Finance Act, 1995 - Explanatory Notes on provisions relating to Direct Taxes - Income Tax - 717

Finance Act, 1995 - Explanatory Notes on provisions relating to Direct Taxes Circular No. 717 Dated 14/8/1995 Introduction The Finance Act, 1995, as passed by Parliament, received the assent of the President on the 26th May, 1995, and has been enacted as Act No. 22 of 1995. This circular explains the substance of the provisions of the Act relating to direct taxes. Changes made by the Finance Act, 1995 2. The Finance Act, 1995 (hereinafter referred to as the Finance Act), has, _ amended sections 2, 10, 10A, 17, 32, 33AC, 35CCA, 36, 40A, 43, 44AB, 55, 80DDA, 80G, 80GGA, 80HHE, 80-IA, 80L, 80U, 88, 112, 115K, 132, 133, 133A, 139, 194A, 194C, 194-I, 197, 197A, 198 to 200, 200 to 205, 230A, 234B, 245C, 245D, 253, 269UC, 269UD, 271B and 293A of the Income-tax Act, 1961 ; inserted new sections 113, 158B, 158BA, 158BB, 158BC, 158BD, 158BE, 158BF, 158BG, 158BH, 194J and 194K in the Income-tax Act, 1961 ; and substituted new sections for sections 139A, 145 and 196A of the Income-tax Act, 1961. Provisions in brief 3. The provisions of the Finance Act, 1995, in the sphere of direct taxes, relate to the following matters :_ (i) Prescribing the rates of income-tax on incomes liable to tax for the assessment year 1995-96 ; the rates at which tax will be deductible at source in the financial year 1995-96 from interest (including interest on securities), dividends, winnings from lotteries or crossword puzzles, winnings from horse races, 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 1995-96. (ii) Amendment of the Income-tax Act, 1961, with a view to _ _listing of exempt allowances under section 10(14) in the Income-tax Rules ; _enlarging scope of income-tax exemption on interest on deposits for benefit of victims of the Bhopal gas leak disaster ; _removing condition of specification for purposes of section 10(23D) in case of Mutual Funds registered with SEBI ; _granting income-tax exemption to funds established for welfare of employees of which such employees are members ; _granting income-tax exemption on income by way of dividends and long-term capital gains of venture capital funds and venture capital companies ; _granting income-tax exemption to Employees' State Insurance Fund ; _granting tax relief for National Minorities Development and Finance Corporation and such other State level corporations ; _restricting five-year tax holiday under section 10A to units in FTZs exporting at least 75 per cent. of their turnover ; _amending section 17(3) of the Income-tax Act for removal of anomaly ; _withdrawing of deduction of full cost of minor items of machinery or plant ; _amending section 33AC to limit deduction to 50 per cent. only in respect of income derived from the carrying on of shipping operations ; _allowing deduction for payments to National Urban Poverty Eradication Fund ; _allowing deduction in respect of income from long-term finance for development of infrastructure facilities ; _amending section 40A(3) of the Income-tax Act, to provide for disallowance of 20 per cent. of cash expenditure ; _amending section 43(3) of the Income-tax Act to exclude plantations and livestock from the definition of plant ; _furnishing of tax audit report ; _having simplified procedure for computation of capital gain on transfer of bonus shares ; _allowing income-tax relief to a guardian for providing for maintenance of handicapped persons on the guardian's death ; _allowing hundred per cent. deduction for donations to Zila Saksharta Samitis for primary and adult education ; _making the deduction in respect of profits from export of computer software under section 80HHE open-ended ; _allowing five-year tax holiday for infrastructure development ; _continuing fiscal incentive under section 80-IA for small-scale industrial units commencing production after 1-4-1995 ; _allowing incentive for savings ; _allowing relief to handicapped persons suffering from permanent physical disability, blindness or mental retardation ; _allowing rebate under section 88 on subscription to life insurance policy_removal of condition regarding premiums exceeding ten per cent. of sum assured ; _introducing special procedure for assessment of search cases ; _raising the qualifying limits for the purposes of the simplified procedure for small businessmen ; _granting power to call for information when no proceeding is pending ; _enlarging power of authorisation for conducting survey ; _enlarging the scope of the provisions relating to permanent account numbers ; _introducing methods of accounting and accounting standards for computing income ; Enlarging scope of deduction of tax at source by way of_ (a) deduction of tax at source from interest on time deposits with banks ; (b) enlarging scope of provision regarding deduction of tax at source from payments to contractors and sub-contractors ; (c) reducing rate of deduction of tax at source from rent in certain cases ; (d) introducing deduction of tax at source from payments by way of fees for professional services or fees for technical services ; (e) introducing deduction of tax at source from income in respect of units of specified Mutual Funds or of the Unit Trust of India ; _introducing simplification in the working of the Settlement Commission ; _modifications of provisions for pre-emptive purchase of immovable properties under Chapter XX-C ; _introducing provisions for modification of the status of persons engaged in the business of prospecting, etc., of mineral oils ; _Repealing of the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974. INCOME-TAX Rate structure I. Rates of income-tax in respect of income liable to tax for the assessment year 1995-96 4. In respect of incomes of all categories of taxpayers (corporate as well as non-corporate) liable to tax for the assessment year 1995-96, the rates of income-tax (including surcharge thereon in the case of domestic companies) have been specified in Part I of the First Schedule to the Act. These rates are the same as laid down in Part III of the First Schedule to the Finance Act, 1994, 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 1994-95. II. Rates for deduction of income-tax at source during the financial year 1995-96 from income other than "Salaries" 5.1. The rates for deduction of income-tax at source during the financial year 1995-96 from income other than "Salaries", have been specified in Part II of the First Schedule to the Act. These rates apply to income by way of interest on securities, interest other than "interest on securities", dividends, insurance commission, winnings from lotteries or crossword puzzles, winnings from horse races and income of non-residents (including non-resident Indians). These rates are the same as those specified in Part II of the First Schedule to the Finance Act, 1994, for the purposes of deduction of income-tax at source during the financial year 1994-95. Reference to income payable to non-residents in respect of units, purchased in foreign currency, of the Unit Trust of India, is omitted, as a consequence of the substitution of section 196A in the Income-tax Act, providing for deduction of income-tax at source in the case of non-residents from income in respect of units of the specified Mutual Funds and the Unit Trust of India. 5.2. The amount of income-tax, so deducted at source, shall be increased in the case of a domestic company, by a surcharge calculated at the rate of 15 per cent. of such income-tax. III. 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 1995-96 6. The rates for deduction of income-tax at source from "Salaries" during the financial year 1995-96 and also for computation of "advance tax" payable during that year in the case of all categories of taxpayers, have been specified in Part III of the First Schedule to the Act. These rates are also applicable for charging income-tax during the financial year 1995-96 on current incomes in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping profits arising in India to non-residents, assessment of persons leaving India for good during that financial year, assessment of persons who are likely to transfer property to avoid tax or where an order has to be passed in a search and seizure case where search was initiated before the 1st day of July, 1995, for calculating the amount of tax on the estimated undisclosed income, etc. The salient features of the rates prescribed in the said Part III are indicated in the following paragraphs. A. Individuals, Hindu undivided families, etc. 7.1. Sub-paragraph I of Paragraph A of Part III of the First Schedule specifies the rates of income-tax in the case of individuals, Hindu undivided families (other than those with one or more members having independent total income exceeding the exemption limit), association of persons, etc. Raising of exemption limit : 7.2. The exemption limit in the case of the aforesaid persons is raised from Rs. 35,000 to Rs. 40,000. The rates of income-tax above the total income of Rs. 40,000 will remain the same as these were during the financial year 1994-95. The Table below gives the income slabs and the rates of income-tax, (a) as specified in Part I of the First Schedule to the Act, i.e., the existing slabs and rates ; and (b) as specified in Part III of the First Schedule to the Act, i.e., the new slabs and rates. TABLE Income slab Rates specified in Part I of the First Schedule to the Act Income slab Rates specified in part III of the First Schedule to the Act Up to Rs. 35,000 Nil Up to Rs. 40,000 Nil Rs. 35,001 - Rs. 60,000 20% Rs. 40,001 - Rs. 60,000 20% Rs. 60,001 - Rs. 1,20,000 30% Rs. 60,001 - Rs. 1,20,000 30% Above Rs. 1,20,000 40% Above Rs. 1,20,000 40% 7.3. In the case of a Hindu undivided family, which, at any time during the previous year, has at least one member whose total income of the previous year relevant to the assessment year commencing on the 1st day of April, 1996, exceeds Rs. 40,000, the rates of income-tax have been specified in Sub-Paragraph II of Paragraph A 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. B. Co-operative societies 8. In the case of co-operative societies, the rates of income-tax have been specified in Paragraph B of Part III of the First Schedule to the Act. These rates are the same as those specified in the corresponding Paragraph of Part I of the First Schedule to the Act. C. Firms 9. 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 is the same as that specified in the corresponding Paragraph of Part I of the First Schedule to the Act. D. Local authorities 10. In the case of local authorities, the rate of income-tax has been specified in Paragraph D of Part III of the First Schedule to the Act. This rate is the same as that specified in the corresponding Paragraph of Part I of the First Schedule to the Act. E. Companies 11. In the case of companies, the rates of income-tax have been specified in Paragraph E of Part III of the First Schedule to the Act. These rates are the same as those specified in the corresponding Paragraph of Part I of the First Schedule to the Act. F. Surcharge 12. In the case of domestic companies, surcharge will continue to be levied at the rate of 15 per cent. of the amount of income-tax where the total income exceeds seventy-five thousand rupees. Effect of changes in the exemption limit 13. The impact of increase in the exemption limit in the case of individuals, non-specified Hindu undivided families, etc., referred to in Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Act, at different income levels, is as under : Table Total Income (Rs.) Existing Tax Liability (Rs.) New Tax Liability (Rs.) Relief Amount (Rs.) Percentage of relief 36,000 200 Nil 200 100 37,000 400 Nil 400 100 38,000 600 Nil 600 100 39,000 800 Nil 800 100 40,000 1,000 Nil 1,000 100 50,000 3,000 2,000 1,000 33.3 60,000 5,000 4,000 1,000 20.0 75,000 9,500 8,500 1,000 10.5 1,00,000 17,000 16,000 1,000 5.9 1,20,000 23,000 22,000 1,000 4.3 1,50,000 35,000 34,000 1,000 2.9 2,00,000 55,000 54,000 1,000 1.8 [Section 2] Listing of exempt allowances under section 10(14) in the Income-tax Rules 14.1. Under the existing provisions of section 10(14)(i), income-tax exemption is provided, to the extent mentioned therein, on any such allowance or benefit, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, as the Central Government may specify by notification in the Official Gazette. Section 10(14)(ii) provides income-tax exemption on any such allowance, granted to an assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides or to compensate him for the increased cost of living, as the Central Government may specify by notification in the Official Gazette. The extent of the income-tax exemption is also to be specified in the notification. 