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TMI BlogThe Finance (No. 2) Act, 1980--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 ..... uch deduction under the Income-tax Act and the rates for computation of advance tax" and charging of income-tax on current incomes in certain cases for the financial year 1980-81. 2. Amendment of the Income-tax Act, 1961 with a view to providing greater incentive for savings and investment; promoting research and development activities; plugging certain loopholes for tax avoidance through the medium of Hindu undivided family and private trusts; simplifying the assessment procedure for summary assessments; providing for tax relief in certain cases; overcoming the effect of certain court decisions resulting in unintended benefit in some cases; modifying the scheme of advance tax in the case of companies and providing for a few other matters. 3. Amendment of the Wealth-tax Act, 1957 with a view to raising the exemption limit; plugging loopholes for tax avoidance through the medium of Hindu undivided family and private trusts; discontinuing the levy of wealth-tax on agricultural property other than property comprised in tea, coffee, rubber or cardamom plantations and providing for a few other matters. 4. Amendment of the Gift-tax Act, 1958 with a view to plugging a loophole for tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rates for deduction of income-tax at source during the financial year 1980-81 from incomes other than "salaries" and "retirement annuities", payable to partners of registered firms engaged in specified professions, have been specified in Part 11 of the First Schedule to the Finance Act. These rates apply to income by Way of interest on securities, other categories of interest, dividends, insurance commission, winnings from lotteries and crossword puzzles, winnings from horse races and other categories of non-salary income of non-residents. As explained later in this circular, the rate of surcharge on income-tax in the case of non-corporate taxpayers has been reduced from 20 per cent to 10 per cent of the income-tax. Consequently, the rates for deduction of income-tax at source during the financial year 1980-81 differ from the rates specified in Part 11 of the First Schedule to the Finance Act, 1979 for purposes of deduction of tax at source from such incomes during the financial year 1979-80 in certain respects as explained below: 1. Payments to residents other than companies - (i) In the case of income by way of winnings from lotteries and crossword puzzles and income by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s higher than 33 per cent, tax will be deducted at such higher rate. In respect of interest on a tax-free security payable to a non-corporate non-resident assessee, the rate for deduction will be 16.5 per cent, made up of income-tax of 15 per cent and surcharge of 1.5 per cent (being 10 per cent of the income-tax). 3. Payments to domestic companies - In the case of income by way of interest other than "interest on securities" payable to domestic companies during the financial year 1980-81, income-tax will be deductible at the rate of 21.5 per cent, made up of income-tax of 20 per cent and surcharge of 1.5 per cent (being 7.5 per cent of the income-tax). Further in the case of any other income (excluding interest payable on a tax-free security). payable to domestic companies during the financial year 1980-8 1, tax will be deductible at the rate of 23 per cent, made up of income-tax of 21.5 per cent and surcharge of 1.5 per cent. It will be seen that the rate for the deduction of income-tax at source from dividends payable to domestic companies is the same as the rate at which income-tax is deductible at source from dividends payable to resident non-corporate assessees. 4. Payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith independent income exceeding the, exemption limit; d. modification of the provision for calculating income-tax in cases where the assessee has any net agricultural income in addition to total income. The modifications in regard to the above matters are explained in paragraphs 5.2 to 5.5 of this circular. 5.2 Raising of the exemption limit - The exemption limit in the case of individuals, Hindu undivided families, unregistered firms, associations of persons, bodies of individuals and artificial juridical persons has been raised from Rs. 10,000 to Rs. 12,000. It is relevant to note that although the rate schedule in the case of individuals, Hindu undivided families.(other than those liable to income-tax at higher rates), unregistered firms, etc.(including nil rate slab of income up to Rs. 8,000) has not been changed, a provision has been made in clause (i) of the proviso below Sub-Paragraph I of Paragraph A of Part IH of the First Schedule to the Finance Act to the effect that no income-tax will be payable in cases where the total income of the assessee does not exceed Rs. 12,000. In order to avoid hardship in cases where the total income of the assessee exceeds Rs. 12,000 by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1980 Rupees Per cent Per cent Below 8,000 Nil Nil 8,001—15,000 18 22 15,001—20,000 25 27 20,001—25,000 30 35 25,001—30,000 40 40 30,001—50,000 50 50 50,001—70,000 55 60 Over 70,000 60 60 5.5 Modification of the provision for calculating income-tax in cases where the assessee has any net agricultural income in addition to total income - The net agricultural income is to be computed in accordance with the rules contained in Part IV of the First Schedule to the Finance Act. The mode of computation of the net agricultural income under these provisions is the same as in the relevant provisions of the Finance Act, 1979, except for the following modifications, namely:- 1. The net agricultural income will be taken into account for determining the advance tax payable by an assessee or for determining the income-tax payable in cases where accelerated assessments are to be made during the financial year 1980-81 only if such net agricultural income exceeds Rs. 600. Where the net agricultural income exceeds Rs. 600, the whole of such net agricultural income shall be taken into account for the purpose. 