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TMI BlogThe Finance Act, 1976--Explanatory notes on provisions relating to direct taxesX X X X Extracts X X X X X X X X Extracts X X X X ..... categories of income liable to such deduction under the Income-tax Act; and the rates for the computation of "advance tax" and charging of income-tax on current incomes in certain cases where accelerated assessments are required to be made during the financial year 1976-77. (ii) Amendment of the Income-tax Act, 1961, with a view to providing greater incentive for savings and investment; providing for tax relief in certain cases; rationalisation of assessment of non-residents and a few other matters. (iii) Amendment of the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974, with a view to extending the requirement of making compulsory deposits for another year and modifying the rates of compulsory deposit. (iv) Amendment of the Companies (Profits) Surtax Act, 1964, with a view to raising the threshold for the levy of surtax and making a few other provisions. (v) Amendment of the Wealth-tax Act, 1957, with a view to lowering the rates of ordinary wealth-tax and dispensing with the levy of additional wealth-tax on urban lands and buildings; providing for greater incentive for construction of houses, especially for weaker sections, and for argumenting foreign exchange reso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical service fees in the case of foreign companies. These modifications are reflected in the rate schedule for deduction of income-tax at source. The position in this regard is explained in paragraphs 5 to 7 of this circular. 4.2 The rates for deduction of income-tax at source (including surcharge on income-tax) in respect of other categories of income are the same as were prescribed for the purpose under the Finance Act, 1975. Deduction of income-tax from dividends paid by domestic companies to foreign companies 5. The rate for deduction of income-tax at source from dividends paid by a domestic company to a foreign company has been fixed at 25 per cent. as against 25.725 per cent. (income-tax 24.5 per cent. plus surcharge 1.225 per cent) under the Finance Act, 1975. Deduction of income-tax from royalties paid by Indian concerns to foreign companies 6. The rate for deduction of income-tax at source from royalties paid by Indian concerns to foreign companies will depend upon whether such royalties are payable under approved agreements or not, and where such royalties are payable under approved agreements, whether such agreements were made before the 1st April, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lained in paragraph 26 of this circular. (c) Royalties payable under agreements made on or after the 1st April, 1976, in cases where agreements are made on the basis of proposals approved by the Central Government before that date. Under section 9(1)(vi) of the Income-tax Act, as inserted by section 4 of the Finance Act, an agreement made by a foreign company with an Indian concern on or after the 1st April, 1976, can, at the option of the foreign company, be regarded as an agreement made before that date if the agreement is made on the basis of proposals approved by the Central Government before that date. Where, by virtue of the aforesaid provision, an agreement made on or after the 1st April, 1976, is regarded as an agreement made before that date, the deduction of income-tax at source will be made on the same basis as in the case of royalties payable under agreements made before that date and explained in (b) above. (d) Royalties payable under agreements which have not been approved or which were made before the 1st April, 1961. From other royalties payable by Indian concerns to foreign companies, e.g., royalties payable under agreements which have not been approved by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.5 per cent surcharge). * In either of these cases, the deduction at the specified rate will be made with reference to the gross amount of technical service fees unless the person responsible for paying such fees has obtained a certificate under section 195(2) of the Income-tax Act, 1961, specifying the appropriate proportion of such fees chargeable under that Act and, in that case, the specified rates will be applied to the portion of the fees which is so chargeable. Further, while determining the chargeable portion of the technical service fees the Income-tax Officer will have to keep in view the provisions of new section 44D as explained in paragraph 26 of this circular. (iii) Rates for deduction of income-tax at source from "Salaries", computation of "advance tax" and charging of income-tax in special cases during the financial year 1976-77 8. Rates for deduction of income-tax at source from "Salaries" in the case of individuals during the financial year 1976-77, as also for computation of "advance tax" payable during that year in the case of all categories of taxpayers, have been specified in Part III of the First Schedule to the Finance Act. These rates are also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either case, be increased by a surcharge of 10% of such income-tax. (b) In the case of Hindu undivided families, having one or more members with independent income exceeding Rs.8,000, the rates of income-tax applicable in respect of various slabs of income are the same as those specified for the next higher slab in the case of individuals, other Hindu undivided families, unregistered firms, etc. (c) In the case of co-operative societies, registered firms and local authorities, the rates of income-tax remain at the existing levels. 