VII Issues; (iii) liberalise the criterion for determining the residential status so as to facilitate non-resident Indians to stay in India for a longer period in order to look after their investments in India; (iv) remove certain anomalies in the language of the provision dealing with exemption of leave travel concession; (v) specify in section 10(14)(ii) that the allowances granted to an assessee to meet his personal expenses not related to his place of posting or residence will not be considered for the purposes of the said clause; (vi) provide incentives to the shipping companies to encourage them to augment their fleet and also making investment in their shares attractive; (vii) provide for computation of capital gains in terms of foreign exchange in the case of non-resident Indians so as to make investment in shares by non-resident Indians more attractive; (viii) restrict the concession available to the contributions to the Jeevan Dhara Scheme of LIC under section 80CCA only as the concession on the contributions to the said Scheme under section 80C as well was not intended to be given; (ix) extend tax concession under section 80C in respect of such unit-linked insurance plans of the LIC Mutual Fund as may be notified by the Central Government, in the Official Gazette, in this behalf; (x) provide enabling powers to the Central Government to notify hereinafter, the savings certificates issued under the Government Savings Certificates Act, 1959, for tax concession under section 80C; (xi) provide for taxation of income earned in India by non- resident sportsmen (including athletes) and sports associations at a flat rate of tax of 10 per cent. on gross receipts; (xii) provide for deduction of tax at source on payment of interest income to non-residents by the Government, public sector banks and public financial institutions, only at the time of payment of such income in cash or by cheque, etc., so as to remove bottlenecks for the smooth inflow of foreign exchange; (xiii) simplify the method of valuation of unquoted shares of investment companies by removing the requirement of separate valuation of each asset of such companies for the purpose of arriving at the break-up value of their shares; and (xiv) permit valuation of shares either on the basis of their quoted price or on the basis of average of the quoted price of five years, i.e., the year in question and the immediately preceding four years in order to overcome the hardships faced by shareholders on account of very high value of shares at certain points of time due to speculative tendencies. Amendments to the Income-tax Act, the Wealth-tax Act and the Gift-tax Act The following amendments have been made to the Income-tax Act, the Wealth-tax Act and the Gift-tax Act through the Second Amending Act, 1989:-- Deemed registration of firms: 4.1 Under the provisions of section 185 of the Income-tax Act, as they existed prior to their amendment through this Act, it was obligatory for an Assessing Officer to pass an order, on receipt of an application for the registration of a firm, either registering the firm or refusing to register it. Such order was based on an enquiry into the genuineness of the firm and its constitution. However, under the new assessment procedure which has come into force with effect from April 1, 1989, it is not necessary to pass an order of assessment on receipt of a return of income. Only in a limited number of cases which are selected for scrutiny, an order of assessment is to be made under section 143(3) of the Income-tax Act. Therefore, in those cases in which no order of assessment is required to be made, there will be no occasion to make enquiries as are specified in section 185 of the Income-tax Act. Hence, as a measure of rationalisation, section 185 has been amended to provide that registration will be deemed to have been granted to the firms automatically, on filing of applications for registration by them, where the returns of income have been accepted as such without passing an assessment order. Consequential amendments have been made to sub-section (3) of section 2 dealing with the definition of the term 'registered firm', section 184 dealing with the application for registration of a firm and section 186 dealing with the cancellation of registration granted to a firm. Section 186 has further been amended to provide that the approval of the Deputy Commissioner shall not be necessary before cancelling the registration deemed to have been granted to a firm. 4.2 Under the provisions of sub-section (2) of section 185, if an application for registration by a firm is not found to be in order, the Assessing Officer has to intimate the defect therein to the firm giving it an opportunity to rectify the defect within a period of one month from the date of intimation. If the defect is not rectified within that period, the application for registration is to be rejected. The aforesaid amendment made to section 185 shall not affect the powers of the Assessing Officers to intimate to the firm a defect, if any, found in the application for registration made by it. In cases where such intimation is sent, all the provisions of sub-section (2) of section 185 shall apply. A provision to this effect has been incorporated in section 185 through the Second Amending Act, 1989. 4.3 Further, it has been specified in section 185, by adding sub-section (7) thereto, that the provisions of this section as they stood immediately before their amendment by the Direct Tax Laws (Second Amendment) Act, 1989, shall apply to and in relation to any assessment for the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year. 4.4 These amendments shall come into force with effect from 1st April, 1989, and will, accordingly, apply to the assessment year 1989-90 and subsequent years. [Sections 2, 19, 20 and 21 of the Second Amending Act, 1989] Insertion of the definition of the term 'security' and regularisation of tax concessions hitherto enjoyed by the National Savings Certificates VI and VII Issues: 5.1 The term 'security' which has been used in a number of provisions of the Income-tax Act, had not been defined in section 2 of the said Act. This had given rise to problems of interpretation of the said term. For example, National Savings Certificates VI Issue and VII Issue, issued under the Government Savings Certificates Act, 1959, were notified as securities for the purposes of section 80C of the Income- tax Act. Clarifications were also issued that the interest on these certificates was exempt under section 80L subject