Explanatory Notes on the provisions relating to direct taxes - Income Tax - 636/1992

Explanatory Notes on the provisions relating to direct taxes Circular No. 636 Dated 31/8/1992 INTRODUCTION The Finance Act, 1992, as passed by Parliament, received the assent of the President on 14th May, 1992, and has been enacted as Act No. 18 of 1992. This circular explains the substance of the provisions in the Act relating to direct taxes. 2. The Finance Act, 1992 (hereinafter referred to as the Finance Act) has,- amended sections 2, 10, 13, 15, 16, 17, 23, 24, 28, 32, 33AC, 36, 37, 40, 40A, 41, 44AA, 44AB, 45, 47, 49, 54, 54B, 54D, 54E, 54F, 54G, 54H, 55, 64, 71, 78, 80A, 80CCA, 80CCB, 80D, 80DD, 80HHC, 80-IA, 80L, 87, 88, 115A, 115AB, 115D, 139, 143, 154, 155, 158, 187, 189, 193, 194A, 194C, 194G, 194H, 197, 197A, 198 to 200, 202 to 203A, 205, 206C, 211, 234C, 239, 246, 253 and the Second Schedule to the Income-tax Act, 1961; inserted new sections 34A, 71A, 88B, 112, 115AC, 115K, 115L, 115M, 115N, 189A and 196C in the Income-tax Act, 1961; substituted new sections for sections 48, 75, 76, 77, 86, 184, 185, 186 and 267 of the Income-tax Act, 1961; omitted sections 44AC, 53, 67, 182, 183 and 247 of the Income-tax Act, 1961; amended sections 2, 3, 4, 5, 7, 21, 21A, 21AA, 35, 45, Schedule I and Schedule III to the Wealth-tax Act, 1957; inserted new section 35HA in the Wealth-tax Act, 1957 omitted Schedule II of the Wealth-tax Act, 1957 omitted section 13 of the Finance Act, 1960, and section 40 of the Finance Act, 1983 amended sections 2 and 5 of the Interest-tax Act, 1974 amended sections 3, 4, 5 and 7 of the Expenditure-tax Act, 1987. PROVISIONS IN BRIEF 3. The provisions in the Finance Act, 1992, in the sphere of direct taxes relate to the following matters: (i) Prescribing the rate of income-tax on incomes liable to tax for the assessment year 1992-93; the rates at which tax will be deductible at source during the financial year 1992-93 from interest (including interest on securities), dividends, salaries, winnings from lotteries or crossword puzzles, winnings from horse-race, insurance commission and other categories of income liable to deduction of tax at source under the Income-tax Act; rates for computation of ' advance tax " and charging of income-tax on current incomes in certain cases for the financial year 1992-93. (ii) Retaining the provisions for levy of surcharge at the rate of 15 per cent. in the case of companies and at the rate of 12 per cent. in the case of other taxpayers as provided by the Finance (No. 2) Act, 1991, but in the case of non-corporate persons providing for levy of surcharge only. where the total income exceeds one lakh rupees (it may be clarified that the surcharge does not apply in the case of all non-resident taxpayers). (iii) Amendment of the Income-tax Act, 1961, with a view to - 1. widening the tax base by incorporating special provisions for taxation of the income of the persons engaged in retail trade or in certain vocations and modifying the provisions relating to income from house property; 2. clubbing of income of a minor child with that of his parent, with some exceptions; 3. modifying the provisions relating to tax concessions on savings by withdrawing the deductions under sections 80CCA and 80CCB, enlarging the scope of section 88 as also increasing the maximum amount of deduction available thereunder and restricting the amount of maximum deduction under section 80-L from Rs. 13,000 to Rs. 7,000 4. encouraging social welfare by providing for further relief in respect of medical treatment of handicapped dependants, providing higher standard deduction to working women, additional tax rebate to persons who have attained the age of 65 years, liberalising the provisions regarding exemption of perquisite in the form of medical benefits provided by employers in private hospitals, increasing the amount of deduction under section 88 for artists, authors, sportsmen, actors, etc., exempting the amount of compensation received by victims of Bhopal gas tragedy, increasing tax relief in respect of medical insurance premia and exempting the income of co-operative societies promoting the interest of the members of the Scheduled Caste or the Scheduled Tribes; 5. encouraging economic welfare by extending the exemption hitherto available to the employees of the public sector companies on the amount received at the time of their voluntary retirement to the employees of other companies as well; 6. simplifying and rationalizing the provisions of the Income-tax Act, 1961, by enlarging the scope of definition of the expression company in which the public are substantially interested % modifying the definition of the expression rates in force % removing the condition of approval by the Central Government of the contract of service of a foreign technician for the purposes of section 10(6)(viia) and of the agreements under which royalty, etc., is paid to a foreign company for the purposes of sections 10(6A) and 115A, extending the benefit of section 33AC to Government shipping companies, deferment of one-third of the unabsorbed carried forward depreciation and investment allowance in the case of companies, enlarging the definition of the expression " financial corporation " for the purposes of section 36(1)(viii) by including therein a Government company, increasing the limits of allowable business expenses for entertainment, etc., 1 excluding persons assessed on presumptive basis from the requirement of compulsory audit, withdrawing presumptive taxation in respect of certain trades, rationalising the provisions relating to tax concession for exports, amending the definition of "small scale industrial undertaking" for the purposes of section 80-IA of the Income-tax Act, with a view to bringing it in line with the industrial policy of the country, providing exemption in the case of winnings from races including horse races upto rupees two thousand five hundred in a previous year, raising of monetary ceiling of income and turnover for the purpose of maintenance of accounts, omitting the waiver of requirement of furnishing the return of income in certain cases, clarifying that the demand of additional income-tax under section 143(1A) is to be deleted or modified if the additions made earlier are not sustained in an assessment made under section 143(3) and reducing the period for claiming the refund; 7. modifying the provisions relating to charitable trusts and other institutions; 8. streamlining the provisions relating to deduction of tax at source and recovery of taxes; 9. restructuring the taxation of partnership firms 10. restructuring capital gains taxation 11. promoting the capital market by exempting the income of Mutual Funds authorised by the Securities and Exchange Board of India and the Reserve Bank of India and providing tax incentives for investment in bonds or shares of Indian companies issued abroad and purchased in foreign currency; 12. providing exemption on interest payable by Small Industries Development Bank of India on monies borrowed by it from sources outside India, and 13. increasing the fees for filing appeals before Income-tax Appellate Tribunal. (iv) Amendment of Wealth-tax Act, 1957, and omission of section 13 of the Finance Act, 1960, and section 40 of the Finance Act, 1983, with a view to, - 1. abolishing wealth-tax on all assets except residential houses and guest houses, motor-cars, jewellery, bullion, yachts, boats, aircrafts, cash in hand and urban lands; 2. extending the levy of wealth-tax to all companies; 3. increasing the monetary limit for the purposes of levy of wealth-tax from rupees two lakhs and fifty thousand and rupees fifteen lakhs, and 4. clubbing the wealth of a minor child with that of his parent. (v) Amendment of Interest-tax Act, 1974, with a view to,-- 1. exempting co-operative societies engaged in the business of banking from the levy of interest tax, and 2. amending the definition of "financial company" to include therein all residuary non-banking companies. (vi) Amendment of Expenditure Tax Act, 1987, with a view to,-- 1. raising the chargeability criterion to expenditure incurred in hotels where the room charge for any unit of accommodation is Rs. 1,200 or more per day per individual; 2. withdrawing the levy of expenditure tax on air-conditioned restaurants, and 3. withdrawing the exemption granted in respect of payment made in foreign exchange. INCOME-TAX Rate Structure L Rates of income-tax in respect of incomes liable to tax for the assessment year 1992-93 4. In respect of incomes of all categories of taxpayer (corporate as well as non-corporate) liable to tax for the assessment year 1992-93, the rates of income-tax (including surcharge thereon) 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 (No. 2) Act, 1991, for the purposes of computation of advance tax, deduction of tax at source from salaries and charging of tax payable in certain cases during the financial year 1991-92. 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 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. 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 1992-93 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 on securities, interest other than "interest on securities" dividends, insurance commission, winnings from lotteries, crossword puzzles and horse races and income of non-residents (including non-resident Indians) other than salary income. These rates are basically the same as those specified in Part II of the First Schedule to the Finance (No. 2) Act, 1991, for purposes of deduction of tax at source during the financial year 1991-92. 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. 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 1992-93 6. The rates for deduction of tax at source from "Salaries" during the financial year 1992-93 and also for the computation of "advance tax" payable during the year in the case of all categories of taxpayers have been specified in Part III of the First Schedule to the Act. These rates are also applicable for charging income-tax during the financial year 1992-93 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 1992-93, 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. 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 one hundred 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 one hundred 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. 6.2 The salient features of the rates prescribed in the said Part III are indicated in the following paragraphs. IIIA. Individuals, Hindu undivided families, etc. 7. Raising of the exemption limit: The exemption limit in the case of individuals, Hindu undivided families (other than those with one or more members having independent income exceeding the exemption limit), association of persons, etc. has been raised from Rs. 22,000 to 28,000. 7.1 Modification in the rates of income tax: The rate schedule applicable (a) in the case of individuals, Hindu undivided families (other than those having at least one member with independent total income exceeding the exemption limit), association of persons, bodies of individuals and artificial juridical persons and (b) the rate schedule applicable in the case of Hindu undivided families with one or more members having independent income exceeding the exemption limit has been restructured. Tables 1 and 2 below give the rates of income-tax applicable to the aforesaid categories of taxpayers (a) as specified in Part I of the First Schedule to the Act i.e. the rates applicable for the assessment year 1992-93 and (b) as specified in Part III of the First Schedule to the Act i.e. the rates applicable on incomes arising in the financial year 1992-93. Table 1 Slabs of income with rates in the case of individuals, Hindu undivided families (other than those covered by Table 2) associations of persons, bodies of individuals, etc. Income slab Rate of tax for income arising in financial year 1991-92 Income slab Rate of tax for income arising in financial year 1992-93 Up to Rs. 22,000 Nil Up to Rs. 28,000 Nil Rs. 22,001-Rs. 30,000 20% Rs. 28,000-Rs. 50,000 20% Rs. 30,001-Rs. 50,000 30% Rs. 50,001-Rs.1,00,000 30% Rs. 50,001-Rs. 1,00,000 40% Above Rs. 1,00,000 40% Above Rs. 1,00,000 50% Table 2 Slabs of income with rates in the cases of Hindu undivided families having one or more members with independent income exceeding the exemption limit : Income slab Rate of tax for income arising in financial year 1991-92 Income slab Rate of tax for income arising in financial year 1992-93 Up to Rs. 12,000 Nil Up to Rs. 18,000 Nil Rs. 12,001-Rs. 20,000 25% Rs. 18,001-Rs. 1,00,000 30% Rs. 20,001-Rs.40,000 30% Above Rs. 1,00,000 40% Rs. 40,001-Rs. 60,000 40% Rs. 60,001 -Rs. 1,00,000 50% Above Rs. 1,00,000 50% IIIB. Co-operative Societies 8. In the case of co-operative societies, the rates of income-tax have been specified in Paragraph B of Part III of the First Schedule to the Act. These rates are the same as those specified in the corresponding Paragraph of Part I of the First Schedule to the Act. IIIC. Firms 9. In the case of firms, the rates of income-tax has been specified in Paragraph C of Part III of the First Schedule to the Act. Income-tax will be levied in the case of every firm at the rate of forty per cent. on the whole of the total income. The distinction for income-tax rate purposes between firms deriving income mainly from profession and other firms has been deleted. IIID. Local Authorities 10. In the case of local authorities, the rate of income-tax has been specified in Paragraph D of Part III of the First Schedule to the Act. In such cases, income-tax will now be levied at the rate of thirty per cent. instead of at the rate of fifty per cent. as in the past, on the whole of the total income. IIIE. Companies 11. In the case of companies, the rates of income-tax have been specified in Paragraph E of Part III of the First Schedule to the Act. These rates are the same as those specified in the corresponding paragraph of Part 1 of the First Schedule to the Act. IIIF Surcharge 12. Surcharge on income-tax for purposes of the Union was earlier levied at the rate of twelve per cent. in the case of all the categories of resident non-corporate taxpayers having total income exceeding seventy-five thousand rupees. Surcharge at the aforesaid rate, for purposes of the Union, is now leviable on income exceeding one hundred thousand rupees in these cases. In the case of domestic companies, surcharge will, however, continue to be levied at the rate of fifteen per cent. of the amount of income-tax where the income exceeds seventy-five thousand rupees. IV. Partially integrated taxation of non-agricultural income with income derived from agriculture 13. As in the past, the Finance Act provide that in the case of individuals, Hindu undivided families, associations of persons, etc., the net agricultural income is to be taken into account for the computation of "advance tax" and charging of income-tax. The net agricultural income has to 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 year. [Section 2 and the First Schedule to the Finance Act] Enlarging the meaning of definition of the expression "company in which the public are substantially interested" 14. The definition of the expression "company in which the public are substantially interested" is provided in clause (18) of section 2 of the Income-tax Act. The company fulfilling the requirements of any one of sub-clauses of clause (18) of section 2 is treated as a company in which the public are substantially interested and is taxed at a rate lower than the rate applicable to other companies. Under the hitherto existing provision, a company formed by co-operative societies could not be treated as a company in which the public are substantially interested. 