9.2 No separate rate schedule has been specified in the case of Life Insurance Corporation of India. This is in view of the position that the basis of taxation of profits from life insurance business has been modified and the rate of income-tax to be charged on the profits and gains of the life insurance business determined on the modified basis has been laid down in new section 115B of the Income-tax Act. These changes have been explained in paragraphs 37 and 40 of this circular. 9.3 In the case of other companies, the rates of income-tax, as also surcharge thereon, have been specified in Paragraph E of Part III of the First Schedule to the Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income-tax Act for payment of advance tax, the Income-tax Officer will take into account the full amount of surcharge on income-tax payable by the company and where the company makes any deposit with the IDBI, the order made by the Income-tax Officer under section 210, as also the notice of demand issued in pursuance thereof, shall have effect as if the surcharge on income-tax specified therein had been reduced by the amount of deposit made by the company. Where the advance tax is paid by the company on the basis of its own estimate, the company will not be required to pay surcharge on income-tax to the extent of the deposit made by it with IDBI. 10.2 It has also been provided that a company may make a deposit with the IDBI under a scheme to be notified by the Central Government in this behalf at any time during the financial year 1976-77 and if it does so, the surcharge on income-tax payable by it for the assessment year 1977-78 shall be reduced by the amount of the deposit so made. In this connection, it may be noted that the abatement in the liability towards surcharge on income-tax will be limited to the amount of deposit made during the financial year 1976-77 and the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom income by way of interest paid on or after that date and for assessment of such income for the assessment year 1977-78 and subsequent years. [Section 3(a) of the Finance Act]. Definition of "rate or rates in force" or "rates in force" - Section 2(37A). 13.1 The definition of the expression "rate or rates in force" or "rates in force" in clause (37A) has been amended in the context of the special rates of income-tax specified in sections 115A and 115B for the purpose of taxation of income by way of dividends, royalty and technical service fees received by foreign companies under approved agreements made by such companies with Indian concerns on or after the 1st April, 1976, and for the purpose of taxation of profits and gains of life insurance business. The effect of this amendment will be that in computing the advance tax payable by foreign companies, the tax on income by way of dividends, royalty and technical service fees received by foreign companies under such agreements as also on profits and gains of the insurance business in the case of all categories of taxpayers will be calculated in accordance with the provisions of the new sections 115A and 115B of the Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for any purpose in India. (c) Interest payable by a non-resident in respect of any debt incurred, or money borrowed and used, for the purposes of a business or profession carried on by him in India. It may be noted that interest payable by a non-resident in respect of any debt incurred, or moneys borrowed and used, for the purposes of making or earning any income from any source, other than a business or profession carried on by him in India, will not be deemed to accrue or arise in India. Thus, if a non-resident 'A' borrows moneys from a non-resident 'B' and invests the same in share of an Indian company, interest payable by 'A' to 'B' will not be deemed to accrue or arise in India. Similarly, if a lead bank obtains loans outside India from a consortium of foreign banks and lends the same to an Indian concern, interest paid by the lead bank to the members of the consortium will not attract liability towards income-tax in India. 14.3 The aforesaid amendment has come into force with effect from the 1st June, 1976, and is accordingly applicable for the deduction of income-tax at source from income by way of interest paid on or after that date and for assessment of such income f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made before 1st April, 1976, will not be deemed to accrue or arise in India, and for this purpose, an agreement made on or after 1st April, 1976, will be deemed to have been made before that date if the following conditions are fulfilled:- (i) in the case of a taxpayer other than a foreign company, if the agreement is made in accordance with proposals approved by the Central Government before that date; (ii) in the case of a foreign company, if the conditions referred to in (1) above is satisfied, and the foreign company exercises an option by furnishing a declaration in writing to the Income-tax Officer that the agreement may be regarded as having been made before the 1st April, 1976. The option in this behalf will have to be exercised before the expiry of the time allowed under section 139(1) or section 139(2) (whether fixed originally or on extension) for furnishing the return of income for the assessment year 1977-78 or the assessment year in which the royalty income first became chargeable to tax, whichever assessment year is later. The option so exercised will be final not only for the assessment year in relation to which it is made but also for every subsequent year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sident if the payment is relatable to a business or profession carried on by him in India or to any other source of his income in India. 