Explanatory Notes on the provisions relating to direct taxes. - Income Tax - 779

Circular Number: 779 File Number: 153/141/99-TPL Dated 14/09/1999 Finance Act, 1999—Explanatory Notes on the provisions relating to direct taxes . 1. Introduction : 1.1. The Finance Act, 1999, as passed by Parliament, received the assent of the President on May 11, 1999, and has been enacted as Act No. 27 of 1999. This circular explains the substance of the provisions of the Act relating to direct taxes. 2. Changes made by the Finance Act, 1999 : 2.1. The Finance Act, 1999 (hereinafter referred to as "the Act"), has,— —amended sections 2, 9, 10, 10A, 10B, 12A, 12AA, 17, 24, 32, 33ABA, 33AC, 35, 35A, 35AB, 35ABB, 35D, 35E, 36, 40A, 41, 42, 43, 43B, 44AD, 44AE, 44AF, 45, 47, 49, 72, 79, 80A, 80D, 80DD, 80DDB, 80G, 80HHA, 80HHB, 80HHC, 80HHD, 80HHE, 80JJA, 80L, 80-O, 80R, 80RR, 80RRA, 88, 112, 115AC, 115AD, 115JA, 139, 140A, 143, 154, 155, 180, 180A, 194A, 194B, 194BB, 194K, 196A, 197, 197A, 198, 199, 200, 201, 202, 203, 203A, 204, 205, 206C, 234A, 234B, 249, 250, 253, 254, 260A and 272A of the Income-tax Act, 1961 ; — inserted new sections 10C, 35DD, 46A, 50B, 80HHF, 115ACA, 115R, 115S, 115T and 194L in the Income-tax Act, 1961 ; — substituted new sections for sections 3, 43D, 72A, 80-IA of the Income-tax Act, 1961 ; — omitted section 194H and Tenth Schedule of the Income-tax Act, 1961 ; — amended sections 2, 16, 23A, 24, 27, 27A and 35 of the Wealth-tax Act, 1957 ; — amended sections 4 and 22 of the Expenditure-tax Act, 1987 ; and — amended section 76 of the Finance (No. 2) Act, 1998. 3. Provisions in brief : 3.1 The provisions of the Act in the sphere of direct taxes relate to the following matters : (i) Prescribing the rates of income-tax on incomes liable to tax for the assessment year 1999-2000 ; the rates at which tax will be deductible at source in the financial year 1999-2000 from interest (including interest on securities), winnings from lotteries or crossword puzzles, winnings from horse races, insurance commission and other categories of income liable for tax deduction at source under the Income-tax Act, rates for computing "advance tax", deduction of income-tax from "salaries" and charging of income-tax on current incomes in certain cases for the financial year 1999-2000. (ii) Amendment of the Income-tax Act, 1961, with a view to— — expand the scope of taxation of salary earned by non-residents Indians ; — increase the exemption limit of leave salary of non-Government employees ; — extend the benefit of tax exemption for interest payable to hedging transaction charges ; — restore the exemption for civil aviation industry ; — extend the income-tax exemption to the pension and family pension received by gallantry award winners and their families ; — rationalise the tax exemption to venture capital fund/venture capital company ; — expand the scope of eligible infrastructure facility for the purpose of exemption under section 10(23G) ; — extend the income-tax exemption to certain Commodity Boards and Authorities ; — provide certain incentives for the development of capital market; — introduce a new section 10C providing exemption to industries in North-Eastern Region ; — rationalise provisions relating to registration of trusts ; — modify the provisions relating to perquisites to include the benefits arising to an employee under stock option and sweat equity plans ; — enhance the deduction of interest payable on account of borrowed capital in respect of self-occupied residential house under certain circumstances ; — amend the provisions of section 35 to provide for weighted deduction for scientific research and development expenditure ; — rationalise the provisions relating to allowance for telecommunication licence fees ; — amend section 36(1)(viia) relating to deduction for provision for bad and doubtful debts in the case of banks ; — remove the requirement of approval by the Central Government under section 36(i)(viii) ; — provide for deduction in respect of Y2K expenditure ; — amend section 43(1) to provide for computation of actual cost of asset in the case of non-residents ; — amend the provisions of section 43B to allow deduction of interest payable to co-operative banks on actual payment basis ; — amend provisions of section 43D to extend it to housing finance companies ; — amend sections 44AD, 44AE and 44AF to provide for claiming lower profits than the presumptive rates ; — amend the provisions of section 45 to tax profits and gains arising from insurance claim received on damage to or destruction of a capital asset as capital gains ; — amend provisions relating to deemed dividend and insert a new section 46A to deal with the tax issues arising on buy-back of shares by companies ; — enhance the limit of deduction for medical insurance premium on the health of senior citizens under section 80D ; — modify the provisions of section 80DD to allow deductions on the basis of any expenditure incurred for the handicapped persons ; — enhance the limit of deductions under section 80DDB for expenditure incurred on treatment of chronic and protracted diseases ; — modify the provisions of section 80G to allow 100% deductions for donations made to the fund for technology development and application; — modify the provisions of section 80G to allow deduction for donations made to funds or institutions for charitable purposes ; — modify the definition of small scale industry for the purpose of section 80HHA ; — modify the provisions of sections 80HHB, 80HHC, 80HHD, 80HHE, 80-O, 80R, 80RR and 80RRA providing deduction on the basis of foreign exchange earnings, to allow deductions on receipt of money beyond the period of six months with the approval of the Reserve Bank of India ; — amend the provisions of section 80HHC to clarify that the deduction under this section is to be computed without taking into account the amount of income not being charged to tax under the Income-tax Act ; — modify the provisions of section 80HHD to increase investment in tourism sector ; — insert new section 80HHF to provide for deduction in respect of profits and gains from exports or transfer of films, software, etc., out of India ; — substitute and modify the provisions of existing section 80-IA with new provisions to provide for deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development (80-IA) and deductions in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings (80-IB) ; — amend the provisions of section 80JJA relating to deduction in respect of profits and gains derived from the business of collecting, processing or treating of bio-degradable waste, to provide for a tax holiday for five consecutive assessment years ; — amend the provisions of section 112 to reduce the tax rate on long-term capital gains earned on sale of listed securities ; — provide for concessional rate of tax for income arising to certain resident employees from certain global depository receipts ; — amend the provisions of section 139(1) to exclude two wheelers from the purview of 'motor vehicle' for the purpose of filing of return on the basis of six specified economic criteria ; — amend the provisions of section 139(6) to provide for particulars of bank accounts and credit card in the prescribed form of return ; — enhance the scope of section 140A to include payment of self-assessment tax while filing returns for the block period in search cases ; — simplify the procedure of processing of return under sub-section (1) of section 143 and doing away with prima facie adjustments ; — introduce sun-set provisions in sections 180 and 180A relating to assessment of income from royalties and copyright fees and consideration for know-how ; — introduce a new section 194L to provide for tax deduction at source on payment of compensation relating to compulsory acquisition of a capital asset ; — amend section 197A for no deduction of tax from interest on securities in certain cases ; — rationalise the provisions relating to interest chargeable under the Income-tax Act from the assessees ; — amend section 206C to enable the assessee to file tax collection at source (TCS) returns on computer media ; — amend section 206C to provide for issue of certificate by the Assessing Officer for collection of tax at a lower rate in appropriate case ; — provide for time-limit for disposal of appeals by the Commissioner (Appeals) and the Appellate Tribunal and empowering the latter to award costs ; — rationalise provisions relating to reduction of litigation and other allied issues ; — rationalise certain provisions by omission of the transitory provisions and modification of certain existing provisions ; — introduce provisions relating to business re-organisation, rationalising the existing provisions concerning amalgamation, making demergers tax neutral and taxing profits and gains in a case of slump sale as capital gains ; — exempt interest on Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999, and also capital gains arising from their transfer. (iii) Amendment of the Wealth-tax Act, 1957 with a view to : — exempt Gold Deposit Bonds from the purview of wealth-tax ; — simplify the procedure of processing of return under section 16(1) of the Wealth-tax Act ; — introduce provisions under the Wealth-tax Act to provide for the time-limit for disposal of appeals by the Commissioner (Appeals) and the Appellate Tribunal and empowering the latter to award costs ; — rationalise provisions under the Wealth-tax Act relating to reduction of litigation and other allied issues. (iv) Amendment of the Expenditure-tax Act, 1987 with a view to introduce necessary provisions to provide time-limit for disposal of appeals by the Commissioner (Appeals). (v) Amendment of section 76 of the Finance (No. 2) Act, 1998, in order to include a reference to section 23A of the Wealth-tax Act relating to appealable orders before the Commissioner (Appeals) making it applicable to the Gift-tax Act. Income-tax 4. Rate structure : 4.1 Rates of income-tax in respect of income liable to tax for the assessment year 1999-2000 : In respect of incomes of all categories of taxpayers (corporate as well as non-corporate) liable to tax for the assessment year 1999-2000, the rates of income-tax have been specified in Part I of the First Schedule to the Act and are the same as those laid down in Part III of the First Schedule to the Finance (No. 2) Act, 1998. 4.2 Rates for deduction of income-tax at source during the financial year 1999-2000 from income other than "salaries" : 4.21 The rates for deduction of income-tax at source during the financial year 1999-2000 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", insurance commission, winnings from lotteries or crossword puzzles, winnings from horse races and income of non-residents (including non-resident Indians). 4.22 The tax so computed for deduction at source in the case of all assessees (except non-residents and foreign companies) will be enhanced by a surcharge calculated at the rate of 10% of such tax. In the case of individuals, Hindu undivided families, association of persons and body of individuals, the surcharge will be payable only by persons having total income above Rs. 60,000. 4.3 Rates for deduction of income-tax at source from "salaries", computation of "advance tax" and charging of income-tax in special cases during the financial year 1999-2000. The rates for deduction of income-tax at source from "salaries" during the financial year 1999-2000 and also the computation of "advance tax" payable during that year in the case of various 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 1999-2000 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 or assessment of persons who are likely to transfer property to avoid tax, etc. The salient features of the rates specified in the said Part III are indicated in the following paragraphs : 4.31 Individuals, Hindu undivided families, etc. : Paragraph A of Part III of the First Schedule specifies the rates of income-tax in the case of individuals, Hindu undivided families, association of persons, etc. There is no change in the rate structure. However, the tax payable would be enhanced by a surcharge for the purposes of the Union at the rate of 10 per cent. of the tax payable (after allowing rebate under Chapter VIII-A of the Income-tax Act). No surcharge would be payable by non-residents and persons having income of Rs. 60,000 or less. Marginal relief would also be provided to ensure that the additional amount of income-tax payable, including surcharge, on the excess of income over Rs. 60,000 is limited to the amount by which the income exceeds Rs. 60,000. The Table below gives the income slabs and the rates of income-tax (a) as specified in Paragraph A of Part I of the First Schedule to the Act ; i. e., the existing slabs and rates, and (b) as specified in Paragraph A of Part III of the First Schedule to the Act, i. e., the new slabs and rates. (a) Existing (b) New Income slab Rates as speci fied in Para graph A of Part I of the First Schedule to the Act Income slab Rates as speci fied in Para graph A of Part III of the First Schedule to the Act Upto Rs. 50,000 Nil Up to Rs. 50,000 Nil Rs. 50,001 to Rs. 60,000 10% Rs. 50,001 to Rs. 60,000 10% Rs. 60,001 to Rs. 1,50,000 20% Rs. 60,001 to Rs. 1,50,000 20%* Above Rs. 1,50,000 30% Above Rs. 1,50,000 30%* *Persons (other than non-residents) in this slab would be required to pay ten per cent. surcharge on the total tax payable after rebate under Chapter VIII-A. 4.3.2 Effect of levy of surcharge— The effect of levy of surcharge in the case of individuals, HUF's, etc. at different income le vels would be as under : Total income Existing tax lia bility New tax liability Additional lia bility Percentage increase (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) 50,000 Nil Nil Nil Nil 55,000 500 500 Nil Nil 60,000 1,000 1,000 Nil Nil 60,100 1,020 1,100** 80 7.8 60,120 1,024 1,120** 96 9.37 60,130 1,026 1,129 103 10 60,150 1,030 1,133 103 10 60,200 1,040 1,144 104 10 60,500 1,100 1,210 110 10 61,000 1,200 1,320 120 10 65,000 2,000 2,200 200 10 70,000 3,000 3,300 300 10 75,000 4,000 4,400 400 10 1,00,000 9,000 9,900 900 10 1,50,000 19,000 20,900 1,900 10 1,75,000 26,500 29,150 2,650 10 2,00,000 34,000 37,400 3,400 10 2,50,000 49,000 53,900 4,900 10 3,00,000 64,000 70,400 6,400 10 4,00,000 94,000 1,03,400 9,400 10 5,00,000 1,24,000 1,36,400 12,400 10 **Marginal relief would be provided to ensure that the additional amount of income-tax payable, including surcharge, on the excess of income over Rs. 60,000 is limited to the amount by which the income is more than Rs. 60,000. 4.3.3 Co-operative societies : In the case of co-operative societies, the rates of income-tax have been specified in paragraph B of Part III of the First Schedule to the Act. These rates are the same as those specified in the corresponding Paragraph of Part I of the First Schedule to the Act. However, the tax payable would be enhanced by a surcharge for the purposes of the Union at the rate of ten per cent. of the tax payable. 4.3.4 Firms : In the case of firms, the rate of income-tax has been specified in paragraph C of Part III of the First Schedule to the Act. This rate is 35% which is the same as that specified in the corresponding paragraph of Part I of the First Schedule to the Act. However, the tax payable by resident firms would be enhanced by a surcharge for the purposes of the Union at the rate of ten per cent. of the tax payable. 4.3.5 Local authorities : In the case of local authorities, the rate of income-tax has been specified in Paragraph D of Part III of the First Schedule to the Act. This rate is 30% which is the same as that specified in the corresponding paragraph of Part I of the First Schedule to the Act. However, the tax payable would be enhanced by a surcharge for the purpose of the Union at the rate of ten per cent. of the tax payable. 4.3.6 Companies : 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. There is no change in the existing rates of 35% for domestic companies and 48% for foreign companies. However, in the case of domestic companies, the tax payable would be enhanced by a surcharge at the rate of ten per cent. of the tax payable.[ Section 2 and First Schedule ] 5. Expanding the scope of taxation of salary earned by non-residents : 5.1 Section 9 of the Income-tax Act details the income which is deemed to accrue or arise in India. Under the existing provisions, it is stated that income which falls under the head "Salaries", if it is earned in India, will be deemed to accrue or arise in India. 5.2 The Act has expanded the existing Explanation which states that salary paid for services rendered in India shall be regarded as income earned in India, so as to specifically provide that any salary payable for rest period or leave period which is both preceded and succeeded by service in India and forms part of the service contract of employment will also be regarded as income earned in India. 