Explanatory Notes on the provisions of the DTL (Amendment) Act, 1989 [excluding those discussed in the Explanatory Notes on the provisions of the DTL (Amendment) Act, 1987]--Parts I to III issued under Circulars Nos. 545, 549 and 551 - Income Tax - 559/1990

Explanatory Notes on the provisions of the DTL (Amendment) Act, 1989 [excluding those discussed in the Explanatory Notes on the provisions of the DTL (Amendment) Act, 1987]--Parts I to III issued under Circulars Nos. 545, 549 and 551 Circular No. 559 Dated 4/5/1990 Introduction 1.1 The Direct Tax Laws (Amendment) Bill, 1988 was introduced in the Lok Sabha on 13th December, 1988. It was passed by both the Houses of Parliament during the Budget Session of 1989 as the Direct Tax Laws (Amendment) Bill, 1989, received the assent of the President on 15th March, 1989 and was enacted as the Direct Tax Laws (Amendment) Act, 1989 (No. 3 of 1989). These explanatory notes cover the provisions of this Amendment Act, excluding those provisions which are relevant in the context of the Direct Tax Laws (Amendment) Act, 1987 and which have already been discussed in Parts I to Ill of the explanatory notes on the provisions of that Act, issued under Circular No.s. 545, 549 and 551. Abbreviations used 1.2 In these explanatory notes following abbreviations have been used:- (i) The Direct Tax Laws (Amendment) Act, 1987 has been referred to as the "Amending Act, 1987". (ii) The Direct Tax Laws (Amendment) Act 1989 has been referred to as the "Amending Act, 1989". (iii) The various provisions of the Income-tax, Wealth-tax and Gift-tax Acts, as they stood before amendments by the Direct Tax Laws (Amendment) Act, 1989 have been referred to as the "old provisions". Objects of the Amending Act, 1989 2. The main objectives sought to be achieved are:- (i) To withdraw the following new provisions introduced by the Amending Act, 1987:- (a) Scheme of taxation of firm and partners. (b) Scheme of tax treatment of charitable and religious trusts, etc., scientific research and sports associations and institutions of national importance. (c) Charging of additional tax in lieu of penalty for concealment of income/wealth/gift (ii) To further amend those provisions of the Income- tax, Wealth-tax and Gift-tax Acts, which were earlier amended by the Amending Act, 1987, to remove some anomalies and practical difficulties. (iii) To amend the provisions of the Income-tax, Wealth-tax and Gift-tax Acts to introduce some tax concessions and incentives and also to rationalise the provisions of these three Acts with a view to remove some anomalies and hardships. (iv) To provide certainty in the matter of wealth-tax assessments and to reduce litigation by incorporating rules for valuation of assets in the Wealth-tax Act itself. Scope of this circular 3.1 The provisions of the Amending Act, 1989, which have achieved the objectives mentioned at Sl. Nos. (i) and (ii) in Para 2 above and which are relevant in the context of the Amending Act,1987, have already been discussed in Circular No.s. 545, 549 and 551 (Parts I to Ill of the explanatory notes on the Amending Act, 1987). Therefore, these are not discussed in this Circular. 3.2 This Circular explains the provisions of the Amending Act, 1989, which have achieved the objectives mentioned at Sl. Nos.(iii) and (iv) of Para 2 above. These provisions relate to:- (i) Tax concession under the Income-tax Act in respect of fees for technical services rendered in connection with projects connected with the security of India. (ii) Tax concession under the Income-tax, Wealth-tax and Gift-tax Acts in respect of non-repatriable NRI Bonds. (iii) Re-introduction of investment allowance in the Income-tax Act as an option to the existing Investment Deposit Scheme. (iv) Tax concessions under the Income-tax Act to encourage tourism for augmenting foreign exchange resources. (v) Tax concessions under the Income-tax Act to foreign companies who receive income in respect of units of a Mutual Fund set up by a public sector bank or public financial institution. (vi) Complete exemption from income-tax in respect of export profits and in respect of income of companies engaged in generation or distribution of electric power by taking these out of the purview of section 115J. (vii) Rationalisation of the provisions of the Income-tax, Wealth-tax and Gift-tax Acts to remove certain anomalies or hardships or practical difficulties. (viii) Incorporation of the rules for valuation of in the Wealth-tax Act. AMENDMENTS TO THE INCOME-TAX ACT, 1961 EXEMPTION FROM INCOME-TAX TO FOREIGN COMPANIES PROVIDING TECHNICAL KNOW-HOW IN CONNECTION WITH PROJECTS CONNECTED WITH SECURITY OF INDIA Insertion of a new clause (6C) in section 10 4.1 Foreign companies, which provide technical assistance in accordance with agreements entered into with the Government of India, are taxable in India in respect of fees for technical services received by them. The tax leviable is 30% of the gross fees for technical services received by them. Accordingly, foreign companies providing technical assistance in connection with defence projects were also liable to similar tax. It was felt that foreign companies hesitated to provide such technical assistance due to hassles of taxation procedure. Therefore, the Amending Act, 1989 has inserted a new clause (6C) in section 10 to provide that income by way of fees for technical services received by a foreign company, which the Central Government may, by notification in the Official Gazette, specify in this behalf, shall not be included in the total income of such a company, where such income is received in pursuance of an agreement entered into with the Central Government for providing services in or outside India in projects connected with security of India. 4.2. This amendment comes into force with effect from 14-1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Clause (a) of section 4 of the Amending Act, 1989] EXEMPTION FROM INCOME-TAX IN RESPECT OF INTEREST ON NON - REPATRIABLE NRI BONDS PURCHASED BY NON-RESIDENT INDIANS Insertion of a new sub-clause (iid) in clause (15) of section 10 5.1 A number of facilities, including fiscal concessions, have been extended to The non-resident Indians (NRls) for facilitating investments by them in India. The Government launched on 14-11-1988 through the State Bank of India, a Scheme for non-repatriable NRI Bonds, 1988 to be purchased by the non-resident Indians in foreign exchange. The maturity period of these Bonds was 7 years and these carried an interest rate higher than that applicable to the repatriable foreign currency non-resident deposits. To encourage investments by NRIs in these Bonds, it was also decided that appropriate exemptions under the Income-tax, Wealth-tax and Gift-tax Acts should also be provided to these Bonds. 5.2 The Amending Act, 1989 has, therefore, inserted a new sub-clause (iid) in clause (15) of section 10 of the Income-tax Act to provide that interest income arising to an individual, being a non-resident Indian, from such Bonds as are notified by the Central Government in the Official Gazette, shall not be included in the total income of such individual. However, to be entitled to this exemption and to have continuity thereof, the following conditions, must be satisfied:- (i) The bonds should be purchased by a non-resident Indian in foreign exchange. (ii) The interest and principal received in respect of such bonds, whether on their maturity or otherwise, should not be allowed to be taken out of India. (iii) The bonds should not be encashed before their maturity. In case the bonds are encashed prior to the date of maturity, the exemption under the sub- clause shall cease to apply from the assessment year relevant to the previous year in which such bonds are encashed. 5.3 It has, however, been provided that even if the non-resident Indian, having purchased such bonds in a previous year, becomes a resident in a subsequent year also be available to a nominee or survivor of the non-resident Indian (sic). Further, the benefit shall also be available to the donee individual, if the non-resident Indian gifts away the bonds to him. 5.4 It has also been provided that for the purposes of this exemption the expression "non-resident Indian" shall have the meaning assigned to it in section 115C(e). 5.5 It may be mentioned that in exercise of the powers conferred by the said new sub-clause (iid), the Central Government notified the "NRI Bonds, 1988" issued by the State Bank of India for purposes of exemption under the said sub-clause vide Notification No. SO 847(E) 24-10-1989, issued under No. 8474/F. No. 132/1/ 89-TPL. 5.6 Corresponding exemptions under the Wealth-tax and the Gift-tax Acts are discussed in Paras 11.2 and 20 of these explanatory notes. 5.7 These amendments come into force with effect from 1-4-1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Clause (b) of section 4 of the Amending Act, 1989] REINTRODUCTION OF INVESTMENT ALLOWANCE AS AN OPTION TO THE EXISTING INVESTMENT DEPOSIT ACCOUNT SCHEME Amendments to section 32A to revive investment allowance 6.1 It was decided in the year 1986 to discontinue the deduction for investment allowance and substitute it by the new provisions of investment deposit account, where the deduction was linked with the profit of the concern. Accordingly, under the provisions of sub-section (8) of the section, a Notification No. GSR 870(E) 12-6-1986 was issued, which discontinued the deduction for investment allowance in respect of a ship or aircraft acquired or any machinery or plant installed after 31-3-1987. The Finance Act, 1986 inserted, with effect from 1-4-1987, a new section 32AB in the Income-tax Act to allow deduction on account of investment deposit account (i.e., deposit in an account with the Development Bank) subject to a maximum of 20% of the profits of the eligible business or profession. This deduction is allowed in accordance with the Investment Deposit Scheme framed under the said section 32AB and is subject to the fulfilment of the conditions mentioned in that section. 6.2 It was, however, felt that the withdrawal of investment allowance, with effect from 1-4-1987, created an adverse situation for entrepreneurs, who were not able to get the benefit of section 32AB for reasons of absence or inadequacy of profit in the year of investment. The Government, therefore, decided to reintroduce investment allowance in respect of new ship or aircraft acquired or new machinery or plant installed after 31-3-1988. The investment allowance could be claimed as an option to the deduction allowable under the investment deposit account scheme (section 32AB) and was to be allowed on the same lines as was being allowed earlier prior to its withdrawal, with the modification that the admissible deduction would be 20% of the cost of the new asset as against 25% allowed earlier. However, investment allowance in respect of any plant or machinery installed for the purposes of business or repairs to ocean-going vessels or other powered craft, which was earlier allowable under section 32A(2)(c), was not to be reintroduced. 6.3 Since the investment allowance had been withdrawn earlier in respect of new ship or aircraft acquired or new machinery or plant installed after 31-3-1987 and it was being revived in respect of such assets acquired or installed after 31-3-1988, the result was that assessees would not have been eligible to claim investment allowance in respect of these assets acquired or installed during the period 1-4-1987 to 31-3-1988. It was felt that the short notice given for withdrawal of investment allowance, vide Notification 12-6-1986, had caused hardship in cases where the assessees had taken steps to acquire such assets prior to the date of notification (i.e., 12-6-1986), but were not able to obtain timely delivery of these assets from the foreign or Indian manufacturers or dealers for reasons beyond their control, so that these could be acquired or installed only after 31-3-1987. These assessees would have been denied the benefit of deduction for no fault of theirs. It was, therefore, decided to make provisions to allow investment allowance to such assessees also. 6.4 In order to implement the decision for re-introduction of investment allowance, as indicated in Paras 6.2 and 6.3 above, the Amending Act, 1989 has made the following amendments to section 32A:- (I) A new sub-section (8B) has been substituted in the section to provide that, notwithstanding anything contained in sub-section (8) or Notification No. GSR 870(E) 12-6-1986 issued thereunder, the provisions of the section shall apply in respect of the following assets: - (a)(i) A new ship or new aircraft acquired after 31-3-1987 but before 1-4-1988, if the assessee furnishes evidence to the satisfaction of the Assessing Officer that he had entered into a contract for the purchase of such ship or aircraft with the builder or manufacturer or owner thereof before 12-6-1986. (ii) Any new machinery or plant installed after 31-3-1987 but before 1-4-1988, if the assessee furnishes evidence to the satisfaction of the Assessing Officer that he had,- (1) purchased such machinery or plant or had entered into a contract for purchasing such machinery or plant with the manufacturer or owner of or dealer in such machinery or plant before 12-6-1986, or (2) where such machinery or plant has been manufactured in an undertaking owned by the assessee, taken steps, before 12-6-1986, for the manufacture of such machinery or plant. In both the situations indicated at (i) and(ii) above, normally, the investment allowance would have been allowable in the assessment year 1988-89. However, to get over the problems which would have arisen by retrospective revival of investment allowance in respect of assessment year 1988-89, it has been specifically provided that in both these situations the investment allowance can be claimed in the assessment