16.3 The expression fees for technical services" has been defined to mean any consideration (including any lump sum consideration) for the rendering of managerial, technical or consultancy services, including the provision of services of technical or other personnel). It, however, does not include fees of the following types, namely:- (i) Any consideration received for any construction, assembly, mining or like project undertaken by the recipient. Such consideration has been excluded from the definition on the ground that such activities virtually amount to carrying on business in India for which considerable expenditure will have to be incurred by a non-resident and accordingly it will not be fair to tax such consideration in the hands of a foreign company on gross basis or to restrict the expenditure incurred for earning the same to 20 per cent. of the gross amount as provided in new section 44D of that Act. Consideration for any construction, assembly, mining or like project will, therefore, be chargeable to tax on net basis, i.e., after al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest calculated at the rate approved by the Central Government in this behalf. [Section 19(15)(iv)(c)] In order to enable our industrial undertakings to raise loans in foreign currency even for purposes not covered by the existing provisions, a new item (f) has been inserted in sub-clause (iv) of clause 15 of section 10 so as to provide for exemption from income-tax of interest payable by an industrial undertaking in India on any moneys borrowed by it in foreign currency from sources outside India. The exemption will be available only where moneys are borrowed under a loan agreement approved by the Central Government having regard to the need for industrial development in India and will be limited to only so much of the interest as does not exceed the amount of interest paid at the rate approved by the Central Government having regard to the terms of the loan and its repayment. 18.2 The proposed amendment has come into force with effect from the 1st June, 1976, and will apply in relation to the assessment years 1977-78, and subsequent years. [Section 5(b) of the Finance Act] Exemption from income-tax of Additional Facilities Allowance received by Members of Parliament - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w-paid employees. The Finance Act has raised the aforesaid monetary limit to Rs.10,000. 21.2 The aforesaid amendment will take effect from 1st April, 1977, and will accordingly apply in relation to the assessment year 1977-78 and subsequent years. [Section 7(1) of the Finance Act] Initial depreciation allowance in respect of machinery or plant-Section 32(1)(vi) 22. The Finance Act has replaced the scheme of initial depreciation allowance by a scheme of "investment allowance". Section 32(1)(vi) has, therefore, been amended to ensure that no initial depreciation is allowed in respect of any ship or aircraft acquired after the 31st March, 1976, or any machinery or plant installed after that date. The other amendments to this section are consequential to the insertion of new section 32A in the Income-tax Act and the amendment of the Ninth Schedule to that Act as explained in later paragraphs. [Section 7(2) of the Finance Act] Investment allowance-Section 32A 23.1 As stated in the preceding paragraph, the Finance Act has replaced the scheme of initial depreciation allowance by a scheme of investment allowance. The new scheme is broadly on the lines of the development reb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iron castings." As a result of this change, alloy and S.G. iron casting will also qualify for investment allowance. (iv) New machinery or plant installed in a small scale industrial undertaking for the purposes of business of manufacture or production of any articles or things, including articles or things specified in the Ninth Schedule. For this purpose, an industrial undertaking will be regarded as a small scale industrial undertaking if the aggregate value of machinery or plant installed therein, as on the last date of the previous year, does not exceed Rs.10 lakhs (as against Rs. 7.5 lakhs for the purposes of initial depreciation allowance) and, in computing the value of such machinery for this purpose, the value of tools, jigs, dies and moulds will not be taken into account. 23.3 Development rebate was not admissible in respect of the following assets, namely:- (i) Machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house; (ii) Office appliances and road transport vehicles. Investment allowance will be inadmissable not only in respect of the assets referred to in (i) and (ii) abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebate for that assessment year was restricted to such amount as would have been sufficient to reduce the total income so computed to nil. The unabsorbed development rebate was allowed to be carried forward for a period of eight years to be set off against profits of subsequent years. In manner referred to above was a loss, no development rebate was admissible for that year and, in a case where such total income was less than the amount of development rebate otherwise admissible, the deduction was limited to such total income. The position in regard to investment allowance is broadly similar. The amount of total