FINANCE (NO. 2) ACT, 1991 - Income Tax - 621/1991

FINANCE (NO. 2) ACT, 1991 Circular No. 621 Dated 19/12/1991 Rate structure Finance (No. 2) Act, 1991 I. Rates of income-tax in respect of incomes liable for assessment year 1991-92. 4. In respect of incomes of all categories of taxpayers (corporate as well as non-corporate) liable to tax for the assessment year 1991-92, the rates of income-tax (including surcharge) have been specified in Part I of the First Schedule to the Act and are the same as those laid down in Part III of the First Schedule to the Finance Act, 1990 as modified by the Taxation Laws (Amendment) Act, 1991. Finance (No. 2) Act, 1991 4.1 Accordingly, in the case of every individual, Hindu undivided family or body of individuals or association of persons governed by the Portuguese system of community of property, having income exceeding seventy-five thousand rupees, the amount of income-tax shall be reduced by the amount of rebate calculated under Chapter VIIIA and the income-tax so reduced shall be increased by a surcharge calculated at the rate of 12 per cent of such income-tax. In the case of every other non-corporate tax-payer, having income exceeding seventy-five thousand rupees, the income-tax shall be increased by a surcharge calculated at the rate of 12 per cent of such income-tax. In the case of companies having income exceeding rupees seventy-five thousand, the amount of income-tax shall be increased by a surcharge at the rate of 15 per cent of such income-tax. However, no surcharge shall be payable by a non-resident or a foreign company. Finance (No. 2) Act, 1991 II. Rates for deduction of tax at source during the financial year from income other than "Salaries" 5. The rates for deduction of income-tax at source during the financial year 1991-92 from incomes other than "Salaries" have been specified in Part II of the First Schedule to the 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, 1990 as modified by the Taxation Laws (Amendment) Act, 1991. In respect of payments referred to above, the amount of tax deducted at source shall be increased by a surcharge calculated at the rate of 12 per cent in the case of non-corporate taxpayers and at the rate of 15 per cent in the case of domestic companies. However, no deduction in respect of surcharge shall be made where the payment is made to a non-resident or to a foreign company. Finance (No. 2) Act, 1991 III. Rates for deduction of tax at source from "Salaries", computation of "Advance tax" and charging of income-tax in special cases during the financial year 1991-92 6. The rates for deduction of tax at source from "Salaries" during the financial year 1991-92 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 Act. These rates are also applicable for charging income-tax during the financial year 1991-92 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 1991-92, 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. Finance (No. 2) Act, 1991 6.1 Accordingly, in the case of every individual, Hindu undivided family or body of individuals or association of persons governed by the Portuguese system of community of property, having income exceeding seventy-five thousand rupees, the amount of income-tax shall be reduced by the amount of rebate calculated under Chapter VIIIA and the income-tax so reduced shall be increased by a surcharge calculated at the rate of 12 per cent of such income-tax. In the case of every other non-corporate taxpayer, having income exceeding seventy-five thousand rupees, the income-tax shall be increased by a surcharge calculated at the rate of 12 per cent of such income-tax. In the case of companies having income exceeding rupees seventy-five thousand, the amount of income-tax shall be increased by a surcharge at the rate of 15 per cent of such income-tax. However, no surcharge shall be payable by a non-resident or a foreign company. Finance (No. 2) Act, 1991 IIIA. Individuals, Hindu undivided families, associations of persons, bodies of individuals, co-operative societies and local authorities 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 the First Schedule to the Act. In the case of co-operative societies and local authorities, the rates of income-tax have been specified in Paragraph B and Paragraph D, respectively of Part III of the First Schedule to the Act, which is the same as in Part III of the First Schedule to the Finance Act, 1990 as modified by the Taxation Laws (Amendment) Act, 1991. The slabs of income and the rates of tax will remain unchanged. In the case of such taxpayers having income exceeding seventy-five thousand rupees, surcharge shall be levied at the rate of 12 per cent of such income-tax as reduced by the amount of rebate calculated under Chapter VIIIA. However, no surcharge will be payable by a non-resident taxpayer. Finance (No. 2) Act, 1991 IIIB. Firms 8. In the case of registered firms, the rates of tax have been specified in paragraph C of Part III of the First Schedule to the Act. The slabs of income and the rates of tax will remain unchanged. In the case of such taxpayers having income exceeding seventy-five thousand rupees, surcharge shall be levied at the rate of 12 per cent of the amount of income-tax. However no surcharge will be payable by a non-resident taxpayer. Finance (No. 2) Act, 1991 IIIC. Companies 9. 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 Act. The rate of income-tax in the case of a company in which the public are substantially interested has been increased from 40 per cent to 45 per cent. A uniform rate of income-tax of 50 per cent has been kept in the case of a company other than one in which the public are substantially interested. In other words, the distinction between trading or investment companies in which the public are not substantially interested and other companies in which the public are not substantially interested, has been removed. Finance (No. 2) Act, 1991 9.1 The rate of tax for companies other than domestic companies continues to be the same at 65 per cent. Finance (No. 2) Act, 1991 9.2 In the case of companies, surcharge will continue to be levied at the rate of 15 per cent of the amount of income-tax. However, no surcharge will be payable by non-resident corporate taxpayers. Finance (No. 2) Act, 1991 IV. Partially integrated taxation of non-agricultural income with income derived from agriculture 10. 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. The net agricultural income will be computed in accordance with the rules contained in Part IV of the First Schedule. These provisions are broadly on the same lines as those in earlier years. [Section 2 and the First Schedule to the Finance Act] income-tax act Finance (No. 2) Act, 1991 Definition of industrial undertaking 11. The expression "industrial undertaking" has been used in many a provision in the Income-tax Act, e.g., section 10( 15 )( iv )( f ) and section 80-I. There has been some controversy as regards the true import of the expression "industrial undertaking" for the purpose of section 10( 15 )( iv )( f ) of the Income-tax Act relating to exemption from income-tax in respect of interest on certain foreign borrowings. Keeping in view the legislative intent, an Explanation has been inserted at the end of section 10( 15 )( iv ) of the Income-tax Act to define the term "industrial undertaking" for the purpose of this provision. An industrial undertaking will mean an undertaking engaged in the business of— ( i ) manufacture or processing of goods, or ( ii ) generation or distribution of electricity, or any other form of power, or ( iii ) mining, or ( iv ) construction of ships, or ( v ) operation of ships or aircrafts. Finance (No. 2) Act, 1991 11.1 This amendment takes effect from 1st April, 1991. [Section 5 of the Finance Act] Finance (No. 2) Act, 1991 Relief to Kuwait returnees in respect of interest on deposits in Non-resident(External) Accounts 12. Under the existing provisions of the Income-tax Act, interest on deposits in a Non-resident (External) Account is exempt from income-tax in the case of persons resident outside India as defined in section 2( q ) of the Foreign Exchange Regulation Act. Finance (No. 2) Act, 1991 12.1 Under the provisions of the Foreign Exchange Regulation Act, only persons resident outside India are permitted to maintain a Non-resident (External) Account in India. However, when Indian nationals residing in Kuwait were forced to return to India due to the Iraqi invasion of Kuwait in August 1990, the Reserve Bank of India, with a view to mitigating the plight of these Kuwait returnees, decided to permit them to continue to maintain their Non-resident (External) Accounts and assets abroad, initially up to 31st March, 1991, and then extended the permission up to 30th September, 1991. Finance (No. 2) Act, 1991 12.2 With a view to taking into account such unforeseen situations clause ( 4 )( ii ) of section 10 of the Income-tax Act has been amended to secure that exemption from tax in respect of the interest on deposits in Non-resident (External) Account will also be available in any case where an individual has been permitted by the Reserve Bank of India to maintain a Non-resident (External) Account. Finance (No. 2) Act, 1991 12.3 This amendment takes effect from 1st April, 1991 and will accordingly apply in relation to the assessment year 1991-92 and subsequent years. [Section 5] Finance (No. 2) Act, 1991 Exemption from income-tax in India of remuneration or fees received by non-resident consultants and their foreign employees 13. Under the existing provisions of the Income-tax Act, individuals assigned to duties in India under a bilateral co-operative technical assistance programme are exempted from Indian income-tax in respect of the remuneration received by them directly or indirectly from the foreign Government. The exemption from Indian income-tax also extends to other incomes of such individuals accruing or arising outside India if such incomes are subject to income-tax or social security tax levied by the foreign Government. This exemption is not available on remuneration, etc., received by individuals engaged as consultants by the World Bank and other multilateral agencies for rendering assistance under technical assistance grant agreements, directly or indirectly, from such grant. Finance (No. 2) Act, 1991 13.1 Since such grant agreements usually stipulate that no portion of the grant should be utilised towards the tax effort of the recipient country, section 10 of the Income-tax Act, 1961 has been amended in order to exempt from income-tax in India the remuneration or fee received by non-resident consultants and their foreign employees in cases where such consultants have been engaged by the World Bank or any other multilateral agency for rendering assistance under technical assistance grant agreement, and such remuneration, etc., is paid, directly or indirectly, from such grant. This exemption is also available to consultants or their employees who, being Indian citizens, are not ordinarily resident in India. The agreement relating to the engagement of the consultants and to the contract of service of their employees have to be approved by the prescribed authority. Finance (No. 2) Act, 1991 13.2 This amendment takes effect from 1st April, 1991 and will, accordingly, apply in relation to assessment year 1991-92 and subsequent years. [Section 5] Finance (No. 2) Act, 1991 Exemption from income-tax of bonus paid on Life Insurance policy 14. Payments received under an insurance policy are not treated as income and hence not taxable. However, in a recent judicial pronouncement, a distinction has been made between the sum assured under an insurance policy and further sums allocated by way of bonus under life policies with profits. The sum representing bonus has been held to be chargeable to income-tax in the year in which the bonus was declared by the Life Insurance Corporation. Finance (No. 2) Act, 1991 14.1 Since such bonus has always been considered as payment under an insurance policy, section 10 of the Income-tax Act has been amended to exempt from income-tax the bonus declared or paid under a life insurance policy by the Life Insurance Corporation of India. Finance (No. 2) Act, 1991 14.2 This amendment takes effect retrospectively from 1st April, 1962. [Section 5] Finance (No. 2) Act, 1991 Modification of the provisions relating to charitable trusts 15. Section 13(1)( d ) of the Income-tax Act, as amended by the Finance Act, 1983, provides that exemption from tax to a charitable or religious trust or institution will be forfeited if any funds of the trust or institution are invested or deposited after 28-2-1983, otherwise than in any one or more of the forms or modes mentioned in section 11(5) of the Income-tax Act. Assets not held in any one or more of the permissible forms or modes including shares in companies were required to be liquidated by 30th November, 1983. Exceptions were, however, made in relation to assets received as corpus donation before 1st June, 1973 and in relation to debentures of companies acquired before 1st March, 1983. Finance (No. 2) Act, 1991 15.1 With a view to removing hardship arising out of this scheme, a new sub-section (5) has been inserted in section 13 of the Income-tax Act to provide that where the debentures of an Indian company are acquired by the trust or institution after the 28th February, 1983 but before the 25th July, 1991, the exemption from tax under section 11 will be denied only in respect of interest on such debentures. If debentures are not disinvested by the 31st March, 1992, the trust or institution will lose exemption under section 11. Finance (No. 2) Act, 1991 15.2 Further, a new clause ( iia ) has been inserted in the proviso in clause ( d ) of sub-section (1) of section 13 to secure that mere accretion to the existing holding of shares by way of bonus shares or acceptance of donations in kind or any asset not conforming to the provision of section 11(5) will not make the fund or trust or institution lose tax exemption. The trusts or institutions will, however, be required to dispose or convert the assets not conforming to the requirement of section 11(5) into permissible investment within one year from the end of the financial year in which such bonus shares or other assets are received on 31-3-1992, whichever is later. Finance (No. 2) Act, 1991 15.3 These amendments take effect retrospectively from 1st April, 1983. Finance (No. 2) Act, 1991 15.4 Another provision relating to exemption from tax of charities is contained in section 10( 23C )( iv ) and ( v ) of the Income-tax Act. Prior to the amendment made by the Direct Tax Laws (Amendment) Act, 1989 income of a fund or institution established for charitable or public religious purposes and notified by the Central Government was exempted from tax under this provision without any conditions. The Direct Tax Laws (Amendment) Act, 1989 amended this provision to secure that notified funds or institutions can claim exemption from tax only if the following conditions are fulfilled: ( i ) the income of the fund or institution is applied wholly and exclusively to the object for which the fund or institution is established; ( ii ) the funds are invested in any one of the forms or modes specified in sub-section (5) of section 11 of the Income-tax Act. Finance (No. 2) Act, 1991 15.5 Funds and institutions claiming exemption under section 10( 23C )( iv ) or ( v ) were given time up to 30-3-1990 to disinvest any funds invested or deposited before 1-4-1989 in any form or mode not permissible under section 11(5). Finance (No. 2) Act, 1991 15.6 The Finance Act has provided further time up to 31-3-1992 to such funds and institutions to dispose or convert investments made before 1-4-1989 which do not conform to the investment pattern prescribed in section 11(5) of the Income-tax Act. Finance (No. 2) Act, 1991 15.7 The exemption under section 10( 23C )( iv ) or ( v ) to these funds and institutions is not available in respect of any business income unless the business is incidental to the attainment of their objectives and separate books of account are maintained in respect of the business. Finance (No. 2) Act, 1991 15.8 In order to bring exemption of charitable or religious trusts in line with the corresponding provisions in section 10( 23C )( iv ) or ( v ) sub-section (4A) of section 11 has been amended to permit trust and institutions to carry on business activities if the business activities are incidental to the attainment of its objective. The charitable or religious trust will no longer lose complete exemption from income-tax. However, the profits and gains from such business activity will be subjected to tax. Finance (No. 2) Act, 1991 15.9 This amendment