year 1989-90 only. (b) A new ship or new aircraft acquired or any new machinery or plant installed after 31-3-1988 but before such date as the Central Government may specify in a notification in the Official Gazette. (II) A proviso has been inserted in sub-section (1) of the section to provide that in respect of a ship or an aircraft or machinery or plant specified in sub-section (8B), the deduction for investment allowance shall be allowed at 20 per cent of the actual cost thereof. (III) Since there would be cases where a portion of the cost of the new asset may be financed by way of withdrawal from the deposits made with the Development Bank under the Investment Deposit Account Scheme, on which deduction under section 32AB has already been claimed by the assessee, it was necessary to provide that investment allowance would not be allowed again on such portion. An Explanation has, therefore, been inserted in sub-section (1) of the section to provide that for the purposes of the investment allowance, "actual cost" shall mean the actual cost of the ship, aircraft, machinery or plant to the assessee as reduced by that part of such cost which has been met out of the amount released to the assessee from the Development Bank in accordance with the provisions of section 32AB(6). (IV) A proviso has been inserted in sub-section (2) of the section, which specifies the assets on which deduction for investment allowance is allowable, to clarify that the deduction shall not be allowed on a new ship or new aircraft acquired or any new machinery or plant installed after 31-3-1987 but before 1-4-1988 unless such assets are acquired /installed in the circumstances specified in clause (a) of sub-section (8B) of the section and the assessee furnishes evidence to the satisfaction of the Assessing Officer as specified in that clause. (V) Sub-section (2C) of the section allows a special rate of investment allowance, being 35 per cent, in respect of new machinery or plant which would assist in control of pollution or protection of environment and which is installed after 31-5-1983 in any industry specified in sub-section (2) of the section. This sub-section has been amended to provide that investment allowance at the enhanced rate of 35 per cent shall be allowed only in respect of such machinery or plant installed before 1-4-1987. Where such, machinery or plant is installed on or after 1-4-1987, it will be entitled to investment allowance at the nominal rate of 20 per cent under the amended provisions of sub-sections (1) and (8B) of the section. (VI) A new sub-section (8C) has been substituted in the section to provide that where a deduction for investment allowance under section 32A has been allowed to the shall be allowed to him in respect of the investment deposit account scheme under section 32AB in the said initial assessment year and a block of further period of four years beginning with the assessment year immediately succeeding the initial assessment year. The intention is that the option, once exercised, cannot be changed for five assessment years. (VII) Amendments of consequential nature have been made in sub-sections (4) and (5) of the section pursuant to the insertion of a proviso in sub-section (1) of the section, as discussed at Serial No. (II) above. Amendment of section 32AB relating to deduction under the investment deposit account scheme 6.5 The old provisions of sub-section (10) of section 32AB provided that no deduction shall be allowed under this section in the case of an assessee who had claimed deduction allowable under section 33AB in respect of the tea development account. Since the Finance Act, 1987 had amended section 33AB to provide that deduction under that section would be allowable only for the assessment years 1986-87 and 1987-88, the said provisions of sub-section (10) of section 32AB were no longer necessary and were to be deleted. 6.6 Further, since the Amending Act, 1989 has amended section 32A to re-introduce investment allowance, as discussed in the preceding paras, and has substituted a new sub-section (8C) in that section to provide that deduction for investment allowance will be an option to the deduction for investment deposit account scheme under section 32AB and the option, once exercised, would be valid for five assessment years, it was necessary that a corresponding provision should be made in section 32AB also. Therefore, the old sub-section (10) has been substituted by a new sub-section, which now contains provisions similar to those of sub-section (8C) of section 32A. The new sub-section (10) provides that where a deduction under the investment deposit account scheme under section 32AB has been allowed to the assessee for any assessment year (called as the initial assessment year), no deduction shall be allowed to him in"respect of investment allowance under section 32A in the said initial assessment year and a block of further period of four years beginning with the assessment year immediately succeeding the initial-assessment year. Combined effect of the provisions of section 32A(8C) and section 32AB(10) 6.7 Since the investment allowance (section 32A) has been re-introduced as an alternative to the investment deposit account scheme (section 32AB) the combined effect of the provisions of sub-section (8C) of section 32A and sub-section (10) of section 32AB is that if the assessee exercises option to claim either of them in an assessment year (called as the initial assessment year), he will have to stick to that allowance for the said initial assessment year and a block of four subsequent assessment years. Thus, once the assessee avails of the claim under section 32A in the assessment year 1989-90 (which will become the initial assessment year for claim under section 32A), he will have to continue claiming the same allowance in the block of next four assessment years, i.e., assessment years 1990-91 to 1993-94. During these five assessment years (i.e., assessment years 1989-90 to 1993-94) he cannot claim deduction under section 32AB, for which he can opt only in the assessment year 1994-95. If the assessee opts for the deduction under section 32AB in the assessment year 1994-95, that will become the initial assessment year for claim under section 32AB and then the assessee would have to stick to this claim in the block of next four years (i.e., assessment years 1995-96 to 1998-99). During these five assessment years (i.e., assessment years 1994-95 to 1998-99) he cannot claim deduction under section 32A, for which he can opt again only in the assessment year 1999-2000 and so on. 6.8 It may be clarified that the period of five assessment years (including the initial assessment year) during which the assessee is debarred from switching over to the other option is counted from the initial assessment year only and not from any assessment year comprised in the block of four assessment years immediately succeeding the initial assessment year. Thus, in the example given in the preceding para the assessee can switch over to deduction under section 32AB in the assessment year 1994-95 (counting the block for claim under section 32A from the initial assessment year 1989-90) notwithstanding that the assessee had claimed deduction under section 32A up to assessment year 1993-94. ln case of an option for claiming deduction under section 32A is exercised by the assessee for the first time during the assessment year 1990-91,that will become the initial assessment year for claim under section 32A and in that case the assessee would be able to switch over to the claim under section 32AB from the assessment year 1995-96, notwithstanding that the assessee had claimed deduction under section 32A up to assessment year 1994-95. The first initial assessment year for the purposes of exercising the option between sections 32A and 32AB 6.9 Doubts have been raised as to which will be the first initial assessment year for the purposes of exercising the option between the investment allowance (section 32A) and investment deposit account scheme (section 32AB) and in view of the fact that section 32AB has been in force since the assessment year 1987-88, whether an assessee, who had claimed deduction under section 32AB during the assessment year 1987-88 or assessment year 1988-89, could exercise an option to claim deduction under section 32A in the assessment year 1989-90. In this connection, it may be clarified that since investment allowance (section 32A) has been reintroduced with effect from the assessment year 1989-90 and an option between section 32A and section 32AB has been made available for the first time from the assessment year 1989-90 only, the assessment year 1989-90 shall be the first initial assessment year for the purposes of exercising the option between the two sections. Thus an assessee, who had claimed deduction under section 32AB during the assessment year 1987-88 or assessment year 1988-89, can exercise the option for claiming deduction either under section 32A or under section 32AB in the assessment year 1989-90. Where any such option is exercised in the assessment year 1989-90, that will be the initial assessment year for the claim for which option is exercised. Consequential amendment of section 155(4A)(b) 6.10 The amending Act, 1989 has also made an amendment of consequential nature in clause (b) of sub-section (4A) of section 155 pursuant to the insertion of a proviso in sub-section (1) of section 32A, as discussed at Sl.No.(II) in Para 7.4 ante. 6.11 These amendments Come into force with effect from 1-4-1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Sections 6, 7 and 25 of the Amending Act, 1989] TAX CONCESSIONS TO ENCOURAGE TOURISM FOR AUGMENTING FOREIGN EXCHANGE RESOURCES 7.1 The Amending Act, 1989 has made available the following tax concessions for encouragement of foreign tourism: - (i) Section 80CC has been amended to provide that investment in the new equity shares of approved hotels that form part of eligible issue of capital will also be entitled to deduction under the section. (ii) A new section 80HHD has been inserted, which allows 100 per cent deduction, subject to fulfilment of certain conditions, in respect of the profits of hotels, tour operators and travel agents, which have been earned in convertible foreign exchange. (iii) Corporate taxpayers, who get 100 per cent deduction in respect of their profits under the new section 80HHD, have been excluded from the purview of section 115J (For amendment of section 115J, refer Paras 9.2 9.3 of these Explanatory Notes). Amendment of section 80CC to extend the benefit to investment in new equity shares of approved hotels 7.2 Section 80CC provides for grant of a tax concession to individuals, Hindu undivided families, associations of persons, bodies of individuals, etc., who acquire out of their income chargeable to tax, new equity shares forming part of an "eligible issue of capital". Such taxpayers are entitled to a deduction out of their Gross Total Income, of an amount equal to 50 per cent of the cost of such shares. The maximum amount of investment qualifying for deduction in a year is limited to Rs. 20,000. 7.3 Meaning of the expression "eligible issue of capital" is explained in sub- section (3) of the section. Clause (a) of the said sub-section (3) enumerates the types of business that a public limited company may carry on in order that the investment in its new equity shares may be entitled to deduction under this section. The Amending Act, 1989 has amended the said clause (a) of sub-section (3) of the section to include hotels approved by the prescribed authority therein. Thus, the benefit of section 80CC is extended to the investment in the new equity shares of approved hotels that form part of eligible issue of capital. Insertion of a new section 80HHD relating to deduction in respect of earnings of a hotel or tour operator or travel agent in convertible foreign exchange 7.4 Provisions of section 80HHD are briefly explained below:- (i) Sub-section (1) of the section provides that in computing the total income of an assessee, being an Indian company or a person (other than a company) resident, who is engaged in the business of a hotel, or of a tour operator, approved by the prescribed authority in this behalf or of a travel agent, deduction shall be allowed, subject to the provisions of this section, of a sum equal to the aggregate of- (a) 50 per cent of the profits derived by him from services provided to foreign tourists; and (b) so much of the amount out of the balance profits as is debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised by the assessee for the purposes of his business in the manner laid down in sub-section (4). Thus 100 per cent of the profits derived by such hotels, tour operators and travel agents from services rendered to foreign tourists can be allowed as a deduction. However, only 50 per cent of such profits is allowed as a deduction straightaway, while profits up to the balance 50 per cent is allowed only to the extent it is credited to a reserve account and subsequently utilised for making certain specified investments for the business of the assessee. (ii) The term "travel agent" has been defined in clause (a) of the Explanation at the end of the section to mean a travel agent or other person (not being an airline or a shipping company) who holds a valid licence granted by the Reserve Bank of India under section 32 of the Foreign Exchange Regulation Act, 1973. Thus only those hotels and tour operators, which are approved by the prescribed authority in this behalf, and travel agents who hold the above mentioned licence granted by the Reserve Bank of India, shall be entitled to claim deduction under this section. Clause (c) of the Explanation also clarifies that "services provided to foreign tourists" shall not include services by way of sale in any shop owned or managed by the person who