income with reference to which the admissibility of investment allowance has to be determined will, however, be the total income as computed after making deduction in respect of development rebate under section 33 and development allowance under section 33A but without making any deduction in respect of investment allowance or any deduction under Chapter VIA of the Income-tax Act. The combined effect of the provisions of sections 32, 32A, 33, 33A and 72 is that in a case where there are allowances in the nature of depreciation allowance, investment allowance, development reb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for acquiring new ships or new aircraft or new machinery or plant [other than machinery or plant referred to in clauses (a), (b) and (d) of the proviso to section 32A(1)] for the purposes of business of the undertaking during a period of ten previous years next following the previous year in which the ship or aircraft was acquired or the machinery or plant was installed. During the interregnum, the amount credited to the Investment Allowance Reserve Account could be utilised for any purposes of the business of the undertaking other than (a) for distribution by way of dividends or profits, or (b) for remittances outside India as profits or for creation of any asset outside India. Further, unlike the development rebate scheme, the requirement of creation of investment allowance reserve will apply even in the case of electricity companies licensed under the Electricity (Supply) Act, 1948. [As explained earlier, in a case where the total income (as computed before making any deduction in respect of development rebate under section 33 or development allowance under section 33A or under Chapter VIA of the Income-tax Act) was a loss, no development rebate was admissible for that year, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount to such account within the time allowed by the Income-tax Officer, the amount so transferred will be regarded as having been transferred to the Investment Allowance Reserve Account of the previous year in which the deduction is admissible. Such transfer will, however, not be taken into account in determining the adequacy of the reserve required to be created by the taxpayer in respect of the previous year in which such further transfer is made. This provision will, however, not apply in a case where the difference in the total income returned by the taxpayer and the total income as proposed to be computed by the Income-tax Officer arises out of the application of the proviso to section 145(1) or section 145(2) or the concealment of income by the taxpayer. 23.7 Where any of the conditions subject to which investment allowance was admissible is contravened, the investment allowance will be withdrawn by amending, under new section 155(4A), the assessment for the year in which the allowance was made. In other words, if the ship, aircraft, machinery or plant is sold or otherwise transferred, before the expiry of a period of eight years in which the ship or aircraft was acquire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure) ½ per cent or Rs. 5,000, which ever is higher ( b ) on the next Rs. 40,00,000 of such profits and gains ¼ per cent ( c ) on the next Rs. 1,20,00,000 1/8 per cent ( d ) on the balance of such profits and gains Nil. 24.2 The Finance Act has amended section 37 of the Income-tax Act in order to provide for deduction in respect of entertainment expenditure whether within or outside India within the existing ceiling limits applicable in respect of entertainment expenditure incurred outside India. The percentage limits will, however, be calculated with reference to the quantum of profits and gains of the business or profession as reduced by not only development rebate, development allowance and entertainment expenditure but also by investment allowance admissible under the new section 32A. 24.3. This amendment will take effect from the 1st April, 1977, and will accordingly be applicable in relation to the assessment year 1977-78 and subsequent years. Ceiling limit in respect of head office expenses in the case of non-residents-New Section 44C. 25.1. Non-residents carrying on any business or profession in India throu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with executive and general administration as may be prescribed by the Board. The expression "adjusted total income", "average adjusted total income" and "average head office expenditure" have been defined in the Explanation to the new section. 25.3 The aforesaid amendments have come into force with effect from 1st June, 1976, and will apply in relation to the assessment year 1977-78 and subsequent years. [Section 10(Part) of the Finance Act]. Special provision for computing income by way of royalties and technical service fees in the case of foreign companies-New Section 44D. 26.1 Hitherto, income by way of royalties received under agreements made after the 31st March, 1961, and approved by the Central Government was taxed in the hands of foreign companies at the rate of 52.5 per cent. (income-tax 50 per cent. plus surcharge 2.5 per cent.). Income by way of technical service fees received under agreements made after the 29th February, 1964, and approved by the Central Government was also taxed at the same rate. In either case, the taxable income was determined on net basis, i.e., after allowing deduction in respect of costs and expenses incurred for earning the income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ains arising on transfer of works of art, etc.-Section 47. 