Finance Act, 1990--Explanatory Notes on the provisions relating to direct taxes - Income Tax - 572/1990

Finance Act, 1990--Explanatory Notes on the provisions relating to direct taxes Circular No. 572 Dated 3/8/1990 INTRODUCTION The Finance Bill, 1990, as passed by Parliament received the assent of the President on 31st May, 1990, and has been enacted as Act No. 12 of 1990. This Circular explains the substance of the provisions relating to direct taxes in the Finance Act, 1990. CHANGES MADE BY THE FINANCE ACT, 1990 2. The Finance Act, 1990 (hereinafter referred to as "the Finance Act"), has, amended sections 2, 6, 10, 28, 32A, 32AB, 33A, 34, 35CCB, 43B, 44AC, 45, 80CCA, 80GGA, 80HH, 80HHA, 80HHC, 80HHD, 80-I, 80L, 8OR, 80RR, 80RRA, 115-I, 115J, 119, 139, 139A, 142, 143, 145, 151, 197A, 246, 268, 271C, 271D, 271E, 273B, 275A and 288 and the Eleventh Schedule ; inserted new sections 80CCB, 80DD, 194F and 271BB ; substituted new sections 87, 88 and 88A in Chapter V111 in place of the omitted sections ; substituted new sections for sections 33AB and 80M ; omitted section 80C and Chapter XXIIB (relating to tax credit certificates) ; amended sections 2, 5, 10, 16, 17, 35K, and Schedule 111 of the Wealth-tax Act, 1957 ; inserted a new section 35EEE in the Wealth-tax Act, 1957 ; amended sections 9, 15 and 16 of the Gift-tax Act, 1958. PROVISIONS IN BRIEF The provisions in the Finance Act, in the sphere of direct taxes relate to the following matters : (i) Prescribing the rates of income-tax on incomes liable to tax for assessment year 1990-91, the rates at which tax will be deductible at source during the financial year 1990-91 from Interest (including interest on securities), dividends, salaries paid to employees, winnings from lotteries or crossword puzzles, winnings from horse-races, insurance commission and other categories of income liable to deduction of tax at source under the Income-tax Act, rates for computation of "advance tax" and charging of income-tax on current incomes in certain cases for the financial year 1990-91. (ii) Retaining with modification as to applicability of the provisions for the levy of surcharge at the rate of 8 per cent. of income-tax. (iii) Amendment of the Income-tax Act, 1961 with a view to - (1) streamlining the tax structure by withdrawing or modifying certain incentives and concessions ; (2) extending the retirement benefit scheme to employees of public sector companies ; (3) exempting interest on securities held by the Registrar, Supreme Court in respect of compensation for the victims of Bhopal gas leak disaster ; (4) incorporating new provisions relating to Tea Development Account ; (5) modifying the conditions for grant of development rebate and investment allowance ; (6) extending the provisions of section 35CCB to programmes of afforestation ; (7) modifying the provisions of section 43B in respect of certain liabilities ; (8) modifying the provisions of section 44AC to clarify the meaning of purchase price and to include co-operative societies within the meaning of the term "seller" ; (9) replacing the tax relief in respect of savings (section 8OC) and in respect of investment in certain shares (section 80CC) by new provisions of sections 88 and 88A ; (10) enhancing the maximum amount of deduction under section 80CCA to Rs. 40,000 and providing for situations where a Hindu undivided family has effected a partition or an association of persons is dissolved after a deduction has been allowed ; (11) inserting new provisions relating to Equity Linked Savings Scheme to encourage investment of savings in equities ; (12) incorporating new provisions relating to deduction in respect of medical treatment, etc., of handicapped dependants ; (13) modifying the provisions relating to deduction in respect of export profit ; (14) extending the concession under section 80-I for a further period of five years with enhanced rate of deduction ; (15) modifying the provisions relating to inter-corporate dividends ; (16) modifying the provisions relating to deductions in respect of foreign incomes of professors, artists, technicians, etc. ; (17) modifying the special provisions relating to certain incomes of non-resident Indians ; (18) amending the provisions of section 119 extending the power of the Board to relax the provisions of certain sections ; (19) enabling firms to file their returns even if their income is below the taxable limit ; (20) making it obligatory for all persons who are required to furnish their returns of income under section 139(4A) to apply for allotment of permanent account number ; (21) conferring power on Assessing Officers to call for return even before the end of the relevant assessment year ; (22) providing for processing of revised returns under the new procedure for assessment ; (23) modifying the definition of "regular assessment" ; (24) conferring power on an Income-tax Officer to reopen assessment with the approval of the Deputy Commissioner ; (25) providing for penalties for certain defaults by mutual funds ; (26) providing for punishment for contravention of prohibitory order served for effecting seizure ; (27) removing anomalies in certain cases ; and (28) modifying the provisions relating to the valuation of jewellery under the Wealth-tax Act. INCOME-TAX Rate Structure I. Rates of income-tax In respect of incomes liable to tax for the assessment year 1990-91. 3. In respect of incomes of all categories of taxpayers (corporate as well as non-corporate) liable to tax for the assessment year 1990-91, the rates of income-tax (including surcharge thereon) have been specified in Part I of the First Schedule to the Finance Act. These are the same as those laid down in Part III of the First Schedule to the Finance Act, 1989. Accordingly, in the case of every person having income exceeding fifty thousand rupees, the amount of income-tax shall be increased by a surcharge for purposes of the Union calculated at the rate of eight per cent. of such income-tax. However, no such surcharge shall be payable by a non-resident individual, HUF, unregistered firm, association of persons/ body of individuals and a foreign company. It may be noted that, in the case of individuals, Hindu undivided families (other than those having at least one member with independent total income exceeding the exemption limit), unregistered firms, associations of persons, bodies of individuals and artificial juridical persons, the rate of tax in respect of incomes liable to tax for the assessment year 1990-91, in the slab of income of Rs. 18,000 to Rs. 25,000, is 20 per cent. It was 25 per cent. for the assessment year 1989-90. II. Rates for deduction of tax at source during the financial year 1990-91 from income other than "Salaries"-. 4. The rates for deduction of income-tax at source during the financial year 1990-91 from incomes other than "Salaries" have been specified in Part II of the First Schedule to the Finance Act. These rates apply to income by way of interest including interest on securities, dividends, insurance commission, winnings from lotteries, crossword puzzles and horse races and income other than salary income of non-residents (including non-resident Indians). These rates are basically the same as those specified in Part II of the First Schedule to the Finance Act, 1989, for purposes of deduction of tax at source during the financial year 1989-90. In respect of payments referred to above, the amount of tax so deducted shall be increased by a surcharge calculated at the rate of 8 per cent. of tax deducted. However, no deduction in respect of surcharge shall be made where the payment is made to a non-resident (including a non-resident Indian) or to a foreign company. III. Rates of deduction of tax at source from "Salaries", computation of "advance tax" and charging of income-tax in special cases during the financial year 1990-91. 5. The rates for deduction of tax at source from "Salaries" during the financial year 1990-91 and also for the computation of "advance tax" payable during that year in the case of all categories of taxpayers have been specified in Part III of the First Schedule to the Finance Act. These rates are also applicable for charging income-tax during the financial year 1990-91 on current incomes in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping profits arising in India to non-residents, assessment of persons leaving India for good during the financial year 1990-91, assessment of persons who are likely to transfer property to avoid tax or where an order has to be passed in a case of search and seizure for calculating the amount of tax on the estimated undisclosed income, etc. 6. The Finance Act, 1989, specified in Part III of the First Schedule that the amount of income-tax deductible or advance tax payable or income-tax payable, as the case may be, shall be increased by a surcharge calculated at the rate of 8 per cent. of the tax so deductible or advance tax or income-tax so payable in the case of a person whose income exceeded fifty thousand rupees. The Finance Act, 1990, provides that the aforesaid surcharge shall be levied in the case of a person whose income exceeds seventy-five thousand rupees. However, no such surcharge shall be levied in a case where the payment is made to or advance tax or income-tax is payable on the income of a non-resident (including non-resident Indian) or a foreign company. III-A. Individuals, Hindu undivided families, associations of persons. bodies of individuals. 7. In the case of individuals, Hindu undivided families, associations of persons, etc., the rates of income-tax have been specified in paragraph A of Part III of First Schedule to the Finance Act. The rate schedule applicable in the case of individuals, Hindu undivided families (other than those having at least one member whose total income exceeds the exemption limit), unregistered firms, associations of persons, bodies of individuals and artificial juridical persons has been restructured by raising the exemption limit from Rs. 18,000 to Rs. 22,000 and by introducing a new slab of income of Rs. 22,000 to Rs. 30,000 on which the rate of tax is 20 per cent. The next slab of income will be Rs. 30,000 to Rs. 50,000 on which the rate of tax shall be 30 per cent. For total income exceeding Rs. 50,000, the slabs of income and the rates of tax will remain unchanged. The rates of income-tax as per the Finance Act, 1989, and the Finance Act, 1990, are indicated in the Table below : TABLE Finance Act, 1989 Finance Act, 1990 Income level Marginal rate of tax Income level Marginal rate of tax Upto Rs. 18,000 Nil Upto Rs. 22,000 Nil Rs. 18,000— 25,000 20 per cent Rs. 22,000— 30,000 20 per cent Rs. 25,000 — 50,000 30 per cent Rs. 30,000 — 50,000 30 per cent Rs. 50,000—1,00,000 40 per cent Rs. 50,000 — 1,00,000 40 per cent Above Rs. 1,00,000 50 per cent Above Rs. 1,00,000 50 per cent III-B. Co-operative societies. 