to specified limits, as these certificates were in the nature of securities. An opinion has now been expressed that the term 'security' which has been defined in the Public Debt Act, 1944, does not cover the National Savings Certificates issued under the Government Savings Certificates Act, 1959. Thus, the notification issued earlier specifying the National Savings Certificates VI and VII Issues as securities for the purposes of section 80C of the Income-tax Act is not in conformity with the said opinion. In order to resolve the problems of various possible interpretations of the term 'security', section 2 of the Income-tax Act has been amended and a definition of the term 'security' has been inserted therein. The term 'security' will mean a Government security as defined in clause (2) of section 2 of the Public Debt Act, 1944. The definition of the term 'Government security' in the said Act is as under:-- "'Government security' means,-- (a) a security, created and issued, (by the Government) for the purpose of raising a public loan, and having one of the following forms, namely:-- (i) stocks transferable by registration in the books of the bank; or (ii) a promissory note payable to order; or (iii) a bearer bond payable to bearer; or (iv) a form prescribed in this behalf; (b) any other security created and issued (by the Government) in such form and for such purposes of this Act as may be prescribed;". 5.2 This amendment shall come into force with effect from 1st April, 1990, and will, accordingly, apply to the assessment year 1990-91 and subsequent years. 5.3 As a result of the insertion of the above definition of the term 'security' in the Income-tax Act, the National Savings Certificates VI and VII Issues can no longer be treated as securities. In order to regularise the tax concessions being enjoyed on the investment in these certificates since April 1, 1984, consequential amendments have been made to section 80C and 80L with effect from the said date by their specific inclusion in the list of items qualifying for benefits under these sections. These amendments, will, therefore, apply to the assessment year 1984-85 and subsequent years. [Sections 2, 7 and 9 of the Second Amending Act, 1989] Liberalisation of the criterion for determining the residential status in the case of non-resident Indians: 6.1 Under the provisions of the Income-tax Act, an individual who is resident in India is taxable on his global income i.e., in respect of income accruing or arising in India as well as outside India. Prior to the amendment by the Second Amending Act, 1989, a citizen of India who was outside India and came to India on a visit in any previous year was held to be resident if he had been in India for a period or periods amounting in all to 365 days or more in the four years preceding that year and was in India for a period of 90 days or more in that year. In the case of individuals who are not citizens of India, the period of 90 days or more is restricted to 60 days or more. The non- resident Indians had been representing that the period of 90 days or 60 days was too short, especially for those who had to supervise their investments in India. In order to enable the non-resident Indians to stay in India for a longer period for looking after their investments without losing their 'non-resident' status, clause (b) of the Explanation to clause (c) of sub-section (1) of section 6 has been amended. The period of 90 days provided thereunder has been increased to 150 days. The amended provision will apply not only to a citizen of India but also to a person of Indian origin within the meaning of Explanation to clause (e) of section 115C of the Income-tax Act. Accordingly, a person shall be deemed to be of Indian origin, if he, or either of his parents or any of his grandparents, was born in undivided India. The effect of the amended provision is that, subject to the other conditions prescribed in section 6 of the Income-tax Act, such persons can stay in India on a visit for 149 days as against 89 days earlier in the case of citizens of India and 59 days earlier in the case of those who were not citizens of India during a previous year without losing their 'non-resident' status. 6.2 This amendment shall come into force with effect from 1st April, 1990, and will, accordingly, apply to the assessment year 1990-91 and subsequent years. [Section 3 of the Second Amending Act, 1989] Modification of provisions relating to exemption of leave travel concession/assistance: 7.1 Sub-section (5) of section 10 of the Income-tax Act, which was amended by the Direct Tax Laws (Amendment) Act, 1987, with effect from April 1, 1989, provided that the value of the leave travel concession/assistance granted to an individual and his family for making journey to any place in India, will be exempt from income-tax, subject to the conditions prescribed by the Central Government. The first proviso to this sub-section provided that the exemption will be restricted to the value of the travel concession/ assistance provided for making journeys to any place in India on leave or on retirement, etc. Thus, the proviso only stated what had been incorporated in the main body of sub-section (5) of section 10. Prior to its amendment by the Direct Tax Laws (Amendment) Act, 1987, the first proviso to sub-section (5) of section 10, as it then existed, provided for restricting the amount exempt from income-tax to the amount of travel assistance/concession which was relatable to making journeys to the home district, except in the cases and circumstances prescribed in rule 2B of the Income-tax Rules in line with the scheme of the leave travel concession available to employees of the Central Government. The first proviso to the amended sub-section (5) of section 10, which was essentially on the lines of the proviso to this sub- section as it existed before the amendment, had thus become redundant as the restriction of the exemption to the amount of leave travel assistance relatable to the journeys to the home district had been done away with thereunder. Further, it was also decided to remove reference to the Central Government as the authority for prescribing conditions for the purpose of this sub-section so that the said authority could be vested in the Central Board of Direct Taxes, under section 295 of the Income-tax Act. Hence, sub-section (5) of section 10 has been substituted with a view to-- (i) delete the first proviso to the said sub-section, and (ii) delete the reference to the Central Government as the authority for prescribing conditions for the purpose of the said sub-section. With the deletion of the first proviso to sub-section (5) of section 10 of the Income-tax Act, the rule-making-power of the Board would have become unfettered. Hence, in the substituted sub-section (5) of section 10, it has been provided that the conditions to be prescribed for the grant of exemption from income-tax thereunder shall be framed having regard to the conditions of the leave travel concession scheme applicable in the case of the employees of the Central Government. 