Finance Act, 2002—Explanatory Notes on provisions relating to direct taxes - Income Tax - 08/2002

Finance Act, 2002—Explanatory Notes on provisions relating to direct taxes Circular No. 8/2002 Dated 27/8/2002 1. Introduction 1.1 The Finance Act, 2002, as passed by Parliament, received the assent of the President on 11th May, 2002, and has been enacted as Act No. 20 of 2002. This circular explains the substance of the provisions of the Act relating to direct taxes. 2. Changes made by the Finance Act, 2002 2.1 The Finance Act, 2002 (hereinafter referred to as the "Act"), has,— Amended sections 2, 10, 10A, 10B, 11, 12, 12A, 14A, 17, 24, 28, 32, 33AC, 35AC, 35CCB, 35DDA, 36, 40, 44E, 47, 54EC, 55, 72A, 74, 80G, 80GGA, 80HHD, 80-IA, 80-IB, 80L, 88, 92A, 92C, 92F, 113, 115A, 115AC, 115ACA, 115AD, 115C, 115JA, 115JB, 115-O, 115R, 119, 132, 133A, 139, 143, 153, 155, 158A, 158B, 158BB, 158BC, 158BD, 158BE, 190, 192, 193, 194, 194A, 194C, 194H, 194-I, 194J, 195, 195A, 196A, 196C, 196D, 197A, 198, 199, 200, 201, 203, 210, 244A, 245C, 245D, 252, 253, 271, 272A, 273B, 279 and rule 68A of the Second Schedule of the Income-tax Act, 1961 ; Inserted new sections 50C, 80M, 92CA, 115BBB, 174A, 206CA, 269UP, 272B, 272BBB and 275B by the Income-tax Act, 1961 ; Substituted new sections for sections 43A, 70, 89, 92, 132B, 194K, 269T and 271F of the Income-tax Act, 1961 ; Omitted section 245HA of the Income-tax Act, 1961 ; Amended sections 18, 18C, 22D and 34 of the Wealth-tax Act, 1957 ; Omitted section 22HA of the Wealth-tax Act, 1957 ; Amended sections 3 and 5 of the Expenditure-tax Act, 1987 ; Omitted section 44 of the National Dairy Development Board Act, 1987 ; Omitted section 22 of the Prasar Bharati (Broadcasting Corporation of India) Act, 1990 ; Omitted section 22A of the Oil India (Development) Act, 1974 ; Omitted section 43A of the Life Insurance Corporation Act, 1956 ; Omitted section 35A of the General Insurance Business (Nationalisation) Act, 1972. 3. Provisions in brief 3.1 The provisions of the Act in the sphere of direct taxes relate to the following matters : (i) Prescribing the rates of income-tax on income liable to tax for the assessment year 2002-2003, the rates at which the tax will be deductible at source in the financial year 2002-2003 from interest (including interest on securities), winnings from lotteries or crossword puzzles, winnings from horse races, insurance commission and other categories of income liable for tax deduction at source under the Income-tax Act, rates for computing "advance tax", deduction of income-tax from "salaries" and charging of income-tax on current incomes in certain cases for the financial year 2002-2003. (ii) Amendment of the Income-tax Act, 1961, Wealth-tax Act and Expenditure-tax Act with a view to— —provide clarification of the definition of persons ; —provide that all casual and non-recurring receipts shall become taxable ; —provide a sunset clause for exemption with respect to bonds, etc. ; —withdraw exemption for grossing up of tax in certain cases ; —withdraw exemption on certain remuneration received by an employee who is a foreign citizen ; —extend exemption of amount received under VRS to employees of institutions having importance throughout India or throughout a State ; —withdraw exemption on exchange risk premium received by public financial institutions ; —withdraw exemption of Agricultural Marketing Societies and Agricultural Marketing Boards, etc. ; —withdraw exemption of income of certain Housing Boards ; —provide power to the Central Government and the prescribed authority to withdraw approval or rescind notification issued in the cases of scientific research association, news agency, notified trust or institution, educational and medical institution, etc. ; —withdraw exemption of income for certain sports bodies ; —modify conditions for accumulation of income of any fund, trust or institution, university or other educational institution and hospital or other medical institution and to provide for restriction on payment or credit out of such accumulation ; —exempt income of the Credit Guarantee Fund Trust for Small Industries ; —withdraw exemption to the Authorities for Marketing of Commodi-ties ; —modify provisions relating to deduction under section 10A to units in Free Trade Zones, Special Economic Zones ; —modify conditions for accumulation of income of the charitable or religious trusts ; —restrict the application of accumulated income of the charitable or religious trusts ; —withdraw the condition of publication of accounts by religious and charitable trusts in a local newspaper ; —amend section 14A to clarify that no reassessment under section 147 or rectification under section 154 shall be made for any assessment year beginning on or before 1st April, 2001 ; —make perquisites non-taxable in the case of low-paid salaried employees ; —modify provisions relating to income from house property ; —tax the receipts in the nature of non-compete fees and exclusivity rights ; —provide for additional depreciation on new machinery and plant ; —provide for fiscal incentives for modernisation and fleet expansion of the shipping business ; —tax amounts/donations received as income in cases of withdrawal of approval to associations/institutions or withdrawal of notification in respect of eligible projects or schemes ; —provide a sunset clause for expenditure by way of payment to associations and institutions for carrying out programmes of conservation of natural resources ; —provide that balance instalments of expenditure incurred under voluntary retirement scheme to be allowed to the resulting entity ; —enhance fiscal incentive for provisioning in respect of bad and doubtful debts in the case of banks and financial institutions ; —rationalize interest paid to partner from 18% to 12% ; —provide that addition or deduction to the actual cost of a capital asset on account of change in the rate of exchange to be allowed on actual discharge of the liability ; —revise presumptive income for truck owners for inflation adjustment ; —exempt capital gains on lending of securities through the RBI ; —provide for computation of capital gains in real estate transactions ; —extend benefit of exemption under section 54EC in case of investment in bonds issued by the Small Industries Development Bank of India (SIDBI) and the National Housing Bank ; —amend section 55 of the Income-tax Act, 1961 ; —modify the provisions relating to set off of long-term capital loss ; —extend incentive for amalgamation in telecom sector ; —extend date of utilisation for donations received for Gujarat earthquake relief ; —enhance rate of deduction on foreign exchange earnings of hotels or tour operators ; —provide for separate audit for undertakings claiming deduction under sections 80-IA and 80-IB mandatory for companies and co-operative societies also ; —extend benefit of tax holiday for convention centres and multiplex theatres ; —extend tax holiday for new industrial undertakings set up in industrially backward States, industrially backward district by two years ; —amend section 80L to include income from dividend, units of Unit Trust of India (UTI) and mutual funds specified under section 10(23D) for deduction ; —rationalize tax rebate under section 88 ; —provide for relief under section 89 for recipients of family pension ; —clarify provisions of transfer pricing ; —amend section 115AC ; —provide for taxation of dividends ; —amend provisions of Minimum Alternate Tax (MAT) on companies under section 115JB ; —provide for taxation of income received in respect of units of UTI and mutual funds ; —modify provisions relating to search and seizure ; —provide for power to impound books during survey under section 133A ; —provide for bulk filing of returns in computer readable medium by certain salaried taxpayers ; —provide for assessment of income on limited issues under section 143 ; —amend section 158A ; —rationalize the provisions of Chapter XIV-B relating to block assessments in cases of search and requisition ; —provide for special provision for early assessment of bodies formed for short duration ; —provide for credit for tax deduction at source ; —provide for tax not to be deducted at source from dividends and interest on securities in certain cases ; —provide for individuals and Hindu undivided families to deduct tax in cases where total turnover or gross receipts exceed the specified limit under section 44AB ; —reduce the rate of tax deduction at source on commission or broker-age ; —provide that provisions of section 197A will not apply in certain cases ; —insert provision for requirement to apply for tax collection account number ; —provide limitation of time for admission of application and passing of orders by the Settlement Commission ; —modify provision relating to appointment of President of Appellate Tribunal ; —abolish the scheme of pre-emptive purchase of immovable properties under Chapter XX-C ; —modify the provisions relating to mode of repayment of certain deposits ; —clarify provision relating to penalty for concealment of income, etc., under section 271 ; —modify provisions relating to penalty for late filing of return, and defaults relating to PAN ; —provide for issue of notice in respect of payment of advance-tax ; —modify provisions relating to interest payable to the assessee ; —withdraw exemption for National Dairy Development Board, Prasar Bharati and Oil Industry Development Board ; —provide relief to hotel industry under the Expenditure-tax Act. 4. Rate structure 4.1. Rates of income-tax in respect of incomes liable to tax for the assessment year 2002-2003. In respect of incomes of all categories of taxpayers (corporate as well as non-corporate) liable to tax for the assessment year 2002-2003, the rates of income-tax have been specified in Part I of the First Schedule to the Act and are the same as those laid down in Part III of the First Schedule to the Finance Act, 2001, 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 2001-2002. It has also been specified that in the case of individuals, Hindu undivided families, association of persons and body of individuals having a total income exceeding sixty thousand rupees, the tax so computed after rebate under Chapter VIII-A shall be enhanced by a surcharge of two per cent. for purposes of the Union. In the case of every artificial juridical person, a firm, a local authority, a co-operative society and a domestic company, the tax so computed shall be enhanced by a surcharge of two per cent. 4.2. Rates for deduction of income-tax at source during the financial year 2002-2003 from income other than "salaries". 4.2.1 The rates for deduction of income-tax at source during the financial year 2002-2003 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", insurance commission, winnings from lotteries or crossword puzzles, winnings from horse races and income of non-residents (including non-resident Indians). The tax so computed for deduction at source shall be enhanced by a surcharge calculated at the rate of five per cent. of such tax. 4.2.2 These rates are broadly the same as those specified in Part II of the First Schedule to the Finance Act, 2001, for the purposes of deduction of income-tax at source during the financial year 2001-2002. However, the rate of deduction of tax with respect to dividends paid to a person other than a company, where the person is resident in India and in the case of a domestic company, has been prescribed as ten per cent. The rate of deduction of tax in respect of income of a foreign company other than those, for which specific rates are prescribed in Part II, has been reduced to forty per cent. from the existing rate of forty-eight per cent. The tax deducted at source in each case (including a foreign company) shall be enhanced by a surcharge of five per cent. Surcharge is also applicable in the case of a foreign company. 4.3 Rates for deduction of income-tax at source from "salaries", computation of "advance tax" and charging of income-tax in special cases during the financial year 2002-2003. The rates for deduction of income-tax at source from or payment of tax on "salaries" during the financial year 2002-2003 and also for computation of "advance tax" payable during that year in the case of all categories of tax payers 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 2002-2003 on current incomes in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping profits arising in India to nonresidents, assessment of persons leaving India for good during that financial year or assessment of persons who are likely to transfer property to avoid tax, or assessment of bodies formed for short duration, etc. The salient features of the rates specified in the said Part III are indicated in the following paragraphs : : 4.3.1 Individuals, Hindu undivided families, etc. Paragraph A of Part III of the First Schedule specifies the rates of income-tax in the case of individuals, Hindu undivided families, association of persons, etc. There is no change in the rate structure. However, the tax payable would be enhanced by a surcharge for the purposes of the Union at the rate of five per cent. of the tax payable (after allowing rebate under Chapter VIII of the Income-tax Act) in cases of persons having total income exceeding Rs. 60,000. No surcharge would be payable by persons having incomes of Rs. 60,000 or below. Marginal relief would be provided to ensure that the additional amount of income-tax payable, including surcharge, on the excess of income over Rs. 60,000 is limited to the amount by which the income is more than Rs. 60,000. It is clarified that the surcharge payable under Paragraph A of Part III of the First Schedule in the case of individuals, Hindu undivided families, association of persons and body of individuals is also payable by non-residents. The following Table gives the income slabs and the rates of income-tax. Column (a) specifies the rates given in Paragraph A of Part I of the First Schedule to the Act ; and column (b) specifies the rates given in Paragraph A of Part III of the First Schedule to the Act. Existing rates New rates Income slab Rates as specified in Paragraph A of Part I of First Schedule to the Act Income slab Rates as specified in Paragraph A of Part III of First Schedule to the Act Up to Rs. 50,000 Nil Up to Rs. 50,000 Nil Rs. 50,001 to Rs. 60,000 10% Rs. 50,001 to Rs. 60,000 10% Rs. 60,001 to Rs. 1,50,000 20% + Surcharge at 2% Rs. 60,001 to Rs. 1,50,000 20% + Surcharge at 5% Above Rs. 1,50,000 30% + Surcharge at 2% Above Rs. 1,50,000 30% + Surcharge at 5% 4.3.2 The effect of levy of surcharge in the case of individuals, Hindu undivided families, etc., at different income levels would be as under : Total income Existing tax liability New tax liability Additional tax liability Additional tax Rs. Rs. Rs. Rs. (%) 50,000 Nil Nil Nil Nil 55,000 500 500 Nil Nil 60,000 1,000 1,000 Nil Nil 60,010 1,010* 1,010* Nil Nil 60,020 1,020* 1,020* Nil Nil 60,050 1,030 1,050* 20 1.94 60,100 1,040 1,071 31 2.98 60,200 1,061 1,092 31 2.94 5,000 2,040 2,100 60 2.94 5,000 4,080 4,200 120 2.94 1,50,000 19,380 19,950 570 2.94 2,00,000 34,680 35,700 1,020 2.94 3,00,000 65,280 67,200 1,920 2.94 4,00,000 95,880 98,700 2,820 2.94 5,00,000 1,26,480 1,30,200 3,720 2.94 10,00,000 2,79,480 2,87,700 8,220 2.94 25,00,000 7,38,480 7,60,200 21,720 2.94 1,00,00,000 30,33,480 31,22,700 89,220 2.94 *Marginal relief would be provided to ensure that the additional income-tax payable, including surcharge, on the excess of income over Rs. 60,000 is limited to the amount by which the income is more than Rs. 60,000. 4.3.3 Co-operative societies 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. However, the tax payable would be enhanced by a surcharge for the purposes of the Union at the rate of five per cent. of the tax payable. 4.3.4 Firms In the case of firms, the rate of income-tax has been specified in Paragraph C of Part III of the First Schedule to the Act. This rate remains at 35 per cent. However, the tax payable by firms would be enhanced by a surcharge, for the purposes of the Union, at the rate of five per cent. of the tax payable. 4.3.5 Local authorities 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. This rate is the same as that specified in the corresponding Paragraph of Part I of the First Schedule to the Act. However, the tax payable would be enhanced by a surcharge for the purposes of the Union at the rate of five per cent. of the tax payable. 4.3.6 Companies In the case of companies, the rate of income-tax has been specified in Paragraph E of Part III of the First Schedule to the Act. There is no change in the existing rates of 35 per cent. for domestic companies. However, for foreign companies, the rate has been reduced to 40 per cent. from the existing 48 per cent. The tax payable by the domestic as well as foreign companies would be enhanced by a surcharge at the rate of five per cent. of the tax payable for the purpose of the Union. [Section 2 and First Schedule] 5. Clarification in the definition of persons 5.1 Under the existing provision contained in clause (31) of section 2, the expression "person" includes an individual, a Hindu undivided family, a company, a firm, an association of persons or a body of individuals, whether incorporated or not, a local authority and every other artificial juridical person, not falling within any of the above definitions. Although, the definition of "person" is inclusive and starts with the qualifying words "unless the context otherwise requires", in some cases, a claim has been made that certain bodies do not fall within any of the definition of "person" provided in clause (31) of section 2 due to the sole reason that they are not supposed to have any income or profits and gains. 5.2 To clarify the correct legal position, an Explanation in clause (31) of section 2 has been inserted through the Finance Act, 2002, so as to provide that an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not, such person or body or authority or juridical person, was formed or established or incorporated with the object of deriving income, profits or gains. 5.3 This amendment takes effect retrospectively from 1st April, 2002 and applies in relation to the assessment year 2002-2003 and subsequent assessment years. [Section 3(b)] 6. Casual and non-recurring receipts to become taxable 6.1 Under the existing provisions contained in clause (3) of section 10, any receipt below Rs. 5,000, which is of casual and non-recurring nature is exempt from payment of income-tax. In the case of winnings from horse races, the exemption is available for Rs. 2,500 only. This clause does not apply to receipts arising from business or profession or receipts by way of addition to the remuneration of an employee or to the capital gains income. 6.2 Through the Finance Act, 2002, clause (3) of section 10 has been omitted so as to bring all the casual and non-recurring receipts including windfall gains from betting, horse racing, lotteries, etc., under the tax net. 6.3 This amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. [Section 4(a)] 7. Sunset clause for exemption with respect to bonds, etc. 7.1 The existing sub-clause (i) of clause (4) of section 10 provides for exemption in respect of income by way of interest on notified securities or bonds, including income by way of premium on redemption of such bonds. Clause (4B) of section 10 provides for exemption with respect to income by way of interest on notified saving certificates subscribed by an individual in convertible foreign exchange. Sub-clause (iib) of clause (15) of section 10 provides for similar exemption in respect of interest on notified Capital Investment Bonds. Sub-clause (iid) of clause (5) of section 10 provides for exemption in respect of interest from notified bonds arising to a non-resident Indian or a nominee or survivor of the non-resident Indian or any individual to whom the bonds have been gifted by the non-resident Indian. 7.2 In order to withdraw these exemptions, a sunset clause has been provided in all the aforesaid clauses of section 10 so that interest on bonds, certificates, securities, savings certificates, etc., which are issued on or after 1st June, 2002, shall not be exempt. 