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TMI BlogTaxation Laws (Amendment) Act, 1975X X X X Extracts X X X X X X X X Extracts X X X X ..... n adopted child of the individual as well. The amended provision is applicable in relation to the assessment year 1976-77 and subsequent years. [Section 2 of the Amending Act] Tax exemption in respect of income of certain trusts of national importance, etc. - New section 10(23C) 3.1 The Amending Act has inserted a new clause (23C) in section 10 exempting from income-tax the income of the following funds: (a) The Prime Minister's National Relief Fund; (b) The Prime Minister's Fund (Promotion of Folk Arts); (c) The Prime Minister's Aid to Students Fund. The provision also empowers the Central Government to grant exemption from income-tax by notification in the official Gazette in respect of- (a) any other fund or institution established for charitable purposes, having regard to its objects and importance throughout India or throughout any one or more States; and (b) any trust or institution, which is either wholly for public religious purposes or wholly for public religious and charitable purposes, and which is administered and supervised in a manner so as to ensure that its income is properly applied for its purposes. 3.2 The tax exemption granted to the funds o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h purposes in the year in which such income is received or in the previous year next following. Thus, in a case where the income derived in a previous year amounted to Rs.1 lakh out of which an amount of Rs.40,000 was not received during the previous year, the person in receipt of the income could obviously not apply Rs. 75,000 to such purposes. In such a case if an amount of not less than Rs.60,000 has actually been applied to such purposes in the year in which the income of Rs.1 lakh was derived, the deficiency could be made up in the year in which balance of income is received or in the previous year next following. For availing of the benefit of the extended time beyond the relevant previous year, the trust or institution will, in either case, have to exercise an option in writing under clause (2) of the Explanation to section 11(1) within the time allowed under sub-section (1) or sub-section (2) of section 139 for furnishing the return of income, whether fixed originally or on extension. Income applied to such purposes during the extended time shall be deemed to have been applied to such purposes during the previous year in which it was derived. 2. Where, in the previous yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1976-77 and subsequent years. [Section 4 of the Amending Act] Amendments to section 13 5. Section 13 spells out certain circumstances in which the exemption provided under section 11 or section 12 in respect of income from property held under trust for charitable or religious purposes will not be available. The Amending Act has made a number of amendments to this section. These are briefly explained in paragraphs 6 to 8 below. 6. According to the definition contained in clause (15) of section 2, the expression "charitable purpose" includes (a) relief of the poor, (b) education, (c) medical relief, and (d) advancement of any other object of general public utility not involving the carrying on of any activity for profit. The effect of the words in italics above is that a trust or institution established for the advancement of any object of general public utility, other than relief of the poor, education or medical relief, can be said to have been established for charitable purposes only if its object does not involve the carrying on of any activity for profit. Such a restriction does not obtain in the case of trusts established for relief of the poor, education and medical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presented by corpus coming into existence on or after 1-6-1973 and being either the original corpus or contributions with a specific direction to form part of the corpus, but not in the form of cash; (c) funds represented by corpus coming into existence on or after 1-6-1973 and being either original corpus or contributions made with specific direction to form part of the corpus, in the form of cash; (d) funds other than those represented by the corpus referred to in (a), (b) and (c) above. 7.4 Funds of the type mentioned at (a) and (b) in para 7.3 above have been grouped into one category and clause (b) of section 13(5) provides that they may be invested or deposited in any form or mode except in equity shares of a company which is neither a Government company nor a statutory corporation. In other words, in respect of these funds there is no restriction regarding their investment except that they should not be in the form of equity shares of a company which is neither a Government company nor a statutory corporation. It may be noted that these provisions do not prohibit investment in the form of preference shares of companies in the private sector. 7.5 The funds of the type ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ategories of persons specified therein consists of those who have made a "substantial contribution" to the trust or institution. The expression "substantial contribution" was not defined by the Income-tax Act so far. The new clause (b) of section 13(3) states that a person whose total contribution to the trust up to the end of relevant previous year exceeds Rs.5,000, shall be treated as a person who has made a "substantial contribution". The amount of Rs.5,000 will be reckoned from the date on which the trust or institution is created or established. The object of this provision is to give a precise definition of the term "substantial contribution" rather than leaving it to varying interpretations by various authorities. The amended provision will apply in relation to the assessment year 1977-78 and subsequent years. [Section 5(i)(b) and section 5(iii) of