14.2. Several notifications have been issued over a period of time for exempting various allowances for the purposes of sub-clauses (i) and (ii) of section 10(14). In order to ascertain whether a particular allowance is exempt from income-tax, all the aforesaid notifications have to be gone through. It was felt that the task of the taxpayers, the tax deductors as also of the income-tax authorities would be facilitated if the aforesaid allowances and benefits were to be listed in the Income-tax Rules. 14.3. The Act, therefore, seeks to amend clause (14) of section 10 of the Income-tax Act, in order to provide income-tax exemption on the allowances or benefits, of the nature referred to in sub-clause (i) and sub-clause (ii) of the said clause, as may be prescribed in the Income-tax Rules. The extent to which an allowance will be exempt under section 10(14)(ii), will also be prescribed in the Income-tax Rules. 14.4. The amendment will take effect from 1st July, 1995. 14.5. A new rule will be inserted in the Income-tax Rules, enlisting all the allowances which have been notified so far under sub-clauses (i) and (ii) of clause (14) of section 10, in order to give effect to the aforesaid proposal. [Section 4] Enlarging scope of income-tax exemption on interest on deposits for benefit of victims of the Bhopal gas leak disaster 15.1. Sub-clause (v) of clause (15) of section 10 of the Income-tax Act, provides income-tax exemption in respect of interest on securities held by the Welfare Commissioner, Bhopal Gas Victims, Bhopal, in Reserve Bank's SGL Account No. SL/DH 048. Recently, in terms of an order of the Supreme Court to finance the construction of a hospital at Bhopal to serve the victims of the gas leak, the shares of the Union Carbide India Limited have been sold. The sale consideration reserved for construction has been deposited with State Bank of India, Main Branch, Parliament Street, New Delhi, in Account Number 807/787. The interest on the aforesaid deposit and similar deposits which may be made in future, needs to be exempted from the levy of income-tax. 15.2. The Act, therefore, substitutes sub-clause (v) of clause (15) of section 10, in order to enlarge the scope of the income-tax exemption by providing such exemption to interest on deposits for the benefit of the victims of the Bhopal gas leak disaster held in such account, with the Reserve Bank of India or with a public sector bank, as the Central Government may, by notification in the Official Gazette, specify in this behalf. It is also being provided that such notification may be made either prospectively or retrospectively, but no retrospective effect may be given from a date earlier than 1st April, 1994. The expression "public sector bank" is proposed to be given the meaning assigned to it in the Explanation to clause (23D) of section 10. 15.3. The amendment will take effect from 1st April, 1995, and will, accordingly, apply, in relation to the assessment year 1995-96 and subsequent years. [Section 4] Removal of condition of specification for purposes of section 10(23D) in case of Mutual Funds registered with SEBI 16.1. Under the existing provisions of clause (23D) of section 10, any income of a Mutual Fund set up by a public sector bank or a public financial institution or authorised by the Securities and Exchange Board of India (SEBI) or the Reserve Bank of India is exempt from income-tax only if it is specified for the purposes of the aforesaid clause by the Central Government by notification in the Official Gazette. From January, 1993, SEBI (Mutual Funds) Regulations, 1993 (see [1993] 77 Comp Cas (St.) 57), framed under the Securities and Exchange Board of India Act, 1992 (see [1992] 75 Comp Cas (st.) 193), have come into force. These regulations apply to all mutual funds except (i) the Money Market Mutual Funds established for investments exclusively in money market instruments, and (ii) Mutual Funds established outside India. The said regulations provide for registration of the mutual funds with SEBI and contain enough safeguards for the efficient and orderly conduct of the mutual funds. There is, therefore, no need to retain the condition, for obtaining income-tax exemption, of specification by the Central Government in the case of a mutual fund which has been registered with SEBI. 16.2. The Act, therefore, seeks to amend clause (23D) of section 10, in order to provide that the condition of specification by the Central Government will not apply in the case of a mutual fund registered under the Securities and Exchange Board of India Act, 1992**, or regulations made thereunder. In the case of other mutual funds, set up by a public sector bank or a public financial institution or authorised by the Reserve Bank of India, the condition of specification by the Central Government for the purposes of clause (23D) of section 10 will continue to operate. 16.3. The amendment will take effect from 1st July, 1995. [Section 4] Income-tax exemption to funds established for welfare of employees of which such employees are members 17.1. A number of funds have been established for the welfare of employees or their dependants in which such employees themselves are members. The funds are expended to provide cash benefits to a member on his superannuation or in the event of his illness or illness of any member of his family, etc., or to the dependants of a member on his death. As these organisations are in the nature of mutual benefit funds, their income does not qualify for exemption under section 10(23C)(iv) or section 11. Representations have been received to the effect that income-tax exemption should be provided to these funds as the liability to pay income-tax reduces the availability of funds with them for utilisation towards their objects. There is merit in these representations. 17.2. The Act, therefore, inserts a new clause (23AAA) in section 10 so as to provide for exemption from income-tax on any income received by any person on behalf of a fund established, for such purposes as may be notified by the Board, for the welfare of employees or their dependants, and of which fund such employees are members. The exemption will be available only if the fund applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is established. The aforesaid fund shall invest its funds and contributions made by the employees and other sums received by it in any one or more of the forms or modes specified in sub-section (5) of section 11. It is also provided that the said fund is to be approved by the Commissioner in accordance with the rules made in this behalf and such approval shall have effect for such assessment year or years not exceeding three assessment years as may be specified in the order of approval. 17.3. The amendment will take effect from 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 4] Income-tax exemption on income by way of dividends and long-term capital gains of venture capital funds and venture capital companies 18.1. Venture capital financing is an important source of finance in many countries, enabling pooled investment by investors in the equity of unlisted companies. Venture capital funds and venture capital companies can play a useful role by filling in the resource gap at the stage when a manufacturing company is expanding, but is not ready to go to the public. 18.2. In order to encourage venture capital financing, the Act inserts a new clause (23F) in section 10 of the Income-tax Act so as to provide income-tax exemption on any income by way of dividends or long-term capital gains of a venture capital fund or a venture capital company from investments made by way of equity shares in a venture capital undertaking. In order to obtain the income-tax exemption, the venture capital fund or the venture capital company will require approval by the prescribed authority in accordance with the rules made in this behalf and will also have to satisfy the prescribed conditions. The approval by the prescribed authority will, at any one time, have effect for such assessment year or years, not exceeding three assessment years, as may be specified in the order of approval. If the aforesaid equity shares are transferred (other than in the event of listing of the shares in a recognised stock exchange in India) by a venture capital fund or a venture capital company at any time within a period of three years from the date of their acquisition, the aggregate amount of the income by way of dividends on such equity shares which has not been included in the total income of the previous year or years preceding the previous year in which such transfer has taken place shall be deemed to be the income of the venture capital fund or of the venture capital company for the assessment year relevant to the previous year in which such transfer has taken place. The exemption will also not be allowed in respect of the long-term capital gains, if any, arising on the aforesaid transfer of equity shares. 18.3. The expression "venture capital fund" is being defined to mean a fund, operating under a trust deed registered under the provisions of the Registration Act, 1908, established to raise monies by the trustees for investments mainly by way of acquiring equity shares of a venture capital undertaking in accordance with the prescribed guidelines. The expression "venture capital company" is being defined to mean a company which has made investments by way of acquiring equity shares of venture capital undertakings in accordance with the prescribed guidelines. The expression "venture capital undertaking" is being defined to mean a domestic company whose shares are not listed in a recognised stock exchange in India and which is engaged in the manufacture or production of such articles or things (including computer software) as may be notified by the Central Government in this behalf. 18.4. The Act also amends section 112 of the Income-tax Act relating to tax on long-term capital gains, in order to omit the provision regarding the concessional rate of tax on long-term capital gains arising to a venture capital company from the transfer of equity shares of venture capital undertakings. 18.5. The amendments will take effect from 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Sections 4 and 23] Income-tax exemption to Employees' State Insurance Fund 19.1. The contributions paid under the Employees' State Insurance Act, 1948, and all other moneys received on behalf of the Employees' State Insurance Corporation are paid into a Fund called the Employees' State Insurance Fund. This Fund is held and administered by the Employees' State Insurance Corporation. The amounts lying in the Fund are to be expended for payment of cash benefits and provision of medical treatment and attendance to insured persons and their families, establishment and maintenance of hospitals and dispensaries, etc. There is a need to provide income-tax exemption on the income of the Employees' State Insurance Fund. 19.2. The Act, therefore, inserts a new clause (25A) in section 10 of the Income-tax Act. This clause provides that any income of the Employees' State Insurance Fund, set up under the provisions of the Employees' State Insurance Act, 1948, will be exempt from income-tax. 19.3. The amendment will take effect retrospectively from 1st April, 1962, and will, accordingly, apply in relation to the assessment year 1962-63 and subsequent years. [Section 4] Tax relief for National Minorities Development and Finance Corporation and such other State level corporations 20.1. The National Minorities Development and Finance Corporation has been set up in pursuance of the announcement made by the Prime Minister in his Independence Day Speech on 15th August, 1993. The main object of this corporation is to promote economic and developmental activities for the benefit of minority communities. Corporations, at the State level, for the development of minority communities already exist in some States. There is a need to provide income-tax exemption on the income of these corporations and also tax relief on the donations made to them. 20.2. The Act, therefore, inserts a new clause (26BB) in section 10 of the Income-tax Act. This clause provides that any income of a corporation established by the Central Government or any State Government for promoting the interests of the members of a minority community, will be exempt from income-tax. The expression "minority community" is defined to mean a community notified as such by the Central Government in the Official Gazette in this behalf. 