7.2 The above amendment shall come into force with effect from 1st April, 1989, and will, accordingly, apply to the assessment year 1989-90 and subsequent years. [Section 4 of the Second Amending Act, 1989] Clarification regarding the nature of allowances which can be exempted under section 10(14)(ii): 8.1 Clause (ii) of sub-section (14) of section 10 of the Income-tax Act, 1961, which was inserted by the Direct Tax Laws (Amendment) Act, 1987, with effect from 1st April, 1989, provides for exemption from income-tax on the allowances which are granted to an assessee either to meet his personal expenses at the place where he performs the duties of his office or employment of profit or at the place where he ordinarily resides. Only such allowances of the above kind are to be exempted from tax which are notified by the Central Government in this behalf. After the insertion of the said clause, a number of representations had been received requesting for issue of notification for exempting the allowances granted to meet the personal expenses of the assessees which were not related either to their place of posting or their place of residence, e.g., special pay, diet allowance, etc. The legislative intent was not to grant exemption on such allowances. Hence, a proviso has been added to clause (ii) of sub-section (14) of section 10 specifying that any allowance in the nature of personal allowance granted to an assessee to remunerate or compensate him for performing duties of a special nature relating to his office or employment will not be considered for the purpose of the said clause unless such allowance is related to his place of posting or residence. 8.2 This amendment shall come into force with effect from 1st April, 1989, and will, accordingly, apply to the assessment year 1989-90 and subsequent years. [Section 4 of the Second Amending Act, 1989] Tax incentives to the Indian shipping companies: 9.1 With a view to provide tax incentives to the public companies engaged in the business of operation of ships for generation of resources internally to augment their fleet, a new section 33AC has been inserted in the Income-tax Act. This section provides for deduction in computing the income from business of any amount credited to a reserve account. This deduction is not to exceed the total income of such companies as computed before making any deduction under this section and Chapter VI-A of the Income-tax Act. In case the accumulated credits to the aforesaid reserve account exceed twice the amount of the paid-up capital of the company, the excess will be disregarded for the purpose of allowance of deduction under this provision. For the above purpose, the paid-up capital of the company shall exclude the amounts capitalised from reserves. The reserve so credited will have to be utilised for the purchase of a new ship for the assessee's own business within a period of eight years next following the previous year in which the reserve was created. If such reserve is not so utilised, it shall be deemed to be the income of the assessee in the year immediately following the period of eight years and charged to tax accordingly. Within the aforesaid period of eight years and before the acquisition of a new ship, the amount credited to the reserve account can be utilised for the business of the assessee, except for distribution of dividends or profits or for remittance outside India either as profits or for creation of any asset. In cases where the amount of reserve is utilised in violation of the aforesaid condition, it will be deemed to be the income of the assessee for the year in which the amount has been so misutilised. Further, if a new ship acquired out of the reserve account is sold or otherwise transferred by the assessee within the period of eight years from the end of the previous year in which it was so acquired, the amount utilised out of the reserve account for the acquisition of the ship shall be deemed to be the income in the year in which the sale or the transfer takes place. 9.2 For purposes of section 115J of the Income-tax Act, the book profits of a company are, inter alia, increased by amounts carried to any reserves by whatever name called, the only exception being the reserves created by hotels and tour operators under section 80HHD. Section 115J of the Income- tax Act has been amended to provide that reserve created by the shipping companies under section 33AC will also not go to increase the book profits. Section 115J has further been amended to provide that the amounts deemed to be income under section 33AC, as discussed in the preceding paragraph, will, however, go to increase the book profits of a shipping company. 9.3 Under section 80CC of the Income-tax Act, a deduction of 50% of the cost of acquisition of shares forming part of the eligible issue of capital is allowed from the gross total income. The maximum deduction eligible under this section is Rs.10,000. Hitherto, the issue of equity shares by shipping companies did not qualify for deduction under section 80CC. Further, the deduction under this section was available on the acquisition of shares only if such shares formed part of the issue of capital made by a company for the first time. This section has now been amended to provide that the acquisition of equity shares whether forming part of the first issue or a further issue of a shipping company will also qualify for deduction under this section. The benefit of deduction on the amount of acquisition of the equity shares of shipping companies will, however, be subject to the other conditions prescribed in section 80CC. 9.4 The above amendments shall come into force with effect from 1st April, 1990, and will, accordingly, apply to the assessment year 1990-91 and subsequent years. [Sections 5, 8 and 12 of the Second Amending Act, 1989] Computation of capital gains in terms of foreign exchange in the case of non-resident-Indians: 10.1 The non-resident Indians who invest in shares and debentures of Indian companies have