carries on the business of a hotel or a tour operator or a travel agent. It may further be clarified that the intention is to exclude only the sale of any goods or merchandise in any such shop from the benefit of exemption under the section. Therefore, services provided at health clubs, beauty parlours, barber's shops, etc., owned or managed by persons who are entitled to deduction under the section will be included in the term "services provided to foreign tourists" and will be entitled to deduction under the section. However, if such health clubs, beauty parlours, etc., also sell any goods or merchandise to the foreign tourists, such sale cannot be included in the term "services provided to foreign tourists" and, therefore, shall not be entitled to the benefit of deduction tinder the section. (iii) Sub-section (2) of the section lays down the important condition for claiming deduction under this section, namely, that the assessee should receive the receipts in relation to services provided to foreign tourists in convertible foreign exchange. Clause (b) of the Explanation at the end of the section defines "convertible foreign exchange" to have the same meaning as in clause (a) of the Explanation to section 80HHC. It may be clarified that the deduction under this section is available only to the first recipient of the convertible foreign exchange - whether it is the hotel or the travel agent or the tour operator. There is no provision in section 80HHD for apportioning the benefit between the travel agents, hotels, tour operators, etc. (iv) Sub-section (3) lays down that for the purposes of claiming deduction under this section profits derived from services provided to foreign tourists shall be determined as follows: - (a) Where assessee's business consists exclusively of services provided to foreign tourists resulting in receipt in convertible foreign exchange, the entire profits of the business as computed tinder the head "Profits and gains of business or profession" shall be treated as such profits. (b) Where assessee's business does not consist exclusively of services provided to foreign tourists resulting in receipts in convertible foreign exchange, only the proportionate profits computed under the head "Profits and gains of business or profession" shall be entitled to the deduction. The proportion shall be the same as the receipts in convertible foreign exchange bear to the total receipts of assessee's business. (v) Sub-section (4) lays down the manner in which the amount credited to the reserve account, referred to in sub-section (1), is to be utilised. It is laid down that the said amount shall be utilised by the assessee, before the expiry of a period of five years from the year in which the amount was credited to the reserve account, for the following purposes: - (i) construction of new hotels approved by the prescribed authority in this behalf or expansion of facilities in existing hotels already so approved; (ii) purchase of new cars and new coaches by tour operators already so approved or by travel agents; (iii) purchase of sports equipment for mountaineering, trekking, golf, river-rafting and other sports in or on water; (iv) construction of conference or convention centres; (v) provision of such new facilities for the growth of Indian tourism as the Central Government may, by notification in the Official Gazette, specify in this behalf. A proviso to the sub-section provides that where any of the aforesaid activities would result in creation of any asset owned by the assessee outside India, such asset should be created only after obtaining prior approval of the prescribed authority. (vi) Sub-section (5) provides for the consequences of not utilising the amount credited to the reserve account in the manner laid down in sub-section (4), as explained above. The said sub-section (5) provides as follows: (a) Where any amount credited to the reserve account has been utilised by the assessee for any purpose other than those referred to in sub-section (4), the amount so utilised shall be deemed to be the profits in the year of utilisation and shall be taxed accordingly. (b) Where any amount credited to the reserve account has not been utilised in the manner specified in sub-section (4), the amount not so utilised - shall be deemed to be the profits in the year immediately following the period of five years specified in sub-section (4) and shall be taxed accordingly. (vii) Sub-section (6) provides that deduction under this section shall not be admissible unless the assessee furnishes in the prescribed form, along with the return of income, the report of a chartered accountant certifying that the deduction has been correctly claimed on the basis of the amount of convertible foreign exchange received by the assessee for services provided by him to foreign tourists. "Prescribed form" for the purposes of sub-section (6) of section 80HHD 7.5 The "prescribed form" for the purpose of sub-section (6) of section 80HHD, in which the report of the chartered accountant is required to be furnished by the assessee, shall be in Form 10CCAD [Refer new sub-rule (4) inserted in rule 18BBA by the Income-tax (Fifth Amendment) Rules, 1989 issued under Notification No. SO 362(E) 18-5-1989]. 'Prescribed authority' for the purpose of section 80HHD 7.6 The "prescribed authority" for the purposes of section 80HHD shall be the Director General in the Directorate General of Tourism, Government of India [Refer new sub- rule (5) inserted in rule 18BBA by the Income-tax (Eleventh Amendment) Rules, 1989 issued under Notification No. SO 975(E), 30-11-1989]. 7.7 These amendments come into force with effect from 1-4-1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Sections 14 and 16 of the Amending Act, 1989] TAX CONCESSIONS TO FOREIGN COMPANIES WHO RECEIVE INCOME IN RESPECT OF UNITS, PURCHASED IN FOREIGN CURRENCY, OF A MUTUAL FUND SET UP BY PUBLIC SECTOR BANKS, ETC. Amendments of section 115A, which prescribes special rates or tax on certain incomes of foreign companies 8.1 Under the old provisions of section 115A of the Income-tax Act, the following special rates of tax were prescribed in respect of certain income of foreign companies:- (i) On interest received from Government or an Indian concern on monies borrowed in foreign currency and on dividends 25 per cent (ii) On royalties or fees for technical services received from Government or an Indian concern in pursuance of an agreement approved by the Central Government 30 per cent 8.2 As a measure to attract foreign investments in India, the State Bank of India decided to set up a fund, the India Fund Inc., which was registered as a company in U.S.A.. This company was to invite subscriptions from global investors by issue of its shares. The resources so mobilised were to be invested in the units of the Mutual Fund floated by the State Bank of India through the SBI Capital Market Limited which are to be purchased in foreign currency. The income received by the India Fund Inc., in respect of units of such Mutual Fund is neither in the nature of dividend income nor in the nature of interest income and, therefore, could not have been taxed at the concessional rate of 25 per cent provided in section 115A. It would rather have been taxed at the rate of 65 per cent, the general rate provided for companies other than a domestic company in the Annual Finance Act. This would have discouraged foreign investors from investing in the India Fund Inc. This would have also discouraged other foreign companies from investing in various other Mutual Funds which may be set up by public sector banks or public financial institutions of similar nature. It was further noticed that under the provisions of section 32(3) of the UTI Act, 1963, the income received by foreign companies from UTI is taxable at a concessional rate of 25 per cent. 8.3 Therefore, in order to secure that Mutual Funds set up by the State Bank of India or other similar Mutual Funds may attract foreign investors and to maintain parity with the concessional rate of tax available to foreign companies on their income from units of the Unit Trust of India, the Amending Act 1989 has amended section 115A of the Income-tax Act to provide that the foreign companies shall be liable to tax at the special rate of 25 per cent also on their income received in respect of units, purchased in foreign currency, of a Mutual Fund specified in section 10(23D), i.e., a Mutual Fund set up by a public sector bank or a public financial institution. 8.4 The Amending Act, 1989 has further omitted the definition of "foreign company" contained in section 115A, as the same is now provided in section 2(23A) of the Income-tax Act. Amendment of section 196A to provide for deduction of tax at source at the rate of 25 per cent from any income payable to a foreign company in respect of units of a Mutual Fund 8.5 Under the old provisions of section 196A, as inserted by the Amending Act, 1987, with effect from 1-4-1988, no tax was to be deducted at source from any sums payable to the unit holders of a Mutual Fund specified under section 10(23D). Thus, even foreign companies, which do not enjoy exemption under section 80L in respect of the income from the units of such Mutual Fund and which are straightaway taxable at the rate of 25 per cent under the amended provisions of section 115A, were excluded from the provisions of tax deduction at source. This made the realisation of tax in respect of such income of the foreign companies difficult. The Amending Act, 1989 has, therefore, substituted a new section 196A in the Income-tax Act to provide that tax shall not be deducted at source from any income payable in respect of units of a Mutual Fund, specified under section 10(23D), to its unit holders, being persons other than foreign companies. It is further provided that in the case of a foreign company the rate of deduction of tax at source from income received by it in respect of units of a Mutual Fund specified under section 10(23D) shall be 25 per cent. 8.6 The amendments of section 115A come into force with effect from 1-4-1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. The amendment of section 196A comes into force on 15-3-1989, i.e., on the date of President's assent to the Amending Act, 1989. [Sections 18 and 32 of the Amending Act, 1989] EXCLUSION OF EXPORT PROFITS, PROFITS OF TOURISM RELATED INDUSTRY EARNED INCONVERTIBLE FOREIGN EXCHANGE AND INCOME OF COMPANIES ENGAGED IN GENERATION OR DISTRIBUTION OF ELECTRIC POWER FROM THE PURVIEW OF SECTION 115J 9.1 Section 80HHC of the Income-tax Act provides for a 100 per cent deduction in respect of export profits earned by the exporters or supporting manufacturers. Section 80HHC provides for a 100 per cent deduction in respect of profits of hotels, tour operators or travel agents derived from services provided to foreign tourists, the receipts in relation to which are received in convertible foreign exchange. Thus, these sections seek to encourage exports and tourism related industry for augmenting the foreign exchange resources of the country by providing 100 per cent tax deduction in respect of profits from such activities. However, section 115J of the Income-tax Act levies a minimum tax on "book profits" of a company. Under the old provisions of section 115J, it was provided that where the total income of the company in respect of any previous year, computed under this Act, was less than 30 per cent of its "book profits", the total income chargeable to tax for that previous year shall be taken as 30 per cent of such "book profits". Thus, 100 per cent exemption allowed to exporters and tourism related industry under the provisions of sections 80HHC and 80HHD was restricted by the provisions of section 115J, under which they would have been obliged to pay tax at least on 30 per cent of their profits, which were otherwise fully exempt under sections 80HHC and 80HHD. 9.2 It was pointed out that the provisions of section 115J took away the 100 per cent exemption which was to be allowed in respect of export profits earned by the exporters and tourism related industry and thus watered down the encouragement which was to be provided to such foreign exchange earning activities. Since the intention was that 100 per cent of such profit should be exempt, it was decided that the profits, which are exempt under sections 80HHC and 80HHD, should be excluded from the purview of section 115J. It was also decided that section 115J should not apply to companies engaged in the business of generation or distribution of electricity. Amendments of section 115J 9.3 To achieve the objectives outlined in para 9.2 above, the Amending Act, 1989 has carried out the following amendments in section 115J: - (i) Sub-section (1) of the section has been amended to provide that the provisions of the sub-section relating to the taxability of 30 per cent of the "book profits" of companies shall not apply in the case of a company engaged in the business of generation or distribution of electricity (ii) An Explanation in the section provides for the manner of computation of "book profits" for the purposes of the section. The Amending Act, 1989 has carried out the following amendments in the said Explanation: - (a) A new clause (iii) has been inserted in the Explanation to provide that for the purposes of computation of "book profits", the net profit shall be reduced by the amount of net profits derived from the business of exports or from services provided to foreign tourists by approved hotels and tour operators or by travel agents, which are eligible for deduction under sections 80HHC and 80HHD. For purpose the net profit to be excluded shall be computed in the same manner as provided for in sub-sections (3) and (3A) of section 80HHC or sub-section (3) of section 80HHD, as the case may be. Thus the profits exempt under sections 80HHC and 80HHD have been excluded from the purview of section 115J. (b) Two new clauses (g) and (h) have been inserted in the Explanation to provide that for the purposes of computation of "book profits", the net profit shall be increased by,- (1) any amount withdrawn from the reserve account under section 80HHD that has been utilised for any purpose other than those referred to in sub-section (4) of that section, or (2) any amount credited to the reserve account under section 80HHD to the extent that amount has not been utilised within the period specified in sub-section (4) of that section, if the said amounts have not been credited to the profit and loss account (c) Certain other consequential amendments have also been made in the said Explanation. 