14.1 An amendment has been made by the Finance Act, 1992, to insert a new sub-clause (ad) in clause (18) of section 2 of the Income-tax Act, to provide that a company where shares carrying not less than fifty per cent. of the voting power have been allotted unconditionally to, or acquired unconditionally by, and are throughout the relevant previous year held by one or more co-operative societies shall be treated as a "company in which the public are substantially interested". 14.2 This amendment will take effect from 1st April, 1993, and will, accordingly, apply in relation to assessment year 1993-94 and onwards. [Section 3] Modification of the provisions regarding "rates in force" 15. Under the scheme of deduction of tax at source as it hitherto existed, even in cases where a lower rate of tax is provided with regard to an item of income in a tax treaty entered into by the Central Government with the Government of a country outside India, tax had to be deducted at the rate prescribed in the Income-tax Act, or the relevant Finance Act. As a result, in many cases, the amount of tax deducted from sums remitted to the residents of tax treaty partner countries was larger than the final tax liability, thus requiring filing of claims for refund. 15.1 With a view to correcting this position, the Act amends section 2(37A) of the Income-tax Act to secure that deduction of tax at source from payments made to non-residents will be at the rate or rates of tax specified in an agreement entered into by the Central Government under section 90 of the Income-tax Act, or the rate or rates of tax specified in the annual Finance Act, whichever is applicable. 15.2 This amendment takes effect from 1st June, 1992. [Section 3] Provision for income-tax exemption on winnings front horse races 16. The income-tax exemption available to income by way of winnings from races including horse races, to the extent such income does not exceed five thousand rupees, was withdrawn with effect from 1st October, 1991. It had been represented that it is difficult for the recipients of the aforesaid income to keep a record of small amounts received. Therefore, the Act seeks to amend clause (3) of section 10 of Income-tax Act, to provide that winnings from races including horse races will not be included in the total income of a person, to the extent such receipts do not exceed two thousand five hundred rupees in the aggregate in a previous year. 16.1 This amendment takes effect from 1st April, 1992. [Section 4] Modification of the provisions of sections 10(6)(viia), 100M and 115A of the Income-tax Act 17. Section 10(6)(viia) of the Income-tax Act provides for exemption from income-tax of the tax paid by the employer on behalf of the foreign technicians for a maximum period of 48 months from the date of his arrival in India, subject to certain conditions. One of the conditions is that the contract of service of the technician in India is approved by the Central Government. 17.1 Section 10(6A) of the Income-tax Act, provided that where in the case of a foreign company deriving income by way of royalty or fees for technical services received from the Government or an Indian concern in pursuance of an agreement made after the 31st day of March, 1976, and approved by the Central Government, the tax on such income was payable, under the terms of such agreement, by Government or the Indian concern, the tax so paid was not to be included in the total income of the foreign company. 17.2 Section 115A of the Income-tax Act provided that where the total income of a foreign company included any income by way of royalty or fees of technical services received from the Government or an Indian concern in pursuance of an agreement made after the 31st day of March, 1976, and where such agreement was with an Indian concern, the agreement was approved by the Central Government, the income-tax payable on income by way of royalty or fees for technical services was to be thirty per cent. thereof. 17.3 The Government tabled a Statement on Industrial Policy in both the Houses of Parliament on 24th July, 1991. A copy of the statement is annexed to this circular. The statement has substantially liberalised the provisions and simplified the procedures regarding foreign technology agreements. For hiring of foreign technicians, no approval of the Government is henceforth necessary. For foreign testing of indigenous raw materials and products and indigenously developed technology, the powers of the Government have been delegated to the Reserve Bank of India. 17.4 The Act, therefore, amends,-- (i) section 10(6)(viia) of the Income-tax Act, so as to omit the condition of approval by the Central Government of the contract of service of a foreign technician or extension of his employment after a period of 24 months commencing from the date of his arrival in India. (ii) section 10(6A) of the Income-tax Act to provide that the agreement under which royalty or fees for technical services received by a foreign company, should either be approved by the Central Government or where the agreement relates to a matter included in the Industrial Policy, for the time being in force, of the Government of India, such agreement is in accordance with that policy, and (iii) section 115A of the Income-tax Act to provide that the agreement under which royalty or fees for technical services received by a foreign company from an Indian concern, should be either approved by the Central Government or where the agreement relates to a matter included in the Industrial Policy, for the time being in force, of the Government of India, such agreement is in accordance with that policy. 17.5 These amendments take effect from 1st June, 1992. [Sections 4 and 5] Modification of the provisions relating to exemption in respect of payments under voluntary retirement schemes 18. Section 10(10C) of the Income-tax Act, as it existed prior to 1 st June, 1992, exempted from income-tax any payment received by an employee of a public sector company at the time of his voluntary retirement in accordance with any scheme which the Central Government may, having regard to the economic viability of such company and other relevant circumstances, approved in this behalf. This exemption is available to any employee, whether a workman or an executive. 18.1 With a view to making themselves economically viable, a number of companies in the private sector have formulated schemes for payment of lump sum compensation and some other terminal benefits to the workmen and the executives on voluntary retirement. It had been represented that the monetary benefit of the compensation received got diluted as the compensation was subjected to income-tax. 18.2 The Act, therefore, amends section 10(10C) of the Income-tax Act to provide income-tax exemption to any amount received by an employee of a public sector company or of any other company at the time of his voluntary retirement in accordance with any scheme or schemes of voluntary retirement. The schemes of the said companies are to be in accordance with the guidelines prescribed which may include the criteria of economic viability. In the case of companies other than public sector companies, the schemes are to be approved by the Chief Commissioner or Director-General. 18.3 This amendment takes effect from 1st April, 1993, and, accordingly, applies to assessment year 1993-94 and subsequent assessment years. [Section 4] Provision for exemption from income-tax on interest payable by SIDBI on Moneys borrowed by it front sources outside India 19. Section 10(15)(iv)(d) of the Income-tax Act provides that interest payable by certain financial institutions on moneys borrowed by them from sources outside India, to the extent to which such interest does not exceed the amount of interest calculated at the rate approved by the Central Government in this behalf, having regard to the terms of the loan and its repayment, shall not be included in the total income of the person. The effect of the aforesaid provision is that the cost of borrowing in the case of the financial institutions specified in the said item is reduced. 19.1 The Act amends section 10(15)(iv)(d) of the Income-tax Act with a view to including Small Industries Development Bank of India among the financial institutions mentioned in the said item. 19.2 This amendment takes effect retrospectively from 1st April, 1992. [Section 4] Enlarging the scope of the provision relating to exemption of income of specified Mutual Funds 20. Section 10(23D) of the Income-tax Act hitherto provided exemption from income-tax to any of such Mutual Funds set up by a public sector bank or a financial institution as the Central Government may by notification in the Official Gazette, specify in this behalf. Government had agreed in principle to allow Mutual Funds to be set up in the joint sector and the private sector. With a view to providing exemption from income-tax to the income of such Mutual Funds, the Act enlarges the scope of clause (23D) of section 10 by including therein the Mutual Funds authorised by the Securities and Exchange Board of India and the Reserve Bank of India. The expression "Securities and Exchange Board of India has been defined for the purposes of this clause. 20.1 This amendment takes effect from 1st April, 1993, and will, accordingly, apply in relation to assessment year 1993-94 and subsequent assessment years. [Section 4] I ncome-tax exemption to co-operative societies promoting the interests of the members of the Scheduled Castes and the Scheduled Tribes 21. Section 10(26B) of the Income-tax Act provides for income-tax exemption in respect of income derived by any body, institution or association wholly financed by the Central or State Government where such body, institution or association has been set up for promoting the interests of the members of the Scheduled Castes or Scheduled Tribes. Certain co-operative societies which are so set up, however, did not get this concession as these were not wholly financed by the Government. In order to provide income-tax exemption to the income of such cooperative societies, the Act inserts a new clause (27) in section 10 of the Income-tax Act to provide that any income of such a co-operative society whose membership consists only of other co-operative societies and such society is financed by the members thereof and the Government, will be exempt from income-tax. 21.1 This amendment takes effect retrospectively from 1st April, 1989, and will, accordingly, apply, in relation to assessment year 1989-90 and subsequent assessment years. [Section 4] Exemption of compensation received by victims of Bhopal Gas Leak Disaster 22. Pursuant to the decision of the Supreme Court, victims of Bhopal Gas Leak Disaster are to be paid compensation in accordance with the provisions of the Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985. With a view to providing relief to these persons, a new clause (10BB) has been inserted by the Finance Act, 1992, in section 10 of the Income-tax Act, providing for exemption from income-tax to such compensation. However, compensation received by an assessee in respect of an expenditure which has been incurred and allowed as a deduction from taxable income, will not be exempt from income-tax. 22.1 This clause comes into effect from 1st April, 1992, and, accordingly, applies in relation to assessment year 1992-93 and subsequent assessment years. [Section 4] Provisions relating to charitable trusts and other institutions 23. Under the existing provisions of section 13(1)(d) of the Income-tax Act, exemption from income-tax provided to a charitable or religious trust or institution will be forfeited if any funds of the trust or institution are invested or deposited after 28th February, 1983, otherwise than in any one or more of the forms or modes specified in section 11(5) of the Act. The specified forms or modes of investment, generally, are Government securities, units of the Unit. Trust of India, bonds issued by certain financial corporations, deposits in Post Office Savings Bank or in any scheduled bank or immovable property other than plant or machinery. However, the proviso to section 13(1)(d) provided that the aforesaid provisions shall not apply to,-- (i) any assets held by the trust or institution where such assets form part of the corpus of the trust or institution as on the 1st day of June, 1973, and such assets were not purchased by the trust or institution or acquired by it by conversion of, or in exchange for, any other asset, (ii) any debentures of a company or a corporation acquired before 1st March, 1983. So far as the assets not conforming to the provisions of section 11(5) are concerned, the proviso to section 13(1)(d) provided that holding such assets would not make the trust or institution lose tax exemption if such assets were disposed of or converted into permissible investments within one year from the end of the financial year in which such assets were received or 31st March, 1992, whichever was later. 23.1 Certain anomalies and hardships arising out of the requirements of the aforesaid investment pattern had been brought to the notice of the Government. With a view to removing these, the Act, (1) amends clause (i) in the proviso to section 13(1)(d) to provide that the provisions of section 13(1)(d) shall not apply in relation to assets held by the trust or institution where such assets form part of the corpus of the trust or institution as on the 1st day of June, 1973, irrespective of the fact whether such assets are held originally by the trust or institution or they are acquired by conversion or exchange of the original assets or purchased out of the sale proceeds on transfer of the original assets, as the case may be, (ii) inserts a new clause (ia) in the proviso to section 13(1)(d) so that it shall not apply in relation to any accretion to the assets, being shares of a company, forming part of the corpus of the trust or institution, as on 1st June, 1973, where such accretion arises by way of allotment of bonus shares. (iii) amends clause (iia) in the proviso to section 13(1)(d) to provide that where an asset, other than an investment or deposit mentioned in section 11(5), is held by the trust or institution, and can be disinvested by 31st day of March, 1992, it can now be disinvested by 31st day of March, 1993. 