been representing that due to the fall in the value of the Indian rupee vis-a-vis the foreign currency in which the investment is made by them, they are adversely affected when they sell such shares or debentures. In order to overcome this situation, sub- section (1) of section 48 of the Income-tax Act has been amended to provide that the computation of capital gains on the transfer of shares and debentures of Indian companies, in the case of non-resident Indians, shall be made by converting the cost of acquisition, the consideration for transfer and the expenditure incurred in connection with such transfer into the foreign currency in which the investment was made. The capital gains as computed in such foreign currency shall be reconverted into Indian currency. The conversion of Indian currency into foreign currency and the reconversion of foreign currency into Indian currency shall be at the rate of exchange prescribed by the Board in this behalf. The above method of computation of capital gains shall apply in respect of capital gains accruing or arising for every reinvestment made thereafter in the shares in and debentures of the Indian companies. The term 'non- resident Indian' shall have the meaning as given to it in clause (e) of section 115C of the Income-tax Act. Therefore, it will cover not only the non-resident citizens of India but also non-resident persons of Indian origin who are not citizens of this country. For the purpose of this section, a person shall be deemed to be of Indian origin if he, or either of his parents or any of his grandparents, was born in undivided India. 10.2 The following example will make the impact of the new provision clear: Assume that Mr. X, a non-resident Indian, remits US $20,000, to India to purchase shares in an Indian company. Assume further that Mr. X holds the shares for 18 months (long- term) before selling them. If, at the time of purchasing the shares, the prescribed rate of exchange of US dollar into the Indian rupee was Rs.14, then the value of the shares purchased would be Rs.2,80,000. It is further assumed that when the shares are finally sold after a lapse of 18 months, the full value of transfer consideration received is Rs.4,40,000. As per the provisions of section 48 as they existed prior to the aforesaid amendment, the long term capital gains would have been computed as under: Rs. Sale consideration of shares: 4,40,000 Less purchase consideration of shares: 2,80,000 Gross capital gains on the sale of shares: 1,60,000 The above calculations are now compared with the calculations of the capital gains after the amendment to section 48 has come into force: Sale consideration of shares in foreign currency, assuming the prescribed rate of exchange of US dollar to the Indian rupee at the time of sale was Rs. 16 to one US dollar: US $ 27,500 Purchase consideration of shares US $ 20,000 Gross capital gains: US $ 7,500 Gross capital gains in Indian rupees at the aforesaid prescribed rate of exchange of US dollar into Indian rupee: Rs. 1,20,000 Thus, on account of the amended provisions of sub-section (1) of section 48, the non-resident Indian investor will be compensated for the lower earning in foreign currency on account of the fall in the value of the Indian rupee. 10.3 The aforesaid amendment shall come into force with effect from 1st April, 1990, and will, accordingly, apply to the assessment year 1990-91 and subsequent years. [Section 6 of the Second Amending Act, 1989] Restricting the tax concession to the Jeevan Dhara Scheme of the Life Insurance Corporation under section 80CCA only: 11.1 The Finance Act, 1988, amended the provisions of section 80CCA of the Income-tax Act to provide that any investment in an annuity plan of the Life Insurance Corporation as the Central Government may, by notification in the Official Gazette, specify, will be allowed as deduction up to an amount of Rs.20,000 (Rs.30,000 from assessment year 1989-90) in the previous year in which such investment was made. On the other hand, section 80C of the Income-tax Act also provides for tax concession in respect of contributions to effect or to keep in force a contract for a deferred annuity on the life of the taxpayer or his spouse or child. The Jeevan Dhara Scheme of the Life Insurance Corporation, which is one of the two schemes of the Life Insurance Corporation notified for the purposes of section 80CCA, is also a deferred annuity scheme. A number of instances had come to notice wherein taxpayers had claimed deduction from their total income in respect of contributions to the Jeevan Dhara Scheme of the Life Insurance Corporation both under the provisions of section 80C and section 80CCA of the Income-tax Act. This was against the legislative intent. Hence, section 80C of the Income-tax Act has been amended to provide that the contributions to the annuity plans covered under section 80CCA will not qualify for deduction under section 80C of the Income-tax Act. 11.2 This amendment shall come into force with effect from 1st April, 1990, and will, accordingly, apply to the assessment year 1990-91 and subsequent years. [Section 7 of the Second Amending Act, 1989] Extending the scope of section 80C: 12.1 The Life Insurance Corporation of India has set up a LIC Mutual Fund which has been notified for the purposes of clause (23D) of section 10 of the Income-tax Act. The LIC Mutual Fund has floated a unit-linked insurance plan along the lines of the unit-linked insurance plan of the Unit Trust of India so as to meet the insurance needs of the different sections of people and mobilise additional savings for investment in the capital market. Further, a new National Savings Certificates Series VIII Issue under the Government Savings Certificates Act, 1959, has been introduced since May, 1989. These certificates are on the same lines as the National Savings Certificates VIth Issue. (Subscription to the National Savings Certificates VIth Issue and contributions to the Unit-linked Insurance Plan, 1971, of the Unit Trust of India qualify for deduction under section 80C of the Income-tax Act). In order to cover investment in the aforesaid schemes under section 80C, this section has been amended to include in its ambit the following:-- (i) contribution for participation in any such unit-linked insurance plan of the LIC Mutual Fund notified under clause (23D) of section 10, as the Central Government may, by notification in the Official Gazette, specify in this behalf, and (ii) subscription to any such savings certificate as defined in clause (c) of section 2 of the Government Savings Certificates Act, 1959, as the Central Government may, by notification in the Official Gazette, specify in this behalf. 