will be effective from 1st April, 1992. Finance (No. 2) Act, 1991 15.10 Under the existing provision contained in clause ( a ) of section 12A of the Income-tax Act, a person in receipt of income of any trust or institution is required to file an application for registration before the expiry of one year from the date of creation of the trust or establishment of the institution. The concerned authority may in his discretion condone the delay for filing an application for registration. Finance (No. 2) Act, 1991 15.11 With a view to rationalising the provision in this regard, section 12A has been amended to provide that, where an application for registration is filed after the due date, the provisions of sections 11 and 12 will apply from the date of the creation of the trust or establishment of the institution only if the Chief Commissioner or Commissioner is satisfied that the delay is for valid reasons. If not, the provisions of sections 11 and 12 will apply from the first day of the financial year in which the application is made. [Sections 5, 6, 7 and 8] Finance (No. 2) Act, 1991 Exemption of perquisite in the form of medical facilities provided by the employers 16. Taxable salary includes the value of any benefit or amenity granted or provided free of charge or at concessional rate by the employer. Accordingly, the value of free medical facility provided to employees and members of their families is required to be included in the taxable income of the employee. However, under administrative circulars, the perquisite value of medical facility provided by the employer is not charged to tax up to certain limits. Finance (No. 2) Act, 1991 16.1 With a view to providing, in the law itself, exemption from tax in respect of perquisite in the form of medical facilities provided by the employer, section 17 of the Income-tax Act has been amended. Finance (No. 2) Act, 1991 16.2 Exemption from tax will now be available in respect of the following : ( i ) medical facility provided in hospitals, clinics, etc., maintained by the employer; ( ii ) reimbursement, by the employer, of expenditure incurred by the employee in hospitals, dispensaries, etc., maintained by Government, any local authority, or in a hospital approved under the Central Health Scheme or a similar scheme of any State Government; ( iii ) group medical insurance obtained by the employer for his employees (including members of their families) or reimbursement of insurance premium to the employees who take such medical insurance; ( iv ) reimbursement by employer of amounts not exceeding, in the aggregate of Rs. 10,000 in a year, spent by the employee in obtaining medical treatment for himself or any member of his family. Finance (No. 2) Act, 1991 16.3 As regards medical treatment abroad, exemption from tax will be provided for the actual expenditure incurred on medical treatment, including the expenditure on travel and stay abroad of the patient and of one attendant in cases where an attendant is permitted by the Reserve Bank to accompany the patient. The expenditure on travel abroad will be exempt from tax subject to such further conditions as the Central Board of Direct Taxes may prescribe, only in the case of employees whose gross total income, as computed under the Income-tax Act before including the said expenditure, does not exceed Rs. 1,00,000. Finance (No. 2) Act, 1991 16.4 This amendment takes effect from 1st April, 1991 and will accordingly, apply in relation to the assessment year 1991-92 and subsequent years. [Section 9] Finance (No. 2) Act, 1991 Rationalisation of the provisions relating to depreciation. 17. Under the existing provisions of section 32 of the Income-tax Act, depreciation of foreign motor cars is not allowed. Only one exception has been made, i.e., where foreign cars are used in a business of running them on hire for tourists, depreciation is allowed on them. It has been pointed out that Indian concerns, which are having foreign branches, have necessarily to use foreign cars in their business or profession carried outside India and that the denial of depreciation in such cases results in hardship. To remove this, it has now been provided that, where a foreign motor car is used outside India in a business or profession carried on by the assessee in another country, depreciation shall be allowed on such a car. Finance (No. 2) Act, 1991 17.1 Further, under the existing provisions of section 32 read with rule 5 of the Income-tax Rules, 1962, full depreciation is allowed on an asset even if it has been acquired by the assessee towards the end of the relevant previous year and has been used for one day during that previous year. This results in excessive allowance of depreciation in the year in which the asset is first put to use thereby depleting the taxable profits of that year by an amount which bears no relationship to the user of that asset for earning the profits of that year. Section 32 has, therefore, been amended to provide that, where in a previous year an asset is acquired and put to use for the purposes of business or profession for less than 180 days, depreciation thereon shall be allowed at 50% of the depreciation allowable according to the percentage prescribed in respect of the block of assets comprising such asset. Furthermore, no depreciation will be allowed in respect of any plant or machinery the cost of which gets amortised in one or more years, under section 42 of the Income-tax Act relating to the special provision for deduction in respect of business of prospecting for mineral oil. Finance (No. 2) Act, 1991 17.2 These amendments will take effect from 1st April, 1992 and will, accordingly, apply in relation to the assessment year 1992-93 and subsequent years. [Section 11] Finance (No. 2) Act, 1991 Extending the tax concessions in respect of contributions for research in social science or statistical research 18. Under the existing provisions of section 35(1)( iii ) of the Income-tax Act, a 100% deduction is allowed to an assessee having income from business in respect of contributions made to an approved University, college or institution to be used for research in social science or statistical research, subject to the condition that such research is related to the class of business carried on by the assessee. This condition has put the institutions carrying on research in social science or statistical research at a disadvantage when compared to the institutions carrying on scientific research, where there is no such condition. Finance (No. 2) Act, 1991 18.1 In order to encourage research in social science or statistics, the condition in section 35(1)( iii ) that such research should be related to the class of business carried on by the assessee, has been omitted. Finance (No. 2) Act, 1991 18.2 Under the existing provisions of section 80GGA, 100 per cent deduction is allowed to an assessee having income from sources other than business or profession in respect of donations made to an approved University, college or institution for being used in scientific research. No such deduction is available in respect of contributions made for research in social science or statistical research. Finance (No. 2) Act, 1991 18.3 To enlarge the tax support to research in social science and statistical research, section 80GGA has been amended to provide that donations made to an approved University, college or institution for such research will also be entitled to deduction under this section. Finance (No. 2) Act, 1991 18.4 These amendments will take effect from 1st April, 1992 and will, accordingly, apply in relation to the assessment year 1992-93 and subsequent years. [Sections 12 and 27] Finance (No. 2) Act, 1991 Tax concession for financing schemes for promoting social and economic welfare of the people 19. A new section 35AC for promoting social and economic welfare or uplift of the public has been inserted in the Income-tax Act. Finance (No. 2) Act, 1991 19.1 Under the new section 35AC, taxpayers carrying on a business or profession will be entitled to deduct, while computing their taxable profits from any business or profession, the expenditure incurred in financing any eligible project or scheme for promoting social and economic welfare or uplift of the public. The qualifying expenditure would consist of payment made to a public sector company, a local authority or an approved association or an institution for being used for any such eligible project or scheme. Companies may, however, also incur expenditure directly on any such project or scheme. Finance (No. 2) Act, 1991 19.2 A National Committee of eminent persons has been constituted, in accordance with the rules prescribed in the Income-tax Rules, for approving associations and institutions for executing projects or schemes for promoting social and economic welfare or uplift of the public and for recommending such projects and schemes for being notified by the Central Government for this tax concession. Finance (No. 2) Act, 1991 19.3 Any claim for deduction under this provision will have to be supported by a certificate obtained from the public sector company, the local authority or the association or institution executing the eligible project or scheme. Where, in the case of a company, the claim for deduction is in respect of expenditure incurred directly on an eligible project or scheme, the company will have to obtain this certificate from a chartered accountant. The form of these certificates is to be prescribed in the Income-tax Rules. Finance (No. 2) Act, 1991 19.4 Section 80GGA of the Income-tax Act has, likewise, been amended to provide for a similar deduction in the case of taxpayers not carrying on any business or profession. The deduction under this provision will be available only in relation to amounts paid to a public sector company, a local authority or an approved association or institution for carrying out any eligible project or scheme. Finance (No. 2) Act, 1991 19.5 These amendments will take effect from 1st April, 1992 and will, accordingly, apply in relation to the assessment year 1992-93 and the subsequent years. [Sections 13 and 27] Finance (No. 2) Act, 1991 Deduction in respect of provision for bad and doubtful debt in the case of financial institutions, etc. 20. Under the existing provisions of section 36(1)( viia ) of the Income-tax Act, in computing the profits of a bank, a deduction, limited to an amount not exceeding five per cent of the gross total income, computed, before making any deduction under the aforesaid clause and Chapter VI-A, is allowed in respect of any provision for bad and doubtful debt. Finance (No. 2) Act, 1991 20.1 Similar facility has now been provided to public financial institutions, State financial corporations and State industrial investment corporations. Finance (No. 2) Act, 1991 20.2 This amendment will take effect from the 1st day of April, 1992 and will, accordingly apply, in relation to the assessment year 1992-93 and subsequent years [Section 14] Finance (No. 2) Act, 1991 Clarification regarding deduction available to a financial corporation providing long-term finance 21. Under the existing provisions of clause ( viii ) of sub-section (1) of section 36, a financial corporation engaged in providing long-term finance for industrial or agricultural development in India is entitled to a deduction, in the computation of its taxable profits, of an amount up to 40% of the total income carried to a special reserve. A public company providing long-term finance for construction or purchase of residential houses in India is also entitled to a similar deduction. In respect of this, the intention of the Government is that the term "financial corporation" should include a "public company". However, a view has been expressed that in the context of the provisions of the said clause ( viii ), the term "corporation" does not include a "public company". Finance (No. 2) Act, 1991 21.1 To make the Government's intention clear, a new Explanation has substituted the earlier Explanation . The new Explanation provides that for the purposes of this clause, the term "financial corporation" shall include a "public company". Finance (No. 2) Act, 1991 21.2 This amendment will take effect retrospectively from 1st April, 1987 and will, accordingly, apply in relation to the assessment year 1987-88 and subsequent years. [Section 14] Finance (No. 2) Act, 1991 Chargeability of income from bad or doubtful debts in the case of financial institutions and banks. 22. The Reserve Bank of India has classified advances given by banks into eight categories called Health codes 1 to 8. Sticky advances which are doubtful of realisation fall under Health codes 4 to 8. The banks and financial institutions normally credit interest from such sticky advances to the "Interest Suspense Account" and not to the "Profit and Loss Account". The issue whether interest on such bad and doubtful advances should be taxed in the year of accrual or of receipt has been a matter of controversy for a long time. Finance (No. 2) Act, 1991 22.1 In view of the fact that interest from bad and doubtful debts in the case of banks and financial institutions are normally very difficult to recover, taxing such income on accrual basis reduces the liquidity of the bank without any actual generation of income. Finance (No. 2) Act, 1991 22.2 With a view to improving the viability of banks, public financial institutions, State financial corporations and State industrial investment corporations, the Income-tax Act has been amended by inserting a new section 43D, so as to provide that interest on sticky loans shall be charged to tax only in the year in which the interest is actually received or is credited to the "Profits and Loss Account", whichever is earlier. The category of bad and doubtful debt in respect of which the interest will qualify for this exemption, will be prescribed by the Central Board of Direct Taxes, keeping in view the guidelines issued by the Reserve Bank of India in relation to such debts. Finance (No. 2) Act, 1991 22.3 This amendment will take effect from the 1st day of April, 1992 and will accordingly, apply in relation to the assessment year 1991-92 and subsequent years. [Section 15] Finance (No. 2) Act, 1991 Streamlining the provisions relating to exemption for roll-over of capital gains 23. Capital gains are deemed to be income of the previous year in which the transfer giving rise to the gains takes place except where otherwise provided. Accordingly, in the case of compulsory acquisition of assets, the capital gains included in the compensation, as originally awarded, is charged to tax in the year in which the transfer by way of compulsory acquisition takes place, but additional compensation is brought to tax only in the year in which it is received Finance (No. 2) Act, 1991 23.1 It has been brought to the notice of the Government that in cases of compulsory acquisition of assets, at times there is a considerable gap between the dates of acquisition and payment of compensation. The result is that the existing provisions of capital gains taxation operate harshly inasmuch as the affected persons are unable to avail of the exemption for roll-over of capital gains, within the specified time period, through investment in specified assets. Finance (No. 2) Act, 1991 23.2 Section 45 of the Income-tax Act has, therefore, been amended to provide that capital gains arising from the transfer of the capital asset by way of compulsory acquisition under any law shall be charged to tax in the previous year in which the compensation is first received. Finance (No. 2) Act, 1991 23.3 This amendment takes effect retrospectively from 1st April, 1988. Finance (No. 2) Act, 1991 23.4 Further, a new section 54H has been inserted in the Income-tax Act, to provide that in cases where compensation in respect of any asset acquired compulsorily is received after the date of such transfer, the period for investment in specified assets shall be reckoned from the date of receipt of such compensation. However, where the compensation was first received before 1st April, 1991, and the period for making investment in any specified asset has expired before 1st October, 1991, such period shall stand extended up to 31st December, 1991. Finance (No. 2) Act, 1991 23.5 This amendment takes effect from the 1st day of October, 1991. [Sections 17 and 21] Finance (No. 2) Act, 1991 Clarification regarding transfer by way of conversion of debentures, etc. 24. For the purposes of capital gains taxation, "transfer", in relation to a capital asset, includes, inter alia, the sale, exchange, or relinquishment of the asset. Doubts have been expressed in the recent past as to whether capital gains arise at the time of conversion of convertible