2. The unabsorbed loss in agriculture incurred during the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of India for the welfare of the ill present and past members and their dependents. These Funds include Benevolent Funds, Charitable Funds, Child Welfare Funds, Children's School Funds, etc. The Funds set up by the Army are generally known as Regimental Funds and those by the Navy and Air Force are called Non-Public Funds. A new clause (23AA) has been inserted in section 10 to provide for exemption from income-tax in respect of the income of the Regimental Funds or Non- Public Funds established by the armed forces of the Union for the welfare of the past and present members of such forces or their dependents. 7.2 This provision has been made with retrospective effect from 1st April, 1962, i.e., from the commencement of the Income-tax Act, 1961 and is accordingly applicable in relation to the assessment year 1962-63 and subsequent years. [Section 4 of the Finance Act] Extension of benefit of standard deduction to pensioners - Section 16(i) 8.1 Under section 16, a standard deduction in respect of expenditure incidental to employment is allowed in computing the income of an assessee under the head "Salaries". The standard deduction is allowed in an amount equal to 20 per cent of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar Plan period, the Finance Act has inserted a new clause (iia) in sub-section (1) of section 32 to provide for a further deduction in respect of additional depreciation in respect of new machinery or plant installed in certain cases. The main points to be noted in regard to this provision are as follows, namely: 1. Additional depreciation will be admissible in respect of new machinery or plant installed after 31 st March, 1980 but before 1st April, 1985. For this purpose, the expression "new machinery or plant" will have the same meaning as in clause (2) of the Explanation below clause (vi) of section 32(1) and will, accordingly, include second-hand machinery or plant imported from a foreign country if the following conditions are fulfilled, namely: a. such machinery or plant was not, at any time, prior to the date of its installation by the assessee, used in India; b. such machinery or plant is imported into India from any country outside India; and c. no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of the 1922 Act or the 1961 Act, in computing the total income of any person for any period pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -the actual cost of the qualifying machinery or plant. 6. Additional depreciation will not be admissible if the machinery or plant is sold, discarded, demolished or destroyed in the previous year. 7. Where the machinery or plant is not exclusively used for the purposes of the business or profession, the additional depreciation, as in the case of normal depreciation, will be restricted to a fair proportionate part which the Income-tax Officer may determine having regard to the user of such machinery or plant for the purposes of the business or profession. & The provisions of section 32(2) relating to set off and carry forward of depreciation allowance shall apply in relation to additional depreciation admissible under the new clause (iia) of section 32(1) as they apply in relation to normal or initial depreciation allowance admissible under clauses (i), (ii), (iv), (v) and (vi) of that section. 9.4 These provisions will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. [Section 6 of the Finance Act] Deduction of capital expenditure on scientific research - Section 35 10.1 The Finance Act has made a f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oved laboratories is allowed where such expenditure is incurred on a programme approved by the prescribed authority having regard to the social, economic and industrial needs of India. The Finance Act has amended the said sub-section (2A) so as to extend its scope to cover expenditure incurred on sponsored research carried out in the in-house research and development facilities of public sector companies. For this purpose, the expression 'public sector company" has the same meaning as in clause (1)) of the Explanation below sub-section (2B) of section 32A. In other words, "public sector company"means any corporation established by or under any Central or State or Provincial Act or a Government company as defined in section 617 of the Companies Act, 1956. The term "Government company as defined in the said section 617 means any company in which not less than 51 per cent of the paid-up share capital is held by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a Government company as thus defined. 