8. In the case of co-operative societies, the rates of tax have been specified in paragraph B of Part Ill of the First Schedule to the Finance Act. Although the exemption limit and the slabs of income remain the same, the rate of income-tax for each slab has been reduced. The existing and new rates of income-tax are indicated in the Table below : Finance Act, 1989 Finance Act, 1990 Income level Marginal rate of tax Income level Marginal rate of tax Up to Rs. 10,000 15 per cent Upto Rs. 10,000 10 per cent Rs. 10,000 — 20,000 25 per cent Rs. 10,000 — 20,000 20 per cent Above Rs. 20,000 40 per cent Above Rs. 20,000 35 per cent III- C. Registered firms. 9. In the case of registered firms, the rates of tax have been specified in paragraph C of Part Ill of the First Schedule to the Finance Act. The exemption limit has been raised from Rs. 10,000 to Rs. 15,000 and the rate schedule has been restructured for registered firms carrying on business and also for registered firms carrying on profession. The existing and new rates of income-tax are indicated in the Table below : - TABLE Finance act, 1989 Finance act, 1990 Income level Marginal rate of tax Income level Marginal rate of tax Firms carrying on business Upto Rs. 10,000 Nil Up to Rs. 15,000 Nil Rs. 10,000 - 25,000 5 per cent Rs. 15,000 - 50,000 6 per cent Rs. 25,000 - 50,000 7 per cent Rs. 50,000 - 1,00,000 12 per cent Rs. 50,000 - 1,00,000 15 per cent Above Rs. 1,00,000 18 per cent Above Rs. 1,00,000 24 per cent Firms carrying on profession : Up to Rs. 10,000 Nil Up to Rs. 15,000 Nil Rs. 10,000 - 25,000 4 per cent Rs. 15,000 - 50,000 5 per cent Rs. 25,000 - 50,000 7 per cent Rs. 50,000 - 1,00,000 10 per cent Rs. 50,000 - 1,00,000 13 per cent Above Rs. 1,00,000 15 per cent Above Rs.1,00,000 22 per cent III-D. Local authorities. 10. In the case of local authorities, the rate of income-tax has been specified in Paragraph D of Part III of the First Schedule to the Finance Act, which is the same as in Part III of the First Schedule to the Finance Act, 1989. III-E. Companies . 11. In the case of companies, the rate of income-tax has been specified in Paragraph E of Part III of the First Schedule to the Finance Act. The rate of income-tax in the case of domestic companies has been reduced as under : - Finance Act, Finance Act, 1989 1990 In the case of a domestic company,— (1) where a company is a company in which the public are substantially interested 50 per cent 40 per cent (2) where a company is not a company in which the public are substantially interested— (i) in the case of a trading company or an investment company 60 per cent 50 per cent (ii) in any other case 55 per cent 45 per cent The rate of tax for companies other than domestic companies is the same as in sub-paragraph II of paragraph E of Part 1 of the First Schedule to the Finance Act, 1989. IV. Partially Integrated taxation of non-agricultural income with income derived from agriculture. 12. As in the past, the Finance Act provides that in the case of individuals, Hindu undivided families, other associations of persons, etc., the net agricultural income will be taken into account for the computation of "advance tax" and charging of income-tax. These provisions are on the same lines as those in earlier years. [Section 2 and the First Schedule of the Finance Act.] Streamlining of tax structure. 13. With the reduction in the rates of taxes in the case of domestic companies, registered firms and co-operative societies and on a review of some of the incentives and concessions available to taxpayers, the following incentives and concessions have been withdrawn or modified : - (a) Under the existing provisions of section 32A of the Income-tax Act, a deduction of an amount equal to twenty per cent. of the cost of new ship or aircraft or plant and machinery installed or put to use is allowed in computing the profits and gains from business or profession. This concession has been withdrawn in relation to new ship or aircraft acquired or new plant or machinery installed after the 31st day of March, 1990. Copy of the notification issued in this regard is at annexure. (b) Under the existing provisions of section 32AB of the Income-tax Act, deduction is allowed in respect of deposit with the IDBI/NABARD or amount utilised for the purchase of any new ship, new aircraft or new machinery or plant. This deduction is allowed in computing the taxable profits or gains of business or profession and is equal to the amount deposited/utilised for the purchase of the new ship or aircraft or machinery or plant or 20 per cent. of the profits of business or profession, whichever is less. No deduction will be allowed under this section in relation to any assessment year commencing on or after the 1 st day of April, 1991. [Section 8 of the Finance Act.] (c) Under the provisions of section 33A of the Income-tax Act, an assessee carrying on the- business of growing and manufacturing tea in India is entitled to a deduction in the computation of profits from that business, of a "development allowance" with reference to the actual cost of planting tea bushes. The amount to be so deducted is calculated at the rate of 50 per cent. of such cost. This deduction is available for planting tea bushes on land which had been previously abandoned or which is newly brought under plantation. The deduction under this provision will now be allowed only if the planting of tea bushes has been completed before the 1st day of April, 1990. [Section 9 of the Finance Act.] (d) Under the existing provisions of section 80HH of the Income-tax Act, all categories of assessees are. entitled to a deduction equal to 20 per cent. of the profits derived by them from new industrial undertakings (other than those engaged in mining) and approved hotels set up after 31st December, 1970, in notified backward areas. The deduction is allowed in respect of each of the ten assessment years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things or the business of the hotel starts functioning. Industrial undertakings which begin to manufacture or produce articles or things and approved hotels which start functioning, after the 31st day of March, 1990, will not be entitled for this deduction. [Section 20 of the Finance Act.] (e) Under the existing provisions of section 80HHA of the Income-tax Act, all categories of assessees are entitled to a deduction equal to 20 per cent. of the profits derived by them from new small-scale industrial undertakings (other than those engaged in mining) set up in any rural area. The deduction is allowed in respect of each of the ten assessment years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things. The small-scale industrial undertakings which begin to manufacture or produce articles or things after the 31st day of March, 1990, will not be eligible for this deduction. [Section 21 of the Finance Act.] (f) Under the existing provisions of section 115J of the Income-tax Act, in the case of a company whose total income as computed under the Income-tax Act, is less than 30 per cent. of the book profit, as computed under that section, the total income chargeable to tax will be 30 per cent. of the book profit. The provision was enacted to restrict the erosion of the base of taxable income on account of a large number of tax concessions. In view of the package of measures for rationalising the tax structure including discontinuance of certain investment incentives, having the effect of increasing the taxable income base, there is no necessity of retaining the provisions of section 115J on the statute book. Accordingly, section 115J has been amended so as to provide that its provisions shall not apply to assessment year 1991-92 and subsequent years. [Section 32 of the Finance Act.] Clarificatory amendment of the definition of "residence in India"-. 14. Under the existing provisions of sub-clause (c) of clause (1) of section 6 of the Income-tax Act, an individual is said to be a resident in India in any previous year, if in the four preceding years he has been in India for a total period of 365 days or more and has stayed in India for 60 days or more in that previous year. Clause (a) of the Explanation to clause (1) makes an exception in the case of a citizen of India who leaves India in any previous year for the purposes of employment. Such a person is treated as a resident in India only if he stays in India during the previous year for 182 days or more. The aforesaid Explanation does not clarify whether a seaman working on board an Indian ship is also a person leaving India for the purposes of employment. 14.1 In order to remove any doubt in this regard, clause (a) of the Explanation to clause (1) of section 6 has been amended to include therein reference to a member of the crew of an Indian ship. This would ensure that Indian seaman working on board an Indian ship would be treated as resident in India for any year only if the stay in India is for 182 days or more in that year. 14.2 This amendment takes effect from the 1st April, 1990. [Section 4 of the Finance Act.] Extension of the retirement benefit scheme to employees of public sector companies. 15. Under the existing provisions of item (i) of sub-clause (iv) of clause (15) of section 10 of the Income-tax Act, exemption from income-tax is available in respect of interest received from Government on deposits made by an employee of a Central Government or a State Government, in accordance with such scheme as the Central Government may, by notification in the Official Gazette, frame in this behalf, out of the moneys due to him on account of his retirement, whether on superannuation or otherwise. The deposits under the aforesaid scheme are also exempt from wealth-tax under section 5(1)(xxviic) of the Wealth-tax Act. 15.1 The aforesaid exemptions have now been extended in respect of deposits made under the aforesaid scheme also by an employee of a statutory corporation or a Government company on retirement, whether on superannuation or otherwise. 15.2 This amendment will take effect from 1st April, 1991, and will, accordingly, apply in relation to the assessment year 1991-92 and subsequent years. [Sections 5 and 52 of the Finance Act.] Exemption in respect of interest on securities held by the Registrar, Supreme Court, in Reserve Bank's SGL Account No. SL/DH 048 16.The amount of US $470 million paid by the Union Carbide Corporation and the Union Carbide India Ltd. on the directions of the Supreme Court as compensation for the victims of the Bhopal gas leak disaster stands deposited in the Reserve Bank of India to the credit of the Registrar, Supreme Court, in the form of certain Government securities. Under the provisions of the Income-tax Act, the interest payable on the aforesaid securities is taxable. However, it was not intended to levy tax on the interest accruing on the amount of the said compensation for the victims of the Bhopal gas leak disaster. Accordingly, a new sub-clause (v) in clause (15) of section 10 of the Income-tax Act, has been inserted to provide for exemption from income-tax in respect of interest on securities held by the Registrar, Supreme Court, in Reserve Bank's Account No. SL/DH 048. 