debentures into shares. With a view to reiterating the legislative intention, a new clause ( x ) has been inserted in section 47 of the Income-tax Act to provide that any transfer by way of conversion of debentures, debenture-stock, or deposits certificate in any form, of a company into shares or debentures of that company will not be regarded as a transfer giving rise to any taxable gain. Further a new sub-section (2A) has been inserted in section 49 of the Income-tax Act to provide that on sale of shares or debentures received on such conversion, the capital gain shall be computed by taking the cost of acquisition as that part of the cost of debentures, debenture-stock or deposits certificate which has been appropriated towards the shares or debentures. Finance (No. 2) Act, 1991 24.1 These amendments take effect retrospectively from 1st April, 1962 and will, accordingly, apply in relation to assessment year 1962-63 and subsequent years. [Sections 18 and 20] Finance (No. 2) Act, 1991 Raising the exemption limit for long-term capital gains 25. In order to remove the illusory capital gains in a period of inflation and smoothen the impact of bunching of capital gains, long-term gains up to Rs. 10,000 are exempt from income-tax under section 48 of the Income-tax Act. The excess of long-term capital gains, if any, is scaled down and the resultant long-term capital gains is subjected to income-tax. Further, the long-term capital gains are exempt if they are rolled-over within a specified time through investment in certain specified assets. These specified assets include, inter alia , the Capital Gains Account Scheme, Capital Bonds of UTI, IDBI, HUDCO and National Housing Bank and National Rural Development Bonds. Finance (No. 2) Act, 1991 25.1 With a view to neutralising the impact of inflation since 1986 when the monetary ceiling of Rs. 10,000 in respect of exemption of long-term capital gains, was fixed, the monetary ceiling has been increased from Rs. 10,000 to Rs. 15,000. Consequential amendments have been made in sections 54, 54B, 54D, 54F and 54G. Finance (No. 2) Act, 1991 25.2 This amendment will take effect from 1st April, 1992 and will accordingly, apply in relation to assessment year 1992-93 and subsequent years. [Sections 19 and 72] Finance (No. 2) Act, 1991 Modification of the provisions relating to set-off of capital gains 26. Under the existing provisions of the Income-tax Act, capital loss arising from the transfer of a capital asset is allowed to be set-off against the gain from the transfer of any other asset. Any remaining loss is allowed to be adjusted against other incomes. This provision has been found to be used for tax avoidance through sham transactions of short-term capital loss and its adjustment against taxable incomes under other heads. Finance (No. 2) Act, 1991 26.1 With a view to preventing this practice, sections 71 and 74 of the Income-tax Act have been amended to provide that capital loss, if any, (whether short-term or long-term) will not be allowed to be set-off against any other head of income and to secure that the amount of unabsorbed capital loss, if any, will be allowed to be carried forward for set-off against capital gains, if any, in the subsequent years. Finance (No. 2) Act, 1991 26.2 This amendment will take effect from 1st April, 1992 and will, accordingly, apply in relation to assessment year 1992-93 and subsequent assessment years. [Sections 23 and 24] Finance (No. 2) Act, 1991 Extending the incentive available to National Savings Scheme to other notified schemes 27. Under the existing provisions of section 80CCA of the Income-tax Act, deduction is allowed in the computation of total income of an assessee of the whole amount deposited by him under National Savings Scheme or payment to a deferred annuity plan out of his income chargeable to tax. Similarly, any deposits under the National Savings Scheme are exempt from wealth-tax under the provisions of clause ( xxvb ) of sub-section (1) of section 5 of the Wealth-tax Act. Finance (No. 2) Act, 1991 27.1 With a view to facilitating notification of other similar schemes in future, references to the National Savings Scheme in section 80CCA of the Income-tax Act and section 5 of the Wealth-tax Act have been omitted. The National Savings Scheme has been notified as an eligible scheme for the purpose of section 80CCA. Finance (No. 2) Act, 1991 27.2 These amendments take effect from 1st October, 1991. [Sections 25 and 73] Finance (No. 2) Act, 1991 Tax concession in respect of contributions made to Africa Fund. 28. Under the provisions of section 80G of the Income-tax Act, 1961, a deduction is allowed in computing the total income of a person in respect of donations made to certain trusts and institutions. The deduction is allowed at the rate of 50 per cent of the amount of donation made except in the case of donations made to the Prime Minister's National Relief Fund, the Prime Minister's Armenia Earthquake Relief Fund, and to the Government or to certain approved associations, etc., for promoting family planning where it is allowed at the rate of 100 per cent. Finance (No. 2) Act, 1991 28.1 As an expression of our traditional support towards fighting apartheid in South Africa, the benefit of 100 per cent deduction has been extended to donations made to the Africa (Public Contributions - India) Fund. Finance (No. 2) Act, 1991 28.2 This amendment takes effect from the 1st day of April, 1991 and will, accordingly, apply in relation to assessment year 1991-92 and subsequent years. [Section 26] Finance (No. 2) Act, 1991 Tax concession in respect of contributions made to Rajiv Gandhi Foundation. 29. The Rajiv Gandhi Foundation has been included in the list of funds and institutions, donation to which qualify for deduction under section 80G. Taxpayers making donations to the Rajiv Gandhi Foundation will be entitled to deduction of 50 per cent of the amount donated in computing their taxable income. There will be no ceiling on the amount qualifying for the deduction. Finance (No. 2) Act, 1991 29.1 This amendment will take effect from 1st April, 1992 and will, accordingly, apply in relation to assessment year 1992-93 and subsequent years. [Section 26] Finance (No. 2) Act, 1991 Streamlining the procedure for approval of trusts. 30. Under the existing provisions of section 80G of the Income-tax Act, funds and institutions seeking donation from public, obtain advance administrative approval from the Commissioner so as to enable the donors to claim deduction under section 80G. Finance (No. 2) Act, 1991 30.1 With a view to streamlining the procedure for approval and enabling the concerned fund or institution to indicate to the prospective donors their status as a trust or institution, donations to which would be eligible for deduction under section 80G, this section has been amended so as to provide that the fund or institution is required to be approved statutorily by the Commissioner. However, such approval shall have effect for such number of assessment years not exceeding three assessment years, as may be specified in the approval. [Section 26] Finance (No. 2) Act, 1991 Tax concession for export of processed minerals and ores 31. Under the existing provisions of section 80HHC of the Income-tax Act, exporters are allowed, in the computation of their total income a deduction of the entire profits derived from export of goods or merchandise other than mineral oil, minerals and ores. Finance (No. 2) Act, 1991 31.1 In view of the fact that significant value addition is achieved when a mineral is processed or when a stone is cut and polished, it is desirable to encourage their export. The benefit of deduction under section 80HHC has, therefore, been extended to exporters of processed minerals. The list of processed minerals, in respect of which this concession is being extended, is being provided in a new Twelfth Schedule to the Income-tax Act. Finance (No. 2) Act, 1991 31.2 This amendment takes effect from the 1st day of April, 1991 and will accordingly apply, in relation to the assessment year 1991-92 and subsequent years. [Sections 28 and 71] Finance (No. 2) Act, 1991 Modification of provisions relating to exemption of income from exports. 32. The provisions of section 80HHC of the Income-tax Act, as they existed, had given rise to some misinterpretations and certain doubts. Moreover, certain genuine difficulties were also witnessed in certain types of transactions. The Finance Act has, therefore, amended section 80HHC in order to address to these problems. Finance (No. 2) Act, 1991 32.1 One of the problems arises in respect of a scheme evolved by the Reserve Bank of India under which exporters are allowed to open a line of credit with a bank outside India. The payments for purchase of raw material is made from these accounts. The exporters, in such cases, are required to bring into India only such amount of foreign exchange as relates to the value addition. Finance (No. 2) Act, 1991 32.2 Since, under the scheme, the entire sale proceeds are not actually brought into India, the exporters availing this facility would be denied full deduction under section 80HHC. Finance (No. 2) Act, 1991 32.3 With a view to removing this difficulty, an Explanation has been inserted in section 80HHC of the Income-tax Act to secure that sale proceeds will be deemed to have been received in India, in case where these are credited to a separate account maintained by the exporter for the aforesaid purpose with the approval of the Reserve Bank of India. Finance (No. 2) Act, 1991 32.4 This amendment will take effect from the 1st day of April, 1992 and will accordingly apply, in relation to the assessment year 1992-93 and subsequent years. Finance (No. 2) Act, 1991 32.5 Under the existing provisions of sub-section (3) of section 80HHC of the Income-tax Act, profit derived from the export of goods is computed in the following manner : Export turnover Profits of the business × ------------------ Total turnover Finance (No. 2) Act, 1991 32.6 The application of this formula has given rise to some misuse. Many cases have come to notice where persons, who are not chargeable to income-tax, transfer their export turnover to business houses merely by endorsement of letter of credit received by them. Business houses which "buy" these export turnover, get the benefit of deduction under section 80HHC without any physical export of goods. Finance (No. 2) Act, 1991 32.7 The tax concession under section 80HHC is intended to compensate an exporter for the comparative disadvantage faced by him in the international market. With a view to ensuring that the tax concession is not misused, sub-section (3) of section 80HHC of the Income-tax Act has been amended. Finance (No. 2) Act, 1991 32.8 Under the new formula, the profits from the business of export of any goods or merchandise would be computed in the following manner : ( a ) where the export is of goods or merchandise manufactured by the taxpayer, the export profits will be computed in the ratio of export turnover to total turnover as is done under the existing formula; ( b ) where the export is of goods not manufactured by the taxpayer but purchased from a third party ( i.e., trading goods), export profits will be computed by deducting from the sale proceeds of export, the direct costs and indirect costs attributable to the export. "Direct costs" means costs directly attributable to such goods including their purchase price. "Indirect costs" means costs other than direct costs allocated in the ratio of the export turnover of trading goods to the total turnover; ( c ) where the export consists of goods manufactured by the taxpayer as well as of goods purchased from a third party, the export profits will be the aggregate of the following amount : ( i ) profits relating to export of goods manufactured by the taxpayer computed by allocating the profits of the business net of profits relating to business of exporting third party goods, in the ratio of the export turnover of the manufactured goods to the total turnover of the manufactured goods; ( ii ) profits relating to export of goods purchased from third party by deducting from the sale proceeds of such goods, the direct and indirect costs attributable to such exports; ( d ) the profits shall be increased by the amount which bears to ninety per cent of export incentives [profits on sale of Exim scrips, receipts by way of duty drawback or payments under the International Price Reimbursement Scheme (IPRS)] the same ratio as the export turnover bears to the total turnover. Finance (No. 2) Act, 1991 32.9 This amendment will take effect from the 1st day of April, 1992 and will accordingly apply, in relation to the assessment year 1992-93 and subsequent years. Finance (No. 2) Act, 1991 32.10 The existing formula often gives a distorted figure of export profits when receipts like interest, commission, etc., which do not have element of turnover, are included in the profit and loss account. Finance (No. 2) Act, 1991 32.11 It has, therefore, been clarified that "profits of the business" for the purpose of section 80HHC will not include receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature. As some expenditure might be incurred in earning these incomes, which in the generality of cases is part of common expenses, ad hoc 10 per cent deduction from such incomes is provided to account for these expenses. Finance (No. 2) Act, 1991 32.12 Many exporters maintain branch offices, warehouses, etc., abroad. The export goods are first sent to these branch offices, etc., and are then sold to foreign buyers from such branch offices, etc. Certain doubts have been raised about the point of time when such goods should be treated as having been exported. Finance (No. 2) Act, 1991 32.13 With a view to removing the doubts in this respect, an Explanation has been inserted in section 80HHC clarifying that, goods will be deemed to be exported out of India when they are transferred by an assessee to an overseas branch office, etc.The value of such goods declared in the shipping bill, etc., will be deemed to be the sale proceeds thereof for the purpose of computing the deduction under section 80HHC. Finance (No. 2) Act, 1991 32.14 It has also been clarified that "profits of the business" for the purpose of section 80HHC will not include profits of any branch, warehouse, etc., situated overseas. Finance (No. 2) Act, 1991 32.15 These amendments will take effect from 1st April, 1992 and will, accordingly, apply in relation to assessment year 1992-93 and subsequent assessment years. Finance (No. 2) Act, 1991 32.16 The issue whether sale of goods to foreigners in shops or other establishments situated in India is export, has been a subject-matter of litigation. The Department's view, all along, has been that such counter-sales within India do not constitute export and therefore, are not eligible for the tax concession under section 80HHC. To give finality to this view and to end all judicial controversies, a clarificatory amendment has been made in order to reiterate that "export out of India" shall not include any transaction by way of sale or otherwise, in a shop, emporium or any other establishment in India, not involving clearance at any customs station. Finance (No. 2) Act, 1991 32.17 This amendment takes effect retrospectively from 1st April, 1986, the day on which the substituted section 80HHC took effect. It will, accordingly, apply in relation to assessment year 1986-87 and subsequent years. Finance (No. 2) Act, 1991 32.18 Whereas the definition of the term "export turnover" excludes freight and insurance attributable to transport, no such exclusion has been specified in respect of the term "total turnover". As a result, in c.i.f. transactions, while the export turnover is taken at fob value, the total turnover includes the sale proceeds of exports at cif value. Finance (No. 2) Act, 1991 32.19 With a view to removing this anomaly, it has now been clarified that "total turnover" will also not include such freight or insurance. Finance (No. 2) Act, 1991 32.20 This amendment takes effect retrospectively from 1st day of April, 1987, the day from which "total turnover" became relevant for the purpose of computation of deduction under section 80HHC. It will accordingly, apply in relation to assessment year 1987-88 and subsequent years. [Section 28] Finance (No. 2) Act, 1991 Modification of provisions relating to foreign exchange earnings by hotels, tour operators, etc. 33. Under the existing provisions of section 80HHD of the Income-tax Act, a resident taxpayer engaged in the business of an approved hotel, or as an approved tour operator or as travel agent is allowed a deduction, in computing its total income, of an