23.2 The amendments at (i) and (ii) above take effect retrospectively from 1st April, 1983, and the amendment at (ill) takes effect from 1st April, 1992. 23.3 Under the provisions of section 10(21), section 10(23), and clauses (iv) and (v) of section 10(23C) of the Income-tax Act, the notified scientific research associations, the notified sports associations or institutions, the notified charitable funds or institutions and the notified wholly public religious and charitable trusts or institutions are required to invest or deposit their funds in any one or more of the forms and modes specified in section 11(5) of the Income-tax Act. If there is a violation of the aforesaid requirement, the exemption from income-tax is denied to such associations, institutions, trusts, etc. It is also provided that where the funds are not so invested, such investments are to be converted into permissible investments by 30th March, 1992. 23.4 It had been represented that whereas the trusts or institutions which claim exemption under section 11 are allowed to retain the assets forming part of their corpus as on 1st June, 1973, or debentures of a company or corporation acquired before 1st March, 1983, this facility was not available to the associations, institutions, trusts, etc. referred to in sections 10(21), 10(23) and clauses (iv) and (v) of section 10(23C). 23.5 The Act, therefore, amends the aforesaid provisions to provide that in case of the associations, institutions, funds or trusts referred to in sections 10(21), 10(23) and clauses (iv) and (v) of section 10(23C), the requirement of investment of funds in any one or more of the forms or modes specified in section 11(5) will not be insisted upon in certain cases. It provides that (i) funds held by these associations or institutions, etc., and forming part of their corpus as on 1st June, 1973, and any accretion thereto by way of bonus shares, and (ii) debentures acquired by them before 1st March, 1983, are not to be disinvested. 23.6 These amendments take effect retrospectively from 1st April, 1990. 23.7 Further, the period of disinvestment of funds held otherwise than in the forms or modes specified in section 11(5) has been extended from 30th March, 1992 to 30th March, 1993. 23.8 This amendment takes effect from 1st April, 1992. [Sections 4 and 5] Tax incentive to working women 24. Under section 16 of the Income-tax Act, a standard deduction of a sum equal to 33A/3 per cent. of the salary or twelve thousand rupees, whichever is less, is allowed in computing the income under the head Salaries 24.1 With a view to giving an incentive to women to take up jobs and to improve their socio-economic conditions, the Finance Act seeks to provide for a higher standard deduction of fifteen thousand rupees in respect of working women whose total income before making the standard deduction does not exceed seventy-five thousand rupees. 24.2 This amendment will take effect from 1st April, 1993, and will, accordingly, apply in relation to the assessment year 1993-94 and subsequent years. [Section 7] Exemption of perquisite in the form of medical benefits provided by employer in private hospitals 25. For the purpose of computing income under the head "Salaries", the taxable salary includes the value of any benefit or amenity granted free of charge or at concessional rate by the employer. Section 17 of the Income-fax Act, however, provides for exemption from tax in respect of perquisite in the form of medical facilities provided by the employer. Exemption from tax is available, inter alia, in respect of reimbursement, by the employer, of expenditure incurred by the employee in hospitals, dispensaries, etc. maintained by the Government, local authority, or in a hospital approved by the Government for the purposes of medical treatment of its employees. 25.1 The restriction that, for claiming exemption, medical treatment should be in a hospital approved by the Government leaves out all cases where the treatment has been undergone in a hospital not so approved. With a view to mitigating this hardship, the Finance Act has, liberalised the provisions relating to medical benefit provided by the employer in case of hospitalisation. The exemption has now been extended to expenses incurred by the employer on medical treatment of the employee or his family in hospitals other than those approved by the Government for the medical treatment of its employees. However, this concession will be allowed only where the payment in respect of the expenditure is made directly by the employer to the hospital and in respect of specified diseases or ailments which have been prescribed in the Income-tax Rules. The hospitals and nursing homes, treatment in which the concessions will be extended to, will be those approved by the Chief Commissioner of Income-tax in accordance with prescribed guidelines. 25.2 Under the existing provisions of section 17 of the Income-tax Act, there is a restriction that the expenditure on travel abroad for medical treatment would be exempt only in the case of employees whose gross total income is up to Rs. 1,00,000. With a view to extending the scope of the exemption to a larger number of employees, this limit has been raised to employees whose gross total income is up to Rs. 2,00,000. 25.3 These amendments will take effect from 1st April, 1993, and will, accordingly, apply in relation to assessment year 1993-94 and subsequent years. [Section 8] Modifications relating to house property income 26. Under the provisions of the second proviso to sub-section (1) of section 23 of the Income-tax Act, a deduction of Rs. 3,600 is allowed from the annual value of a house property, in respect of new residential units. The deduction is allowed for a period of five years from the date of completion of such unit. 26.1 As part of a package which includes reduction in the rate of personal taxation and raising of the exemption limit, the provisions relating to house property income have been rationalised. The Finance Act has, accordingly, amended section 23 of the Income-tax Act in order to provide that no deduction will be allowed for new residential units completed after 31st March, 1992. 26.2 Under the provisions of section 24 of the Income-tax Act, deduction is allowed at the rate of 1/6th of the "annual value" towards repair of the house property. Another item under section 24 relates to deduction in respect of collection charges. This deduction is based on actuals subject to a maximum of 6% of the "annual value" of the property. In practice, however, many taxpayers claim deduction of the entire 6% of the "annual value' as, collection charges, irrespective of the actual expenditure incurred. This leads to avoidable disputes and administrative work, without any significant revenue implication. 26.3 With a view to rationalising and simplifying the aforesaid deductions, the Finance Act has. provided for a composite standard deduction, both for repair of the house property and for collection of rent of an amount equal to 1/5th of the "annual value" of the property. 26.4 Section 2.4 of the Income-tax Act also provides for a deduction in respect of the current interest liability on money borrowed for the acquisition, construction, repair, renewal or construction of the property. It has been noticed that in many cases, taxpayers show negative income from house property, largely because of the deduction allowed in respect of interest on money borrowed. This negative income is then set off against income from other sources such as salaries, business or professional income etc. 26.5 The Finance Act has amended the provisions in Chapter VI of the Income-tax Act, relating to carry forward and set off, with a view to providing. that the loss from house property will not be allowed to be set off against income under any other head of income. Further, the carry forward of loss of any year from house property will be allowed to be set off only against income from house property of subsequent years. 26.6 These amendments will take effect from 1st April, 1993, and will, accordingly apply in relation to assessment year 1993-94 and subsequent years. [Sections 9, 10, 37 and 38] Extension of benefit of section 33AC to Government shipping companies 27. Under the provisions of section 33AC of the Income-tax Act, before being amended by the Finance Act, a deduction of an amount credited to a reserve account for the purpose of utilisation in a specified manner was allowed, subject to certain conditions, in case of a public company formed and registered in India with the main object of carrying on the business of operation of ships. This deduction was not available to Government companies. 27.1 An amendment has been made to section 33AC which extends the benefit of deduction to a Government company as defined in section 617 of the Companies Act, 1956. 27.2 This amendment will take effect from 1st April, 1993, and, will, accordingly, apply in relation to the assessment year 1993-94 and subsequent assessment years. [Section 12] Deferment of unabsorbed carried forward depreciation and investment allowance 28. Under the existing provisions of the Income-tax Act, unabsorbed depreciation allowance and unabsorbed investment allowance are allowed as deductions in the computation of income from business or profession. 28.1 The Finance Act, 1992, has introduced a new section 34A in the Income-tax Act, to provide that in the case of domestic companies, only sixty-six and two-thirds per cent. of unabsorbed depreciation allowance or unabsorbed investment allowance or the aggregate of such allowances carried forward from earlier years shall be allowed to be deducted from the business income and the balance shall be carried forward and allowed in the subsequent years until the same is absorbed. However, to ensure that marginal cases are not affected, the operation of this amendment has been restricted only to cases where such brought forward allowance is Rs. 1,00,000 or more. 28.2 The provisions relating to charging of interest under sections 234B and 234C of the Income-tax Act will not apply to any shortfall in the payment of any tax due on the assessed income or returned income where such shortfall is due to the restriction on the quantum of unabsorbed depreciation or investment allowance and the assessee has made good the shortfall by paying the amount before filing the return of income under section 139(1). 28.3 This section will take effect from 1st April, 1992, and will accordingly, apply in relation to the assessment year 1992-93 only. [Section 13] Enlarging the meaning of "financial corporation to include "Government); company" 29. Under the provisions of clause (viii) of sub-section (1) of section 36 of the Income-tax Act, a deduction in respect of a special reserve of an. amount not exceeding 40% of the total income, as stipulated therein, carried to such reserve account is allowed, within specified limits, inter alia, to a financial corporation engaged in providing long-term finance for industrial or agricultural development. 29.1 The term "financial corporation" has been defined in the Explanation to the aforesaid clause to include a public company. It has been provided in clause (b) of the Explanation that public company shall have the meaning assigned to it in section 3 of the Companies Act, 1956. As the expression " public company" does not include "Government company", the deduction was not available to Government companies. The Finance Act has enlarged the definition of "financial corporation" so as to include "Government company" as defined in section 617 of the Companies Act, 1956, to become eligible for deduction under clause (viii) of sub-section (1) of section 36. 29.2 This amendment will take effect retrospectively from 1st April, 1987, and, will, accordingly, apply in relation to assessment year 1987-88 and subsequent assessment years. [Section 14] Increasing the limit of allowable business expenses 30. Under section 37 of the Income-tax Act, there were restrictions on the quantum of expenses allowable as entertainment expenditure. Similarly, there were restrictions under sub-section (12) of section 40A of the Income-tax Act, on the admissible expenditure for services in connection with any proceeding under the Income-tax Act. 30.1 The Finance Act has liberalised the allowable deductions as under:-- (a) In respect of entertainment expenditure, actual expenditure up to Rs. 10,000 and 50% of the balance. This has been done by substitution of a new sub-section (2) for sub-sections (2) and (2A) in section 37 of the Income-tax Act; (b) In respect of expenditure for services in connection with any (c) any proceeding under the Income-tax Act, the actual expenses. This has been achieved by omission of sub-section (12) of section 40A. Further, In case of articles of gifts, the income-tax rules have been amended by the Income-tax (Tenth Amendment) Rules, 1992, to provide that in respect of each article of gift 100% of the actual expenses up to Rs. 1,000 will be allowed and if the cost is more than Rs. 1,000, then 50% of the balance. Similarly, in case of hotel expense the income-tax rules have also been amended and it has been provided that actual expenses up to Rs. 1,500 per day will be allowed and if the expenditure exceeds Rs. 1,500, 75% of the balance will be allowed. 30.2 The operation of these provisions will take effect from 1st April, 1993, and will, accordingly, apply for the assessment year 1993-94 and onwards. [Sections 15 and 17] Provision for taxing of benefit by way of remission or cessation of trading liability in the hands of recipient 31. Under the provisions of sub-section (1) of section 41 of the Income tax Act, where an assessee who has been allowed deduction in respect of any loss, expenditure or trading liability in any year obtains any amount in respect of such loss or expenditure or any benefit in respect of trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him is deemed to be profits and gains of business or profession. However, it has been held by Courts that such an amount or benefit can be charged to tax only if the assessee who receives the amount or benefit is the same person who was allowed the deduction earlier. 31.2 With a view to ensuring that there is no loss of revenue and undue enrichment, sub-section (1) of section 41 has been substituted by the Finance Act, 1992, so as to bring to tax the amount or benefit, as the case may be, also in cases where the recipient is a successor in business and is other than the person who- was allowed the deduction earlier. 