2 A new sub-section (2B) has been inserted in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year 1981-82 and subsequent years. [Section 7 of the Finance Act] Modification of the provisions relating to the export markets development allowance - Section 35B 11.1 Under section 35B, domestic companies and non-corporate assessees resident in India are entitled to a weighted deduction in the computation of their taxable profits at the rate of one and one-third times the amount of the qualifying expenditure incurred by them on the development of export markets. The weighted deduction under this provision is allowed with reference to expenditure on the following activities: 1. Advertisement or publicity outside India in respect of the goods, services or facilities dealt in or provided by the assessee in the course of his business. 2. Obtaining information regarding markets outside India for such goods, services or facilities. 3. Distribution, supply or provision outside India of such goods, services or facilities, where such expenditure is incurred before 1st April, 1978. [Expenditure incurred in India in connection with these activities or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or provides in the course of his business. 2. Maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities. 3. Travelling outside India for the promotion of the sale outside India of such goods, services or facilities, including travelling outward from and return to India. 4. Such other activities for the promotion of the sale outside India of such goods, services or facilities as may be prescribed in the Income-tax Rules. (No rules have so far been framed in this regard.) Sub-clauses (ii), (iii), (v) and (viii) of clause (b) of section 35B(1) have accordingly been omitted. 11.4 Further, the Finance Act has substituted another Explanation for Explanation 2 below clause (b) of section 35B(1) with a view to clarifying that any expenditure which, by its very nature, is debitable to the trading account or a manufacturing account of a business, such as, wages to labourers, purchase of raw materials, carriage inward, etc., will not qualify for the weighted deduction. 11.5 These amendments will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requirements of sub-sections (1) and (3) of section 37 read with rule 6B of the Income-tax Rules. 13.2 This amendment will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. [Section 10 of the Finance Act] Balancing charge in respect of assets represented by capital expenditure eligible for weighted deduction under new sub-section (2B) of section 35 - Section 41 14.1 As explained in item (ii) of paragraph 10.3 of this circular, a new sub-section (2B) has been inserted in section 35 under which a weighted deduction will be allowed in an amount equal to one and one-fourth times the expenditure incurred by an assessee on scientific research undertaken by him under a programme approved in this behalf by, the prescribed authority having regard to the social, economic and industrial needs of India. Under this provision, capital expenditure incurred on the purchase of machinery and equipment would, in some cases, qualify for the weighted deduction. The Finance Act has made two consequential amendments in section 41. In a case where such machinery or equipment used for the purpose of business after it ceased to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustrial explosives. In respect of other dividends received by a domestic company from any other domestic company, the deduction is allowed at the rate of 60 per cent of such dividend income. 15.2 The income by way of dividends is charged to tax under the head "Income from other sources" and is computed after making the deduction, firstly, in respect of any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purposes of realising such dividends on behalf of the company and, secondly, in respect of any other expenditure, not being capital expenditure, laid out or expended wholly or exclusively for the purpose of making or earning such income, e.g., interest paid on borrowings utilised for the purchase of shares, etc. 15.3 In computing the total income of the assessee, the deduction specified in section 80M is allowed from the "gross total income". For this purpose, "gross total income" means the total income computed in accordance with the provisions of the income-tax Act before making any deduction under Chapter VIA. The income by way of dividends computed in accordance with the provisions of the Income-tax Act, i.e., after allowing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment for which the Supreme Court has given a judgment adverse to the Revenue on an appeal or reference made to that Court. The saving provision will not, therefore, apply in relation to cases where neither the assessee nor the Commissioner of Income-tax had gone up in appeal or reference to the Supreme Court. Persons who entered only as interveners will not, therefore, be eligible to the benefit of the saving provision. Even in cases where the matter had gone up in appeal or reference to the Supreme Court, the deduction with reference to the gross amount of dividends will be allowed in computing the total income only in respect of the years for which the appeals or references were preferred. 