7.3 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. [Section 4(b), 4(c), 4(k)(i) and 4(k)(ii)] 8. Withdrawal of exemption of grossing up of tax in certain cases 8.1 Under the existing provision contained in clause (5B) of section 10, the tax paid by an employer (being the Government, local authority, any corporation set up under any special law or any approved institution or body carrying on scientific research), on remuneration payable to a technician (being an individual not resident in India in any of the four financial years immediately preceding the year in which he arrived in India) is not included in computing the total income of the technician. 8.2 Under the existing provision of clause (6A) of section 10, the tax paid by the Government or Indian concern, on royalty/or fees for technical services paid by them under an agreement, which either relates to a matter included in the industrial policy of the Government and is in accordance with that policy or is approved by the Central Government, is not included in computing the total income of the person on whose behalf the tax is paid. 8.3 Under the existing provision of clause (6B) of section 10, the tax paid by the Government or an Indian concern, under certain conditions, is not included in computing the total income of the non-resident/foreign company, on whose behalf the tax is so paid. 8.4 Since the tax paid by another person on behalf of an assessee is a part of the total income of the assessee and in a moderate tax regime, such exemptions are not required, clause (5B) has been deleted and a sunset clause has been provided in clauses (6A) and (6B) of section 10 through the Finance Act, 2002 so that exemptions will not be made available with respect to agreements entered into on or after 1st June, 2002. 8.5 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. [Section 4(d), 4(f) and 4(g)] 9. Withdrawal of exemption on certain remuneration received by an employee who is a foreign citizen 9.1 Under the existing provisions contained in sub-clause (i) of clause (6) of section 10, passage money or the value of any free or concessional passage, received by or due to an employee, who is not a citizen of India, for himself, his spouse and children, is exempt, subject to certain conditions. 9.2 Sub-clause (i) of clause (6) of section 10 has been omitted through the Finance Act, 2002, so as to withdraw this exemption. 9.3 This amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent years. [Section 4(e)] 10. Exemption of amount received under VRS extended to employees of institutions having importance throughout India or throughout a State 10.1 Under the existing provision contained in clause (10C) of section 10, an amount up to Rs. 5 lakhs received by an employee of a public sector company or any other company or an authority established under a Central, State or Provincial Act or a local authority or a co-operative society or a University or an Indian Institute of Technology or any State Government or the Central Government or a notified Institute of management, at the time of his voluntary retirement/separation is not included in computing his total income. The exemption is available if the payment is in accordance with a scheme of voluntary retirement/separation framed by the employer as per the prescribed guidelines. 10.2 Clause (10C) of section 10 has been amended through the Finance Act, 2002, so as to extend the exemption to employees of an institution having importance throughout India or throughout any State or States, as may be specified by the Central Government by notification in the Official Gazette. 10.3 Through Notification No. 151 of 2002, dated 19th June, 2002, rule 2BA of the Income-tax Rules, 1962, has been amended so as to provide the exemption to employees of institutions having importance throughout any State or States only if the conditions mentioned in the said rule 2BA are satisfied. 10.4 These amendments take effect retrospectively from 1st April, 2002 and apply in relation to the assessment year 2002-2003 and subsequent assessment years. [Section 4(h)] 11. Withdrawal of exemption on exchange risk premium received by public financial institutions 11.1 Under clause (23E) of section 10, the income of a notified Exchange Risk Administration Fund (ERAF) set up by public financial institutions is exempt from payment of income-tax. Under clause (14A) of section 10, any income received by a public financial institution as exchange risk premium from any person borrowing in foreign currency from such institutions is exempt, provided the premium is credited by the institution to the ERAFs. 11.2 These exemptions were introduced in 1989 for providing exchange risk protection to borrowers of foreign currency loans from the financial institutions. The operations of these ERAFs are commercial in nature, wherein they collect an exchange risk premium to meet the actual losses on account of exchange fluctuation. The ERAFs have been in existence for a considerable period now and the tax exemptions have outlived their utility. However, any sum paid by a public financial institution by way of contribution to any such Exchange Risk Administration Fund shall continue to get deduction under section 36(1)(x). 11.3 In view of this, through the Finance Act, 2002, clauses (14A) and (23E) of section 10 have been deleted so as to withdraw exemption on income of Exchange Risk Administration Funds and also on income received as exchange risk premium by a public financial institution. 11.4 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. [Section 4(j) and 4(u)] 12. Income of certain local authorities to become taxable 12.1 Under the existing provisions contained in clause (20) of section 10, the income of a local authority chargeable under the head "Income from house property", "Capital gains" or "Income from other sources" or from a trade or business carried on by it which accrues or arises from the supply of a commodity or service within its jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area is exempt from payment of income-tax. 12.2 Through the Finance Act, 2002, this exemption has been restricted to the Panchayats and Municipalities as referred to in articles 243(d) and 243P(e) of the Constitution of India respectively. Municipal Committees and District Boards, legally entitled to or entrusted by the Government with the control or management of a municipal or a local fund and Cantonment Boards as defined under section 3 of the Cantonments Act, 1924. 12.3 The exemption under clause (20) of section 10 would, therefore, not be available to Agricultural Marketing Societies and Agricultural Marketing Boards, etc., despite the fact that they may be deemed to be treated as local authorities under any other Central or State legislation. Exemption under this clause would not be available to port trusts also. 12.4 This amendment will take effect from 1st April, 2003 and will, accordingly, applies in relation to the assessment year 2003-2004 and subsequent assessment years. [Section 4(l)] 13. Income of certain Housing Boards, etc., to become taxable 13.1 Under the existing provisions contained in clause (20A) of section 10, income of the Housing Boards or other statutory authorities set up for the purpose of dealing with or satisfying the need for housing accommodations or for the purpose of planning, development or improvement of cities, towns and villages is exempt from payment of income-tax. 13.2 Through the Finance Act, 2002, clause (20A) of section 10 has been deleted so as to withdraw exemption available to the abovementioned bodies. The income of Housing Boards of the States and of Development Authorities would, therefore, also become taxable. 13.3 Under section 80G, donation made to housing authorities, etc., referred to in clause (20A) of section 10 is eligible for 50% deduction from total income in the hands of the donors. Since clause (20A) of section 10 has been deleted, donation to the housing authorities, etc., would not be eligible for deduction in the hands of the donors and this may result in drying up of donations. To continue the incentive to donation made to housing authorities, etc., section 80G has been amended so as to provide that 50% of the sum paid by an assessee to an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both, shall be deducted from the total income of such assessee. 13.4 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. [Sections 4(m) and 30] 14. Power to withdraw approval or rescind notification issued in the cases of scientific research association, news agency, notified trust or institution, educational and medical institution, etc. 14.1 Through the Finance Act, 2002, clauses (21), (22B), (23A), (23B) and (23C) of section 10 have been amended, by inserting a proviso in respective clauses, so as to provide explicit powers to the Central Government and the prescribed authority to rescind the notification or withdraw the approval, if the Central Government or the prescribed authority is satisfied that all or any of the specified conditions have been contravened. A copy of such order, rescinding the notification or withdrawing the approval shall be sent to such association, institution, etc., and also to the Assessing Officer. 14.2 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. [Section 4(n), 4(o), 4(q), 4(r) and 4(s)] 15. Withdrawal of exemption to certain sports bodies 15.1 Under the existing provisions contained in clause (23) of section 10, income of a notified association or institution established in India and having as its object the control, supervision, regulation or encouragement of the games of cricket, hockey, football, tennis or other notified sports, is exempt from income-tax. 15.2 Through the Finance Act, 2002, clause (23) of section 10 has been omitted so as to withdraw the tax exemption available to the abovementioned bodies. 15.3 Under section 80G, donation made to sports associations and institutions notified under clause (23) of section 10, is eligible for 50% deduction from total income in the hands of the donor subject to fulfilment of certain conditions. In addition, sums donated to Indian Olympic Association or to associations or institutions notified under that clause, for development of sports and games in the country and for their sponsorship, is eligible for 100% deduction from total income in the hands of the donor provided the amount received is applied for purposes of development of infrastructure or for sponsoring of games and sports. Even after the omission of clause (23) of section 10, if a sports body is registered as a charitable organisation under section 12AA, the donor will be entitled to deduction under section 80G at 50% in respect of the donation made to such sports body. However, donations for the purposes of development of infrastructure for sports and games and for their sponsorship would not be eligible for 100% deduction after omission of clause (23) of section 10. In order to continue this benefit, section 80G has been amended to provide that any sum paid by a corporate assessee as donations to the Indian Olympic Association or to any other association or institution established in India as the Central Government may, having regards to the prescribed guidelines, by notification in the Official Gazette, specify in this behalf for— (i) the development of infrastructure for sports and games ; or (ii) the sponsorship of sports and games, in India ; shall be deducted from the total income of that corporate assessee. The guidelines in this regard will be prescribed by the Central Government. 15.4 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. [Sections 4(p) and 30] 16. Modified conditions for accumulation of income of any fund, trust or institution, university or other educational institution and hospital or other medical institution and restriction on payment or credit out of such accumulation. 16.1 The existing provisions contained in sub-clauses (iv) or (v) or (vi) or (via) of clause (23C) of section 10, inter alia, permit accumulation of twenty-five per cent. of the income for an unlimited period, without any conditions. 16.2 Through the Finance Act, 2002, clause (23C) of section 10 has been amended to provide that where more than fifteen per cent. of the income is accumulated on or after the 1st day of April, 2002, the period of the accumulation of the amount exceeding fifteen per cent. of its income shall, in no case exceed five years. Thus, only fifteen per cent. of the income can now be accumulated for an unlimited period and without any condition. 16.3 Through the Finance Act, 2002, a proviso has also been inserted in clause (23C) of section 10 so as to provide that where the fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or (v) or (vi) or (via) does not apply its income during the year of receipt and accumulates it, any payment or credit out of such accumulation to any trust or institution registered under section 12AA or to any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or (v) or (vi) or (via) shall not be treated as application of income to the objects for which such entity is established. 16.4 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. [Section 4(s)] 17. Exemption of the income of the Credit Guarantee Fund Trust for Small Industries. 17.1 Through the Finance Act, 2002, a new clause (23EB) has been introduced in section 10 of the Income-tax Act so as to exempt the income of the Credit Guarantee Fund Trust for Small Industries being a trust created by the Government of India and the Small Industries Development Bank of India established under sub-section (1) of section 3 of the Small Industries Development Bank of India Act, 1989, for a period of five previous years relevant to the assessment years beginning on 1st day of April, 2002 and ending on the 31st day of March, 2007. 17.2 This amendment takes effect retrospectively from 1st April, 2002 and applies in relation to the assessment years 2002-2003, 2003-2004, 2004-2005, 2005-2006 and 2006-2007. [Section 4(v)] 18. Withdrawal of exemption to the authorities for marketing of commodities. 18.1 Under the existing provisions contained in clause (29) of section 10, in the case of an authority constituted under law, for marketing of commodities, any income derived from the letting of godown or warehouses for storage, processing or facilitating the marketing of commodities, is exempt from payment of income-tax. 18.2. Through the Finance Act, 2002, clause (29) of section 10 has been omitted to withdraw the exemption provided to these marketing authorities. The income of Central Warehousing Corporation and the State Warehousing Corporations which was hitherto exempt under clause (29), will therefore, become taxable. 18.3 This amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. [Section 4(y)] 19. Amendment in the provisions relating to deduction under section 10A to units in Free Trade Zones, Special Economic Zones, etc. and under section 10B to 100% Export Oriented Units. 19.1 Under the existing provisions of section 10A, a deduction is given of 100% of profit and gains from export earnings of new undertakings established in Free Trade Zones, Software Technology Parks, Electronic Hardware Technology Parks or Special Economic Zones (SEZs), which are engaged in manufacture or production of articles or things or computer software. 19.2 Section 10B provides for a similar deduction in respect of export earnings of 100% Export Oriented Units engaged in manufacture or production of articles or things or computer software. 19.3 Such deduction is available for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be. For computing the deduction, the profits derived from export of articles or things or computer software are worked out by taking the amount, which bears to the net profits of the business, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. 19.4 In view of the need for resource mobilization in the short run, the Finance Act, 2002 seeks to restrict the 100% deduction under sections 10A and 10B, for one assessment year, i.e., 2003-2004 to 90% of such profits and gains as are derived by an undertaking from the export of articles or things or computer software. 19.5 Under the existing provisions of section 10A, the deduction is available for a maximum period of ten consecutive assessment years starting from the year of commencement of production. After the assessment year commencing on or after 1st April, 2010, no deduction shall be available irrespective of the year of commencement of production. However, in respect of undertakings commencing operation in the notified Special Economic Zones (SEZs) on or after 1st April, 2002, the Finance Act, 2002, intends to provide a separate tax holiday for a total period of seven assessment years, comprising a deduction of 100% of export profits for five years followed by deduction of 50% of export profits for subsequent two years. The proposal shall have the effect of extending the deduction under section 10A beyond the assessment year 2010-2011, in respect of undertakings operating from the notified Special Economic Zones (SEZs). 19.6 Sub-section (9) of section 10A and sub-section (9) of section 10B provide that no deduction under those sections shall be available where during any previous year the ownership or the beneficial interest in the undertaking is transferred by any means. 19.7 The above provision was introduced by the Finance Act, 2000, to prevent trading in incentives by shell companies formed only for that purpose. However, the above provision was not intended to bring within its purview cases of genuine business reorganization while maintaining the major portion of ownership or beneficial interest with the same persons who were the owners of the business before such reorganization. 19.8 Exceptions were made by the Finance Act, 2001, in the case of private limited companies becoming companies in which public are substantially interested as also disinvestment of equity shares by venture capital companies or funds. It was also clarified that cases of change in shareholding pattern in the case of public limited companies will also not affect the deduction. 19.9 The Finance Act, 2002, has introduced sub-section (9A) to provide that in case of genuine reorganization of business whereby a proprietary concern or a partnership is succeeded by a company, the prohibition of sub-section (9) will not apply if the beneficial ownership of not less than 51% continues to be held by the original promoters. Since undertakings can be owned by body corporate also, it is clarified that this will hold good even if the proprietor happens to be a body corporate. 19.10 This is however, subject to the condition that, the aggregate of the shareholding in the company of the partners of the firm, or of the sole proprietor in case of a proprietorship concern, is not less than fifty-one per cent. of the total voting power in the company and their shareholding continues to be as such for the period for which the deduction under this section is being claimed by the company in respect of the undertaking. 19.11 The amendment is proposed to be effective from 1st April, 2003, and shall be effective from assessment year 2003-04 and subsequent years. [Sections 5 and 6] 20. Modified conditions for accumulation of income of the charitable or religious trusts. 20.1 Under the existing provisions contained in clauses (a) and (b) of sub-section (1) of section 11, twenty-five per cent. of the income of a trust can be accumulated for an indefinite period, without any condition. 20.2 Through the Finance Act, 2002, sub-sections (1) and (2) of section 11 have been amended so as to provide that only fifteen per cent. of the income of a trust as against the existing limit of 25%, can be accumulated for an indefinite period, without any condition. 20.3 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. [Section 7] 21. Restriction on the application of accumulated income of the charitable or religious trusts. 