31.3 This provision will take effect from 1st April, 1993, and, will, accordingly, apply for the assessment year 1993-94 and subsequent assessment years. [Section 18] Raising of monetary ceiling of income and turnover for the purpose of maintenance of accounts 32. Under the provisions of section 44AA of the Income-tax Act, every person carrying on business or profession other than the profession specified in sub-section (1) thereof (legal, medical, engineering profession etc.) is to keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of the Income-tax Act, if, - (i) his income from business or profession exceeds Rs. 25,000 or his total sales, turnover or gross receipts exceed rupees two hundred and fifty thousand in any one of the three years immediately preceding the previous year, or (ii) his income from business or profession, where the business or profession is newly set up in any previous year, is likely to exceed twenty-five thousand rupees or his total sales, turnover or gross receipts are likely to exceed two hundred and fifty thousand rupees, during such previous year. 32.1 The aforesaid monetary limits were prescribed in 1976. As a measure of rationalisation, the Finance Act has amended section 44AA of the Income-tax Act, to provide that the monetary limits of income and total sales, etc., specified in sub-section (2) of section 44AA of the Income-tax Act, shall be revised from twenty-five thousand rupees to forty thousand rupees and from two hundred and fifty thousand rupees to five hundred thousand rupees respectively. 32.2 This amendment will take effect from 1st April, 1993, and will, accordingly, apply in relation to the assessment year 1993-94 and subsequent assessment years. [Section 19] Exclusion of persons assessed on presumptive basis from requirement of compulsory audit 33. Under section 44AB of the Income-tax Act, every person carrying on business or profession is required to get his accounts audited, if his total sales in business or gross receipts of profession exceed Rs. 40 lakhs or Rs. 10 lakhs respectively. 33.1 The purpose of compulsory audit under the provisions of section 44AB is to ensure that the true income is reflected in the return of income through the books of account, duly audited. However, under sections 44AC, 44B, 44BB, 44BBA and 44BBB, income chargeable to tax is determined on presumptive basis and the provisions of section 28 to 43C do not apply. Accordingly, assessees deriving income of the nature referred to in the aforesaid provisions have been excluded from the purview of compulsory audit. 33.2 The amendment will take effect retrospectively from 1st April, 1985, and, will, accordingly, apply to assessment year 1985-86 and subsequent assessment years. [Section 20] Withdrawal of Presumptive tax in respect of certain trades 34. Under section 44AC of the Income-tax Act, for computing profits and gains of persons engaged in the trading of country liquor, timber obtained under forest lease, timber obtained by any other mode other than under a forest lease and any other forest produce not being timber, a prescribed percentage of the purchase price is deemed to be the profit in respect of trading in such specified goods. 34.1 Having regard to the controversy on the interpretation of the provisions of section 44AC and the administrative difficulties in the implementation of this provision, this section has been deleted through the Finance Act. 34.2 This amendment takes effect from 1st April, 1993, and accordingly, applies in relation to the assessment year 1993-94 and subsequent years. 34.3 However, section 206C providing for collection of tax at source in respect of these cases shall continue to remain in force with certain amendments consequential to the deletion of section 44AC of the Income-tax Act. The amended section takes effect from 1st April, 1992. [Sections 21 and 79] Taxation of capital gains 35. The Finance Act has recast the system of taxation of long-term capital gains. At present, an asset is considered to be long-term if it is held for a period of more than 36 months except for shares of a company, where the period of holding should be more than 12 months. This definition continues to be the same in the changed format. In the scheme prior to 1-4-1992, a basic deduction of Rs. 15,000 and a fixed percentage of the balance amount of capital gains was allowed as deduction under section 48(2). The percentage depended on the nature of the asset and the status of the assessee, but was unrelated to the length of the period of holding. This deduction was intended to give a rough and ready relief for inflation, to counteract bunching of profits and to exclude from the tax net capital gains which were relatively small. As an additional measure to offset the effect of inflation, all appreciation before 1-4-1974 in the value of assets was excluded from taxation. A fair method of allowing relief for these factors is to link it to the period of holding. For this purpose, the cost of acquisition of and the cost of improvement to the asset are to be inflated to arrive at the indexed cost of acquisition and indexed cost of improvement and then deduct these amounts from the sale consideration to arrive at the long-term capital gains. The cut off date for assets held for purposes of indexation is taken as 1-4-1981. Accordingly, for an asset acquired before this date, its value as on 1-4-1981, will be taken for indexation. The cost of improvement after this date only will be taken into account for indexation. 35.1 As per the revised format of section 48, the long-term capital gains arising out of sale of a long-term asset is to be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts:- (i) Expenditure incurred wholly and exclusively in connection with such transfer; (ii) The indexed cost of acquisition of the asset and the indexed cost of any improvement thereto; 35.2 "Indexed cost of acquisition" means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the first day of April, 1981, whichever is later. Similarly, "Indexed cost of any improvement " means an amount which bears to the cost of improvement the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the year in which the improvement to the asset took place. "Cost Inflation Index" for any year means such index as the Central Government may, having regard to 75% of average rise in the Consumer Price Index for urban non-manual employees for that year, by notification in the official gazette, specify in this behalf. The Cost Inflation Index for the financial years 1981-82 to 1992-93 have been notified as under Financial Year Cost Inflation Index 1981-82 100 1982-83 109 1983-84 116 1984-85 125 1985-86 133 1986-87 140 1987-88 150 1988-89 161 1989-90 172 1990-91 182 1991-92 199 1992-93 223 35.3 Under the provisos to section 48(1)(a), non-resident Indians were given protection from fluctuation in the rupee value in terms of the foreign currency utilised for the purpose of shares or debentures while computing capital gains on transfer of assets being such shares or debentures. Under the first proviso to section 48, the protection has now been extended to all non-residents in respect of long-term capital gains arising, out of transfer of shares and debentures originally purchased by utilising foreign currency. However, in the earlier scheme, the non-resident Indians were allowed further deduction under section 48(2). As protection from fluctuation in rupee value in terms of foreign currency ensures protection from inflation, further relief in terms of indexation will not be available to non-residents who will enjoy the concession available in the first proviso to section 48. 35.4 These amendments come into force with effect from 1st April, 1993, and, accordingly, will apply to assessment years 1993-94 and subsequent years. 35.5 The Cost Inflation Index is to be prescribed for each year starting with 1981-82. For this purpose, it has been provided in section 49 that in respect of assets acquired before 1-4-1981, for the purpose of indexation, the market value as on 1-4-1981 will be taken for indexation in place of cost of acquisition. However, the assessee will have the option of substituting the cost of acquisition to be the value as on 1-4-1981. For example, if an asset has been purchased for Rs. 50,000 before 1-4-1981 and its market value as on 1-4-1981 is Rs. 80,000 then Rs. 80,000 will be taken for indexation. In another case if the purchase value is Rs. 80,000 (prior to 1-4-1981) and the market value as on 1-4-1981 is Rs. 70,000, then the assessee may opt for Rs. 80,000 being considered as the value as on 1-4-1981, for the purpose of indexation. Since the market value as on 1-4-1981 is taken into account for indexation, the cost of improvement to the asset prior to this date will be ignored. Only the cost of improvements taking place on or after this date will be taken into account for indexation. 35.6 For the financial year 1981-82, Cost Inflation Index is 100 and the C. I.I. for each subsequent year would be determined in such a way that 75% of the rise in Consumer Price Index for urban non-manual employees would be reflected in the rise in C.I.I. It would be seen that the date of transfer of an asset would be immaterial as long as it is within a particular financial year. That means that transfers of assets in any part of the year would be subject to indexation using the same C.I.I. as applicable to an asset transferred on 1st April of the year. This has the effect of all the assets transferred during the year to be deemed to be sold on the first day of the year. 35.7 These amendments come into force with effect from 1st April, 1993, and accordingly, will apply to assessment years 1993-94 and subsequent years. 35.8 The provisions of section 53 have been omitted with effect from 1-4 1993, and, accordingly, will not apply for assessment years 1993-94 onwards. Under the existing. provisions long-term capital gains arising to an individual or a Hindu undivided family from sale of a residential house is fully exempt if the full value of consideration is up to Rs. 2,00,000. If it exceeds Rs. 2,00,000 then a proportionate amount out of the capital gains is exempt from lax. As a measure of rationalisation, this provision has been withdrawn from assessment year 1993-94. 35.9 Exemption from tax in respect of long-term capital gains is allowed under section 54E to the extent the net consideration is invested or deposited in any specified asset prescribed in that section. As a measure of rationalisation and simplification, this provision also stands withdrawn from assessment year 1993-94. The provisions of section 54E will be available for all sales made before 1-4-1992, if the whole or any part of the net consideration is invested in specified assets within six months after the date of such transfer. 35.10 According to the second proviso to section 54E(1), as it stood before 1-4-1992, where long-term capital gains arises out of compulsory acquisition of an asset under any law and there is any delay in receipt of the compensation, then the period of six months for depositing or investing in specified assets was to be reckoned from the date immediately following the date on which such compensation was received by the assessee. However, as per the amendment to this proviso, the reckoning of six months from the date immediately following the date on which such compensation was received will be allowed only in respect of compensation received before 1-4-1992. The benefit of section 54E will not be available in respect of compensation received after 31-3-1992. 35.11 An assessee could invest or deposit in any specified assets from out of the amount received as advance money and get the benefit of exemption under section 54E as and when long-term capital gains arise on transfer of the capital asset. It may so happen that some assessees may have invested or deposited in the specified assets as prescribed in section 54E from out of advance money received before the presentation of the budget. In order to give protection to such deposits or investments, it has been provided that these investments or deposits will be eligible for the purpose of exemption from tax under section 54E whenever long-term capital gains arise out of transfer of the capital asset on a date after 31-3-1992, provided such investments had been made on or before 29-2-1992. Thus, the provisions of section 54E will be enforced in respect of only such cases where the assessee has made deposits or investments in specified assets from out of the advance money received on or before 29-2-1992. 35.12 These amendments will come into force with effect from 1-4-1992 and will accordingly apply to assessment year 1992-93 and subsequent years. 35.13 Section 47 prescribes certain transactions which are not regarded as transfers for the purpose of computing capital gains. One of these is contained in clause (vi) which refers to any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company, if the amalgamated company is an Indian company. It has been represented that, in the case foreign companies, which have invested in Indian companies, a situation may arise where there may be transfer of shares of the Indian company from one foreign company to another by way of amalgamation. The Finance Act has, therefore, inserted a new clause (via) in section 47 providing for one more situation where there is no transfer, in a scheme of amalgamation, of a capital asset, being a share or shares held in an Indian company, by a foreign company to another foreign company. However, the following conditions are to be fulfilled :-- (a) At least 25% of the shareholders of the amalgamating foreign company should continue to remain shareholders of the amalgamated foreign company. (b) Such transfer, in a scheme of amalgamation, does not attract tax on capital gains in the country, in which the amalgamating company is incorporated. A consequential amendment has been made in section 49(1)(iii)(e) that in a case where the amalgamated foreign company comes to hold shares in an Indian company by way of transfer from the amalgamating foreign company, the cost of the capital asset shall be deemed to be the cost for which the amalgamating company acquired it. 35.14 These amendments come into force with effect from 1st April, 1993, and will accordingly apply in relation to the assessment year 1993-94 and subsequent years. 35.15 Long-term capital gains is to be taxed separately at a flat rate and other incomes at appropriate slab rates prescribed in the Finance Act. For an assessee having income from long-term capital gains, the manner of taxation has been prescribed in a new section 112 inserted through the Finance Act, 1992. The rates of taxation for long-term capital gains are as under : S.No Assessee Rate of tax 1. ( a ) In the case of a company, except in a situation referred to in ( b ) 40% ( b ) For venture capital company in relation to long-term capital gains arising from the transfer of equity shares of venture capital undertaking 20% 2 In the case of an individual or a Hindu undivided family 20% 3. In any other case 30% The terms "venture capital company" and "venture capital undertakings" have been defined in the Explanation to sub-section (1) of section 112. 