20.3. The Act also amends section 80G of the Income-tax Act to allow deduction, at the rate of fifty per cent., in respect of donations to the corporations referred to in clause (26BB) of section 10 of the Income-tax Act. The deduction in respect of donations to the aforesaid corporations will be subject to the overall limit of ten per cent. of the gross total income of the assessee, as provided in sub-section (4) of section 80G in respect of donations to certain funds, institutions, etc. 20.4. The amendments will take effect from 1st April, 1995, and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years. [Sections 4 and 16] Restricting five-year tax holiday under section 10A to units in FTZs exporting at least 75 per cent. of their turnover 21.1. Under section 10A of the Income-tax Act, a five-year tax holiday is allowed to any industrial undertaking in a Free Trade Zone (FTZ) which manufactures or produces any article or thing. This tax holiday is in operation from the assessment year 1981-82. Similarly, the provisions of section 10B exempt the entire profits of 100 per cent. EOUs from the assessment year 1989-90. 21.2. Units in FTZs/100 per cent. EOUs get special treatment by virtue of the fact that they export their entire produce. However, in order to provide economic flexibility to them and to allow them to dispose of the export rejects and by-products, they are allowed under the scheme to sell 25 per cent. of their product in the domestic market. In effect, such units get exemption for five years even in respect of profits from the 25 per cent. domestic sales allowed to them. 21.3. As long as domestic sales are within reasonable limits (up to 25 per cent. of total sales), the exemption of profits in the case of units in FTZs/100 per cent. EOUs can be justified as a concession incidental to export. Recently, however, it has come to notice that several units approved as 100 per cent. EOUs/FTZs are allowed to sell more than 25 per cent. of their produce in the domestic market. 21.4. In view of this undue benefit, last year, in the case of 100 per cent. EOUs exemption under section 10B was restricted only to units exporting at least 75 per cent. of their turnover. It has now been provided that, in the case of units in FTZ also, exemption under section 10A be restricted to units exporting at least 75 per cent. of their turnover. Units which export less than 75 per cent. of their turnover can avail themselves of the normal 100 per cent. deduction under section 80HHC to the extent of the export profits. The restriction will apply to new units which begin to manufacture or produce an article or thing on or after 1st April, 1995. 21.5. This amendment will take effect from 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 5] Amendment of section 17(3) of the Income-tax Act_removal of anomaly 22.1. Under section 10(13) of the Income-tax Act, any payment from an approved superannuation fund on the death of a beneficiary or any payment to an employee on commutation of pension on retirement is exempt from tax. Part B of the Fourth Schedule to the Act contains rules relating to approval, etc., of the superannuation funds. Rule 6 thereof provides for deduction of tax at source where employees' contributions to the approved superannuation fund are paid to an employee in circumstances other than those referred to in section 10(13). 22.2. Although tax is deducted at source on payments which are not covered by the exemption under section 10(13), the tax so deducted is being refunded because under the existing section 17(3) relating to profits in lieu of salary, payments from an approved superannuation fund are not treated as income. This is an unintended benefit and creates an anomalous situation where tax is deducted at source but has to be refunded because payments not covered by section 10(13) have not been specifically included as income. 22.3. In order to remove this anomaly, section 17(3)(ii) of the Income-tax Act has been amended to exclude from the definition of profits in lieu of salary, only payments which are covered under section 10(13) and not other payments from the approved superannuation fund. 22.4. This amendment will take effect from 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 6] Withdrawal of deduction of full cost of minor items of machinery or plant 23.1. The first proviso to section 32(1)(ii) of the Income-tax Act provided that where the actual cost of any individual item of machinery or plant did not exceed Rs. 5,000, the full cost would be allowed as depreciation in the very first year of user, and the written down value of the asset thereafter is taken to be nil. This proviso was introduced through the Finance Act, 1966, when the concept of "block of assets" was not in existence. Thereafter, sweeping changes were made in the provisions relating to depreciation. 23.2. Further, it was seen that this provision was being misused by claiming 100 per cent. depreciation on a large number of assorted items below Rs. 5,000. This enabled the assessees to reduce their taxable profits by claiming 100 per cent. write off in the year of purchase. The Finance Act, 1995, has deleted the first proviso to section 32(1)(ii) and all items of machinery or plant, including those costing less than Rs. 5,000 will form part of a "block of assets" and be allowed depreciation at the specified rate in accordance with rule 5 of the Income-tax Rules. 23.3. As books are also covered within the meaning of the term "plant", the Government has decided to allow 100 per cent. depreciation on the books purchased by professionals for purposes of their profession. Necessary amendment in the Income-tax Rules is being made separately for giving effect to this decision. 23.4. The amendment will take effect from 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 7] Amendment of section 33AC to limit deduction to 50 per cent. only in respect of income derived from the carrying on of shipping operations 24.1. Section 33AC of the Income-tax Act, 1961, was inserted by the Direct Tax Laws (Second Amendment) Act, 1989, with effect from 1st April, 1990, with a view to provide a tax incentive to public/Government companies engaged in the business of operation of ships. This deduction is available to the extent of the total income provided the amount is credited to a reserve account and is utilised for the purchase of a new ship within the specified period. 24.2. It was noticed that shipping companies have diversified into trading, real estate business, etc., and are claiming deduction under this section even in respect of their income from activities other than shipping. There is no justification for allowing 100 per cent. deduction with reference to income from activities other than operation of ships. 24.3. Section 33AC has been amended to restrict the deduction to 50 per cent. of the income derived from the business of operation of ships only. This takes outside the purview of the deduction any income arising from businesses other than shipping business, or from sources other than business. 24.4. The amendment will take effect from 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 8] Deduction for payments to National Urban Poverty Eradication Fund 25.1. The Government is setting up a fund called the "National Urban Poverty Eradication Fund" (NUPEF), on the lines similar to those on which the National Fund for Rural Development (NFRD) has been set up. This Fund will be notified on its being set up. 25.2. Under the existing provisions of section 35CCA of the Income-tax Act, sums paid by an assessee to any association or institution for carrying out rural development programmes or to a rural development fund set up and notified by the Central Government are allowed as a deduction in computing profits and gains of business or profession. Section 35CCA has been amended to allow the benefit of deduction under this section in respect of payments made to NUPEF also. 25.3. Towards the same end section 80GGA has also been amended. This section provides, inter alia, for 100 per cent. deduction in respect of donations made to an approved association or institution for carrying out the programmes approved under section 35CCA and is available to all taxpayers other than those deriving income from business or profession. The amended section 80GGA provides that donations made to NUPEF will also be allowed as a deduction in the hands of such taxpayers. 25.4. The amendment will take effect from 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Sections 9 and 17] Deduction in respect of income from long-term finance for development of infrastructure facilities 26.1. Under clause (viii) of sub-section (1) of section 36 of the Income-tax Act, 1961, prior to its amendment by the Finance Act, 1995, an approved financial corporation engaged in providing long-term finance for industrial or agricultural development in India, or an approved public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of residential houses, was entitled to a deduction of an amount not exceeding 40 per cent. of its total income carried to a special reserve. The deduction was allowed on the "total income" and not with reference to the income from the activities specified in section 36(1)(viii). 26.2. It was noticed that many of these approved financial corporations/approved public companies had diversified their activities and were claiming deduction under this section even in respect of their income derived from activities other than those specified in this section. As there was no justification for allowing the deduction with reference to income from other activities or from sources other than business, the Finance Act, 1995, has amended section 36(1)(viii) to limit the deduction to 40 per cent. only in respect of income derived from providing long-term finance for the activities specified in section 36(1)(viii). Now, income arising from other business activities or from sources other than business will not be taken into account for computing deduction under section 36(1)(viii). 26.3. Section 36(1)(viii) has also been amended to extend the ambit of deduction up to 40 per cent. of the income credited to a special reserve account to approved financial corporations providing long-term finance for development of infrastructure facilities in India. 26.4. The amendments will take effect from 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 10] Amendment of section 40A(3) of the Income-tax Act, to provide for disallowance of 20 per cent. of cash expenditure 27.1. Section 40A(3) provides for disallowance of an expenditure, incurred for business or profession, in respect of which payment exceeding Rs. 10,000 is made otherwise than by a crossed cheque or a crossed bank draft. Certain cash payments have, however, been excluded under rule 6DD from the prohibition contained in this section. Sub-rule (j) of rule 6DD prescribes the mitigating circumstances with a view to relax the rigours of section 40A(3) in genuine and bona fide cases. Sub-rule (j) was introduced at a time when banking facilities had yet to take roots in rural areas. Now that banks have established themselves in rural areas and a vast branch network is available, it is felt that sub-rule (j) has outlived its utility. 