21.1 Through the Finance Act, 2002, an Explanation has been inserted below sub-section (2) of section 11 so as to provide that any amount paid or credited out of income from property held under trust referred to in clause (a) or clause (b) of sub-section (1), read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, either during the period of accumulation or thereafter, shall not be treated as application of income for charitable or religious purposes. Thus, payment to other trusts and institutions out of income from property held under trust in the year of receipt will continue to be treated as application of income. However, any such payment out of the accumulated income shall not be treated as application of income and will be taxed accordingly. 21.2 Through the Finance Act, 2002, a new clause (d) has also been inserted in sub-section (3) of section 11 so as to provide that if any income referred to in sub-section (2) of the said section, is paid or credited to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or (v) or (vi) or (via) of clause (23C) of section 10, such payment or credit shall be deemed to be the income of the person making such payment or credit, of the previous year in which such payment or credit is made. 21.3 A proviso in sub-section (3A) has also been inserted so as to provide that the Assessing Officer shall not allow application of accumulated income by way of payment or credit made for the purposes referred to in clause (d) of sub-section (3) of section 11. This takes away the discretion of the Assessing Officer provided in sub-section (3A) to allow the trusts to apply the accumulated income for payment or credit to other charitable or religious trusts and institutions. 21.4 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent years. [Section 7] 22. Condition of publication of accounts by religious and charitable trusts in a local newspaper has been dispensed with. 22.1 Under the existing provision contained in clause (c) of section 12A, the exemption under sections 11 and 12 is not available to a trust or institution, having total income exceeding one crore rupees (before giving effect to the provisions of sections 11 and 12), unless such trust or institution publishes its accounts in a local newspaper, before the due date of furnishing the return of income and also furnishes a copy of such newspaper along with the return of income. 22.2 Under the existing provisions contained in the ninth proviso to clause (23C) of section 10, income of trust or fund or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clauses (iv), (v), (vi), (via) of the said clause, whose gross receipts exceed one crore rupees, is not exempt, unless the said trust or fund or institution or university or other educational institution or hospital or other institution, publishes its accounts in a local newspaper and furnishes a copy of such newspaper, along with the form of application for exemption or continuance thereof. 22.3 Since the trusts or institutions registered under section 12AA are already filing their returns, and the entities exempt under sub-clauses (iv), (v), (vi) and (via) are now also required to file their return of income, the requirement of publishing accounts in a local newspaper and furnishing a copy of such newspaper along with the return of income or along with the form of application for exemption or continuance thereof, as the case may be, has been dispensed with by omitting clause (c) of section 12A and the ninth proviso to clause (23C) of section 10 through the Finance Act, 2002. 22.4 These amendments take effect retrospectively from 1st April, 2002 and apply in relation to the assessment year 2002-2003 and subsequent years. [Sections 4(s) and 9] 23. Amendment of section 14A 23.1 Through the Finance Act, 2001, a new section namely 14A was inserted in the Income-tax Act retrospectively with effect from 1st April, 1962 to clarify the intention of the Legislature that no deduction shall be allowed in respect of any expenditure incurred by an assessee in relation to income which does not form part of the total income under the Income-tax Act. The intention of inserting the new section retrospectively was to set the existing controversy on this issue at rest and not to unsettle the cases by raising the issue afresh. 23.2 Through the Finance Act, 2002, a proviso to section 14A has been inserted so as to clarify that the Assessing Officer shall not reassess the cases under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. 23.3 This amendment takes effect retrospectively from 11th May, 2001, that is, the date on which the Finance Bill, 2001, received the assent of the President of India. [Section 10] 24. Perquisites not to be taxed in the case of low-paid salaried employees 24.1 As per the existing provisions of section 17, perquisites (representing the value of any benefit or amenity granted or provided free of cost or at concessional rate) are not included in the salary income in case of employees whose income under the head "Salaries", exclusive of the value of all benefits or amenities not provided by way of monetary payment, does not exceed rupees fifty thousand. 24.2 The Finance Act, 2002, provides an option to the employer to pay tax on non-monetary perquisites on behalf of the employee, which would be operative from assessment year 2003-2004. In the transitional year, i.e., for the assessment year 2002-2003, when no such option is available, the above limit of rupees fifty thousand has been enhanced to rupees one lakh. 24.3 This amendment shall be effective from 1st April, 2002 and will, accordingly, apply in relation to the assessment year 2002-2003 only. [Section 11] 25. Modification of provisions relating to income from house property 25.1 Under the existing provisions contained in section 24 of the Income-tax Act, interest payable on capital borrowed on or after 1st April, 1999, for acquiring or constructing one self-occupied house is deductible up to one lakh fifty thousand rupees where such acquisition or construction is completed before 1st April, 2003. 25.2 To sustain the pace of investment in the housing sector, the Finance Act, 2002, has amended the section to allow this deduction even where the acquisition or construction is completed on or after 1st April, 2003, so long as the acquisition or construction is completed within three years from the end of the financial year in which the capital was borrowed. 25.3 The Finance Act, 2002, has also inserted a proviso after the second proviso and the Explanation under section 24 with a view to prevent the unintended benefit of deduction of interest paid on amounts not actually used in acquiring or constructing the house. It stipulates that no such deduction shall be allowed in respect of such interest unless the person extending the loan certifies that such interest was payable in respect of the amount advanced for acquisition or construction of the house, or as refinance of the principal amount outstanding under an earlier loan taken for such acquisition or construction. 25.4 These amendments will take effect from 1st April, 2003, and will accordingly apply in relation to the assessment year 2003-04 and subsequent years. [Section 12] 26. New provisions for taxing the receipts in the nature of non-compete fees and exclusivity rights 26.1 For the purpose of giving certainty to taxation of receipts in the nature of non-compete fees and fees for exclusivity rights, the Finance Act, 2002, has included within the scope of "profit and gains of business or profession", any sum received or receivable in cash or in kind under an agreement for not carrying out activity in relation to any business ; or not to share any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services. However, the provisions clarify that receipts for transfer of right to manufacture, produce or process any article or thing or right to carry on any business, which are chargeable to tax under the head "Capital gains", would not be taxable as profits and gains of business or profession. 26.2 With a view to facilitate the implementation of the Montreal Protocol for the phasing out of the business of manufacture of Chloro-Fluoro Carbons (CFC) and Hydro Chloro-Fluoro Carbons (HCFC), the provision lays down that any sum received as compensation from the multilateral fund of the Montreal Protocol under the United Nations Environment Programme, in accordance with the terms of agreement entered into with the Government of India, will not be taxable as profits and gains of any business or profession. 26.3 This amendment shall be effective from 1st April, 2002 and will, accordingly, apply in relation to the assessment year 2002-2003 only. [Sections 3 and 13] 27. Additional depreciation on new machinery and plant 27.1 Under the existing provisions contained in sub-section (1) of section 32 of the Income-tax Act, deduction is allowed in respect of depreciation on assets owned wholly or partly by the assessee and used for the purposes of the business or profession at the rates prescribed under the Income-tax Rules, 1962. 27.2 Clause (iia) has been inserted in sub-section (1) of section 32 to allow a deduction of a further sum equal to fifteen per cent. of the actual cost of such machinery or plant acquired and installed after 31st day of March, 2002— (i) in the case of a new industrial undertaking, in the previous year in which it begins to manufacture or produce any article or thing ; or (ii) in the case of an industrial undertaking existing before 1st April, 2002, in the previous year in which it achieves substantial expansion by way of increase in the installed capacity by not less than twenty-five per cent. 27.3 Such further sum shall be deductible from the written down value of the asset. The deduction shall be allowed only if the assessee furnishes the details of plant and machinery and the increase in installed capacity of production in the prescribed form along with the return of income and a report from an accountant certifying that the deduction has been correctly claimed in accordance with the provisions of the clause. No deduction will be admissible in respect of machinery or plant installed in any office premises or any residential accommodation, including any accommodation in the nature of guest house or in respect of any office appliances or road transport vehicles. Further, no deduction will be admissible in respect of any machinery or plant, the whole of the actual cost of which is allowed as deduction, either by way of depreciation or otherwise in any one previous year. "Installed capacity" has been defined to mean the capacity of production as existing on the 31st March, 2002. 27.4 The Income-tax Rules, 1962, have been, suitably amended. The substituted rule 5A provides that the report from the accountant as required under section 32(1)(iia) shall be in Form No. 3AA. The earlier Form No. 3AA relating to audit report under section 32AB has been renumbered as Form No. 3AAA. 27.5 The amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent years. [Section 14] 28. Fiscal incentives for modernisation and fleet expansion of the shipping business 28.1 Under the existing provisions of section 33AC of the Income-tax Act, a Government company or a public company formed and registered in India with the main object of carrying on the business of operation of ships is allowed a deduction of an amount not exceeding hundred per cent. of the profits derived from the business of operation of ships and carried to a reserve account, subject to certain conditions. The first proviso to sub-section (1) of the said section, however, provides that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid-up share capital (excluding the amounts capitalised from the reserve) of the assessee, no allowance shall be made in respect of such excess. 28.2 In order to help the shipping industry modernise and expand its fleet, the Act has expanded the scope of the reserve to provide that only in case the aggregate of the amounts carried to the reserve account exceeds twice the aggregate of the amounts of the paid-up share capital, the general reserves and amount credited to the share premium account of the assessee, no allowance shall be made in respect of such excess. 28.3 The amendment will take effect from the 1st April, 2003, and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent years. [Section 15] 29. Amounts/donations received to be taxed as income in cases of withdrawal of approval to associations/institutions or withdrawal of notification in respect of eligible projects or schemes 29.1 Under the existing provisions of section 35AC, a deduction of the amount of expenditure incurred during the previous year by way of payment of any sum to a public sector company or a local authority or to an association or institution approved by the National Committee for carrying out any eligible project or scheme is allowed. Eligible project or scheme means a project or a scheme for promoting the social and economic welfare of, or upliftment of, the public as the Central Government may, by notification in the Official Gazette, specify in this behalf on the recommendations of the National Committee. Sub-section (4) of the said section provides that where the National Committee is satisfied that the project or scheme is not being carried on in accordance with all or any of the conditions subject to which approval was granted, it may withdraw the approval earlier granted to the association or institution. Sub-section (5) also provides for withdrawal of the notification where the project or scheme is not being carried out in accordance with all or any of the conditions on the basis of which such project or scheme was notified. 29.2 The Act has amended section 35AC, by inserting a new sub-section (6), to provide that in cases where the National Committee withdraws the approval granted by it to an association or institution on the ground that the project or scheme is not being carried out in accordance with all or any of the conditions subject to which the approval was granted or the notification through which a project or scheme was notified is withdrawn, the entire amount of contribution or donation received by the company or authority or association or institution, as the case may be, or the deduction claimed by a company in respect of any expenditure incurred directly on the eligible project or scheme, the notification for which is withdrawn by the National Committee, shall be deemed to be the income of the company or authority or association or institution, as the case may be, of the year in which such approval or notification is withdrawn. Such income will be taxed at the maximum marginal rate as if such income was not exempt under any provision of the Income-tax Act. This will be notwithstanding the exemption, if any, otherwise available to such company or authority or association or institution under any provision of the Income-tax Act. 29.3 The amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent years. [Section 16] 30. Expenditure by way of payment to associations and institutions for carrying out programmes of conservation of natural resources 30.1 Under the existing provisions of section 35CCB, sums paid by an assessee carrying on business or profession to any association or institution which has as its object the undertaking of programmes of conservation of natural resources or of afforestation to be used for such programmes or to such fund for afforestation, as may be notified by the Central Government, are allowed as deduction in the computation of taxable profits. The deduction under this provision is not allowed unless the association or institution, and also the programme of conservation of natural resources or afforestation for which sums are paid, have been approved by the prescribed authority. 30.2 Under the existing provisions of section 80GGA, sums paid to any association or institution, which is approved by the prescribed authority for the purposes of section 35CCB, to be used for carrying out any approved programmes of conservation of natural resources or of afforestation, qualify for deduction in computation of taxable income of an assessee not carrying on business or profession. Similar deduction is also available in case the sums are paid to a fund notified by the Central Government for the purposes of afforestation. 30.3 The Act has amended the said sections to provide that no deduction under section 35CCB and under section 80GGA shall be allowed in cases where sums are paid after 31st March, 2002. However, rule 11K of the Income-tax Rules, 1962, relating to guidelines for recommending projects or schemes for the purpose of section 35AC has been amended to include, within the list, programmes of conservation of natural resources and of afforestation with effect from 1st April, 2002. 30.4 The amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent years. [Sections 17 and 31] 31. Balance instalments of expenditure incurred under voluntary retirement scheme to be allowed to the resulting entity 31.1 Under the existing provisions of sub-section (1) of section 35DDA of the Income-tax Act, where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee at the time of his voluntary retirement under any scheme of voluntary retirement, one-fifth of the amount so paid is deducted in computing the profits and gains of the business for that previous year and the balance amount is allowed to be deducted in equal instalments for each of the four immediately succeeding previous years. 31.2 The Act has amended the said section so as to provide that where the undertaking of an Indian company entitled to deduction for amortised voluntary retirement expenses is transferred before the expiry of the period specified to another Indian company in a scheme of amalgamation or demerger, the deduction shall continue to be available to the amalgamated company or the resulting company as if the amalgamation or demerger had not taken place. 31.3 Similarly, in case of re-organisation of certain forms of business, whereby a firm or a proprietary concern is succeeded by a company, the deduction shall continue to be available to the successor-company. 31.4 In the year of transfer, however, no deduction shall be available to the amalgamating company, the demerged company or to the firm or proprietary concern. 31.5 The amendment will take effect retrospectively from 1st April, 2001 and will, accordingly, apply in relation to the assessment year 2001-2002 and subsequent years. [Section 18] 32. Fiscal incentive for provisioning in respect of bad and doubtful debts in the case of banks and financial institutions 32.1 Under the existing provisions of sub-clause (a) of clause (viia) of sub-section (1) of section 36, a scheduled bank (not being a bank incorporated by or under the laws of a foreign country) or a non-scheduled bank is allowed a deduction in respect of any provision for bad and doubtful debts to the extent of five per cent. of the total income (computed before making any deduction under the said clause and Chapter VI-A) and an amount not exceeding ten per cent. of the aggregate average advances made by the rural branches of such banks. 32.2 In order to provide fiscal incentive to scheduled and non-scheduled banks, the Act has amended the said sub-clause to increase the present limit of deduction of five per cent. of the total income to seven and one-half per cent. of the total income. 32.3 The first proviso to section 36(1)(viia)(a) gives an option to a scheduled bank or a non-scheduled bank to claim deduction in respect of any provision made by the bank to the extent of five per cent. of the amount of any assets classified by the Reserve Bank of India as doubtful assets or loss assets shown in the books of account of the bank on the last day of the previous year. This option is available for five consecutive assessment years commencing on or after 1st April, 2000 and ending before 1st April, 2005. 32.4 Further, under sub-clause (c) of clause (viia) of sub-section (1) of section 36, a deduction to the extent of five per cent. of the total income (computed before making any deduction under this clause and Chapter VI-A) is allowed to a public financial institution, a State Financial Corporation and a State Industrial Investment Corporation in respect of any provision for bad and doubtful debts made by such institutions or corporations. 