the Amending Act] Determination of annual value where the rent received exceeds the municipal valuation - Section 23(1) 9. Hitherto, the annual value of house property chargeable to income-tax under the head "Income from house property" was deemed to be the sum for which the property might reasonably be expected to let fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from the property is to be included in his total income. As mentioned earlier, sub-section (2) of section 23 provides for a concessional tax treatment in respect of income from self-occupied property. The new Explanation to section 26 provides that where a property is used by co-owners for self-residence, each such co-owner will be individually entitled to the concessional tax treatment under sub-section (2) of section 23. This amendment has come into force with effect from 1-4-1976 and, accordingly, applies in relation to the assessment year 1976-77 subsequent years. [Section 7 of the Amending Act] Amendment in the provision relating to depreciation allowance on ships - Section 32(1)(i) 12. Section 32 provides for depreciation allowance on various types of assets used for the purposes of a business or profession, carried on by an assessee. Clause (i) of sub-section (1) of section 32 provided that in the case of a ship, depreciation will be allowed at such percentage on its actual cost to the assessee as may be prescribed in any case or class of cases. The provision as now amended will enable the Board to prescribe, having regard to the date of purchase of ships, differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.2,50,000 during the previous year. 14.3 Under sub-section (3) of section 44AA, the Board has been empowered to prescribe, by rules, the books of account and other documents to be kept and maintained, having regard to the nature of the business or profession carried on by any class of persons and the form and the manner in which and the place at which they shall be so kept and maintained. Under sub-section (4), the Board has been empowered to prescribe, by rules, the period for which the books of account and other documents are to be retained. 14.4 Section 44AA has come into force with effect from 1-4-1976. The requirement contained in sub-sections (1) and (2) of this section regarding maintenance of books of account and documents will, therefore, apply in relation to books of account, etc., for accounting years commencing on or after that date. [Section 11 of the Amending Act] Amendment of the provision relating to cost of acquisition for the purpose of computing capital gains - Section 49 15. The income chargeable under the head "Capital gains" is computed after deducting from the full value of the consideration received as a result of the transfer of the capital as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion (1) of section 64 is a new clause which provides that where the spouse of an individual derives any income by way of salary, commission, fees or any other form of remuneration from a concern in which the individual has a substantial interest, such income will be included in computing the total income of the individual. An exception has, however, been provided in cases where the spouse in receipt of such income possesses technical or professional qualifications and the income is solely attributable to the application of his or her technical or professional knowledge and experience. 16.3 For the purpose of this provision, an individual will be deemed to have substantial interest in a concern, if: (a) where the concern is a company, at any time during the previous year, its shares (not being shares entitled to a fixed rate of dividend) carrying not less than twenty per cent of the voting power are owned beneficially by such individual or partly by him or partly by one or more of his relatives; (b) in any other case, such individual is entitled, or such individual and one or more of his relatives are entitled, in the aggregate, to twenty per cent or more of the profits of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the amount is borrowed or repaid. Where any amount borrowed is assessed as the borrower's income under this provision, it will not be assessed again in his hands under this provision, on repayment of that amount. The requirement contained in the provision will apply also to the amount of interest paid on the amount borrowed on hundi. 18.2 The term "hundi" which has not been defined in the Income-tax Act, denotes, in common commercial parlance, an indigenous instrument in vernacular language which can be used by the holder thereof to collect money due thereon without using the medium of currency. It may also be regarded as an indigenous form of a bill of exchange expressed in vernacular language which has been in use in the mercantile community in India for the purpose of collecting dues. There are numerous varieties of hundis, for example, darshani hundi, muddati hundi, shahajogi hundi, jokhmi hundi, namjog hundi, dhanijog hundi, jawabi hundi and zickrichit. The characteristics of hundis will differ according to the variety of the same. It may, however, be mentioned here that the characteristics of a hundi resemble almost all the characteristics of a bill of exchange. The foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h effect from 1-4-1977 and will apply in relation to the assessment year 1977-78 and subsequent years. [Section 15 of the Amending Act] Deduction to be made in computing total income - Section 80A 20. Two amendments have been made to section 80A. They are both of a consequential nature. The amendment to sub-section (1) is in consequence of insertion of two new sections 80V and 80VV by section 26 of the Amending Act, regarding deduction of interest on money borrowed to pay taxes and allowance of expenses incurred in connection with income-tax proceedings, respectively. The second amendment is to sub-section (3) which is in consequence