15.7 Although the issue before the Supreme Court in Cloth Traders' case (supra) was in respect of concessional tax treatment of inter-corporate dividends only, the Supreme Court has specifically referred to the provisions of some of the other sections contained in Chapter VIA of the Income-tax Act. The Supreme Court has in respect of such other sections observed that on a plain reading of these sections, it appears that the deduction admissible is in respect of the gross amount of income re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ody or on the life of any child or either member, as also through the Public Provident Fund, Unit-linked Insurance Plan and 10-Year and 15-Year Cumulative Time Deposit Accounts qualify for tax relief. The tax relief in all cases is allowed by deducting the whole of the first Rs. 5,000 of the qualifying savings plus 35 per cent of the next Rs. 5,000 plus 20 per cent of the balance of such savings, in computing the taxable income of the assessee. Long-term savings qualify for tax relief only to the extent such savings do not exceed the ceiling limits laid down in this behalf. In the case of individuals, Hindu undivided families and specified associations of persons, the ceiling limit applicable is 30 per cent of the "gross total income" or Rs. 30,000, whichever is less. A higher ceiling limit is laid down in the case of authors, playwrights, artists, musicians and actors. The ceiling limit in their case has been prescribed in the Income-tax Rules at 40 per cent of the professional income of the author, playwright, artist, musician and actor plus 30 per cent of the remaining part of the "gross total income" or Rs. 50,000, whichever is less. 16.2 With a view to providing further incen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , institution or association as is approved in this behalf by the Central Government to be utilised for the purpose of promoting family planning are eligible for 100 per cent deduction. The amount of donations qualifying for deduction under section 80G is, however, limited to 10 per cent of the gross total income of the donor, subject to a further monetary limit of Rs. 5 lakhs. The aforesaid ceiling limits, however, do not apply in relation to the donations made to the National Defence Fund, the Jawaharlal Nehru Memorial Fund, the Prime Minister's Drought Relief Fund and the Prime Minister's National Relief Fund. 18.2 In Hyderabad Race Club v. Addl. CIT [1979] 120 ITR 185, (SC) the Andhra Pradesh High Court held that the ceiling limits prescribed in sub-section(4) of section 8OG apply with reference to the quantum of deduction admissible under that section and not with reference to the aggregate amount of qualifying donations referred to in that sub-section. With a view to bringing out clearly the intention underlying this provision, the Finance Act, has substituted a new sub-section for the existing sub-section(4) in order to clarify that the limits specified therein will apply w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits of the other units, but also derive a larger benefit in some cases over the entire "tax holiday" period. 19.3 The existing "tax holiday" provisions will apply in relation to new industrial undertakings which go into production before 1st April, 1981 or approved hotels which start functioning before that date or new ships which are brought into use on or before that date. The Finance Act has inserted a new section 80-I which will apply in relation to new industrial undertakings (including cold storage plants) which are set up after 31st March, 1981 or approved hotels which start functioning after that date or ships which are brought into use after 1st April, 1981. The "tax holiday" under the new provision will be available in respect of new industrial undertakings set up before 1st April, 1985 or approved hotels which start functioning before that date or new ships which are acquired on or before that date. 19.4 The new "tax holiday" scheme differs from the existing scheme in the following respects, namely: 1. The basis of computing the "tax holiday" profits has been changed from capital employed to a percentage of the taxable income derived from the new industrial unit, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent per annum in the case of a company) of the capital employed in the undertaking, hotel or ship for five successive assessment years commencing from the assessment year relevant to the previous year in which the undertaking goes into production or starts operation of the cold storage plant or the hotel starts functioning or the ship is first put to use. In the case of a company, deriving profits from an industrial undertaking (including a cold storage plant) newly set up in India before 1st April, 1976 or from a ship which was first brought into use before that date or from the business of a hotel which started functioning before that date, the exemption from income-tax is limited to 6 per cent per annum, In the case of cooperative societies, the "tax holiday" period extends to seven years as against five years in the case of other categories of assessees. The benefit of this tax concession will be available in respect of industries which go into- production before 1st April, 1981, or hotels which start functioning before that date and ships which are brought into use on or before that date, however, an industrial undertaking which begins to manufacture or produce any articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the industrial undertaking or, as the case may