16.1 This amendment will take effect from the 1st April, 1989 and will, accordingly, apply in relation to the assessment year 1989-90 and subsequent years. [Section 5 of the Finance Act.] New provisions relating to Tea Development Account. 17. Section 33AB inserted by the Finance Act, 1985, provided for deduction in respect of the amount deposited by a tea company with the National Bank for Agriculture and Rural Development. By the Finance Act, 1986, a new section 32AB relating to Investment Deposit Account was inserted in the Income-tax Act. Under this provision an assessee was allowed deduction in respect of amounts deposited with the IDBI/NABARD or the amount utilised during the previous year for the purchase of any new ship, aircraft, machinery or plant. Since the scheme of Investment Deposit Account applied also to taxpayers carrying on the business or profession of growing and manufacturing tea in India, the benefit under the then existing provision in section 33AB relating to Tea Development Account was withdrawn by the Finance Act, 1987. 17.1 The existing provisions of section 32AB have been discontinued by the Finance Act, 1990. However, in view of the continuing need to encourage tea companies to mobilise resources internally for specified purposes, a new section 33AB has been substituted in place of the old section 33AB. 17.2 Under the new provisions, an assessee carrying on the business of growing and manufacturing tea in India is allowed a deduction in respect of the amount deposited by him in a special account with the National Bank for Agriculture and Rural Development within a period of six months from the end of the previous year or before furnishing the return of his income, whichever is earlier. The deduction is limited to 20 per cent. of the profits of such business as computed before making deduction under the provision and will be allowed before the loss, if any, brought forward from earlier years is set off. 17.3 The other salient features of the new scheme of Tea Development Account are . (i) The special account with the National Bank for Agriculture and Rural Development is the account maintained in accordance with and for the purposes specified in the scheme approved in this behalf by the Tea Board. (ii) The amount standing to the credit of such special account may be withdrawn only for the purposes specified in such scheme. Except in the circumstances mentioned below at (iii), if the amount released by NABARD in a year is not utilized for the purpose for which it is released, the amount not so utilised will be treated as taxable profits of that year and taxed accordingly. (iii) Apart from the purposes specified in the scheme, the amount standing in the credit of the special account may be allowed to be withdrawn in any of the following circumstances (a) closure of business ; (b) death of the taxpayer ; (c) partition of Hindu undivided family ; (d) dissolution of firm ; (e) liquidation of company. Where the amounts are withdrawn because of closure of business or because of dissolution of firm, the amount withdrawn will be treated as taxable profit and taxed accordingly on the basis as if the business was continuing or the firm had not been dissolved. In all other cases, viz., death of the taxpayer, partition of the Hindu undivided family and liquidation of the company, the amounts withdrawn on closure of account because of the occurrence of any of these events will not be included in the taxable income even though the amounts have not been utilised for any of the purposes specified in the scheme. (iv) There is an overriding condition that the deduction under this provision cannot be claimed in relation to amounts utilised for the purchase of any machinery or plant to be installed in any office premises or residential accommodation including guest houses ; any office appliance, other than computers ; any other plant or machinery which either is installed in an undertaking producing low priority items specified in the Eleventh Schedule in the Income-tax Act or is an item of plant or machinery entitled to 100 per cent. write off by way of depreciation or for any other reason in any one year. (v) For claiming the deduction, it is necessary that the accounts of the taxpayer are audited by a chartered accountant and the report of the auditor in the prescribed form duly signed and verified is filed along with the return of the relevant assessment year. In cases where the accounts of the taxpayer are required to be audited under any other law, e.g., under the Companies Act, it would be sufficient if the accounts are audited under that law and the audit report as per that law is furnished with the return along with a further report in the form prescribed for the purposes of this provision. The audit report form is being notified separately. (vi) The deduction allowed under this provision will be withdrawn if the asset acquired in accordance with the scheme is sold or otherwise transferred within 8 years of the end of the previous year in which it is acquired. For this purpose, the cost of the asset relatable to the deduction allowed will be treated as taxable business profits of the year in which the asset is sold or otherwise transferred. The deduction allowed earlier will, however, not be withdrawn in cases where the asset is transferred within the 8 year-period to Government, local authority, statutory corporation or Government company. It will also not be withdrawn where the transfer takes place in connection with the succession of a firm by a company. For this purpose it is necessary that : (a) the scheme continues to apply to the company in the manner applicable to the firm ; (b) the successor company takes over all the properties and liabilities of the firm ; and (c) all the shareholders of the company were partners of the firm before the succession. 17.4 This provision will take effect from 1st April, 1991, and will, accordingly, apply to the assessment year 1991-92 and subsequent years. [Section 10 of the Finance Act.] Modification of conditions for grant of development rebate and investment allowance. 18. The provisions of section 33 read with section 34 of the Income-tax Act, relating to development rebate, provide for deduction of a percentage of the actual cost of a ship acquired or machinery or plant installed. One of the conditions for the deduction is that an amount equal to 75 per cent. of the amount of development rebate to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve account. 18.1 In the context that appropriation to a reserve presupposes existence of sufficient profits and it should suffice if the required amount is so appropriated before the deduction by way of development rebate came to be allowed, the Central Board of Direct Taxes through a circular clarified that the requirement of creation of reserve will be considered to have been satisfied if the accumulated reserves in respect of the said machinery or plant up to the year or years of actual deductions is equal to seventy-five per cent. of the amount of development rebate to be actually allowed. This means that in a year when profits are insufficient or there are no profits, the creation of reserve was not mandatory. 18.2 The Supreme Court in the case of Shri Shubhlaxmi Mills Ltd. [1989] 177 ITR 193, has held that in order to claim the deduction on account of development rebate, it is obligatory that the reserve should be created in the year of acquisition/installation of machinery or plant, etc., even in a case where there are no profits. If the decision of the Supreme Court is to be followed, then taxpayers who have been following the Board's circulars for many years would be placed in a very difficult situation as their assessments already completed could be reopened. Apart from this, it may run contrary to accounting principles and the assurance given by the Central, Board of Direct Taxes through its circular. 18.3 Though the decision of the Supreme Court has been pronounced only with regard to the provisions relating to development rebate, the underlying principle may apply equally to the grant of investment allowance. Accordingly, sections 32A and 34 have been amended to secure that the condition of creation of reserve even in a year of loss or of insufficiency of profit as laid down by the Supreme Court will not be mandatory in respect of both development rebate and investment allowance. It is now provided that in considering whether the condition regarding creation of reserve is fulfilled or not, the reserve(s) created in the year in which the deduction is to be allowed and in any earlier year will be taken into account. Of course, the earlier year will not be a year earlier than the year in which the plant, machinery is installed or put to use or the ship is acquired. 18.4 These amendments will take effect retrospectively from 1st April, 1962, in relation to the development rebate and 1st April, 1976, in relation to the investment allowance and will, accordingly, apply from assessment years 1962-63 and 1976-77, respectively and subsequent years. [Sections 7 and 11 of the Finance Act.] Tax concessions in respect of contribution to. a fund or programme of afforestation. 19. Under the existing provisions of section 35CCB, in the case of an assessee having income from business or profession, any expenditure incurred by way of payment of any sum to an approved association or institution is allowed as deduction where the object of such association or institution is undertaking of any approved programme of conservation of natural resources. Deduction for similar payments made by other assessees who are not having income from business or profession is allowed under section 8OGGA of the Income-tax Act. With a view to promoting afforestation, the scope of deduction under sections 35CCB and 8OGGA has been enlarged so as to cover the payments made to an association or institution which has as its object the undertaking of any programme of afforestation. For this purpose, both the association/institution and the programme of afforestation will have to be approved by the prescribed authority. Moreover, any payment made to a Fund for afforestation to be set up and notified in this behalf will also qualify for deductions under sections 35CCB and 8OGGA of the Income-tax Act. 19.1 These amendments will take effect from 1st April, 1991, and will, accordingly, apply in relation to the assessment year 1991-92 and subsequent years. [Sections 12 and 19 of the Finance Act.] Modification of the provisions relating to deductions in respect of certain liabilities. 