amount equal to— ( i ) 50 per cent of the profits derived from services provided to foreign tourists, payment for which are received in convertible foreign exchange; and ( ii ) so much of the remaining profits referred to above as are credited to a reserve fund to be utilised for the purpose of the business of the taxpayer in the prescribed manner. Finance (No. 2) Act, 1991 33.1 The tax concession under section 80HHD is available for the assessment year 1989-90 and subsequent years. One of the conditions for availing of the deduction under this section is that the business of a hotel or tour operator is approved by the prescribed authority for the purposes of this tax concession. Since the Director General of Tourism was notified as prescribed authority only with effect from 30th November, 1989, hotel and tour operators otherwise eligible for the tax concession could not be approved for the purposes of the tax concession from a date prior to the notification of the Director General of Tourism as the prescribed authority. As a result, many hotels and tour operators had been denied this concession for the assessment years 1989-90 and 1990-91. Finance (No. 2) Act, 1991 33.2 With a view to correcting this situation, section 80HHD of the Income-tax Act has been amended to provide that a hotel or a tour operator approved by the prescribed authority between 30th November, 1989 and 1st October, 1991 will be deemed to have been approved by the authority for the purposes of section 80HHD in relation to assessment years 1989-90, 1990-91 and 1991-92 if the business of the hotel or of a tour operator existed during the previous year relevant to any of these assessment years. Finance (No. 2) Act, 1991 33.3 This amendment takes effect from the 1st day of October, 1991. Finance (No. 2) Act, 1991 33.4 In many cases, the foreign tourists visit India on a package tour and make payment in foreign exchange, in one lump sum, to a tour operator in India. The Indian tour operator, thereafter, makes payments to the hotels where the tourist groups are lodged. Since the foreign exchange is received only by the tour operator, it is only he who can claim the tax concession under section 80HHD. The hotel owner is denied the benefit of section 80HHD, even though the payment for service to the foreign tourists rendered by the hotel may constitute the major part of the expenditure by the foreign tourist in India. Finance (No. 2) Act, 1991 33.5 With a view to securing that the benefits under section 80HHD for all the three segments of the tourism industry, section 80HHD has been amended to provide that, in cases where payments for services to the foreign tourist provided by hotel, tour operator or a travel agent are received in Indian currency from another hotel, tour operator, travel agent or airline, the person providing the service to the foreign tourists will be eligible for deduction under section 80HHD in relation to profits derived therefrom, subject to the condition that the payment in Indian currency is made out of funds obtained by conversion of foreign exchange brought into India, through an authorised dealer in foreign exchange, by the tour operator, travel agent or the airline, on behalf of the foreign tourist. The person claiming the deduction will be required to furnish, along with the return of income, a certificate obtained from the person making payment in Indian currency out of foreign exchange paid by the foreigner. Finance (No. 2) Act, 1991 33.6 This amendment will take effect from 1st April, 1992, and will, accordingly, apply in relation to assessment year 1992-93 and subsequent years. [Section 29] Finance (No. 2) Act, 1991 Tax concessions for the export of computer software and for import of system software 34. With a view to providing fiscal incentive for promoting export of computer software, a new section 80HHE has been inserted in the Income-tax Act for providing tax concessions similar to those available under section 80HHC of the Income-tax Act in relation to commodity exports. Finance (No. 2) Act, 1991 34.1 Under the new provisions, Indian companies and resident non-corporate taxpayers will be eligible for a deduction, in computing their taxable income, of an amount equal to the profits derived from export of computer software. Finance (No. 2) Act, 1991 34.2 The broad features of the new provision are as under: ( i ) The tax concession will be available with regard to profits from export of software not only through magnetic media or on paper but also through satellite data link and consultancy delivered at the location of foreign client outside India. ( ii ) The tax concession will be available only in cases where the export profits are received in or brought into India in convertible foreign exchange within six months of the end of the relevant financial year or within such further period as the Commissioner of Income-tax may allow. ( iii ) It will be necessary for claiming the tax concession that the taxpayer furnishes along with the return of income a report of a chartered accountant in the proforma to be prescribed in the Income-tax Rules, certifying the correctness of the claim for deduction. ( iv ) The tax concession will be available with reference to export profits derived during the financial years 1990-91, 1991-92 and 1992-93 relevant to assessment years 1991-92, 1992-93 and 1993-94 respectively. Finance (No. 2) Act, 1991 34.3 At present, the value of software in a physical form such as magnetic tape or disc imported into India is subjected to custom duty on the ground that what is imported is commodity. At the same time, since import of software is generally under a licence from the foreign licensor, the lump sum payments made for using the software are regarded as payment of royalty within the meaning under Explanation 2 of section 9(1)( vi ) of the Income-tax Act and taxed accordingly. Finance (No. 2) Act, 1991 34.4 In order to prevent this dual levy, the Income-tax Act has been amended to provide that any lump sum payment for obtaining use of systems software supplied by a non-resident manufacturer along with the computer hardware will not be subjected to income-tax. This tax concession will not be available in relation to payments in respect of system software imported otherwise than under an approved Computer Software Export Scheme or where the software is supplied separately or independently of the computer hardware even though the software has been developed or marketed by the supplier of the computer hardware. Finance (No. 2) Act, 1991 34.5 This amendment takes effect from 1st April, 1991 and will accordingly apply for assessment year 1991-92 and subsequent years. Finance (No. 2) Act, 1991 34.6 The present policy on software permits import of software on OGL by the actual users or manufacturers of software for stock and sale. The applicable rate of tax on royalty income, in cases where the recipient is a foreign company, is 30 per cent if the royalty is received under an agreement approved by the Central Government. If the royalty payment is otherwise than under an agreement approved by the Central Government, the applicable rate of tax at present is 65 per cent. These rates of tax are applied to the gross amount of royalty and the taxpayer is not allowed deduction in respect of any expenses incurred in earning the royalty income. Finance (No. 2) Act, 1991 34.7 Since software can be imported by the actual users or manufacturer of software in India for stock and sale under OGL, section 115A of the Income-tax Act has been amended to provide that, the condition regarding approval by the Central Government of the relevant agreement for applying the lower rate of tax at 30 per cent will not apply in cases where the royalty payment is in respect of use of software permitted to be imported under an Open General Licence in accordance with the Import Trade Control Policy of the Central Government. Finance (No. 2) Act, 1991 34.8 This amendment takes effect from 1st April, 1991 and accordingly, will apply in relation to assessment year 1991-92 and subsequent assessment years. [Sections 4, 30 and 40] Finance (No. 2) Act, 1991 Tax concessions to hotels in hilly and other remote areas 35. Under section 80-I of the Income-tax Act, 1961, deduction is allowed, in computing the taxable income, in respect of profits derived from a new industrial undertaking or a ship or the business of a hotel. The deduction under this section is allowed in the case of companies, at 30 per cent of profits in respect of the assessment year relevant to the previous year in which the hotel starts functioning or the industrial undertaking starts manufacture or ship is first brought to use and nine assessment years immediately succeeding the initial assessment year. In the case of the taxpayer being a co-operative society, similar deduction is allowed for the initial assessment year and eleven succeeding years. Finance (No. 2) Act, 1991 35.1 The scope of the concessions under section 80-I has been extended in the new section 80-IA. With a view to encouraging development of tourism infrastructure in remote regions where such facilities do not exist, section 80-IA seeks to secure that, in addition to the benefits now available under section 80-I, deduction in respect of new hotels in hilly area or a rural area or a place of pilgrimage or such other place as the Central Government may specify, will be admissible at the rate of 50 per cent of the profits as against 30 per cent at present provided under section 80-I of the Act. Section 80-I will cease to operate from 1st April, 1991. Finance (No. 2) Act, 1991 35.2 To be eligible for the tax concession at the enhanced rate, the hotel in the remote region will have to comply with the conditions prescribed in the Income-tax Rules and will also require approval of the prescribed authority. Finance (No. 2) Act, 1991 35.3 As a further measure to encourage tourism in remote areas, expenditure tax will not be charged for a period of 10 years commencing from 1-4-1991, on any expenditure incurred in such new hotel in a hilly area or a rural area or a place of pilgrimage or such other place as the Central Government may specify which fulfils the conditions for its being eligible for deduction under the new section 80-IA at the higher rate of 50 per cent. Finance (No. 2) Act, 1991 35.4 These concessions will be available to eligible hotels which start functioning before 31st March, 1994. Finance (No. 2) Act, 1991 35.5 These amendments take effect from 1st April, 1991 and will, accordingly, apply in relation to the assessment year 1991-92 and subsequent years. [Sections 31 and 32] Finance (No. 2) Act, 1991 Incentive under section 80L for interest on National Savings Certificate VIII Issue 36. At present, interest on National Savings Certificate VI Issue and VII Issue qualifies, along with incomes from certain other financial assets, for deduction under section 80L of the Income-tax Act. Interest on National Savings Certificate VIII Issue does not qualify for this tax concession. With a view to encouraging investment by taxpayers in National Savings Certificates, the benefit of section 80L of the Income-tax Act has been extended to interest on National Savings Certificate VIII Issue. Finance (No. 2) Act, 1991 36.1 This tax concession will be available for and from the assessment year 1992-93. [Section 33] Finance (No. 2) Act, 1991 Extending the scope of deduction in respect of income from royalties, commission, technical fee, etc. 37. Under the existing provisions of section 80-O of the Income-tax Act, an Indian company, deriving income by way of royalties, commission, fees, etc., from a foreign Government or a foreign enterprise in consideration of the provision of technical know-how or technical services under an approved agreement, is entitled to a deduction, in computing its taxable income, of an amount equal to 50 per cent of such income provided such income is received in or brought into, India in convertible foreign exchange. Finance (No. 2) Act, 1991 37.1 With a view to bringing this provision on a parity with other tax concessions for the export sector and also as a measure of rationalisation, the benefit under section 80-O has been extended to non-corporate taxpayers resident in India. The concession will now also be available in relation to professional services as well as for services rendered to foreign enterprise from India. Further, the requirement of prior approval of the tax authorities in this regard has been done away with. Finance (No. 2) Act, 1991 37.2 This amendment will take effect from 1st April, 1992 and will, accordingly, apply in relation to the assessment year 1992-93 and subsequent years. [Section 34] Finance (No. 2) Act, 1991 Revival of tax concession in respect of profits from the business of publication of books 38. Under the provisions of section 80QQ of the Income-tax Act prior to its omission by the Direct Tax Laws (Amendment) Act, 1987, any person carrying on a business in India, of printing and publication of books or only publication of books without the activity of printing, was entitled to a deduction in the computation of his taxable income of an amount equal to 20 per cent of the profits from such business. Finance (No. 2) Act, 1991 38.1 Keeping in view the vital role of the publishing industry in the development of human resources, a new section 80Q has been inserted in the Income-tax Act to revive the aforesaid tax concession for five years commencing with the assessment year 1992-93. [Section 35] Finance (No. 2) Act, 1991 Revival of fiscal incentive to authors of textbooks in Indian languages 39. Under the provisions of section 80QQA of the Income-tax Act, an individual resident in India is allowed, in the computation of his total income, of a deduction of an amount equal to twenty-five per cent of any income derived by way of royalties, copyright fees, etc., in respect of any textbook, dictionary, thesaurus or encyclopaedia written by him in any Indian language specified in the Eighth Schedule to the Constitution. This concession is allowed for the assessment year commencing on 1st April, 1980 and for nine subsequent years. The incentive is, therefore, applicable only in respect of incomes earned up to the previous year relevant to the assessment year 1989-90. Finance (No. 2) Act, 1991 39.1 With a view to reviving this fiscal incentive to authors of textbooks in Indian languages, section 80QQA has been amended to secure that deduction under this section will be allowed for the assessment year commencing on 1st April, 1992 and for four subsequent assessment years. [Section 36] Finance (No. 2) Act, 1991 Deduction in the computation of taxable income in the case of blind or physically handicapped persons 40. The Finance Act has substituted a new section for section 80U relating to deduction for the blind or physically handicapped resident persons. Finance (No. 2) Act, 1991 40.1 Under the existing provisions, resident individuals suffering from total blindness or other physical disability of a permanent nature or mental retardation are allowed deduction of Rs. 15,000 in computing their taxable income. For the purposes of claiming this deduction, the permanent physical disability (other than blindness) or mental retardation should be as specified in the Income-tax Rules. The person claiming deduction is also required to furnish a certificate from a physician, surgeon, oculist or psychiatrist, as the case may be, working in a Government hospital in support of claim of blindness, other physical disability or mental retardation in the first assessment year for which deduction is claimed. Finance (No. 2) Act, 1991 40.2 It has been brought to the notice of Government that there are cases of partial blindness of a permanent nature having the effect of reducing substantially the person's capacity to engage in a gainful employment. The benefit of deduction available under section 80U has, therefore, been extended to individuals suffering from partial blindness which is in the nature of a permanent physical disability specified in the Income-tax Rules. In addition, the amount of deduction allowed has been increased from Rs. 15,000 to Rs. 20,000. Finance (No. 2) Act, 1991 40.3 This amendment will take effect from 1st April, 1992 and will, accordingly, apply in relation to the assessment year 1992-93 and subsequent years. [Section 37] Finance (No. 2) Act, 1991 Deduction in respect of repayment of loans taken for purchase or construction of new residential houses 41. Under the existing provisions of section 88, tax rebate is available only in respect of a residential house only if constructed or purchased after 31st March, 1987. No tax rebate is available in case the residential house was purchased