5.3 This amendment will take effect from 1st April, 2000, and will accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 5 ] 6. Exemption limit of leave salary of non-Government employees revised to salary of ten months : 6.1 The amount of encashment of earned leave up to a period of eight months was exempt under section 10(10AA) of the Income-tax Act. Pursuant to recommendations of the Fifth Pay Commission, the limit has been raised to leave encashment of ten months in cases of employees of the Central or State Government. 6.2 With a view to bring parity for non-Government employees, the Act enhances the existing exemption limit applicable to such employees from eight months to ten months. 6.3 This amendment will take effect retrospectively from 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [ Section 6 ] 7. Benefit of tax-exemption for interest payable extended to hedging transaction charges : 7.1 Clause (15) of section 10 of the Income-tax Act, exempts interest payable in certain cases and includes interest paid by industrial undertakings for specified foreign borrowings. 7.2 The Act has inserted a new Explanation in sub-clause (iv) of this clause so as to extend the scope of this exemption also to hedging transaction charges on account of currency fluctuations. 7.3 This amendment will take effect from 1st April, 2000, and will, accordingly, apply to the assessment year 2000-2001 and subsequent years.[ Section 6 ] 8. Reintroduction of incentives for the civil aviation industry : 8.1 Under clause (15A) of section 10, income-tax exemption is provided for any payment made by an Indian company engaged in the business of operation of aircrafts, to acquire an aircraft or aircraft engine on lease from the Government of a foreign State or a foreign enterprise under an agreement approved by the Central Government. The Finance Act, 1997, had withdrawn this exemption in respect of payments made under the agreements entered into on or after the 1st day of April, 1997. 8.2 With a view to provide a boost to the civil aviation industry, the Act has restored the above exemption in respect of payments made under the agreements which are entered on or after 1st day of April, 1999. 8.3 As a consequence of this amendment exemption provided with regard to grossing up of tax paid in respect of such payment under clause (6BB) of section 10 has been withdrawn. 8.4 These amendments will take effect from 1st April, 2000 and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 6 ] 9. Pension of gallantry award winners exempt in certain cases : 9.1 In order to acknowledge the services rendered by the members of defence forces who have been awarded the Param Vir Chakra, the Maha Vir Chakra and the Vir Chakra, for demonstration of exceptional courage and valour during a war, the Act by inserting a new clause (18) in section 10, has provided exemption from tax for the pension and family pension of such gallantry award winners. Similar exemption would also be available to the winners of other gallantry awards as notified by the Central Government in the Official Gazette. 9.2 This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 6 ] 10. Rationalisation of tax exemption to venture capital fund/venture capital company : 10.1 In order to encourage venture capital financing, the Finance Act, 1995, had with effect from 1-4-1996, inserted a new clause (23F) in section 10 of the Income-tax Act, 1961, to provide tax exemption to a venture capital fund or venture capital company (VCF/VCC) on income earned by way of dividend or long-term capital gains from investments made by way of equity shares in a venture capital undertaking (VCU). 10.2 With a view to rationalise the existing exemption available to income from venture capital, the Act has inserted a new clause (23FA) in section 10 to provide that any income by way of dividends (other than dividends referred to in section 115-O) 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 will not be included in computing the total income. 10.3 To be eligible for this exemption, the venture capital fund or the venture capital company would require the approval of the Central Government in accordance with the rules made in this behalf and would also be required to satisfy the prescribed conditions. Such approval of the Central Government will have effect for the number of assessment years prescribed in the order of approval. However, at one time the approval can be granted for a maximum number of three assessment years. 10.4 The expression "venture capital fund" has been defined to mean a fund operating under a registered trust deed established to raise moneys by the trustees for investments mainly by way of acquiring equity shares of a venture capital undertaking in accordance with the prescribed guidelines. 10.5 The expression "venture capital company" has been defined to mean such a company as has made investments by way of acquiring equity shares of venture capital undertakings in accordance with the prescribed guidelines. 10.6 The expression "venture capital undertaking" has been defined to mean a domestic company whose shares are not listed in a recognised stock exchange in India and which is engaged in the business of software ; information technology ; production of basic drugs in the pharmaceutical sector ; bio-technology ; agriculture and allied sectors ; and such other sectors as may be notified by the Central Government in this behalf or production and manufacture of any article or substance for which patent has been granted to the National Research Laboratory or any other scientific research institution approved by the Department of Science and Technology. 10.7 As a consequence of the above amendment, a sunset clause is introduced in the existing section 10(23F) so that the provisions of this clause shall not apply to any investment made after 31st March, 1999. Such investments will qualify for exemption under the newly inserted clause (23FA) in section 10. 10.8 This amendment will take effect from 1st April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 6 ] 11. Exemption of the scope of eligible infrastructure facilities for the purpose of exemption under section 10(23G) : 11.1 The existing clause (23G) of section 10 of the Income-tax Act exempts any income of an infrastructure capital fund or an infrastructure capital company earned by way of interest, dividends (other than dividends referred to in section 115-O) and long-term capital gains from investments made by way of equity or long-term finance in an approved enterprise wholly engaged in the business of developing, maintaining and operating an infrastructure facility. 11.2 The Act amends this clause to enhance the scope of the nature of infrastructure activities eligible for exemption under this clause. It provides that enterprises wholly engaged in either (i) developing, maintaining and operating, or (ii) developing, or (iii) maintaining and operating an infrastructure facility would now be eligible for the exemption. With this amendment, it is made clear that any enterprise engaged in developing, maintaining and operating the infrastructure facility or maintaining and operating the infrastructure facility or only developing the infrastructure facility would also be eligible for exemption under this clause. 11.3 The Act has also expanded the scope for infrastructure facility defined for the purpose of this clause in Explanation 1 , by including within its ambit the undertaking which starts transmission or distribution of power by laying a network of new transmission or distribution lines at any time between 1st April, 1999 and 31st March, 2003. 11.4 An undertaking or a project for (i) developing, (ii) developing and operating, or (iii) maintaining and operating an industrial park which has been notified by the Central Government under clause (iii) of sub-section (4) of section 80-IA is also included in the definition of infrastructure facility and is, thus, within the scope of exemption under this clause. 11.5 This amendment will take effect from 1st April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 6 ] 12. Exemption of commodity boards and authorities from income-tax : 12.1 A new clause (29A) is inserted in section 10 so as to provide that the income of certain Commodity Boards and Export Development Authorities would be exempt from income-tax. The Commodity Boards and Export Development Authorities which are set up under various statutes and are under the administrative control of the Commerce Ministry, namely, the Coffee Board, the Rubber Board, the Tea Board, the Tobacco Board, the Marine Products Export Development Authority, the Agricultural and Processed Food Products Export Development Authority and the Spices Board, are exempted from Income-tax with effect from 1st April, 1962 or the previous year in which these Boards or Authorities were constituted, whichever is later. 12.2 This amendment takes effect from the date of Presidential assent to the Act, i. e., 11-5-1999. [ Section 6 ] 13. Measures for development of capital market : 13.1 With a view to encourage more investments in the capital market, the Act amends section 10(33) of the Income-tax Act so as to exempt the income received in respect of units from UTI and mutual funds specified under section 10(23D). 13.2 As a consequence of the above and with a view to rationalise and streamline the collection of tax on the income distributed by the UTI or mutual funds, the Act provides for levy of additional income-tax on such distributed income. For this purpose, a new Chapter XII-E containing sections 115R, 115S, 115T have been inserted in the Income-tax Act. 13.3 Section 115R provides for levy of tax on the income distributed by the Unit Trust of India and mutual funds at a flat rate of ten per cent. This tax would be payable by the UTI or the mutual funds. However, income distributed under the US-64 scheme, and other open-ended equity oriented schemes of UTI and mutual funds have been exempted from the levy of this tax for a period of three financial years starting from April 1, 1999. 13.4 It is also provided that the tax on distributed income shall be payable even though no income-tax is payable by the fund on its total income computed under the provisions of the Act. 13.5 It is further provided that the principal officer of the fund and the fund shall be liable to pay the tax on distributed income to the credit of the Central Government within fourteen days from the date of declaration or distribution or payment of such income, whichever is earlier. No deduction under any other provision of the Income-tax Act shall be allowed to the fund in respect of the amount of income which has been charged to tax under sub-section (1) or the tax paid thereon. 13.6 The term "open-ended equity oriented funds" has been defined for the purpose of this Chapter so as to mean US-64 scheme of UTI and such funds whose more than 50% of the investible funds are invested by way of equity shares in domestic companies. The percentage equity holding of such mutual funds will be computed as an annual average of the monthly averages based on monthly opening and closing figures. 13.7 "Mutual fund" for the purposes of this Chapter means a mutual fund specified under clause (23D) of section 10 of the Income-tax Act and "Unit Trust of India" means the Unit Trust of India established under the Unit Trust of India Act, 1963. 13.8 Section 115S, provides that if the principal officer and the fund fail to pay the whole or part of the tax on distributed income to the credit of the Central Government, he or it shall be liable to pay simple interest at the rate of 2% for every month or part thereof on such amount of tax which he or it fails to pay to the credit of the Central Government. 13.9 Under section 115T, such principal officer and the fund who do not pay the tax in accordance with the provisions of section 115R shall be deemed to be an assessee in default in respect of such tax payable and all the provisions relating to collection and recovery shall apply to them. 13.10 Consequential amendments are also provided in certain other provisions of the Income-tax Act. The Act accordingly amends :— (i) section 10(23D) of the Income-tax Act so as to provide that the exemption in respect of income of a mutual fund shall be subject to the provisions of the newly inserted Chapter XII-E of the Income-tax Act ; (ii) section 80-L of the Income-tax Act relating to deduction in respect of interest on certain securities, dividends, etc., so as to exclude the income received in respect of units from Unit Trust of India and mutual funds ; (iii) the provisions for deduction of tax at source under sub-section (1) of sections 194K and 196A so as to provide that provisions of these sub-sections shall not apply to any income received by a unit holder from the Unit Trust of India and other mutual funds on or after the 1st day of June, 1999. 13.11 These amendments will take effect from 1st June, 1999, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Sections 6, 52, 61, 73 and 75 ] 14. Insertion of a new provision providing exemptions to industries set-up in the North Eastern Region : 14.1 A new section 10C has been inserted with a view to provide ten years tax holiday to industrial undertakings set-up in the North Eastern Region on or after 1st day of April, 1998, in the Integrated Infrastructure Development Centres and Industrial Growth Centres. These centres are to be notified by the Central Government. 14.2 In order to avail of the exemption under this provision, following conditions are to be satisfied :— (a) The industrial undertaking should not be formed by the splitting up or the reconstruction of a business already in existence. (b) Such an undertaking should not be formed by the transfer to a new business of machinery or plant previously used for any purpose. 14.3 For the assessment year(s) succeeding the last assessment year for which the exemption is claimed under this section, deduction under section 32 and the expenditures under sections 35 and 36(1)(ix) would be considered as had been given full effect to for the period covered under the period of exemption. Thus, unabsorbed allowances or deductions are not allowed to be carried forward and set off against the income of the assessment years following the period of exemption. 14.4 The losses under section 72(1) or 74(1) or 74(3) are not allowed to be carried forward in assessment years succeeding the period of exemption. The deductions under section 80-IA or 80-IB or 80JJA shall also not be available to such undertakings. 14.5 In the assessment year following period of exemption, the depreciation will be computed on the written down value of the asset as if the depreciation had actually been allowed in respect of each assessment year falling in the period of exemption. 14.6 It has also been provided that the profits may be recomputed where inter-group transfers are made at prices other than market prices or where the profits computed by the assessee are higher than the ordinarily expected profit owing to the close connection of the assessee and other entities. 14.7 The benefits under this section are optional. In case the assessee does not wish to claim the benefit under section 10C, he has to file a declaration to this effect along with the return of income before the due date of filing the return for the first assessment year for which the exemption under this section is available to him. 14.8 These amendments take effect from the 1st day of April, 1999, and, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years. [ Clause 7 ] 15. Rationalisation of provisions relating to registration of trusts : 15.1 Section 12AA of the Income-tax Act details the provisions for registration of trust/ institution for which an application has been filed under section 12A of the Income-tax Act. Under the existing provisions, the application for the registration of trust or institution can be filed either before the Chief Commissioner of Income-tax or Commissioner of Income-tax. Similarly, the power for passing order with regard to registration under section 12AA is vested with both, i.e., the Chief Commissioner and Commissioner. However, in practice, the application under section 12A for registration is actually filed before the Commissioner of Income-tax and the order under section 12AA is also passed by him. Hence, with a view to rationalise these provisions, the Act amends both sections 12A and 12AA so as to delete the reference to Chief Commissioner therefrom and to provide that the application for registration of a trust or an institution is now to be made to the Commissioner only and the order regarding registration shall also be passed by him. 15.2 The Act has inserted a new sub-section (1A) in section 12AA so as to provide that all applications pending before the Chief Commissioner on which no order has been made by him before 1st June, 1999, shall stand transferred from 1st June, 1999, to the Commissioner and the Commissioner may proceed with such applications from the stage at which it was on that day. 15.3 As per the existing provisions, a trust or institution that is refused registration under section 12AA is not able to file an appeal against such refusal. With a view to provide natural justice to the aggrieved trust or institution, the Act amends section 253 of the Income-tax Act relating to appeals to the Appellate Tribunal so as to enable such trust/institution to file an appeal before the ITAT against an order passed under section 12AA. 15.4 These amendments take effect from 1st June, 1999.