32.5 The Act has increased the limit of five per cent. given under the proviso to sub-clause (a) to ten per cent. and also extended this facility to a public financial institution, State Financial Corporation or State Industrial Investment Corporation. The optional deduction shall be available for a period of two consecutive assessment years commencing on or after 1st April, 2003 and ending before 1st April, 2005. 32.6 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent years. [Section 19] 33. Rationalization of interest paid to partner 33.1 Under the existing provisions of sub-clause (iv) of clause (b) of section 40, payment of interest by a firm to any partner which is authorised by, and is in accordance with the terms of the partnership deed, is allowed as a deduction subject to the maximum rate of eighteen per cent. simple interest per annum. 33.2 With a view to rationalise the provisions, the Act has amended the said sub-clause so as to reduce the above maximum rate of interest from eighteen per cent. to twelve per cent. 33.3 The amendment will take effect from 1st June, 2002. [Section 20] 34. Addition or deduction to the actual cost of a capital asset on account of change in the rate of exchange to be allowed on actual discharge of the liability 34.1 Under the existing provisions contained in section 43A, where an assessee has acquired any capital asset from a country outside India for the purposes of his business or profession on deferred payment terms or against a foreign loan and due to change in the rate of exchange at any time after the acquisition of the asset, there is increase or reduction in the rupee liability towards meeting the instalments of the cost of the asset or of the foreign loan, as the case may be, falling due for payment after the date of change of rate of exchange, the amount of such increase or reduction will be allowed to be adjusted in the original actual cost of the asset for the purpose of calculating the allowance on account of depreciation in computing the profits. 34.2 Similar adjustment in the original actual cost is allowed to be made in respect of capital assets acquired by the assessee and used in scientific research related to the business carried on by him or patent rights or copyrights acquired from abroad or of any capital asset acquired by a company for the purpose of promoting family planning amongst its employees. Further, in computing the capital gains arising to the assessee on the sale or transfer of a capital asset acquired by him from abroad on deferred payment terms or against a foreign loan, the additional rupee liability incurred by him in repaying the instalments of the cost or the foreign loan, as the case may be, after the date of devaluation of the rupee, is to be added to the original actual cost of the asset. The section also secures that where there is a decrease in the rupee liability of the assessee in respect of assets acquired by him from abroad, due to change in the rate of exchange of the rupee, the original actual cost of the asset will have to be correspondingly reduced. 34.3 With a view to rationalize the provisions of the said section, the Act has substituted the existing section 43A to provide that where a capital asset has been acquired from a foreign country, the adjustments to the actual cost of the asset on account of change in the rate of exchange shall be allowed to be made only on the basis of rupee liability at the time of actual payment by the assessee towards the cost of the asset or repayment of the foreign loan or interest irrespective of the method of accounting adopted by the assessee. 34.4 It has also been provided that if any adjustment to the actual cost or expenditure or cost of acquisition has been allowed in consequence of change in the rate of exchange in any assessment year before the 1st April, 2003, the adjustment to that extent shall not be made again at the time of actual payment. 34.5 The amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent years. [Section 21] 35. Presumptive income for truck owners revised for inflation-adjustment 35.1 Under the existing provisions of section 44AE of the Income-tax Act, 1961, a presumptive scheme of taxation is available to assessees engaged in business of plying, hiring or leasing goods carriages. The scheme applies to an assessee, who owns not more than ten goods carriages. Under this scheme, which is optional for the assessee, a fixed amount of income per vehicle is presumed to accrue to the owner of the vehicle and charged to tax at applicable tax rates for the year. Under the existing provisions, income under this section is presumed to be Rs. 2,000 per month, per vehicle for owners of heavy goods vehicles, and Rs. 1,800 per month, per vehicle for the owners of light goods vehicles. An assessee opting for this scheme is exempted from maintaining books of account and other details to substantiate the income. 35.2 With a view to rationalize the presumptive rates on account of inflation, the Finance Act, 2002, has enhanced the amounts of income to Rs. 3,500 per vehicle, per month for the owners of heavy goods vehicle and to Rs. 3,150 per vehicle, per month for the owners of light goods vehicle. 35.3 This amendment will take effect from the 1st day of April, 2003 and will, accordingly, apply in relation to the assessment year 2003-04 and subsequent years. [Section 22] 36. Exemption of capital gains on lending of securities through the RBI 36.1 Under the existing provision contained in clause (xv) of section 47 of the Income-tax Act, any transfer in a scheme for lending of any securities under an agreement or arrangement, which the assessee has entered into with the borrower of such securities and which is subject to the guidelines issued by the Securities and Exchange Board of India, shall not be regarded as transfer for the purpose of charging capital gains to tax. 36.2 With a view to ensure guaranteed settlement of transactions in money, government securities and forex markets, the RBI has established the Clearing Corporation of India Limited (CCIL). Since the settlement process may involve lending of securities, the Finance Act, 2002, has extended the benefit of exemption from capital gains tax also to any transfer in a scheme for lending of any securities under an agreement or arrangement, which is subject to the guidelines issued by the Reserve Bank of India. 36.3 This amendment will take effect from 1st April, 2003, and will accordingly apply in relation to assessment year 2003-04 and subsequent years. [Section 23] 37. Computation of capital gains in real estate transactions 37.1 The Finance Act, 2002, has inserted a new section 50C in the Income-tax Act to make a special provision for determining the full value of consideration in cases of transfer of immovable property. 37.2 It provides that where the consideration declared to be received or accruing as a result of the transfer of land or building or both, is less than the value adopted or assessed by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall be deemed to be the full value of the consideration, and capital gains shall be computed accordingly under section 48 of the Income-tax Act. 37.3 It is further provided that where the assessee claims that the value adopted or assessed for stamp duty purposes exceeds the fair market value of the property as on the date of transfer, and he has not disputed the value so adopted or assessed in any appeal or revision or reference before any authority or court, the Assessing Officer may refer the valuation of the relevant asset to a Valuation Officer in accordance with section 55A of the Income-tax Act. If the fair market value determined by the Valuation Officer is less than the value adopted for stamp duty purposes, the Assessing Officer may take such fair market value to be the full value of consideration. However, if the fair market value determined by the Valuation Officer is more than the value adopted or assessed for stamp duty purposes, the Assessing Officer shall not adopt such fair market value and shall take the full value of consideration to be the value adopted or assessed for stamp duty purposes. 37.4 This amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-04 and subsequent years. [Section 24] 38. Exemption under section 54EC in case of investment in bonds issued by Small Industries Development Bank of India (SIDBI) and the National Housing Bank 38.1 Under the existing provisions of section 54EC of the Income-tax Act, the capital gain arising from the transfer of a long-term capital asset is not charged to tax if such capital gain is invested in any bond redeemable after three years, issued on or after 1st April, 2000 by the National Bank for Agriculture and Rural Development or the National Highway Authority of India, or on or after the 1st day of April, 2001 by the Rural Electrification Corporation Limited. 38.2 The Finance Act, 2002, has extended the benefit provided under section 54EC to cases where long-term capital gains are invested in bonds redeemable after three years issued on or after the 1st day of April, 2002, by the Small Industries Development Bank of India (SIDBI) or by the National Housing Bank (NHB). 38.3 These amendments will take effect from 1st April, 2003 and, will accordingly apply in relation to the assessment year 2003-04 and subsequent years. [Section 25] 39. Amendment of section 55 of the Income-tax Act, 1961 39.1 Under section 45, any capital receipts arising out of transfer of any business or commercial rights are taxable under the head "Capital gains". The amount of "capital gains" is computed according to section 48 of the Income-tax Act, 1961. For this purpose, "cost of acquisition" and "cost of improvement" are defined under section 55. At present, in case of receipts for transfer of right to manufacture, produce or process any article or thing the "cost of acquisition" and "cost of improvement" are taken as "nil" under section 55. 39.2 The Finance Act, 2002, has amended section 55 so as to provide that the "cost of acquisition" and "cost of improvement" for working out "capital gains" on capital receipts arising out of transfer of right to carry on any business would also be taken as "nil". [Section 26] 40. Modifications of provisions relating to set off of long-term capital loss 40.1 The existing provision contained in section 70 of the Income-tax Act provides that where the net result for any assessment year in respect of any source falling under any head of income is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. Further, section 74 of the Income-tax Act provides that a loss under the head "Capital gains" can be carried forward and set off against capital gains in the following eight assessment years. 40.2 Since long-term capital gains are subject to lower incidence of tax, the Finance Act, 2002 has rectified the anomaly by amending the said sections to provide that while losses from transfer of short-term capital assets can be set off against any capital gains, whether short-term or long-term, losses arising from transfer of long-term capital assets, will be allowed to be set off only against long-term capital gains. It is further provided that a long-term capital loss shall be carried forward separately for eight years to be set off only against long-term capital gains. However, a short-term capital loss, may be carried forward and set off against any income under the head "Capital gains". 40.3 The existing provisions of sub-section (3) of section 74 are transitory provisions with regard to carry forward of capital losses relating to assessment year 1987-88 and earlier years. Since these provisions have become redundant, the Finance Act, 2002, has omitted this sub-section. 40.4 These amendments will take effect from 1st April, 2003, and will accordingly apply in relation to assessment year 2003-04 and subsequent years. [Sections 27 and 29] 41. Incentive for amalgamation in telecom sector 41.1 Under the existing provision contained in section 72A of the Income-tax Act, the benefit of carry forward and set off of accumulated losses and unabsorbed depreciation is allowed in cases of demerger or amalgamation of a company owning an industrial undertaking or a ship. Industrial undertaking is defined to mean any undertaking which is engaged in the manufacture or processing of goods or computer software, the business of generation or distribution of electricity or any other form of power, mining or the construction of ships, aircrafts and railway systems. 41.2 With a view to encourage rapid consolidation and growth in an important infrastructural area, the Finance Act, 2002, has amended the section to extend the benefit under this section to an industrial undertaking engaged in the business of providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services. 41.3 This amendment will take effect from 1st April, 2003 and will accordingly apply in relation to assessment year 2003-04 and subsequent years. [Section 27] 42. Extension of date for utilisation of donations received for Gujarat earthquake relief 42.1 As per the existing provisions of section 80G of the Income-tax Act, 1961, an assessee is allowed a deduction from his total income in respect of donations made to specified charitable funds and institutions. The amount of deduction is 100% of donation, in respect of donations to certain funds of national importance, while deduction on account of donation to other approved funds/institutions is available at 50%. 42.2 In view of the enormity of the earthquake in Gujarat, donations to trusts, funds and institutions received up to 30th September, 2001, to be utilized for relief of victims of the earthquake were allowed 100% deduction, by the Taxation Laws (Amendment) Act, 2001. Such donations were to be utilized for relief of earthquake victims in Gujarat, by 31st March, 2002. The un-utilized amount was to be transferred to the Prime Minister's National Relief Fund by 31st March, 2002, failing which, the amount of donations to the extent unutilized or not transferred to the Prime Minister's National Relief Fund were to be taxed in the hands of such funds, institutions, or trusts, in terms of provisions of clause (23C) of section 10 or section 12 of the Income-tax Act, 1961. Further, such trusts, funds and institutions, had to maintain separate accounts in respect of such funds and had to render the same to the prescribed authority by 30th June, 2002. 42.3 With a view to allow adequate time for the completion of the relief work required due to wide-scale extent of the damage, the Finance Act, 2002, extends the time limit for utilization of eligible donations and transfer of un-utilized funds to the Prime Minister's National Relief Fund from 31st March, 2002 to 31st March, 2003. The date of submission of separate accounts to the prescribed authority has been extended upto 30th June, 2003. 42.4 Further, in order to ensure fiscal discipline, amendment has been made in clause (23C) of section 10 and section 12, so as to provide that if no accounts are submitted to the prescribed authority within the prescribed time-limit, the amount of donations received by the trusts, funds or institutions for relief of earthquake victims, would be treated as the income of such trusts, funds or institutions and charged to tax accordingly. 42.5 The proposed amendment shall be effective retrospectively from 3rd February, 2001. [Sections 4, 8 and 30] 43. Enhancement of rate of deduction on foreign exchange earnings of hotels or tour operators 43.1 Under the existing provisions of section 80HHD, a deduction is available to the business of a hotel, tour operator or travel agent, in respect of earnings in convertible foreign exchange from service provided to foreign tourists. The total amount of deduction, for the assessment year 2003-2004 is computed by taking the aggregate of 20% of the profits derived from services provided to foreign tourists and a further amount equal to 20% of the profits, as are transferred to a reserve account to be utilised in the prescribed manner for development of tourism related infrastructure within five years. For the assessment year 2004-05, the total amount of deduction is equal to 10% of eligible profits and a further 10% of profits, as are transferred to the reserve account. 43.2 In view of the slowdown in the tourism sector subsequent to the recent global events, as a measure to provide fiscal support to this sector, the Finance Act, 2002, enhances the rate of deduction in the following manner : (i) For the assessment year 2003-04, 25% of profits from services to foreign tourist, and further 25% of the profits, as are transferred to the reserve, thereby raising the overall deduction from 40% to 50%. (ii) For the assessment year 2004-05, 15% of profits from services to foreign tourist, and further 15% of the profits as are transferred to the reserve, thereby raising the overall deduction from 20% to 30%. 43.3 This amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-04 and subsequent years. [Section 32] 44. Separate audit for undertakings claiming deduction under sections 80-IA and 80-IB mandatory for companies and co-operative societies also 44.1 Section 80-IA of the Income-tax Act, 1961 provides for a ten-year period (out of initial fifteen years) hundred per cent. tax holiday to undertakings or enterprise engaged in the business of developing, or/and maintaining, or/and operating the infrastructure facilities specified in that section, or of providing telecommunication services, or of developing or/and operating/or maintaining and operating an industrial park or a Special Economic Zone or of generating power or generation and distribution of power. 44.2 Section 80-IB of the Income-tax Act, 1961, provides for a deduction at specified percentage from profits and gains of an undertaking/enterprise, carrying on an eligible business for such number of assessment years as may be specified. 44.3 For availing of the deduction under sections 80-IA and 80-IB of the Income-tax Act, 1961, a separate audit report in respect of the eligible undertaking is to be furnished by an eligible assessee, other than a company or a co-operative society. 44.4 The Finance Act, 2002, makes the requirement of furnishing separate audit report (in the prescribed form and in the prescribed manner), mandatory for companies or co-operative societies as well, for claiming deduction under sections 80-IA and 80-IB. 44.5 The Finance Act, 2002, has also amended sub-section (2) of section 80-IA of the Income-tax Act, 1961, to make reference to the undertaking or enterprise which develops, develops and operates, or maintains and operates a Special Economic Zone, which is clarificatory in nature. [Section 33] 45. Tax holiday for convention centres and multiplex theatres 45.1 Under the existing provisions of section 80-IB, deduction is available to industrial undertakings set up in backward districts/backward areas, undertakings engaged in scientific research and development, undertakings engaged in developing and building housing projects and those engaged in the integrated business of handling, storage and transportation of food grains, etc. 45.2 The entertainment industry in the country is a major source of employment and has a significant potential to boost the economy. The Finance Act, 2002, therefore, makes amendment in the section 80-IB of the Income-tax Act, 1961, to allow 50% deduction for a period of 5 years from the profits of the business of building, owning and operating a multiplex theatre in cities other than New Delhi, Chennai, Kolkata and Mumbai. For availing of this deduction, the multiplex theatre is to be constructed during 1st April, 2002 to 31st March, 2005 and should be of approved norms. The deduction commences from the year the multiplex starts commercial operation. 45.3 With a view to encourage construction of large-scale modern convention centres, the Finance Act, 2002, provides a deduction of 50% from the profits of the business of building, owning and operating a convention centre for a period of 5 years. For availing of the deduction, the convention centre should be of approved norms and should be constructed during 1st April, 2002 to 31st March, 2005. The deduction commences from the year the convention centre starts commercial operation. 