or constructed prior to 31st March, 1987. Finance (No. 2) Act, 1991 41.1 Tax rebate has now been extended even in cases where payment of instalment or repayment of loan is in respect of a house purchased or constructed before 1st April, 1987. Finance (No. 2) Act, 1991 41.2 This amendment will take effect from 1st April, 1991 and will, accordingly, apply in relation to assessment year 1991-92 and subsequent assessment years. [Section 38] Finance (No. 2) Act, 1991 Incentive for deposits in Home Loan Account Schemes floated by certain public sector companies, etc. 42. Under the existing provisions of section 88 of the Income-tax Act, deposits in the Home Loan Account Scheme of the National Housing Bank along with other long-term savings in life insurance policy, provident fund, etc., qualify for tax rebate. The list of savings for the purposes of tax rebate under section 88 has been enhanced to include subscriptions to schemes similar to the Home Loan Account Scheme, floated by: ( a ) public sector companies engaged in providing long-term finance for construction or purchase of houses in India for residential purposes; or ( b ) any authority constituted in India by any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns, villages or for both. Finance (No. 2) Act, 1991 42.1 This amendment will take effect from 1st April, 1992 and will, accordingly, apply in relation to assessment year 1992-93 and subsequent years. [Section 38] Finance (No. 2) Act, 1991 Taxation of foreign companies and other non-resident taxpayers 43. Tax treaties generally contain a provision to the effect that the laws of the two contracting States will govern the taxation of income in the respective State except when express provision to the contrary is made in the treaty. It may so happen that the tax treaty with a foreign country may contain a provision giving concessional treatment to any income as compared to the position under the Indian law existing at that point of time. However, the Indian law may subsequently be amended, reducing the incidence of tax to a level lower than what has been provided in the tax treaty. Finance (No. 2) Act, 1991 43.1 Since the tax treaties are intended to grant tax relief and not put residents of a contracting country at a disadvantage vis-a-vis other taxpayers, section 90 of the Income-tax Act has been amended to clarify that any beneficial provision in the law will not be denied to a resident of a contracting country merely because the corresponding provision in the tax treaty is less beneficial. Finance (No. 2) Act, 1991 43.2 This amendment takes effect retrospectively from 1st April, 1972. Finance (No. 2) Act, 1991 43.3 Under the provisions of section 195 of the Income-tax Act, any person responsible for paying to a non-resident taxpayer or to a foreign company any sum, other than interest on securities, salary or dividends, chargeable to income-tax in India, is required, to deduct income-tax thereon at the rates in force. Where the person responsible for paying any sum to a non-resident, considers that the whole amount would not be income chargeable to tax, he may apply to the Assessing Officer to determine the appropriate proportion of such sum chargeable to tax. In such cases, tax is required to be deducted from the portion as determined by the Assessing Officer. Finance (No. 2) Act, 1991 43.4 This facility of deducting tax only from a portion of the sum payable is not available in cases where the payment is by way of interest, royalty or fee for technical services to a foreign company. Finance (No. 2) Act, 1991 43.5 In some of the bilateral agreements for the avoidance of double taxation, it has been provided that any or all of the incomes referred to above would be taxed in India on net basis. Further, under certain tax treaties, income by way of royalty or fee for technical service is charged to tax on net basis in cases where such income is attributable to any "permanent establishment" of the foreign enterprise in India. Finance (No. 2) Act, 1991 43.6 As a result, in a large number of cases of payments of royalty, fee for technical services, etc. to non-residents, tax required to be deducted at source is much larger than the final tax liability. Finance (No. 2) Act, 1991 43.7 With a view to avoiding such situations, section 195 of the Income-tax Act has been amended to empower the Assessing Officer to determine, in all cases of payment of interest, dividends, royalties, fees for technical services, paid to a foreign company or to a non-resident taxpayer, the appropriate proportion of the amount from which tax is to be deducted at source. Finance (No. 2) Act, 1991 43.8 This amendment takes effect from 1st October, 1991. Finance (No. 2) Act, 1991 43.9 Under the existing scheme of deduction of tax at source, even in cases where a lower rate of tax income is provided in the tax treaty, tax has to be deducted at the rate prescribed in law. As a result, in many cases, the amount of tax deducted from sums remitted to foreign companies is larger than the final tax liability, thus requiring filing of claims for refund. Finance (No. 2) Act, 1991 43.10 With a view to correcting this position, section 2( 37A ) of the Income-tax Act has been amended to secure that tax is deducted at source at the rate applicable in a particular case, for final tax liability. Finance (No. 2) Act, 1991 43.11 This amendment takes effect from 1st October, 1991. Finance (No. 2) Act, 1991 43.12 Section 115A of the Income-tax Act provides for special rates of tax in respect of income from dividends, royalty, technical fees, etc., in the case of foreign companies. Section 44D of the Income-tax Act provides that such income in the hands of foreign companies shall be taxed on gross basis without allowing for any deduction in respect of expenditure. By the Direct Tax Laws (Amendment) Act, 1989, an insertion was made in section 115A to provide for a special rate of tax in respect of income of a foreign company from units of a Mutual Fund. However, no corresponding amendment was made in section 44D. Finance (No. 2) Act, 1991 43.13 With a view to bring parity in respect of incomes which are taxed at special rates in respect of foreign companies, section 44D has been amended to clarify that the income from units of a Mutual Fund in the hands of a foreign company would also be taxed on gross basis. Finance (No. 2) Act, 1991 43.14 This amendment takes effect retrospectively from 1st April, 1989. [Sections 3, 16, 39 and 56] Finance (No. 2) Act, 1991 Tax incentive to off-shore mutual funds for investment in India 44. At present, under section 115A of the Income-tax Act, in the case of foreign companies, the income by way of dividend (including income from Unit Trust of India) and income in respect of units of mutual funds, purchased in foreign currency, is charged to tax at the rate of 25 per cent. A lower rate of tax on these incomes is provided in the double taxation avoidance agreement between India and certain foreign countries. Tax on capital gains is charged at the normal rate of 65 per cent, after deducting from the amount of gain the deduction allowed under section 48 of the Income-tax Act. Finance (No. 2) Act, 1991 44.1 The Unit Trust of India and some other mutual funds have, during the last few years, floated certain off-shore funds with a view to attracting overseas institutional investment. These off-shore funds compete with other country funds internationally. It is, therefore, necessary that the tax regime for these off-shore funds is competitive vis-a-vis other countries competing for off-shore funds. Finance (No. 2) Act, 1991 44.2 In view of the above, a new section 115AB has been inserted in the Income-tax Act to provide special rates of tax for certain incomes of off-shore funds. The income from unit purchased by off-shore funds in foreign currency and by way of long-term capital gains arising from the transfer of such units will be charged to tax at the rate of 10 per cent. However, this rate of tax will apply on the gross income of the nature specified above without allowing for any deduction under sections 28 to 44C, 48 and 57 and Chapter VI-A of the Income-tax Act. Finance (No. 2) Act, 1991 44.3 This amendment will take effect from 1st April, 1992 and will, accordingly, apply in relation to assessment year 1992-93 and subsequent years. Finance (No. 2) Act, 1991 44.4 In order to facilitate easy collection of tax from the off-shore fund, a new section 196B has been inserted in the Income-tax Act to provide for deduction of tax at source at the rate of 10 per cent, on any payment representing income from units held by off-shore funds. The tax is required to be deducted either at the time of payment of credit to the account of the payee, whichever is earlier. Finance (No. 2) Act, 1991 44.5 This amendment is effective from 1st October, 1991. [Sections 41 and 58] Finance (No. 2) Act, 1991 Amendment to the provisions which empower the Board to relax the effect of provisions of certain sections 45. 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 sub-section (1A) of section 201 relating to charge of mandatory interest for defaults in deduction of tax at source or payment of such tax, section 211 relating to instalments of advance tax and due dates for payment thereof and section 234C relating to charge of mandatory interest for deferment of advance tax may sometimes need to be relaxed in cases of genuine hardship. At present, it is not possible for the Board to relax these provisions. Finance (No. 2) Act, 1991 45.1 Therefore, a reference to sub-section (1A) of section 201, sections 211 and 234C 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 incomes or class of cases. Finance (No. 2) Act, 1991 45.2 This amendment takes effect from 1st April, 1991. Finance (No. 2) Act, 1991 45.3 The existing provisions of sub-section (2) of section 119 of the Income-tax Act do not empower the Board to relax the requirements contained in any of the provisions of Chapter IV (Computation of income) and Chapter VI-A in cases of genuine hardship. Finance (No. 2) Act, 1991 45.4 Therefore, a new clause ( c ) has been inserted in sub-section (2) to empower the Board to relax any of the provisions of Chapter IV or Chapter VI-A of the Act, if it considers it desirable or expedient so to do for avoiding genuine hardship in any case or class of cases. However, this can be done only by a general or special order for reasons to be specified therein. The said order can be made by the Board subject to the conditions that the default has been due to circumstances beyond the control of the assessee and the assessee has complied with the requirement before the completion of assessment for the assessment year in which such deduction is claimed. A copy of the order issued is also required to be laid before each House of Parliament. Finance (No. 2) Act, 1991 45.5 This amendment takes effect from 1st October, 1991. [Section 42]. Finance (No. 2) Act, 1991 Modification of the provisions of section 132 of the Income-tax Act 46. The existing provisions of sub-section (8A) of section 132 of the Income-tax Act provide that the authorised officer can extend the operation of the prohibitory order made under sub-section (3) of section 132 with the approval of the Commissioner. Finance (No. 2) Act, 1991 46.1 In a majority of the cases, searches under the Income-tax Act are authorised by the Directors of Income-tax (Investigation). Therefore, sub-section (8A) has been amended to provide that the said prohibitory order can also be extended with the approval of the Director. Finance (No. 2) Act, 1991 46.2 Similar amendment has been made to the corresponding provisions in sub-section (6A) of section 37A of the Wealth-tax Act. Further, reference to the expression "Chief Commissioner" therein has been deleted. Finance (No. 2) Act, 1991 46.3 These amendments take effect from 1st October, 1991. [Sections 43 and 82] Finance (No. 2) Act, 1991 Modification of provisions relating to furnishing of returns of income 47. Sub-section (10) of section 139 of the Income-tax Act, which was inserted with effect from 1st April, 1986, provides that a return of income which shows total income below the maximum amount not chargeable to tax is deemed as never to have been furnished, with certain exceptions. The insertion of the aforesaid sub-section has created certain anomalies. For example, furnishing of evidence along with the return of income is a necessary condition for claiming exemption from tax or deduction from gross total income in a number of provisions of the Income-tax Act. However, if as a result of such claims, the income returned falls below taxable limit, the return becomes non est and such claims cannot be verified by the Assessing Officer. This provision has also disturbed the continuity of assessment records in certain cases. Finance (No. 2) Act, 1991 47.1 Sub-section (10) of section 139 of the Income-tax Act has, therefore, been omitted. Finance (No. 2) Act, 1991 47.2 This amendment takes effect from 1st April, 1991 and will be applicable to the assessment year 1991-92 and subsequent years. [Section 44] Finance (No. 2) Act, 1991 Removal of anomalies in respect of section 140A of the Income-tax Act 48. Under the existing provisions of sub-section (1) of section 140A relating to payment of self-assessment tax, etc., an assessee is required to pay the tax payable on the basis of the return required to be furnished under section 139 or section 148, after taking into account the taxes already paid, before filing the return. With effect from 1st April, 1989, section 142 of the Income-tax Act was amended to provide that a notice thereunder can be served on the person, who has not made a return within time allowed under sub-section (1) of section 139, to furnish a return of his income or the income of any other person in respect of which he is assessable under the Act. The provisions of section 140A of the Income-tax Act are intended to cover all the returns filed under the Income-tax Act. Sub-section (1) of section 140A has, therefore, been amended to insert therein a reference to the returns furnished under section 142 of the Act. Finance (No. 2) Act, 1991 48.1 This amendment takes effect from 27th September, 1991, the date on which this Act received the assent of the President. [Section 45] Finance (No. 2) Act, 1991 Extending the period of limitation for the service of notice under sub-section (2) of section 143 of the Income-tax Act 49. Under the existing provisions of section 143 of the Income-tax Act relating to the assessment procedure, no notice under sub-section (2) thereof can be served on the assessee after the expiry of the financial year in which the return is furnished or the expiry of six months from the end of the month in which the return is furnished, whichever is later. Finance (No. 2) Act, 1991 49.1 The aforesaid period of limitation for the service of a notice under sub-section (2) of section 143 does not allow sufficient time to the Assessing Officers to select returns for scrutiny before assessment. Therefore, sub-section (2) has been amended to provide that the notice thereunder can be served on the assessee within twelve months from the end of the month in which the return is furnished. Finance (No. 2) Act, 1991 49.2 Similar amendments have been made to the corresponding provisions in section 16 of the Wealth-tax Act and section 15 of the Gift-tax Act. Finance (No. 2) Act, 1991 49.3 These amendments take effect from 1st October, 1991. [Sections 46, 74 and 86] Finance (No. 2) Act, 1991 Provisions for enlarging the scope of the revisional jurisdiction of Commissioner of Income-tax 50. A proviso to clause ( a ) of sub-section (1) of section 143 of the Income-tax Act enables the Department to make the following adjustments to the returned income or loss for the purpose of computing the tax or interest payable by or refundable to the assessee,— ( i ) rectification of any arithmetical error; ( ii ) allowing any deduction, allowance, etc., prima facie admissible but not claimed; and ( iii ) disallowing any deduction, allowance, etc., claimed but prima facie inadmissible. Finance (No. 2) Act, 1991 50.1 Whenever any such adjustment is made to the returned income the Assessing Officer is required to send an "intimation" to the taxpayers. The taxpayers have no remedy against such adjustment, except to apply for rectification of any mistake in the "intimation". Finance (No. 2) Act, 1991 50.2 With a view to providing another avenue for taxpayers' grievance, section 143 of the Income-tax Act has been amended in order to bring an intimation within the ambit of section 264 which empowers the Commissioner of Income-tax to exercise his revisional jurisdiction. Finance (No. 2) Act, 1991 