20. Under the existing provisions of section 43B of the Income-tax Act, apart from certain other sums, a deduction in respect of any interest payable on any loan or borrowing from any public financial institution is allowed only if the same has been actually paid by the assessee before the due date of filing of the return. For this purpose, the term "public financial institution" has been assigned the same meaning as in section 4A of the Companies Act which at present does not cover State Financial Corporations and State Industrial Investment Corporations. 20.1 The scope of section 43B has been enlarged to provide that any sum +payable as interest or any loan or borrowings from any State Financial Corporation or State Industrial Investment Corporation shall also not be allowed as deduction if the same is not actually paid before the due date of filing of return. 20.2 This amendment will take effect from 1st April, 1991 and will, accordingly, apply in relation to the assessment year 1991-92 and subsequent years. [Section 13 of the Finance Act.] Modification of special provisions for computing profits and gains from the business of trading in certain goods. 21. Under the existing provisions of section 44AC of the Income-tax Act, in the case of a trader in alcoholic liquor for human consumption (other than Indian made foreign liquor), forty per cent. of the purchase price paid or payable is deemed to be his income. As a result of different systems prevailing in different States, the term purchase price is being understood in different ways. Therefore, an Explanation has been inserted in clause (a) of sub-section (1) of section 44AC to provide that purchase price shall mean all amounts paid or payable to obtain country liquor, excluding the amount paid or payable towards the bid money in an auction or the highest accepted offer in a tender or any other mode. 21.1. At present, the provisions of section 44AC apply where the goods of the specified nature are sold by the Central Government, a State Government, any local authority, a statutory corporation or authority, a company or a firm. The Explanation below section 44AC has been amended to include co-operative societies within the meaning of the term "seller" in section 44AC. 21.2 These amendments will take effect from 1st April, 1991 and will, accordingly, apply in relation to the assessment year 1991-92 and subsequent years. [Section 14 of the Finance Act.] Modification of tax reliefs in respect of savings. 22. Under the existing provisions of section 80C of the Income-tax Act, tax incentive to promote savings takes the form of deduction in respect of the whole or part of the funds invested or deposited in life insurance policies, deferred annuity policies, provident funds, superannuation funds etc. The deduction is allowed at the rate of 100 per cent. on the savings of the first Rs. 6,000, at the rate of 50 per cent. of the next Rs. 6,000 and at the rate of 40 per cent. on the balance. The maximum amount eligible for deduction is Rs. 40,000. In the case of authors, playwrights, artists, musicians, actors and sportsmen (including athletes), the maximum amount eligible for the deduction is Rs. 60,000. 22.1 Under the existing scheme of section 80C, a person gets tax relief at the highest marginal rate of tax applicable to him. Accordingly, it confers higher amount of tax benefits to a person with higher income vis-a-vis a person with a lower income. The scheme is, therefore, regressive and inequitable. 22.2 With a view to removing this imbalance, section 80C of the Income-tax Act has been replaced by a new provision in section 88. Under the new provision, an assessee will be entitled to a deduction of twenty per cent. of the amount invested or deposited in the life insurance policies, provident funds, superannuation funds, etc., from the income-tax payable by him on his total income. The maximum tax rebate allowable will be Rs. 10,000. In the case of authors, playwrights, artists, musicians, actors or sportsmen (including athletes), the maximum tax rebate allowable will be Rs. 14,000. 22.3 The payments eligible for tax rebate under the new section 88 will be the same as are at present eligible for deduction under section 80C of the Income-tax Act. 22.4 The surcharge, if any payable by an assessee shall be levied on the income-tax payable by him after allowing the tax rebate under the aforesaid provisions. 22.5 The effect of the new provision is illustrated as under : Existing New Rs. Rs. Gross Total Income 70,000 70,000 Deduction under section 80C (assuming savings of Rs. 14,500) 10,000 Nil Total Income 60,000 70,000 Tax on total income 12,900* 15,600** Tax rebate on savings of Rs. 14,500 Nil 2,900 *As per the existing rates. **As per the new rates. Tax payable : Rs. Tax 12,900 Surcharge 1,032 13,932 13,932 12,700 22.6 These amendments will take effect from 1st April, 1991, and will, accordingly, apply in relation to the assessment year 1991-92 and subsequent years. [Sections 2, 30 and 50 of the Finance Act.] Modification of the provisions of tax concession in respect of investments an certain shares, etc. 23. Under the existing provisions of section 80CC of the Income-tax Act, a deduction of an amount equal to fifty per cent. is allowed in respect of investment in shares forming part of an eligible issue of equity capital or units issued under any scheme of a mutual fund or the Unit Trust of India, if the amount mobilised under the scheme is invested only in the eligible issue of capital. The total amount of investment qualifying for deduction under this section is restricted to Rs. 20,000 per year. The maximum amount of deduction is, therefore, Rs. 10,000. In order to take the benefit of this deduction, a person has to continue to hold the shares for a minimum period of three years. 23.1 The tax concession under this provision is available only in respect of eligible public issues made before 1st April, 1990. 23.2 The existing scheme of section 80CC of the Income-tax Act is regressive and inequitable as it gives higher tax concession to persons with higher income and a lower tax concession to persons with lower income. With a view to rectifying this position, section 80CC has been replaced by a new section 88A in the Income-tax Act to provide for a tax rebate calculated at the rate of 20 per cent. of the investment in the eligible issue of capital or units. The maximum amount of investment eligible for tax rebate is Rs. 25,000. The new provision also provides- (i) that the funds so mobilised under the schemes of the mutual fund or the Unit Trust of India must be invested in the eligible issue of capital within six months from the close of subscription, of the schemes. Further, pending investment under the eligible issue of capital, the mutual funds or the Unit Trust of India will be allowed to invest in such Government securities as may be approved by the Board, in this behalf ; (ii) that the tax concession under the new section 88A will not be available to any scheme floated by any mutual fund or the Unit Trust of India. the subscription to which closes after 30th September, 1990. 23.3 A new section 27IBB has been introduced to provide that if any mutual fund or the Unit Trust of India referred to in sub-section (1) of section 88A, fails to invest any amount of subscription to the units issued under any scheme referred to in the said sub-section in the eligible issue of capital within a period of six months specified in that sub-section, the Deputy Commissioner may levy a penalty of a sum equal to twenty per cent. of the amount not subscribed by the mutual fund or the Unit Trust of India in the eligible issue of capital. 23.4 This scheme will lapse after 31st March, 1991. 23.5 The newly inserted sections 88A and 271BB will come into force from the 1st day of April, 1991, and will, accordingly, apply in relation to the assessment year 1991-92 and subsequent years. [Sections 30 and 43 of the Finance Act.] Modification of the provisions in respect of deposits under National Savings Scheme. 24. Under the existing provisions of section 80CCA of the Income-tax Act, deduction is allowed to an individual, a Hindu undivided family and certain categories of associations of persons or bodies of individuals, in respect of deposits made under the National Savings Scheme and payments made towards notified annuity plans of the Life Insurance Corporation. The deduction is provided on the whole of amount so deposited or paid as does not exceed Rs. 30,000 in a year (Rs. 20,000 for the assessment year 1988-89). 24.1 With a view to provide further incentives for savings, this section has been amended to increase the maximum amount, which would qualify for deduction, to Rs. 40,000. 24.2 Further, under the existing provisions of section 80CCA of the Income-tax Act, where any amount standing to the credit of an assessee under the National Savings Scheme in respect of which a deduction has been allowed together with the interest accrued thereon is withdrawn, it is deemed to be income of the assessee in the year of the withdrawal. Similarly, amount received on account of the surrender of a policy or as annuity or bonus in accordance with the notified annuity plans of the Life Insurance Corporation is also deemed to be income of the assessee in the year of the receipt. These provisions do not take into account a situation where a Hindu undivided family effects a partition or an association of persons is dissolved, after a deduction has been allowed to it under this section. 24.3 With a view to ensuring that such amount when withdrawn or received, is brought to tax, a new sub-section (3) has been inserted in section 80CCA to provide that where a Hindu undivided family has effected a partition or an association of persons is dissolved, after a deduction has been allowed to it under this section, the amount withdrawn or received, as the case may be, shall be deemed to be the income of the recipient and taxed accordingly. 24.4 These amendments will take effect from 1st April, 1991, and will, accordingly, apply in relation to the assessment year 1991-92 and subsequent years. [Section 16 of the Finance Act.] New provisions relating to Equity Linked Savings Scheme to encourage investment of savings in equities. 