45.4 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-04 and subsequent years. [Section 34] 46. Tax holiday for new industrial undertakings set up in industrially backward States industrially backward district extended for two years 46.1 Under sub-section (4) of section 80-IB of the Income-tax Act, 1961, industrial undertakings which begin to manufacture or produce articles or things or to operate cold storage plant or plants during the period beginning on the 1st day of April, 1993 and ending on 31st March, 2002, in an industrially backward State as specified in the Eighth Schedule, are eligible for deduction of the profits of such undertakings for ten years. For cooperative societies the deduction is available for a period of twelve assessment years. The deduction is equal to 100% of profits and gains of the undertaking for five years commencing from the initial assessment year and thereafter, twenty-five per cent. (or thirty per cent. for companies) for further five years. In respect of certain notified industries in North-Eastern Region, the amount of deduction is equivalent to hundred per cent. of profit and gains of the undertaking for ten assessment years. 46.2 Under sub-section (5) of section 80-IB of the Income-tax Act, 1961, industrial undertakings which begin to manufacture or produce articles or things or to operate cold storage plant or plants during the period beginning on the 1st day of October, 1994 and ending on 31st March, 2002, in certain notified industrially backward districts, are eligible for deduction of its profits for ten years. For co-operative societies the deduction is available for a period of twelve assessment years compared to ten years for others. 46.3 The deduction for Category A districts is available for ten assessment years and is equal to 100% of profits and gains of the undertaking for five years commencing from the initial assessment year and thereafter, twenty-five per cent. (thirty per cent. for companies) for further five years. 46.4 The deduction for Category B districts is equal to 100% of profits and gains of the undertaking for three years commencing from the initial assessment year and thereafter, twenty-five per cent. (thirty per cent. for companies) for further five years. 46.5 The Finance Act, 2002, extended the tax holiday to new undertakings to be set up in industrially backward States and districts under section 80-IB, in respect of undertakings set up on or before 31st March, 2004. 46.6 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-04 and subsequent years. [Section 34] 47. Amendment of section 80L to include income from dividend, units of Unit Trust of India (UTI) and Mutual Funds specified under section 10(23D) for deduction 47.1 Under section 80L certain specified incomes such as interest on securities, etc., are deductible from gross income up to Rs. 9,000. In addition, income in the nature of interest on any Government security is eligible for a further deduction of Rs. 3,000. 47.2 By the Finance Act, 1997, a new clause (33) was added to section 10, whereby the income from dividend, units of Unit Trust of India (UTI) and Mutual Funds specified under section 10(23D) was made exempt from taxation in the hands of shareholders with effect from 1st April, 1998. As a corollary, deduction under section 80L was withdrawn on such incomes with effect from 1st April, 1998. However, prior to 1st April, 1998, when such incomes were taxable in the hands of the shareholders, it was eligible for deduction under section 80L. 47.3 The Finance Act, 2002, has reversed the taxability of dividend income, and accordingly the exemption provided by clause (33) of section 10 to the income from dividend, units of Unit Trust of India (UTI) and Mutual Funds specified under section 10(23D) was withdrawn with effect from 1st April, 2003. In view of the same, income from dividend, units of Unit Trust of India (UTI) and Mutual Funds specified under section 10(23D) are being made eligible for the purpose of the deduction under section 80L. The proposed benefit shall be available within the basic limit of Rs. 9,000. In addition, an additional deduction of Rs. 3,000 is allowable in respect of income from interest on Government securities. 47.4 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-04 and subsequent years. [Section 35] 48. Rationalization of tax rebate under section 88 48.1 Section 88 of the Income-tax Act provides for a deduction from the amount of income-tax payable by individuals and Hindu undivided families, in respect of sums paid or deposited out of the income chargeable to tax during the previous year in certain specified schemes, at a fixed percentage of the aggregate of such investments or contributions. 48.2 The eligible investments/contributions include life insurance premia, provident fund contributions, subscriptions to National Savings Certificates, investments in specified mutual funds and pension funds, repayment of principal amount of housing loans or co-operative housing instalments, investment in specified infrastructure bonds, etc. 48.3 The aggregate amount of investment eligible for the tax rebate is subject to an overall limit of Rs. 60,000. In case of certain specified infrastructure bonds, the eligible limit of investment gets enhanced to Rs. 80,000. The deduction is equal to 20% of the aggregate amounts invested in specified instruments. In the case of an author, playwright, artist, musician or sportsman, the deduction is equal to 25% of the amounts invested in such instruments. For taxpayers having gross salary income not exceeding Rs. 1 lakh (before allowing deduction under section 16) and in whose case, gross salary income is not less than 90% of the gross total income from all other sources, the deduction is available at the rate of 30%. 48.4 With a view to reduce the high cost of mobilizing small savings, the Finance Act, 2002, intends to rationalize the rate of tax rebate under section 88. As per the new provisions, persons having gross total income (before deduction under Chapter VI-A) above Rs. 1,50,000 but not more than Rs. 5 lakhs, would be entitled to get the tax rebate at 15%. As an incentive for savings for the low-income group, rebate at 20% shall be continued for tax payers having gross total income, (before deduction under Chapter-VI-A) not exceeding Rs. 1,50,000. Keeping in account the needs of the low cash salaried taxpayers, the rebate shall be higher at the rate of 30% for salaried taxpayers having gross salary income not exceeding Rs. 1 lakh (before allowing deduction under section 16) and where gross salary income is not less than 90% of the gross total income from all other sources. The rebate shall not be available in case of persons having gross total income (before deduction under Chapter VI-A) more than Rs. 5 lakhs. 48.5 The special rate of 25% of tax rebate for sportspersons, artists, etc., is also being withdrawn for the sake of rationalization. 48.6 Also, the requirement of making investment out of income chargeable to tax of the previous year has also been withdrawn, if the amount of investment does not exceed the total income of the assessee. 48.7 Further, the general limit of eligible investment has been increased from Rs. 60,000 to Rs. 70,000 and in case of investment in infrastructural securities, etc., specified in clauses (xvi) and (xvii) has been increased from Rs. 80,000 to Rs. 1,00,000. 48.8 The amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent years. [Section 37] 49. Relief under section 89 for recipients of family pension 49.1 Under the existing provisions of section 89 of the Income-tax Act, tax relief is provided to the assessee, if his tax liability is increased on account of receipt of salary, profits in lieu of salary, etc., being paid in arrears or in advance, in the year of such receipt. The tax relief is computed by working out the extent to which the tax liability would have been lower, had such income been received in the years it relates to. The proposed amendments seek to provide similar relief to family pension received in arrears by family members of the deceased employee. 49.2 The amendment shall be retrospectively effective from 1st April, 1996 and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 38] 50. Clarification regarding provisions of transfer pricing 50.1 Under the existing provisions contained in section 92 of the Income-tax Act, any income arising from an international transaction shall be computed having regard to the arm's length price. 50.2 The intention underlying the provision is to prevent avoidance of tax by shifting taxable income to a jurisdiction outside India by an associate enterprise controlling the prices charged in intra-group transactions. With a view to further clarify this intention, the Finance Act, 2002, has substituted section 92 so as to provide that even where the international transaction comprises of only an outgoing, the allowance for such expenses or interest arising from the international transaction shall also be determined having regard to the arm's length price. The provisions, however, would not be applicable in a case where the application of arm's length price results in reduction of income chargeable to tax in India. 50.3 The existing provisions contained in section 92A of the Income-tax Act provide as to when two enterprises shall be deemed to be associated enterprises. 50.3.1 The Finance Act, 2002, has amended sub-section (2) of section 92A to clarify that where any of the criteria specified in sub-section (2) is fulfilled, two enterprises shall be deemed to be associate enterprises. 50.4 Under the existing provisions contained in the proviso to the sub-section (2) of section 92C of the Income-tax Act, if the application of the most appropriate method leads to determination of more than one price, the arithmetical mean of such prices shall be taken to be the arm's length price in relation to the international transaction. 50.4.1 With a view to allow a degree of flexibility in adopting an arm's length price, the Finance Act, 2002, has amended the proviso to sub-section (2) of section 92C to provide that where the most appropriate method results in more than one price, a price which differs from the arithmetical mean by an amount not exceeding five per cent. of such mean may be taken to be the arm's length price, at the option of the assessee. 50.5 Under the existing provisions contained in the second proviso to sub-section (4) of section 92C, where the total income of an enterprise is computed by the Assessing Officer on the basis of the arm's length price as computed by him, the income of the other associated enterprise shall not be recomputed by reason of such determination of arm's length price in the case of the first mentioned enterprise, where the tax has been deducted under the provisions of Chapter XVII-B on the amount paid by the first enterprise to the other associate enterprise. 50.5.1 The Finance Act, 2002, has amended the said second proviso to clarify that the provisions contained therein apply not only in a case where tax has been deducted under Chapter XVII-B, but also in cases where such tax was deductible, even if not actually deducted. 50.6 A new section 92CA has been introduced by the Finance Act, 2002. It provides that where an assessee has entered into an international transaction in any previous year, the Assessing Officer may, with the previous approval of the Commissioner, refer the computation of the arm's length price in relation to the said international transaction to a transfer pricing officer. The transfer pricing officer, after giving the assessee an opportunity of being heard and after making enquiries, shall determine the arm's length price in relation to the international transaction in accordance with sub-section (3) of section 92C. The Assessing Officer shall compute the total income of the assessee under sub-section (4) of section 92C having regard to the arm's length price determined by the Transfer Pricing Officer. 50.7 Section 92F of the Income-tax Act provides definitions of certain terms relevant to computation of arm's length price. The Finance Act, 2002, has amended the definition of "enterprise" contained in section 92F to include "in carrying out any work in pursuance of a contract" as one of the activities in which an enterprise may be engaged. 50.8 A separate definition of "permanent establishment" on the lines of the definition found in tax treaties entered into by India with other countries has been provided. Permanent establishment includes a fixed place of business through which the business of the enterprise is wholly or partly carried on. The Finance Act, 2002, also substituted the definition of "specified date" to provide that "specified date" shall have the same meaning as assigned to "due date" in Explanation 2 below sub-section (1) of section 139. 50.9 These amendments being of clarificatory nature, will take effect from 1st April, 2002 and will accordingly apply to the assessment year 2002-2003 and subsequent years. [Sections 39, 40, 41, 42 and 43] 51. Amendment of section 115AC 51.1 Under the existing provisions contained in sub-clause (iii) of clause (b) of sub-section (1) of section 115AC, in the case of an assessee who is a non-resident, income by way of dividend and long-term capital gains arising from Global Depository Receipts (GDRs), "re-issued" in accordance with a scheme notified by the Central Government, against the existing shares of an Indian company purchased by him in foreign currency, through an approved intermediary, is taxed at a concessional rate of ten per cent. However, the GDRs "issued" against the existing shares are not covered by these provisions. 51.2 Through Finance Act, 2002, the said sub-clause (iii) has been amended so as to extend the concessional rate of tax on income by way of dividend and long-term capital gains arising from GDRs issued or re-issued in accordance with a scheme, as specified by the Central Government, against the existing shares of an Indian company, and purchased by the assessee in foreign currency through an approved intermediary. 51.3 In view of the above amendment, even the GDRs issued against the existing shares of an Indian company would be covered by the provisions of section 115AC. The condition that the Indian company issuing such GDRs should be listed on a recognised stock exchange, would no longer be a statu-tory requirement to avail of the benefit under this section, as long as the GDRs are issued in accordance with a scheme notified by the Central Government. Sub-clause (iv) would now, not be required and, therefore, has been omitted through the Finance Act, 2002. 51.4 These amendments take effect retrospectively from 1st April, 2002 and apply in relation to the assessment year 2002-2003 and subsequent assessment years. [Section 46] 52. Taxation of dividends 52.1 Under the existing provisions contained in section 115-O, in addition to the income-tax chargeable in respect of the total income of a domestic company, any amount declared, distributed or paid by way of dividends is charged to additional income-tax at the rate of 10 per cent. The tax so paid by the company is treated as the final payment of tax in respect of the amount declared, distributed or paid by way of dividend. Such dividend referred to in section 115-O is exempt in the hands of the shareholders under sub-clause (i) of clause (33) of section 10. The incidence of tax is, thus, on the payer company and not on the recipient. 52.2 Through the Finance Act, 2002, the earlier system of taxing dividend has been reverted to and the incidence of tax has been shifted on to the shareholder receiving the dividends, by omitting sub-clause (i) of clause (33) of section 10 and amending section 115-O so as to make the provisions of this section applicable only in respect of the profits distributed by the domestic companies before the 31st day of March, 2002. 52.3 To prevent cascading effect in the case of a company, section 80M has been reintroduced in a revised form. A deduction under this section would be available to a domestic company, which receives dividend from another domestic company, and again distributes dividend out of its profits. The amount of deduction on the dividends, so received by a domestic company from another domestic company, is limited to the extent of dividends distributed by the recipient company on or before the due date of filing of return. 52.4 Under the existing provisions contained in section 194, no tax is required to be deducted at source in the case of a shareholder, who is resident in India, for dividends referred to in section 115-O. With this shifting of the tax incidence to the recipient, the provisions of tax deduction at source have also been revived through the Finance Act, 2002. The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payments of dividends within India before making any payment in cash or before issuing any cheque or warrant in respect of any dividend or before making any distribution or payment to a shareholder, who is resident in India, of any dividend, would now be required to deduct from the amount of such dividend, income-tax at the rates in force. These rates are specified in Part II of the First Schedule to the Finance Act. With a view to avoid hardship to small investors and also to reduce the avoidable infructuous paperwork and issue of refund in non-taxable cases, a threshold limit of Rs. 1,000 has been provided below which no tax would be required to be deducted at source from payments by way of dividends. 52.5 As per the second proviso to sub-section (1) of section 195, no tax is required to be deducted at source in the case of a shareholder, who is a nonresident, or a foreign company, in respect of dividends referred to in section 115-O. Consequent upon the change in the scheme of taxation of dividend, this proviso has been omitted through the Finance Act, 2002. Thus, any person responsible for paying to a non-resident, not being a company, or a foreign company, at the time of credit of income by way of dividend, to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, would be required to deduct tax at the rates in force. These rates are specified in Part II of the First Schedule to the Finance Act. 52.6 Since provisions of section 115-O would now be inoperative, references to "other than dividends referred to in section 115-O" in sections 10(23FA), 10(23G), 115A, 115AC, 115ACA, 115AD and 115C have also been omitted. The provisos to sections 196C and 196D have also been omitted so that the tax shall be deducted at source with respect to incomes referred to in sections 115AC and 115AD, where the income is received in the form of dividends referred to in section 115-O also. 52.7 These amendments will take effect from 1st April, 2003, and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. However, the provisions relating to tax deduction at source under sections 194, 195, 196C and 196D will take effect from 1st June, 2002. [Sections 4(w), 4(x), 4(y), 35, 36, 45, 46, 47, 48, 50, 53, 73, 80, 83 and 84] 53. Amendments in Minimum Alternate Tax (MAT) on companies under section 115JB 53.1 Section 115JB of the Income-tax Act, 1961 provides for a Minimum Alternate Tax (MAT) on companies. Under the provisions of this section, a company is required to pay at least 7.5% of its book profit as corporate tax. In case the tax liability of a company under regular provisions is more than this amount, the provisions of MAT will not apply and the company shall pay corporate tax as per the regular scheme. 