27.2. These provisions have also given rise to substantial litigation arising out of the interpretation and scope of section 40A(3) read with rule 6DD(j). 27.3. Section 40A(3) has been amended to provide that in case any payment is made in contravention of section 40A(3), then 20 per cent. of such expenditure would be disallowed and taken into account for computation of income. Necessary amendments in the Income-tax Rules will consequently be made so as to delete clause (j) of rule 6DD. 27.4. The amendment will take effect from 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 11] Amendment of section 43(3) of the Income-tax Act to exclude plantations and livestock from the definition of plant 28.1. Under sub-section (3) of section 43, the term "plant" includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of business or profession. 28.2. In some judicial pronouncements, it has been held that the term "plant" includes tea bushes and, therefore, they would also be eligible for depreciation under section 32. Rule 8(2) of the Income-tax Rules already provides for a deduction in respect of the expenditure incurred on replacement of old tea bushes by an assessee. The deduction under rule 8(2) is allowed in lieu of depreciation. As a result of the judicial pronouncements, double deduction is now being claimed on the tea bushes, once as replacement cost and then as depreciation allowance. 28.3. With a view to setting at rest the aforesaid controversy, section 43(3) has been amended to provide that the expression "plant" will not include tea bushes and livestock. 28.4. The amendment will take effect, retrospectively, from 1st April, 1962, and will, accordingly, apply in relation to the assessment year 1962-63 and subsequent years. [Section 12] Furnishing of tax audit report 29.1. Section 44AB of the Income-tax Act, 1961, requires every person carrying on business or profession with gross receipts exceeding the prescribed limits to get his accounts audited by an accountant before 31st October, or 30th November, as the case may be. Section 139(6A) states that the return forms for sub-sections (1) and (3) of section 139 and clause (i) of sub-section (1) of section 142 shall, in the case of an assessee engaged in business or profession, require him to furnish, inter alia, the report of audit obtained under section 44AB. Section 271B prescribes levy of penalty for any of the following failures : (1) Failure to get the accounts audited as required under section 44AB ; (2) Failure to obtain a report of such audit ; (3) Failure to furnish the said report along with the return of income filed either under section 139(1) or under section 142(1)(i). 29.2. The existing provisions under sections 139(6A) and 271B allow interpretations contrary to the legislative intent of getting the accounts audited by the specified date. With a view to set the controversies at rest, the provisions of sections 44AB, 139 and 271B have been recast so as to make them effective. The provisions of section 44AB have been amended to ensure that tax audit is completed by the specified date and the audit report is furnished by that date irrespective of the fact that the return of income has been furnished or not by that date. However, the return whenever furnished shall be accompanied by a copy of the audit report and proof of filing the same by the specified date. 29.3. Wherever the audit report has been furnished before filing of the return, non-furnishing of a copy of such report along with the return of income will only be a defect under section 139(9) which can be rectified. 29.4. Consequential amendments have been made in section 271B to provide penal action for not getting the accounts audited or failure to furnish the audit report by the specified date. 29.5. These amendments take effect from 1st July, 1995. [Sections 13, 29 and 48] Simplified procedure for computation of capital gain on transfer of bonus shares 30.1. Bonus shares are issued to an existing shareholder without making a payment in cash. Presently, cost of acquisition of these shares is taken on the basis of principles laid down by the Supreme Court. It has been held that after a bonus issue, the cost of each of the bonus shares as also each of the original shares is to be determined by spreading the cost of the original shares over the number of the original and bonus shares. There are no specific provisions under the Income-tax Act to deal with computation of the cost of acquisition in such cases. 30.2. Computation of the cost of bonus shares on the principle of averaging, however, is not simple. It is very difficult to correlate bonus shares to corresponding original shares purchased on different dates and at different costs. Necessarily, separate streams of calculations have to follow for each set of original shares purchased on a particular date and every time a sale of shares takes place. In order to overcome the problem of complexity, a simple method has been laid down for computing the cost of acquisition of bonus shares. For the sake of clarity and simplicity, the cost of bonus shares is to be taken as nil while the cost of original shares is to be taken as the amount paid to acquire them. This procedure will also be applicable to any other security where a bonus issue has been made. Here the expression "security" will take its meaning from the definition in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956. 30.3. The period of holding of the bonus asset will be reckoned from the date of allotment of such an asset. 30.4. These amendments will take effect from 1st April, 1996, and will, accordingly, apply to the securities transferred on or after 1st April, 1995. [Section 14] Income-tax relief to a guardian for providing for maintenance of handicapped persons on the guardian's death 31.1. Section 80DD of the Income-tax Act allows deduction of a sum of Rs. 15,000 from the income of a taxpayer who incurs any expenditure on medical treatment, nursing, training and rehabilitation of a handicapped dependant. However, this deduction, by its very nature, is available only during the lifetime of the parents or a guardian as the case may be. 31.2. Many voluntary relief organisations have represented that the parents or guardians of children with disability have to provide for maintenance of the disabled after the death of the primary care-giver, i.e., the parent or the guardian. 31.3. Accordingly, a new section 80DDA has been inserted in order to allow a separate deduction, from the gross total income, of an amount not exceeding Rs. 20,000, deposited in a year in any scheme of LIC, UTI, etc., specifically framed for providing recurring or lump sum payment for the maintenance and upkeep of a handicapped dependant after the death of the assessee and approved by the Board in this behalf. 31.4. In the event of the death of the parent or other relative on whom the handicapped person depends, the basic sum assured together with accretions, etc., will be utilised to provide for payment of an annuity or lump sum amount for the benefit of the handicapped dependant. For this purpose, the taxpayer would nominate either the handicapped himself or any other person or a trust to receive the payment on his behalf, for the benefit of the handicapped dependant. In case, the handicapped dependant predeceases the taxpayer, an amount equal to the amount paid or deposited by the taxpayer in the preceding year or years shall be deemed to be the income of the previous year in which such amount is received by the assessee and shall accordingly, be treated as income of that previous year. 31.5. This amendment will take effect from 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Sections 4 and 15] Hundred per cent. deduction for donations to Zila Saksharta Samitis for primary and adult education 32.1. Under section 80G of the Income-tax Act, a deduction from total income is allowed in respect of donations made by an assessee. In most cases, the deduction is 50 per cent. of the donations. However, in respect of donations to certain funds and for universities, 100 per cent. deduction is allowed. 32.2. There is an urgent need for mobilisation of additional resources for elementary and adult education, especially in rural and semi-urban areas where facilities for such education are deficient. 32.3. In view of this, section 80G has been amended to provide for 100 per cent. deduction for donations to Zila Saksharta Samitis constituted in the districts under the chairmanship of the district collectors for the purpose of improvement of primary education in villages and towns in such districts and for literacy and post-literacy efforts. 32.4. For this purpose, the term "town" has been defined to mean a town which has a population up to 1 lakh as per the last preceding census for which the relevant figures have been published before the first day of the relevant previous year. 32.5. This amendment will take effect from 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 16] Making the deduction in respect of profits from export of computer software under section 80HHE open-ended 33.1. Under the provisions of section 80HHE, 100 per cent. deduction is allowed on profits derived from export of computer software provided the sale consideration is received in or brought into India in convertible foreign exchange. 33.2. The provisions of section 80HHE were introduced by the Finance (No. 2) Act, 1991, for the assessment years 1991-92 to 1993-94. The Finance Act, 1993, extended the deduction for the assessment year 1994-95. The Finance Act, 1994, further extended this for the assessment year 1995-96. 33.3. Software export has considerably increased in the last five years and is today a major foreign exchange earner. The sector deserves fiscal incentives to maintain the momentum gained. The deduction under section 80HHE has, therefore, been extended beyond the assessment year 1995-96 by omitting the proviso to sub-section (1) of section 80HHE. The deduction in respect of export profit of computer software has, thus, been made open-ended in line with the deduction under section 80HHC. 33.4. This amendment will take effect from 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 18] Five-year tax holiday for infrastructure development 34.1. Under the provisions of section 80-IA, new industrial undertakings are allowed a deduction of 25 per cent. (30 per cent. for companies) for the first ten years (twelve years for the co-operative sector) of production. However, an industrial undertaking, engaged in the generation or generation and distribution of power or an industrial undertaking set up in specified backward States or districts, is allowed a five-year full tax holiday. For undertakings entitled to the five-year full tax holiday, normal deduction of 25 per cent. (30 per cent. for companies) is allowed for the balance period after the five-year holiday. 34.2. Industrial modernisation requires a massive expansion of, and qualitative improvement in, infrastructure. Our country is very deficient in infrastructure such as expressways, highways, airports, ports and rapid urban rail transport systems. Additional resources are needed to fulfil the requirements of the country within a reasonable time frame. In many countries, the BOT (build-operate-transfer) or the BOOT (build-own-operate-transfer) concepts have been utilised for developing new infrastructure. 