27.1 The Finance Act has inserted a new clause (ix) in section 47 of the Income-tax Act with a view to exempting from income-tax capital gains arising from the transfer of a capital asset, being any work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting, photograph or print, in cases where such asset is transferred by the taxpayer to the Government or a University established or incorporated by or under a Central, State or Provincial Act (including an institution declared under section 3 of the University Grants Commission Act, 1956, to be a University for the purposes of that Act) or the National Museum, National Art Gallery or National Archives. The provision will also apply in relation to capital gains arising from the transfer of works of art, etc., to any such public museum or institution as may be notified by the Central Government in the Official Gazette to be of national importance or to be of renown throughout any State or States. 27.2 The aforesaid amendment will come into force with effect from the 1st April, 1977, and will accordingly apply in relation to the assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax under the head "Income from other sources" in the case of foreign companies-Section 58. 30.1 As explained in paragraph 26 of this circular, new section 44D of the Income-tax Act has placed a ceiling limit over the deductible amount of expenditure incurred by foreign companies in earning income by way of royalties and technical service fees. The provisions of the aforesaid section will apply where income by way of royalties or technical service fees is chargeable under the head "Profits and gains of business or profession." The Finance Act has amended section 58 of the Income-tax Act to secure that the aforesaid ceiling limit is attracted even in cases where income by way of royalties or technical service fees received under approved agreements is charged to tax in the hands of a foreign company under the head "Income from other sources." 30.2 This amendment has come into force with effect from the 1st June, 1976, and will apply in relation to the assessment year 1977-78 and subsequent years. [Section 14 of the Income-tax Act]. Withdrawal of certain concessions in the case of certain Hindu undivided families-Section 80A. 31.1 The Finance Act has amended section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequent years. [Section 16 of the Finance Act] Tax concession in respect of donations made to State Housing Boards, Slum Clearance Boards, etc., and for family planning work-Section 80G. 33.1 The Finance Act has made the following amendments to section 80G of the Income-tax Act:- (i) At present an amount equal to 50 per cent. of the qualifying amount of donations made by a taxpayer to certain funds and charitable institutions is deductible in computing the taxable income of the donor. With a view to encouraging more liberal donations for the purposes of promoting family planning, an amendment has been made raising the deduction in respect of donations made to the Central Government or any State Government or to any such local authority, institution or association as is approved in this behalf by the Central Government from 50 per cent. to 100 per cent. of the qualifying amount of such donations where such donations are to be utilised by the recipient for the purpose of promoting family planning. It should be noted that whereas the percentage deduction in respect of such donations has been raised from 50 per cent. to 100 per cent. of the qualifying amount, the qualify ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by a foreign company will now be charged to tax on gross basis, i.e., without allowing any deduction whatsoever in respect of expenditure incurred for earning such income. The deduction currently available under section 80M of the Income-tax Act in respect of 65 per cent. of the dividend income derived from domestic companies is also being discontinued. Section 80M has been amended accordingly. 34.2 Under the existing law, income by way of dividends derived by domestic companies from new companies engaged in the manufacture of fertilisers, pesticides, paper, pulp and newsprint and cement is exempt from income-tax. The Finance Act has enlarged the area of this concession to include industries engaged in the manufacture of non-ferrous metals, ferro-alloys and special steels; steel castings and forgings; electric motors; industrial and agricultural machinery; earth moving machinery; machine tools; commercial vehicles; ships; tyres and tubes; heavy chemicals (including soda ash and caustic soda) and industrial explosives. 34.3 The above amendments will take effect from the 1st April, 1977, and will accordingly apply in relation to the assessment year 1977-78 and subsequent years. [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts made on or after the 1st April, 1976, will be charged to tax at 40 per cent. on gross basis, except that so much of such income as represent lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property will be charged to tax at the rate of 20 per cent. of the gross amount of such lump sum consideration. (iii) Income by way of fees for technical services received by a foreign company from an Indian concern in pursuance of an approved agreement made on or after the 1st April, 1976, will be charged to tax at the rate of 40 per cent. on the gross amount of such fees. The flat rates specified above will, however, not be applicable in relation to royalties received by a foreign company from an Indian concern in pursuance of an approved agreement made