25. A new section 80CCB has been inserted in the Income-tax Act in respect of deduction relating to investment made in accordance with the Equity Linked Savings Scheme which will be notified by the Central Government. 25.1 Under the new provisions, a deduction shall be allowed in the case of an assessee, being an individual, a Hindu undivided family and certain categories of associations of persons or bodies of individuals in relation to the investment made under any plan framed in accordance with the Equity Linked Savings Scheme. The investment will be in the units of Mutual Funds specified under clause (23D) of section 10 or Unit Trust of India. The deduction shall be allowed on so much of the amount invested as does not exceed ten thousand rupees. 25.2 The new provision also provides that when any amount in respect of which deduction has been allowed is returned to the assessee either by way of repurchase of the units by the Fund or the Trust or on the termination of the plan, it shall be deemed to be his income for the previous year in which the amount is returned. Further, where the amount is so returned to a member of a Hindu undivided family or of an association of persons after partition of the Hindu undivided family or the dissolution of association of persons, the amount so received shall be deemed to be the income of the recipient. 25.3 A new sub-section (6) and Explanation thereto has been inserted in section 45 to provide that the difference between the repurchase price of the units and the amount invested therein by the assessee shall be deemed to be the capital gains of the year in which the units are repurchased or the scheme is terminated and taxed accordingly. 25.4 Further, a new section 194F has been inserted to provide for deduction of tax at source at the time of payment of any amount on account of repurchase of units or termination of the scheme. The tax will be deducted at the rate of 20 per cent. 25.5 These amendments will take effect from 1st April, 1991, and will, accordingly, apply in relation to the assessment year 1991-92. [Sections 15, 17 and 40 of the Finance Act.] New provisions relating to deduction of expenditure incurred on handicapped dependent relatives. 26. A new section 80DD relating to deduction in respect of expenditure incurred on handicapped dependent relatives has been inserted in the Income-tax Act. 26.1 Under the new provision, deduction of Rs. 6,000 shall be allowed in the case of individuals and Hindu undivided families resident in India who incur expenditure on medical treatment (including nursing), training and rehabilitation of a person suffering from a permanent physical disability (including blindness) or mental retardation. The deduction will be available only to those assessees whose total income before this deduction does not exceed rupees one lakh in a year. The deduction will be allowed if the person suffering from permanent physical disability or mental retardation is a relative of the individual or, in the case of a Hindu undivided family, he is a member of the joint family and is in either case exclusively dependent on the assessee. Further, the permanent physical disability or mental retardation of the dependent relative has to be certified by a physician, a surgeon, an oculist or a psychiatrist, as the case may be, working in a Government hospital. A Government hospital shall include a dispensary run by a Department of Government. or a hospital which has made arrangements with the Government for treatment of Government servants. 26.2 The amendment will take effect from 1st April, 1991, and will, accordingly, apply in relation to the assessment year 1991-92 and subsequent years. [Section 18 of the Finance Act.] Modification of provisions relating to exemption of income from exports. 27. At present exporters are given incentives by way of Cash Compensatory Support (CCS), drawback of duty and import entitlement licences. The taxation of CCS has been a subject matter of litigation. The Calcutta High Court in the case of Jeevan Lal (1929) Ltd. [1983] 142 ITR 448 held that the CCS received by an exporter was a revenue receipt and was subject to income-tax. The Special Bench of the Income-tax Appellate Tribunal has, however, in a case, distinguished the aforesaid decision and come to the conclusion that the CCS was a capital receipt and hence not subject to tax. The Department's view all along has been that CCS or any other subsidy received by an exporter as an export incentive is a revenue receipt and hence taxable. 27.1 Similarly, the Department's view as regards drawback of duty and profit on sale of import entitlement licences has been that these are revenue receipts and hence liable to tax. There are many court decisions supporting this view. 27.2 To put an end to litigation which may arise regarding the taxability of these incentives received by exporters, new clauses (iiia), (iiib) and (iiic) have been inserted in section 28 of the Income-tax Act to provide that profit on sale of import entitlement licences, CCS and drawback of duty respectively shall be chargeable to income-tax under the head "Profits and gains of business or profession". These have, further, been included in the definition of the term "income" in clause (24) of section 2. 27.3 These amendments will take effect retrospectively from the dates from which these incentives were introduced. Thus, amendment with regard to profit on sale of import entitlement licences will apply from 1st April, 1962 ; cash assistance from 1st April, 1967, and drawback of duty from 1st April, 1972, and will, accordingly, apply in relation to the assessment years 1962-63, 1967-68 and 1972-73, respectively, and subsequent years. 28. Under the existing provisions of section 80HHC of the Income-tax Act, exporters are allowed 100 per cent. deduction in respect of the profits derived from export of goods or merchandise. One of the conditions for allowing the deduction is that the sale proceeds should be receivable in convertible foreign exchange. As a result, the deduction may be allowed even if the foreign exchange is not brought into India. In the absence of such a condition, one of the main purposes of allowing such concessions, namely, to augment the foreign exchange earnings of the country, is 'being defeated. Therefore, section 80HHC has been amended to provide that for obtaining the deduction under this section, the taxpayer will be required to bring into India, the sale proceeds of goods or merchandise, in convertible foreign exchange, within a period of six months from the end of the previous year or within such extended period as the Chief Commissioner or Commissioner of Income-tax may allow on being satisfied that the taxpayer was prevented from complying with this requirement for reasons beyond his control. 28.1 Likewise, under the existing provisions of section 80HHD of the Income-tax Act, persons engaged in the business of hotel or as a tour operator or travel agent is allowed a deduction of 50 per cent. of the profits derived from services provided to foreign tourists and so much of the balance profits as is credited to a reserve account to be utilised for specified, purposes. This section applies only to services provided to foreign tourists the receipts of which are received in convertible foreign exchange. In order to make the condition in this regard identical to that in section 80HHC, section 80HHD has been amended to provide that the deduction will be allowed to the extent the receipts in relation to services provided to foreign tourists, are received in or brought into India in convertible foreign exchange within a period of six months from the end of the previous year or within such extended period as the Chief Commissioner or Commissioner of Income-tax may allow on being satisfied that the assessee was prevented from complying with this requirement for reasons beyond his control. 28.2 In view of the fact that the exporters/hotels, etc., are being allowed a period of six months from the end of the previous year for bringing foreign exchange into the country, and the taxpayers under the existing provisions are required to file, along with the return, a report from a chartered accountant in the prescribed form certifying, inter alia, that the deduction under this provision has been correctly claimed, section 139 has also been amended to allow such taxpayers who were required to furnish their returns of income by the 31st day of August to file their returns by the 31st day of October of the assessment year. 28.3 Under the existing provisions of section 80HHC, the benefit of deduction is also allowed to supporting manufacturers who export goods or merchandise through recognised export houses or trading houses. A person who processes goods or merchandise and exports the same directly is eligible to claim the deduction under section 80HHC. However, if the processor of goods or merchandise sells his goods or merchandise to an export house or trading house for the purposes of export, he is presently denied the benefit of deduction. The benefit of deduction under section 80HHC has now been extended to processors who sell their goods or merchandise to export houses or trading houses for export purposes. The condition for obtaining the benefit is the same as already applicable to supporting manufactures, namely, that of obtaining a disclaimer certificate from the export house or trading house. 28.4 By an amendment in clause (a) of sub-section (2) of section 80HHC, it has been clarified that the requirement of receipt of sale proceeds in convertible foreign exchange will not apply in the cases of supporting manufacturers who sell their goods or merchandise to export houses or trading houses for exports. 28.5 The amendment mentioned in paragraph 28.4 above will take effect retrospectively from 1st April, 1989, and will, accordingly, apply in relation to the assessment year 1989-90 and subsequent years. For and from the assessment year 1991-92, it will apply in relation to supporting processors as well. 28.6 The deduction under section 80HHC in the case of an exporter,who makes domestic sales also is computed in the following manner : Export turnover Profits of the business × _____________________ Total turnvover 28.7 In view of the clarificatory amendment in section 28, profits of the business shall include the three export incentives, viz., CCS, duty drawback and sale of import entitlement licences. 