34.3. Applying commercial principles in the operation of infrastructure facilities can provide both managerial and financial efficiency. In view of this, a ten-year concession including a five-year tax holiday has been allowed for any enterprise which develops, maintains and operates any new infrastructure facility such as roads, highways, expressways, bridges, airports, ports and rail systems or any other public facility of similar nature as may be notified by the Board on BOT or BOOT or similar other basis (where there is an ultimate transfer of the facility to a Government or public authority). The enterprise has to enter into an agreement with the Central or the State Government or a local authority or any other statutory authority for this purpose. The period within which the infrastructure facility has to be transferred needs to be stipulated in the agreement between the undertaking and the Government concerned. The enterprise has to be owned by a company registered in India or a consortium of such companies. The tax holiday will be in respect of income derived from the use of the infrastructure facilities developed by them. 34.4. It will apply in respect of infrastructure facilities becoming operational on or after 1st April, 1995. 34.5. The five-year period will be counted from the initial year. The enterprise will be allowed to choose the initial year from which it wants to avail itself of the five-year tax holiday. The concession has to be availed of within a span of the 12 years beginning with the year of operation. This means that an enterprise which chooses the fourth year of operation as the initial year gets the full tax holiday for five years_from the fourth to the eighth year_and the 30 per cent. deduction for the remaining four years, the ninth to the twelfth year. Similarly, an enterprise which chooses the eighth year of operation as the initial year will avail of the full tax holiday for five years from the 8th year to the 12th year only. It will not have the advantage of claiming 30 per cent. deduction for any year within the span of 12 years. 34.6. This amendment will take effect from 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 19] Continuance of fiscal incentive under section 80-IA for small-scale industrial units commencing production after 1st April, 1995 35.1. Under the provisions of section 80-IA, new industrial undertakings, hotels and ships are allowed a deduction of 25 per cent. of the profits (30 per cent. for companies) for the first ten years (twelve years for the co-operative sector) of production. However, for an industrial undertaking engaged in the generation or generation and distribution of power or an industrial undertaking set up in specified backward States or districts, full tax holiday is allowed for the first five years and deduction of 25 per cent. (30 per cent. for companies) is allowed, thereafter, for a further period of five years (seven years for co-operatives). 35.2. For hotels and ships and industrial units, other than those industrial units in backward States or districts, the tax incentive is available to industrial units commencing production between 1st April, 1991, and 31st March, 1995. Therefore, the units which commence production by 31st March, 1995, will continue to avail themselves of the incentive for 10 years, or as the case may be, 12 years. The incentive will, however, not be available to new units commencing production after 31st March, 1995. 35.3. Indian industry and the service sector have come of age. In this liberalised atmosphere, there is little justification for continuing the across-the-board incentive to large-scale industrial units in areas which are not backward. However, the small-scale sector still needs fiscal support. In view of this, section 80-IA has been amended in order to provide continuance of the existing concession to the small-scale units commencing production between 1st April, 1995, and 31st March, 2000. These units will be allowed a deduction of 25 per cent. of the profits (30 per cent. for companies) for a period of ten years (12 years for co-operatives) as at present. 35.4. This amendment will take effect from 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 19] Incentive for savings 36.1. Under section 80L of the Income-tax Act, a deduction of up to Rs. 10,000 from total income is allowed in respect of income by way of dividend and interest, etc., income from certain specified savings instruments. 36.2. With a view to giving a fillip to savings, the deduction allowed to individuals and Hindu undivided families under section 80L has been raised from the present Rs. 10,000 to Rs. 13,000. 36.3. This amendment will take effect from 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 20] Relief to handicapped persons suffering from permanent physical disability, blindness or mental retardation 37.1. Under the provisions of section 80U of the Income-tax Act, tax relief in the form of deduction of Rs. 20,000 is allowed in computing the total income of a resident individual who is suffering from permanent physical disability, blindness or mental retardation. The nature of permanent physical disability or mental retardation is specified in the Income-tax Rules. 37.2. The cost of living aids for handicapped persons and of normal medical care has gone up substantially. The level of deduction allowed under section 80U has, therefore, been raised from Rs. 20,000 at present to Rs. 40,000. 37.3. This amendment will take effect from 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 21] Rebate under section 88 on subscription to life insurance policy_removal of condition regarding premiums exceeding 10 per cent. of sum assured 38.1. Section 88 of the Income-tax Act allows a rebate of tax amounting to 20 per cent. of the amount deposited in certain specified savings instruments including, inter alia, life insurance premiums. According to sub-section (3) of section 88, the amount eligible for rebate in respect of premium paid for life insurance policy is limited to ten per cent. of the actual capital sum assured. 38.2. This restriction has the effect of discouraging insurance policies which are of durations of less than ten years. With a number of insurance policies coming up for persons in the higher age groups, premiums limited to a few years or a single premium are now quite common. It would be unjust to exclude from the benefit of section 88, higher premium paid generally by older persons for effecting life insurance policy. 38.3. In view of the above, sub-section (3) of section 88 has been deleted in order to permit rebate on premium paid on life insurance policies even where premium paid is in excess of ten per cent. of the actual sum assured. 38.4. In the case of any single premium policy which is surrendered within two years of the date of insurance, the amount of rebate allowed earlier shall be treated as income-tax payable in the year of such surrender. 38.5. This amendment will take effect from 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 22] Special procedure for assessment of search cases 39.1. Searches conducted by the Income-tax Department are important means for unearthing black money. However, under the present scheme, valuable time is lost in trying to relate the undisclosed incomes to the different years. Tax-evaders generally manage to divert the focus to procedural and legal issues and often invent new evidence to explain undisclosed income. By the time search-related assessments are completed, the effect of the search is considerably diluted. Legal battles continue for many years to decide which income is assessable in which assessment year. No finality is reached and the seized assets remain with the Department for a long time. 39.2. In order to make the procedure of assessment of search cases cost-effective, efficient and meaningful, a new scheme has been introduced for the assessment of undisclosed income determined as a result of search under section 132 or requisition under section 132A. Under this scheme, the undisclosed income detected as a result of any search initiated, or requisition made, after 30th June, 1995, shall be assessed separately as income of a block of years. Where the previous year has not ended or the due date for filing a return of income for any previous year has not expired, the income or the transactions recorded on or before the date of the search or requisition in the books of account or other documents maintained in the normal course of business relating to such previous years shall not be included in the block assessment. 39.3. The salient features of this scheme are as under : (a) Block period : The undisclosed income of a person shall be assessed as the income of the block period consisting of a period of ten previous years, preceding the previous year in which the search was conducted or the books of account, assets, etc., were requisitioned. The period of the current year up to the date of the search will also form part of the block period. (b) Undisclosed income : (i) The undisclosed income has been defined in clause (b) of section 158B. The term "undisclosed income" includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act. (ii) The undisclosed income of the block period, therefore, shall be the aggregate of the total income of the previous years falling within the block period, computed on the basis of evidence found as a result of search and such other enquiries as the Assessing Officer may make and such other materials or information as are available with him, as reduced by the aggregate of the total income, or as increased by the losses returned/determined earlier in respect of such previous years. (iii) Where assessments under section 143, 144 or 147 have been concluded or determination of income has been made under section 143(1A) or 143(1B), the same will be reduced for determining the undisclosed income. (iv) Where returns of income have been filed under any sub-section of section 139 or in response to a notice issued under section 142(1) or under section 148, but assessments have not been made till the date of search, the incomes disclosed in such returns of income shall be reduced for computing the undisclosed income. (v) In a case where the due date for filing a return of income has expired, but no return of income has been filed there will be no reduction of any amount for determining the undisclosed income stated above. (vi) Where the previous year has not ended or the date of filing the return of income under section 139(1) for any previous year has not expired, the income determined on the basis of transactions recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous years shall be reduced. (vii) However, in a case where undisclosed income has been determined in any earlier block assessment, the same will be reduced from the total income for determining the undisclosed income. (viii) Where any order of settlement under section 245D has been passed by the Settlement Commission, the income determined in such order shall be reduced accordingly. (ix) It may again be emphasised that the use of the words "such previous years" shows that the exercise shall be restricted to years in respect of the undisclosed income has been found and need not be undertaken for all the ten years comprised in the block period. (c) Applicability of the provisions : (i) The special procedure for assessment of search cases as prescribed in Chapter XIV-B shall apply in cases where search is initiated under section 132 or a requisition is made under section 132A after 30th June, 1995. Proceedings under section 132(5) or 132(7) will no longer be necessary for searches initiated on or after 1st July, 1995. Proceedings under section 132(5) or 132(7) will, however, be required where initial search was conducted prior to 1st July, 1995, irrespective of the last search or consequential searches which may have continued and concluded on or after that date, i.e., 1st July, 1995. (ii) The order of assessment for the block period shall be passed within one year from the end of the month in which the last of the search warrants is executed. Though the term execution has not been defined in Chapter XIV-B, it will take its usual meaning which means the date on which the search has been completed. Where consequential searches or requisitions