of omission of section 80H by section 20 of the Amending Act. [Section 16 of the Amending Act] Amendment to section 80B 21. This section contains definitions of the terms used in Chapter VIA. Through the amendment, clauses (1) and (9) have been omitted. This amendment is consequential to the omission of section 80H by section 20 of the Amending Act. [Section 17 of the Amending Act] Deduction in respect of donations to certain funds, charitable institutions, etc. - Section 80G 22.1 Section 80G provides that in computing the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax (Fourth Amendment) Rules, 1976 notified by the Board under Notification No. SO 275(E), dated 1-4-1976, a new rule 11B has been inserted in the Income-tax Rules, 1962, prescribing the condition for allowance of deduction under section 80GG. The new rule states that the deduction to be allowed under section 80GG in respect of any expenditure incurred by an assessee towards payment of rent for any furnished or unfurnished accommodation occupied by him for the purposes of his own residence will be allowed subject to the condition that the accommodation is situated in any of the following places, namely: Agra, Ahmedabad, Allahabad, Amritsar, Bangalore, Bombay, Calcutta, Cochin, Coimbatore, Delhi, Hyderabad, Indore, Jabalpur, Jaipur, Kanpur, Lucknow, Madras, Madurai, Nagpur, Patna, Poona, Sholapur, Srinagar, Surat, Trivandrum, Vadodara (Baroda) and Varanasi (Banaras). [Section 19 of the Amending Act] Deduction in case of new industrial undertakings employing displaced persons, etc. - Section 80H 24. Section 80H provided that in computing profits and gains derived from an industrial undertaking employing displaced persons, etc., and fulfilling certain conditions, an amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mits references to section 80H from section 80QQ. [Section 25 of the Amending Act] Deduction in respect of interest on moneys borrowed to pay taxes - New section 80V 30. Section 80V provides for deduction in respect of interest paid by the assessee in the previous year on money borrowed for payment of income-tax payable under the Income-tax Act. The object of this provision is to encourage taxpayers to pay their taxes promptly, even by borrowing. [Section 26 (Part) of the Amending Act] Deduction in respect of expenses incurred In connection with proceedings under the Act - New section 80VV 31.1 In the case of a taxpayer having income from business, the expenses incurred by him in connection with his assessment proceedings are allowed to be deducted in computing his taxable income. Under the newly inserted section 80VV, provision has been made to allow to all taxpayers, having income from any source, deduction of expenditure incurred by them in respect of any proceedings before the income-tax authorities or the Appellate Tribunal or any court, relating to the determination of any liability under the Income-tax Act by way of taxes, penalty or interest. There is, how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnical know- how, to other persons. In the case of investment companies and the remaining companies covered by section 104, the statutory percentage will continue to be 90 per cent and 60 per cent respectively as at present. In the case of a company which derives only a part of its gross total income from the provision of technical know-how or construction of ships or manufacture or processing of goods, etc., the statutory percentage in relation to the said part of its gross total income would be 45 per cent. [Sections 27 and 28 of the Amending Act] Return of income - Section 139 33. Sub-section (6) of section 139 has been amended to empower the Board to call for information in the return of income, in such cases as may be prescribed, regarding the income exempt from tax assets of prescribed nature and value and particulars of expenditure under prescribed heads and exceeding prescribed limits and such other outgoings. The amendment made in sub-section (2) of section 139 is consequential to the amendment made in section 142(1) under section 43 of the Amending Act. [Section 38 of the Amending Act] Permanent account numbers - New section 139A 34.1 The new section 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the taxpayers. It is also intended to enable cross check of information received with the information furnished by the taxpayers with regard to the transactions relating to their business, investments, etc. [Section 39 of the Amending Act] Return by whom to be signed - Section 140 35. Clauses (c) and (d) of section 140 have been substituted by three new clauses. The new provisions lay down that in the case of a company, the return of income shall be signed by the managing director, and where for any unavoidable reason the managing director is not able to sign the return or there is no managing director, by any other director. In the case of a firm, the return shall be signed by the managing partner or where there is no managing partner or where he is not able to sign for any unavoidable reason, the same may be signed by any other partner (not being a minor). The object of this provision is to ensure that the returns of income are signed by the persons mainly responsible for the affairs of the company or the firm and that such persons are not able to avoid the penal consequences of tax fraud. The amended provisions have come into force with effect from 1-4-1976 and will, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e served after the issue of a notice under section 139(2) without having to wait for the service of the notice on the assessee. The object of this amendment is to expedite the issue of notice under section 142(1) calling for books of account, etc., in cases in which returns have not been filed voluntarily. [Section 43(i) of the Amending Act] Audit in certain cases - New sub-sections (2A), (2B), (2C) and (2D) of section 142 39.1 New sub-sections (2A), (2B), (2C) and (2D) have been inserted in section 142 empowering the Income-tax Officer to direct an assessee to get his accounts audited. Under sub-section (2A), the Income-tax Officer has been empowered to direct an assessee, in a case where the nature and complexity of the accounts and the interests of the revenue so require, to get his accounts audited by a chartered accountant had furnish a report of such audit in the prescribed manner. Such a direction can, however, be issued only with the prior approval of the Commissioner. The chartered accountant for the purposes of conducting the audit is also to be nominated by the Commissioner. 