53.2 Under section 33AC of the Income-tax Act, 1961 companies engaged in the operation of ships are allowed a deduction equal to 100% of profits, for sums transferred to a reserve account to be utilized for acquiring new ships for the purpose of the business of the assessee. Accordingly, no tax liability arises in the hands of a shipping company under the regular provisions of the Income-tax Act, 1961. However, provisions of MAT continue to apply in respect of such companies, since the amounts transferred to the reserve specified under section 33AC are added back to the book profits under section 115JB. 53.3 With a view to provide necessary fiscal support to the shipping industry, the Finance Act, 2002, provides that the amounts transferred to a reserve specified under section 33AC of the Income-tax Act, 1961, shall not be added to the book profit, under section 115JB. 53.4 For the sake of rationalization, the Finance Act, 2002, makes further amendment to section 115JB, to provide that in case the tax liability of a company is less than 7.5% of the book profits, such book profits shall be deemed to be the "total income", chargeable to tax at the rate of seven and one-half per cent. 53.5 Further, the Finance Act, 2002, provides that the amounts withdrawn from reserves, in the nature of revaluation reserve, if credited to the profit and loss account, shall not be reduced from the book profit. It also provides that any amount withdrawn from a reserve or a provision created on or after 1st day of April, 1997, and which is credited to the profit and loss account shall not be reduced from the book profit, unless the book profits in the year of creation of such reserves or provisions were increased by the amount transferred to such reserves or provisions at that time. 53.6 Another amendment introduced in section 115JB clarifies that where the value of the amount of either loss brought forward or unabsorbed depreciation is "nil", no amount on account of such loss brought forward or un-absorbed depreciation would be reduced from the book profit. 53.7 The same clarification as above, is also being provided in section 115JA of the Income-tax Act, 1961, with retrospective effect from the 1st day of April, 1997. 53.8 The amendments in section 115JB shall take effect retrospectively from the 1st day of April, 2001. [Sections 51 and 52] 54. Taxation of income received in respect of units of UTI and mutual funds 54.1 Under the existing provision contained in section 115R, any amount of income distributed by the Unit Trust of India (UTI) or a Mutual Fund to its unitholders is chargeable to tax and the UTI or the Mutual Fund is liable to pay additional income-tax on such distributed income at the rate of ten per cent. Such income is, however, exempt in the hands of the unitholders under sub-clauses (ii) and (iii) of clause (33) of section 10. 54.2 In the case of dividends distributed by a domestic company, the incidence of tax has been shifted to shareholders receiving the dividends. In a similar way, sub-clauses (ii) and (iii) of clause (33) of section 10 have been omitted through the Finance Act, 2002, so as to shift the incidence of tax on to the unitholders of the UTI and mutual funds. Section 115R has also been made inoperative so that the UTI and the mutual funds will not be required to pay tax on income distributed by them on or after the 1st day of April, 2002, to their unitholders. 54.3 Income from units of the UTI and the mutual funds would now be taxable in the hands of the recipients. However, in order to continue support to the open-ended equity oriented funds of the UTI and of the Mutual Funds, a new section 115BBB has been inserted so as to provide that income from the units of such funds of the UTI or a Mutual Fund, arising on or before the 31st day of March, 2003, shall be taxed at a concessional rate of ten per cent. 54.4 In view of the changed scheme of taxation of the income from units, section 194K has also been revived in a new form so as to provide that where any income is payable to a resident in respect of units of a mutual fund specified under clause (23D) of section 10, or of the UTI, the person responsible for making the payment shall, at the time of credit of such income to the account of payee or at the time of payment thereof, in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent. With a view to avoid hardship to small investors and also to reduce the avoidable infructuous paperwork and issue of refund in non-taxable cases, a threshold limit of Rs. 1,000 has been provided below which no tax would be required to be deducted at source from payments by way of income from units of UTI and mutual funds. 54.5 The provisions of section 196A has also been revived so as to provide that tax shall be deducted at source from any income paid to a non-resident, not being a company, or to a foreign company, in respect of units of UTI or Mutual Funds at the rate of twenty per cent. 54.6 Consequential amendment has also been made in clause (23D) of section 10. 54.7 These amendments will take effect from 1st April, 2003, and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. However, the provisions relating to tax deduction at source under sections 194K and 196A will take effect from 1st June, 2002. [Sections 4(t), 4(y), 49, 54, 79 and 82] 55. Modification of provisions relating to search and seizure 55.1 Section 132 of the Income-tax Act relates to search and seizure. Under the existing provisions of sub-section (1) of the said section, the authorised officer has the power to enter and search any building, place, vessel, vehicle or aircraft where he has reason to suspect that incriminating books of account or documents, or undisclosed assets are kept. The authorised officer is also empowered, inter alia, to seize any such books of account or documents or assets found as a result of the search. 55.1.1 It has been noticed that, books of account or documents are often found stored in electronic form on computers, and in many cases, the authorised officer is unable to open or have access to computer files containing books of account or documents suspected to be of incriminating nature, as such files are protected by secret codes or passwords, and the persons-in-charge of the premises do not make available such computer codes or passwords to the officer. 55.1.2 To overcome such difficulties, the Finance Act, 2002, has inserted a new clause (iib) in sub-section (1) of section 132 to provide that in addition to the powers specified therein, the authorised officer shall also have the power to require any person who is found to be in possession or control of any books of account or other documents maintained in the form of electronic records, to afford him the necessary facility to inspect all such books of account or documents. 55.1.3 With a view to compel taxpayers to make available such electronic records to the authorised officer conducting the search, the Finance Act, 2002, has inserted a new section 275B of the Income-tax Act to provide that if any person who is in immediate control or possession of books of account and documents maintained in the form of electronic records, fails to afford the necessary facility for inspection as required under clause (iib) of sub-section (1) of section 132, he shall be punishable with rigorous imprisonment which may extend to two years and shall also be liable to fine. Section 279 of the Income-tax Act has also been amended to provide that no such person shall be proceeded against for such offence except with the previous sanction of the Commissioner. 55.2 The Finance Act, 1995, had inserted a new procedure of block assessment in search cases in Chapter XIV-B of the Income-tax Act, and the provisions of sub-section (5) of section 132 which required an estimate of the undisclosed income to be made in a summary manner, were made inoperative for any search initiated on or after the 1st day of July, 1995. As the provisions of sub-section (5) have now become redundant, the Finance Act, 2002, has omitted the said sub-section and has also omitted sub-sections (6), (7), (11), (11A) and (12) of section 132, being specifically related to the estimate of undisclosed income made under sub-section (5). 55.3 Under the existing provisions of sub-section (8) of section 132, the books of account or documents seized during search cannot be retained by the authorised officer or the Assessing Officer beyond a period of 180 days from the date of the seizure, unless the approval of the Chief Commissioner, Commissioner, Director General or Director is, obtained for such retention, on the basis of reasons to be recorded in writing. 55.3.1 It has been noticed that this limit of 180 days is not practical, as the assessment proceedings relating to the seized records generally take up to two years to be finalised. It is only then that the Assessing Officer can come to a conclusion as to whether any of the seized books of account or documents are required to be retained further. 55.3.2 Therefore as a measure of rationalization, the Finance Act, 2002, has amended sub-section (8) of section 132 to provide that books of account or documents seized under section 132(1)(iii) shall not be retained beyond 30 days after completion of the relevant block assessment under Chapter XIV-B, unless the approval of the Chief Commissioner, Commissioner, Director-Gene- ral or Director is obtained on the basis of reasons to be recorded in writing. 55.4 Under the provisions of sub-section (3) of section 132, the authorised officer, in the course of search, is empowered to pass an order prohibiting the owner or any person who is in immediate possession or control of any books of account, documents or assets, from removing or dealing with them in any manner except with the permission of the officer. Under the existing provisions of sub-section (8A), such a prohibitory order can remain in force for a period of 60 days from the date of the order, and thereafter, the period of operation of the order can be extended with the approval of the Commissioner or Director for any period up to 30 days after the completion of all relevant assessments, appeals and penalty proceedings, etc. 55.4.1 The Finance Act, 2002, has amended sub-section (8A) to provide that under no circumstances a prohibitory order passed under section 132(3) shall remain in force beyond a period of 60 days from the date of the order. 55.5 Under the existing provisions of sub-section (9A) of section 132 where the Authorised Officer has no jurisdiction over the person searched, the books of account or other documents or assets seized are required to be handed over to the Income-tax Officer having jurisdiction over such person within a period of 15 days of the seizure. It has been noticed that this time limit of 15 days is impractical as in many cases it takes more than 15 days to complete the search operations, including post search hot pursuit inquiries in the relevant case. 55.5.1 With a view to rationalise the provision, the Finance Act, 2002, has amended sub-section (9A) to provide that the authorised officer shall hand over the seized books of account, documents and assets to the Assessing Officer having jurisdiction over the person searched within a period of 60 days from the date on which the last of the authorisations for search was executed. 55.6 Sub-section (10) of section 132 was amended to provide that where an assessee makes an application to the Board for the return of the books of account or other documents, the Board may, after giving the applicant an opportunity of being heard, pass such orders as it thinks fit. 55.7 These amendments will take effect from 1st June, 2002, and will, accordingly, apply in relation to a search initiated or requisition made on or after that date. [Section 56] 56. Rationalisation of provisions relating to application of seized or requisitioned assets. 56.1 The existing provisions of section 132B of the Income-tax Act provide for the manner in which assets seized during search and retained under section 132(5) are to be dealt with in the discharge of any existing liability as well as the amount of the liability arising on assessments or reassessments made as a result of search. 56.2 Section 132B has been substituted by the Finance Act, 2002, to harmonise the provisions contained therein with the provisions for assessment in search cases as laid down under Chapter XIV-B. The following liabilities can be recovered out of the assets seized under section 132 or requisitioned under section 132A : (i) The existing liability under the Income-tax Act, the Wealth-tax Act, the Expenditure-tax Act, the Gift-tax Act and the Interest-tax Act ; (ii) The liability determined on completion of the assessment under Chapter XIV-B for the block period ; and (iii) The liability in respect of which the assessee is in default or is deemed to be in default. 56.3 It is further provided that where the nature and source of acquisition of seized assets is explained to the satisfaction of the Assessing Officer, he may after recovering the existing liability, release the remaining portion of these assets with the prior approval of the Chief Commissioner or Commissioner within a period of 120 days from the date on which the last of the authorisations for search under section 132 or for requisition under section 132A was executed. 56.4 The rate at which interest is payable under sub-section (4) by the Central Government has been reduced to eight per cent. per annum. Such interest shall be payable for the period commencing on the expiry of one hundred and twenty days from the date on which the last of the authorisations for search or for requisition was executed and ending on the date on which the assessment under Chapter XIV-B is made. 56.5 The Explanation has been inserted at the end of the section to clarify the meaning of block period and of execution of an authorisation for search or for requisition. 56.6 These amendments will take effect from 1st June, 2002, and will accordingly apply in relation to a search initiated or requisition made on or after that date. [Section 57] 57. Providing for power to impound books during survey under section 133A 57.1 Under the existing provisions of section 133A of the Income-tax Act, the powers of an income-tax authority conducting a survey are limited to the inspection of books of account and other documents available at the place of business or profession of the assessee, placing of marks of identification there-on, taking copies or extracts therefrom, making an inventory of any cash, stock or valuable article or thing and recording the statement of any person which may be useful for, or relevant to any proceedings under the Act. 57.2 With a view to prevent the destruction or misappropriation of any evidence found during survey, the Finance Act, 2002, has amended the provisions by inserting a new clause (ia) and proviso thereunder in sub-section (3) of section 133A to empower the income-tax authority to impound and retain in his custody books of account or other documents inspected by him during survey, after recording his reasons for doing so. Such books of account or other documents shall not be retained for more than fifteen days without obtaining the approval of the Chief Commissioner or Director General or Commissioner or Director therefor : 57.3 This amendment will take effect from 1st June, 2002. [Section 58] 58. Bulk filing of returns in computer readable medium by certain salaried taxpayers. 58.1 Under the existing provisions contained in section 139 of the Income-tax Act, every company whether it has a profit or loss and every person other than a company, if the total income in respect of which he is assessable under this Act during the previous year exceeded the maximum amount not chargeable to income-tax, is required to file a return of such income on or before the due date in the prescribed form and manner. 58.2 In order to enable salaried taxpayers to fulfil their tax obligations and receive refunds, if any, within a short period without any interface with the Income-tax Department, the Finance Act, 2002, has introduced a new sub-section (1A) in section 139 to provide that a return furnished by an employee through his employer, in accordance with a scheme to be notified by the Central Board of Direct Taxes for bulk filing of returns on computer readable media, will be deemed to be a return furnished under that section by the employee. The Board has notified the scheme vide Notification No. GSR S. O. No. 661(E), dated 24th June, 2002. 58.3. This amendment will take effect retrospectively from 1st April, 2002. [Section 59] 59. Providing for assessment of income on limited issues under section 143. 59.1 Under the existing procedure of assessment laid down in section 143 of the Income-tax Act, the Assessing Officer if he considers it necessary or expedient, issues a notice under sub-section (2) of section 143 of the Income-tax Act, requiring the assessee to produce any evidence which he may rely on in support of the return. Sub-section (3) provides that after hearing such evidence and after taking into account all relevant material which he has gathered, the Assessing Officer shall pass an order of assessment determining the total income or loss, and the sum payable or refundable to the assessee. 59.2 Since a miniscule percentage of returns filed are taken up for scrutiny under the existing procedure, in order to evolve a mechanism which can check wrong claims of deductions, allowances, relief, etc., and prevent leakage of revenue, the Finance Act, 2002, has introduced a concept of assessment on limited issues in which, if an Assessing Officer has reason to believe that an assessee has made a claim of any loss, exemption, deduction, allowance or relief which is inadmissible, he will issue a notice under the new clause (i) of sub-section (2) of section 143. The notice should specify the claim and calling upon the assessee to produce evidence and particulars in support thereof. After hearing such evidence and considering such particulars, he will make an assessment of total income or loss under the clause (i) of sub-section (3) of section 143, limiting himself to the claims he had set out to verify. If he feels that the case requires further scrutiny on other issues, he will be free to issue a notice initiating comprehensive scrutiny of the return, as is being done presently. 59.3 These amendments will take effect from 1st June, 2002. [Section 60] 60. Consequential amendment of section 158A 60.1 The Finance (No. 2) Act, 1998, had inserted section 260A in the Income-tax Act to provide for direct appeal to High Court against the order of the Appellate Tribunal. By the same Act, sections 256 and 257 which required the Tribunal to refer a case to the High Court or the Supreme Court, became inoperative. The Finance Act, 2002, has made consequential changes in section 158A of the Income-tax Act relating to procedure for avoiding repetitive appeals by including therein references to appeals to High Court under section 260A, and omitted references to sections 256 and 257, wherever necessary. 60.2 Amendments on similar lines are made in section 18C of the Wealth-tax Act. 60.3 These amendments will take effect from 1st June, 2002. [Sections 63 and 111] 61. Rationalisation of the provisions of Chapter XIV-B relating to block assessments in cases of search and requisition 61.1 The existing provisions contained in Chapter XIV-B of the Income-tax Act provide for a single assessment of undisclosed income of a block period of six years, in cases of search under section 132 or requisition under section 132A and lay down the manner in which such income is to be computed, and the interest or penalty which may be levied in certain circumstances. 61.2 The existing provisions of clause (b) of section 158B define undisclosed income to include income or property which has not been or would not have been disclosed for the purposes of the Act, and which is represented by any money, bullion, jewellery or other valuable article or thing, or by any entry in the books of account or other document or any other transaction. It has been noticed that in some cases the appellate authorities have taken a view that this definition covers only property or receipts which have not been disclosed and does not cover income represented by entries in respect of false claims of expenses or deductions. Such view is contrary to the intention underlying the provision of bringing to tax the entire undisclosed income, including income which has been suppressed by making false claims of expenses or deduction, which have been discovered as a result of search or requisition. 