12.2 This amendment shall come into force with effect from 1st April, 1990, and will, accodingly, apply to the assessment year 1990-91 and subsequent years. [Section 7 of the Second Amending Act, 1989] Rationalisation in the taxation provisions for non-resident sportsmen and sports bodies: 13.1 Under the provisions of the Income-tax Act, any income which accrues or arises or is deemed to accrue or arise in India is taxable in the hands of a non-resident. As per section 9(1)(i) of the Income-tax Act, all incomes accruing or arising directly or indirectly from any source of income in India are deemed to accrue or arise in India. Therefore, any guarantee money paid to the foreign sports teams/Boards and payments to individual players on account of the sports activities taking place in India is liable to be taxed in India. Under section 195 of the Income-tax Act, it is also necessary to deduct tax at source at the time of payment/ credit of such income. On the other hand, in countries like the United Kingdom, Australia and New Zealand, the income of the visiting non-resident sportsmen or sports bodies is either not taxes or taxed at lower rates. Further, practical difficulties were being experienced in enforcing the provisions of the Income-tax Act with regard to the payments to be made to the non-resident sportsmen or sports bodies. Therefore, as a measure of reciprocity and rationalisation, a new section 115BBA has been introduced in the Income-tax Act, providing that the income of the non-resident sports boides and non-resident sportsmen (who are not citizens of India) other than the income chargeable under section 115BB will be chargeable to tax at a flat rate of 10# of the gross payments due to them. This rate will also be applicable in respect of income derived by non-resident sportsmen from their other activities like participating in advertisements and writing in newspapers, etc. It has also been prescribed that, in such cases, there will be no necessity for filing the return of income by such non-residents, once tax has been deducted at source. It has further been prescribed that the person responsible for paying any sum to these non- resident sports bodies/players will be required to deduct the tax at source at the rate of 10% of the gross payments. 13.2 The above amendment shall come into force with effect from 1st April, 1990, and will, accordingly, apply to the assessment year 1990-91 and subsequent years. However, the provisions regarding deduction of tax at source will be effective from 1st November, 1989. [Sections 10, 22 and 24 of the Second Amending Act,1989] Withdrawal of unintended benefit of deduction under section 48(2) in the case of non-resident Indians taxed under the provisions of Chapter XII-A: 14.1 Section 115D of the Income-tax Act containing special provisions for computation of total income of non-resident Indians provides that while computing investment income or income by way of long term capital gains in their cases, no deduction shall be allowed under Chapter VI-A. Under this Chapter, section 80T which provided for deduction in respect of long-term capital gains in the case of non-corporate assessees was omitted by the Finance Act, 1987, with effect from 1st April, 1988. From this date, the deduction allowed under section 80T was incorporated in section 48(2) of the Income-tax Act which does not fall under Chapter VI-A. Hence, non-resident Indians having investment income or income from long-term capital gains and electing to be governed by the provisions of Chapter XII-A were getting the unintended benefit of deduction under section 48(2). In order to rectify this situation, section 115D has been amended to provide that no deduction shall be allowed under sub-section (2) of section 48 as well while computing investment income or income by way of long-term capital gains. 14.2 The above amendment shall come into force retrospectively from the 1st day of April, 1988, and will, accordingly, apply to the assessment year 1988-89 and subsequent years. [Section 11 of the Second Amending Act, 1989] Due date for filing of income-tax returns of the partners of a firm: 15.1 Section 139 of the Income-tax Act specifies the due dates on or before which the returns of income are to be filed by different categories of taxpayers. In the case of a partnership firm whose accounts are required to be audited under the Income-tax Act or any other law, the due date for filing of the income-tax return is the 31st day of October of the assessment year. However, in the case of the partners of such a firm, the due date specified in section 139 was the 31st day of August of the assessment year. This created difficulties in the case of the partners because their correct share in the profits of the firm could be known only towards the end of the month of October by which time the audit of the accounts of the firm would have normally been completed. Hence, as a measure of rationalisation, section 139 has been amended to provide that in the case of partners of a firm whose accounts are required to be audited under the Income-tax Act or any other law, the due date for filing the return of income will be the 31st day of October of the assessment year. 15.2 This amendment shall come into force retrospectively with effect from 1st April, 1989, and will, accordingly, apply to the assessment year 1989-90 and subsequent years. [Section 13 of the Second Amending Act, 1989] Specifying the effective date of application of the new assessment procedure: 16.1 The provisions of the new section 143 of the Income-tax Act, substituted by the Direct Tax Laws (Amendment) Act, 1987, incorporating substantial changes in the assessment procedure have come into force with effect from 1st April, 1989. Under the scheme of the new section 143, refund, if any, due to an assessee on the basis of the return filed, with or without making adjustments, is to be granted only under the provisions of sub-section (1) thereof. Hence, on the basis of the order made under section 143(3), only the sum payable by an assessee is determined. In cases where the total income, as a result of adjustments, exceeds the total income declared in the return by any amount, an additional income-tax at the rate of 20% of the tax payable on such excess amount is levied. The additional income-tax is also leviable in cases where loss declared in the return is reduced or is converted into profit as a result of the adjustments. Further, in cases selected for scrutiny, assessment proceedings are to be commenced by issue of a notice under section 143(2) and such a notice has to be served on the assessee within the financial year or within a period of six months from the end of the month in which the return is furnished, whichever is later. 