35.16 The total amount of tax payable by an assessee will be the amount of tax on. long-term capital gains calculated at rates stated above and the amount of income-tax payable on the total income without taking into consideration long-term capital gains. Where the assessee has income from long-term capital gains, deduction under Chapter VI-A shall be allowed on the gross total income without taking into consideration the long-term capital gains. Further, rebate under section 88 will be allowed only from ' the income-tax payable on the total income without including in it the long-term capital gains. Surcharge is payable on the capital gains tax on the same lines as that on other income. 35.17 These amendments come into force with effect from 1st April, 1993, and will, accordingly, apply in relation to assessment year 1993-94 and subsequent years. 35.18 As a consequence of recasting of the provisions of section 48, the Explanation to subsection (2) to each of sections 54, 54B, 54D, 54G and Explanation to sub-section (4) of section 54F have been omitted. These explanations provide for disallowance of the initial deduction of Rs. 15,000 under sub-section (2) of section 48 while charging tax on capital gains, exempted earlier and subsequently withdrawn, when certain conditions laid down in the respective sections granting exemption from capital gains tax are breached in subsequent years. 35.19 As a consequence of omission of section 53, section 45 has been amended so as to omit reference to section 53. Section 54H has been amended to omit reference to section 54E in it. As per the new provisions of section 48, non-residents have been protected from fluctuation of rupee value in terms of foreign currency while computing long-term capital gains on shares and debentures originally subscribed in such foreign currency. In such cases, indexation in terms of the second proviso to section 48 will not be applicable. Sub-section (2) of each of sections 115AB and 115D have been amended to provide that while computing long-term capital gains, indexation in terms of the second proviso to section 48 shall not be applicable. 35.20 These amendments come into force with effect from 1-4-1993 and, accordingly, apply in relation to assessment year 1993-94 and subsequent years. [Sections 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 53 55 and 57] Clubbing of minors' income 36. Section 64 of the Income-tax Act provided that in computing the total income of any individual, there shall be included all such income as arises directly or indirectly to a minor child of such individual from-- (i) the admission of the minor to the benefits of partnership in a firm, (ii) assets transferred directly or indirectly to the minor child by such individual otherwise than for adequate consideration, and (iii) assets transferred directly or indirectly by such individual to any person or association of persons otherwise than for adequate consideration, to the extent to which income from such assets is for the immediate or deferred benefit of such individual's minor child. 36.1 In reality as well as in law, the minor children cannot administer their property nor can they take decisions on the disposal of income arising therefrom. These responsibilities fall on the parents, who, for all practical purposes, treat and use this income as part of their own income. Exclusion of minor children's income from the income of their parents also leads to tax avoidance. The aforesaid provisions of section 64 with regard to clubbing, of minors' income had also led to litigation between the Income-tax Department and the assessees. 36.2 Section 64 of the Income-tax Act has, therefore, been amended to provide that all income of a minor is to be included in the income of his parent. However, the income derived by the minor from manual work or from any activity involving his skill, talent or specialised knowledge or experience will not be included in the income of his parent. It has also been provided that the income of the minor will be included in the income of that parent whose total income is greater. Once clubbing of minor's income is done with that of one parent, it will continue to be clubbed with that parent only, in subsequent years. The Assessing Officer may, however, club the minor's income with that of the other parent if, after giving the other parent an opportunity to be heard, he is satisfied that it is necessary to do so. Where the marriage of the parents does not subsist, the income of the minor will be includible in the income of that parent who maintains the minor child in the relevant previous year. 36.3 The Act has also inserted clause (32) in section 10 of the Income-tax Act, to provide that in case the income of an individual includes the income of his minor child in terms of section 64 of the Act, such individual shall be entitled to exemption of one thousand five hundred rupees in respect of each minor child if the income of such minor as includible under section 64 exceeds that amount. However, where the income of any minor so includible is less than one thousand five hundred rupees, the aforesaid exemption shall be restricted to the income so included in the total income of the individual. This provision is to provide relief to the individuals in whose total income the income of the minor child is to be included. 36.4 These amendments take effect from 1st April, 1993, and will, accordingly, apply in relation to assessment year 1993-94 and subsequent years. [Sections 4 and 35] Modification of the tax concessions relating to savings 37. Under the provisions of section 80CCA of the Income-tax Act, full deduction is allowed from the gross total income of a taxpayer in respect of deposits made under National Savings Scheme or payment to a deferred annuity plan subject to a limit of Rs. 40,000. When any amount standing to the credit of the taxpayer under the aforesaid schemes in respect of which a deduction has been allowed, together with interest accrued thereon, is withdrawn, it is deemed to be the income in the year of withdrawal. Similarly any amount received on surrender of a policy or as annuity or bonus in accordance with the notified annuity plan of the Life Insurance Corporation is also deemed to be the income of the taxpayer in the year of its receipt. 37.1 Likewise, the provisions of section 80CCB stipulate full deduction in relation to investment made in the units of any plan, framed in accordance with the Equity-Linked Savings Scheme of specified Mutual Funds or of Unit Trust of India, subject to a limit of Rs. 10,000. When an amount in respect of which deduction has been allowed is returned to the taxpayer, the same is deemed to be the income of the taxpayer in the year of its receipt. 37.2 As part of a package which includes raising of the exemption limit and reduction in the rates of personal taxation, the Finance Act has withdrawn the deduction allowed under sections 80CCA and 80CCB in respect of payments made under the aforesaid schemes after 31st March, 1992. These withdrawals are coupled with an enlargement of the scope of tax rebate under section 88 so as to include schemes which are, at present, included for the concession under sections 80CCA and 80CCB. Contributions to pension funds set up by the National Housing Bank and approved Mutual Funds will also be entitled to the tax rebate under section 88. The overall investment level under section 88 has also been enhanced from Rs. 50,000 at present to Rs. 60,000. In effect, the ceiling of the maximum rebate has been raised from ten thousand rupees to twelve thousand rupees. Thus, instead of a deduction from the income, a tax rebate of 20 per cent. of the amount invested in the. National Savings Scheme or an annuity plan of LIC (such as Jeevan Akshay and Jeevan Dhara) or any Equity Linked Savings Scheme will be allowed. The enhanced overall investment level of Rs. 60,000 is subject to the condition that, in respect of Equity Linked Savings Schemes, the tax rebate will be allowed only for subscription up to Rs. 10,000 during the previous year. 37.3 A person who has already effected a contract for annuity plan of LIC will, if he continues with the annuity plan, now be eligible for the tax rebate under section 88. However, in order to mitigate the hardship of any person who desires to opt out of the annuity plan of the LIC before 1st October, 1992, as a result of the withdrawal of the tax concession under section 80CCA, the amount received on surrender of such annuity plan will not be deemed to be his income in the year of receipt. 37.4 Under the existing provisions of section 80L of the Income-tax Act, deduction in respect of income from interest on certain securities, deposits, debentures as well as income from dividends and from units of the Unit Trust of India is allowed up to Rs. 7,000 and additional deduction of up to Rs. 6,000 is allowed in respect of income from certain specified savings schemes, thus amounting to a total deduction of Rs. 13,000. 37.5 With a view to rationalising the concession available under section 80L, the deduction has been reduced to Rs. 7,000 in all cases without any additional deduction allowed earlier in respect of income from certain savings instruments. 37.6 These amendments will take effect from 1st April, 1993, and will, accordingly, apply in relation to assessment year 1993-94 and subsequent years. [Sections 42, 43, 48 and 51] Increase in the tax relief in respect of medical insurance premia 38. Under the provisions of section 80D of the Income-tax Act, a deduction of Rs. 3,000 is allowed in respect of any sum paid by an assessee to effect an insurance on his health and that of his family (including dependent parents). 38.1 Since self-employed persons do not have the support of any employer for their medical treatment, it is necessary to provide adequate incentives to them for effecting medical insurance for themselves and for their families in order to cover unforeseen expenses on account of medical treatment. It is also desirable to encourage salaried persons who are not provided adequate medical facilities by their employers to take up medical insurance. In view of this, section 80D has been amended with a view to raising the monetary limit of deduction from Rs. 3,000 to Rs. 6,000. 38.2 This amendment will take effect from 1st April, 1993, and will, accordingly, apply in relation to assessment year 1993-94 and subsequent years. [Section 44] Relief in respect of medical treatment of Handicapped dependants 39. Under the provisions of section 80DD of the Income-tax Act, a deduction of rupees six thousand is allowed in respect of expenditure incurred by a resident-assessee being an individual or a Hindu undivided family, on the medical treatment, training and rehabilitation etc., of handicapped dependants. The deduction is not allowed to a person whose total income exceeds one lakh rupees. 39.1 In order to help the guardians to provide better facilities to their handicapped dependants, as also to compensate for the increased cost of the aforesaid treatment and rehabilitation, a higher deduction of twelve thousand rupees has now been provided for under section 80DD as against six thousand allowed earlier. Further, since treatment and rehabilitation of handicapped dependants is a heavy burden on all parents, no matter what their level of income be, the income ceiling of one lakh rupees for being eligible for this deduction has been removed. 39.2 These amendments will take effect from 1st April, 1993, and will accordingly apply in relation to assessment year 1993-94 and subsequent years. [Section 45] Rationalisation of provisions relating to tax concession for export profits 40. Under the 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. There exists a dual system for computation of export profits. The first method operates in cases where the export is of goods manufactured by the taxpayer. The export profit is computed on the basis of the ratio of export turnover to. total turnover. In effect, - export turnover 80HHC concession = export profits - total profits × ____________________ total turnover Where the export is of goods purchased from third parties, i.e., "trading goods ", the second method of computation operates, that is to say, the export profit is calculated by deducting from the export turnover, the direct and indirect costs attributable to such export, i.e., -- 80HHC concession = export profits = export turnover - (direct costs + indirect costs) "Trading goods" have been defined to mean goods not manufactured by the assessee. Thus, even where goods are processed by the taxpayer, they are treated as trading goods. To remove !his anomaly, the Finance Act, 1992, has amended the definition of "trading goods" to mean "goods not manufactured or processed by the assessee". Thus, in effect, where goods processed by the taxpayer are exported, the first method of computation will apply. 40.1 Another amendment to section 80HHC made by the Finance Act, 1992, relates to the provision concerning the disclaimer of the tax concession under section 80HHC by a recognised Export or Trading House in favour of supporting manufacturers. When an Export or Trading House disclaims the concession, the tax concession in the case of the Export or Trading House is reduced by the amount which bears to the total export profits of the assessee the same proportion as the disclaimed export turnover bears to the total export turnover. That is to say,-- 80HHC concession = export profits disclaimed export turnover] - [export profits x ________________________________ total export turnover With the adoption of the dual system for computing export profit, the computation of the disclaimed export turnover also required modification. The Finance Act has therefore amended section 80HHC in order to provide that, where the Export or Trading House disclaims the tax concession in favour of the supporting manufacturer, the concession to the Export or Trading House will be reduced by the amount which bears to the total export profits of trading goods the same proportion as the disclaimed export turnover bears to. the total export turnover of trading goods. The formula in such cases will now be, 80HHC concession = export profits disclaimed export turnover] - [export profits on trading goods x ________________________________ total export turnover 40.2 These amendments will take effect from 1st April, 1992, the date from which the dual system of computation of export profits comes Into effect. [Section 46] Rationalisation of the Definition of "small scale industrial undertaking" in the provisions relating to concessions for new industrial undertakings 41. Section 80-IA of the Income-tax Act, provides that, in computing the total income of a taxpayer, a deduction of 25 to 30 per cent. of the profits earned by a new industrial undertaking or a hotel or a ship is allowed for a period of ten years. In the case of a hotel set up in a remote area, this deduction is allowed at the rate of 50 per cent. of the profits earned. In the case of co-operative societies, the deduction is for an increased period of twelve years. The deduction is not allowed if the industrial undertaking manufactures or produces any article listed in the Eleventh Schedule to the Income-tax Act. This condition, however, does not apply to small scale industrial undertakings. 