50.3 Similar amendments have been made to the corresponding provisions in section 16 of the Wealth-tax Act and in section 15 of the Gift-tax Act. Finance (No. 2) Act, 1991 50.4 These amendments take effect from 1st October, 1991. [Sections 46, 74 and 86] Finance (No. 2) Act, 1991 Modification of provisions relating to time limit for completion of assessments and reassessments 51. Under the existing provisions in Explanation 1 to section 153 of the Income-tax Act, period relating to certain contingencies specified therein is to be excluded while computing the period of limitation laid down in sub-sections (1), (2) and (2A) of the said section for completion of assessments and reassessments, etc. In certain cases, the proceedings are stayed by the order or injunction of a court when only a few days are left within the normal operation of the rule of limitation. In such cases, on vacation of the stay the remaining period available to the Assessing Officer for completing assessment, etc., is not sufficient for consideration of the various issues involved in the assessment, as continuity in assessment proceedings is broken by the stay. This also applies to other cases where the time available, after exclusion of the periods on account of the contingencies specified in the Explanation, for completion of assessments or reassessments, etc., is very short. Finance (No. 2) Act, 1991 51.1 Explanation 1 to section 153 of the Income-tax Act has, therefore, been amended to provide therein that where immediately after the exclusion of the time or period mentioned in the Explanation , the remaining period of limitation referred to in sub-sections (1), (2) and (2A) for completing assessments or reassessments, etc., is less than sixty days, such remaining period shall be extended to sixty days and the aforesaid period of limitation shall be deemed to be extended accordingly. Finance (No. 2) Act, 1991 51.2 Similar amendments have been made to the corresponding provisions in section 17A of the Wealth-tax Act and in section 16A of the Gift-tax Act. Finance (No. 2) Act, 1991 51.3 These amendments take effect from 27th September, 1991, i.e., the date on which this Act received the assent of the President. [Sections 47, 75 and 87] Finance (No. 2) Act, 1991 Removal of hardship in provisions relating to rectification in respect of foreign exchange earnings 52. Under the provisions of section 80-O of the Income-tax Act, an assessee deriving income by way of royalties, commission, fees, etc., is entitled to a deduction of an amount equal to 50 per cent of such income provided such income is received in, or brought into, India in convertible foreign exchange. Finance (No. 2) Act, 1991 52.1 Since, in some cases, delay in remitting the foreign exchange income to India is unavoidable, a provision was made in section 155(12) of the Income-tax Act enabling rectification of an assessment where deduction under section 80-O was denied on the ground that income otherwise qualifying for deduction had not been received in India in convertible foreign exchange. Under this provision, the assessment order could be rectified within a period of 4 years from the date on which the qualifying income was received. Finance (No. 2) Act, 1991 52.2 Through the Finance Act, 1987, certain amendments were made in section 80-O under which the Chief Commissioner or Commissioner is authorised to grant extension of time for bringing in the foreign exchange into India if he is satisfied that the taxpayer was prevented by reasons beyond his control from bringing the income within specified time. As a consequence, section 155(12) was deleted with effect from 1st April, 1988. An unintended effect of these changes has been that taxpayers who were denied the benefit of section 80-O for any of the assessment years up to assessment year 1987-88 on the ground that qualifying income was not received in convertible foreign exchange during the relevant previous year would lose the benefit even though the qualifying income is brought into India at a subsequent date and the delay in the remittance was for reasons beyond their control. Finance (No. 2) Act, 1991 52.3 With a view to removing this anomaly, a new sub-section (11) has been inserted in section 155 of the Income-tax Act to enable rectification of an assessment for assessment year 1987-88 or any earlier assessment year where deduction under section 80-O has been denied only on the ground that income otherwise qualifying for deduction had not been received in convertible foreign exchange during the relevant previous year and such income is so received at a subsequent date. The Assessing Officer will have the power to modify the assessment at any time within the period of 4 years from the end of the previous year in which the qualifying income is received in or brought into India in convertible foreign exchange. In computing this period of 4 years, the period between 1-4-1988 and 30-9-1991, during which the power to rectify was not available, will be excluded. Finance (No. 2) Act, 1991 52.4 This amendment takes effect from 1st October, 1991. [Section 48] Finance (No. 2) Act, 1991 Removal of anomalies in respect of section 161 of the Income-tax Act 53. Sub-section (1A) of section 161 provides that where the income of a trustee consists of or includes profits and gains of business, income-tax shall be charged on the whole of the income at the maximum marginal rate. The Explanation below sub-section (1A) states that the term "maximum marginal rate" shall have the meaning assigned to it in Explanation 2 to section 164. The latter Explanation has been omitted with effect from 1st April, 1989 and instead, a definition of the term "maximum marginal rate" has been inserted in clause ( 29C ) of section 2 from the said date. Therefore, as the Explanation to sub-section (1A) of section 161 has become redundant, the same has been omitted. Finance (No. 2) Act, 1991 53.1 Clause ( 29C ) of section 2 has also been amended to provide that the term "maximum marginal rate", will also mean the rate of income-tax applicable in relation to the highest slab of income in the case of an association of persons or body of individuals. This amendment is consequential to the omission of Explanation to sub-section (1A) of section 161 and the earlier omission of Explanation 2 to section 164 by the Direct Tax Laws (Amendment) Act, 1987. Finance (No. 2) Act, 1991 53.2 The amendments to clause ( 29C ) of section 2 and sub-section (1A) of section 161 of the Income-tax Act take effect from 1st April, 1991. [Sections 3 and 49] Finance (No. 2) Act, 1991 Provision for enabling Central Government to authorise deduction of tax at source at a lower rate on income of scheduled banks 54. Under the provisions of section 193 of the Income-tax Act, income-tax is deductible at source on income by way of interest on securities, either at the time of credit to the account of the payee or at the time of payment thereof in cash or by issue of a cheque, etc., whichever is earlier, at the rates in force. Finance (No. 2) Act, 1991 54.1 The scheduled banks are required to invest a sizeable portion of their funds in various Government securities, in order to comply with the reserve requirements prescribed by the Reserve Bank of India. Representations have been received that certain scheduled banks have been put to considerable hardship as a substantial portion of their funds gets blocked in the form of tax deducted at source which is far in excess of their ultimate tax liability. On the other hand, the Government has to pay interest at the rate of 18 per cent per annum on the amount of such excess from the beginning of the assessment year till the refund is granted. In view of this, the Act has amended section 193 of the Income-tax Act to provide that in the case of a scheduled bank, if the Central Government is satisfied that the total income of the bank justifies deduction of income-tax at a rate lower than the rate in force, it may, by notification in the Official Gazette, specify the rate at which deduction of income-tax is to be made in respect of such bank. The notification issued by the Central Government shall, at any one time, have effect for a maximum of three assessment years. The expression "scheduled bank" is being defined for the purposes of this section. Finance (No. 2) Act, 1991 54.2 This amendment takes effect from 1st October, 1991. [Section 50] Finance (No. 2) Act, 1991 Provision for deduction of tax at source on interest income from bank deposits, etc. 55. Section 194A of the Income-tax Act provides that the provisions regarding deduction of income-tax at source shall not apply to the income credited or paid in respect of deposits with a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act) or with co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank). Finance (No. 2) Act, 1991 55.1 Instances have come to notice of the unaccounted incomes being deposited in banks in one's own name or benami. Interest on such deposits is not likely to be declared in the income-tax returns. Finance (No. 2) Act, 1991 55.2 With a view to improving 'tax compliance, section 194A of the Income-tax Act has been amended to secure deduction of tax at source from interest on time deposits with the aforesaid banking companies and co-operative societies engaged in carrying on the business of banking. However, the requirement of deduction of tax at source will not apply in the case of interest on time deposits with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank. Further, there will be no requirement of deduction of tax at source if the amount of interest does not exceed two thousand five hundred rupees in a financial year. The "term of time deposits" has been defined to mean deposits, excluding "recurring deposits", repayable on the expiry of fixed periods. Thus, interest on savings bank accounts and recurring deposits accounts is not subject to deduction of tax at source. Finance (No. 2) Act, 1991 55.3 For the purpose of computing the threshold limit of rupees two thousand and five hundred below which there is no requirement of deduction at source, the interest paid or credited between 1st April to 30th September, 1991, will also be taken into account. Finance (No. 2) Act, 1991 55.4 These amendments take effect from 1st October, 1991. [Section 52] Finance (No. 2) Act, 1991 Modification of the tax deduction at source provisions regarding winnings from horse races 56. Under the existing provisions of sub-section (3) of section 10 of the Income-tax Act, casual and non-recurring receipts up to five thousand rupees are not to be included in the total income of a previous year of any person with certain exceptions. As a result, income by way of winnings from races including horse races up to five thousand rupees in a financial year is exempt from income-tax. Such income in excess of Rs. 5,000 is charged to income-tax at the rate of forty per cent. Section 194BB of the Income-tax Act relating to deduction of income-tax at source at the time of payment of such income also provides that tax will be deducted at source only if the amount of income exceeds five thousand rupees. Finance (No. 2) Act, 1991 56.1 The aforesaid provisions have led to widespread practice of splitting of winnings from horse races in order to evade tax thereon. Therefore, sub-section (3) of section 10 has been amended with a view to exclude winnings from races from its ambit. Section 194BB of the Income-tax Act has also been amended in order to bring down the monetary limit below which there is no requirement for deduction of tax at source from rupees five thousand to rupees two thousand and five hundred. Finance (No. 2) Act, 1991 56.2 These amendments take effect from 1st October, 1991. [Sections 5 and 53] Finance (No. 2) Act, 1991 Insertion of a provision for deduction of tax at source from payments in respect of deposits under National Savings Scheme 57. Under the provisions of clause ( a ) of sub-section (2) 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 deduction has been allowed under sub-section (1) together with the interest accrued on such amount is withdrawn in whole or in part in any previous year, the amount of withdrawal is deemed to be the income of the assessee in such year. There are likely to be cases where the fact of the withdrawal of the aforesaid amounts is not disclosed by the assessees in their income-tax returns. Finance (No. 2) Act, 1991 57.1 In order to overcome possible evasion of tax as aforesaid and also to facilitate early collection of tax, a new section 194EE in the Income-tax Act relating to deduction of tax at source has been inserted. Under this section, the person responsible for paying any amount referred to in clause ( a ) of sub-section (2) of section 80CCA shall deduct income-tax thereon at the rate of 20 per cent. However, no such deduction shall be made,— ( a ) where the amount of payment or the aggregate amount of payments in a financial year is less than two thousand five hundred rupees, ( b ) where the payment is made to the heirs of the deceased assessee (depositor), and ( c ) where in the case of a resident individual, the tax on whose estimated total income of the previous year including the amount of withdrawal from National Savings Scheme would be nil and such individual furnishes a declaration in writing to the above effect in the prescribed form and verified in the prescribed manner, to the person responsible for payment. Finance (No. 2) Act, 1991 57.2 The aforesaid amendments take effect from 1st October, 1991. [Sections 54 and 59] Finance (No. 2) Act, 1991 Insertion of a provision for deduction of tax at source from payments to lottery agents 58. The Income-tax Act contains a provision for deduction of tax at source from any income by way of winnings from any lottery or crossword puzzle. The rate of deduction of tax at source at present is forty per cent of such income. While tax is required to be deducted at source in respect of payments to the winner of a lottery or crossword puzzle, there is no requirement under the law for deduction of tax at source from payments, in the nature of bonus or reward (allowed on prize winning tickets, etc.) or for that matter, commission and service charges paid to lottery agents or sellers of lottery tickets with regard to the sales made by them. This being so, there is considerable scope for the lottery agents and sellers of lottery tickets to evade tax on the income arising from receipts by way of bonus or reward (allowed on prize winning tickets) or commission or other remuneration on the sale of lottery tickets. Finance (No. 2) Act, 1991 58.1 Therefore, a new section 194G has been inserted in the Income-tax Act relating to deduction of tax at source. Under this section, the person responsible for paying any income by way of commission, remuneration or prize (by whatever name called) on lottery tickets to any person, who is or has been stocking, distributing, purchasing or selling lottery tickets, shall deduct income-tax thereon at the rate of ten per cent. However, no such deduction is to be made where the amount of the aforesaid income does not exceed one thousand rupees. Finance (No. 2) Act, 1991 58.2 This amendment takes effect from 1st October, 1991. [Section 55] Finance (No. 2) Act, 1991 Insertion of a provision for deduction of tax at source from payments in the nature of commission, brokerage, etc. 59. Income by way of commission (not being insurance commission referred to in section 194D) and brokerage is, at present, not subject to deduction of tax at source. This is one source of income where the incidence of tax evasion is very high. A new section 194H relating to deduction of tax at source has, therefore, been inserted. Under this section, the person responsible for paying any income by way of commission or brokerage for services rendered (not being professional services) or for any services in the course of buying or selling of goods, etc., shall deduct income-tax thereon at the rate of ten per cent. However, no such deduction shall be made where the amount of payment or the aggregate amount of payments, in a financial year, does not exceed two thousand five hundred rupees. The new section will not apply when payments are made by individuals or Hindu undivided families. The expressions "commission or brokerage" and "professional services" have been defined in the Explanation to this section. Finance (No. 2) Act, 1991 59.1 The aforesaid provisions shall not apply to such persons or class or classes of persons as the Central Government may specify in this behalf by notification in the Official Gazette, having regard to the extent of inconvenience caused or likely to be caused to them and being satisfied that it will not