have been made, the period of limitation of one year shall start from the end of the month in which the last of such consequential operations were concluded. (iii) The assessment order for the block period shall be passed by an Assessing Officer not below the rank of Assistant Commissioner of Income-tax with the prior approval of the Commissioner of Income-tax. (d) Treatment of unabsorbed losses, depreciation, etc. : Brought forward losses or unabsorbed depreciation will be allowed to be carried forward and set-off in subsequent regular assessments and shall not be set-off against the undisclosed income determined in the block assessment. Therefore, the total income or total losses of each previous year shall for the purpose of aggregation be taken as the total income or total losses without giving effect to set-off of brought forward losses under Chapter VI or unabsorbed depreciation under section 32. In other words, where in the regular assessment proceedings set-off of loss or unabsorbed depreciation has been allowed in the regular assessment proceedings, the same shall be ignored for determining the undisclosed income for the block period. (e) Procedure for making block assessment : (i) The Assessing Officer shall serve a notice on such person requiring him to furnish within such time, not being less than 15 days, as may be specified in the notice, a return in the prescribed form and verified in the same manner as a return under clause (i) of sub-section (1) of section 142 setting forth his total income including undisclosed income for the block period. The officer shall proceed to determine the undisclosed income of the block period and the provisions of section 142, sub-sections (2) and (3) of section 143 and section 144 shall apply accordingly. The Assessing Officer shall not be required to issue any notice under section 148 for the purpose of proceedings under this Chapter. Though the block period can be extended up to ten years in a case where the assessee has not disclosed undisclosed income in any one or more of the previous years in the block periods and the Assessing Officer also does not find any material indicating undisclosed income in any one or more of the previous years comprised in the block period, it will not be necessary to do the exercise of computing the undisclosed income for the relevant years and the exercise may be limited to the years in respect of which the undisclosed income has been found. On determination of the undisclosed income of the block period, the Assessing Officer shall issue an order of assessment and determine the demand payable by him on the basis of such assessment. The assets seized in the course of search or taken possession of as a result of requisition under section 132A shall be retained to the extent necessary and shall be dealt with in the manner laid down under section 132B. (ii) In computing the undisclosed income for the block period, the provisions of sections 68, 69, 69A, 69B and 69C shall, mutatis mutandis apply and the term "financial year" mentioned in these sections shall be taken to mean the relevant financial years falling within the block period. (iii) Before the adoption of the uniform previous year, the assessees were allowed to have any accounting period as their previous year. In working out the block period, therefore, there may be cases in which a part of a particular financial year may go beyond the block period or during the transitional period of switching over from the old system to uniform previous year, part of a financial year may not fall in the previous year covered in the block period. In such cases, the "10 previous years preceding the previous year in which the search has been initiated" shall be taken as the previous years relevant to the ten assessment years immediately preceding the year relevant to the previous year in which the search has taken place irrespective of the fact whether the assessments for all these assessment years have already been made or not. For example, when a search has taken place on 11th July, 1995, the block of ten previous years shall be the block relevant to the assessment years 1986-87 to 1995-96 plus the period up to date of search, i.e., from 1st April, 1995, to 11th July, 1995. (iv) Where the assessee offers no explanation about the nature of source of acquisition of certain assets or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value of such assets may be deemed to be the income of the relevant previous year as mentioned in section 158BB(2). The onus of proving to the satisfaction of the Assessing Officer that any undisclosed assets including the income from undisclosed property has already been disclosed in any return of income filed by the assessee before the initiation of the search shall be on the assessee. (v) An appeal shall lie against the order under this Chapter before the Income-tax Appellate Tribunal. (f) Tax, penalty, etc. : The undisclosed income of the block period shall be taxed at a flat rate of 60 per cent. plus surcharge at the rate of 15 per cent. in the case of a domestic company. No penalty under section 271(1)(c), 271A or 271B or interest under section 234A, 234B or 234C shall be leviable. Penalties under all other sections wherever applicable and interest on delayed payment under section 220 shall, however, be leviable. Wherever considered necessary, the prosecution proceedings can also be initiated against the persons searched. Besides, all other provisions of this Act shall apply to the assessments to be made under this Chapter. In other words, provisions relating to regular income-tax proceedings, obligation for payment of self-assessment tax under section 140A before filing return showing undisclosed income, recovery proceedings, appellate proceedings, etc., shall be applicable. [Sections 24, 26, 32 and 45] Raising the qualifying limits for the purposes of the simplified procedure for small businessmen 40.1. A simplified procedure for small businessmen, carrying on certain specified businesses or vocations, was introduced in the Income-tax Act by the Finance Act, 1992. 40.2. A person is eligible to opt for the scheme if _ _his income from such business or vocation does not exceed Rs. 42,000 ; _in the case of retail business, his turnover does not exceed Rs. 5,00,000 ; _taxable income from any source other than the business or vocation does not exceed Rs. 5,000 ; _no deduction under Chapter VI-A (except section 80L) or rebate under Chapter VIII is allowed. 40.3. Under the scheme, the income of a person is deemed to be Rs. 42,000. The tax in respect of the deemed income of Rs. 42,000 amounts to Rs. 1,400. For income up to Rs. 5,000 from any other source (as reduced by deduction under section 80L) tax is chargeable at the appropriate rate, i.e., 20 per cent. 40.4. In view of the raising of the exemption limit for individuals and non-specified Hindu undivided families from Rs. 35,000 to Rs. 40,000, the qualifying amount and the deemed income under the simplified procedure has been raised from Rs. 42,000 to Rs. 47,000. The limit on turnover in the case of retail business has also been raised from Rs. 5,00,000 to Rs. 6,00,000. 40.5. This amendment will take effect from 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 25] Power to call for information when no proceeding is pending 41.1. The Income-tax Department has taken steps to improve information-gathering and its processing to be in line with its plans of computerisation. Allotment of permanent account numbers is being done with the help of computers. Quoting of such numbers in high value transactions may be made a statutory requirement. 41.2. At present the provisions of sub-section (6) of section 133 empower the income-tax authorities to call for information which is useful for, or relevant to, any proceeding under the Act which means that these provisions can be invoked only in cases where the proceedings are pending and not otherwise. This acts as a limitation or a restraint on the capability of the Department to tackle evasion effectively. It is, therefore, thought necessary to have the power to gather information which after proper enquiry, will result in initiation of proceedings under the Act. 41.3. With a view to having a clear legal sanction, the existing provisions to call for information have been amended. Now the income-tax authorities have been empowered to requisition information which will be useful for or relevant to any enquiry or proceedings under the Income-tax Act in the case of any person. The Assessing Officer would, however, continue to have the power to requisition information in specific cases in respect of which any proceeding is pending as at present. However, an income-tax authority below the rank of Director or Commissioner can exercise this power in respect of an inquiry in a case where no proceeding is pending, only with the prior approval of the Director or the Commissioner. 41.4. The proposed amendment takes effect from 1st July, 1995. [Section 37] Authorisation for conducting survey 42.1. Section 133A of the Income-tax Act, 1961, empowers an income-tax authority to conduct survey. The term "income-tax authority" for the purpose of conducting survey has been defined in the Explanation, appearing at the end of section 133A, to mean a Deputy Commissioner, an Assistant Director or an Assessing Officer and for some specific purposes, if authorised, an Inspector of Income-tax. The powers of these authorities are restricted to their territorial jurisdiction resulting in operational difficulties whenever any of the specified authorities is not available for conducting a survey on the basis of any unexpected information from any external source warranting immediate action. Secondly, in the case of a big assessee, services of a number of officers may be required. Therefore, in order to accentuate the operational efficiency of the Department as also to cover large premises, the existing law has been amended to provide that the Deputy Director, the Director and the Commissioner will also have powers to conduct survey and an officer having jurisdiction over an assessee or within the limits of his territorial jurisdiction can authorise any other officer to conduct survey. 42.2. This amendment takes effect from 1st July, 1995. [Section 28] Enlargement of the scope of the provisions relating to permanent account numbers 43.1. "Permanent account number" has been defined to mean a number allotted to any person for the purpose of identification. The Income-tax Department has been trying to evolve a system which could enable it to identify every taxpayer with a unique identification number allotted to him. This would facilitate cross-reference, storage and retrieval of information concerning the assessees and cross-checking of third-party information with what is available in the assessment records. 43.2. Under the existing provisions of section 139A, the Board has the power to make rules in relation to the procedure for applying and also the categories of transactions and documents in relation to which the permanent account number is required to be quoted. So far, rules have been framed only in regard to the manner in which the application for permanent account number is to be made. With increased emphasis on computerisation, the Department will be able to cover all the assessees for the allotment of permanent account numbers. Many non-assessees also enter into high value transactions. It is necessary to keep a track of such persons and verify the genuineness of the source of money utilised by them in such transactions. Cross-verification with the assessment records would be possible only when persons entering into these transactions are required to quote their permanent account numbers. The Board may prescribe the transactions in which the parties shall be required to quote permanent account numbers. 