9.4 These amendments come into force with effect from 1-4-1989 and win, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Section 19 of the Amending Act, 1989] RATIONALISATION OF THE PROVISIONS OF CERTAIN SECTIONS OF THE INCOME-TAX ACT TO REMOVE ANOMALIES OR HARDSHIPS OR PRACTICAL DIFFICULTIES Amendments of sections 44AC and 206C relating to levy and collection of presumptive tax in the case of trading in certain goods to remove hardships and to remove the lacuna 10.1 Section 44AC was inserted in the Income-tax Act by the Finance Act, 1988, with effect from 1-4-1989. The purpose was to counteract tax evasion by liquor contractors and dealers in forest produce by providing presumptive rates of profits in the case of trading in these items, where such items are obtained by way of auction, tender or any other mode. The presumptive rates prescribed in the section are: Sl. No. Nature of goods Rate of profit 1 Alcoholic liquor for human consumption (other than foreign liquor) 40% of the purchase price. 2 Timber obtained under a forest lease 35% of the purchase price. 3 Timber obtained by any mode other than under a forest lease 15% of the purchase price. 4. Any other forest produce, not being timber 35% of the purchase price. 10.2 It was, however, pointed out that in some of the States the contracts for sale of liquor are not given by auction or any similar mode, but licences to sell the liquor are issued to the contractors by the State Government more or less on a permanent basis. The licences are renewable every year automatically on payment of the prescribed fees. Both the purchase and sale prices are regulated by the State Government. Thus indirectly the entire profit in such cases is regulated by the State laws and this leaves little scope of manipulation for tax evasion. It was, therefore, pointed out that the application of the rate of presumptive profits operated very harshly in such cases. To remove this hardship, the Amending Act, 1989 has amended section 44AC to provide that the provision for the application of rate of presumptive profit would not apply in a case where the liquor is not obtained by the buyer by way of auction and where the sale price of such liquor to be sold by the buyer is fixed by or under any State Act. 10.3 Simultaneously with the insertion of section 44AC, another section 206C was also inserted in the Income-tax Act by the Finance Act, 1988, with effect from 1-6-1988, which provided for collection of tax by the seller of the goods, referred to in section 44AC, at a fixed percentage of the purchase price of such goods. The rates of tax were provided in this section in respect of all the four items mentioned in section 44AC. In the case of timber obtained by any mode other than under a forest lease, the rate of tax prescribed in the section was 10 per cent of the purchase price. 10.4 It was pointed out that the said rate of tax of 10 percent of purchase price prescribed in the case of timber obtained by any mode other than under a forest lease was too high and caused hardships in such cases. To avoid this hardship, the Amending Act, 1989, has amended section 206C to reduce the rate of collection of tax in such cases from 10 per cent to 5 per cent. This amendment has been made retrospectively with effect from 1-6-1988. 10.5 The provisions of section 206C relating to collection of tax at source are analogous to the provisions for deduction of tax at source in respect of certain incomes, which are contained in sections 192 to 195. Section 206 provides for furnishing of returns of tax deducted at source by the persons responsible to deduct such tax to the prescribed income-tax authorises. However, there was no provision in section 2O6C corresponding to section 206 requiring the persons collecting tax at source to furnish returns of such tax collected at source. to the Income-tax authorities. To remove this lacuna, the Amending Act, 1989, has inserted a new sub-section (5A) in section 206C to provide that every person collecting tax in accordance with the provisions of this section shall prepare half-yearly returns for the periods ending 30th September and 3 1st March in each financial year and deliver to the prescribed income-tax authority such returns in such form and verified in such manner and setting forth such particulars and within such time, as may be prescribed. Amendments of section 80C relating to deduction in respect of life insurance premia, contributions to provident fund, etc., to rationalise certain provisions of the section 10.6 Section 80C of the Income-tax Act provides for deductions to be made in computing the total income of an assessee in respect of payments made by him towards life insurance premia, contributions to provident fund, etc. The Amending Act, 1989, has made amendments to certain provisions of the section to rationalise the same. These amendments are discussed below: - (i) Amendment of section 80C(2)(d) - Under the old provisions of clause (d) of sub- section (2) of the section, an employee participating in a recognised provident fund was allowed deduction under the section on his contributions to the provident fund subject to the limit of 1/5th of his salary or Rs. 10,000, whichever was less. The monetary ceiling of Rs. 10,000 was not very necessary and had also lost its relevance in view of the increased salary now being paid to the Government as well as non-Government employees. The said clause (d) has, therefore, been amended to remove this monetary ceiling of Rs. 10,000 therefrom. Thus the qualifying amount for deduction under the section for contributions by an employee to the recognised provident fund will now be subject to only one limit that is 1/5th of his salary. (ii) Insertion of the definition of the term "contribution"- Some appellate courts had been taking the view that even repayment of loans taken by employees from their provident funds would amount to "contributions" by them to such funds and would be entitled to deduction under this section. This was never the intention of the Government, as this amounts to allowing the deduction twice for the same contribution. To make the position clear and beyond doubt, a new clause (d) has been introduced in sub-section (8) of the section to provide that the term "contribution" to any fund shall include any sums in repayment of loan. (iii) Amendment of section 8OC(2)(h)(ii)(c)(6) - Under the old provisions of sub-item (6) of item (c) of sub-clause (ii) of clause (h) of sub-section (2) of the section, deduction under the section was allowed in respect of repayment of loans taken by the assessee for construction of his house property from his employer, where such employer was a public company. It was pointed out that the benefit should also be extended to the employees of a public sector company or a university or a college affiliated to such university or a local authority. Necessary amendment has, therefore, been carried out in the said sub-item (6) to extend the benefit to the employees of the aforesaid entities also. Amendments of section 80HHC to rationalise the provisions of the section and to remove certain anomalies 10.7 Section 80HHC of the Income-tax Act, after its amendment by the Finance Act, 1988, provides for 100 per cent deduction in respect of the export profits. The Amending Act, 1989, has made certain amendments to this section, which are discussed below: - (i) Under the old provisions of sub-section (1) of the section, where the assessee was engaged in the business of export of any goods or merchandise, he was allowed, in computing his total income, a deduction of the "whole of the income" derived by the assessee from such exports. Similarly, in sub- section (1A), which allows deduction in the case of supporting manufacturers, and sub-section (4A), Which requires the supporting manufacturer to furnish, with his return of income, the claimed, the deduction was to be computed and allowed on the basis of "income" of the supporting manufacturer derived on the sale of goods or merchandise to the Export House or the Trading House. The wordings of sub-sections (1), (1A) and (4A), according to which deduction was computed on the basis of "income" from the export activity, created confusion, as under the Income-tax Act as well as in accountancy principal income from business or profession is normally referred to as "profits". Even sub-sections (3) and (3A) of section 80HHC itself provides for determination of export "profits" of the exporter or the supporting manufacturer and not export "income" for the purposes of deduction under the section. Therefore, to rationalise the provisions of section 80HHC and to remove the confusion, the words "whole of the income" used in sub-sections (1), (1A) and the word "income" used in sub-section (4A) of the section have been substituted by the word "profits" in each case. (ii) Sub-section (4) of the section provides that in order to claim deduction under the section an exporter should furnish, along with the return of income, the report of a chartered accountant in the prescribed form. Under the old provisions of the said sub-section (4), the chartered accountant was to certify that the deduction had been correctly claimed on the basis of the amount of "net foreign exchange realisation as determined iii accordance with the Import and Export Policy of the Government of India for the relevant period". However, "net foreign exchange realisation" was no longer relevant for computing the deduction allowable under the section, because the Finance Act, 1988, had amended the section to allow 100 per cent deduction on the basis of export turnover. Therefore, to remove this anomaly, sub-section (4) has now been amended so that the chartered accountant is now required to certify in his report that the deduction has been correctly claimed on the basis of the amount of "export turnover". (iii) The definition of the term "net foreign exchange realisation", earlier given in clause (c) of the Explanation to the section, being no longer necessary, has been omitted. Certain consequential amendments in various sections of Chapter XVII relating to collection and recovery of tax 10.8 (i) Section 190 provides that even if a regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction at source or by advance payment in accordance with the provisions of Chapter XVU. The Finance Act, 1988, had inserted a new Sub-Chapter BB and a new section 206C in Chapter XVII to provide for collection of tax at source in cases where presumptive rates of profits were provided for in section 44AC. Consequently it was necessary that a reference to tax payable by collection at source should also have been made in section 190. The Amending Act, 1989, has, therefore, amended section 190 to include reference to tax payable by "collection at source" also in that section. The amendment has been made retrospectively, with effect from 1-6-1988. (ii) Pursuant to the substitution of section 196A by a new section, which provides for deduction of tax at source in the case of foreign companies in respect of their income from units of a Mutual Fund (refer Para 8.5 ante), the Amending Act, 1989 has carried out consequential amendments in sections 198, 199, 200, 202, 203, 203A(1), 205 and 215(5) to include reference to section 196A in each of these sections. Amendment of sub-section (4) of section 249 dealing with the payment of tax due on the returned income before filing an appeal 10.9 Sub-section (4) of section 249 of the Income-tax Act provides that no appeal shall be admitted unless, at the time of filing the appeal, the assessee has,- (a) where a return has been filed by him, paid the tax due on the income returned by him, or (b) where no return has been filed by him, paid an amount equal to the amount of advance tax which was payable by him. Under the old provisions of a proviso to the said sub-section (4), discretion was allowed to the first appellate authority, i.e., any Deputy Commissioner (Appeals) or the Commissioner (Appeals) to waive the above requirement for good and sufficient reasons. 