be prejudicial to the interests of the revenue. Finance (No. 2) Act, 1991 59.2 For the removal of doubts, it is clarified that the provisions of section 194H shall also apply in cases where commission, etc., is retained by the agent/consignee, etc. Finance (No. 2) Act, 1991 59.3 These amendments take effect from 1st October, 1991. [Section 55] Finance (No. 2) Act, 1991 Exemption from tax deduction at source on income from units of UTI received by charitable trusts, institutions, etc. 60. At present, mutual funds are not required to deduct tax at source from payments by way of distribution of income on their units to persons other than foreign companies. In the case of the Unit Trust of India, the exemption from requirement of deducting tax at source applies only where the payments are to individuals. Charitable or religious trusts and institutions can obtain payments from UTI without deduction of tax at source only by filing a statement in the prescribed form stating that their income is exempt from tax. Finance (No. 2) Act, 1991 60.1 In order to bring UTI on par with other mutual funds, a new sub-section (3) has been inserted in section 196A to secure that no deduction of tax shall be made from any income payable under any scheme of the UTI to any institution or fund where such income is not liable to tax under the provisions of section 10( 22 ), 10( 22A ), 10( 23 ), 10( 23AA ), 10( 23C ), 11 or 12 of the Income-tax Act. Finance (No. 2) Act, 1991 60.2 This amendment takes effect from 1st October, 1991. [Section 57] Finance (No. 2) Act, 1991 Removal of anomalies in section 206 of the Income-tax Act 61. The provisions of section 206 provide that the person responsible for deducting income-tax under Chapter XVII of the Act is to prepare, within the prescribed time after the end of each financial year, and deliver or cause to be delivered the return of such tax deducted at source to the prescribed income-tax authority. Certain doubts were raised on account of the aforesaid language of this section that the prescribed time limit is relatable to the preparation of the return and not its delivery to the prescribed income-tax authority. In order to set these doubts at rest, section 206 has been amended to clarify that the returns under that section are to be prepared and delivered to the prescribed income-tax authority within the time prescribed after the end of each financial year. Finance (No. 2) Act, 1991 61.1 This amendment takes effect from 27th September, 1991, the date on which this Act received the assent of the President. [Section 62] Finance (No. 2) Act, 1991 Interest for deferment of advance tax 62. Section 234C of the Income-tax Act provides for furnishing of interest at the rate of 1.5 per cent per month or part thereof in the case of shortfall in payment of advance tax instalment. Opinion has been expressed that shortfall in payment of advance tax instalment does not include non-payment of advance tax and hence the aforesaid provisions would not apply in cases where no advance tax is paid. Finance (No. 2) Act, 1991 62.1 A clarificatory amendment has, therefore, been made to the effect that the provisions of sub-section (1) of section 234C shall apply even in cases where no advance tax has been paid by the assessee who is liable to pay such tax during the financial year. Finance (No. 2) Act, 1991 62.2 This amendment takes effect retrospectively from 1st April, 1989. [Section 63] Finance (No. 2) Act, 1991 Modification of the provisions relating to interest on refunds. 63. Under the existing provisions of section 244A of the Income-tax Act relating to interest on refunds, the rate of interest payable by the Government is one and one-half per cent for every month or part of a month. Finance (No. 2) Act, 1991 63.1 This section has been amended to reduce the aforesaid rate of interest from one and one-half per cent to one per cent. Finance (No. 2) Act, 1991 63.2 Similar amendments have been made to the corresponding provisions in section 34A of the Wealth-tax Act and section 33A of the Gift-tax Act. Finance (No. 2) Act, 1991 63.3 These amendments take effect from 1st October, 1991. [Sections 64, 80 and 89] Finance (No. 2) Act, 1991 Provision for constitution of Special Benches of the Settlement Commission 64. Under the existing provisions of section 245BA of the Income-tax Act, a Bench of the Income Tax Settlement Commission is to consist of three Members which in certain circumstances may function even with two Members. At present, the Income Tax Settlement Commission is functioning through four Benches, i.e., the principal Bench at Delhi and the additional Benches at Bombay, Calcutta and Madras. There can be cases when the two Benches of Settlement Commission may hold contrary views on a particular issue. Such a situation needs to be avoided in order to provide uniform treatment to the taxpayers who approach the Commission for settlement of their cases. Section 245BA of the Income-tax Act has, therefore, been amended to provide therein that the Chairman of the Income Tax Settlement Commission may, for the disposal of any particular case, constitute a Special Bench consisting of more than three Members. Finance (No. 2) Act, 1991 64.1 Similar amendment has been made to the corresponding provisions in section 22BA of the Wealth-tax Act. Finance (No. 2) Act, 1991 64.2 These amendments take effect from 1st October, 1991. [Sections 65 and 77] Finance (No. 2) Act, 1991 Simplification of procedure subsequent to the receipt of an application by the Settlement Commission. 65. Under the existing provisions of sub-section (1) of section 245D of the Income-tax Act, the Settlement Commission, on receipt of an application under section 245C, has to call for a report from the Commissioner and on the basis of the materials contained in such report and having regard to the nature and circumstances of the case, etc., the Settlement Commission may allow the application to be proceeded with or reject the application. Further, sub-section (1A) of section 245D provides for filing of objection by the Commissioner against proceeding with the application made under section 245C. Finance (No. 2) Act, 1991 65.1 The above provisions cause delay, at times, in the disposal of applications filed before the Settlement Commission under section 245C. In order to expedite the disposal of such applications, sub-section (1) of section 245D has been amended to provide that the Commissioner shall furnish the report within a period of one hundred and twenty days of the receipt of communication from the Settlement Commission in case of all applications made under section 245C on or after the date on which the Finance Act received the assent of the President ( i.e. , 27th September, 1991) and if the Commissioner fails to furnish the report within the said period, the Settlement Commission may make the order on the application without such report. The provisions relating to filing of objection by the Commissioner against proceeding with the application made under section 245C contained in sub-section (1A) of section 245D, have also been omitted. Finance (No. 2) Act, 1991 65.2 Similar amendment has been made to the corresponding provisions in section 22D of the Wealth-tax Act. Finance (No. 2) Act, 1991 65.3 These amendments take effect from 27th September, 1991, i.e., the date on which the Act received the assent of the President. [Sections 66 and 78] Finance (No. 2) Act, 1991 Modification of the provisions regarding the service of the orders of the Appellate Tribunal. 66. Under the existing provisions of sub-section (3) of section 254 of the Income-tax Act, the Appellate Tribunal has to send a copy of any order passed by it to the Commissioner or Chief Commissioner. On the other hand, section 256 of the Income-tax Act provides, that a Commissioner may, within sixty days of receipt of the order of the Appellate Tribunal, by an application, require the Tribunal to refer to the High Court any question of law arising out of such order. Finance (No. 2) Act, 1991 66.1 The reference to Commissioner as well as Chief Commissioner in the provisions of sub-section (3) of section 254 has resulted in some of the reference applications filed by the Department under section 256 being held as time barred by the Appellate Tribunal. This is because the Appellate Tribunal, in these cases, has reckoned the period of filing the application from the date of the service of the order on the Chief Commissioner and not the concerned Commissioner. Finance (No. 2) Act, 1991 66.2 The time lag between the receipt of the order of the Appellate Tribunal by the Chief Commissioner and the concerned Commissioner is unavoidable, especially in mofussil charges where the office of the Chief Commissioner is situated at a place other than that of the Commissioner. Therefore, sub-section (3) of section 254 has been amended to omit reference to the expression "Chief Commissioner" in the aforesaid sub-section. Finance (No. 2) Act, 1991 66.3 This amendment takes effect from 27th September, 1991, i.e., the date the Finance Act received the assent of the President. [Section 67] Finance (No. 2) Act, 1991 Modification of provisions for levy of penalties for certain defaults. 67. Section 272A of the Income-tax Act contains provisions for levy of penalty for various defaults of miscellaneous nature, including the failure to furnish returns or statements, etc. Under the existing provisions of this section, penalty is provided for failure to furnish in due time returns regarding tax deducted at source mentioned in section 206 and for failure to furnish certificate of tax deducted at source as required by section 203. Finance (No. 2) Act, 1991 67.1 Section 206C of the Income-tax Act contains provisions for the collection of tax at source relating to profits and gains from the business of trading in alcoholic liquor, forest produce, etc. Sub-section (5) thereof provides that the person collecting such tax has to furnish to the buyer of goods, i.e., the person on whose behalf the collection of tax is made, a certificate specifying the particulars of tax collected within ten days of such collection. Further, sub-section (5A) of section 206C provides for the furnishing of the half-yearly returns of the tax collected for the period ending on 30th September and 31st March of the financial year within one month from the said dates, to the prescribed income-tax authorities. However, no penalty has been provided in the Income-tax Act in the event of failure of a person to comply with the requirements of the aforesaid provisions of section 206C. Such a penalty is essential to enforce compliance with these provisions. Finance (No. 2) Act, 1991 67.2 The quantum of penalty for cases in which default is of continuous nature is provided in sub-section (2) of section 272A. The minimum and maximum penalty is prescribed at the rate of Rs. 100 and Rs. 200 for every day during which the default continues. Representations have been received that the aforesaid provision creates hardship in cases where the amount of tax deductible for which the return under section 206 is to be furnished is very small and the return could not be furnished in time for various reasons. Finance (No. 2) Act, 1991 67.3 Section 272A of the Income-tax Act has, therefore, been amended to,— ( a ) provide for levy of penalty for failure to furnish the certificate and the return required by section 206C, and ( b ) provide that the amount of penalty leviable for failure to furnish returns under sections 206 and 206C shall not exceed the amount of tax deductible/collectible for which such returns are required to be furnished. Finance (No. 2) Act, 1991 67.4 These amendments come into force with effect from 1st October, 1991. [Section 68] Finance (No. 2) Act, 1991 Modification of the provisions relating to the power to reduce or waive penalty, etc., in certain cases. 68. Under the existing provisions of sub-section (3) of section 273A of the Income-tax Act relating to powers to reduce or waive penalty, etc., in certain cases, where an order has been made under sub-section (1) in favour of any person, whether such order relates to one or more assessment years, he shall not be entitled to any relief under the said section in relation to any other assessment year at any time after the making of such order. Finance (No. 2) Act, 1991 68.1 In order to provide one more opportunity to the taxpayers who have already availed of the relief under this section to disclose fully their income, sub-section (3) of section 273A has been amended to provide that a person in whose favour an order has been made under sub-section (1) of section 273A relating to one or more assessment years on or before the 24th day of July, 1991, shall be entitled to further relief only once under this section in relation to other assessment year or years after the making of such order, if he makes an application to the Chief Commissioner or Commissioner at any time before the 1st day of April, 1992. Finance (No. 2) Act, 1991 68.2 Similar amendment has been made to the corresponding provisions in section 18B of the Wealth-tax Act. Finance (No. 2) Act, 1991 68.3 These amendments take effect from 27th September, 1991, i.e., the date on which the Finance Act received the assent of the President. [Sections 69 and 76] Finance (No. 2) Act, 1991 Modification of provisions relating to offences and prosecutions. 69. Under the existing provisions of sub-section (1) of section 279 of the Income-tax Act, a Director General or a Chief Commissioner or a Commissioner (Appeals) or an appropriate authority may authorise launching of prosecution. By administrative orders of the Board, the functions of the Chief Commissioner, the Director General and the Commissioner have been clearly demarcated. In order to give effect to this, sub-section (1) of section 279 has been amended to provide that prosecution proceedings shall be launched with the previous sanction of the Commissioner or Commissioner (Appeals) or appropriate authority. It is also being provided that the Chief Commissioner or, as the case may be, Director General may issue such instructions or directions to the aforesaid income-tax authorities as he may deem fit in relation to initiation of such proceedings. Finance (No. 2) Act, 1991 69.1 Under the existing provisions of sub-section (2), any offence under Chapter XXII, either before or after the institution of proceedings, may be compounded by— ( i ) the Board or a Chief Commissioner or a Director General authorised by the Board in this behalf in a case where the prosecution would lie at the instance of the Commissioner (Appeals) or the appropriate authority, and ( ii ) Chief Commissioner, Director General or Commissioner, in any other case. Finance (No. 2) Act, 1991 69.2 As the Board has been issuing instructions from time to time laying down guidelines for compounding the offences for the benefit of the other income-tax authorities, and the Chief Commissioner and the Director General exercise supervisory control over the technical functions of the officers of the rank of Commissioners, sub-section (2) of section 279 has been amended to provide for the compounding of all the offences under Chapter XXII, either before or after the institution of proceedings, by the Chief Commissioner or the Director General. Finance (No. 2) Act, 1991 69.3 Similar amendments have been made to the corresponding provisions of section 35-I in the Wealth-tax Act and section 35 in the Gift-tax Act. Finance (No. 2) Act, 1991 69.4 The aforesaid amendments will take effect from 1st October, 1991. Finance (No. 2) Act, 1991 69.5 In the instructions issued by the Board in this regard, it has been specified that compounding of an offence by the income-tax authorities will be done only with the previous approval of the Board. In a judicial pronouncement, it has been held that the Board cannot restrict the statutory powers of the Commissioner under sub-section (2) of section 279 by issuing instructions to the effect that the previous approval of the Board has to be obtained. Finance (No. 2) Act, 1991 69.6 Therefore, an Explanation has been inserted in section 279 which clarifies that the powers of the Board to issue orders, instructions or directions to other income-tax authorities shall include and shall be deemed always to have included the powers to issue instructions or directions (including instructions or directions to obtain the previous approval of the Board) to other income-tax authorities for the proper composition of offences under section 279. Finance (No. 2) Act, 1991 69.7 Similar amendments have been made to the corresponding provisions of section 35-I in the Wealth-tax Act and section 35 in the Gift-tax Act. Finance (No. 2) Act, 1991 69.8 