39.2 The expenses of, and incidental to, such an audit (including audit fee) are to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is attributable to the assessee is to be excluded. The amended provision will apply in respect of applications filed on or after 1-4-1976. [Section 46 of the Amending Act] Rectification of mistake - Section 154 42. The amendment to section 154 is consequential to the amendment made in section 274 by section 65 of the Amending Act. [Section 48 of the Amending Act] Discontinued business - Section 176 43. Sub-section (4) of section 176 provides that any sum received after the discontinuance of a profession will be treated as income of the recipient in the year of receipt if it would have been included in the total income of the person who carried on the profession, had it been received before such discontinuance. The new sub-section (3A) inserted by the Amending Act provides for a similar treatment to be given to a sum received after discontinuance of a business. The provision will apply in relation to the assessment year 1976-77 and subsequent years. [Section 49 of the Amending Act] Procedure on receipt of application for registration of a firm - Section 185 44.1 The Explanation to section 185(1) has been amended to provide that if a partner in a firm i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... members of the Settlement Commission, in addition to their duties as members of the Board. Application for settlement of cases - New section 245C 48.1 An application for settlement of cases can be made by an assessee at any stage of his case. Keeping in view the definitions given in section 245A, it follows that a settlement application can be filed only while a proceeding under the 1961 Act or the 1922 Act, for or in connection with an assessment or reassessment is pending before any Director of Inspection, Commissioner, Assistant Commissioner or Income-tax Officer. (There is a special provision in respect of proceedings pending before the Tribunal which is explained in paragraph 58 below.) Thus, where an assessment has been made and the assessee has filed an appeal to the Appellate, Assistant Commissioner of Income-tax against the same, it will still be open for him to make an application for settlement. Similarly, in the course of proceedings initiated for reassessment, the assessee will be entitled to make an application for settlement. In case, however, no proceeding is pending before any income-tax authority, no application for settlement will lie. 48.2 An applicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation but also any other matter relating to the case which is referred to in the Commissioner's report. The order will provide for the terms of settlement, including any demand by way of tax, penalty or interest, and the manner of payment of the sum due under the settlement, etc. The order will also provide that the settlement will be void if it is subsequently found to have been obtained by fraud or misrepresentation of facts. 49.4 Before the order of settlement is passed, the materials brought on record before the Settlement Commission will be considered by all its members and in case there is a difference of opinion among the members, the order will be based on the majority decision. In case the settlement becomes void on being found to have been obtained by fraud or misrepresentation of facts, the proceedings with regard to the matters covered by the settlement will be deemed to have been revived from the stage at which the application was allowed to be proceeded with. The provisions relating to period of limitation laid down by section 153 will not be applicable to such a case and a period of two years from the end of the financial year in which the settlement became void wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax authority to the Settlement Commission, the Settlement Commission has been given full discretion to allow inspection of such reports or to furnish copies thereof to the applicant on an application and on payment of the prescribed fee. In case, however, some evidence has been brought on record against the applicant in any report furnished by the income-tax authority, he will be entitled to obtain a certified copy of any such report or part thereof on making an application to the Settlement Commission and on payment of the prescribed fee. The provision is intended to enable the applicant to rebut the evidence against him. 52.2 The scale of fees for the above purposes has been prescribed under rule 44D newly inserted in the Income-tax Rules, through the Income-tax (Third Amendment) Rules, 1976 notified under Board's Notification No. SO 266(E), dated 31-3-1976. Powers of Settlement Commission to grant immunity from prosecution, etc. - New section 245H 53.1 The Settlement Commission has been given the power to grant immunity to the applicant from prosecution as also from imposition of penalty. The immunity from prosecution may relate to any offence under the Income-tax A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been placed on a person who is subsequently convicted of any offence under Chapter XXII in relation to the same case in respect of which an order of settlement under section 245D(4) was passed by the Settlement Commission. Proceedings before the Settlement