10.10 In a case where the assessee has filed a return of income, there is no reason as to why he should not have paid the tax due on the basis of income declared in the return. This is all the more necessary now under the new procedure of assessment, which has become effective from 1-4-1989, according to which the assessee must pay at the time of filing the return, not only the tax due on the basis of the returned income, but also the interest due, if any, for late filing of the return and for defaults in the payment of advance tax. In view of this, there is no justification for the said proviso to sub-section (4), at least to the extent it allows discretion to the first appellate authorities to admit an appeal even where tax on the basis of the returned income has not been paid. The Amending Act, 1989, has, therefore, amended the said proviso to limit the discretion of the first appellate authorities to admit an appeal only in cases falling in clause (b) of sub-section (4), i.e., where no return has been filed by the assessee and the assessee has not paid an amount equal to the amount of advance tax payable by him. It, therefore, follows that where an assessee has filed a return of income, his appeal will now be admitted by the first appellate authority only if he has paid the tax due on the returned income. Consequential amendments to section 253 relating to appeals to the Appellate Tribunal 10.11 The Amending Act, 1989, has made the following consequential amendments in the provisions of section 253 dealing with appeals to the Appellate Tribunal: - (i) The provisions regarding filing of an appeal against a penalty order under sub-section (2) of section 131 have been omitted, as the said sub-section (2) of section 131 had already been omitted by the Amending Act, 1987. (ii) The provisions regarding filing of an appeal against a penalty order under section 272A passed by the Commissioner have been amended so that now an appeal can also be filed before the Appellate Tribunal against a penalty order under section 272A passed by the Chief Commissioner, Director General or Director. This is pursuant to the amendment of section 272A by the Amending Act, 1987, whereby penalties under that section can also be levied by the Chief Commissioner, Director General or Director. Amendment of sub-section (3) of section 255 to enable a Single Member Bench of the Appellate Tribunal to bear appeals where assessed income is upto Rs. 1,00,000 10.12 Under the old provisions of sub-section (3) of section 255 of the Income-tax Act, a Single Member Bench of the Appellate Tribunal could hear appeals arising from orders of assessment in which the total income computed by the Assessing Officer did not exceed Rs. 40,000. This monetary limit had been raised from Rs. 25,000 to Rs. 40,000 by the Taxation Laws (Amendment) Act, 1970, with effect from 1-4-1971, and had stayed as such since then. On account of continued inflation, this limit of Rs. 40,000 had become very low and had lost its relevance, especially in view of the fact that the basic exemption limit had been raised from Rs. 5,000 in the year 1971 to Rs. 16,000 at present. It had, therefore, become necessary to suitably raise this monetary limit of Rs. 40,000. The Amending Act, 1989, has, therefore, amended the said sub-section (3) of section 255 to raise the monetary limit of Rs. 40,000 mentioned therein to Rs. 1,00,000. Thus, a Single Member Bench of the Appellate Tribunal can now hear appeals arising from orders of assessment where the assessed income is up to Rs. 1,00,000. Amendments of sections 269A and 269B of Chapter XXA relating to acquisition of immovable properties in certain cases of transfer, to remove an anomaly 10.13 Under the old provisions of clause (b) of section 269A and clause (a) of sub- section (1) of section 269B of Chapter XXA of the Income-tax Act relating to acquisition of immovable properties in certain cases of transfer to counteract evasion of tax, an "Assistant Commissioner of Income-tax" was referred to as a competent authority for the purposes of performing the functions under the Chapter. This referred to the "Assistant Commissioner of Income-tax", before changes in the designations of income-tax authorities were made by the Amending Act, 1987. However, as a result of changes in the designations made by the Amending Act, 1987, with effect from 1-4-1988, the term "Assistant Commissioner" now means an "Income-tax Officer Group A". Since it was always intended that an officer of the rank of a "Deputy Commissioner" (which was earlier called as "Assistant Commissioner") should perform functions of a competent authority under Chapter XXA, the Amending Act, 1989, has amended both the sections 269A and 269B to substitute the authority "Assistant Commissioner of Income-tax" mentioned in these sections by the authority "Deputy Commissioner". These amendments have been made retrospectively, with effect from 1-4-1988. Thus the anomaly in these two sections has been removed from the date the new designations of income-tax authorities have come into effect. Insertion of a new section 279B to remove practical difficulties in production of original records and documents, etc., in evidence during prosecution proceedings 10.14 During prosecution proceedings for offences under the Income-tax Act, the Department has to produce a number of original records, documents, seized books of account, etc., before the Courts for establishing the case. Before insertion of section 279B by the Amending Act, 1989, the officers of the Department had to carry all such records to the Court every time a hearing was fixed in the Court. This very often caused practical difficulties, because, besides being cumbersome, this involved the risk of important records being lost or being unlawfully taken away. It was, therefore, necessary to dispense with the necessity of production of original records in evidence.The Amending Act, 1989, has, therefore, inserted a new section 279B in the Income-tax Act to provide that entries in the records or other documents in the custody of an income-tax authority shall be admitted in evidence during prosecution proceedings for an offence under Chapter XXII of the Income-tax Act and all such entries may be proved either by the production of such records or other documents or by the production of a copy of the entries certified by the income-tax authority having the custody of such records or other documents under its signature and stating that it is a true copy of the original entries which are contained in the records or other documents in his custody. 10.15 Amendment of section 44AC (Para 10.2), section 80C (Para 10.6) and section 80HHC (Para 10.7) came into force with effect from 1-4-1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. 10.16 Amendments of section 206C (Para 10.5), various sections of Chapter XVII [Item (ii) of Para 10.8], section 249(4) [Para 10.10], section 253 (Para 10.11), section 255(3) [Para 10.12], and insertion of a new section 279B (Para 10.14) come into force with effect from 1-4-1989. 10.17 The following amendments come into force retrospectively, with effect from the dates mentioned against them:- ( i ) Amendment of section 190 [Item ( i ) of Para 10.8] 1-6-1988 ( ii ) Amendment of section 206C (Para 10.4) 1-6-1988 ( iii ) Amendment of sections 269A and 269B (Para 10.13) 1-4-1988 [Sections 10,13, 15, 29, 33, 34, 45 to 49 and 53 of the Amending Act, 1989] AMENDMENTS TO THE WEALTH-TAX ACT, 1957 AMENDMENTS CORRESPONDING TO THE AMENDMENTS MADE IN THE INCOME-TAX ACT Table indicating the corresponding amendments 11.1 The Amending Act, 1989 has either inserted new provisions or made amendments to the existing provisions in the Wealth-tax Act relating to exemption to non-repatriable NRI Bonds, appeals to the Appellate Tribunal and production of evidence during prosecution proceedings, in order to make these provisions in line with the corresponding provisions in the Income-tax Act, as they have emerged after their amendments by the said Amending Act, 1989 and which have been discussed in the preceding paras in these explanatory notes. The Table below shows the provisions of the Wealth-tax Act that have been so inserted/amended and the corresponding provisions in the Income-tax Act. The Table also indicated the sections of the Amending Act, 1989, which have carried out the necessary amendments to the Wealth-tax Act and the subject-matter of amendments in brief. Sl. No. Section of the Amending Act, 1989 Section of the Wealth-tax Act that has been amended/ inserted Corresponding section of the Income-tax Act Subject-matter of the amendment in brief 1 2 3 4 5 1 60( a ) 5( 1 )( xvig ) 10( 15 )( iid ) Exemption from wealth-tax in respect of non-repatriable NRI Bonds 2. 72 26 253(1)(c) Consequential amendment of section 26 relating to appeals to the Appellate Tribunal from orders of the Chief Commissioners or Commissioners. 3. 75 36 279B Insertion of a new section 36 to dispense with the necessity of production of original records and documents in evidence during prosecution proceedings. Note : The amendment indicated at Sl No. 1, which is star-marked is further explained in the following para. Insertion of a new clause (xvig) in sub-section (1) of section 5 to exempt from wealth-tax non-repatriable NRI Bonds 11.2 The interest income from notified bonds, which have been purchased by non-resident Indians in foreign exchange and which are non-repatriable, has been exempted from income-tax by insertion of a new sub-clause (iid) in clause (15) of section 10 of the Income-tax Act (refer paras 5.1 to 5.5 of these explanatory notes). The Amending Act, 1989 has also inserted anew clause (xvig) in sub-section (1) to section 5 of the Wealth-tax Act, which contains similar provisions and exempts such Bonds from wealth-tax also. The exemption from wealth-tax in respect of such Bonds is available to all those individuals who enjoy the exemption under the Income-tax Act, i.e., to the following:-- (i) An individual, who is a non-resident Indian, who acquires or holds such Bonds during the year. (ii) A nominee or survivor of such non-resident Indian. (iii) An individual, receiving the Bonds by way of gift from such non-resident Indian. (iv)An individual, who is a non-resident Indian during the year in which such Bonds are acquired, but who becomes a resident in India in any subsequent year. AMENDMENTS TO ENSURE PROPER DEDUCTION OF DEBTS SECURED OR INCURRED IN RESPECT OF ASSETS WHICH ARE EXEMPT UNDER CERTAIN PROVISIONS OF THE WEALTH-TAX ACT Amendment of the definition of 'net wealth' in section 2(m) 12.1 Clause (m) of section 2 of the Wealth-tax Act defines 'net wealth' to mean the aggregate value of the assets computed in accordance with the provisions of the Act minus the aggregate value of debts owned by the assessee on the valuation date. However, certain categories of debts are not deductible. Under the provisions of sub-clause (ii) of the said clause (m), debts, which are secured on or which are incurred in relation to any property in respect of which wealth-tax is not chargeable, are not deductible from the net wealth. This provision led to contradictory interpretations under certain circumstances. For example, where the asset was only partially exempt under the provisions of sub-section (1A) of section 5, which restricts exemptions under section 5(1) in respect of certain assets to Rs. 5,00,000, two views were taken regarding deductibility of debts secured or incurred in relation to such an asset. One view was that the entire amount of the debt was not deductible, while the other view was that only the proportionate amount of debt was not deductible. To set the controversy at rest, the Amending Act, 1989 has inserted an Explanation 2 in the said clause (m) of section 2 to clarify that the non-deductibility of the debt mentioned in sub-clause (ii), which is secured on or incurred in respect of an asset exempt either wholly or partly under sub-section (1A) of section 5, shall be limited to the value of the exemption which the said asset shall get under the said sub-section(1A) of section 5. Thus, if a debt of Rs. 6,00,000 has been incurred in respect of an asset of the value of Rs. 10,00,000, which is exempt up to Rs. 5,00,000 under the provisions of section 5(1A), the debt to the extent up to Rs. 5,00,000 shall not be deductible, while the balance debt of Rs. 1,00,000 only shall be deductible from the net wealth. However, if the amount of the debt is only Rs. 4,00,000, the entire debt shall not be deductible from the net wealth. Consequential amendment of sub-section (1A) of section 5 12.2 Consequent to the insertion of Explanation 2 in section 2(m), as explained above, the Amending Act, 1989 has also inserted an Explanation in sub-section (1A) of section 5 to clarify that where a debt is secured on or has been incurred in relation to any asset exempt under sub-section(1A) of section 5, the exemption under this sub-section shall be allowed first against the value of the asset on which or in relation to which such debt is secured or has been incurred and, thereafter, against the value of any other asset so exempt. This brings the provisions of section 5(1A) in harmony with the provisions of section 2(m). 12.3 These amendments come into force with effect from 1-4-1989 and, will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Section 58 and clause (b) of section 60 of the Amending Act, 1989] AMENDMENTS TO SECURE PROPER VALUATION OF INTEREST OF A PARTNER OR A MEMBER IN THE FIRM OR ASSOCIATION OF PERSONS Amendments of the provisions of section 4 dealing with inclusion of certain assets in the net wealth 13.1 Section 4 of the Wealth-tax Act deals with the inclusion of the value of certain assets in the net wealth of an assessee. Under the provisions of clause (a) of sub-section (1) of the section, the value of assets transferred by an individual to his or her spouse, minor, etc., is included in the net wealth of that individual, while under the provisions of clause (b) of the said sub-section (1), the value of interest of a partner or a member in the firm or association of persons, as the case maybe, is included in the net wealth of that partner or member. Under the old provisions of the said sub-section (1), both its clauses (a) and (b) were governed by the same opening words which referred to an "individual". This let to an interpretation that clause (b) dealing with inclusion of the value of interest of a partner or a member in the firm or association of persons in his net wealth was applicable to individuals only. This left a lacuna in the provisions, because clause (b) is intended to apply to all partners and members, whether they are individuals or Hindu undivided families. 