These amendments take effect retrospectively from 1st April, 1962, that is to say, the date of commencement of the Income-tax Act, 1961. [Sections 70, 81 and 90] WEALTH-TAX ACT Finance (No. 2) Act, 1991 Exemption from wealth-tax in respect of deposits held by HUF, etc., in accounts of Public Provident Fund Scheme 70. Under the Public Provident Fund Scheme, as formulated in 1968, only individuals could contribute to the Public Provident Fund. Under an amendment made to the Income-tax Act by the Finance Act, 1968, such contributions were made eligible for deduction under section 80C relating to the deduction in respect of savings. The amount standing to the credit of a taxpayer's account in the Public Provident Fund was also excluded from the net wealth under section 5(1)( xviia ) of the Wealth-tax Act. Finance (No. 2) Act, 1991 70.1 Hindu undivided families (HUF) and association of persons (AOP) or bodies of individuals (BOI) consisting only of husband and wife governed by the Portuguese Civil Code were made eligible to contribute in the Public Provident Fund in 1983. With a view to extending to these categories of taxpayers the same concession as was available to individuals, section 80C was amended in 1983. Corresponding amendment to section 5 of the Wealth-tax Act had, however, remained to be made. Finance (No. 2) Act, 1991 70.2 With a view to removing this anomaly, section 5(1)( xviia ) of the Wealth-tax Act has been amended to provide exemption from wealth-tax in respect of deposits under the Public Provident Fund Scheme held by the HUFs and AOPs or BOIs consisting of husband and wife governed by the Portuguese Civil Code. Finance (No. 2) Act, 1991 70.3 This amendment will apply retrospectively from 1st April, 1984, the date from which the corresponding concession under the Income-tax Act was extended to these categories of taxpayers. [Section 73] Finance (No. 2) Act, 1991 Removal of anomalies regarding reference to High Court 71. Under the existing provisions of section 27 relating to reference to High Court, a reference application can be filed for statement of a case to the High Court with regard to the orders made by the Appellate Tribunal under section 24 or section 26 of the Wealth-tax Act. The Appellate Tribunal can also rectify any of its orders passed under section 24, in view of the provisions of clause ( e ) of sub-section (1) of section 35. Such an order also needs to be brought within the ambit of section 27. Finance (No. 2) Act, 1991 71.1 Section 27 of the Wealth-tax Act has, therefore, been amended by inserting a reference therein to an order made under clause ( e ) of sub-section (1) of section 35. Similar amendment has been made to the corresponding provisions in section 26 of the Gift-tax Act. Finance (No. 2) Act, 1991 71.2 These amendments will take effect from 27th September, 1991, the date on which this Act received the assent of the President. [Sections 79 and 88] Finance (No. 2) Act, 1991 Modification of the provisions relating to valuation of shares in investment companies. 72. For the purposes of levy of wealth-tax, the rules of valuation of assets aim at capturing their market value, or near about, as on the valuation date. A distortion has crept into these rules. When an individual holds any asset in his name, its valuation is at the market value. However, if a group of persons holds assets through an investment company, the taxable value of these assets gets reduced considerably because it is based on the book value and not on the market value. This anomaly has now been removed by amending rule 12 of Schedule III of the Wealth-tax Act to provide that in valuing unquoted shares of an investment company, the break-up value of the share will be determined after revaluing the assets of the company at the value determined in accordance with the rules applicable to that particular asset ( i.e., rules 3 to 19 of Schedule III). Finance (No. 2) Act, 1991 72.1 Further, in order to even out the distortioning effect caused by an upsurge in the share market, rule 9A of Schedule III of the Wealth-tax Act has been amended so that, for valuation of quoted shares, averaging of the market quotation of shares will now be over a period of ten years instead of over a period of five years. Finance (No. 2) Act, 1991 72.2 This amendment will take effect from 1st April, 1992 and will, accordingly apply in relation to assessment year 1992-93 and subsequent years. [Section 83] Finance (No. 2) Act, 1991 Modification in the provisions relating to valuation of assets in the case of closely-held companies. 73. Under the provisions of section 40 of the Finance Act, 1983, wealth-tax at the rate of 2 per cent is levied in the case of closely-held companies on the net value of certain unproductive assets. The value of these assets, for the purpose of levy of wealth-tax is determined at the price which in the opinion of the Wealth-tax Officer or the Valuation Officer these assets would fetch if sold in the open market. This provision was made on the same lines as in the then existing provisions in section 7 of the Wealth-tax Act relating to valuation of assets. The Direct Tax Laws (Amendment) Act, 1989, however, substituted section 7 of the Wealth-tax Act, by a new section under which the value of an asset is determined in accordance with rules of valuation laid down in Schedule III of Wealth-tax Act. Finance (No. 2) Act, 1991 73.1 In order to bring the provisions relating to valuation of assets for the purposes of levy of wealth-tax in the case of closely-held companies, in line with the provisions relating to valuation of assets in other cases under the Wealth-tax Act, section 40 of the Finance Act, 1983 has been amended. Finance (No. 2) Act, 1991 73.2 Under the existing provisions, land held for industrial use by closely held companies is not charged to wealth-tax for a period of two years. This concession has been provided on the consideration that it is generally not feasible to commence construction of a factory building soon after the acquisition of land for that purpose. Finance (No. 2) Act, 1991 73.3 On a parity of reasoning, the same concession has been extended to any land held for constructing a hotel which remains unused for a period of two years from the date of acquisition. Finance (No. 2) Act, 1991 73.4 These amendments will take effect from 1st April, 1992. [Section 125] GIFT-TAx Act Finance (No. 2) Act, 1991 Rationalisation of the provisions relating to deemed gifts. 74. Under the existing provisions of section 4(1)( a ) of the Gift-tax Act, where a property is transferred otherwise than for adequate consideration, the amount by which the market value of the property on the date of transfer exceeds the value of the consideration is deemed to be a gift made by the transferor. Finance (No. 2) Act, 1991 74.1 Since, for the purposes of valuation of gifts, the concept of "market value" has now been replaced by rules contained in Schedule II to the Gift-tax Act for determining the value of each category of gifted assets, section 4(1)( a ) has been amended so that deemed gift shall now be an amount by which the value of the transferred property determined in the manner laid down in Schedule II exceeds the value of the consideration. Finance (No. 2) Act, 1991 74.2 This amendment will take effect from 1st April, 1992 and will, accordingly, apply in relation to the assessment year 1992-93 and subsequent years. [Section 84] Finance (No. 2) Act, 1991 Incentive for investment in NRI Bonds. 75. Under the existing provisions of section 5(1)( iiie ) of the Gift-tax Act, gifts made by the non-resident Indians, to any-relative, of NRI Bonds specified in section 10( 15 )( iid ) of the Income-tax Act, 1961, are exempt from gift-tax. Such bonds are to be notified by the Central Government for the purposes of exemption. One of the conditions for exemption in respect of such bonds is that the gift should be made after a period of three years from the date of purchase. Finance (No. 2) Act, 1991 75.1 To make the new issues of NRI Bonds more attractive, it is considered necessary to do away with the conditions that the gift should be made to a relative and that it should be made after a period of three years from the date of purchase. Accordingly, section 5(1)( iiie ) has been amended to omit both these conditions. Finance (No. 2) Act, 1991 75.2 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 85] INTEREST-TAx Act Finance (No. 2) Act, 1991 Revival of the Interest-tax Act, 1974. 76. As an anti-inflationary measure, the Finance Act has revived the levy of interest-tax which was earlier introduced in 1974 and withdrawn in 1978 and again reintroduced in a modified form in 1980 and withdrawn in 1985. Finance (No. 2) Act, 1991 76.1 The tax will be levied on the gross interest income of "credit institutions", that is, banks, including co-operative societies engaged in the business of banking (not being a co-operative bank catering primarily to farmers and village artisans), Public Financial Institutions, State Financial Corporations and Financial Companies. For this purpose, Financial Companies will mean companies engaged in the business of hire-purchase transactions or financing such transaction; investment companies; house finance companies; companies engaged in the business of providing finance by way of making loans, advances or otherwise, mutual benefit finance companies and companies which carry on business consisting of one or more of the abovementioned activities. Finance (No. 2) Act, 1991 76.2 The interest income chargeable to tax will include commitment charges and discount on promissory notes and bills of exchange. However, interest on deposits made by a bank with the Reserve Bank of India under section 42(1B) of the Reserve Bank of India Act and discount on treasury bills will not form part of the chargeable interest. Interest earned by a credit institution on loans and advances made to another credit institution will also not form part of the chargeable interest. Further, interest on sticky loans will be charged to interest-tax only in the year in which the interest is actually received or credited to profit and loss account, whichever is earlier. Finance (No. 2) Act, 1991 76.3 The tax will be levied on interest income accruing or arising to a credit institution on or after 1st October, 1991. The rate of tax will be three per cent of the gross amount of interest received by the credit institution. Finance (No. 2) Act, 1991 76.4 Interest-tax levied under the Interest-tax Act will be allowed as a deduction in computing the income of the credit institution chargeable to income-tax under the head "Profits and gains of business or profession". Further, credit institutions are empowered to vary the rate of interest on term loans sanctioned before 1st October 1991. Finance (No. 2) Act, 1991 76.5 The credit institutions will pay interest-tax in advance during the financial year immediately preceding the relevant assessment year. The due dates for payment of instalment of advance interest-tax and the amount payable as advance interest-tax, are similar to the corresponding provisions in the Income-tax Act, which will be as under : Due date of instalment Amount payable On or before 15th September not less than 20% of interest-tax payable in advance. On or before 15th December not less than 50% of interest-tax payable in advance as reduced by the amount already paid On or before 15th March whole amount of interest payable in advance as reduced by the amount already paid. Finance (No. 2) Act, 1991 76.6 The income-tax authorities will also perform the functions of interest-tax authorities and they shall exercise powers and perform functions and will be subject to control as income-tax authorities are under the corresponding provision in the Income-tax Act. Finance (No. 2) Act, 1991 76.7 Credit institutions will be required to file return of chargeable interest by 31st December of the relevant assessment year. Finance (No. 2) Act, 1991 76.8 The deduction in respect of the interest-tax payable under the Interest-tax Act in the income-tax assessment, earlier admissible in the assessments of scheduled banks has been extended to credit institutions liable to interest-tax. Finance (No. 2) Act, 1991 76.9 The procedure for assessment, payment of tax on self-assessment, time given for completion of assessment and reassessment, payment of interest for default in furnishing return of chargeable interest for default in payment of interest-tax in advance and for deferment of tax payable in advance are, more or less, on the same lines as in the corresponding provisions of the Income-tax Act. Finance (No. 2) Act, 1991 76.10 Concealment of interest or of furnishing inaccurate particulars of interest will attract penalty of a minimum amount equal to the interest-tax sought to be evaded but which may extend up to three times such amount. Failure to comply with notices will attract penalty of an amount which shall not be less than one thousand rupees but which may extend up to twenty-five thousand rupees. Finance (No. 2) Act, 1991 76.11 Prosecution has been provided for making false statement in any verification of document, for wilful attempt to evade tax and for abetment of these offences. Rigorous imprisonment for not less than three months but which may extend up to 7 years and with fine have been stipulated for these offences. Finance (No. 2) Act, 1991 76.12 These amendments take effect from 1st October, 1991. [Sections 91 to 112] EXPENDITURE-TAx Act Finance (No. 2) Act, 1991 Extension of the scope of expenditure-tax. 77. Under the existing provisions of the Expenditure-tax Act, 1987, a tax at the rate of 20 per cent is levied on expenditure incurred in certain hotels. This tax is charged on expenditure on accommodation, food or drink, and other services incurred in a hotel where the room charge for any unit of accommodation is Rs. 400 or more per day per individual. Finance (No. 2) Act, 1991 77.1 As a further measure for discouraging ostentatious and wasteful expenditure, the scope of expenditure-tax has been extended to expenditure incurred in air-conditioned restaurants. A tax of 15 per cent will be levied on expenditure incurred in, or any payment made to, such restaurant after 30th September, 1991. The tax will, however, not be levied on expenditure incurred by diplomatic personnel and others enjoying diplomatic immunities. However, unlike in the case of expenditure-tax on hotels, there is no exemption from tax in respect of expenditure incurred in a restaurant for which payment is made in foreign exchange. Finance (No. 2) Act, 1991 77.2 The Finance Act has given a very wide meaning to the term "restaurant". Restaurant has been defined as any premises where business of sale of food or drink to the public is carried on and such premises are equipped with or have access to facilities for air-conditioning. Chargeable expenditure in relation to a restaurant means any expenditure or payment in connection with the provisions of food or drink by the restaurant, whether inside or outside, or by any other person in the restaurant. Accordingly, expenditure incurred in all restaurants, confectionery shops, pastry shops, ice cream parlours, etc., which are air-conditioned will be covered by the new tax. Likewise, expenditure incurred in packed food or drinks stalls in air-conditioned super markets will also be covered. The tax will also be liable where such restaurant, etc., provides food outside whether in lawns or as take-aways. However, if the restaurant has a separate non-air-conditioned portion which has an independent counter located in it for recording sales, then the tax liability may not be attracted inasmuch as the food or drink has not been sold from that part of the premises which is air-conditioned or has access to facilities for air-conditioning. Finance (No. 2) Act, 1991 77.3 The existing provision relating to filing of return, assessment, penalty for failure to collect or pay tax will apply to the new tax as they apply to the tax on expenditure in hotels. [Sections 113 to 119] Finance (No. 2) Act, 1991- Explanatory Notes on the provisions relating to Direct Taxes (Circular No. 621)- Corrigendum to para 22.3 - Regarding. In terms of the Finance (No. 2) Act of 1991, section 43D of the Income-tax Act, 1961, came into force with effect from 1 st April, 1991. However, it was inadvertently mentioned in para 22.3 of the board's Circular no. 621, dated 19 th December, 1991, hat this provision would apply in relation to the assessment year 1992-93 and subsequent years. It is clarified that section 43D will take effect from 1 st April, 1991 and will apply in relation to the assessment year 1991-92 and subsequent years. Circular: No. 698, dated 26-12-1994.