be, the business of the hotel. The position under new sub-section (1A), however, remains the same as in clause (1) of that sub-section which in terms provides that the computation under that sub-section will be made except as otherwise expressly provided in that section. The effect, therefore, would be that the value of the following assets shall not be taken into account in computing the capital employed in the industrial undertaking or, as the case may be, the business of the hotel: 1. In relation to the assessments for the assessment years prior to the assessment year 1976-77. Where, in the case of an industrial undertaking, any building, machinery or plant previously used for any purpose was transferred to a new business, and the total value of the building, machinery or plant so transferred did not exceed 20 per cent of the total value of the building, machinery or plant used in the business, the total value of the building, machinery or plant so transferred shall not be taken into account in computing the capital employed in the industrial undertaking. 2. Where in the case of the business of a hotel, any building previously us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is entitled to a deduction, in the computation of his total income, of an amount equal to one-third of the aggregate of the income derived from these sources or Rs.10,000, which-ever is higher. Where the aggregate of such income does not exceed Rs.10,000, the whole of such income is exempt from tax. 21.2 The Finance Act has amended section 80JJ to provide that an assessee deriving income from the business of livestock breeding or poultry or dairy farming would be entitled to a deduction, in the computation of his total income, of an amount equal to one-fifth of the aggregate of the income derived from these sources or Rs. 15,000, whichever is higher. Where the aggregate of such income does not exceed Rs. 15,000, the whole of such income will be exempt from tax. In computing the deduction under this section in a case where the profit derived from the business Of poultry farming exceeds Rs. 75,000, the excess will be ignored. In other words, the deduction in respect of profits and gains from the business of poultry farming will not exceed Rs. 15,000 (i.e., one-fifth of Rs.75,000). To illustrate in a case where the profits and gains derived by an assessee from the business of poultr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. [Section 19 of the Finance Act] Extension of the benefit of deduction in respect of professional income from foreign sources to sportsmen and athletes - Section 80RR 23.1 Under section 80RR, a resident individual being an author, playwright, artist, musician or actor, who derives income in the exercise of his profession from foreign sources and receives such income in India or brings it into India in foreign exchange, is entitled to deduct 25 per cent of the income so received or brought into India in computing his total income. This provision is designed to encourage authors, playwrights, artists, musicians and actors in our country to project their activities outside India with a view to contributing to greater understanding of our country and its culture abroad and also for augmenting our foreign exchange resources. With a view to encouraging our sportsmen and athletes to compete in international events, the Finance Act has amended section 80RR to include them in the category of persons entitled to the benefit of that section. 23.2 This amendment has come into force with effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his taxable income. In order to avail of the deduction, such an assessee is required to furnish, in respect of the first assessment year for which the deduction is claimed in a case of total blindness, a certificate from a registered oculist, and in a case of other physical disability, a certificate from a registered medical practitioner. 26.2 he Finance Act has amended section 80 with a view to raising the quantum of deduction admissible to an assessee who is totally blind or who suffers from a permanent physical disability from Rs.5,000 to Rs.10,000. 26.3 his amendment wig take effect from 1st April, 1981 and will, accordingly, applying relation to the assessment year 1981-82 and subsequent years. [Section 23 of the Finance Act] Modification of the provision relating to returns of income - Section 139 27.1 Under section 143(1) an Income-tax Officer may make a regular assessment without requiring the presence of the assessee or the production by him of any evidence in support of the return, and without being satisfied that the return was correct and complete in all respects. In making such a summary assessment", the Income-tax Officer has the authority to make certain adjustm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue a notice in cases where an assessment has been completed under section 143(1). However the issue of a notice in such cases is subject to the requirement that prior approval of the Inspecting Assistant Commissioner has been obtained. The basis for the issue of such a notice is that the Income-tax Officer considers it necessary or expedient to verify the correctness and completeness of the return by requiring the presence of the assessee or the production of evidence in this behalf. 