41.1 With a view to bringing the definition of "small scale industrial undertaking" in the Income-tax Act, in line with the industrial policy of the Government, section 80-IA has been amended. A "small scale industrial undertaking" will now mean an industrial undertaking which is regarded as a small scale industrial undertaking under section 11B of the Industries (Development and Regulation) Act, 1951. 41.2 This amendment will take effect from 1st April, 1993, and will accordingly apply in relation to assessment year 1993-94 and subsequent years. [section 47] Enhanced incentive for savings by artists, authors, sportsmen, actors, etc. 42. Under the provisions of section 88 of the Income-tax Act, a rebate at the rate of 20 per cent. of the amount paid by way of life insurance premia, contribution to provident fund or subscription to certain notified schemes etc., is allowed to an individual from the tax payable. This is subject to a limit of fourteen thousand rupees in the case of authors, playwrights, artists, musicians, actors and sportsmen. 42.1 The earning life of an author, playwright, artist, musician, actor or sportsman from his respective profession is substantially shorter than in most other cases. His earnings depend substantially on popularity, current trends and form. He, therefore, requires an incentive for higher than normal savings during the short but active and remunerative period of his career. With this end in view, the Finance Act has provided for a higher tax rebate for authors, playwrights, artists, musicians, actors and sportsmen, at the rate of 25 per cent. of the contribution to life insurance premia, provident fund or subscription to certain notified schemes, etc., as against 20 per cent. allowed normally. The ceiling of the maximum rebate in their case has been raised from fourteen thousand rupees to seventeen thousand five hundred rupees. 42.2 This amendment will take effect from 1st April, 1993, and will, accordingly, apply in relation to assessment year 1993-94 and subsequent years. [Section 51] Special relief for senior citizens 43. With a view to helping senior citizens meet the increased expenses in their old age, the Finance Act has inserted a new section 88B in the Income-tax Act to provide for a special tax relief in the form of an additional rebate of ten per cent. from the net tax payable by persons who have attained the age of 65 years and have a gross total income not exceeding fifty thousand rupees. 43.1 This amendment will take effect from 1st April, 1993, and will, accordingly, apply in relation to assessment year 1993-94 and subsequent years. [Section 52] Tax incentive for investment in bonds or shares of Indian companies issued abroad 44. Under section 115AB of the Income-tax Act, in the case of offshore funds, income in respect of units purchased in foreign currency and income by way of long-term capital gains arising from the transfer of such units are charged to tax at the rate of ten per cent. 44.1 The Government had approved, in principle, the scheme of permitting issue abroad of foreign currency convertible bonds/equity by established Indian companies. These bonds and shares can be purchased by the non-residents in foreign currency. The object of the scheme is to augment the foreign exchange resources of the country. It was, therefore, necessary that the tax regime for the non-resident investors of these bonds/ equities was competitive vis-a-vis tax regime of other such instruments of investment available in the international market. Accordingly, a new section 115AC has been inserted in the Income-tax Act to provide for special rates of tax applicable to income from such bonds or shares purchased in foreign currency or long-term capital gains arising from their transfer. 44.2 The income by way of interest or dividends in respect of bonds issued by or shares in an Indian company purchased in foreign currency in accordance with the notified scheme of the Central Government in this behalf and income by way of long-term capital gains arising from the transfer of such bonds or shares is to be charged to tax at the rate of ten per cent. However, this rate of tax is to apply on the gross income of the nature specified above without allowing for any deduction under sections 2 8 to 44C, 48 and 5 7 and Chapter VI-A. The provisions for protection from fluctuation of rupee value against foreign currency for computing capital gains in the case of non-residents are not to apply to the aforesaid shares. Further, when the said bonds or shares are transferred outside India by a non-resident to another non-resident, it is not to be regarded as transfer for the purpose of capital gains tax. It has also been provided that it shall not be necessary for a non-resident to furnish a return of income under section 139(1) if his total income consists only of interest or dividends referred to above and tax has been deducted on such income. 44.3 These amendments take effect from 1st April, 1993, and, accordingly, apply in relation to assessment year 1993-94 and subsequent assessment years. 44.4 In order to facilitate collection of tax from the non-resident investors of these bonds/equity, a new section 196C has been inserted in the Income-tax Act, to provide that any person responsible for paying any income payable in respect of these bonds, etc., shall deduct income-tax at the rate of ten per cent. of such income. The tax is required to be deducted either at the time of payment or credit to the account the payee, whichever is earlier. In view of the insertion of section 196C in the Income-tax Act, sections 198 to 200, 202 to 203A and 205 of the Income-tax Act, relating to procedure in respect of tax deduction at source have also been amended. 44.5 These amendments take effect from 1st June, 1992. [Sections 56, 75 and 78] Special provisions for small shopkeepers, etc. 45. With a view to building an atmosphere of trust and confidence and also to widen the tax base by encouraging small shopkeepers to pay their taxes, the Finance Act has introduced a new simplified procedure for taxation. The new procedure is intended to help small shopkeepers in meeting their tax liability by filing a simple statement-cum-challan at the bank counter without having to go through the intricacies of income-tax law and procedure. The salient features of the simplified procedure are as follows : (a) the scheme is optional ; (b) it is open to individuals and HUFs, not assessed to tax earlier, who have income of not more than Rs. 35,000 from the business of retail trade or of running an eating place or any vocation and, in the case of business of retail trade, have an annual turnover of upto Rs. 5 lakhs ; (c) a person carrying on the business of retail trade and opting for the simplified procedure will be deemed to have a turnover of Rs. 5 lakhs and his total income will be deemed to be seven per cent. of this turnover. Thus, in effect, his total income will be presumed to be Rs. 35,000. A person running an eating place or engaged in any vocation and opting for the simplified procedure will be deemed to have total income of Rs. 35,000. Thus, the tax in respect of income from the business of retail trade or of running an eating place or any vocation works out to Rs. 1,400 ; (d) persons opting for the simplified procedure should not have taxable income exceeding Rs. 5,000 from any source other than the business or vocation mentioned above. No deduction under Chapter VIA except under section 80L will be allowed. No rebate under Chapter VIII will be allowed. Tax in respect of income up to Rs. 5,000 from any other source (as reduced by deduction under section 8OL) will be required to be paid at the appropriate rate -which at present is 20 per cent. (e) such persons will not be required to file any income tax return.Chapter XIV relating to " Procedure for assessment" will not apply in their case. Instead, a simple prescribed statement containing the name, address, nature of business, and a declaration that the conditions mentioned in (b) above are fulfilled ; (f) the tax is required to be paid along with the prescribed statement by the 31st March of the financial year in which the income is earned ; (g) there will be no enquiry nor assessment ; (h) no proceeding under any other provision of the Income-tax Act will be initiated against a person opting for the scheme, in respect of his income from retail trade, from running an eating place or from any vocation, for the assessment year for which the statement under the scheme has been filed, unless the Department has evidence in its possession that the statement furnished by the person is untrue ; (i) the scheme will be in force initially for two assessment years viz. assessment years 1993-94 and 1994-95. 45.1 For the purposes of this provision, vocation has been defined to include tailoring, hair-cutting, washing clothes, typing, photocopying, repair work of any kind and other services of a similar nature. Other services of a similar nature would include vocations which are of the same genus as the ones mentioned in the definition that is to say, vocations which do not require any substantial intellectual input. Illustrations of this would be persons earning their livelihood as carpenters, electricians, plumbers, painters, welders, lathe machine operators, taxi drivers etc. The simplified procedure will, thus, not be available to professionals like lawyers, accountants, consultants, engineers, architects, teachers, etc. [Section 58] Omission of waiver of requirement of furnishing the return of income in certain case 46. Section 139(1A) of the Income-tax Act provides that if the total income of a person consists only of income chargeable under the head " Salaries " or income chargeable under that head and also income in the nature of dividends, interest or income from units referred to in clauses (j) and (ix) of sub-section (1) of section 8OL, it is not necessary for such a person to furnish a voluntary return of income, subject to certain conditions. 46.1 As the Finance Act restricts the deduction under section 80L from Rs. 13,000 to Rs. 7,000 and also raises the income-tax exemption limit from Rs. 22,000 to Rs. 28,000, it also omits the provisions of sub-section (1A) of section 139. It is only in order that the persons who pay income tax are on the register of the Income-tax Department. 46.2 The aforesaid amendment takes effect from 1st April, 1993, and will, accordingly, apply in relation to the assessment year 1993-94 and subsequent years. [Section 59] Modification in the procedure for assessment 47. Under section 143(1A) of the Income-tax Act, an assessee is required to pay additional income-tax at rate of 20 per cent. of the tax payable on the excess amount of the income determined over that returned by the assessee. In cases where, in the course of regular assessment proceedings under sub-section (3) of section 143, the additions made while processing a return of income under clause (a) of sub-section (1) of section 143 are not sustained, the additional income-tax levied under section 143(1A) is to be deleted or modified as the case may be. With a view to making this position beyond doubt, an amendment has been made to sub-section (1A) of section 143 of the Income-tax Act. 47.1 The above amendment takes effect retrospectively from 1st April, 1989, and, accordingly, applies to the assessment year 1989-90 and subsequent years. 47.2 Under the provisions of the Income-tax Act, an assessee can file an application for rectifying any mistake in the intimation referred to in clause (a) of sub-section (1) of section 143. The assessee can go in appeal only against the order passed under section 154 in respect of the application for rectification, no order of appeal being available against such intimation. In order to expedite the disposal of such applications and to provide a right of appeal within a fixed time frame, sub-section (2) of section 154 of the Income-tax Act has been amended. Under the amended provisions, the Assessing Officer is required to take action on the application for rectification within a period of three months from the end of the month in which the application is filed. Where no order is made within the said period, the assessee will have a right to appeal to the Deputy Commissioner (Appeals) or as the case may be, to the Commissioner (Appeals). 47.3 This amendment takes effect from 14th May, 1992, i.e. the date on which the Finance Bill, 1992, received the assent of the President. [Sections 60 and 61] Taxation of firm's income 48. Before the changes made by the Finance Act, the system of levy of tax on firms involved double taxation. The firm as such was taxed in respect of its total income at rates varying from 5% to 18% (the maximum rate being applicable at Rs. 1 lakh and above). After deducting the tax payable by the firm, the balance of income was distributed amongst the partners and they were again taxed at the appropriate rates. Further, the tax liability of a firm and its partners depended upon the question whether the firm was granted registration under the Income-tax Act or not. In the case of a registered firm, the firm paid tax on its total income according to the rates prescribed in the Schedule for registered firms. An unregistered firm was taxed at the rates applicable to individuals, with the share income included in the hands of the partners for rate purposes only. There has been a consistent demand for removal of the double taxation. A new scheme of assessment of firms has been introduced from assessment year 1993-94. The scheme is modelled after the scheme introduced by the Direct Tax Laws (Amendment) Act, 1987, with suitable modifications to take care of the difficulties pointed out in the context of the 1987 Scheme. The scheme contained in Direct Taxes Laws (Amendment) Act, 1987, sought to tax firms at the maximum marginal rate after allowing interest and remuneration to partners. Further there was a rigorous definition of "whole time working partners " to whom alone remuneration was payable. The deduction for remuneration and interest allowable to partners and allowing remuneration to any partner or partners at the discretion of the firm have been suitably restructured. 48.1 A firm will now onwards be taxed as a separate entity (sections 184 and 185). There will be no distinction between registered and unregistered firms, and clauses 39 and 48 of section 2 containing the definition of "registered firm" and "unregistered firm" have been omitted. After allowing remuneration and interest to the partners, the balance income of the firms will be subject to maximum marginal rate of tax of income-tax, which will be 40% for assessment year 1993-94. The surcharge on income-tax will be at the rate of 12% of the total tax, if the income exceeds Rs. 1,00,000. The earlier distinction between rates of income-tax for professional and non-professional firms has been removed. Partners are not liable to tax in respect of the share of income from the firm. However, remuneration and interest allowed to partners will be charged to income-tax in their respective hands. The only distinction between professional and non- professional firms will be in respect of slabs for allowing deduction to firms in respect of remuneration. 