28.8 Whereas the term "export turnover" is defined in section 80HHC, the term "total turnover" had not been defined earlier. This has given rise to various interpretations about the inclusion of the items like cash compensatory support, drawback of duty, profits on sale of import entitlement licences, in the total turnover of the business carried on by the exporter. Therefore, a new clause (bb) has been inserted in the Explanation to section 80HHC in order to clarify that these items will not be included in the term "total turnover". Further, the meaning of the term "export turnover" has been restricted to mean the FOB sale proceeds actually received by the assessee in convertible foreign exchange within six months of the end of the previous year or within such further time as the Chief Commissioner or Commissioner may allow in this regard. 28.9 These amendments (other than the amendment in section 80HHC(2)(a) relating to exclusion of supporting manufacturer from the requirement of bringing in convertible foreign exchange), will take effect from 1st April, 1991, and will, accordingly, apply in relation to the assessment year 1991-92 and subsequent years. 28.10 The application of section 80HHC read with section 28, as amended by the Finance Act, can be illustrated by the following examples :- Case I Case II Case III Case IV Exclusively export business 2/3 export 1/3 domestic sales 1/2 export 1/2 domestic sales 1/3 export 2/3 domestic sales (i) Turnover (Rs. in lakhs) (a) FOB export 100 100 100 100 (b) Domestic sales Nil 50 100 200 (c) Total turnover [(ia) + (ib)] 100 150 200 300 (ii) Business profits before incentives (assumed figure) 10 15 20 30 (iii) CCS, DBK, I/L 10 10 10 10 (iv) Total profits of the business [(ii) + (iii)] 20 25 30 40 (v) Deduction u/s 80HHC if entire export proceeds, i.e., Rs. 100 lakhs are brought into India within the stipulated period [(iv) × (ia)/(ic)] 20.00 25 X 100/150 = 16.67 30 X 100/200 =15.00 40 X 100/300 =13.33 (vi) Deduction u/s. 80HHC if only 50 per cent of the export proceeds i.e., Rs. 50 lakhs are brought into India [(iv) × 50% (ia)/(ic)] 20 X 50/100 =10 25 X 50/150 =8.33 30 X 50/200 =7.50 40 X 50/300 =6.67 [Sections 3,6,22 and 23 of the Finance Act] Extension of concession to new industrial undertakings with enhanced rate of deduction. 29. Under the existing provisions of section 80-I of the Income-tax Act, a deduction is allowed in respect of profits and gains derived from new industrial undertakings manufacturing or producing any article or thing other than the non-priority items listed in the Eleventh Schedule or operating cold storage. Similar deduction is also allowed in respect of the profit and gains derived from operation of a new ship by an Indian company or the business of a hotel carried on by an Indian company. 29.1 The deduction is allowed at the rate of twenty-five per cent. in the case of a company and twenty per cent. in other cases. 29.2 The period for which such deduction is allowed is 10 assessment years in the case of a co-operative society and 8 assessment years in other cases beginning with the assessment year relevant to the year in which the industrial undertaking begins to manufacture or produce articles or things or to operate cold storage plant or plants or the ship is first brought into use or the business of hotel starts functioning. It is also provided that the event enabling the grant of this tax concession, viz., commencement of manufacture or production or bringing the ship into use etc., should have occurred before April 1, 1990. 29.3 In view of the need to promote industrial growth by encouraging the setting up of new industrial undertakings, etc., the tax concession under section 80-I has been extended for a further period of five years. Accordingly, industrial undertakings which begin to manufacture or produce articles or things or bring into use of ship or carry on the business of a hotel which starts functioning, after 31st March, 1990, but before 1st April, 1995, will also be eligible for the tax concession under section 80-L The rate of deduction in such cases has also been enhanced to thirty per cent. in the case of companies and twenty-five per cent. in other cases. 29.4 The period for which the tax concession under section 80-I will be available in these cases has also been increased as under : (a) in the case of a co-operative society, twelve assessment years ; (b) in any other case, ten assessment years. 29.5 This amendment will take effect from the 1st April, 1990. [Section 24 of the Finance Act.] Deletion of the definition of the term "security" 30. Under the existing provisions of section 2(42C) of the Income-tax Act, "security" means a Government security as defined in clause (2) of section 2 of the Public Debt Act, 1944. 30.1 The insertion of the definition of the term "security" in section 2 dealing with definition having general application for the purposes of the Act had created anomalies resulting in problems of implementation. Therefore, sub-section (42C) of section 2 of the Income-tax Act has now been omitted. 30.2 Further, section 80L of the Income-tax Act has also been amended to provide that the term "security" appearing therein shall mean a Government security as defined in clause (2) of section 2 of the Public Debt Act, 1944. The same definition of the term "security" has been incorporated in the new section 88 of the Income-tax Act inserted through this Finance Act. This will clarify the nature of the security referred to in the aforesaid two sections and ensure that the interest on National Savings Certificates VIII Issue does not qualify for benefit under section 80L as specified in the scheme framed for this issue. 30.3 These amendments will take effect from 1st April, 1990, and will, accordingly, apply in relation to the assessment year 1990-91 and subsequent years. [Sections 3, 25 and 30 of the Finance Act.] Modification of the provisions relating to inter corporate dividends. 31. Under the existing provisions of section 80M of the Income-tax Act, a domestic company is allowed deduction of an amount equal to sixty per cent. of the dividend received from another domestic company. There is no statutory obligation on the recipient domestic company to declare dividends out of the dividends received. 31.1 In order to ensure that dividend income is taxed only where it finally rests, a new section 80M has been substituted for the existing section. Henceforth, the existing deduction of sixty per cent. without any further condition as regards distribution as dividend would be applicable only to a scheduled bank, a public financial institution, a State Financial Corporation, a State Industrial Investment Corporation or a company registered under section 25 of the Companies Act, 1956 (a company set up for charitable and other useful purposes, which does not pay dividend to its members). In respect of any other domestic company, the deduction shall be limited to the amount of dividend received as does not exceed the amount of dividend distributed. Accordingly, if a domestic company receives any dividend income, but fails to declare any dividend, the domestic company will now be liable to pay tax on the whole of the dividend income received. If on the other hand, the whole amount of dividend received is distributed as dividend, no tax will be payable on the dividend income by the receiving company. 31.2 This amendment will take effect from 1st April, 1991, and will, accordingly, apply in relation to the assessment year 1991-92 and subsequent years. [Section 26 of the Finance Act.] Modification of the provisions relating to deductions in respect of foreign incomes of professors, teachers, artists, technicians, etc. 32. Under the existing provisions of section 8OR, a deduction equal to fifty per cent. of the remuneration received is allowed in computing the total income in the cases of Indian professors, teachers or research workers who work in a foreign university or other educational institutions abroad. Similarly, a deduction under section 80RR equal to twenty-five per cent. of the income received in, or brought into, India in foreign exchange is allowed to a resident individual being an author, playwright, artist, musician, actor or sportsman (including an athlete) who derives income in exercise of his profession from foreign sources. In order to provide a further incentive for bringing foreign exchange into India by these categories of taxpayers, the benefit of deduction in sections 8OR and 80RR has now been enhanced. The new deduction will be:- (i) Fifty per cent. of such income received by the taxpayers ; or (ii) Seventy-five per cent of such income as is brought into India, by or on behalf of the taxpayer in accordance with the Foreign Exchange Regulation Act, 1973, and any rules made thereunder whichever is higher. 32.1 Under the existing provisions of sections 8OR and 80RRA (relating to deduction in respect of remuneration received for services rendered outside India under approved agreements), the deduction is allowed for a maximum continuous period of thirty-six months. With the deletion of the test for determining residential status on the basis of maintenance of dwelling house in India, a person leaving India for employment abroad and serving there continuously for more than thirty-six months becomes a non-resident and hence is not subject to Indian Income-tax in respect of the foreign income. The limitation of thirty-six months in sections 80R and 80RRA has, therefore, lost its significance and has, therefore, been deleted. 32.2 These amendments will take effect from 1st April, 1991, and will, accordingly, apply in relation to the assessment year 1991-92 and subsequent years. [Sections 27, 28 and 29 of the Finance Act]. Modification of special provisions relating to certain incomes of non-resident Indians. 33. In the case of non-resident Indians, investment income from "specified assets" and long-term capital gains is charged to tax at a flat rate of 20 per cent. under Chapter XII-A of the Income-tax Act (sections 115C to 115-I). The existing provisions of section 115-I provide that a non-resident Indian may opt not to be governed by the provisions of Chapter XII-A for any assessment year by furnishing his return of income together with a declaration in writing to the effect that the provisions of that Chapter shall not apply to him for that assessment year. However, many times, due to ignorance, the NRIs fail to file the abovesaid declaration along with their return filed on the basis that provisions of Chapter XII-A were not to apply. 33.1 Since the return form contains a column seeking information from NRIs whether any part of his income is to be taxed in accordance with the provisions of Chapter XII-A of the Income-tax Act, the requirement of filing a separate declaration in writing by NRIs does not serve any useful purpose. The requirement of filing a declaration in writing along with the return has, therefore, been deleted. 