Commission to be judicial proceedings - New section 245L 57. This section provides that all the proceedings under this Chapter before the Settlement Commission will be deemed to be judicial proceedings within the meaning of sections 193 and 228 and for the purposes of section 196 of the Indian Penal Code. Certain persons who have filed appeals to the Appellate Tribunal entitled to make application to the Settlement Commission - New section 245M 58.1 This provision enables an assessee whose appeal is pending before the Tribunal to approach the Settlement Commission for settlement of his case. Such a person is required first to make an application to the Appellate Tribunal seeking its permission to withdraw the appeal. The Appellate Tribunal is required to allow all such applications. The assessee is, thereupon, required to file his application for settlement before the Settlement Commission within thirty days of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng effect to the provisions of sections 11 and 12, sub-section (4A) of section 139 casts an obligation on the person in receipt of such income to file a return if the income without giving effect to the provisions of sections 11 and 12 exceeds the exemption limit. Since the quantum of penalty for default in filing the return was to be calculated with reference to the amount of tax payable, no penalty for default in filing the return under section 139(4A) could be levied in cases where no tax was payable after giving effect to the provisions of sections 11 and 12. The amended provision provides for levy of penalty in such cases in a sum not exceeding one per cent of the total income of the trust (without giving, effect to the provisions of sections 11 and 12) for each year of default or part thereof. 61.4 Hitherto, under section 271(1)(i), there was a ceiling of 50 per cent of assessed tax on the penalty for non-filing or late filing of returns in the case of assessees other than charitable or religious trusts or institutions. This ceiling has now been removed. Attention is invited in this connection, however, to paragraph 61.12. 61.5 Hitherto, a person was liable under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which the deposit was made as there was no concealment in that year, the deposit having been explained as out of an earlier year's income. New Explanation 2 provides that in such cases, the assessee would become liable to penalty for concealment in respect of additions made in the earlier year in which the additions were made. 61.10 New Explanation 3 provides that if a person, who has not hitherto been assessed to tax under the 1961 Act or the 1922 Act, does not file a return of income for an assessment year voluntarily within the normal period of limitation and no notice under sections 139(2) and 148 is issued to him till the expiry of the said period, he will be treated to have concealed his income and penalty will be leviable on him accordingly if he is later found to have had taxable income in that year. The provision will be applicable in respect of defaults in filing the return for the assessment year 1974-75 and subsequent years. 61.11 New Explanation 4 defines "the amount of tax sought to be evaded". According to the definition, this expression will ordinarily mean the difference between the tax on the total income assessed and the tax that would have been chargeable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amended provision will be imposable in respect of the assessment year 1974-75 and subsequent years. [Section 61 (Part) of the Amending Act] Failure to keep, maintain or retain books of account, documents, etc. - New section 271A 62. This section has been inserted to provide for penalty for failure to keep and maintain books of account, etc., and for not retaining them for the prescribed period. As explained in paragraphs 14.1 and 14.2 of this circular assessees falling in certain categories are required to maintain such books of account and other documents as may enable the Income-tax Officer to compute their total income in accordance with the provisions of the Income-tax Act. The Board has also been given the power to prescribe, through rules, the books of account, documents, etc., to be maintained by any class of taxpayers. The Board has been empowered to prescribe the period for which the books of account are to be retained. In case of default in complying with these provisions, the assessee will be liable to a penalty which shall not be less than 10 per cent but not more than 50 per cent of the tax which would have been avoided if the income returned had been accepte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re to make payments or deliver returns, etc. - Section 276 66. This section provided for imposition of fine on prosecution of a person by the court. Section 63 of the Amending Act has inserted a new section 272A (explained in para 63 above) through which such fines have been replaced now by penalties which can be imposed by income-tax authorities. Section 276 has, therefore, been omitted. [Section 67 of the Amending Act] Failure to produce books of account and documents - Section 276D 67. This section provides that in cases of failure of an assessee to produce the books of account, documents, etc., that may be called for by the Income-tax Officer by a notice issued under section 142(1), the assessee will be liable to punishment with rigorous imprisonment for a term which may extend to one year or with fine or with both. The amendment provides that the failure on the part of the assessee to comply with the direction for audit of accounts issued under section 142(2A) will also render him liable to the said punishment. [Section 69 of the Amending Act] Information by contractors in certain cases - Section 285A 68.1 The existing provision in this section requires c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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