on or after the 1st April, 1976, if such agreement is regarded as an agreement made before the said date under section 9(1)(vi) of the Income-tax Act. Such royalties will be charged to tax on a net basis at the rates sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnection with any amalgamation or succession covered by sub-sections (6) and (7) of section 32A it will be open to the Income-tax Officer to amend the relevant assessment order at any time before the expiry of a period of 4 years from the end of the previous year in which the sale or transfer took place. Where the taxpayer does not utilise the amount credited to the Investment Allowance Reserve Account within a period of ten years from the end of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed for the purposes of acquiring a new ship or aircraft or machinery or plant [other than machinery or plant referred to in clauses (a), (b) and (d) of the proviso to section 32A(1)], the rectification of the original assessment order will be permissible within a period of four years from the end of the 10 years aforesaid. Where the taxpayer utilises, before the expiry of the aforesaid period of ten years, the amount credited to the Investment Allowance Reserve Account for distribution by way of dividends or profits or for making remittance outside India as profits or for any purpose other than a purpose of the business of the undertaking, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not deductible under the provisions of sections 30 to 43A in computing income chargeable under the head "Profits and gains of business or profession". 40.2 Under the amendment made by the Finance Act, the method of determining the profits on the basis of gross external incomings, as stated at (i) in the preceding paragraph has been dropped and the profits and gains of a life insurance business will, in all cases, be taken to be the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act in respect of the last inter-valuation period ending before the commencement of the assessment year, so as to exclude therefrom any surplus or deficit which was made in any earlier inter-valuation period. No further adjustment to the annual average of the surplus so arrived at will be made. In other words, no further deduction will be allowed in respect of any portion of the amount paid or reserved or expended on behalf of the policy-holders nor will the expenditure and allowances which are not deductible under the provisions of sections 30 to 43A be added back. The profits and gains of life insur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set up before the commencement of the previous year relevant to the assessment year 1976-77 provided other conditions specified in section 80HH are fulfilled. In the case of industrial undertakings which began to manufacture or produce articles during the previous year relevant to the assessment year 1976-77 as also in the case of hotels which started functioning during such previous year, the deduction will be admissible for a period of ten years. Where, however, the industrial undertaking began to manufacture or produce articles, or, as the case may be, the hotel started functioning before the commencement of the previous year relevant to the assessment year 1976-77, the deduction will be admissible for the unexpired period of ten years reckoned from the previous year in which the industrial undertaking began to manufacture or produce articles or the hotel started functioning. Thus, where the industrial undertaking was set up in the previous year relevant to the assessment year 1974-75, the deduction will be available for the assessment year 1976-77 and seven assessment years immediately following. [Section 24 of the Finance Act]. Amendment to the Ninth Schedule 42.1 The N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies (Profits) Surtax Act, 1964, provides for the levy of a special tax called "surtax" on "chargeable profits" of companies in excess of the "statutory deduction". For this purpose, the chargeable profits broadly comprise the profits as computed for the purposes of income-tax as reduced by the income-tax payable thereon. At present, the statutory deduction is Rs.2 lakhs, or 10 per cent. of the capital of the company, whichever is higher. The capital of the company is the aggregate of the following amounts :- (i) Paid-up share capital. (ii) Development Rebate Reserve. (iii) Other reserves, excluding such amounts credited thereto as have been allowed as deduction in computing the taxable income. (iv) Debentures. (v) Long-term borrowings from Government, IFCI, ICICI, banking institutions, other approved financial institutions, as well as loans raised in foreign countries. Since debentures and long-term borrowings are included in the capital base, the chargeable profits are correspondingly increased by the amount of interest paid on such debentures and borrowings. 44.2 As a result of increase in interest rates in recent years, the return on safe investments has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd declared or paid in relation to that previous year. Any interim dividend which has been paid before the commencement of the relevant previous year will, however, not be taken into account for this purpose. 