13.2 Further, the old provisions of the said clause (b) of sub-section (1) of the section made no provision for including the value of the interest of a minor admitted to the benefits of partnership in a firm in the net wealth of either of the parents of the minor. This was again a lacuna in the Wealth-tax Act, because in the Income-tax Act such provisions are contained in section 64(1). Also, some consequential amendments were required to be made in section 4 pursuant to the inclusion of rules of valuation of assets in Schedule III to the Wealth-tax Act. 13.3 Therefore, to remove the lacuna and to achieve the objectives pointed out in the preceding paras, the Amending Act, 1989 has made the following amendments in the said section 4: (i) Sub-section (1) has been amended so that it is clarified that while clause (a) applies to an individual, clause (b) applies to any assessee who is partner in a firm or a member of an association of persons. (ii) A proviso to clause (b) of the amended sub-section (1) now contains provisions for the inclusion of the value of the interest of a minor admitted to the benefits of partnership in a firm in the net wealth of that parent of the minor whose net wealth is greater. (iii) Sub-section (2), which provided for rule-making procedure for valuation of interest of a partner or member in the firm or association of persons, having become redundant pursuant to the valuation rules being included in Schedule III to the Wealth-tax Act, is omitted. Amendment of section 5 dealing with exemption in respect of certain assets 13.4 Sub-section (1) of section 5 enumerates various assets which are exempt from wealth-tax. However, since firms and association of persons are not liable to wealth-tax, exemption in respect of assets mentioned in section 5(1), if held by a firm or association of persons, should be allowed in the hands of the partners or members thereof in computing their net wealth. There was, however, no provision to this effect in the old provisions of section 5. The Amending Act, 1989 has, therefore, inserted anew sub-section (4) in section 5 to provide that where the assessee is a partner of a firm or a member of an association of persons, exemption under sub-section (1) of the section in respect of assets held by the firm or association of persons shall be given in the hands of that partner or member in the same proportion in which that partner or member is entitled to share in the profits of the firm or the association of persons. 13.5 These amendments come into force with effect from 1-4-1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Section 59 and clause (c) of section 60 of the Amending Act, 1989] CONSEQUENTIAL AMENDMENTS OF THE PROVISIONS RELATING TO DETERMINATION OF THE VALUE OF ASSETS PURSUANT TO INCLUSION OF RULES FOR VALUATION IN SCHEDULE III TO THE WEALTH-TAX ACT Substitution of new section for section 7 dealing with determination of the value of assets 14.1 Under the old provisions of section 7 of the Wealth-tax Act, the value of any asset, other than cash, was taken, subject to any rules made in this behalf, as the price it would fetch if sold in the open market on the valuation date. Sub-sections (1) to (3) contained provisions for determination of this "open market value" of the asset. Sub-section (4) gave an option to the assessee, in the case of a house belonging to him and exclusively used by him for residential purposes, to opt for the "open market value' on the valuation date next following the date on which he became the owner of the house or on the valuation date relevant to the assessment year 1971-72, whichever valuation date was later. 14.2 The rules for valuation of various assets have now been incorporated by the Amending Act, 1989, in the Wealth-tax Act itself as Schedule III to the Act. The rules contained in the said Schedule III provide for the method of valuation of different categories of assets (refer Paras 18.1 to 18.33). Consequently the provisions of section 7 also needed to be substantially amended to replace references to "open market value" of an asset therein by references to "value determined in the manner laid down in Schedule III". 14.3 The Amending Act, 1989 has, therefore, substituted a new section 7 in the Wealth-tax Act, which consist of two sub-sections that provide as follows: (i) Sub-section (1) provides that, for the purposes of the Wealth-tax Act, the value of any asset, other than cash, shall be its value on the valuation date determined in the manner laid down in Schedule III. (ii) Sub-section (2) contains provisions similar to those of sub-section(4) of the old section 7 relating to option to the assessee in respect of valuation of a house exclusively used by him for residence, with the difference that the value is to be determined in the manner laid down in Schedule III instead of on the basis of "open market value." Consequential amendment of section 16A relating to reference to the Valuation Officer 14.4 Under the old provisions of sub-section (1) of section 16A, the Assessing Officer could, for the purposes of making an assessment, refer the valuation of any asset to a Valuation Officer. Thereupon, as was provided under the old provisions of sub-section (3) of section 7, the value of such asset was to be determined by the Valuation Officer on the basis of the price which, in his opinion, it would fetch, if sold in the open market on the valuation date. Consequent upon the substitution of anew section 7 (as explained in Paras 14.2 and 14.3 above), which does not contain the provisions of sub-section (3) of the old section, necessary amendment has been made in sub-section (1) of section 16A also. According to the amended sub-section (1) of section 16A, a reference cannot be made to the Valuation Officer only where the market value of any asset is to betaken into account for purposes of assessment, either under the provisions of section 7 read with rules made under the Act or under the provisions of rules in Schedule III. 14.5 These amendments come into force with effect from 1-4-1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Section 62 and 65 of the Amending Act, 1989] AMENDMENTS OF THE PROVISIONS RELATING TO POWER OF THE COMMISSIONER TO REDUCE OR WAIVE PENALTY IN CERTAIN CASES Amendment of section 18B 15.1 Under the old provisions of sub-section (1) of section 18B of the Wealth-tax Act, the Commissioner was empowered to reduce or waive the following penalties:-- (i) Penalty under section 18(1)(i) for failure to furnish return of wealth under section 14(1). (ii) Penalty under section 18(1)(iii) for concealment of wealth or furnishing inaccurate particulars of wealth. 15.2 The provisions regarding levy of penalty for default in filing the return of wealth were omitted and replaced by charge of mandatory interest under a new section 17B inserted by the Amending Act, 1987, which is applicable from the assessment year 1989-90. Consequently, the Amending Act, 1989, has also made the following amendments to section 18B of the Wealth-tax Act: (i) Under the amended sub-section (1) of the section, only penalty leviable under section 18(1)(iii) for concealment of wealth, etc., can be reduced or waived. (ii) A new section (6) has been inserted in the section to provide that the provisions of the section, as they stood immediately before their amendment by the Amending Act, 1989, shall apply up to assessment year 1988-89. This means that the amended provisions of section 18B would be applicable from the assessment year 1989-90. 15.3 As a result of the aforesaid amendments, the provisions of section 18B of the Wealth-tax Act have been brought on the same lines as the provisions of the corresponding section 273A of the Income-tax Act. 15.4 As already explained above, the amended provisions of section 18B would apply to the assessment year 1989-90 and subsequent assessment years. [Section 70 of the Amending Act, 1989] APPLICATION OF THE PROVISIONS RELATING TO SERVICE OF NOTICE AND PUBLICATION OF INFORMATION IN RESPECT OF ASSESSEES TO COMPANIES Amendment of section 41 relating to service of notice 16.1 Section 41 of the Wealth-tax Act, provides for service of a notice or requisition under this Act. Under the old provisions of sub-section (2) of section, persons to whom a notice or requisition under the Act should be addressed in the case of a firm or a Hindu undivided family or an association of persons were mentioned. With the revival of wealth-tax on closely held companies in respect of certain assets, as per the provisions of section 40 of the Finance Act, 1983, it had become necessary to provide for service of notice etc., in the case of companies also. Similar provisions exist in the Income-tax Act. The Amending Act, 1989 has, therefore, amended the said sub-section (2) of section 41 of the Wealth-tax Act to provide that in the case of a company, the notice or requisition may be addressed to the principal officer thereof. Amendment of section 42A relating to publication of information in respect of assessees 16.2 Section 42A of the Wealth-tax Act empowers the Central Government to publish, in public interest, the names of any assessees and also may other particulars relating to any proceedings or prosecutions under the Act in respect of such assessees. With the revival of wealth-tax on companies, as per the provisions of section 40 of the Finance Act, 1983, it had become necessary to provide that in the case of companies names of its principal officers could also be published. Similar provisions exist in the Income-tax Act. The Amending Act, 1989 has, therefore, inserted an Explanation in the said section 42A to provide that in the case of a company, the names of the directors, secretaries and treasurers, or managers of the company, may also be published if, in the opinion of the Central Government, the circumstances of the case justify it. 16.3 These amendments come into force with effect from 1-4-1989. [Section 70 and 77 of the Amending Act, 1989] AMENDMENTS TO REMOVE ANOMALIES RELATING FROM CERTAIN PROVISIONS OF THE AMENDING ACT, 1987 OF WITHDRAWAL THEREOF 17.1 The Amending Act, 1989 has amended certain sections of the Wealth-tax Act to remove some anomalies which had resulted from some provisions of the Amending Act, 1987, or on account of omission of certain provisions introduced by that Amending Act. The sections so amended and the nature of the amendments are indicated below: (i) Section 6 dealing with exclusion of assets and debts outside India in the case of certain non-residents - Explantation 1A of this section, which refers to "clause (4A) of section 10" of the Income-tax Act, has been amended to replace this reference by a reference to "sub-clause (ii) of clause (4) of section 10", as the said clause (4A) of section 10 had been renumbered as sub-clause (ii) of clause (4) by the Amending Act, 1987. (ii) Section 11 dealing with jurisdiction of Assessing Officer and power to transfer cases - In sub-section (2) of section 11, which was substituted by the Amending Act, 1987, a reference was incorrectly made to sub-section (5) of section 127 of the Income-tax Act. The correct reference should have been to sub-section (4). Therefore, the said sub-section (2) of section 11 has been amended to substitute the reference to sub-section (5) therein by a reference to sub-section (4). (iii) Section 35 dealing with rectification of mistakes - Clause (c) of sub-section (1) of section 35 was substituted by the Amending Act, 1987. This clause made a reference to section 23A, which was newly inserted by that Amending Act. This reference to section 23A in the said clause (c) has now been omitted, as section 23A has also been omitted by the Amending Act, 1989. 17.2 These amendments come into force with effect from 1-4-1989. [Sections 61, 63 and 74 of the Amending Act, 1989] INCORPORATION OF RULES FOR VALUATION OF ASSETS IN THE WEALTH-TAX ACT - INSERTION OF SCHEDULE III Reasons for incorporating rules for valuation of assets in the Wealth-tax Act 18.1 In the past one of the main areas of litigation under the Wealth-tax Act was the valuation of assets for the purposes of inclusion in the net wealth of the assessee. Section 7 of the Wealth-tax, laid down the general principle that for purposes of the Act the value of an asset shall betaken to be its market value or the valuation date, i.e., the price it would fetch if sold in the open market on that date. Since the concept of"open market value" led to prolonged litigation on various issues, an attempt was made to reduce the litigation by prescribing rules of valuation in respect of certain assets. Thus rules 1B to 1D and 2 to 2-I of the Wealth-tax Rules, 1957, provided for determination of the value of life interest, residential house, unquoted preference shares, unquoted equity shares of companies other than investment companies, interest in partnership or association of persons, determination of net value of assets of business as a whole, etc. This did not solve problem to any appreciable extent, as the determination of the value of accordance with these rules was often challenged in the courts on the ground that such determination did not correspond to the market value concept envisaged in the Wealth-tax Act and, therefore, the rules were ultra vires the main provisions of the Act. Thus, it was held by several High Courts that the rules are not mandatory. [Smt. Kusumben D. Mahadevia vs CWT [1980] 124 ITR 799 (Bom) and K. M. Mammen vs WTO [1983] 139 ITR 357 (Mad)], such interpretations made the rules for valuation ineffective. Therefore, in order to eliminate litigation on the subject and also to made the said rules mandatory so that there is certainty and uniformity in the matter of valuation of assets, the Amending Act, 1989 has incorporated the rules for valuation in the wealth-tax itself, by inserting a new Schedule III in the Act. Simultaneously section 7 has also been suitably amended (refer paras 14.1 to 14.3 ante). Rules 1B to 1D and 2 to 2-I of the Wealth-tax Rules, 1957 have been omitted. 