[ Sections 8, 9 and 85 ] 16. Provisions to tax perquisites in case of stock options and sweat equity plans : 16.1 Many corporate bodies are offering stock option plans to their employees. In such schemes, the stock is often offered to the employee free of cost or at a value less than the prevailing market value. In such a situation, a benefit accrues to the employee. To remove any uncertainty on the taxability of such benefits, it is now provided that when any such share, security is directly or indirectly, offered to any assessee by the company or any other person on behalf of such company, the difference between the market value of stock and the cost at which it is offered to the employee shall be taxed as perquisite. This benefit shall be taxed in the year in which the right for such option is exercised by the employee or is exercised and transferred in the name of any other person by him. It is further provided that the difference between the market value on the date of exercise of option and the sale consideration in the event of sale by the employee would be taxed as capital gains in his hands. 16.2 Section 79 of the Companies (Amendment) Act, 1999 (21 of 1999), provides that a company may issue sweat equity shares of a class of shares to its employees or directors. These shares may be issued at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights by whatever name called. The value of such shares will be treated as perquisite in the year in which such option is exercised by the employee or director as the case may be. Where the amount paid for such securities is "nil" , the perquisite value shall be the market value of such shares. 16.3 A consequential amendment is also made in section 49, to define the cost of acquisition of such shares. In case such shares are ultimately sold, the fair market value of these shares at the time of exercise of option would be their cost of acquisition for the purposes of capital gains. 16.4 This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Sections 10 and 35 ] 17. Enhancement of deduction of interest allowable on borrowed capital in respect of a self-occupied residential house under certain circumstances : 17.1 The deduction of interest on account of borrowed capital invested in the acquisition or construction of a self-occupied residential house is prescribed in the proviso to sub-section (2) of section 24. The ceiling of deduction presently stands at Rs. 30,000. To give a boost to the house building activity and encourage construction of more residential units to meet the increasing housing needs, the Act has amended sub-section (2) of section 24 to enhance the deduction of interest from Rs. 30,000 available at present to Rs. 75,000. However, the deduction on account of interest on loans can be availed of up to a limit of Rs. 75,000, only if such loan has been taken for constructing or acquiring the residential unit on or after 1-4-1999 and the construction or acquisition of the residential unit out of such loan has been completed before 1-4-2001. In other cases, the existing limit of Rs.30,000 shall continue. 17.2 It is clear from the above that the essential conditions necessary for availing of higher deduction of interest are that the relevant loan must have been taken after 1-4-1999 and the acquisition or construction of residential unit must be completed before 1-4-2001. There is no stipulation regarding the date of commencement of construction. Consequently, the construction of the residential unit could have commenced before 1-4-1999 but, as long as its construction/acquisition is completed before 1-4-2001, the higher deduction would be available. Also, there is no stipulation regarding the construction/acquisition of the residential unit being entirely financed by loan taken after 1-4-1999. It may be so in part. However, the higher deduction of Rs. 75,000 towards interest can be claimed only in relation to that part of the loan which has been taken and utilised for construction/acquisition after 1-4-1999. The loan taken prior to 1-4-1999 will carry deduction of interest up to Rs. 30,000 only. 17.3 This amendment will take effect from 1st day of April, 2000, and will, accordingly, apply to the assessment year 2000-2001 and subsequent years. [ Section 11 ] 18. Weighted deduction for scientific research and development expenditure : 18.1 Under the existing provisions of clauses (ii) and (iii) of sub-section (1) of section 35 of the Income-tax Act, full deduction is allowable for any sum paid to a scientific research association, university, college or other institution for the purposes of scientific, social or statistical research, as the case may be, provided such association, university, college or institution is for the time being approved by the prescribed authority. With a view to induce more investment for research and development activities, the Act amends these provisions to provide for a weighted deduction of one and one-fourth times of such sums paid. The Act also vests the authority for approval, for the purposes of above clauses, in the Central Government instead of the prescribed authority as at present. 18.2 The existing provisions of sub-section (3) of section 35 provide that if any question arises as to whether and if so, to what extent, any activity constitutes or constituted, or any asset is or was being used for, scientific research, it is referred by the Board to the prescribed authority, whose decision is final. As a consequence to change of authority for approval for the purposes of clauses (ii) and (iii) of sub-section (1), the Act amends sub-section (3) to provide that when a question relates to any activity under clauses (ii) and (iii) of sub-section (1), it shall be referred by the Board to the Central Government whose decision shall be final. 18.3 Under the existing provisions of sub-section (2AB) of section 35, weighted deduction of a sum equal to one and one-fourth times of the expenditure incurred on scientific research on in-house research and development facility is allowed to a company engaged in the business of manufacture or production of any drugs, pharmaceuticals, electronic equipments, computers, telecommunication equipment, chemicals or any other article or thing notified by the Board. This deduction was available for the expenditure incurred up to 31st March, 2000. The Act extends this time-limit up to 31st March, 2005, and, accordingly, the deduction shall now be available for the expenditure incurred up to 31st March, 2005. 18.4 These amendments will take effect from 1st April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 15 ] 19. Rationalisation of the provisions relating to allowance for telecommunication licence fees : 19.1 Under the existing provisions of section 35ABB of the Income-tax Act, a deduction is allowable in respect of any capital expenditure incurred for acquiring any right to operate telecommunication services, for which the payment has actually been made to obtain a licence. This deduction is allowable in equal instalments during the relevant previous years. The expression "relevant previous years" is defined to mean the previous years beginning with the previous year for which the licence fee is actually paid and the subsequent previous year or years during which the licence, for which the fees are paid, is in force. 19.2 In order to clarify that the deduction is allowable in respect of the entire capital expenditure incurred and actually paid by the assessee, whether before the commencement of the business or thereafter, the Act amends section 35ABB to provide that in a case where the licence fee is actually paid before the commencement of the business, the "relevant previous years" would mean the previous years beginning with the previous year in which such business commenced and the subsequent previous year or years during which the licence is in force. The Act also provides that no deduction under sub-section (1) of section 32 shall be available for such expenditure for the same year or any subsequent previous years. 19.3 These amendments will take effect retrospectively from 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [ Section 18 ] 20. Amendment of provisions relating to deduction for provision for bad and doubtful debts in the case of banks : 20.1 Under the existing provisions of section 36(1)(viia) of the Income-tax Act, in computing the business income of a scheduled bank (not being a bank incorporated by or under the laws of a country outside India) or a non-scheduled bank, deduction is allowable in respect of any provision for bad and doubtful debts made by such bank at an aggregate of the amount not exceeding 5% of the total income and 10% of the aggregate average advances made by its rural branches. 20.2 In order to strengthen the financial position of the banks, the Act provides an option to such banks, for a period of five years, to claim a deduction for any provision made by it in respect of doubtful or loss assets in accordance with the guidelines issued by the Reserve Bank of India for an amount not exceeding 5% of such loss or doubtful assets. 20.3 This amendment will take effect from 1st April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years up to the assessment year 2004-2005. [ Section 22 ] 21. Removal of requirement of approval by the Central Government under section 36(1)(viii) : 21.1 The existing provisions of section 36(1)(viii) of the Income-tax Act provide for deduction of an amount not exceeding 40% of the profits derived by a financial corporation engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India or a 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 houses in India for residential purposes, provided the amount is carried to a special reserve account. The deduction is, however, allowable only if the corporation or the company is approved by the Central Government. 21.2 As a measure of simplification, the Act removes the requirement of approval by the Central Government for the purposes of the said section. Consequently, the references of requirement of such approval in sections 80L(1)(x) and 194A(3)(i) have also been omitted. 21.3 These amendments will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Sections 22, 52 and 69 ] 22. Deduction of Y2K expenditure : 22.1 The change in the millennium is expected to create a major software problem in respect of the computer systems which are not Y2K compliant, that is, which are not programmed to correctly reckon dates within and between the 20th and 21st centuries. In order to ensure that the business entities run their businesses smoothly without hindrance and to avoid possible disruption in the economic activities of the country as a whole at the time of entering the new millennium, it is essential that the existing computer systems being used by the business entities are made Y2K compliant. 22.2 With a view to encourage the business entities to make their existing computer systems Y2K compliant at the earliest, the Act inserts a new clause (xi) in sub-section (1) of section 36 of the Income-tax Act to provide for allowability of 100% deduction, in computing the profits and gains of business or profession, of any expenditure, whether capital or revenue, incurred in respect of existing non-Y2K compliant computer system so as to make it a Y2K compliant computer system. In order to avail of the deduction under the new provision, the following conditions need to be satisfied :— (i) there should be an existing computer system which is owned by the assessee and used for the purposes of his business or profession ; (ii) such existing computer system should be a non-Y2K compliant computer system ; (iii) the assessee should incur the expenditure wholly and exclusively in respect of such non-Y2K compliant computer system so as to make such computer system a Y2K compliant computer system ; (iv) the expenditure should have been incurred during the period 1-4-1999 to 31-3-2000 ; (v) the assessee should furnish along with the return of income the report of an accountant in the prescribed form certifying that the deduction has been correctly claimed in accordance with the provisions of this section. The prescribed form and rule in this regard have already been notified by the Central Board of Direct Taxes vide S. O. No. 479(E), dated 23-6-1999(See [1999] 238 ITR (St.) 28.) 22.3 The deduction is allowable in respect of any expenditure incurred on an existing computer system so as to make it a Y2K compliant computer system and such existing computer system should continue to remain in existence after having made it a Y2K compliant computer system. The deduction will not be allowable under this section in respect of an expenditure which results in discarding the existing computer system and acquisition of a new computer system. The expenditure incurred on acquisition of new Y2K compliant computer system will be eligible for depreciation at the prescribed rates. 22.4 This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 only. [ Section 22 ] 23 Computation of actual cost of assets in the case of non-residents : 23.1 Under the existing provisions of section 43(1) of the Income-tax Act, the term "actual cost" is defined to mean the actual cost of the asset to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. With a view to rationalise the determination of actual cost of an asset acquired outside India by a non-resident assessee, the Act inserts a new Explanation 11 to section 43(1) of the Income-tax Act. This Explanation provides that in case an asset, which was acquired outside India by an assessee, being a non-resident, is brought by him to India and used for the purposes of his business or profession, the actual cost of the asset to the assessee shall be the actual cost to the assessee, as reduced by an amount equal to the amount of depreciation calculated at the rate in force that would have been allowable had the asset been used in India for the said purposes since the date of its acquisition by the assessee. 23.2 This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 26 ] 24. Deduction of interest payable to co-operative banks to be allowed on actual payment basis : 24.1 Clause (e) of section 43B of the Income-tax Act, inter alia, allows deduction in respect of interest payable on any term loan from a scheduled bank on actual payment basis and not on accrual basis. Under the existing provisions contained in Explanation 4(aa) , the term "scheduled bank" does not include a co-operative bank. The Act amends this Explanation so as to include a co-operative bank within the meaning of the term "scheduled bank". As a result of this, the provisions of clause (e) of section 43B will now be applicable in respect of interest payable on term loans from scheduled banks including co-operative banks. 24.2 This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 27 ] 25. Extension of provisions of section 43D to the housing finance companies : 25.1 Under the existing provisions of section 43D of the Income-tax Act, in the case of a public financial institution or a scheduled bank or a State Financial Corporation or a State Industrial Investment Corporation, income by way of interest in relation to such categories of bad or doubtful debts, as may be prescribed having regard to the guidelines issued by the Reserve Bank of India, is chargeable to tax in the previous year in which it is credited to the profit and loss account or, as the case may be, in which it is actually received, whichever is earlier. 25.2 With a view to improve the viability of housing finance companies and to provide a boost to the housing sector, the Act amends section 43D so as to extend its provisions to a public company whose main object is carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and which is registered in accordance with the Housing Finance Companies (NHB) Directions, 1989, given under section 30 and section 31 of the National Housing Bank Act, 1987. The Act provides that in the case of such a company, the income by way of interest in relation to such categories of bad or doubtful debts, as may be prescribed having regard to the guidelines issued by the National Housing Bank in relation to such debts, shall be chargeable to tax in the previous year in which it is credited by the company to its profit and loss account or, as the case may be, in which it is actually received by that company, whichever is earlier. 25.3 This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 28 ] 26. Amendments to sections 44AD, 44AE and 44AF to provide for claiming lower profits : 26.1 Under the existing provisions of sections 44AD, 44AE and 44AF of the Income-tax Act, presumptive tax schemes are provided for computing the profits and gains of the business of civil construction, the business of plying, hiring or leasing goods carriages, and retail trade in any goods or merchandise, respectively. There is no requirement for the assessees to maintain books of account for such businesses and to get them audited, if the deemed profits and gains are taken as taxable profits of such businesses. 