16.2 Since the provisions of the new section 143 were to come into force with effect from 1st April, 1989, they were to apply not only in respect of the assessment year 1989-90 and the subsequent years but also in respect of the assessments of the earlier assessment years pending on 1st April, 1989. This would have created difficulties both for the taxpayers as well as the Income-tax Department. For example, the taxpayers would have been denied the issue of refund as a result of a regular assessment completed under section 143(3) on or after 1st April, 1989, in respect of the assessment year 1988-89 or the earlier assessment years. The assessee could also be made available to pay additional income-tax at the rate of 20 per cent. for the assessments for the assessment year 1988-89 and earlier assessment years completed on or after 1st April, 1989. Similarly, in the case of returns filed before 1st April, 1989, pertaining to the assessment year 1988-89 and the earlier years, notices under section 143(2) of the Income-tax Act could not have been issued in case the prescribed period of limitation for their service had lapsed. To overcome these difficulties, Removal of Difficulties Order under section 298(3) of the Income-tax Act was passed on 23rd March, 1989. In this order, it was specified that the provisions of section 143 of the Income-tax Act as they stood before the commencement of the Direct Tax Laws (Amendment) Act, 1987, were to apply in respect of assessments for the assessment year commencing on the 1st day of April, 1988, and any earlier assessment year. A provision to this effect has now been incorporated in section 143 itself, as sub-section (5) thereof. 16.3 Amendments to the above effect have also been made to sections 140A, 142 and 144 of the Income-tax Act which are connected with the assessment procedure contained in section 143 to provide that the provisions of these sections as they stood immediately before their amendment by the Direct Tax Laws (Amendment) Act, 1987, shall apply to and in relation to any assessment for the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year. 16.4 Amendments in the assessment procedure under the Wealth-tax Act and the Gift-tax Act on the lines of the new section 143 of the Income-tax Act were also made through the Direct Tax Laws (Amendment) Act, 1987. In order to ensure that the amended assessment procedure does not affect the assessments for the assessment year 1988-89 and earlier years pending on 1st April, 1989, amendments on the lines as discussed in the preceding paragraphs have been made to sections 15B and 16 of the Wealth-tax Act and sections 14B and 15 of the Gift-tax Act through the Second Amending Act, 1989. 16.5 The above amendments shall come into force retrospectively with effect from 1st April, 1989. [Sections 14, 15, 16, 17, 27, 28, 31 and 32 of the Second Amending Act, 1989] Removal of difficulties and anomalies relating to the new assessment procedure: 17.1 Under the provisions of sub-section (1) of section 143, which have come into force with effect from 1st April, 1989, an intimation was required to be sent to an assessee where tax or interest was found to be due on the basis of the return after adjustments of pre-paid taxes and/or after adjustments made to the returned income/loss. Hence, there was no requirement to issue an intimation in those cases where adjustments had been made to the returned income/loss, but no tax or interest was found due. For example, where adjustments made reduce the returned loss or convert it into profit but the total amount of adjustments made is less than the maximum amount not liable to tax, then no tax or interest is due to be paid. Similarly, in cases where as a result of adjustments made to the returned income, the amount of refund claimed by the assessee is reduced, no intimation was necessary. As a result, in certain cases, the assessees remained ignorant about the adjustments made to the amount of income/loss returned by them. To overcome this problem, section 143 has been amended to provide that where adjustments are made to the returned income/loss, then notwithstanding that no tax or interest is found due from the assessee, an intimation shall be sent to him. 17.2 Section 16 of the Wealth-tax Act and section 15 of the Gift-tax Act have also been amended on the above lines. 17.3 Clause (b) of sub-section (1) of section 143 provided that where as a result of any appellate, revisionary or settlement order, etc., relating to any earlier assessment year and passed subsequent to the filing of the return for a later assessment year, there was any variation in the carried forward loss, deduction, etc., claimed in the return, then the necessary adjustments could be made in the said return. However, this provision did not cover the variations resulting on account of the orders under section 143(3) or section 144 for an earlier assessment year made subsequent to the filing of the return for a later assessment year. It was necessary to include this eventuality also in the aforesaid clause. Hence, clause (b) of sub-section (1) of section 143 has been amended to include therein reference to orders made under section 143(3) and section 144 also. 17.4 Section 16 of the Wealth-tax Act and section 15 of the Gift-tax Act have also been amended on the above lines. 17.5.1 Further, in sub-section (1) of section 143, there was no provision to vary the share income or loss of the partners of the firm or members of an association of persons or body of individuals if there was a variation in their share as a result of variation in the returned income/loss of that assessment year of such a firm, association of persons or body of individuals subsequent to the filing of the returns by them. The variation in the income of the firm, association of persons, etc., could arise due to adjustments made under section 143(1)(a) to the income/loss returned or as a result of orders passed under various other sections of the Income-tax Act. The manner of inclusion of the share income of the partners of the firm, etc., could also change depending upon whether registration claimed by the firm was granted to it or not. To include the above eventualities in sub-section (1) of section 143, clause (c) has been added thereto. This clause provides that where the assessee is a partner in a firm or a member of an association of persons or body of individuals and there is any variation in his share or in the manner of inclusion of the said share as a result of adjustments made under section 143(1)(a) in the returned income/loss or orders passed under various other sections of the Income-tax Act in the case of the firm, association or body subsequent to the filing of the return by the partner or member, necessary adjustments shall be carried out in the share declared or in the manner of the inclusion of the said share by the partner/member in his return. 