43.3. In view of the above, the requirement of applying for permanent account number has been extended to professionals whose gross receipts are, or are likely to exceed, fifty thousand rupees in any previous year. Any person who is not specifically required to apply, may also apply for a permanent account number and the Assessing Officer shall make the allotment. The persons who have already been allotted permanent account number under the new series need not apply for such a number again. After allotment under the new series, any number allotted earlier shall cease to have effect. 43.4. Enabling powers have been provided to the Board for switching over to the new series of permanent account numbers. The Board has also been given powers to notify the places to be covered from time to time, the classes of persons and the period within which the application for allotment of a permanent account number under the new series has to be made. 43.5. It has been provided that every person will have to quote the permanent account number in his returns or correspondence with income-tax authorities, in challans for payment of any sum and in the documents pertaining to prescribed transactions. The Board may prescribe dates from which different classes of persons will have to quote the permanent account number and the transactions in respect of which such a number will have to be quoted. Any person receiving any document pertaining to prescribed transactions will ensure that the permanent account number has been quoted in the document. The Board will also make rules to provide the time within which the application for allotment of a permanent number is to be made and to specify the categories of transactions and documents in relation to which the permanent account number will have to be quoted. 43.6. A number allotted under the new series having ten alphanumeric characters and issued on a laminated card has been included within the meaning of "permanent account number". Here, the expression "Assessing Officer" includes an income-tax authority who has been assigned the job of allotting permanent account numbers. 43.7. These amendments take effect from 1st July, 1995. [Section 30] Methods of accounting and accounting standards for computing income 44.1. Section 145(1) of the Income-tax Act prior to its amendment by the Finance Act, 1995, provided for computation of income from business or profession or income from other sources in accordance with the method of accounting regularly employed by the assessee. Income is generally computed by following one of the three methods of accounting, namely, (i) cash or receipts basis, (ii) accrual or mercantile basis, and (iii) mixed or hybrid method which has elements of both the aforesaid methods. It was noticed that many assessees are following the hybrid method in a manner that does not reflect the correct income. The Finance Act, 1995, has amended section 145 of the Income-tax Act to provide that income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall be computed only in accordance with either the cash or the mercantile system of accounting, regularly employed by an assessee. The first proviso to sub-section (1) of section 145 has been deleted. 44.2. The Finance Act, 1995, has also empowered the Central Government to prescribe by notification in the Official Gazette, the accounting standards which an assessee will have to follow in computing his income under the head "Profits and gains of business or profession" or "Income from other sources". These accounting standards will be laid down in consultation with expert bodies like the Institute of Chartered Accountants. 44.3. The amendment will take effect from 1st April, 1997, and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years. [Section 31] Enlarging the scope of deduction of tax at source 45. An effective method of widening the tax base is to enlarge the scope of deduction of income-tax at source. Apart from bringing in more persons in the tax net, it also improves correct reporting of incomes. The Act, therefore, subjects, _ (a) interest on time deposits with banks, (b) payments by way of fees for professional services or fees for technical services, and (c) income in respect of units of the Mutual Funds specified under clause (23D) of section 10 or of the Unit Trust of India, to the requirement of deduction of tax at source. It also enlarges the scope of deduction of tax at source under section 194C relating to payments made to contractors and sub-contractors. The details of the provisions are as under : Deduction of tax at source from interest on time deposits with banks 46.1. On account of the provisions contained in clause (vii) of sub-section (3) of section 194A, income credited or paid in respect of deposits with a banking company to which the Banking Regulation Act, 1949, applies or with a co-operative society engaged in carrying on the business of banking is exempt from the requirement of deduction of income-tax at source. 46.2. The Act amends section 194A of the Income-tax Act, relating to deduction of income-tax at source from interest other than interest on securities in the case of residents. The amendment provides for deduction of income-tax at source at the rates in force (at present, ten per cent. in the case of resident non-corporate persons and 20 per cent. plus surcharge thereon in the case of domestic companies) from payment of interest exceeding ten thousand rupees in a financial year on time deposits made on or after 1st July, 1995, with a banking company or with a co-operative society engaged in carrying on the business of banking. The aforesaid limit of ten thousand rupees shall be computed with reference to the income credited or paid by a branch of the banking company or the co-operative society, as the case may be. The interest on time deposits made with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank, will not be subject to the requirement of deduction of income-tax at source. The expression "time deposits" is defined to mean deposits, excluding recurring deposits, repayable on the expiry of fixed period. 46.3. The amendment will take effect from 1st July, 1995. [Section 33] Enlarging the scope of provision regarding deduction of tax at source from payments to contractors and sub-contractors 47.1. Sub-section (1) of section 194C provides for deduction of income-tax at source from any sum payable for carrying out any work in pursuance of a contract between the contractor and the Government, local authorities, statutory corporations, companies, co-operative societies, statutory authorities engaged in provision of housing accommodation, etc., registered societies, trusts and universities. There is no requirement for deduction of income-tax at source where the contract is between a contractor and a firm. The payments under such contracts also need to be subjected to the requirement of deduction of income-tax at source. The Act, therefore, amends section 194C, in order to apply its provisions to the payments made in pursuance of a contract between a contractor and any firm. 47.2. In order to subject payments in respect of advertising contracts, broadcasting contracts, telecasting contracts, transport contracts and catering contracts to the requirement of deduction of income-tax at source, the Act amends section 194C by providing that the expression "work", used therein, shall also include : (a) advertising, (b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting, (c) carriage of goods and passengers by any mode of transport other than by railways, and (d) catering. While the deduction of tax shall be at the rate of two per cent. of the amount in regard to items (b), (c) and (d) above, it shall be at the rate of one per cent. in the case of an advertising contract. The deduction in regard to item at (a) above shall apply when a client (i.e., an advertiser) makes payment to an advertising agent. When an advertising agency makes payments to their models, artists, photographers, etc., tax shall be deducted by it under section 194J of the Income-tax Act at the rate of five per cent. as applicable to fees for professional and technical services. There will, however, be no tax deduction at source when an advertising agent makes payment to the print or electronic media. 47.3. Under the existing provisions of section 194C, no deduction of income-tax at source is required to be made if the consideration for the contract or the sub-contract does not exceed ten thousand rupees. As a measure of rationalisation, the Act raises the aforesaid limit to twenty thousand rupees. 47.4. The aforesaid amendments will take effect from 1st July, 1995. [Section 34] Reduction of rate of deduction of tax at source from rent in certain cases 48.1. Under the existing provisions of section 194-I of the Income-tax Act, income-tax has to be deducted at source at the rate of twenty per cent. from payments of rent made by any person other than an individual or a Hindu undivided family, if such payments exceed one hundred and twenty thousand rupees in a financial year. Representations have been received to the effect that the rate of deduction of tax at source, at twenty per cent., is high where the payee is an individual or a Hindu undivided family and needs to be lowered. 48.2. The Act amends section 194-I of the Income-tax Act, in order to reduce the rate of deduction of tax at source from twenty per cent. to fifteen per cent. if the payee is an individual or a Hindu undivided family. In other cases, the rate of deduction of tax at source will remain at twenty per cent. 48.3. The amendment will take effect from 1st July, 1995. [Section 35] Deduction of tax at source from payments by way of fees for professional services or fees for technical services 49.1. The Act inserts a new section 194J in the Income-tax Act providing for deduction of income-tax at source, at the rate of five per cent., on payments to a resident of fees for professional services or fees for technical services exceeding twenty thousand rupees, in either case, in a financial year made by any person other than an individual or a Hindu undivided family. No deduction under the provisions of this section will be required to be made in respect of the aforesaid fees paid or credited before the 1st day of July, 1995. Where the Assessing Officer is satisfied that the total income of any person in receipt of the said fees justifies deduction of income-tax at a lower rate or no deduction of income-tax, as the case may be, he shall, on an application made by such person in this behalf, give to him such certificate as may be appropriate. Where any such certificate is given, the person responsible for making the payment of the said fees to that person shall, until such certificate is cancelled, deduct income-tax at the rate specified in the certificate or deduct no tax at source, as the case may be. The expression "professional services" is being defined to mean services rendered by a person in the course of carrying on a legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or of this section. The expression "fees for technical services" is proposed to be given the same meaning as in Explanation 2 below clause (vii) of sub-section (1) of section 9. 49.2. The Act also amends sections 198 to 200 and 202 to 205 of the Income-tax Act, containing provisions in respect of deduction of income-tax at source. These amendments are consequential to the insertion of new section 194J in the Act. 49.3 The amendments will take effect from 1st July, 1995. [Sections 36 and 40] Deduction of tax at source from income in respect of units of specified Mutual Funds or of the Unit Trust of India 50.1. On account of the existing provisions of section 196A of the Income-tax Act, the income in respect of units of a Mutual Fund specified under clause (23D) of section 10 is not liable to deduction of income-tax at source except in the case of foreign companies. On account of the existing provisions of section 32 of the Unit Trust of India Act, 1963, the income in respect of units payable to the unitholders, who are individuals, is not liable to deduction of income-tax at source. In the case of other unitholders of the Unit Trust of India, such income is liable to deduction of income-tax at source at the rate of fifteen per cent., if the amount of income payable exceeds seven thousand rupees in a financial year. Further, section 32 of the Unit Trust of India Act provides income-tax exemption on the income in respect of units of a unitholder of the Unit Trust of India, being a non-resident Indian or a non-resident Hindu undivided family, where the units have been acquired from the Unit Trust of India out of funds in a Non-resident (External) Account or out of the remittance of funds in foreign exchange. 