18.2 It may also be pointed out that the rules for valuation of assets, as contained in the Wealth-tax Rules, 1957, did not provide for valuation of certain categories of assets like commercial house property, quoted equity shares or preference shares of companies, unquoted equity shares of investment companies, jewellery etc. Therefore, draft rules for valuation of these assets were notified for eliciting public opinion, as Draft Rules, 1986 - Notification No. 149(E), dated 31-3-1986. These Draft Rules also contained proposals for appropriate amendments in the existing rules. After considering the comments and suggestions in this respect, these Draft Rules, with necessary modification, have also been incorporated in the said Schedule III to the Wealth-tax Act. 18.3 Thus, the said Schedule III to the Wealth-tax Act, consisting of Parts A to H (Rules 1 to 21), provides for the method of determining the value of each category of assets. The provisions of these rules are discussed in detail in the following paras. Part A: General [Rules 1 and 2] 18.4 Rule 1 provides that the value of any asset, other than cash, for the purposes of the Wealth-tax Act, shall be determined in the manner laid down in these rules. 18.5 Rule 2 contains definitions of certain terms for the purposes of the Schedule. These are, "accounting year", "debenture", "equity share","gold", "gold ornament", "investment company", "jewellery", "preference share", "quoted share", or "quoted debenture", "recognised stock exchange" and "unquoted share" or "unquoted debenture". These will be discussed at their appropriate places, while discussing the relevant rules. Part B: Immovable Property [Rules 3-8] 18.6 Rules 3 to 8 provide for the manner in which the value of any immovable property, being a building or land appurtenant thereto or part thereof (hereinafter referred to as house property) is to be determined. The provisions of these rules are on the same lines as those of the erstwhile rule 1BB of the Wealth-tax Rules, 1957, with appropriate modifications. The main difference is that while rule 1BB prescribed a method for valuation of residential house properties only, the present rule 3-8 cover residential as well as commercial house properties. The provisions of these rules are discussed in the following paras. Valuation of immovable property (rule 3) 18.7 Rule 3 provides that the value of a house property shall be determined by multiplying the net maintainable rent by the figure 12.5. First proviso to this rule provides that in the case of a house property constructed on leasehold land, the multiplying factor of 12.5 shall be substituted by 10 if the unexpired period of the lease of such land is 50 years or more, and by 8 if the unexpired period of the lease is less than 50 years. 18.8 Second proviso to the said rule 3 further provides that where the house property is acquired or constructed after 31-3-1974, its value shall be taken to be the cost of acquisition or the cost of construction plus the cost of any improvement thereto, if the value so determined is more than the value arrived at by the method of multiplying factor envisaged in the main rule and the first proviso. Third proviso to the rule, however, provides that the provisions of the second proviso shall not apply for determining the value of one house belonging to the assessee, even before the house is acquired or constructed after 31-3-1974, if the house is exclusively used by the assessee for his own residence throughout the period of 12 months immediately preceding the valuation date and the cost of acquisition or the cost of construction, as increased, in either case, by the cost of any improvement does not exceed,-- (a) Rs. 50 lakhs, where the house is situated at Bombay, Calcutta, Delhi or Madras. (b) Rs. 25 lakhs, where the house is situated at any other place. The effect is that the value of such a house shall be determined in the manner prescribed in the main rule 3 or the first proviso thereto, i.e.,by multiplying the net maintainable rent by the figure 12.5 or 10 or 8, as the case may be. This removes the hardship in the case of persons to acquire one residential house only for their own residence at the prevailing high prices, especially in the metropolitan cities. 18.9 Fourth proviso to the said rule 3 provides that where an assessee has more than one house, exclusively used for his own residence, the provisions of the third proviso shall apply only in respect of one such house, which the assessee may, at his option, specify in this behalf. Thus, the benefit of the provisions of the third proviso is restricted to one house only. Computation of "net maintainable rent" (rule 4) 18.10 Rule 4 provides that for purposes of rule 3 "net maintainable rent" is to be computed after deducting from the "gross maintainable rent" the amount of taxes levied by any local authority in respect of the house property and a sum equal to 15 per cent of gross maintainable rent. Computation of "gross maintainable rent" (rule 5) 18.11 Rule 5 provides the method for computing "gross maintainable rent" for the purposes of rule 4. Thus, the gross maintainable rent means: (i) where the house property is let, the amount received or receivable by the owner as annual rent or the annual value assessed by the local authority, whichever is higher. (ii) where the house property is not let, the amount of annual rent assessed by the local authority, or, if there is no such assessment or the property is situated outside the area of any local authority, the amount which the owner can reasonably be expected to receive as annual rent. 18.12 An Explanation to rule 5 defines in detail the term "annual rent" used in the rule and also the term "rent received or receivable". The intention is that the value of all benefits or perquisites obtained from the tenant are included in the annual rent. Thus where the owner takes a deposit (except advance rent for three months or less) from the tenant, 15 per cent per annum of such deposit (minus interest per annum if any paid by the owner on the deposit) is included in the annual rent. Where the tenant bears the taxes levied by any local authority in respect of the House, the amount of such taxes borne by the tenant is also included in the annual rent. Again, where the tenant bears the expenditure on repairs, 1/9th of the annual rent is further included in the annual rent. Adjustments to the value of house property arrived at under rule 3 (rules 6 and 70) 18.13 Rule 6 provides for adjustments to the value arrived at under rule 3 for unbuilt area of plot of land. Rule 7 provides for adjustments for unearned increase in the value of the land, where the house property is constructed on leasehold land and the terms of the lease entitle the Government or any local authority to claim and recover a specified part of the unearned increase in the value of the land at the time of the transfer of the house property. The provisions of rules 6 and 7 are on the same lines as the provisions of sub-rules (3) and (4) of the erstwhile rule 1BB. Cases where rule 3 shall not apply (rule 8) 18.14 Rule 8 mentions the cases where the provisions of rule 3 for valuation of house property shall not apply. The provisions of this rule are on the lines of sub-rule (5) of the erstwhile rule 1BB, with the modification that the valuation in such cases shall be done by the Assessing Officer in the manner laid down in rule 20 and for doing so the approval of the Deputy Commissioner will not be necessary. PART C : SHARES IN OR DEBENTURES OF COMPANIES(RULES 9 AND 13) Valuation of quoted shares and debentures of companies (rule 9) 18.15 Rule 9 provides for the method of valuation of quoted shares in or debentures of companies. It provides that the value of a quoted equity or preference share in or a quoted debenture of any company shall be taken as the value quoted in respect of such share or debenture on the valuation date or where there is no such quotation on the valuation date, the quotation on the date closest to the valuation date and immediately preceding such date. 18.16 The definitions of the terms 'debenture', 'equity share' and 'preference share' are given in rule 2. Further, 'quoted share' or 'quoted debenture' has also been defined to mean a share or debenture quoted on any recognised stock exchange with regularity from time to time, where the quotations of such shares or debentures are based on current transactions made in the ordinary course of business. It has been clarified that where any question arises whether a share or debenture is a 'quoted share' or a 'quoted debenture', a certificate to that effect furnished by the concerned stock exchange in the prescribed from shall be accepted as conclusive. The meaning of the term 'recognised stock exchange' has also been given in rule 2. Note : It may be pointed out that following representations in this respect, an alternative method of valuation of quoted equity shares has been provided, with effect from 1-4-1990, in a new rule 9A, inserted by the Direct Tax Laws (Second Amendment) Act, 1989 (Refer para 22 of the explanatory notes on that Act issued under Circular No. 554, dated 13-2-1990). Valuation of unquoted preference shares (rule 10) 18.17 Rule 10 provides for the method of valuation of unquoted preference shares of companies. The provisions of this rule are on the same lines as those of the erstwhile rule IC of the Wealth-tax Rules, 1957 except that the words 'market value' have been substituted by the word 'value'. Valuation of unquoted equity shares in companies other than investment companies (rule 11) 18.18 Rule 11 provides for the method of valuation of unquoted equity shares in companies other than investment companies. The provisions of this rule, which provide from valuation of such shares at a percentage of the break-up value of the share, are on the same lines as those of the erstwhile rule 1D of the Wealth-tax Rules, 1957 subject to the following modifications: (i) Under the provisions of the erstwhile rule 1D, the value was determined at 85 per cent of the break-up value determined in the manner laid down in that rule. However, where no dividend was paid by the company for three years or more, the percentage was varied from 82.5 per cent to 75 per cent depending upon the number of years for which dividend was not paid. Under the present provisions of rule 11, the value is determined in all cases at 80 per cent of the break-up value irrespective of whether the dividend has been paid or not. The method of determining the break-up value, however, remains the same as in the erstwhile rule 1D. (ii) The words 'market value' have been substituted by the word 'value'. Valuation of unquoted equity shares in investment companies (rule 12) 18.19 Rule 12 provides for the method of valuation of unquoted equity shares in investment companies as follows:-- (i) The valuation is made on the basis of the break-up value of the shares determined in the same manner as in rule 11. However, the full break-up value is taken into account, instead of 80 per cent taken while determining the break-up value under rule 11. (ii) Sub-rule (3) of rule 12 provides that for the purpose of determining the break-up value, the value of an asset disclosed in the balance-sheet of the company shall be substituted by the value determined in accordance with the rules as applicable to that particular asset and, in the absence of any such rule, the value of such assets shall be substituted by its value as determined under rule 20. This is a major departure from the method provided in rule 11 for determining the value of unquoted equity shares in companies other than investment companies. Thus, while under rule 11, for determining the break-up value, the book value of an asset as shown in the balance-sheet is taken, under rule 12, the value of each asset, as determined under the rules applicable to that asset, is taken. (iii) Sub-rule (5) of rule (12) provides that for the purposes of facilitating the valuation under this rule, the company concerned shall have such valuation made by its auditors appointed under section 224 of the Companies Act, 1956, and a certificate of the auditors relating to such valuation in the prescribed from shall be furnished to the Assessing Officer in the case of the company and the valuation made by the auditors shall be taken into account in the assessments of the shareholders of the company. Note: It may be pointed out that following representations in this respect, sub-rules (3) and (5) of rule 12 have been omitted, with effect from 1-4-1989, by the Direct Tax Laws (Second Amendment) Act, 1989, so that the method of valuation of unquoted equity shares in investment companies becomes almost the same as the method of valuation of unquoted equity shares in other companies under rule 11, with the difference that in rule 12, full break-up value is taken into account instead of 80 percent taken into account in rule 11. (Refer para 22 of the explanantory notes on that Act issued under Circular No. 554 dated 13-2-1990. Valuation of unquoted equity shares in interlocked companies (rule 13) 18.20 Rule 13 provides for the method of valuation of unquoted equity shares in interlocked companies. An Explanation to this rule clarifies that for the purposes of this rule, 'interlocked companies' means any two investment companies, each of which holds shares in the other company. The provisions of this rule are as follows:-- (i) Sub-rule (1) provides that the value of an unquoted equity share in one of the two interlocked companies held by the other interlocked company for the purposes of this rule shall be equal to the paid up value of such share or the value determined under sub-rule (2), whichever is higher. (ii) Sub-rule (2) provides the method for determining the value of such share for the purposes of sub-rule (1), as follows: (1) First arrive at the 'aggregate value of all the equity shares' in an interlocked company as follows: (a) In a case where 50 per cent or more of the gross total income of the company consists of income chargeable under the head 'Income from house property' multiply the 'maintainable profits', of the company by the fraction 100/8.5 (b) In the case of any other interlocked company, multiply the maintainable profits' of the company by the fraction 100/10. (2) Then divide the 'aggregate value of all the equity shares' so arrived at by the number of equity shares in that interlocked company. The resultant amount shall be the value of the unquoted equity share in that interlocked company. (iii) Sub-rule (3) provides the manner in which the 'maintainable profits' of the company for the above purpose shall be computed. The maintainable profits are computed on the basis of average of the book profits of the company for five accounting years immediately preceding the valuation date. The adjustments which are to be made to the book profits of each of the said five years are enumerated in the said sub-rule (3). PART D : ASSETS OF BUSINESS [RULE 14] Global value of assets of business 18.21 Rule 14 provides the manner in which the net wealth of the assets of the business as a whole, having regard to the balance-sheet of the business, is to be determined. The provisions of this rule correspond to those of the erstwhile rules 2A to 2G of the Wealth-tax Rules, 1957, which have been incorporated in the present rule 14 with appropriate modifications. The provisions of rule 14 are discussed in the following paras. 