26.2 The Act amends these sections to provide for enabling provisions so as to allow an assessee to claim his income to be lower than the deemed profits and gains, subject to the condition that the books of account and other documents are kept and maintained as required under section 44AA(2) and the assessee gets his accounts audited and furnishes a report of such audit as prescribed under section 44AB. 26.3 These amendments will take effect retrospectively from the 1st day of April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [ Sections 29, 30 and 31 ] 27. Taxing profits and gains arising from insurance claim received for damage to or destruction of a capital asset as capital gains : 27.1 Under the existing law, it was not feasible to tax the profits and gains arising from receipts by way of insurance claims for damage to or destruction of a capital asset as various courts have held that there is no transfer when the asset is destroyed since the asset ceases to exist. The money received under the insurance policy is a compensation for the loss of the asset and not a consideration for its transfer. 27.2 The Act has inserted a new sub-section (1A) in section 45 to provide that the profits and gains arising from the receipts of an insurance claim on account of damage to or destruction of a capital asset as a result of flood, typhoon, hurricane, cyclone, earthquake or other convulsions of nature, riot or civil disturbance, accidental fire or explosion and enemy action with or without declaration of war, shall be deemed to be capital gains for the purposes of section 48 and taxed in the year of receipt. It is also provided that for the purposes of section 48, the value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of consideration received or accrued as a result of transfer of such capital assets. 27.3 The newly inserted section 45(1A) has certain significant implications. In the first place, the destruction, etc., of an asset resulting in receipt of insurance claim is deemed as "transfer" of that asset. Secondly, the money or fair market value of assets received from the insurer is deemed to be the full value of the consideration received on transfer of asset. The provisions contained in section 48 (for non-depreciable assets) and 50 (for depreciable assets) proceed to provide the mode of computation of capital gains on the basis of "the full value of the consideration received or accruing as a result of the transfer of the capital asset." Thus, in effect, capital gains would be worked out in respect of assets which get destroyed, etc., as per the provisions of sections 48 and 50, as the case may be, by taking the insurance money or the market value of the asset received from the insurer as the "full value of consideration". Further, adjustment for cost inflation index will be made for non-depreciable assets and for depreciable assets, the written down value of such assets will be reduced from the block of assets as provided for in section 43(6). Also, the benefits of provisions contained in section 54EA/54EB, etc., would be available to the consideration, thus, received. 27.4 This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply to the assessment year 2000-2001 and subsequent years. [ Section 32 ] 28. Clarification of tax issues arising out of the provision to allow buy-back of shares by the companies : 28.1 The Companies (Amendment) Ordinance, 1998 [subsequently enacted as the Companies (Amendment) Act, 1999], inserted section 77A in the Companies Act, 1956, which allows a company to purchase its own shares subject to certain conditions. The shares bought back have to be extinguished and physically destroyed and the company is precluded from making any further issue of securities within a period of 24 months from such buy-back. 28.2 The above newly introduced provisions of buy-back of shares threw up certain issues in relation to the existing provisions of the Income-tax Act. The two principal issues are whether it would give rise to deemed dividend under section 2(22) of the Income-tax Act and whether any capital gains would arise in the hands of the shareholder. The legal position on both the issues were far from clear and settled and there was apprehension that there will be unnecessary litigation unless the issues are clarified with finality. 28.3 The Act, therefore, has amended clause (22) of section 2 of the Income-tax Act by inserting a new clause to provide that dividend does not include any payment made by a company on purchase of its own shares in accordance with the provisions contained in section 77A of the Companies Act, 1956. It has also inserted a new section, namely, section 46A in the Income-tax Act, to provide that any consideration received by a shareholder or a holder of other specified securities from any company on purchase of its own shares or other specified securities shall be, subject to provisions contained in section 48, deemed to be the capital gains. 28.4 This amendment will take effect from 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Sections 3 and 33 ] 29. Deduction for medical insurance premium on the health of senior citizen raised : 29.1 Under the existing provisions of section 80D, a deduction upto Rs.10,000 is available for payment to effect or keep in force an insurance on the health of the assessee or his wife or her husband or dependent parent, as the case may be, or any family member, in case the assessee is a Hindu undivided family in case the payment is to effect or keep in force an insurance on the health of such assessee or other eligible family members who is or who are senior citizens, the limit of deduction in such cases has been raised to Rs. 15,000. 29.2 This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 40 ] 30. Full deductions allowed for any amount of expenditure incurred on the maintenance of handicapped dependant : 30.1 Under the existing provision of section 80DD, a deduction for the amount incurred on maintenance of a handicapped dependent or payment made for such person under a specified scheme of LIC or UTI is allowed subject to an overall limit of Rs. 40,000. Reservations were expressed that the provision in this form might create difficulties for such assessees as it may lead to a situation where evidence for such expenditure may be difficult to be kept. In order to mitigate any such hardship of the guardians of a handicapped person, it is now provided that where the assessee incurs any expenditure on maintaining a handicapped dependant or makes payment of any amount under a specified scheme of LIC or UTI framed in this behalf, he shall be allowed deduction of the lump sum amount of Rs. 40,000. 30.2 This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Clause 41 ] 31. Limits under section 80DDB revised : 31.1 Under the existing provisions of section 80DDB, a deduction of Rs.15,000 was allowed in the computation of total income of an individual suffering from chronic and protracted diseases and terminal ailments or of any individual or HUF, on whom such individual is dependent. Considering the expensive nature of treatment involved in diseases specified in the provisions, this limit is raised to Rs. 40,000 with effect from 1st day of April, 2000. The amount of deduction under the amended provision shall be worked out after reducing the amount, if any, received under any scheme of medical insurance. In other words, the deduction (subject to limits specified in the provision) would be available on the net amount after reducing the insurance receipts from the expenditure actually incurred. The benefit shall be available in cases where such expenses have been actually incurred. 31.2 In case the assessee or such dependent relative is a senior citizen (a resident Indian who is of the age of 65 years or more at any time during the previous year) the monetary limit under this section will be Rs. 60,000. 31.3 This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 42 ] 32. Full deductions to donations to the fund for technology development and application : 32.1 Under the existing provisions of section 80G of the Income-tax Act, a deduction of 50% of the donations is allowed in the computation of the income of a donor. However, in respect of donations to certain funds 100% deduction is allowed. 32.2 To promote research and development institutions and industry for overall development of technology and its commercial applications, the provisions have been amended to allow 100% deduction for donations made to the "Fund for Technology Development and Application", being operated by the Technology Development Board. 32.3 This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 43 ] 33. Deduction for donations made to funds or institutions for charitable purposes : 33.1 Under the provision of section 80G of the Income-tax Act, 1961, a deduction in respect of donations to certain funds, institutions, etc., is provided. However, clause (ii) of sub-section (5) of that section provides that if such fund or institution has in its instrument any provision for the transfer or application of the whole or any part of the income or asset for any purpose other than a charitable purpose, it could not avail of the benefit under this section. It has also been provided in Explanation 3 that for the purpose of this section, "charitable purpose" does not include any purpose the whole or substantially the whole of which is of a religious nature. These provisions have been interpreted to deny the benefit to even such funds or institutions as are predominantly engaged in charitable activities but are either inspired to do charity by tenets of religion or spend a negligible amounts on purposes other than charitable. It would be harsh to deny the benefits to the institutions which are engaged in activities, the whole or substantially the whole of which are of charitable nature. 33.2 In order to mitigate hardship to such funds or institutions, the provisions of section 80G are amended so as to provide that in case such institutions or funds spend upto five per cent. of their income during the relevant previous year for religious purpose, the benefit of deduction will not be denied to them. 33.3 This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 43 ] 34. Modification of the definition of small scale industry : 34.1 Under the existing provisions of section 80 HHA, a deduction of 20% for a period of ten years was available to small scale industrial undertakings which commenced manufacture or production between the period beginning from 30th September, 1977, and ending on 31st March, 1990. The definition of "small scale industry" based on value of investment in plant and machinery is different for different periods, as such limits were revised from time to time by the Department of Industries. In order to bring the definition of small scale industry in consonance with that provided in the Industries (Development and Regulation) Act, 1955, the provision has been amended to provide that an industrial undertaking shall be deemed to be a small scale industrial undertaking which is, on the last day of the previous year, regarded as small scale industrial undertaking under section 11B of the Industries (Amendment and Regulation) Act, 1955. 34.2 These amendments will take effect retrospectively from the 1st day of April, 1978, and will, accordingly, apply for the assessment year 1978-79 and subsequent years. [ Section 44 ] 35. Receipts of money in convertible foreign exchange to be considered for deduction when received beyond the period of six months with the approval of the Reserve Bank of India : 35.1 Under the existing provisions of sections 80HHB, 80HHC, 80HHD, 80HHE, 80-O, 80R, 80RR, and 80RRA, when receipts in convertible foreign exchange are received after a period of six months from the end of the previous year, the approval of the Chief Commissioner or Commissioner is required to avail of the benefit of the deduction under these provisions. As obtaining such approval from the Chief Commissioner or Commissioner often results in avoidable delay, such approval is being done away with, as the Reserve Bank of India, in any case, monitors such remittances and accords approval in cases of delay. As a result, where remittances are brought after the period of six months, the approval of the Reserve Bank of India (or any other authority empowered to deal with any law governing such receipts) shall suffice. However, the requirement of furnishing a certificate shall continue. The amendment being effective from 1-6-1999 shall apply in relation to all remittances received after that date. 35.2 The provisions of sections 80HHB and 80-O have been amended to provide that the assessees should furnish certificates in Form No. 10CCAH and 10HA respectively to the effect that deductions under these sections have been claimed correctly. The provisions of section 155 have been amended by inserting a new sub-section (13) therein to provide that the Assessing Officer may amend the order of assessment consequent upon bringing in of such convertible foreign exchange into India with the approval of the Reserve Bank of India or the competent authority, as the case may be. 35.3 These amendments take effect from the 1st day of June, 1999.[ Sections 45, 46, 47, 48, 53, 54, 55, 56 and 66 ] 36. Amendment of section 80HHC : 36.1 Forty per cent. of income derived from the sale of tea grown and manufactured by the sellers in India is chargeable to tax and the balance is regarded as agricultural income not chargeable to tax. In some cases where the assessee is exporting tea, the deductions under section 80HHC are claimed with reference to the composite income, including the income not chargeable to income-tax. For removal of doubts, it has now been clarified that for the purposes of computing deduction under section 80HHC, the amount of income not being charged to tax under the Act shall not be eligible for deduction under this section. 36.2 This amendment will take effect retrospectively from the 1st day of April, 1992, and will, accordingly, apply in relation to the assessment year 1992-93 and subsequent years. [ Section 46 ] 37. Incentive to increase investment in tourism sector : 37.1 Under the existing provisions of section 80HHD, the assessee is allowed a deduction in respect of income from the business of a hotel, tour operation and travel agency, of an amount equal to :— (i) 50 per cent. of the profits derived from services provided to foreign tourists ; and (ii) so much of the remaining profits as are credited to a reserve fund. Sub-section (4) provides for the manner in which such funds are to be utilised, namely, construction of new hotels, purchase of new cars/coaches, sports equipment, construction of conference or convocation centres, etc. 37.2 With a view to facilitate investment in the tourism sector, the amendment provides that the amount credited to the reserve fund can also be invested in equity shares of a public company carrying on the business of new hotels or setting up a new facility, as may be notified by the Central Government. 37.3 This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 47 ] 38 Incentives for film industry : 38.1 With a view to provide incentive to the export of films, a new provision being 80HHF is inserted to provide for 100% deduction to an Indian company of profits and gains from export or transfer of any film software, TV software, music software and TV news software, etc., as detailed in the provision. 38.2 There are certain conditions to be fulfilled for availing of the benefit. These are— (i) The consideration in convertible foreign exchange should be brought into India within six months from the end of the previous year or within such further period as allowed by the Reserve Bank of India. (ii) Such business should not be prohibited by any law for the time being in force. (iii) A report of an accountant in Form No. 10CCAI should be filed along with the return of income certifying that the deduction has been claimed correctly. The definitions of film software, music software, telecast rights, television news software and television software are given in the section. 38.3 The deduction under this provision shall be hundred per cent. of the profits from such earning from exports. In case the profits of the companies includes profits from other activities also, the profits eligible for this benefit will be worked out as per following formula. Export profits Total profit x Export turnover/total turnover profits of any branch, office, warehouse or any other establishment of assessee outside India and 90% of receipts by way brokerage, commission, interest, rent, charges or any other receipt of similar nature which is included in profit, are to be excluded from the computation of profits for the purpose of this section. 38.4 The total turnover for this purpose does not include export incentives covered under sections 28(iiia), 28(iiib) and 28(iiic), freight, telecommunication charges or insurance attributable to delivery of software or software rights outside India and expenses, if any, incurred in foreign exchange in providing technical services outside India. 