27.3 The revised procedure of assessment known as "summary assessment scheme" has been in operation for the last one decade. It was felt that the objective of making the assessment without requiring the presence of the assessee to produce the books of account and other evidence in support of the return of income and thereby ensuring expeditious completion of the bulk of assessment has not been fully realised. This call be ascribed to two main reasons, namely - 1. In some cases, returns of income are not properly filled in and are not accompanied by all documents necessary for the completion of assessments. 2. Considerable time is taken in determining whether adjustments of the nature referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vious year. 27.5 Where the Income-tax Officer considers that the return of income furnished by the assessee is defective, he is given the discretion to intimate the defect to the assessee and give him an opportunity to rectify the defect within a period of fifteen days from the date of intimation or within such further extended time as the Income-tax Officer may allow. If the defect is not rectified within the period of fifteen days or such further extended period, then, the Income-tax Officer shall treat the return as an invalid return and other provisions of the Income-tax Act shall apply as if the assessee had failed to furnish the return. Where, however, the assessee rectifies the defect after the expiry of the period of fifteen days or the further extended period, but before assessment is made, the Income-tax Officer has been empowered to condone the delay and treat the return as a valid return. 27.6 This amendment has come into force from 1st September, 1980 and is accordingly applicable in relation to the returns of income filed on or after that date. 27.7 The following points may be carefully noted in regard to the new provision in section 139(9): 1. The new provision w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 139(1),the Income-tax Officer cannot proceed to make an ex parte assessment under section 144 without serving a notice under section 139(2) or, as the case may be, under section 148. Where, however, the defective return was filed in response to a notice under section 139(2) or section 148, the Income-tax Officer may straightaway proceed to complete the assessment ex part under section 144 or issue a notice under section 142(1). 6. The position stated in item (5) above, however, is subject to the proviso that in a case where the assessee rectifies the defect after the expiry of the prescribed period of 15 days or the further period allowed by the Income-tax Officer, but before the assessment is made, the Income-tax Officer may condone the delay and treat the return as a valid return. Thus, in a case where the defect is not rectified within the time allowed but the assessee rectifies the same before the Income-tax Officer has completed the assessment, it will not be open to the assessee to question the validity of the assessment made by the Income-tax Officer on the ground that the defect had not been rectified within the time allowed and accordingly the return filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and industrial needs of India. The said sub-section (2B), inter alia, provides that the assessee must furnish a certificate of completion of the approved programme from the prescribed authority after the programme of scientific research has been implemented and if he fails to furnish such certificate within one year of the period allowed by the prescribed authority for the completion of the programme, the tax concession already allowed will be withdrawn. 29.2 In order to enable the Income-tax Officer to amend the original assessment in such cases, the Finance Act has inserted a new sub-section (5B) in section 155. This sub-section provides that in case of failure on the part of the assessee to furnish the certificate of completion within one year of the period allowed for the completion of the programme, the deduction originally made in excess of the expenditure actually incurred shall be deemed to have been wrongly made and the Income-tax Officer may recompute the total income of the assessee for the relevant previous year and make the necessary amendment. The amendment under new sub-section (5B) of section 155 will be required to be made within a period of four years from the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under a will; and iii where a non-testamentary trust was created before 1st March, 1970 bona fide exclusively for the benefit of the dependent relatives of the settlor. 30.3 It was felt that the provisions of section 164, even after their amendment in 1970, had not been fully effective in curbing the use of private trusts for avoiding proper tax liability. The Finance Act has, therefore, made the following amendments to section 164 with a view to curbing tax avoidance through the medium of such trusts: 1. A discretionary trust will be liable to tax at the maximum marginal rate of income-tax on their entire income. As a result, the entire income of a discretionary trust will be liable to tax at the maximum marginal rate of income-tax (including surcharge) applicable to the Finance Act of the relevant year to the highest slab of income in the case of an association of persons. Thus, for the assessment year 1980-81, the entire income of a discretionary trust will be charged to tax at the rate of 72 per cent (income-tax 60 per cent plus surcharge 12 per cent) and for the assessment year 1981-82 at the rate of 66 per cent (income-tax 60 per cent plus surcharge 6 per cent). 