45.2 This amendment has come into force with effect from the 1st April, 1975, and will, accordingly, apply in relation to the assessment year 1975-76 and subsequent years. [Section 29 (Part) of the Finance Act] AMENDMENT TO THE WEALTH-TAX ACT Exemption in respect of newly constructed small dwelling units-New section 5(1)(ivc) 46.1 The Finance Act has inserted a new clause (ivc) in section 5(1) of the Wealth-tax Act with a view to exempting from wealth-tax the value of small dwelling units the construction of which is begun on or after the 1st April, 1976. The exemption will be available in cases where the plinth area of the unit does not exceed 80 square metres and will also apply in relation to the value of the land appurtenant to the dwelling unit. The exemption will be available for a period of five successive assessment years next following the date on which the construction of the dwelling unit or units is completed. The expression "dwelling unit" and "lan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1st April, 1976, and will, accordingly, apply in relation to the assessment year 1976-77 and subsequent years. [Section 27(2)(c) and (d)(i) of the Finance Act] Exemption in respect of assets, etc., brought into India by persons of Indian origin-New section 5(1)(xxxiii). 49.1 The Finance Act has inserted a new section (xxxiii) in section 5(1) of the Wealth-tax Act to provide for exemption from wealth-tax of the moneys and value of assets brought into India by persons of Indian origin who are ordinarily residing in foreign countries in cases where such persons returned to India with the intention of permanently residing therein. The value of assets acquired by them out of the moneys brought into India will also qualify for this exemption. The exemption will be available only for seven assessment years commencing with the assessment year next following the date on which such person returns to India. For this purpose, a person shall be deemed to be of Indian origin if he, or either of his parents or any of his grandparents, was born in undivided India. 49.2 This amendment will take effect from the 1st April, 1977, and will, accordingly, apply in relation to the assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im for residential purposes may, at the option of the taxpayer, be taken to be the price which, in the opinion of the Wealth-tax Officer, it would fetch if sold in the open market on the valuation date next following the date on which he became the owner of the house, or on the valuation date relevant to the assessment year 1971-72, whichever is later. This concession will be available for an assessment year only where the house has been used by the taxpayer for residential purposes throughout the period of 12 months immediately preceding the valuation date relevant to the assessment year. If more than one house belonging to the taxpayer is used by him for residential purposes, he will have the option to specify one of such houses in his return of net wealth for the purpose. A part of a house comprising an independent residential unit will also be regarded as a house for the purposes of the new provision. 51.2 This amendment has come into force with effect from the 1st April, 1976, and will be applicable in relation to the assessment year 1976-77 and subsequent years. [Section 27(3) of the Finance Act] Reduction in the rates of wealth-tax in the case of individuals and Hindu u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 1 lakh will apply in the case of both individuals as well as Hindu undivided families. (iii) The additional wealth-tax leviable on lands and buildings situated in "urban areas" has been discontinued. 52.3 The aforesaid amendments will take effect from the 1st April, 1977, and will, accordingly, apply in relation to the assessment year 1977-78 and subsequent years. [Section 27(6)(a) of the Finance Act.] AMENDMENT TO THE GIFT-TAX ACT Exemption in respect of donations made to State Housing Boards, Slum Clearance Boards, etc. 53.1 As explained in paragraph 33.1 of this circular, the Finance Act has amended section 80G of the Income-tax Act to secure that donations made by taxpayers to State Housing Boards, Slum Clearance Boards and other statutory authorities set up for framing and execution of housing and other development schemes qualify for tax concession in the same manner as donations to charitable institutions, etc. A corresponding amendment has been made in section 5 of the Gift-tax Act to secure that donations made to such State Housing Boards, etc., are not charged to gift-tax under that Act. 53.2 This amendment will take effect from the 1st April, 197 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 1977-78 and subsequent years. [Section 42 of the Finance Act] AMENDMENT TO THE LIFE INSURANCE CORPORATION ACT, 1956 Waiving of deduction of income-tax at source from interest on securities and dividends paid to Life Insurance Corporation of India . 56.1 Under the existing provisions of the Income-tax Act, tax is required to be deducted at source from income by way of interest on securities and dividends payable to the Life Insurance Corporation of India. No deduction is, however, required to be made from interest, other than interest on securities, paid to the Corporation. The Finance Act has inserted a new section 43A in the Life Insurance Corporation Act, 1956, to provide that, notwithstanding anything contained in the Income-tax Act, income-tax will not be deducted from any interest on securities or dividends payable to the Corporation. 56.2 This amendment has come into force with effect from the 1st June, 1976. [Section 41 of the Finance Act] (Sd.) R.R. KHOSLA, Director, Central Board of Direct Taxes. - Circular - Trade Notice - Public Notice - Instructions - Office orders Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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