38.5 The export turnover does not include freight, telecommunication charges or insurance attributable to delivery of software or software rights outside India. 38.6 Where a deduction is claimed and allowed for any assessment year with respect to profits from eligible business no deduction shall be allowed in relation to such profits under any other provision of the Income-tax Act for the same or any other assessment year. 38.7 This amendment will come into force with effect from 1st April, 2000, and will, accordingly, apply to the assessment year 2000-2001 and subsequent years. [ Section 49 ] 39. Incentives to promote economic growth and industrialization : 39.1 The erstwhile provision of section 80-IA in the Income-tax Act has been restructured and incorporated as two new distinct sections—sections 80-IA and 80-IB. The restructured sections seek to retain the benefits hitherto provided in section 80-IA. However, the amended provisions extend the benefits to certain sectors as discussed hereunder. 39.2 Enterprises setting up infrastructure projects may avail of tax holiday benefits in any ten consecutive years out of fifteen initial years. 39.2.1 Under the existing provisions of section 80-IA, a road, highway, bridge, airport, port and rail system and any other public facility of similar nature as may be notified are regarded as "infrastructure facility" and an undertaking engaged in providing or maintaining such infrastructure facility is entitled to a tax holiday for five years and a deduction of 30% of profits for the next five years. Such an enterprise has the choice of availing of such benefits in any ten consecutive years out of the initial twelve years from the year in which the enterprise commences operation. The Finance Act, 1999, provides that such an entity could avail of such concessions in any ten consecutive years out of the initial fifteen years (or twenty years in the case of a highway). 39.2.2 Likewise, under the existing provisions of section 80-IA, industrial undertakings generating or generating and distributing power, undertakings developing and operating industrial parks and undertakings engaged in providing telecom services are entitled to a five year tax holiday and a deduction of 25% (30% in the case of companies) of profit in the subsequent five years. By the amendments made through the Finance Act, 1999, such undertakings have been allowed to avail of similar benefits in any ten consecutive years out of the initial fifteen years. 39.2-3 This amendment will come into force with effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 50 ] 39.3 Tax benefits for generation of power or generation and distribution of power to be extended to any undertaking laying new transmission and distribution lines for transmission activities. 39.3-1 Under the provisions of section 80-IA, a five year tax holiday and a deduction of 25% (30% in the case of companies) of profits in the subsequent five years is allowed, to an undertaking engaged in the business of generation, or generation and distribution of power, provided it commences generation of power between 1-4-1993 and 31-3-2003. 39.3-2 To augment transmission and distribution of power in the country, similar benefits are also extended to undertakings setting up new transmission or distribution lines on or after 1-4-1999 on profits derived therefrom, as are available for generation or generation and distribution of power. The profits thereof shall be eligible for deduction if the undertaking sets up network of new transmission or distribution lines on or after 1-4-1999 but before 31-3-2003 under the restructured provisions of section 80-IA of the Income-tax Act. The deduction shall be confined to the profits derived from transmission or distribution of power through the new network. 39.3-3 This amendment will come into force with effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 50 ] 39 Tax holiday benefits to cold chains : 39.4-1 The provisions of section 80-IA, inter alia, provide, a five year tax holiday in respect of profits and gains of an assessee operating a cold storage in an industrially backward State or in an industrially backward district, if the assessee begins to operate the cold storage plant before the 31st March, 2000. A further deduction of 25% of profits of such business (30% in the case of companies) for the subsequent five years is also allowed. 39.4-2 The complex food chain from the producer to the consumer, involves various intermediaries for handling and processing agricultural produce. The loss and wastage of perishable agricultural produce, vegetables and similar other commodities in India continues to be high. In order to minimise such a loss of produce and to ensure smooth and uniform distribution of agricultural produce, a hundred per cent tax holiday for a period of five years and 25% (30% in case of companies) deductions for further five years from profits derived from operating a cold chain facility which starts operating after the 1st day of April, 1999, has been provided in the restructured provisions of sub-section (11) of section 80-IB. 39.4-3 The term "cold chain facility" has been defined to mean a chain of facilities for storage and transportation of agricultural produce under scientifically controlled conditions including refrigeration and other facilities necessary for the preservation of such produce. This amendment will come into force with effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 50 ] 39.5 Concession for infrastructure facility and industrial parks may be availed of by persons operating and maintaining it. 39.5-1 The provisions of section 80-IA provide that an infrastructure facility developed by an enterprise has to be ultimately transferred to the Central, State Government or local authority or such other statutory body, as the case may be within the stipulated period. To further encourage private sector participation, it is now provided in the newly inserted proviso to clause (i) of sub-section (4) of section 80-IA that any person other than a developer (i.e., the O and M contractor) may undertake operation and maintenance before handing such facility to the Central Government, State Governments or statutory body, if the terms of agreement so provide. The benefits and concession under section 80-IA in such cases, for the remaining period out of the period of ten consecutive years, may be availed of by the undertaking operating and maintaining such facility. Other conditions would remain the same in the amended provision. 39.5-2 The new provision contained in clause (iii) of sub-section (4) of restructured section 80-IA also provides that in the case of industrial parks, the developer and operator or the developer or the operator may avail of the benefit in a similar manner. In case of industrial parks, if an undertaking develops it and transfers its maintenance and operation to another to make management of such parks participatory, the deduction for the remaining period of ten assessment years may thereafter be availed of by the transferee undertaking. This modified provision shall apply to industrial parks developed between 1-4-1999 and 31-3-2002. 39.5-3 These amendments shall come into force with effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 50 ] 39.6. Tax holiday for industries in North-East : 39.6-1 In order to promote industrialisation and encourage economic growth in the North-East Region, a proviso has been added in sub-section (4) of restructured section 80-IB to provide that such industrial undertakings as are notified by the Central Government set up in that region shall be entitled to a deduction of 100% of their profits for a period of ten consecutive assessment years. This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to assessment year 2000-2001 and subsequent years. [ Section 50 ] 39.7 Liberalisation of tax holiday to approved housing projects : 39.7.1 Under section 80-IA of the Income-tax Act, profits of approved housing projects where the development and construction commences on or after 1-10-1998 and is completed by 31-3-2001, are fully deductible. The conditions necessary for claiming the benefit are that the approved housing project should be on a minimum area of one acre and should have dwelling units with a maximum built up area of 1,000 sq. ft. 39.7.2 The amended provisions contained in section 80-IB have extended the scope of deduction in a manner that in areas other than those falling in and within 25 kms. from the municipal limits of Delhi and Mumbai, the housing projects having built up area of dwelling units upto a maximum of 1,500 sq. ft. each instead of 1,000 sq. ft. each will be entitled to the benefit. The built up area for units in areas falling in Delhi and Mumbai and within 25 kms. of the municipal limits of both, shall, however, remain unchanged. These provisions apply to profits derived from such housing projects that may be assessable in any year. 39.7.3 This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 50 ] 40. Tax holiday for processing of bio-degradable waste : 40.1 Under section 80JJA, deduction in respect of profits and gains derived from the business of collecting and processing of bio-degradable waste was allowed upto a limit of rupees five lakhs. To facilitate and give further impetus to the entry of the non-Government sector in waste management, such units (irrespective of location), which are collecting, processing or treating bio-degradable waste for generating power or producing bio-fertilizers, bio-pesticides, biological agents or for producing or making pellets or briquettes for fuel or organic manure will be allowed a hundred per cent. deduction of profits and gains derived from such activities subject to a limit of rupees five lakhs, for a period of initial five years. 40.2 The amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 51 ] 41. Reduction of tax rate on long-term capital gains in regard to securi-ties : 41.1 Under the existing provisions, long term capital gains are taxed at the rate of 20% after giving the benefit of cost inflation index. However, certain categories of non-residents and non-resident Indians are required to pay tax at the rate of 10% on long term capital gains on securities and specified assets respectively. However, the benefit of cost inflation index is not available to them. This has led to a widespread demand for level playing field between non-residents and resident investors in share market notwithstanding the availability of cost inflation index to the latter. 41.2 The Act has, therefore, amended section 112 of the Income-tax Act to limit the tax on long term capital gains at 10% of the capital gain on securities as defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956, and listed in recognised stock exchanges in India before allowing adjustment for cost inflation index for all assessees. In other words, the benefit of cost inflation index shall continue as before but where the tax on long term capital gains without adjustment of cost inflation exceeds 10%, such excess shall be ignored. 41.3 Section 2(h) of the Securities Contracts (Regulation) Act, 1956, has defined securities as under : " 'Securities' include— (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate ; (ii) Government securities ; (iia) such other instruments as may be declared by the Central Government to be securities ; and (iii) rights or interest in securities ;" 41.4 This amendment will take effect from 1st day of April, 2000, and will, accordingly, apply to assessment year 2000-2001 and subsequent years. [ Section 57 ] 42. Concessional rate of tax for income arising to certain resident employees from certain Global Depository Receipts : 42.1 The Act inserts a new section 115ACA in the Income-tax Act relating to tax on income from global depository receipts (GDRs) purchased in foreign currency or capital gains arising from their transfer. 42.2 The new section provides that on income by way of dividends (other than dividends referred to in section 115-O) or long term capital gains in respect of global depository receipts of an Indian company purchased by a resident employee of such company in accordance with a notified employees' stock option scheme, the income-tax payable shall be at the rate of ten per cent. This concessional rate would only apply to the income from investements in global depository receipts of a resident employee of a domestic company engaged in information technology software and information technology services. 42.3 It further provides that in the case of the aforesaid resident employee, no deduction shall be allowed under any other provision of the Income-tax Act in respect of such dividend income and long term capital gains. 42.4 It also provides that while computing such long term capital gains, the first and second provisos to sub-section (1) of section 48 relating, inter alia, to indexation, will not apply. 42.5 In the Explanation to the new section the expressions "global depository receipts", "information technology software", "information technology service" and "overseas depository receitps" have been defined. 42.6 This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 59 ] 43. Exclusion of two-wheelers from the purview of "motor vehicle" for the purpose of filing return under first proviso to section 139(1) : 43.1 The first proviso to section 139(1) casts an obligation on a person to file return of income on the basis of six specified economic criteria. One such criterion is the ownership or lease of a motor vehicle. The definition of "motor vehicle" in this section follows the definition given in clause (28) of section 2 of the Motor Vehicles Act, 1988. This definition includes vehicles of less than four wheels having engine capacity of more than 25 cubic centimeters. Consequently owners of two-wheeled vehicles come under the ambit of the first proviso to sub-section (1) of section 139 of the Income-tax Act. 43.2 The Act, therefore, amended clause (ii) of the first proviso to sub-section (1) of section 139 to provide that the definition of "motor vehicle" shall not include a two-wheeled vehicle whether having any detachable side car having extra wheel attached to such two-wheeled vehicle or not. 43.3 This amendment takes effect from the 1st day of June, 1999.[ Section 62 ] 44. Amendment of section 139(6) to provide for particulars of bank account and credit card in prescribed form of return : 44.1 The details and information to be furnished in the return of income and the statements and annexures to accompany the return of income are guided by the provisions of sub-sections (6), (6A) and (9) of section 139. 44.2 Under the existing provisions contained in sub-section (6), the form of return requires the assessee to furnish the particulars of income exempt from tax, assets of the prescribed nature and value belonging to him and prescribed expenditure and outgoings. 44.3 Particulars of bank accounts or of credit cards in the form of return were considered necessary for the purposes of refunds and also for other purposes. The Act, therefore, has amended section 139(6) requiring the assessee to give the details of bank accounts and credit cards in the prescribed form of return. 44.4 This amendment takes effect from the 1st day of June, 1999.[ Section 62 ] 45. Self-assessment tax to be paid while filing returns for the block period in search cases : 45.1 Under sub-section (1) of section 140A of the Income-tax Act, the assessee is required to pay tax on the basis of income declared in the return and such tax is required to be paid before the return is furnished and the return is to be accompanied by the proof of such payment. Failure to make the required payment under sub-section (1) deems an assessee to be in default. The existing provisions of section 140A are not applicable to Chapter XIV-B relating to the assessment of the income of the block period in search and seizure cases. There is also no corresponding provision in Chapter XIV-B for payment of self-assessment tax at the time of filing of the return. Therefore, the tax on the admitted income declared in the return cannot be collected till the assessment is completed. The Act has, therefore, amended section 140A of Income-tax Act to provide for the statutory requirement of payment of self-assessment tax at the time of filing the return under section 158BC relating to block assessment of search cases. 45.2 This amendment takes effect from the 1st day of June, 1999.[ Section 63 ] 46. Simplification of procedure of processing of return under sub-section (1) of section 143 and doing away with prima facie adjustment : 46.1 Under the existing provisions of the Income-tax Act, all the returns filed are processed under sub-section (1) of section 143 for payment of tax and issue of refund. Certain powers are available with the Assessing Officer to rectify arithmetical mistakes and to make prima facie adjustments regarding allowable and disallowable claims and deductions. These are known as prima facie adjustments. In addition to tax on income as a result of prima facie adjustment, 20% of the tax is also levied as additional tax for making incorrect claims. 