61.2.1 The Finance Act, 2002, has amended the definition of undisclosed income in section 158B to specifically include therein income based on entries in books of account or other documents which represent a false claim of any expense, deduction, or allowance under the Income-tax Act. 61.3 The existing provisions of section 158BB specify the manner of computation of undisclosed income of the block period. According to sub-section (1) of the said section, the first step is to compute the aggregate of the total income, including undisclosed income, of the previous years falling within the block period on the basis of evidence found as a result of search or requisition and such other materials or information as are available with the Assessing Officer. Such aggregate income is, thereafter, to be adjusted for the income or loss which has already been assessed or declared, to arrive at the undisclosed income of the block period. 61.3.1 Some appellate authorities have held that income which can be included in the block assessment is only such income which is directly evidenced by material found during the search and does not include income which has been discovered on the basis of post-search inquiries made during the block assessment proceedings. This is contrary to the intention that any undisclosed income discovered as a result of search is to be included in the block assessment as long as such income has been detected as a result of evidence gathered during the search. 61.3.2 The Finance Act, 2002, has amended section 158BB to clarify that the block assessment of undisclosed income is to be based on the evidence found in the search and material or information gathered in post-search inquiries made on the basis of evidence found in the search. 61.4 As per clause (a) of sub-section (1) of section 158BB as it existed, the aggregate total income of the block period including the undisclosed income was to be adjusted by the income or loss already assessed in regular assessments. However, the clause does not specify the date by which such assessments should be completed. 61.4.1 The Finance Act, 2002, has amended clause (a) to clarify that the aggregate total income is to be adjusted by the income or loss assessed in assessments completed prior to the date of commencement of the search or the date of requisition. 61.5 Clause (b) of sub-section (1) of section 158BB states that the aggregate total income is to be reduced or adjusted by the income or loss disclosed in returns filed under section 139 or under section 147, in cases where no assessments have been completed on the basis of such returns till the date of search. However, there can be cases where returns have been filed in response to notice under section 142(1) and assessment has not been completed till the date of search. 61.5.1 The Finance Act, 2002, has amended the said clause (b) to include a specific reference to such returns filed in response to notices issued under section 142(1). 61.6 Under the existing provisions of clause (c) of section 158BB(1), where no return has been filed and the due date has expired, no adjustment is to be made to the aggregate total income for computing undisclosed income of block period. There could be cases where the regular books of account of the assessees reflected losses but no returns were filed by the due dates. While filing the return for block period, the assessee, in such cases used to consider such losses in computing the aggregate total income of the block period and used to claim that no adjustment should be made in view of clause (c) of section 158BB(1) and such losses should not added back for computing undisclosed income of the block period. 61.6.1 There could also be cases where returns were not filed for some years by reason of the total income of those years being below the minimum taxable limit. The aggregate total income computed under section 158BB would include such income but no adjustment of such income would be made to compute undisclosed income of the block period. These situations would result into incorrect computation of undisclosed income of the block period which was not the intention underlying the provisions of Chapter XIV-B. 61.6.2 With a view to clarify the provisions, the Finance Act, 2002, has substituted clause (c) of section 158BB(1) to make it clear that losses incurred in years for which no return has been filed by the due date shall be added back while computing the undisclosed income and further, that where returns were not filed because the total income was not taxable, undisclosed income shall not include such total income. 61.7 The existing provision of the Explanation to section 158BB provides that the total income of the block period for the purpose of aggregation is to be computed without giving effect to set-off of brought forward losses under Chapter VI or unabsorbed depreciation under section 32(2). In many cases it is being claimed by the assessees that the deduction allowable under Chapter VI-A for any previous year should also be computed on the total income before giving effect to set off of brought forward losses and depreciation. In such cases the amount of deduction under Chapter VI-A admissible in computing aggregate total income comes out to be more than the deduction actually allowed in regular assessments resulting in underassessment of undisclosed income for the block period. It has also been noted that the computation of aggregate total income under section 158BB is required to be made in accordance with the provisions of Chapter IV of the Act. This has given rise to doubts as to whether deductions under Chapter VI-A are to be allowed in computing the aggregate total income. 61.7.1 The Finance Act, 2002, has carried out amendments to clarify that the aggregate total income is to be computed in accordance with the provisions of the Act including the provisions of Chapter VI-A, and that for the purpose of computing deductions under Chapter VI-A, effect shall be given to set off of brought forward losses or unabsorbed depreciation. 61.8 Section 158BC lays down the procedure for block assessment. Clause (b) of the said section provides that after issuing a notice calling for a return for the block period, the Assessing Officer shall proceed to determine the undisclosed income, and the provisions of sections 142, 143 and 144 relating to issue of notices, calling for certain information and making best judgment assessment shall apply to the extent possible. The clause does not refer to section 145, which requires that income from business or profession and income from other sources is to be computed in accordance with the method of accounting regularly followed by the assessee. This gave rise to disputes as to whether provisions of section 145 applicable in block assessments. 61.8.1 The Finance Act, 2002, has made a clarificatory amendment to the said clause to include a reference therein to section 145, so as to make the provisions of that section applicable in block assessments. 61.9 These amendments take effect retrospectively from 1st day of July, 1995 and accordingly apply to block assessments in cases of search under section 132 or requisition under section 132A made on or after 1st day of July, 1995. [Sections 64, 65 and 66] 62. Other amendments relating to block assessments. 62.1 The Finance Act, 2002, has amended clause (d) of section 158BC under Chapter XIV-B to provide that the assets seized or requisitioned may be dealt with in accordance with the provisions of section 132B as substituted. 62.2 The Finance Act, 2002, has amended section 158BD to provide that in the circumstances specified in the said section, the proceedings against a person other than the person in whose case the search was conducted or requisition was made, shall be the proceedings under section 158BC, and all the provisions of Chapter XIV-B shall apply accordingly. 62.3 The existing provisions of section 158BE provide for time limit for completion of block assessment. For the purpose of limitation, Explanation 1 below the section excludes the period during which assessment proceedings are stayed by any court and the time taken by the assessee for furnishing an audit report under section 142(2A). There could be other circumstances beyond the control of the Assessing Officer which could delay the completion of assessment proceedings, In fact, section 153 which lays down time limits for completion of regular assessments refers to several other time periods apart from the periods mentioned above which may be excluded in computing the time limit. 62.3.1 With a view to align the provisions of section 158BE relating to block assessment with the provisions of section 153 relating to regular assessments, the Finance Act, 2002, has amended Explanation 1 below section 158BE to further exclude from the period of limitation the time taken in giving an opportunity to be reheard under section 129 on change in incumbent and the time taken by the Settlement Commission for passing an order rejecting or not allowing an application to be proceeded with. It is further provided as in section 153 that the minimum time available with the Assessing Officer after excluding any of the periods specified in the Explanation shall be sixty days. 62.4 Surcharge in the case of block assessment of search cases—Section 113 of the Income-tax Act has been amended to provide that the tax chargeable on the undisclosed income determined under Chapter XIV-B shall be increased by the amount of surcharge applicable in the previous year in which the search commenced or requisition was made. 62.5 The Board is empowered to issue instructions or directions to subordinate authorities, as per provisions of clause (a) of sub-section (2) of section 119, for relaxation, inter alia, of provisions of sections 234A, 234B and 234C relating to charging of interest in cases of regular assessments. With a view to align the provision of block assessments with the cases of regular assessment in respect of charging of interest, clause (a) of sub-section (2) of section 119 of the Income-tax Act was also amended to enable the Central Board of Direct Taxes to issue such directions as it deems fit for relaxing the provisions of section 158BFA relating to charging of interest in block assessments. 62.6 These amendments will take effect from 1st June, 2002. [Sections 44, 55, 67 and 68] 63. Special provision for early assessment of bodies formed for short duration 63.1 Through the Finance Act, 2002, a new section 174A has been inserted to provide that where it appears to the Assessing Officer that any association of persons or a body of individuals or an artificial juridical person formed or established or incorporated for a particular event or purpose, is likely to be dissolved in the same assessment year in which it was formed or established or incorporated, or immediately after such assessment year, the total income of such person or body or juridical person, for the period from the expiry of the previous year for that assessment year up to the date of its dissolution, shall be chargeable to tax in that assessment year. The provisions of sub-sections (2) to (6) of section 174 shall, so far as may be, apply to any proceedings in the case of any such person as they apply in the case of persons leaving India. 63.2 This amendment will take effect retrospectively from 1st April, 2002 and will, accordingly, applies in relation to the assessment year 2002-2003 and subsequent assessment years. [Section 69] 64. Scheme for taxation of perquisites simplified with employer given option to pay tax on behalf of employees 64.1 Under the existing provisions of section 192 of the Income-tax Act, 1961, an employer is required to deduct tax at source on income under the head "Salaries", inclusive of the value of perquisites. In case, such tax is paid by an employer on behalf of an employee, the same being in the nature of an obligation which, but for such payment, would have been payable by the employee, is considered a perquisite, and is chargeable to tax. 64.2 The Finance Act, 2002, provides for a new scheme of taxation of perquisites, wherein an employer has been given an option to pay tax on the whole or part-value of perquisite (not provided for by way of monetary payments), on behalf of an employee, without making any deduction from the income of the employee. 64.3 To bring into effect this new scheme, a new clause (10CC) has been inserted in section 10, to exempt the amount of tax actually paid by an employer, at his option, on the income in the nature of a perquisite, (not provided for by way of monetary payment) on behalf of an employee, from being included in perquisites. 64.4 Such tax paid by the employer shall not be treated as an allowable expenditure in the hands of the employer under section 40 of the Income-tax Act, 1961. 64.5 The amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-04 and subsequent years. 64.6 Necessary changes in various provisions of Chapter XVII relating to collection and recovery of taxes have been made to give effect to the new scheme. Amendment in section 192 has also been made, so as to provide that an employer shall have an option to pay tax on behalf of an employee, without making any deduction from his income, on the income in the nature of perquisites, (not provided for by way of monetary payment). The employer shall, also continue to have the option to deduct the tax on whole or part of such income. 64.7 Section 200 is also amended to provide that such tax shall be paid within the prescribed time, to the credit of the Central Government or as the Board directs. 64.8 Amendment in section 203 has been made, to provide that where any such tax has been paid by an employer, on behalf of an employee, the employer shall provide to an employee, a certificate in the prescribed form, giving details of the amount of tax paid, the rate at which the tax paid and other particulars, within the prescribed time. 64.9 The Finance Act, 2002, also makes amendment in section 199, in order to give credit to the employee in respect of tax paid by the employer on behalf of the employee, on the income in the nature of perquisites (not provided for by way of monetary payment). 64.10 Amendment is also made in section 195A of the Income-tax Act, 1961, so as to exclude the tax paid by the employer on behalf of the employee, on the income in the nature of perquisites, (not provided for by way of monetary payment) for calculating the income of the employee for the purpose of deducting tax at source. 64.11 Further amendment is made in section 198 of the Income-tax Act, 1961, so as to provide that the tax paid by the employer on behalf of the employee on the income in the nature of perquisites, (not provided for by way of monetary payment), shall not be added in the income of the employee. 64.12 These amendments will take effect from 1st June, 2002. [Sections 4, 20, 71, 81, 86, 87, 88 and 90] 65. Credit for tax deduction at source 65.1 Under the existing provisions of section 199 of the Income-tax Act, any deduction made in accordance with the provisions of sections 192 to 194, I94A, 194B, 194BB, 194C, 194D, 194E, 194EE, 194F, 194G, 194H, 194-I, 194J, 194K, 194L, 195, 196A, 196B, 196C and 196D and paid to the account of Central Government is treated as a payment of tax on behalf of the person from whose income the deduction was made or the owner of the security or depositor or owner of property or of unitholder or of the shareholder, as the case may be, and credit is given to such person for the amount so deducted on the production of a certificate furnished under section 203 in the assessment made under this Act for the assessment year for which such income is assessable. 65.2 With a view to mitigate this hardship being faced by the assessee due to non-furnishing of TDS certificates, the Act has inserted a new sub-section (14) in section 155 to provide that where in the assessment for any previous year or in any intimation or deemed intimation under sub-section (1) of section 143 for any previous year, credit for tax deducted in accordance with the provisions of section 199 has not been given on the ground that the TDS certificate was not filed with the return and subsequently such certificate is produced before the Assessing Officer within two years from the end of the assessment year in which such income is assessable, credit for tax deducted at source shall be given to the assessee on production of such certificate. However, nothing contained in the sub-section shall apply unless the income from which tax has been deducted has been disclosed in the return of income filed by the assessee for that assessment year. 65.3 The amendment shall enable the Assessing Officer to rectify the order of assessment or any intimation or deemed intimation under sub-section (1) of section 143. 65.4 As a consequence, the Act has amended sub-section (9) of section 139 to provide that where the return is not accompanied by proof of the tax, if any, claimed to have been deducted at source, the return of income shall not be regarded as defective if such certificate was not furnished under section 203 to the person furnishing his return of income and such person produces the certificate within a period of two years specified under sub-section (14) of section 155. 65.5 The amendment will take effect from 1st June, 2002. [Sections 59 and 62] 66. Tax not to be deducted at source from dividends and interest on securities in certain cases 66.1 Special provisions have been made in the Act through which certain statutory bodies were created regarding no deduction of tax at source under sections 193 and 194 from interest or dividend paid to the respective bodies. 66.2 Section 43A of the Life Insurance Corporation Act, 1956, provides that no deduction of income-tax shall be made on any interest or dividend payable to the Corporation in respect of any securities or shares owned by it or in which it has full beneficial interest. 66.3 Section 35A of the General Insurance Business (Nationalisation) Act, 1972, provides that no deduction of income-tax shall be made on any interest or dividend payable to the Corporation or to any of the four companies formed by virtue of the schemes framed under sub-section (1) of section 16 of that Act, in respect of any securities or shares owned by the Corporation or such company or in which the Corporation or such company has full beneficial interest. 66.4 The Act has omitted section 43A of the Life Insurance Corporation Act, 1956 and section 35A of the General Insurance Business (Nationalisation) Act, 1972. 66.5 The Act has also amended section 193 and section 194 of the Income-tax Act to provide that no tax shall be deducted at source under the said sections in respect of any interest or dividend payable to the Life Insurance Corporation of India or the General Insurance Corporation of India or to any of the four companies formed by virtue of the schemes framed under sub-section (1) of section 16 of the General Insurance Business (Nationalisation) Act, 1972, or any other insurer in respect of any securities or shares owned by them or in which they have full beneficial interest. 66.6 These amendments will take effect from 1st June, 2002. [Sections 72, 73, 157 and 158] 67. Individuals and Hindu undivided families to deduct tax in cases where total turnover or gross receipts exceed the specified limit under section 44AB 67.1 Individuals and Hindu undivided families are not required to deduct tax at source under the existing provisions of sections 194A, 194C, 194H, 194-I and 194J. 67.2 Individuals and Hindu undivided families whose sales turnover or gross receipts of the business or profession exceed rupees forty lakhs or rupees ten lakhs, as the case may be, are required to maintain books of account and other documents and get their accounts audited. 67.3 The Act has amended the provisions of the above sections to provide that individuals or Hindu undivided families, whose total sales, turnover or gross receipts from the business or profession carried on by them exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which the income is to be credited or paid, shall be liable to deduct income-tax under the relevant provisions of the aforementioned sections. 67.4 These amendments will take effect from 1st June, 2002. [Sections 74, 75, 76, 77 and 78] 68. Reduction in the rate of tax deduction at source on commission or brokerage. 68.1 Under the existing provisions contained in section 194H of the Income-tax Act, tax is required to be deducted at source at the rate of ten per cent. on income by way of commission (other than insurance commission referred to in section 194D) or brokerage. 