48.2 The share of a partner in the income of the firm will not be included in computing his total income (section 10(2A)). However, interest, salary, bonus, commission or any other remuneration allowed by the firm to a partner will be liable to be taxed as business income in the partner's hand (section 2(24)(ve) and section 28(v)). An Explanation has been added to the newly inserted clause (2A) of section 10 to make it clear that the remuneration or interest which is disallowed in the hands of the firm will not suffer taxation in the hands of the partner. In case any remuneration paid to a partner is disallowed in the hands of the firm or the amount is varied in subsequent proceedings, the partner's assessment can be rectified (section 155(1A)). 48.3 The gross total income of the firm is to be determined in the normal way under different heads as in the case of any taxable entity. The gross total income so computed is reduced by salary, bonus, commission, or any remuneration payable or paid to a partner (section 40(b)). Remuneration due to or received by a partner is not to be assessed as income under the head "Salaries " (Explanation 2 to section 15). Any salary, interest, bonus, commission or remuneration due to or received by a partner in view of clause (v) to section 28 shall be chargeable to income-tax under the head " Profits and gains of business or profession ". 48.4 The payment of remuneration only to a working partner is allowable (defined in Explanation 4 to section 40(b)). Only individuals are capable of being working partners. 48.5 The payments should be duly authorised by and in accordance with the terms of the partnership deed. These payments will be allowed as deduction only for a period beginning with the date of the partnership deed and not for any earlier period. Thus, if a partner is allowed a higher remuneration by varying the terms of the deed on a particular date, such higher remuneration cannot be allowed to him for any period prior to the said date. However, as the financial year 1992-93 had already commenced by the time the Bill received the Presidential assent, it would not have been possible for assessees to change the partnership deed with effect from 1-4-1992. Therefore, the Finance Act has provided that for the previous year 1992-93, interest or remuneration would be allowed if the partnership deed provides for such payment anytime during the accounting period. Thus, for the previous year 1992-93, relevant to the assessment year 1993-94, the terms of the partnership deed may be amended to have retrospective operation. There is no restriction as to the number of times the terms of a partnership deed may be changed during a previous year in so far as payment of salary, bonus, commission or other remuneration to a working partner is concerned. It is also possible that a partner who is not a "working partner" may become a "working partner" at any point of time during a year (or vice versa). In such a situation also, the said terms of the deed may be suitably amended. 48.6 Of the aggregate payment to all partners by way of salary, bonus, commission or other remuneration, up to Rs. 50,000 is fully allowable in the hands of the firm. In case the aggregate payment exceeds the limit of Rs. 50,000, certain monetary limits have been prescribed under section 40(b)(v) in the form of a percentage of "book profit" [defined in Explanation 3 to section 40(b)]. Up to a "book-profit" of Rs. 1,00,000 or a loss, in the case of a professional firm and Rs. 75,000 in the case of a nonprofessional firm, the limit is 90% of the "book-profit" or Rs. 50,000 whichever is higher. For "book-profit" exceeding Rs. 1,00,000 in the case of a professional firm and Rs. 75,000 in the case of a non-professional firm, the limit is 60% of the "book-profit" in this slab. For the balance of the "book-profit" after these two slabs, the limit is 40%. 48.7 Under the provisions of section 40A(2) an Assessing Officer can disallow any expenditure, if it is excessive, having regard to the legitimate needs of the business. There have been several representations on this issue. A demand has been raised that this provision should not be used in the case of remuneration paid by a firm to its partners, since a ceiling is already separately provided. The Finance Minister, in his speech dated 30-4-1992 in Parliament during the budget discussion stated as follows : "There seems to be some apprehension that the provisions of section 40A(2) of the Income-tax Act, may be indiscriminately resorted to by the Assessing Officer to make disallowance out of salary paid to the partners as being excessive. The Central Board of Direct Taxes will be asked to issue instructions to the Assessing Officers so as to ensure that this power is not used in the case of small firms and even otherwise, it should be used sparingly." The Assessing Officers who invoke the provisions of section 40A(2) in any case, must keep in mind the assurance given by the Finance Minister to Parliament. 48.8 Interest paid to a partner would be allowed as a deduction in the hands of the firm. The payment of interest should be in pursuance of the partnership deed. The maximum rate of interest allowed would be 18% simple interest per annum. [section 40(b)(iv)] 48.9 Changes have been made in the scheme of set off and carry forward of losses. The existing provisions relating to firms and their partners in sections 76 and 77 have been omitted. Under the new scheme, the firms are treated as a separate entity and the losses suffered by them would be allowed to be carried forward in their hand only. There would be cases where brought forward losses apportioned to a partner have not been set off in the hands of the partner prior to assessment year 1992-93. A provision has been made for dealing with brought forward losses pertaining to assessment years prior to assessment year 1993-94. In such cases, the carried forward losses of a partner will be allowed as a set-off in the assessment income of the firm subject to the condition that the partner continued to remain a partner in the said firm [section 75]. 48.10 Although the distinction between a registered and unregistered firm has been removed, a partnership will be assessed as a firm only if-- (1) the partnership is evidenced by an instrument ; and (ii) the individual shares of the partners are specified in that instrument. A copy of the partnership instrument duly certified has to accompany the return of income for the relevant year for which assessment as a firm is first sought. Thereafter, assessment as a firm will continue to be made so long as the constitution of the firm remains unchanged. Whenever there is a change in the constitution of a firm, a copy of the new partnership instrument has to be similarly filed. Where a firm does not comply with the provisions of section 184 for any assessment year, the firm shall be assessed as for the assessment year in the same manner as an association of persons and all the provisions of this Act shall accordingly be applicable (section 185). [Sections 3, 4, 6, 11, 16, 35, 36, 39, 40, 41, 49, 62 to 69, 83, 84, 86 and 88] Modification of the provisions regarding deduction of tax at source 49. Under the provisions of section 194A of the Income-tax Act, deduction of income-tax at source is to be made from interest in respect of time deposits with banks, etc., at the rates in force. Similarly, under the provisions of section 194H of the Act, deduction of income-tax at source is to be made from income by way of commission (other than insurance commission) or brokerage, at the rate of ten per cent. thereof. These changes came into force from 1st October, 1991. 49.1 A large number of representations have been received from members of public, representative bodies and banks pointing out various difficulties which had. arisen on account of the operation of these provisions. Keeping in view these difficulties, the Act amends, - a section 194A of the Income-tax Act, to restore the position as obtaining before 1st October, 1991, in relation to deduction of income-tax at source in the case of 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 a 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), and (b) section 194H of the Income-tax Act, to provide that the deduction of income-tax at source from income by way of commission or brokerage will not be required to be made on or after 1st June, 1992. 49.2 Under the provisions of section 194C of the Income-tax Act, income-tax is deductible at source from income comprised in payments made by the persons stipulated therein to resident contractors engaged for carrying out any work (including supply of labour for carrying out any work) at the rate of two per cent., of such payments. Statutory authorities set up for the purpose of development or improvement of cities, etc., registered societies, trusts and universities, which award contracts for carrying out works involving substantial consideration were not referred to in section 194C. 49.3 The Act, therefore, amends section 194C of the Income-tax Act, with a view to including the following categories of persons who will be required to deduct income-tax at source from payments made by them to contractors : (i) any authority constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purposes of planning, development or improve ment of cities, towns and villages, or for both ; or (ii) any society registered under the Societies Registration Act, 1860, or under any law corresponding to that Act in force in any part of India ; or (iii) any trust ; or (iv) any University established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a University under section 3 of the University Grants Commission Act, 1956. 49.4 Section 194G of the Income-tax Act provides for deduction of income-tax at source from income by way of commission, etc., on sale of lottery tickets, where such income exceeds one thousand rupees, at the rate of ten per cent. thereof. 49.5 In order to obviate the hardship in the cases of persons who have no tax liability or who have tax liability which is below the rate of deduction of tax at source prescribed in section 194G, the Act amends section 194G of the Income-tax Act to provide that where the Assessing Officer is satisfied that the total income of a person who is or has been stocking, distributing, purchasing or selling lottery tickets justifies the deduction of income-tax at any lower rate or no deduction of tax, as the case may be, the Assessing Officer, shall, on an application made by such person in this behalf, give to him such certificate as may be appropriate. It also seeks to provide that where any such certificate is given, the person responsible for paying the income by way of commission, remuneration or prize (by whatever name called) on lottery tickets shall, until such certificate is cancelled by the Assessing Officer, deduct income-tax at the rate specified in such certificate or deduct no tax, as the case may be. 49.6 Section 197 of the Income-tax Act provides that the Assessing Officer can issue a certificate to a non-corporate person for deduction of income-tax at rates lower than the rates in force or for no deduction of tax at source, if he is satisfied that the income of the recipient so warrants. 49.7 Representations had been received to the effect that there was no justification for excluding from the ambit of section 197 the cases of companies which suffered losses or were not likely to have an income or their income liable to tax was likely to be inadequate to absorb the full amount of tax deducted. As a measure of rationalisation, the Act, therefore, amends section 197 of the Income-tax Act, with a view to making the provisions thereof applicable to any person including a company. 49.8 As all the persons are proposed to be covered within the ambit of section 197 of the Income-tax Act, the Act also amends section 193 of the Income-tax Act, relating to interest on securities, with a view to omitting the first proviso to section 193, which enabled the Central Government to specify a lower rate at which deduction of income-tax is to be made in respect of a scheduled bank. 49.9 Under the provisions of the proviso to sub-section (1) of section 194A, relating to deduction of tax at source from income by way of interest other than interest on securities, a person (other than a company or a registered firm) could furnish an affidavit or a statement in writing for non-deduction of income-tax at source in its case. The statement in writing had to be signed in the presence of a gazetted officer, etc. On the other hand, sub-section (1) of section 197A of the Income-tax Act also provided for furnishing of a declaration by a resident individual deriving income from interest other than interest on securities, for the purpose of non deduction of tax at source. Therefore, as a measure of rationalisation, the Act applies the provisions of sub-section (1) of section 197A to the persons (not being companies or firms) entitled to receive income by way of interest other than interest on securities referred to in section 194A. 49.10 The aforesaid amendment take effect from 1st June, 1992. [Sections 70, 71, 72, 73, 74, 76 and 77] Modification of the provisions relating to advance payment of tax 50. Section 211 of the Income-tax Act provides that advance tax on the current income, calculated in the manner laid down in section 209 of the Act, shall be payable by all the assessees who are liable to pay the same in three instalments during each financial year. The due date of, and the amount payable in, each such instalment were as follows : Due date of instalment Amount payable On or before the 15th September Not less than 20% of such advance tax On or before the 15th December Not less than 50% of such advance tax, as reduced by the amount, if any, paid in the earlier instalment. On or before the 15th March The whole amount of such advance tax as reduced by the amount or amounts, if any, paid in the earlier instalments. 50.1 Thus, in the first instalment of advance tax, an assessee was required to pay minimum of 20% of advance tax only, even though about six months had passed in the financial year. Similarly, in the second instalment, an assessee was required to pay minimum of 50% of advance tax only, even though about nine months had passed in the financial year. 50.2 As a measure of rationalisation, the Act amends section 211 of the Income-tax Act to provide that the advance tax payable in a financial year,- (a) on or before the 15th day of September, shall not be less than thirty per cent., and (b) on or before the 15th day of December, shall not be less than sixty per cent. of such advance tax. 50.3 This amendment takes effect from 1st April, 1992. 