46.2 It is seen that the present system of prima facie adjustments has become some sort of assessment in itself where every return is examined minutely and such adjustments are also open to appellate remedy. Most of the time of the Assessing Officer is utilised in processing the returns in the above manner leaving very little time for thorough investigation and other important activities. The ever increasing number of returns resulting from the drive to widen the tax base may make it more difficult. In view of the above, the Act has amended section 143 of the Income-tax Act to modify the present provisions contained in section 143(1)/143(1A)/ 143(1B) and to do away with the provisions relating to prima facie adjustments, additional tax and issue of intimations in all cases. Filing of the return by itself would complete the process of assessment limiting its scope to raise demand where taxes are not paid and issue refund wherever due, on the basis of return of income so filed. With the exception of issuing intimations where any sum is payable by the assessee or any refund is due to him, the acknowledgment shall be deemed to be an intimation. The Act has also amended section 154 of the Income-tax Act to provide for recitification of intimation or deemed intimation referred to in sub-section (1) of section 143. 46.3 These amendments take effect from the 1st day of June, 1999.[ Section 64 ] 47. Sunset provisions to sections 180 and 180A relating to the assessment of income from royalties and copyright fees and consideration for know-how : 47.1 Section 180 of the Income-tax Act is applicable for assessment of income or receipt of a lump sum consideration received by an author or an artist for assigning away his interest in the copyright or royalty, where the literary or the artistic work has taken more than 12 months to be completed. The lump sum cosideration is allowed to be allocated amongst the previous years as per rule 9(2) of the Income-tax Rules. 47.2 Section 180A inserted by the Finance Act, 1985 provides that the assessment of consideration received or receivable by the resident individual for allowing the use of know-how developed by him is to be spread over the year of receipt or receivable and two immediately preceding previous years in equal instalments. This provision was introduced with a view to encouraging the development of indigenous know-how. 47.3 These provisions constituted significant tax incentives earlier in a tax regime which was based on the philosophy of imposing higher rate of taxes progressively as the slab of income became higher. But, after rationalisation of the structure of income slabs for rate purposes and significant reduction in tax rates in recent years, these provisions have outlived their utility. Otherwise also they have a narrow applicability. The expert group set up for simplification and rationalisation of income-tax law also recommended the omission of these sections. Therefore, the Act has amended sections 180 and 180A to provide that the provisions shall not be applicable for the previous year relevant to the assessment year commencing on or after the 1st day of April, 2000. 47.4 These amendments will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Sections 67 and 68 ] 48. Tax deduction at source on payment of compensation relating to compulsory acquisition of a capital asset : 48.1 With a view to widening the tax base, the Act inserts a new section 194L in the Income-tax Act, to provide for deduction of income-tax at source on payment of compensation or consideration or account of compulsory acquisition of any capital asset. 48.2 The new section provides that any person responsible for paying to a resident any sum being in the nature of compensation or the enhanced compensation or the consideration or the enhanced consideration on account of compulsory acquisition, under any law for the time being in force, of any capital asset shall, at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to ten per cent of such sum as income-tax on income comprised therein. However, no such deduction shall be made under this section where the amount of such payment or, as the case may be, the aggregate amount of such payments to a resident during the financial year does not exceed one hundred thousand rupees. 48.3 The Act also amends section 197 of the Income-tax Act relating to certificate for deduction of income-tax at a lower rate so as to include the new section 194L within the scope of the said section. Consequent to the insertion of the new section 194L, the Act also amends sections 198 to 200 and 202 to 205 of the Income-tax Act relating to the provisions in respect of deduction of income-tax at source. 48.4 These amendments take effect from the 1st day of June, 1999.[ Sections 74, 76 and 78 ] 49. No deduction of tax from interest on securities in certain cases : 49.1 Under the existing provisions of section 197A of the Income-tax Act, an individual can receive the income from interest on securities without deduction of tax at source, on furnishing to the payer of such income a declaration to the effect that tax on his estimated total income will be "nil". 49.2 With a view to mitigate the hardship faced by the tax exempt entities like trusts, provident funds, gratuity funds, superannuation funds, etc., the Act amends the said section so as to allow any person (other than a company or a firm) to receive such income from interest on securities without any deduction of tax at source on furnishing such declaration. 49.3 This amendment takes effect from the 1st day of June, 1999.[ Section 77 ] 50. Rationalisation of interest chargeable from the assessees : 50.1 Under the existing provisions of the Income-tax Act, rates of interest chargeable from the assessee for various defaults vary from 15% to 24% per annum. The interest for defaults in furnishing the return of income under section 234A and for default in payment of advance tax under section 234B is chargeable at the rate of 2% for every month or part of a month. The interest for failure to deduct and pay tax at source is chargeable at 15% per annum under section 201(1A). 50.2 In order to rationalise these rates, the Act prescribes a uniform rate of interest at 18% per annum for various defaults under the above sections. Accordingly, the Act reduces the rate of interest chargeable under sections 234A and 234B from 2% for every month or part of a month to 1.5% for every month or part of a month and enhances the rate of interest chargeable under sub-section (1A) of section 201 from 15% per annum to 18% per annum. 50.3 These amendments take effect from the 1st day of June, 1999. [ Sections 79, 81 and 82 ] 51. Filing of TCS returns on computer media : 51.1 Section 206C(5A) of the Income-tax Act provides for filing of returns of tax collection at source by persons responsible for collecting tax in accordance with the provisions of Chapter XVII-BB. The returns so filed contain voluminous data and preparing these returns as also processing the data contained therein for checking its correctness requires substantial manual effort. 51.2 In order to make filing of these returns and processing of data easier, the Act amends section 206C by inserting new sub-sections (5B) and (5C) to provide for filing of returns on computer media such as floppies, diskettes, magnetic cartridge tape, CD-ROM or any other computer readable media, as may be specified by the Board. It has been provided that such a return shall be deemed to be a return for the purpose of sub-section (5A) and the rules made thereunder and shall be admissible in any proceedings thereunder as evidence. 51.3 While receiving such return on computer media, necessary checks by scanning the documents filed on computer media will be carried out and the media will be duly authenticated by the Assessing Officer. He shall also take due care to preserve the computer media by duplicating, transferring, mastering or storage without loss of data. 51.4 These amendments take effect from the 1st day of June, 1999.[ Section 80 ] 52. Certificate for collection of tax at a lower rate : 52.1 The existing provisions of sub-section (1) of section 206C of the Income-tax Act, provide that every person, being a seller, shall, at the time of debiting of the amount payable by the buyer to the account of the buyer or at the time of receipt of such amount from the said buyer in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, collect income-tax at the prescribed rate from the buyer of any goods of the nature specified in the said sub-section. 52.2 With a view to mitigate the genuine hardships faced by the buyer, the Act amends section 206C of the Income-tax Act by inserting therein new sub-sections (9), (10) and (11) to provide for issue of certificate by the Assessing Officer for collection of tax at a lower rate in appropriate case. Sub-section (9) provides that where the Assessing Officer is satisfied that the total income of the buyer justifies the collection of tax at any lower rate than the relevant rate specified in sub-section (1), the Assessing Officer shall, on an application made by the buyer in this behalf, give to him a certificate for collection of tax at such lower rate than the relevant rate specified in sub-section (1). 52.3 Sub-section (10) provides that the person responsible for collecting the tax shall collect the same at the rates specified in such certificate until the certificate is cancelled by the Assessing Officer. Sub-section (11) confers upon the Board, power to make rules for all matters connected with the issuance of such certificate. The relevant rules have since been notified by the Board vide S. O. No. 515(E), dated 29-6-1999 (see [1999] 238 ITR (St.) 33). 52.4 These amendments take effect from the 1st day of June, 1999.[ Section 80 ] 53 Time limit for disposal of appeals by the Commissioner (Appeals) and the Appellate Tribunal and empowering the latter to award costs : 53.1 Under the existing provisions, there was no time limit for disposal of appeals filed before the Commissioner (Appeals) or the Appellate Tribunal under the Income-tax Act or other direct tax enactments. In the absence of any statutory provision, there is considerable delay in the disposal of appeals. It is also seen that there is disinclination to take up the old appeals for disposal. To ensure accountability as well as the disposal of appeals within a reasonable time-frame, the Act has amended sections 250 and 254 of the Income-tax Act to provide that the Commissioner (Appeals), where it is possible, may hear and decide every appeal within a period of one year from the end of the financial year in which the appeal is filed. The Appellate Tribunal, where it is possible, may hear and decide every appeal within a period of four years from the end of the financial year in which the appeal is filed. 53.2 To discourage filing of frivolous appeals, the Act has amended section 254 of the Income-tax Act empowering the Appellate Tribunal to award costs in suitable cases under the Income-tax Act. 53.3 These amendments take effect from the 1st day of June, 1999.[ Sections 84 and 86 ] 54. Rationalisation of provisions relating to reduction of litigation and other allied issues : 54.1 Finance (No. 2) Act, 1998 introduced a number of measures to reduce mounting litigation and delay in disposal of appeals under direct tax enactments. The major amendments included direct appeal to the High Court, introduction of a scale of fee payable before the Commissioner (Appeals) and enhancement of existing scale of fee payable before the Appellate Tribunal. These provisions have come into effect from the 1st day of October, 1998. A number of suggestions were received on the implementational aspects of these measures. Some of them required amendment of the relevant sections of the Income-tax Act to rationalise and streamline the provisions. The following amendments have been made by the Act in this regard : (i) The Finance (No. 2) Act, 1998, introduced a scale of fees for filing appeals before the Commissioner (Appeals) and also enhanced the existing scale of fee payable before the Appellate Tribunal under various direct tax acts. The fee payable under the Income-tax Act both before the Commissioner (Appeals) and the Appellate Tribunal is relatable to the assessed income. However, appeals are also filed on issues such as TDS defaults, non-filing of returns, etc. which may not have any nexus with the assessed income. The Act, therefore, has amended section 249 of the Income-tax Act to provide a fee of Rs. 250 for appeals before the Commissioner (Appeals) and Rs. 500 for appeals before the Appellate Tribunal for the residuary group of appeals which cannot be linked with the assessed income. [ Sections 83 and 85 ] (ii) The orders passed by the Appellate Tribunal are final, subject to the provisions of section 256 of the Income-tax Act relating to reference to the High Court. The Act has amended section 256 of the Income-tax Act to provide that the finality of orders passed by the Appellate Tribunal shall also be subject to provisions of section 260A of the Income-tax Act providing for direct appeal to the High Court. Section 260A was inserted by the Finance (No. 2) Act, 1998. [ Section 86 ] (iii) Under the existing provisions brought about by the Finance (No. 2) Act, 1998, an appeal filed by an assessee before the High Court is to be accompanied by a fee of Rs. 10,000 in income-tax appeals. A debate arose about the nature of the above payment as to whether it is a tax on litigation or a court fee. Therefore, the Act has amended section 260A(2) of the Income-tax Act to omit the requirement to pay any fee. After its omission, the fee for filing the appeal to the High Court shall be such fee as may be specified in the relevant law relating to court fees for filing appeals to the High Court. [ Section 87 ] (iv) Sub-section (2) of section 260A has been amended to provide that the Chief Commissioner or the Commissioner or an assessee aggrieved by any order passed by the Tribunal shall file the appeal before the High Court within 120 days from the date of the receipt of the order of the Appellate Tribunal. [ Section 87 ] (v) As the procedure for filing appeals before the High Court is prescribed in the Code of Civil Procedure, the Act has amended section 260A of the Income-tax Act to provide that the relevant provisions of the Code of Civil Procedure shall apply, mutatis mutandis, to section 260A of the Income-tax Act. [ Section 87 ] 54.2 These amendments take effect from the 1st day of June, 1999. 55. Omission of transitory provisions and certain modifications : A large number of amendments have been made in the Income-tax Act in the past with regard to transitory periods or to make certain provisions inoperative from certain dates. Such provisions are still continuing on the statute inspite of having served their purpose. Therefore, in order to rationalise the provisions of the Income-tax Act, following amendments have been made by the Act by omitting/modifying certain provisions in the Income-tax Act : (i) Clause (30) of section 2 is amended so as to include in the definition of "non-resident", a person who is not ordinarily resident in India. This amendment restores the earlier provision as it stood before its amendment by the Finance (No. 2) Act, 1998. This amendment takes effect from the 1st day of April, 1999, and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years. [ Section 3 ] (ii) Sub-clause (viia) of clause (6) of section 10 was omitted by the Finance (No. 2) Act, 1998. Consequent to this omission, reference to the said sub-clause in clause (5B) of section 10 is omitted by the Act. This amendment takes effect from the 1st day of April, 1999, and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years. [S ection 6 ] (vi) The provisions of clause (23C) of section 10 are rationalised so that the Central Government before notifying a fund, trust or institution may call for any information and may hold any enquiry so as to determine the genuineness of such fund, trust or institution. The second proviso to this clause has been substituted so as to empower the prescribed authority to call for information or to hold such enquiry as it deems fit before the University or other educational institution or a hospital is approved for exemption under clause (23C) of section 10. This amendment takes effect from the 1st day of April, 1999, and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years. [ Section 6 ] (vii) Section 33ABA which relates to Site Restoration Fund is amend-ed so as to omit the proviso in sub-section (7). This amendment is consequential to the omission of clauses of sub-section (3) of this section by the Finance (No. 2) Act, 1998. This amendment takes effect from the 1st day of April, 1999, and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years. [ Section 13 ] (viii) Section 115AD of the Income-tax Act relates to tax on income of the foreign institutional investors from securities or capital gains arising from their transfer. With a view to harmonise with the provisions of section 115-O, clause (a) of sub-section (1) of section 115AD is amended so as to exclude the income by way of dividends referred to in section 115-O from the income mentioned in this clause. This amendment takes effect from the 1st day of April, 1999, and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years. [ Section 60 ] (ix) Existing section 3 which defines the term "previous year" is substituted so as to omit the transitory provisions which were applicable only for a limited period. These transitory provisions were inserted with effect from 1-4-1989 and relate to the definition of the previous year relevant to the assessment year 1989-1990. As these transitory provisions are no longer applicable, they have been deleted. Similarly, the Tenth Schedule to the Income-tax Act, which provides for modification of the provisions of the Income-tax Act in cases where the previous year in relation to the assessment year commencing on the 1st day of April, 1989, exceeds 12 months, has also been omitted. These amendments will take effect from the 1st day of April, 2000.