50.2. The Act inserts a new section 194K in the Income-tax Act relating to deduction of income-tax at source. The new section provides for deduction of income-tax at source at the rate of twenty per cent. in the case of a domestic company and fifteen per cent. in the cases of other residents, from payments of income exceeding ten thousand rupees in a financial year in respect of units of a Mutual Fund specified under clause (23D) of section 10 or of the Unit Trust of India. The aforesaid limit of ten thousand rupees shall be computed with reference to the income credited or paid in respect of a branch office of the Mutual Fund or of the Unit Trust of India as the case may be. Further, the said limit shall be computed with reference to the income credited or paid to a unitholder under a particular scheme of the Mutual Fund or of the Unit Trust of India, as the case may be, under which the units have been issued. No deduction under the provisions of this section will be required to be made in respect of the income, _ (a) credited or paid to a unitholder before the 1st day of July, 1995 ; (b) from units issued under such scheme already in operation, of the Mutual Fund or of the Unit Trust of India, as the Central Government may specify having regard to the plan of payment or income thereunder to the unitholders ; and (c) credited or paid in respect of units issued under any scheme of the Unit Trust of India to any institution or fund where such income is not liable to inclusion in its total income under the provisions of sections 11 and 12 or clause (22) or clause (22A) or clause (23) or clause (23AA) or clause (23C) of section 10. 50.3. The Act also substitutes a new section for section 196A of the Income-tax Act, so as to provide for deduction of income-tax at source from income in respect of units of a Mutual Fund specified under clause (23D) of section 10 or of the Unit Trust of India payable to a non-resident (not being a company) or to a foreign company at the rate of twenty per cent. It is also being provided that no deduction of income-tax at source will be made from any income credited or paid to a unitholder, being a non-resident Indian or a non-resident Hindu undivided family, in respect of units of the Unit Trust of India acquired from the Unit Trust of India out of the funds in a Non-resident (External) Account, maintained with any bank in India or out of remittance of funds in foreign currency, in accordance, in either case, with the provisions of the Foreign Exchange Regulation Act, 1973, and the rules made thereunder. 50.4. The Act also amends section 197 of the Income-tax Act, relating to certificate for deduction of income-tax at lower rate or for non-deduction of income-tax in appropriate cases, to insert reference to the new section 194K therein. 50.5. The Act further amends section 197A of the Income-tax Act relating to non-deduction of income-tax at source on the basis of a declaration furnished by the payee that the tax on his estimated total income of the relevant previous year will be nil. The amendment is for inserting reference to the new section 194K therein. 50.6. The Act also amends sections 198 to 200 and 202 to 205 of the Income-tax Act, containing provisions in respect of deduction of income-tax at source. These amendments are consequential to the insertion of new section 194K in the Act. 50.7. The Act also amends section 32 of the Unit Trust of India Act, 1963, relating to income-tax and other taxes. The proposed amendment is consequential to insertion of new section 194K in the Act and the proposed substitution of section 196A. 50.8. The amendments will take effect from 1st July, 1995. [Sections 36, 37, 38, 39, 40 and 90] Settlement Commission 51.1. Section 245C(1)(b) specifies that no application for settlement can be made unless the additional amount of income-tax payable on the income disclosed in the application exceeds Rs. 50,000. The Tax Reforms Committee headed by Dr. Raja J. Chelliah, amongst other things, had recommended an increase of the same to Rs. 1 lakh. The prescribed limit of Rs. 50,000 is too low at current prices and its enhancement would ensure that relatively unimportant and insignificant cases do not take the limited time available to the Benches of the Commission. This recommendation has been implemented in order to bring down the voluminous workload accumulated with the Benches of the Commission. 51.2. Under the second proviso to sub-section (1) of section 245D, the Commissioner is required to furnish the report called from him by the Settlement Commission within a period of 120 days of the receipt of communication from the Commission failing which the Settlement Commission is empowered to make the order without such report. This time-limit was provided in view of the search and seizure cases wherein order under section 132(5) is required to be passed within 120 days from the date of search. However, specific provisions of section 245C(1E) already provide for the special situation relevant to search cases where the assessee shall not be entitled to make an application before the expiry of 120 days from the date of seizure. In the rest of the cases, a much shorter period would be enough for the Commissioner to furnish his report. Hence, the period for the submission of the report by the Commissioner has been reduced to 45 days from the date of receipt of the communication from the Settlement Commission. 51.3. These amendments take effect from 1st July, 1995. [Sections 43 and 44] Modifications of provisions for pre-emptive purchase of immovable properties under Chapter XX-C 52.1. Rule 48K of the Income-tax Rules provides that the value of any immovable property for the purposes of section 269UC shall be the apparent consideration of that property exceeding 10 lakhs rupees. A single monetary limit for all the notified cities has resulted in the accumulation of heavy workload in Delhi and Bombay. For better management of work and keeping the escalation in real estate prices in view, the provisions of section 269UC(1) have been amended so as to enable the Government to prescribe different monetary limits for different cities. 52.2. Many High Courts have held that the provisions of Chapter XX-C allow the Income-tax Department to either purchase the property or issue a no objection certificate in response to an application for no objection certificate in Form No. 37-I. There is no third alternative. The Supreme Court, while dismissing the Department's S. L. P. in Appropriate Authority v. Tanvi Trading and Credits Pvt. Ltd. [1991] 191 ITR 307 (SC), has upheld this view of the High Courts. However, problems arise when a defective application in Form No. 37-I is furnished before the appropriate authority. In order to overcome such problems, the appropriate authorities are being empowered to intimate the defects, if any, in Form No. 37-I to the parties for rectification within 15 days of the receipt of the communication. Where the defects are not rectified within this specified period, it shall be presumed that the statement had never been furnished. Where the statement is rectified, it shall be presumed that the statement had been furnished on the date on which it stood rectified and the period of limitation prescribed in section 269UD shall be reckoned from that date. 52.3. These amendments take effect from 1st July, 1995. [Sections 46 and 47] Provision for modification of the status of persons engaged in the business of prospecting, etc., of mineral oils 53.1. Section 42 of the Income-tax Act provides a machinery for securing flexible deductions in respect of expenses and allowances, etc., admissible in determining the profits and gains of any business consisting of the prospecting for, or extraction or production of, mineral oils. The provisions of this section can be invoked only where the Central Government has entered into an agreement with any person for prospecting for or extraction or production of mineral oils and the Central Government or its nominee is a participant in such business. This is done by means of production-sharing contracts. Besides the Government and its nominee, a consortium of companies is usually engaged in this business. As a result, the assessment of these persons (except the Government which is not liable to income-tax) is to be made in the status of association of persons (AOP). It has been represented that persons engaged in the business of prospecting, etc., for mineral oil should be assessed in their several capacities on their income from such business and not in the status of association of persons. Assessment in the latter status tends to create difficulties in availing of the facility of the "carry forward" of losses if the constitution of the association of persons were to change later on. Further, the non-resident persons who are members of the association of persons, would find it difficult to get credit in their own country for the tax paid in India, as the tax has been paid by the association of persons and not by the non-residents as such. There is merit in the representation made. 53.2. Under the existing provisions of section 293A of the Income-tax Act, the Central Government is empowered to make, by notification in the Official Gazette, an exemption, reduction in rate or other modification in respect of income-tax or in regard to the income in favour of any class of persons engaged in the business of prospecting for, or extraction or production of, mineral oils. The Act amends section 293A to provide enabling powers to the Central Government to make a modification in regard to the status in which the aforesaid class of persons or members thereof (if such persons are association of persons themselves) are to be assessed on their income from the said business. The term "status" is explained to mean the category under which the assessee is assessed as "individual", "Hindu undivided family" and so on. It is also provided that the notification for modification of the status may be given effect from an assessment year beginning on or after 1st April, 1993. 53.3. The amendment will take effect retrospectively from 1st April, 1993, and will, accordingly, apply in relation to the assessment year 1993-94 and subsequent years. [Section 49] Repealing of the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974 54.1. The Compulsory Deposit Scheme (Income-tax Payers) Act, 1974, provided for income-tax payers to make compulsory deposits up to the assessment year 1984-85 in special accounts opened under the Compulsory Deposits Scheme. The deposits were to be refunded in five equal annual instalments commencing from the expiry of two years from the date of deposit. Accordingly, the last instalment had become refundable from 1st April, 1991. However, in terms of sub-section (2) of section 8 of the Act, the depositors had the option not to withdraw the instalment amount and interest, on becoming due and continue to earn interest. Some of the depositors have chosen not to withdraw the amount from the accounts opened under the Compulsory Deposit Scheme and the Government is burdened with payment of periodical interest. 54.2. To avoid this recurring liability on an old scheme, which is no longer current, the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974, is being repealed so as to bring to a close all the accounts from which the amounts have not been withdrawn after 1st April, 1991. 54.3. The repeal of the Act takes effect from 1st April, 1996. [Section 92] (Sd.) (K. G. Bansal), Director (TPL).