50.4 The Act also amends sub-section (1) of section 234C of the Income-tax Act relating to interest for deferment of advance tax. It has been provided that the shortfall for the purpose of charging interest for deferment of advance tax shall be the difference between,- (1) thirty per cent. of the tax due' on the returned income and advance tax paid by the assessee on or before 15th day of September, and (ii) sixty per cent. of the tax due on the returned income and advance tax paid by the assessee on or before the 15th day of December. 50.5 The aforesaid amendment takes effect from 1st June, 1992. 50.6 The Act also makes an amendment of clarificatory nature in the Explanation to sub-section (1) of section 234C to make it clear that interest under that section will be chargeable even in cases where no advance tax is paid. 56.7 This amendment takes effect retrospectively from 1st April, 1989. [Sections 80 and 81] Reduction in the period for claiming deduction 51. Under the provisions of section 239 of the Income-tax Act, as these hitherto existed, a taxpayer claiming refund had to file a claim in the prescribed form within a period of two years from the last day of the assessment year to which the claim for refund related. Every claim for refund has to be accompanied by a return of income unless the claimant has already filed such return. However, under the provisions of sub-section (4) of section 139, a refund of income can be filed only within a period of one year from the date of the relevant assessment year or before the completion of the assessment, whichever is earlier. 51.1 With a view to bringing the provisions of section 239 in conformity with those of section 139, the Act reduces the period during which a taxpayer can claim refund from two years from the end of the assessment year concerned to one year from the end of that assessment year. 51.2 This amendment takes effect from the 1st day of April, 1993. [Section 82] Filing fee for appeals before Income-tax Appellate Tribunal 52. The Finance Act has amended section 253 enhancing the fee to be paid for filing appeals before the Income-tax Appellate Tribunal. Under the pre-amended provisions of sub-section (6), an appeal to the Appellate Tribunal shall be in the prescribed format and shall be accompanied by a fee of Rs. 200. After the amendment, the fee will be Rs. 250, where the total income computed by the Assessing Officer is up to Rs. 1 lakh and Rs. 1,500 in cases where the total income as so computed is more than Rs. 1 lakh. The former type of cases would include cases where the total income computed by the Assessing Officer is a negative figure. 52.1 These amendments come into force with effect from 1st June, 1992. [Section 85] Provision of limitation for the sale of immovable property attached towards recovery of tax 53. Section 222 of the Income-tax Act prescribes the modes of recovery of tax from an assessee who is in default in making payment of tax, in accordance with the rules laid down in the Second Schedule to the Income-tax Act. One of the prescribed modes is attachment and sale of the assessee's immovable property. Part III of the Second Schedule to the Income-tax Act contains the rules for attachment and sale of immovable property. No limitation of time had been provided for sale of the immovable property attached towards recovery of tax. 53.1 The recovery provisions without the prescribed time limit of disposal of attached immovable properties had not proved as coercive and deterrent as they should have been. 53.2 The Act, therefore, inserts a new rule, i.e., rule 68B, in the Second Schedule to the Income-tax Act to provide a time limit of three years from the end of the financial year in which the order, giving rise to a demand of any tax, interest, fine, penalty or any other sum for the recovery of which the immovable property has been attached, has become conclusive under the provisions of section 245-I or has become final, as the case may be, in terms of the provisions of Chapter XX of the Income-tax Act. The period of three years shall stand extended by one year in certain cases where the sale falls through. Further, certain periods during which the order is stayed by any court, are also to be excluded from the aforesaid period of limitation. 53.3 This amendment takes effect from 1st June, 1992. [Section 87] WEALTH-TAX Restructuring of the taxation of wealth 54. With a view to stimulating investment in productive assets, the Finance Act has abolished wealth-tax on all assets except certain specified assets. The term "asset" will include guest houses and residential houses including farm houses within twenty-five kilometres from the local limits of any municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board but does not include a house which has been allotted by a company to an employee or an officer, or a director who is in the whole time employment, having a gross annual salary of less than two lakh rupees. It will also not include a house for residential purposes which forms part of stock-in-trade. Further, it will include motor cars other than those used in the business of running them on hire or which form part of stock-in-trade ; jewellery, bullion, furniture, utensils or any other articles made wholly or partly of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals (other than those used as stock-in-trade); yachts and boats and aircrafts (other than those used for commercial purposes), cash in hand in excess of Rs. 50,000 of individuals or HUFs and in case of any other person any amount not recorded in the books of account and urban land. 54.1 Urban land is also specified as an asset which would be liable to wealth-tax for and subsequent to assessment years 1993-94. "Urban land" means land situate-- (i) in any area which is comprised within the jurisdiction of a municipality (by whatever name called) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the valuation date ; or (ii) in any area within such distance, not being more than eight kilometres from the local limits of any municipality or cantonment board referred to above, as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations specify in this behalf by notification in the Official Gazette. 54.2 The definition of urban land has been amended to exclude the following : (a) land on which construction of a building is not permissible on account of any law for the time being in force ; and (b) land held by the assessee for industrial purposes for a period of two years from the date of its acquisition by him. 54.3 The Finance Act has amended clause (m) of section 2 of the Wealth-tax Act to provide that only debts which have been incurred in relation to the assets assessable to wealth-tax will be allowed to be deducted in computing the net wealth. This is to avoid a situation where an assessee creates a charge on an asset which is liable to wealth-tax and use the amount raised through such charge to acquire assets which are not liable to wealth-tax, simultaneously claiming the benefit of a deduction in respect of such a charge. 54.4 The list of assets which were exempt from wealth-tax contained in section 5 of the Wealth-tax Act have been substantially reduced by the Finance Act, 1992. The exemption is now available in respect of the following five categories of assets only : (a) any property held by the assessee under trust or other legal obligation for any public purpose of a charitable or religious nature in India. (b) the interest of the assessee in the coparcenary property of any Hindu undivided family of which the assessee is a member, since the asset is already liable to tax in the hands of the Hindu undivided family. (c) any one building which was in the occupation of a Ruler which, before the commencement of the Constitution (Twenty-sixth) Amendment, was declared as his official residence. (d) jewellery in the possession of a Ruler, not being his personal property and recognised by the Government as his heirloom or which the Board had recognised as his heirloom at the time of his first assessment to wealth-tax. (e) moneys and value of assets or the value of assets acquired by a person of Indian origin or a citizen of India who was residing outside India if he returns to India with the intention of permanently residing in India. The exemption is provided for a period of seven successive assessment years commencing with the assessment year next following his return to India. 54.5 The Wealth-tax Act was not to apply to a number of entities under section 45 of the Wealth-tax Act. Clauses (a) to (c) of this section have been omitted. Thus the exemption will now be only available to the undernoted categories : (a) companies registered under section 25 of the Companies Act, 1956. These are companies which are formed for the object of promoting commerce, art, science, religion, charity, or any useful object and which apply such profits for promoting their objects and prohibit the payment of dividend to their members ; (b) any co-operative society ; (c) any company incorporated outside India which has no place of business in India ; (d) any social club ; (e) any political party ; (f) a Mutual Fund specified under clause (23D) of section 10 of the Income-tax Act. 54.6 Part C of Schedule III of the Wealth-tax Act relates to valuation of shares in or debentures in companies. The Finance Act has omitted these provisions as shares or debentures in companies are no longer assets for the purpose of wealth-tax. However, Schedule II of the Gift-tax Act, provides that the value of gifts of shares or debentures in companies will be taken as for wealth-tax purposes. It is clarified that for the limited purpose of valuation of these gifts, Part C of Schedule III of the Wealth-tax Act shall be taken into account. 54.7 Further, in order to prevent tax avoidance, it is proposed that the wealth of a minor, except in respect of such assets as have been acquired by a minor child from manual work or from any activity involving his specialised knowledge or experience, will be clubbed with the wealth of that parent whose net wealth (excluding the assets of the minor) is greater. It may be mentioned that the scheme of clubbing of minor's income adopted in the Income-tax Act has been incorporated in the Wealth-tax Act as well. 54.8 A new section, viz. section 35HA, has been introduced in the Wealth-tax Act to specify the person who is to be proceeded against in cases of offences by companies. 54.9 Wealth-tax will be charged in respect of net wealth on the valuation date of every individual, Hindu undivided family and company at the rate of one per cent. of the amount by which the net wealth exceeds fifteen lakhs rupees. 54.10 These amendments will come into effect from 1st April, 1993, and will, accordingly, apply in relation to assessment year 1993-94 and subsequent years. [Sections 89 to 102] INTEREST-TAX Modification of the scope of the term "credit institution" 55. Under the provisions of the Interest-tax Act, 1974, tax is levied at the rate of 3 per cent. on the gross interest income accruing or arising to a credit institution. "Credit institution" has been defined in clause (5A) of section 2 of the Act to include, inter alia, a banking company or a co-operative society engaged in the business of banking, not being a co-operative society providing credit facilities to farmers or artisans. 55.1 With a view to encouraging the growth of the co-operative movement in the country, the Finance Act has exempted from the levy of interest-tax, co-operative societies engaged in the business of banking. Further, chargeable interest for a credit institution will also not include interest received from advances made to any co-operative society engaged in the business of banking. 55.2 This amendment will take effect from 1st April, 1993, and will accordingly, apply in relation to the assessment year 1993-94 and subsequent years. 55.3 When the Interest-tax Act was revived last year, the intention was to cover all non-banking financial companies. It has, however, been found that there are a number of finance and investment companies which earn substantial income from interest on loans and advances and are yet not covered by the definition given in section 2(5B). These companies receive deposits under schemes or other arrangements, in one lump sum or in instalments by way of contributions or subscriptions or by sale of units or certificates or other instruments. The Reserve Bank of India have, vide Notification No. DFC. 55/DG(O)-87, issued on 15th May, 1987, treated such financial companies as residuary non-banking companies. 55.4 In view of the fact that the Government's intention is to impose tax on the gross amount of interest earned. by all banks, financial institutions and non-banking financial companies, in respect of loans and advances made in India, the Finance Act has included, in the definition of financial company, all residuary non-banking companies. 55.5 This amendment will take effect from 1st April, 1993, and will, accordingly, apply in relation to the assessment year 1993-94 and subsequent years. [Sections 103 and 104] EXPENDITURE-TAX Modification in the scope and applicability of expenditure tax 56. Under the provisions of the Expenditure-tax Act, 1987, a tax at the rate of 20 per cent. is levied on expenditure incurred in hotels where the room charge for any unit of accommodation is Rs. 400 or more per day per individual. This tax is charged on expenditure on food or drink, accommodation and other services incurred in a hotel. However, expenditure for which payment is made in foreign exchange or any expenditure incurred by persons within the purview of the Vienna Convention on Diplomatic Relations, 1961, or the Vienna Convention on Consular Relations, 1963, are exempt from levy of expenditure tax. 56.1 With the room tariff going up substantially in the last few years, inflation adjustment has been imperative. In view of this, the Finance Act has raised the chargeability criterion to expenditure incurred in hotels where the room charge for any unit of accommodation is Rs. 1,200 or more per day per individual. 56.2 After the exchange rate adjustments made last year and the liberalised exchange rate mechanism announced this year, there is no justification in allowing exemption in respect of payment made in foreign exchange especially. In view of this, the Finance Act has withdrawn the exemption granted in respect of payment made in foreign exchange after 30th September, 1992. 56.3 By the Finance (No. 2) Act, 1991, the scope of expenditure tax had been extended to expenditure incurred in air-conditioned restaurants. The tax was levied at the rate of 15 per cent. on the expenditure incurred in, or any payment made to, such restaurants for the provision of food and drink. The Finance Act, 1992, has withdrawn the levy of expenditure tax on air-conditioned restaurants with effect from 1st June, 1992. [Sections 105 to 108] (Sd.) K. M. Sultan, Director (TPL-II).