[ Sections 4 and 89 ] (x) Section 36 of the Income-tax Act relates to certain deductions made in computing the income under the head "Profits and gains of business or profession". Under the existing provisions contained in clause (iia) of sub-section (1) of section 36, a weighted deduction is allowed in respect of the expenditure incurred by the assessee on payment of salary to an employee who is totally blind or suffers from a permanent physical disability for any period of employment before 1st March, 1984. As these provisions are not applicable on or after the 1st day of March, 1984, they are omitted. This amendment will take effect from the 1st day of April, 2000.[ Section 22 ] (xi) Section 40A of the Income-tax Act relates to expenses or payments that are not deductible in certain circumstances. Under the provisions of sub-section (7) of this section no deduction is to be allowed in respect of any provision made by the assessee for payment of gratuity to his employees unless payment of gratuity has become payable during the previous year. Sub-clause (ii) of clause (b) of this sub-section contained a transitory provision in respect of any provision of gratuity made after the 1st day of April, 1973 but before 1st April, 1976. As these transitory provisions are no longer in operation, sub-section (7) has been substituted so as to omit these provisions. This amendment will take effect from the 1st day of April, 2000.[ Section 23 ] (xii) Section 194A of the Income-tax Act relates to deduction of tax at source from interest other than interest on securities. Clause (ii) of sub-section (3) of section 194A provides that the provisions of sub-section (1) of section 194A shall not apply in case of income credited or paid before the 1st day of April, 1967. As this clause has outlived its utility, it has been omitted. This amendment will take effect from the 1st day of April, 2000.[ Section 69 ] (xiii) Section 194B of the Income-tax Act relates to deduction of tax at source from any payment made on account of winnings from lottery or crossword puzzle. The first proviso to this section provides that no deduction at source shall be made under this section from any payment made before the 1st day of June, 1972. As this proviso is no longer applicable, it is omitted by the Act. Consequential changes have also been made in the second proviso. This amendment will take effect from the 1st day of April, 2000.[ Section 7 0] (xiv) Section 194BB of the Income-tax Act relates to deduction of tax at source from any payment made on account of winnings from horse races. The proviso to this section provides that no deduction at source shall be made under this section from any payment made before the 1st day of June, 1978. As this proviso is no longer applicable, it is omitted by the Act. This amendment will take effect from the 1st day of April, 2000.[ Section 71 ] (xv) Section 194H of the Income-tax Act relates to deduction of tax at source from any payment made on account of commission, brokerage, etc. This section provides for deduction of tax at source only from those payments made on or after the 1st day of October, 1991, but before the 1st day of June, 1992. As these provisions are no longer required, they have been omitted by the Act. This amendment will take effect from the 1st day of April, 2000.[ Section 72 ] 56. Business re-organization—extensive amendments in relation to amalgamation demerger and slump sale : 56.1 The business and economic environment of the country has thrown up the need for simplification and rationalisation of laws relating to business re-organization for rationalisation of the production system and better utilization of resources which have become necessary with a view to enabling the Indian industry to restructure itself to become globally competitive. It was in this background that the tax concessions to conversion of firms into companies or proprietary concerns into companies were provided in the Finance (No. 2) Act, 1998, and were widely welcomed. Following this up, the Act has carried out a number of amendments for the entire gamut of business reorganization. These include rationalisation of the existing provisions relating to amalgamation of companies, new provisions relating to demerger of companies and sale or transfer of business as a going concern through slump sale. 56.2 Amalgamation in relation to the companies has been defined under the existing provisions of the Income-tax Act to mean the merger of one or more companies with another company or the merger of two or more companies to form one company. There are a number of provisions in the Income-tax Act having bearing on amalgamation. Demerger is relatively a new phenomenon in the Indian corporate sector. A demerger is a reorganization of a company where all the existing assets and liabilities are divided into one or more additional entities leading to resulting companies. While there are no specific provisions under the Companies Act governing demergers, some transactions of this nature do take place through schemes of compromise or arrangement under sections 391 to 394 of the Companies Act and these are sanctioned by the High Courts. A slump sale is a form of reorganization where an undertaking or a division is transferred from one person to another for a lump sum consideration without values being assigned to the individual assets and liabilities transferred. 56.3 Extensive amendments in the Income-tax Act have been carried out on the basis of the following broad principles : (a) The restructuring shall not attract additional liabilities to tax and also not result in the withdrawal of relief and concessions available to the existing unit. (b) The tax benefits and concessions available to an undertaking of a company shall continue to be available to the undertaking on transfer of the same while concessions and benefits that are available to the transferor company as an entity and not to the undertaking of the company proposed to be transferred, should remain with the transferor-company. (c) Tax benefits to such business reorganizations should be limited to the transfer of business as a going concern and not to the transfer of specific assets which would amount to sale of assets and not a business reorganization. 56.4 The amendments inserted by the Act to the Income-tax Act on the above subject are discussed individually as under : (i) Clause (1B) of section 2 which defines amalgamation in relation to companies and provides for the manner in which the amalgamation will take place has been amended to provide that instead of shareholders holding nine-tenths in value of shares, shareholders holding three-fourths in the value of shares shall be required to become shareholders of the amalgamated company. [ Clause (a), section 3 ] (ii) A new clause (19AA) has been inserted in section 2 of the Income-tax Act to define demerger. According to the definition, demerger in relation to the companies shall mean transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956, by a demerged company of its one or more undertakings to the resulting company. The definition provides that all the property of the undertaking and all the liabilities relatable to the undertaking being transferred by the demerged company shall become the property or liabilities of the resulting company. The property and liabilities of the undertaking being transferred by the demerged company are to be transferred at book value. As a consideration for demerger, the resulting company shall issue shares to the shareholders of the demerged company on a proportionate basis. The shareholders holding not less than three-fourths in value of shares in the demerged company shall become the shareholders of the resulting company. The transfer of the undertaking will be on a going concern basis. Further, the demerger will be subject to conditions, if any, notified under sub-section (5) of section 72A. Explanation 1 to the clause has clarified that the expression "undertaking" shall include a part of an undertaking or a unit or division of an undertaking or a business activity taken as a whole but does not include individual assets or liabilities or any combination thereof which does not constitute a business activity. Explanation 2 to the clause enumerates the liabilities to be included. Such liabilities must arise out of the operations or activities of the undertaking and shall comprise specific loans or borrowings raised and utilised for the activities of the undertaking. In case of general or multi-purpose borrowings, the includible liabilities are to be determined in a proportionate manner in the ratio to the value of assets being transferred in a demerger to the total value of the assets of the demerged company. According to Explanation 3 , the change in value of the assets upon their revaluation shall be ignored. According to Explanation 4 , the splitting up or reconstruction of any authority or a body constituted under a Central, State or Provincial Act or a local authority or a public sector company into separate authorities or bodies or companies shall be deemed to be a demerger, if these fulfil the conditions specified in sub-clauses (i) to (vii). [ Clause (c), section 3 ] (iii) A new clause (19AAA) has been inserted in section 2 of the Income-tax Act to define "demerged company" as being a company whose undertaking is transferred, pursuant to a demerger, to a resulting company. [ Clause (c), section 3 ] (iv) A sub-clause (v) has been inserted in clause (22) of the Income-tax Act to specify that dividends shall not include any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company whether or not there is a reduction of the capital in the demerged company. [ Clause (d), section 3 ] (v) A new clause (41A) has been inserted in section 2 of the Income-tax Act to define the expression "resulting company" to mean one or more companies to which the undertaking of the demerged company is transferred in a demerger and as a consideration for such transfer, the resulting company issues shares to the shareholders of the demerged company. It also provides that the resulting company shall include any authority or body or local authority or public sector company or a company formed as a result of demerger. [ Clause (f), section 3 ] (vi) Clause (42A) of section 2 of the Income-tax Act defining short-term capital asset has been amended to provide that in respect of shares in an Indian company which have become the property of the assessee in consideration of demerger, the period of holding of such shares in the demerged company shall be included in computing the total period of holding of the shares by the assessee. [ Clause (g), section 3 ] (vii) A new clause (42C) has been inserted in section 2 of the Income-tax Act to define the expression "slump sale". Slump sale shall mean the transfer by way of sale of one or more undertakings for a lump sum consideration without assigning values for individual assets and liabilities. Explanation 1 to the clause follows the meaning of "undertaking" given in clause (19AA) of section 2. Explanation 2 to the clause has clarified that the determination of the value of an asset or a liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities. [ Clause (h), section 3 ] (viii) Section 32 of the Income-tax Act has been amended substituting the fourth proviso to clause (ii) of sub-section (1). The existing provisions provided that the aggregate depreciation allowable to predecessor and successor business entities in the case of succession or amalgamation shall not exceed in any previous year, the deduction allowable at prescribed rates, as if succession or amalgamation has not taken place. Further, the deduction on account of depreciation shall be apportioned between the predecessor and the successor entities in the ratio of number of days for which the assets were used by them. These provisions have now been extended to a demerger involving demerged and resulting companies.[ Section 12 ] (ix) The Act has amended section 33AC of the Income-tax Act which allows deduction of 50% of profits from shipping business to be credited to a reserve account which has to be utilised in a prescribed manner. There is a stipulation that the ship acquired out of the reserve is not transferred within eight years. The amended section provides that transfer of a ship pursuant to a scheme of demerger shall not constitute a transfer. [ Section 14 ] (x) A new sub-section (7) has been inserted in section 35A of the Income-tax Act which provides for the deduction of expenditure on acquisition of patent rights and copyrights. Sub-sections (3) and (4) prescribe the manner in which expenditure allowed or yet to be allowed is to be treated for the purpose of deduction or write-back in the year such rights came to an end or were sold with reference to the proceeds from such sale. The newly inserted sub-section (7) provides that provisions of sub-sections (3) and (4) shall not apply to damerged company in a case of demerger and the provisions of this section shall apply to the resulting company as they would have applied to the demerged company, if the latter had not sold or otherwise transferred the rights. [ Section 16 ] (xi) Section 35AB of the Income-tax Act relating to deduction of expenditure on know-how has been amended to allow the continuation of deduction under the section to the amalgamated company or the resulting company in the case of transfer of business under the scheme of amalgamation of demerger. [ Section 17 ] (xii) The Act has amended section 35ABB of the Income-tax Act relating to allowance of expenditure incurred for licence to operate telecommunication services before commencement of business. The section also provides for the manner of write-back of deduction of expenditure already allowed or yet to be allowed in the event of transfer of licence depending upon the amount of proceeds received on transfer. The newly inserted sub-section (7) provides that the above provisions relating to transfer of licence shall not be applicable to the demerged company when the demerged company transfers the licence to the resulting company in a scheme of demerger. It also provides that the provisions of this section shall apply to the resulting company as they would have applied to the demerged company, as if the demerger had not taken place. [ Section 18 ] (xiii) A new section, namely 35DD, has been inserted in the Income-tax Act to provide for amortisation of expenditure in case of amalgamation or demerger. It provides for deduction of such expenditure in five successive previous years beginning with the previous year in which amalgamation or demerger takes place at one-fifth of the expenditure in each year. [ Section 20 ] (xiv) Section 35E of the Income-tax Act relating to deduction of expenditure for prospecting, etc., for certain minerals has been amended to ensure continuity of deduction in the case of demerger to the resulting company as if demerger has not taken place. [ Section 21 ] (xv) Section 41 of the Income-tax Act has been amended to provide that "successor in business" shall include resulting company in the case of a demerger. [ Section 24 ] (xvi) Section 42 of the Income-tax Act has been amended to allow the continuation of deduction in the case of business for prospecting, etc., for mineral oil to the amalgamated or the resulting company in the case of an amalgamation or a demerger. The provisions of sub-section (2) relating to transfer of business shall not apply in the case of the amalgamating or demerged company. [ Section 25 ] (xvii) Section 43 of the Income-tax Act has been amended by inserting Explanation 7A in clause (1) to provide that the actual cost of the transferred assets to the resulting company in the case of a demerger shall be taken to be the same as it would have been if the demerged company had continued to hold the assets. A new sub-item (C) in item (i) of sub-clause (c) of clause (6) has been inserted to provide that in the case of slump sale the written down value of any block of assets shall be reduced by the amount of actual cost of the asset as falling within that block as decreased by depreciation allowed upto assessment year 1987-88 and depreciation allowable thereafter, as if the asset was the sole asset in the block. However, such decrease shall not exceed the written down value. The Act has also inserted two new Explanations , namely, Explanation 2A and Explanation 2B , in clause (6) in section 43. Explanation 2A provides that where in the previous year, any asset forming part of a block of asset is transferred by the demerged company to the resulting company, the written down value of the block of assets of the demerged company for the immediately preceding year shall be reduced by the book value of the assets transferred. Explanation 2B provides that in the corresponding situation, the written down value of the block of assets in the case of a resulting company shall be the value of assets as appearing in the books of the demerged company immediately before the demerger. However, if such book value exceeds the written down value, the excess shall be reduced from the written down value of the asset. [ Section 26 ] (xviii) Section 47 of the Income-tax Act has been amended inserting clauses (vib), (vic) and (vid) to provide that liability for capital gains tax shall not arise for any transfer of a capital asset in a demerger, if the resulting company is an Indian company. The liability to pay capital gains tax will also not be attracted to any transfer in a demerger of a foreign company in respect of capital assets being shares held in an Indian company to the resulting company if at least 75% of the shareholders of the demerged foreign company continue to remain shareholders of the resulting foreign company and such transfer does not attract tax on capital gains in the country in which the demerged foreign company is incorporated. It has also been provided that the provisions contained in sections 391 to 394 of the Companies Act, 1956, shall not apply in such a case. It has further been provided that the provisions of section 45 attracting liability of capital gains tax shall not apply to transfer or issue of shares in a demerger to the shareholders of the demerged company by the resulting company.