68.2 With a view to rationalise the rate at which tax is required to be deducted at source under the said section, the Act has reduced the rate from ten per cent. to five per cent. 68.3 The amendment will take effect from 1st June, 2002. [Section 76] 69. Provisions of section 197A not to apply in certain cases 69.1 Under the existing provisions of section 197A, no tax is to be deducted at source from certain incomes if a declaration is furnished by the payee that the tax on his estimated total income of the relevant previous year would be nil. The provisions of sub-section (1) of the said section apply to deduction of tax at source from payments by way of dividends and payments in respect of deposits under National Saving Schemes, etc. The provisions of sub-section (1A) apply in respect of income from interest on securities, interest other than "interest on securities" and units in the case of a person other than a company or a firm. 69.2 With a view to rationalise the provisions of the said section, an amendment has been carried out by the Finance Act, 2002, to the effect that no self-declaration can be filed by an assessee whose income from dividends or payments in respect of deposits under National Saving Schemes, etc., or interest on securities or interest other than "interest on securities" or units or the aggregate of such incomes exceeds the maximum amount which is not chargeable to income-tax. 69.3 The amendment will take effect from 1st June, 2002. [Section 85] 70. Requirement to apply for tax collection account number 70.1 Under the existing provisions of section 206C, every person, being a seller shall, at the time of debiting of the amount payable by the buyer to the account of the buyer or at the time of receipt of such amount from the said buyer in cash or by the issue of the cheque or draft or by any other mode, collect from the buyer a sum equal to the percentage specified in the Table under sub-section (1) of the said section, of such amount. 70.2 The Act has inserted a new section 206CA to provide that every person collecting tax at source in accordance with the provisions of section 206C shall apply to the Assessing Officer for the allotment of a tax collection account number. It has also been provided that such tax collection account number shall be quoted in all challans for payment of any tax collected at source, in all certificates for tax collected and in all returns to be furnished under the provisions of section 206C. Such tax collection account number would also be required to be quoted in all other documents pertaining to such transactions as may be prescribed in the interests of revenue. 70.3 A new rule 114AA has been inserted in the Income-tax Rules, 1962, which provides that those persons who have collected tax prior to 1-6-2002 (the date from which section 206CA has come into force) in accordance with the provisions of Chapter XVII-BB of the Income-tax Act, 1961, should make an application for the allotment of tax collection account number before the 30th September, 2002, and in every other case, within one month from the end of the month in which tax is collected, whichever is later. It is also provides that the application for the allotment of tax collection account number is to be furnished to the Assessing Officer who has been assigned by the Chief Commissioner or Commissioner to discharge these functions, as in any other case, to the Assessing Officer having jurisdiction to assess the applicant. The form for the purpose shall be form No. 49B which has also been substituted. 70.4 The Act has also introduced a new section 272BBB to provide for levy of a penalty of ten thousand rupees in cases where the persons who are required to apply for such account number have failed to do so without a reasonable cause. Consequent to the insertion of section 272BBB, section 273B has also been amended to provide that the penalty shall not be imposed if it is proved that there was reasonable cause for the failure. 70.5 The amendment will take effect from 1st June, 2002. [Sections 91, 105 and 106] 71. Notice in respect of payment of advance-tax 71.1 Under the existing provisions contained in sub-section (3) of section 210, the Assessing Officer is empowered to issue a notice to the assessee who has already been assessed by way of regular assessment in respect of the total income of any previous year and who has not paid any advance tax under sub-section (1) of the said section. 71.2 With a view to rationalise the provisions of section 210, the Act has amended sub-section (3) to provide that the Assessing Officer by an order in writing may require any person who has been already assessed by way of regular assessment if he is of the opinion that such person is liable to pay advance-tax, to pay advance-tax in the specified instalment or instalments. This would enable the Assessing Officer to issue the notice of demand not only in cases of non-payment of any instalment of advance tax but also in cases of short payment of advance-tax where the first instalment of advance-tax has been paid but subsequent instalments are not being paid as per the provisions of sections 208 to 210 of the Income-tax Act. 71.3 The amendment will take effect from 1st June, 2002. [Section 92] 72. Modification of provisions relating to interest payable to the assessee 72.1 Under the existing provisions of the Income-tax Act, interest is payable to the assessee at the rate of three-fourths per cent. for every month or part of a month or nine per cent. per annum. 72.2 The Act has reduced the aforesaid rate of interest from three-fourths per cent. to two-thirds per cent. for every month or part of a month and from 9% to 8% per annum, as the case may be. Accordingly, section 244A and sub-rule (3) of rule 68A of the Second Schedule to the Income-tax Act have been amended. 72.3 Similar amendment has been made in section 34A of the Wealth-tax Act. 72.4 The amendments will take effect from the 1st day of June, 2002. [Sections 93, 109 and 114] 73. Providing limitation of time for admission of application and passing of orders by the Settlement Commission 73.1 Under the existing provisions contained in sections 245C, 245D and 245HA of the Income-tax Act, the Settlement Commission on receipt of an application for settlement, calls for a report from the Commissioner, and on the basis of the report and having regard to the nature of the case, or complexity of investigation, passes an order either allowing the application to be proceeded with or rejecting the same. After admitting the application, and after making or causing to be made such enquiry as it deems necessary and after giving an opportunity to the applicant of being heard, the Settlement Commission may pass such orders as it thinks fit. Further, the Commission has been vested with the powers to send a case back to the Assessing Officer if the assessee does not co-operate in the proceedings before the Commission. 73.2 In order to ensure early settlement of such applications, and speedy recovery of taxes at low cost, the Finance Act, 2002, has amended section 245C to provide that the Settlement Commission may, where it is possible, pass an order either allowing or rejecting the application to be proceeded with within a period of one year from the end of the month in which such application is made. 73.3 The Finance Act, 2002, has further amended section 245D of the Income-tax Act to provide that in every application admitted, the Settlement Commission may, wherever it is possible, pass a final order within a period of four years from the end of the financial year in which such application was allowed to be proceeded with. 73.4 The Finance Act, 2002, has also withdrawn the power of the Settlement Commission given under section 245HA of sending back the case to the Assessing Officer, thereby requiring the Settlement Commission to finally decide and settle all applications admitted by it. 73.5 Similar amendments are made in sections 22D and 22HA of the Wealth-tax Act. 73.6 Sub-section (1E) of section 245C has also been deleted, being consequential in nature. 73.7 These amendments will take effect from 1st June, 2002. [Sections 94, 95, 96, 112 and 113] 74. Modification of provision relating to appointment of President of Appellate Tribunal 74.1 Under the existing provision contained in sub-section (3) of section 252 of the Income-tax Act, the Central Government ordinarily appoints a judicial member of the Appellate Tribunal to be the President thereof. 74.2 With the creation of the posts of Vice-Presidents and Senior Vice-President, and considering the functions performed by them, the Finance Act, 2002, has substituted the said sub-section to provide that the Central Government shall appoint the Senior Vice-President or one of the Vice-Presidents of the Tribunal to be the President thereof. 74.3 This amendment will take effect retrospectively from 1st April, 2002. [Section 94] 75. The scheme of pre-emptive purchase of immovable properties under Chapter XX-C abolished 75.1 Under the existing provision contained in Chapter XX-C of the Income-tax Act, any person intending to transfer immovable property in specified areas at values exceeding specified amounts is required to file a statement in Form 37-I before the Appropriate Authority within the prescribed time before the intended date of transfer. The transfer can be registered only if the Appropriate Authority does not pass an order of pre-emptive purchase of the property, and issues a no-objection certificate. 75.2 Since these provisions were causing procedural delays in registration of transfers, and with a view to remove source of hardship for the tax payers, the Finance Act, 2002 has, by inserting a new section 269UP in the Income-tax Act, made the provisions of Chapter XX-C inapplicable in respect of any transfer of immovable property effected on or after 1st July, 2002. 75.3 This amendment will take effect from 1st July, 2002. [Section 96] 76. Modification of the provisions relating to mode of repayment of certain deposits 76.1 Under the existing provision of section 269T of the Income-tax Act, no branch of a banking company, cooperative bank and no other company or cooperative society or partnership firm or other person, can repay any deposit made with such entity otherwise than by an account payee cheque or an account payee draft drawn in the name of the person who has made the deposit, in cases where the amount of deposit or the aggregate of the deposits held, is twenty thousand rupees or more. The Explanation below sub-section (2) of the said section defines "deposit" to mean any deposit of money which is repayable after notice or repayable after a period and, in the case of a person other than a company includes deposit of any nature. 76.2 It has been noticed that the provisions of this section are being circumvented by terming deposits as loans and contending that the section applies only to deposits and not to loans. In a judgment of a High Court it was held that the meaning of word "deposit" occurring in section 269T cannot be stretched to include loans. In order to clarify the intention of the Legislature, the Finance Act, 2002, has substituted the existing section by a new section so as to extend its scope to loans also, and delete provisions contained therein which have become obsolete. However, it is clarified that the provision of section 269T will not be attracted in case of repayment of credit facilities availed of by depositing money in cash, into cash credit account, bill account or such other credit facilities account with a bank maintained by an assessee in the ordinary course of his business. 76.3 These amendments will take effect from 1st June, 2002. [Section 95] 77. Clarificatory amendments in section 271 relating to penalty for concealment of income, etc. 77.1 Section 271 of the Income-tax Act provides that the Assessing Officer or the Commissioner (Appeals) shall levy penalty in case an assessee fails to comply with certain notices issued in the course of assessment proceedings and cases in which particulars of income have been concealed or inaccurate particulars furnished. 77.2 The Finance Act, 2002, has amended the section to include a reference to the Commissioner as being an authority who can initiate and levy penalty under sub-section (1) of the said section. Similar reference is made in Explanation 1 and Explanation 7 to the said sub-section. 77.3 Amendment on similar lines is made in section 18 of the Wealth-tax Act. 77.4 These amendments will take effect from 1st June, 2002. 77.5 The existing provisions of clauses (ii) and (iii) of sub-section (1) of the said section provide for levy of the penalty specified therein, in addition to any tax payable. Certain courts have held that unless some tax is payable, no penalty can be levied. 77.6 The Finance Act, 2002, has amended the said clauses to clarify that the penalty specified in them can be levied even if no tax is payable on the total income assessed. 77.7 The Finance Act, 2002, further amended Explanation 4 which defines the expression "the amount of tax sought to be evaded" in different circumstances, to clarify that in cases where the income in respect of which particulars have been concealed or inaccurate particulars have been furnished has the effect of reducing the loss declared in the return or of converting that loss into positive income, the tax sought to be evaded shall be the tax that would have been chargeable on the amount of such income as if it were the total income. 77.8 These amendments will take effect from 1st April, 2003. 77.9 Explanation 3 to sub-section (1) of the said section provides that if any person who has not been assessed earlier fails to furnish a return under section 139(1), and is found to have taxable income for a year, and no notice under section 142(1) or 148 calling for return was issued to him till the expiry of the period during which an assessment could have been made, it will be deemed that the person has concealed the particulars or furnished inaccurate particulars of his income for that year. 77.10 The Finance Act, 2002, has amended the said Explanation 3 so as to provide that even where a person who has been assessed earlier, fails to furnish a return till the end of the specified period, he shall be deemed to have concealed the particulars or furnished inaccurate particulars of his income. 77.11 Amendment on similar lines is made in section 18 of the Wealth-tax Act. 77.12 This amendment will take effect from 1st June, 2003. [Sections 101 and 110] 78. Modification of provisions relating to penalty for late filing of return, and defaults relating to PAN 78.1 Section 271F of the Income-tax Act provides for penalty of five thousand rupees for failure to furnish return of income under section 139(1) before the end of the relevant assessment year, or to furnish a return as required by the first proviso to section 139(1) before the due date. 78.2 In order to remove the disparity between the penalties relating to returns filed under section 139(1) and under the proviso to that section (i.e., under the one-by-six scheme), the Finance Act, 2002, substituted the section to provide that the penalty of five thousand rupees for failure to furnish a return under the first proviso to that section shall also be levied only if the return is not filed by the end of the relevant assessment year. 78.3 Under the existing provision contained in clause (d) of sub-section (1) of the section 272A of the Income-tax Act a penalty of ten thousand rupees is leviable for failure to comply with the provisions of section 139A of the Income-tax Act relating to permanent account number (PAN). 78.4 In view of the importance of complying with the provisions relating to PAN, the Finance Act, 2002, has omitted the said clause from section 272A and inserted a new section 272B in the said Act, to provide for penalty of ten thousand rupees for failure to comply with the provisions of section 139A or for quoting or intimating a PAN which is false. An opportunity of being heard shall be given to the assessee before imposing any such penalty. 78.5 A reference to section 272B has been inserted in section 273B of the Income-tax Act to provide that such penalty shall not be imposed if it is proved that there was reasonable cause for the failure. The proposed amendment is consequential in nature. 78.6 These amendments will take effect from 1st June, 2002. [Sections 102, 103,104 and 106] 79. National Dairy Development Board, Prasar Bharati and Oil Industry Development Board to pay income-tax 79.1 Certain statutory bodies have been exempted from payment of income-tax by having a provision for the same in the Act through which these bodies were set up. 79.2 National Dairy Development Board (NDDB) is exempted from payment of income-tax or any other tax in respect of its income, profits or gains derived, under section 44 of the National Dairy Development Board Act, 1987. Prasar Bharati (Broadcasting Corporation of India) is exempted from payment of any income-tax or any other tax in respect of any income, profits or gains, accruing or arising out of the Fund of the Corporation or any amount received in that Fund, and on any income, profits or gains, derived or any amount received, by the Corporation under section 22 of the Prasar Bharati (Broadcasting Corporation of India) Act, 1990. The Oil Industry Development Board is exempted from payment of income-tax on its income, profits or gains under section 22A of the Oil Industry (Development) Act, 1974. 79.3 Through the Finance Act, 2002, section 44 of the National Dairy Development Board Act, 1987, section 22 of the Prasar Bharati (Broadcasting Corporation of India) Act, 1990, and section 22A of the Oil Industry (Development) Act, 1974, have been omitted with effect from 1st day of April, 2003 so as to make the income of National Dairy Development Board, Prasar Bharati (Broadcasting Corporation of India) and Oil Industry Development Board taxable. As income of the previous year becomes taxable next year, the income of these Boards for the financial year 2002-2003 and subsequent financial years will be subject to tax. 79.4 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. [Sections 159, 162 and 163] Expenditure-tax 80. Relief to hotel industry under the Expenditure-tax Act 80.1 Under the existing provisions of the Expenditure-tax Act, tax is levied on expenditure incurred in, or payments made to a hotel, where the room charges are two thousand rupees or more, per individual in connection with the provision of any accommodation ; residential or otherwise ; or food or drink ; or any accommodation in such hotel on hire or lease ; or any other service at the hotel, by way of beauty parlour, health club, swimming pool or other services. 80.2 In order to give a boost to the tourism sector and reduce the incidence of tax on the hotel industry, the Act has amended sections 3 and 5 of the Expenditure-tax Act to make the provisions of the Act applicable only to room charges, and only where such charges for any unit of residential accommodation are three thousand rupees or more per day. 80.3 It was also noticed that some hotels have been claiming that where a room is occupied by more than one person, the room charges should be divided amongst the occupants and only the charges per occupant should be considered for determining whether the threshold limit is crossed in such cases. The intention underlying section 3 was always to levy the tax with respect to the room charges for a unit of accommodation and the room charges cannot be split up in case of more than one occupant. This intention has been endorsed in a recent judgment of the Himachal Pradesh High Court in the case of H. P. Tourism Development Corporation v. Union of India [1999] 238 ITR 38. With a view to clarify the intention, sub-section (1) of section 3 of the Expenditure-tax Act has been amended to provide that expenditure tax shall be chargeable per unit of accommodation where the room charge is three thousand rupees or more per day. 80.4 These amendments have taken effect from 1st June, 2002 and shall accordingly apply in relation to expenditure incurred on or after that date. [Sections 115 and 116] (Sd.) Suraj Bhan Nain, Director to the Government of India. [F. No. 153/91/2002-TPL]