17.5.2 It has further been provided in the above clause that an intimation for any tax or interest due as a result of the aforesaid variations in the share of a partner or member shall not be sent after the expiry of four years from the end of the financial year in which adjustments were made or orders were passed in the case of the firms, associations of persons, etc., giving rise to such variations. 17.6 Sub-section (2) of section 143 provided that in a case referred to under sub-section (1) of section 143, the Assessing Officer could serve a notice on the assessee in specified circumstances asking him to attend his office or produce evidence in support of his return. Therefore, a view was being taken that in cases where a return had been correctly filed after payment of tax and interest due on the basis of the return and no action under sub-section (1) of section 143 was found necessary, it would not be possible to issue a notice under sub-section (2) of section 143. However, the legislative intent was not to restrict the scope of sub-section (2) of section 143 only to those cases wherein action had been taken under the provisions of section 143(1). Hence, sub-section (2) of section 143 has been amended to specify that a notice thereunder can be issued in all cases where a return has been made under section 139 or in response to a notice under sub-section (1) of section 142. 17.7 Section 16 of the Wealth-tax Act and section 15 of the Gift-tax Act, have also been amended on the above lines. 17.8 Under the provisions of section 143, there was no provision enabling adjustment of the tax or interest collected or the refund issued under sub-section (1) of section 143 against the demand created on regular assessment under sub-section (3) of section 143 or section 144. This had created an anomalous situation as returns, on the basis of which tax or interest had been collected or refund issued under the provisions of section 143(1), could be subsequently picked up for regular assessment under sub- section (3) of section 143 or section 144. To overcome this anomaly, sub-section (4) has been added to section 143 which provides that any tax or interest collected from the assessee or any refund issued to him under the provisions of section 143(1), shall be adjusted against the demand of tax and interest created as a result of the regular assessment, if any, made under the provisions of section 143(3) or section 144 of the Income-tax Act. 17.9 Section 16 of the Wealth-tax Act and section 15 of the Gift-tax Act have also been amended on the above lines. 17.10 The above amendments shall come into force retrospectively with effect from 1st April, 1989, and will, accordingly, apply to the assessment year 1989-90 and subsequent years. [Sections 16, 28 and 32 of the Second Amending Act, 1989] Deletion of superfluous words appearing in section 149 of the Income-tax Act: 18.1 Provisions of section 149 of the Income-tax Act regarding the time limit for issue of a notice under section 148 have been amended with effect from 1st April, 1989. Clause (a) of sub-section (1) of section 149 specifies the various time limits for the issue of a notice under section 148 depending upon the amount of income chargeable to tax escaping assessment. In sub-clause (iii) thereof, the amount of income chargeable to tax escaping assessment was mentioned as "more than rupees one lakh or more". the words "more than" in the aforesaid expression were superfluous. Sub-clause (iii) of clause (a) of sub-section (1) of section 149 has been amended in order to delete these superfluous words. 18.2 The above amendment, shall come into force retrospectively with effect from 1st April, 1989, and will, accordingly, apply to the assessment year 1989-90 and subsequent years. [Section 18 of the Second Amending Act, 1989] Amendment to provisions of section 195: 19.1 Section 195 of the Income-tax Act was amended by the Finance Act, 1987, to provide for deduction of tax at source on payment of certain sums to non-residents either at the time of credit of the same to their account or at the time of payment thereof in cash or by the issue of a cheque, etc., whichever was earlier. Prior to this amendment, the requirement to deduct tax at source was only at the time of payment in cash or by cheque, etc. After the aforesaid amendment had come into force with effect from 1st June, 1987, a number of public sector banks had represented that they would have to restructure the interest schedule and also the maturity period of the various deposit schemes relating to non-resident accounts on account of the requirement to deduct tax at source at the time of credit of interest to such accounts. After considering the practical difficulties pointed out by these banks, it was decided to revert to the pre-amendment situation in respect of deduction of tax at source out of payments of interest to the accounts of the non-residents by the Government or a public sector bank or a public financial institution. Hence, section 195 of the Income-tax Act has been amended to provide that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode. 19.2 The above amendment shall come into force retrospectively with effect from 1st June, 1987. [Section 23 of the Second Amending Act, 1989] Amendment of provisions relating to withholding or refunds: 20.1 Under the provisions of section 241 of the Income-tax Act, incorporating the power to withhold refunds in certain cases, a refund could be withheld only if it arose as a result of an order passed under the Income-tax Act. Therefore, refunds due under the provisions of sub-section (1) of section 143 could not be so withheld as no order is required to be passed under this sub-section. However, conditions may exist even in these cases necessitating the withholding of refunds. In order to overcome this anomaly, section 241 has been amended to provide that any refund becoming due under the provisions of the Income-tax Act can be withheld in the circumstances specified in the section. 