33.2 This amendment will take effect from 1st April, 1990, and will, accordingly, apply in relation to the assessment year 1990-91 and subsequent years. [Section 31 of the Finance Act.] Amendment of the provisions which empower the Board to relax the effect of provisions of certain sections. 34. Under the existing provisions of clause (a) of sub-section (2) of section 119 of the Income-tax Act, the Board is empowered to relax, by issue of general or special orders, the provisions of certain sections of the Act, relating to assessment and collection of revenue in respect of any class of incomes or class of cases. The provisions of section 139 relating to filing of return of income, section 234A relating to the charging of mandatory interest for defaults in furnishing return of income and section 234B relating to charge of mandatory interest for defaults in payment of advance tax, may sometimes need relaxation. At present, it is not possible for the Board to relax these provisions. 34.1 Therefore, a reference to sections 139, 234A and 234B has been incorporated in clause (a) of sub-section (2) of section 119 so that the Board is empowered to relax the provisions of these sections applicable to any class of income or class of cases. 34.2 Similar amendments have been made in the corresponding provisions in section 10(2)(a) of the Wealth-tax Act and section 9(2)(a) of the Gift-tax Act. 34.3 These amendments will take effect from 1st April, 1990. [Sections 33, 53 and 59 of the Finance Act.] Allowing the firms to file their returns even if their income is below the taxable limit. 35. Under the existing provisions of sub-section (10) of section 139 of the Income-tax Act, a return of income which shows the total income below the taxable limit is deemed never to have been furnished. A proviso to this section contains certain exceptions to this rule. One of the exceptions mentioned in clause (b) of the proviso is in respect of a partner of a firm. Thus, return of a partner of a firm can be filed even if the income shown is below the taxable limit. A similar exception is also necessary in the case of a firm, because the share declared by the partner in a firm which has income below the taxable limit, will remain undetermined unless such a firm is also allowed to file its return of income. 35.1 Clause (b) of the proviso to sub-section (10) of section 139 has, therefore, been amended to make an exception, not only in the case of a partner of a firm, but also in the case of a firm, so that a firm as well as the partner can file their returns of income even if their income is below the taxable limit. 35.2 This amendment will take effect from 1st April, 1990. [Section 34 of the Finance Act.] Religious and charitable trusts and others, who are required to furnish return of income under section 139(4A), also to apply for allotment of Permanent account number. 36. Under the existing provisions of section 139A of the Income-tax Act, a person is required to apply for the allotment of a permanent account number only if his income exceeds the maximum amount not chargeable to tax or he is carrying on a business who - se sales or gross receipts exceed Rs. 50,000. This leaves out certain categories of persons, like religious and charitable trusts and others who are required to file their return of income under the provisions of sub-section (5A) of section 139 even when their income is not taxable by virtue of the exemption provided in section 11. Such persons, although under an obligation to file the return, are neither under an obligation to apply for the allotment of a permanent account number, nor can the Assessing Officer himself allot a permanent account number to them because no tax is payable by them. 36.1 Sub-section (2) of section 139A has, therefore, been amended to make it obligatory for all persons who are required to furnish their returns of income under the provisions of section 139(4A), to apply for the allotment of a permanent account number. 36.2 This amendment will take effect from 1st April, 1990. [Section 35 of the Finance Act.] Conferring power on Assessing Officers to call for return before the end of an assessment year. 37. Under the existing provisions of clause (i) of sub-section (1) of section 142, the Assessing Officer can require any person to furnish a return of his income only after the end of the relevant assessment year. This has given rise to problems because, if the taxpayers do not file their returns of income in time, the Department has no powers to enforce compliance till the relevant assessment year is over. 37.1 To solve this practical difficulty, clause (i) of sub-section (1) of section 142 has been amended so that if a person fails to furnish return of income by the due date mentioned in section 139(1), a notice calling for the return can be sent to him within the relevant assessment year itself. 37.2 Similar amendments have been made in the corresponding provisions of section 16(4) of the Wealth-tax Act and section 15(4) of the Gift-tax Act. 37.3 These amendments will take effect from 1st April, 1990. [Sections 36, 54 and 60 of the Finance Act.] Processing of revised returns under the new Procedure for assessment. 38. Under the provisions of sub-section (1) of section 143 of the Income-tax Act, a return of income is processed for recovery of any tax or interest due from the assessee or for the issue of any refund due to him on the basis of the return, without making an assessment. If a revised return under section 139(5) is filed by the assessee after action under sub-section (1) of section 143 has been completed on the basis of the earlier return, there is no provision in section 143 for the revision of the intimation already sent to the assessee. 38.1 A situation may arise where income declared in the earlier return has been increased as a result of prima facie adjustments made under the first proviso to clause (a) of sub-section (1) and additional income-tax has been charged under sub-section (1A), but the assessee revises his return declaring therein the increased income (after making the adjustment already intimated to him on the basis of the earlier return) and claims that no additional income-tax is chargeable from him on the basis of the revised return. 38.2 To cover the situation as pointed out above, a new sub-section (1B) has been inserted in section 143 to provide that the intimation already sent can be amended on the basis of the revised return and the amount of income-tax, additional income-tax or the interest can be enhanced or reduced as a result of such amendment. Similarly, the amount of refund already granted can also be enhanced or reduced on the basis of the said revised return. It has, however, been provided that an assessee, who has furnished a revised return after the service upon him of the intimation under sub-section (1) on the basis of earlier return, shall still be liable to pay additional income-tax in relation to the adjustments specified in the said intimation, irrespective of the fact that he has himself made the said adjustment while declaring his income or loss in the revised return. 38.3 Similar amendments have been made in the corresponding provisions of section 16 of the Wealth-tax Act and section 15 of the Gift-tax Act. 38.4 These amendments will take effect retrospectively from 1st April, 1989, and will, accordingly, apply in relation to the assessment year 1989-90 and subsequent years. [Sections 37, 54 and 60 of the Finance Act]. Clarificatory amendment of the definition of "Regular assessment" 39. The existing provision in clause (40) of section 2 of the Income-tax Act, defines the expression "regular assessment" to mean the assessment made under section 143 or section 144. Prior to April 1, 1989, an assessment could be made under sub-section (1) as well as sub-section (3) of section 143. However, the new section substituted by the Direct Tax Laws (Amendment) Act, 1987, with effect from April 1, 1989, provides for making of an assessment only under sub-section (3), while under sub-section (1) the return is processed for recovery of any tax or interest due from the assessee or for the issue of any refund due to him without making an assessment. Since the definition of regular assessment in section 2(40) refers to the whole of section 143, without referring to the relevant sub-section, it may raise a controversy whether even the processing of a return under sub-section (1) of the new section 143, is included in "regular assessment". 39.1 Therefore, clause (40) of section 2 has been amended to clarify that regular assessment would mean only an assessment made under sub-section (3) of section 143 or section 144. 39.2 Similar amendment has been made in the corresponding provisions of section 2(cb) of the Wealth-tax Act. 39.3 These amendments will take effect retrospectively from April 1,1989. [Sections 3 and 51 of the Finance Act]. Removal of anomaly in taxing interest on securities. 40. Before deletion of the head "Interest on Securities" by the Finance Act, 1988, with effect from 1st April, 1989, the interest chargeable under this head used to be taxed on due basis. With the deletion of the provisions relating to this head of income, such income is now taxed either under the head "Profits and gains of business or profession" or under the head "Income from other sources", and is to be computed in accordance with the method of accounting regularly employed by the assessee. However, in a case where the assessee follows the mercantile method of accounting, a situation has arisen where the interest on securities which had accrued but had not become due during the assessment year 1988-89 could not be charged to tax in assessment year 1989-90, either on due basis of taxation or on the basis of accrual method of accounting. Therefore, in order to remove such an anamolous situation, a new proviso has been inserted after the second proviso in sub-section (1) of section 145 to provide that no assessee shall be precluded from being charged to income-tax in respect of any interest on securities received by him in a previous year, if such interest had not been charged to income-tax for any earlier previous year. 40.1 This amendment will take effect retrospectively from 1st April, 1989, and will, accordingly, apply in relation to the assessment year 1989-90 and subsequent years. [Section 38 of the Finance Act.] Conferring power to an Income-tax Officer to reopen a completed assessment with the approval of the Deputy Commissioner. 41. Under the existing provisions of sub-section (1) of section 151 of the Income-tax Act, only an Assistant Commissioner or a Deputy Commissioner can issue a notice under section 148 to reopen an assessment, which has already been completed under section 143(3) or section 147, if he finds that any income has escaped assessment. An Income-tax Officer cannot reopen a completed assessment. Whenever an assessment has to be reopened by an Income-tax Officer, the case has to be assigned and transferred either to an Assistant Commissioner or a Deputy Commissioner. 