18.22 Sub-rule (1) of this rule provides that where the assessee is carrying on a business for which accounts are maintained by him regularly, the net value of the assets of the business as a whole, having regard to the balance-sheet of such business on the valuation date, after adjustments, specified in sub-rule (2), shall be taken as the value of such assets for the purposes of this Act. 18.23 Sub-rule (2) provides for the manner in which the various adjustments are to be made in the value of assets and liabilities of the business for the purposes of sub-rule (1). The provisions in brief are: (i) Clauses (a) and (b) enumerated the adjustments that are to be made in the value of an asset disclosed in the balance-sheet. (This corresponds to the erstwhile rule 2B of the Wealth-tax Rules, 1957). (ii) Clause (c) provides that the value of an asset not disclosed in the balance-sheet, shall be taken to be the value determined in accordance with the provisions of this schedule as applicable to that asset. (This corresponds to the erstwhile rule 2C of the Wealth-tax Rules, 1957 with appropriate modifications). (iii) Clause (d) enumerates certain assets disclosed in the balance-sheet, which are not to be taken into account. (This corresponds to the erstwhile rules 2D and 2G of the Wealth-tax Rules, 1957, with appropriate modifications). (iv) Clause (e) enumerates certain liabilities shown in the balance-sheet, which are not to be taken into account. (This corresponds to the erstwhile rules 2E and 2G of the Wealth-tax Rules, 1957, with appropriate modifications). 18.24 It may be clarified that there is no provision in rule 14 for allowing deduction on account of liabilities relating to business, but which have not been disclosed in the balance-sheet corresponding to the erstwhile rule 2F of the Wealth-tax Rules, 1957. Consequently, if any debt owed by the assessee and relating to the business is not disclosed in the balance-sheet, no deduction for the same shall now be allowed while determining the net value of the assets of business. PART E : INTEREST IN FIRM OR ASSOCIATION OF PERSONS [RULES 15 AND 16] 18.25 Rules 15 and 16 provide for the manner in which the value of the interest of a partner or a member in the firm or association of persons is to be determined. The provisions of these rules are on the same lines as those of the erstwhile rule 2 of the Wealth-tax Rules, 1957, with minor modification. The modification is that it has now been clarified in the rule 16 as to how the assets held by the firm or associations of persons, which are exempt under sub-sections (1) and (1A) of section 5, are to be treated. A proviso to rule 16 provides that in determining the net wealth of the firm or association of persons (for purposes of determining the interest of a partner or a member therein), exemptions under sub-sections(1) and (1A) of section 5, shall not to be taken into account, i.e., no deduction for these exemptions shall be given and all such assets will be included in the net wealth of the firm or the association. It has, however, been clarified in clause (b) of the Explanation to rule 16 that where the net wealth of the firm or association includes the value of such exempt assets, the value of the interest of a partner or a member therein shall be deemed to include the value of his proportionate share in the said asset and, the provisions of sub-sections (1) and (1A) of section 5 shall apply to him accordingly. PART F : LIFE INTEREST [RULE 17 WITH APPENDIX] 18.26 Rule 17, along with Appendix to the rules, provides for the method of determining the value of the life interest of an assessee. The provisions of this rule and Appendix to the Wealth-tax Rules, 1957, except that the words 'market value' have been substituted by the word 'value'. PART G : JEWELLERY [RULES 18 AND 19] Valuation of jewellery (rule 18) 18.27 Rule 18 provides the following method for determination of the value of jewellery:-- (i) Clause (a) of the rules provides that where the value of jewellery declared by the assessee in the return of net wealth is Rs. 5,00,000 or less, the value so declared shall be accepted provided the return is supported by a statement of jewellery in the prescribed form. (ii) Clause (b) of the rule provides that where the value of jewellery so declared is more than Rs. 5,00,000 the value shall be the price which, in the opinion of the Valuation Officer, on a reference to him under section 16A, jewellery would fetch if sold in the open market on the valuation date. 18.28 The definition of the term 'jewellery' is given in rule 2(7). Adjustment in the value of jewellery for subsequent assessment years (rule 19) 18.29 Rule 19 provides that the value of any jewellery determined under clause (b) of rule 18, i.e., in cases where the value declared by the assessee is more than Rs. 5,00,000 and the value is determined by the Valuation Officer for any assessment year (hereinafter referred to as the first assessment year) shall be taken to be the value of such jewellery for the subsequent four assessment years. This will, however, be subject to the following adjustments: (a) Where the jewellery includes gold or silver or any alloy containing gold or silver, the value of such gold or silver or such alloy as on the valuation date relevant to the concerned subsequent assessment year shall be substituted for the value of such gold or silver or alloy on the valuation date relevant to the first assessment year. (b) Where any jewellery or part of jewellery is sold or otherwise disposed of by the assessee, or any jewellery or part of jewellery is acquired by him, on or before the valuation date relevant to the concerned subsequent assessment year, the value of the jewellery determined for the first assessment year shall be reduced or increased, as the case may be. 18.30 The definitions of the terms 'gold' and 'gold ornament' are given in rule 2(4) and (5). PART H : RESIDUARY [RULES 20 AND 21] Valuation of assets in other cases (rule 20) 18.31 Rule 20 provides that the value of an asset, other than cash, being an asset which is not covered by rules 3 to 19, shall be estimated to be the price which, in the opinion of the Assessing Officer, it would fetch if sold in the open market on the valuation date. However, where the valuation of any asset is referred by the Assessing Officer to the Valuation Officer under section 16A, the value of such asset shall be estimated to be the price which, in the opinion of the Valuation Officer, it would fetch if sold in the open market on the valuation date. It is further provided that in the case of an asset, which is not saleable in the open market, the value shall be determined in accordance with such guidelines or principles as may be specified by the Board from time to time by general or special order. Restrictive covenants to be ignored in determining the market value (rule 21) 18.32 Rule 21 is declaratory or clarificatory in nature. It provides that for the purposes of determining, under any provisions of this Schedule, the market value of any property (that is, the price it would fetch if sold in the open market on the valuation date), the price or other consideration for which such property may be acquired or transferred to any person under the terms of a deed of trust or under any restrictive covenant in any instrument of transfer shall be ignored. 18.33 These amendments come into force with effect from 1-4-1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Section 78 of the Amending Act, 1989] AMENDMENTS TO THE GIFT-TAX ACT Table indicating the corresponding amendments in the Wealth-tax Act and the Income-tax Act 19. The Amending Act, 1989 has either inserted certain new provisions or made amendments to certain existing provisions in the Gift-tax Act in order to make these provisions in line with the corresponding provisions in the Wealth-tax Act as they have emerged after their amendments by the said Amending Act, 1989 and which have been discussed in the preceedings paras in these explanatory notes. The Table below shows the provisions of the Gift-tax Act that have been so inserted/amended and the corresponding provisions in the Income-tax Act, that has also been indicated. The Table also indicates the sections of the Amending Act, 1989, which have carried out the necessary amendments to the Gift-tax Act and the subject-matter of amendments in brief. Sl. No. Section of the Amending Act, 1989 Section of the Gift-tax Act that has been amended/ inserted Corresponding section of the Wealth-tax Act/Income-tax Act Subject-matter of the amendment in brief 1 2 3 4 5 1. 79 3 - Consequential amendment of section 3 pursuant to insertion of a new Schedule II in the Gift-tax Act. 2. 80 5(1)(iiie) (i) 5(1)(xvig) of the W.T. Act. (ii) 10(15)(iid) of the I.T. Act Exemption from gift-tax in respect of non-repatriable NRI Bonds. 3. 81 6 7 of the W.T. Act Substitution of new section for section 6 dealing with determination of the value of gifts, pursuant to insertion of a new Schedule II in the Gift-tax Act. 4. 82 10 11 of the W.T. Act Amendment in section 10 to set right an incorrect reference to sub-section (5) of section 127 of the Income-tax Act, instead of to sub-section (4). 5. 89 25(1) (i) 26(1) of the W.T. Act. (ii) 253 (1)(c) of the I.T. Act. Consequential amendment of section 25 relating to appeals to the Appellate Tribunal from orders of the Chief Commissioner or Commissioner. 6. 91 34 35 of the W.T. Act. Consequential amendment of section 34 dealing with rectification of mistake, pursuant to omission of section 22A. 7. 92 35K (i) 36 of the W.T. Act. (ii) 279B of the I.T. Act Insertion of a new section 35K to dispense with the necessity of production of original records and documents in evidence during prosecution proceedings. 8. 94 Schedule II Schedule III to the W.T. Act. Insertion of a new Schedule II containing rules for determining the value of property gifted. Note: The amendments indicated at Serial Nos. 2 and 8 of the above Table, which are star marked, are further explained in the following paras. Insertion of a new clause (iiie) in sub-section (1) of section 5 to exempt from gift-tax non-repatriable NRI Bonds **** 20. The interest income from notified bonds, which have been purchased by non-resident Indians in foreign exchange and which are non-repatriable, has been exempted from income-tax. Such bonds have also been exempted from wealth-tax (refer paras 5.1 to 5.5 and 11.2 of these explanatory notes). The Amending Act, 1989 has further inserted a new clause (iiie) in sub-section (1) of section 5 of the Gift-tax Act, which exempts the gift of such bonds by the non-resident Indians from gift-tax also. However, exemption from gift-tax is subject to the following restrictions: (i) The exemption is available only to an individual who purchases the bonds as a non-resident individual. The exemption shall continue to be available to him even if he becomes a resident of India in any subsequent year, after having purchased the bonds as a non-resident Indian. However, the exemption shall not be available to the nominee or survivor of such non-resident Indian, nor shall ot be available to an individual receiving the bonds by way of gift from such non-resident Indian. (ii) The gift of such bonds should be made to a relative of the non-resident Indian. Thus gifts made to persons other than relatives will not be exempt from gift-tax. The term 'relative' shall have the same meaning as defined in section 2(41) of the Income-tax Act, i.e., it would mean the husband, wife, brother or sister or any lineal ascendant or descendant of the individual. (iii) The gift of such bonds should be made after a period of three years from the date of their purchase by the non-resident Indian. Thus gifts made before the expiry of the said period of three years would be liable to gift-tax. Insertion of Schedule II containing rules for determining the value of property gifted 21. The Amending Act, 1989 has inserted a new Schedule II in the Gift-tax Act, which incorporates the rules for determining the value of the property gifted in the Act itself, as has been done in the Wealth-tax Act. The new Schedule II provides that the value of any property, other than cash, transferred by way of gift shall be determined for the purposes of the Act, in accordance with the provisions of Schedule III to the Wealth-tax Act, which shall apply for the valuation of the gifted property subject to certain modifications mentioned in the said Schedule II.