20.2 Section 34A of the Wealth-tax Act and section 33A of the Gift-tax Act have also been amended on the above lines. 20.3 The above amendment shall come into force retrospectively with effect from 1st April, 1989, and will, accordingly, apply to the assessment year 1989-90 and subsequent years. [Sections 25, 29 and 33 of the Second Amending Act, 1989] Specifying the effective date of application of the amended provisions of section 275: 21.1 Section 275 of the Income-tax Act regarding bar of limitation for imposition of penalties was amended through the Direct Tax Laws (Amendment) Act, 1987, with effect from 1st April, 1989. The amended provisions generally reduced the time limit for completion of penalty proceedings from two years from the end of the financial year in which the proceedings, in the course of which action for imposition of penalty was initiated, were completed, to the end of the financial year in which such proceedings were completed or six months from the end of the month in which action for imposition of penalty was initiated, whichever period expired later. A view was being taken that the aforesaid bar of limitation would apply even to the penalty proceedings initiated prior to 1st April, 1989, and pending on that date. Therefore, it was contended that pending penalty proceedings initiated prior to 1st October, 1988, would get barred by limitation on 1st April, 1989. To avoid penalty proceedings in such cases from getting time barred and to be on the safe side, Removal of Difficulties Order under section 298(3) of the Income-tax Act was passed on 23rd March, 1989. In this Order, it was specified that the provisions of section 275 of the Income-tax Act, as they stood before the commencement of the Direct Tax Laws (Amendment) Act, 1987, were to apply in respect of any action for imposition of penalty initiated on or before 31st day of March, 1989. A provision to this effect has now been incorporated in section 275 itself, as sub-section (2) thereof. 21.2 The above amendment shall come into force retrospectively from 1st April, 1989. [Section 26 of the Second Amending Act, 1989] Valuation of shares of companies--Amendments in Schedule III to the Wealth-tax Act: 22.1 Under the provisions of rule 9 of Schedule III, the value of an equity share in any company which was a quoted share was taken on the basis of its quoted value in the stock exchange as on the date of valuation. If no such quotation was there on the valuation date, the quotation on the date closest to the valuation date immediately preceding it was taken as its value. Representations had been received to the effect that in the case of equity shares of certain companies, the quoted value was very high at certain points of time on account of speculative tendencies. It was represented that valuing the equity shares of such companies on the basis of their quoted value on a single date caused hardship in the case of shareholders of these companies. To remove this hardship, rule 9A has been inserted in Schedule III to the Wealth-tax Act, which provides an alternative method of valuation of such shares. Such shares can now be valued, at the option of the assessee, either on the basis of their quoted value on the valuation date or on the basis of the average of the quoted value on the valuation date for the relevant assessment year and the values quoted in respect of such shares on the said dates in relation to each of the immediately preceding four assessment years. Where there is no such quotation on any of these dates, the quotation on the date closest to the said date immediately preceding it is to be taken for the purpose of working out the average. Further, where for any reason, the value of such shares is quoted in relation to lesser number of assessment years than the aforesaid four assessment years, then the value or values so quoted is/are to be taken into account for working out the average. It has also been provided in rule 9A that in cases where an assessee opts for the aforesaid basis of valuation, he shall get the quoted values on different dates certified by an accountant and attach the certificate to the return of wealth. The term "accountant" shall have the meaning as given in the Explanation below sub-section (2) of section 288 of the Income-tax Act. 22.2 The above amendment shall come into force with effect from 1st April, 1990 and will, accordingly, apply to the assessment year 1990-91 and subsequent years. 22.3 Provisions of rule 12 of Schedule III to the Wealth-tax Act for determining the value of unquoted equity shares in investment companies had come into force from 1st April, 1989. This rule provided that the method of valuation of such shares would be the break-up value method. For this purpose, sub-rule (3) thereof further provided that the value of an asset disclosed in the balance-sheet of the company was to be taken to be its value determined in accordance with the rules applicable to that particular asset. Representations had been received that this manner of valuation would cause great hardship in cases where the asset in the balance-sheet was unquoted shares. In such cases, the balance-sheet of other companies would also have to be examined. This method would be very cumbersome and the cost of compliance would be high. To remove this hardship, rule 12 has been amended to omit sub-rule (3) thereof which provided for separate valuation of each asset in the balance sheet of the company in accordance with the rules applicable to that asset. 22.4 Sub-rule (5) of rule 12 of Schedule III to the Wealth- tax Act required that for facilitating the valuation of unquoted equity shares, the company concerned was to have such valuation done by its statutory auditors. This had been provided because the assessees themselves would not generally be in a position to determine the net wealth of the company by making variation in the balance-sheet figures. With the omission of sub-rule (3), sub-rule (5) also had no relevance as the balance-sheet figures alone were to be taken for determining the break-up value. Therefore, sub-rule (5) of rule 12 has also been deleted. 22.5 The above amendments shall come into force retrospectively from 1st April, 1989, and will, accordingly, apply to the assessment year 1989-90 and subsequent years. [Section 30 of Second Amending Act, 1989] (Sd.) Sunil Chopra, Director (TPL-III)