[ Section 34 ] (xix) Section 49 of the Income-tax Act has been amended by inserting a new sub-section (2C) to provide that cost of acquisition of shares in the resulting company shall be the amount which bears to the cost of acquisition of shares held by the assessee in the demerged company the same proportion as the net book value of the assets transferred in a demerger bears to the net worth of the demerged company immediately before such demerger. A new sub-section (2D) has also been inserted to provide that the cost of acquisition of the original shares held by the shareholder in the demerged company shall be deemed to have been reduced by the amount so arrived at under sub-section (2C) as above. A further explanation has been inserted to define the expression "net worth". Net worth shall mean the aggregate of the paid-up share capital and general reserves as appearing in the books of account of the demerged company immediately before the demerger. [ Section 35 ] (xx) A new section 50B has been inserted in the Income-tax Act containing special provision for computation of capital gains in the case of slump sale. It provides that the profits and gains arising from slump sale shall be chargeable to income-tax as capital gains arising from transfer of long-term capital assets in the previous year in which the transfer takes place. However, the profits and gains arising from such transfer of one or more undertakings held for less than 36 months shall be deemed to be short-term capital gains. It is further provided that the net worth of the undertaking or the division shall be deemed to be the cost of acquisition and cost of improvement for the purpose of sections 48 and 49 and the provisions contained in the second proviso to section 48 relating to adjustment for cost inflation index shall be ignored. The "net worth" of the undertaking shall be determined with reference to the net worth of the company. It is also provided that the assessee shall furnish a report of an accountant in the prescribed form (Form No. 3CEA) along with the return of income in the case of slump sale indicating the computation of net worth of the undertaking or division and certifying that the same has been correctly arrived at. The expression "net worth" means net worth as defined in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985. Net worth has been defined in this Act as under: " 'net worth' means the sum total of the paid-up capital and free reserves. Explanation. —-For the purposes of this clause, "free reserves" means all reserves credited out of the profits and share premium account but does not include reserves credited out of re-evaluation of assets, writeback of depreciation provisions and amalgamation." [ Section 36 ] (xxi) Section 72 of the Income-tax Act relating to carry forward and set off of business loss has been amended deleting the proviso to clause (i) of sub-section (1) which stipulated that the business or profession for which the loss was computed has to be continued in order to avail of carry forward and set-off of loss. With this omission, business loss can be carried forward and set-off even if the assessee is engaged in a different business.[ Section 37 ] (xxii) The Act has substituted section 72A of the Income-tax Act relating to carry forward and set-off of accumulated loss and unabsorbed depreciation in certain cases of amalgamation. According to the new provisions, the carry forward of loss or unabsorbed depreciation in cases of amalgamation will be allowed subject to the following conditions. The amalgamating company shall hold at least three-fourths in the value of assets of the amalgamating company acquired as a result of amalgamation for at least five years. The amalgamated company shall continue the business of the amalgamating company for at least five years. The Central Government has been empowered to notify such other conditions as may be necessary to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose. It has also been provided that if the specified conditions are not complied with, set-off of carried forward loss or allowance of depreciation already availed will be treated as income of the year in which the conditions are not complied with. It has also provided that in the case of demerger, the accumulated loss and unabsorbed depreciation directly relatable to the undertaking being transferred shall be allowed to be carried forward and set-off in the hands of the resulting company. If the accumulated loss or unabsorbed depreciation is not directly relatable to the undertaking, the same shall be apportioned between the demerged company and the resulting company in the same ratio in which the value of the assets have been transferred. Power has also been conferred on the Central Government to notify such conditions as it considers necessary to ensure that the demerger is for genuine business purposes. The cumulative conditions of holding of assets and the continuance of the same business for a period of five years for the amalgamation suggest that assets in question would be fixed assets only as the continuance of business would necessarily entail change of inventories, etc. The term "value" connotes "book value". The existing conditions regarding the carry forward and set-off of accumulated losses or unabsorbed depreciation in the case of reorganization of business whereby a firm or proprietary concern is succeeded by the company has been retained along with the definition of accumulated loss or unabsorbed depreciation. [ Section 38 ] (xxiii) The Act has amended section 79 of the Income-tax Act by inserting a second proviso to clause (a). Under the existing provisions, no loss incurred in any previous year is allowed to be carried forward and set-off, unless there is continuation of share holding having at least fifty-one per cent. of the voting power where there is a change in the share holding in the case of a company (not being a company in which the public is substantially interested) to the last day of the year, in which the loss was incurred. The amended provisions provide that the above condition shall not apply to any change in the share holding of an Indian company which is subsidiary of a foreign company arising as a result of amalgamation or demerger of a foreign company subject to the condition that fifty-one per cent. of the shareholders of the amalgamating or demerged foreign company continue to remain the shareholders of the amalgamated or the resulting foreign company. [ Section 39 ] (xxiv) The Act has substituted section 80-IA by sections 80-IA and 80-IB of the Income-tax Act. The substituted section 80-IA, inter alia, in sub-section (12) provides that where any undertaking of an Indian company entitled to the deduction under this section is transferred to another Indian company in a scheme of amalgamation or demerger before the expiry of the specified period, the deduction shall be availed of by the amalgamated company or the resulting company. Identical provision has been enacted in sub-section (12) of section 80-IB in regard to deduction available under that section in the case of an amalgamation or demerger. [ Section 50 ] (xxv) The Act has amended section 115AC of the Income-tax Act by inserting sub-section (5). The section provides for rate of tax on income from bonds or shares purchased in foreign currency or capital gains arising from their sale. The newly inserted sub-section makes the provisions of the section applicable to shares or bonds acquired by an assessee in an amalgamated or resulting company by virtue of holding shares or bonds in the amalgamating or demerged company. [ Section 58 ] 56.5 These amendments will take effect from 1st day of April, 2000, and will, accordingly, apply to the assessment year 2000-2001 and subsequent years. 57. Gold Deposit Scheme : 57.1 In the Finance Act, 1999, a Gold Deposit Scheme, 1999, has been proposed to be started this year. Under this scheme, interest earned on the bonds and capital gain arising from their transfer or redemption would be exempt from the income-tax. These bonds would also be exempt from the wealth-tax. 57.2 In order to provide the above immunities from the income-tax, clause (14) of section 2 of the Income-tax Act has been amended to exclude the Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999, from the definition of capital assets so as to exempt the capital gain arising from their transfer or redemption. Clause (15) of section 10 has also been amended so as to provide that the interest on Gold Deposit Bonds issued under the said scheme shall not be included in computing the total income. 57.3 In order to provide immunity from the wealth-tax, section 2 of the Wealth-tax Act has been amended by inserting an Explanation to clause (ea) to clarify that jewellery does not include the Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government. 57. 4 These amendments will take effect from the 1st day of April, 2000, and will accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Sections 3, 6 and 91 ] Wealth-tax 58. Simplification of procedure of processing of return under sub-section (1) of section 16 and doing away with prima facie adjustment : 58.1 As in the case of the Income-tax Act, the Act has amended section 16 of the Wealth-tax Act to modify the present provisions contained in section 16(1)/16(1A)/16(1B) to do away with the provisions relating to prima facie adjustments, additional tax and issue of intimations in all cases. Filing of return by itself would complete the process of assessment limiting its scope to raise demand and issue refund on the basis of return filed. With the exception of issuing intimations where any sum is payable by the assessee or refund is due to him, the acknowledgment shall be deemed to be an intimation. The Act has also amended sub-section (1) of section 35 of the Wealth-tax Act to provide for rectification of intimation or deemed intimation referred to in sub-section (1) of section 16. 58.2 This amendment takes effect from the 1st day June, 1999. [ Sections 92 and 97 ] 59. Rationalisation of provisions relating to reduction of litigation and other allied issues : 59.1 As in the case of the Income-tax Act, the Act has introduced a number of amendments to further rationalise and streamline the provisions to reduce litigation and delay in disposal of appeals under the Wealth-tax Act. (i) The Finance (No. 2) Act, 1998, introduced a scale of fees for filing appeals before the Commissioner (Appeals) and also enhanced the existing scale of fee payable before the Appellate Tribunal under the Wealth-tax Act. The fees prescribed are linked to the assessed net wealth. The Act has amended section 24 of the Wealth-tax Act to provide a fee of Rs. 250 for appeals before the Commissioner (Appeals) and Rs. 500 for appeals before the Appellate Tribunal for the residuary group of appeals which cannot be linked with assessed net wealth. [ Section 94 ] (ii) The orders passed by the Appellate Tribunal are final subject to the provisions of section 27 of the Wealth-tax Act relating to reference to the High Court. The Act has amended section 24 of the Wealth-tax Act to provide similar provisions in relation to section 27A of the Wealth-tax Act providing for direct appeal to the High Court which were inserted through the Finance (No. 2) Act, 1998. [ Section 94 ] (iii) Section 27A of the Wealth-tax Act inserted by the Finance (No. 2) Act, 1998, provides for direct appeal to the High Court. Earlier, provisions regarding making a reference to the High Court were contained in section 27 of the Wealth-tax Act. The Act has inserted a sun-set clause in section 27 of the Wealth-tax Act whereby the provisions of the section would cease to be applicable in respect of orders passed on or after 1-6-1999 under section 24 or section 26 or clause (e) of sub-section (1) of section 35 of the Wealth-tax Act. [ Section 95 ] (iv) The Act has amended section 27A(3) of the Wealth-tax Act to omit the requirement of paying a fee of Rs. 5,000 in the case of wealth-tax appeals filed by the assessee. After its omission, the fee for filing the appeal to the High Court shall be such fee as may be specified in the relevant law relating to court fees for filing appeals to the High Court. [ Section 96 ] (v) The Act has inserted sub-section (8) in section 27A of the Wealth-tax Act to provide that the relevant provisions of the Code of Civil Procedure shall apply mutatis mutandis to appeals under this section. These amendments take effect from the 1st day of June, 1999.[ Section 96 ] 60. Time-limit for disposal of appeals by the Commissioner (Appeals) and the Appellate Tribunal and empowering the latter to award costs : 60.1 As in the case of Income-tax Act, the Act has amended sections 23A and 24 of the Wealth-tax Act to provide that the Commissioner (Appeals), where it is possible, may hear and decide every appeal within a period of one year from the end of the financial year in which the appeal is filed. The Appellate Tribunal, where it is possible, may hear and decide every appeal within a period of four years from the end of the financial year in which the appeal is filed. 60.2 To discourage filing of frivolous appeals, the Act has amended section 24 of the Wealth-tax Act empowering the Appellate Tribunal to award costs in suitable cases. 60.3 These amendments take effect from the 1st day of June, 1999.[ Sections 93 and 94 ] Expenditure-tax 61. Time-limit for disposal of appeals by the Commissioner (Appeals) and the Appellate Tribunal : 61.1 As in the case of Income-tax Act, the Act has amended section 22 of the Expenditure-tax Act to provide that the Commissioner (Appeals), where it is possible, may hear and decide every appeal within a period of one year from the end of the financial year in which the appeal is filed. 61.2 In view of the applicability of the provisions of section 254 of the Income-tax Act to the Expenditure-tax Act in terms of section 24 of that Act, the newly introduced time-limit for disposal of appeals by the Appellate Tribunal would apply also for appeals under the Expenditure-tax Act. Similarly, the Appellate Tribunal has been empowered to award costs at its discretion under the Expenditure-tax Act. 61.3 This amendment takes effect from the 1st day of June, 1999.[ Section 99 ] 62. Amendment to Finance (No. 2) Act, 1998 : 62.1 Section 76 of the Finance (No. 2) Act, 1998, made certain amended provisions of the Wealth-tax Act applicable to Gift-tax Act. The Act has amended the Finance (No. 2) Act, 1998, to include a reference to section 23A of the Wealth-tax Act relating to appealable orders before the Commissioner (Appeals) making it applicable to the Gift-tax Act. 62.2 This amendment takes effect from the 1st day of June, 1999.[ Section 139 ] (Sd.) Deepa Krishnan, Director to the Government of India. F. No. 153/141/99-TPL