41.1 With a view to removing this practical difficulty, sub-section (1) of section 151 has been amended to provide that an Income-tax Officer can reopen a case, with the approval of the Deputy Commissioner, where an assessment has been completed under section 143(3) or section 147, if he finds that any income has escaped assessment. 41.2 Similar amendments have been made in the corresponding provisions of section 17 of the Wealth-tax Act and section 16 of the Gift-tax Act. 41.3 These amendments will take effect from 1st April, 1990. [Sections 39, 55 and 61 of the Finance Act.] Removal of anomaly in section 268 of the Income-tax Act. 42. Under the existing provisions of section 268, if an assessee is not furnished with a copy of the order, then, in computing the period of limitation for filing an appeal, the time required for obtaining a copy of such order is to be excluded. This provision needs to be applied also in deciding the limitation period for making a reference application under section 256 of the Act. Therefore, an amendment has been made in section 268 to provide that the time required for obtaining copy of the order complained would be excluded in computing the period of limitation for filing reference application under section 256 as well. 42.1 This amendment will take effect from 1st April, 1990. [Section 42 of the Finance Act.] Penalties for certain defaults to be levied by a Deputy Commissioner. 43. Sections 271C, 271D and 271E, which were inserted in the Income-tax Act with effect from 1st April, 1989, by the Direct Tax Laws (Amendment) Act, 1987, provide for the levy of penalties for certain defaults. Penalty under section 271C is levied for failure to deduct tax at source. Penalty under section 271D may be levied for failure to comply with the provisions of section 269SS, i.e., for taking or accepting any loan or deposit in excess of Rs. 20,000 otherwise than by an account payee cheque or bank draft. Penalty under section 271E may be levied for failure to comply with the provisions of section 269T relating to repayment by a company, including a banking company, a co-operative society or a firm, of deposits, including interest, exceeding Rs. 10,000 in the aggregate otherwise than by an account payee cheque or bank draft. 43.1 The income tax authority, which can levy these penalties, is not mentioned in any of these sections. In order to ensure that these penalties are imposed by senior officers only, a new sub-section (2) has been inserted in each of the said sections 271Q, 271D and 271E to provide that penalty under each of these sections shall be imposed by the Deputy Commissioner. 43.2 A consequential amendment has been made in section 246 of the Income-tax Act relating to filing of appeal before the Deputy Commissioner (Appeals) or Commissioner (Appeals), so that appeals against orders imposing penalties under the said sections 271C, 271D and 271E shall now be filed before the Commissioner (Appeals) only. 43.3 These amendments will take effect from 1st April, 1990. [Sections 41, 44, 45 and 46 of the Finance Act.] Punishment for contravention of prohibitory order served for effecting seizure. 44. Under the existing provision of section 132(3) of the Income-tax Act, the authorised officer may, where it is not practicable to seize any documents, money, bullion, jewellery, etc., make an order prohibiting the person in immediate possession or control of such documents, money, bullion, jewellery, etc., from removing or parting with or otherwise dealing with such documents, money, bullion, jewellery, etc. Any infringement of such prohibitory order is punishable under section 275A with rigorous imprisonment up to two years and fine. 44.1 The Finance Act, 1988, inserted a second proviso to sub-section (1) of section 132, which empowers the authorised officer to make a constructive seizure, by a similar prohibitory order, in circumstances where, on account of the physical characteristics, volume or weight of the articles to be seized, it is not possible to take physical possession and remove them to a safe place. The contravention of such a prohibitory order has not been made punishable. 44.2 Accordingly, section 275A has been amended to provide for punishment also for contravention of an order made by the authorised officer under the second proviso to sub-section (1) of section 132. 44.3 Further, section 37A of the Wealth-tax Act contains provision for issue of prohibitory orders similar to those mentioned above. However, there are no provisions in the Wealth-tax Act corresponding to section 275A of the Income-tax Act. To remedy this situation and ensure effective compliance, a new section 35EEE has been inserted in the Wealth-tax Act, which contained provisions similar to those of section 275A of the Income-tax Act discussed earlier. 44.4 These amendments will take effect from 1st April, 1990. [Sections 47 and 56 of the Finance Act.] Omission of Chapter XXII-B of the Income-tax Act relating to tax credit certificates. 45. Chapter XXII-B of the Income-tax Act contains provisions relating to tax credit certificates. This was introduced with effect from 1st April, 1965, with various objects, viz., providing an incentive to individuals and Hindu undivided families for investing in newly-floated equity shares of certain companies (section 280Z), facilitating the shifting of industrial undertakings of public companies from urban areas to new areas with a view to relieving congestion in urban areas (section 280ZA), providing resources for purposes relevant to the expansion of industry to companies engaged in important industries and earning profits higher than in a "base year" (section 280ZB), stimulating export (section 280ZC) and encouraging the production of certain goods liable to central excise duty (section 280ZD). The provisions dealing with tax credit certificates for shifting of industrial undertakings from urban areas to new areas have already been omitted with effect from 1st April, 1988. Sections 280ZB and 280ZD read with the schemes made thereunder prescribed a time-limit till 31st March, 1973, for utilisation of the tax credit certificates. Thus, the provisions contained in Chapter XXII-B have become virtually redundant. Therefore, as a measure of rationalisation, the Chapter containing these provisions has been omitted with effect from the 1st day of April, 1990. 45.1 The tax credit certificates granted under section 280Z or section 280ZC and not presented so far for payment or adjustment of tax liability can, however, be presented before the Assessing Officer up to 31st day of March, 1991, for the said purposes. [Section 48 of the Finance Act] Amendment of section 288 of the Income-tax Act. 46. Prior to the amendments carried out by the Direct Tax Laws (Amendment) Acts, 1987 and 1989, a person was disqualified from representing an assessee before the tax authorities in case a penalty for concealment had been levied on him. This provision has lost its effect with the various amendments made in section 271 by the Direct Tax Laws (Amendment) Acts, 1987 and 1989. To remove this anomaly, section 288 has been amended to provide that a person will be disqualified to represent an assessee as an authorised representative in case a penalty for concealment has been imposed on him. 46.1 This amendment will take effect from 1st April, 1990. [Section 49 of the Finance Act 1]. WEALTH-TAX Amendment of section 35K of the Wealth-tax Act. 47. Sub-section (1) of section 35K of the Wealth-tax Act provides that a person shall not be proceeded against for an offence under section 35A (relating to wilful attempt to evade tax, etc.) or section 35D (relating to false statement in verification, etc.) in respect of which penalty for concealment of wealth has been reduced or waived under section 18B. The applicability of the said sub-section (1) was restricted till the assessment year 1988-89 by an amendment made by the Direct Tax Laws (Amendment) Act, 1987, because penalty for concealment of wealth was omitted by the said Amendment Act. However, since penalty for concealment of wealth has been restored by the Direct Tax Laws (Amendment) Act, 1989, with effect from 1st April, 1989, it is necessary that this restriction in the applicability of the provisions of sub-section (1) of section 35K is also removed from that date. 47.1 Sub-section (1) of section 35K has, accordingly, been amended so that its provisions would apply to any assessment year. 47.2 This amendment will take effect retrospectively from 1st April, 1989. [Section 57 of the Finance Act.] Modification in the provisions relating to valuation of jewellery under the Wealth-tax Act. 48. Under the existing provisions of rule 18 of Schedule III to the Wealth-tax Act, 1957, the Assessing Officer has to accept compulsorily the value of the jewellery declared by the assessee in the return, if the same is Rs. 5 lakhs or less and the return is accompanied by a statement in the prescribed form. On the other hand, where the value of the jewellery declared exceeds Rs. 5 lakhs, the Assessing Officer has no choice but to refer the same to the Valuation Officer. 48.1 The existing rule does not provide any basis for determination of value for the assessee or for the Valuation Officer on reference to him. Schedule III has, therefore, been amended by substituting a new rule 18 in place of the existing rule to provide that the value of jewellery shall be estimated to be the price which it would fetch if sold in the open market on the valuation date. Further to check the suspected cases of gross understatement of valuation of jewellery (where the declared value is Rs. 5 lakhs or less), it is provided that if the Assessing Officer is of the opinion that the value of the jewellery declared in the return is less than the fair market value, he can make a reference to the Valuation Officer. As under the existing provision, it is provided that an assessee has to make declaration in the prescribed form where the value of jewellery declared by him in the return does not exceed Rs. 5 lakhs and support the valuation by a report from a registered valuer in the prescribed form, if it exceeds Rs. 5 lakhs. In cases where the value of jewellery declared exceeds Rs. 5 lakhs, it shall no longer be compulsory for the Assessing Officer to refer each and every case to the Valuation Officer. 48.2 A consequential amendment has also been made in rule 19 of the Schedule. 48.3 These amendments will take effect from 1st day of April, 1990. [Section 58 of the Finance Act.] (Sd.) K. M. Sultan, O.S.D. (TPL).