2. As a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isused in some cases by giving discretion to the trustees to decide the allocation of income every year and in several other ways. In such a situation, the trustees and beneficiaries were able to manipulate the arrangements in such a manner that a discretionary trust was converted into a specific trust whenever it suited them tax-wise. In order to prevent such manipulation, the Finance Act has inserted Explanation 1 in section 164 to provide as under: a. any income in respect of which the court of wards, the administrator general, the official trustee, receiver, manager, trustee or mutawalli appointed under a wakf deed is liable as a representative assessee or any part thereof shall be regarded as not being specifically receivable on behalf or for the benefit of any one person unless the person on whose behalf or for whose benefit such income or such part thereof is receivable during the previous year is expressly stated in the order of the court or the instrument of trust or wakf deed, as the case may be, and is identifiable as such on the date of such order, instrument or deed. [For this purpose, it is not necessary that the beneficiary in the relevant previous year should be act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty. 31.2 While under the Hindu law, a joint family may make a division and severance of interest in respect of the joint estate while retaining their status as a joint family, the Income-tax Act does not recognise a partial partition in status alone and where a Hindu undivided family had been assessed to income as such, it continues to be regarded as a Hindu undivided family unless the property has been partitioned by metes and bounds. These provisions are contained in section 171 and apply equally in the case of total as well as partial partition. In spite of the measures taken in recent years, a Hindu undivided family continues to be used as a medium for reduction of proper tax liability. This appears to be specially true in cases where multiple Hindu undivided families are created by effecting partial partitions as regards persons constituting the joint family or as regards the properties, belonging to a joint family or both. 31.3 With a view to curbing the practice of creating multiple Hindu undivided families by making partial partitions, the Finance Act has inserted a new sub-section (9) in section 171 whereunder partial partitions of Hindu undivided families effected after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity, Rs. 2,500; (ii) in the case of a registered firm Rs.20,000; iii in the case of other categories of assessee Rs.10,000; 32.2 With the raising of the exemption limit to Rs. 12,000 the aforesaid limit of Rs. 10,000 in the case of other categories of assessees, such as individuals, Hindu undivided families, associations of persons, unregistered firms, etc., has been increased to Rs. 12,000. The Finance Act has amended section 208 of the Income-tax Act to achieve this objective. 32.3 This amendment has come into force with effect from 1st September, 1980. [Section 29 of the Finance Act] Modification of the provisions relating to payment of advance tax and other related matters In the case of companies - Sections 209A, 212, 215 and 273 33.1 Under section 209A(4), an assessee is required to revise upward the advance tax payable by him if the tax on his current income is likely to exceed the advance-tax shown by him in the statement/estimate furnished under sub-section (1) or sub-section (2) or sub-section (3) of section 209A by more than 33-1/3 per cent of the tax so shown. Similarly, under section 212(3A), an assessee who is required to pay advance tax by an order under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or ii. the amount which would have been payable by way of advance tax if the assessee had furnished a correct and complete statement in accordance with the provisions of section 209A(1)(a), whichever is less. In the case referred to in (b) above, the penalty is not less than 10 per cent but does not exceed one and a half times of 75 per cent of the assessed tax. The Finance Act has inserted a proviso in sub-section (1) of section 273 to provide that in the case of companies, the penalty will be leviable where the advance tax paid falls short of 83-1/3 per cent (that is, five-sixths) of the assessed tax. 33.5 Section 273(2) lays down the scale of penalty reviable for furnishing a false estimate of advance tax or for failure to furnish an estimate of advance tax in certain circumstances. Where an assessee had filed a false estimate of advance tax payable by him, he is liable to a penalty of not less than 10 per cent but not exceeding one and a half times the amount by which the advance tax actually paid during the financial year immediately preceding the assessment year falls short of - a. 75 per cent of the assessed tax, or by the amount payable by him in accordance with a statemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said rule, the contribution made by the employer to the credit of an employee participating in a recognised provident fund in excess of I 0 per cent of the salary of the employee is included in his salary income. Further, any interest credited on the balance to the credit of the employee insofar as it exceeds one-third of the salary or is allowed at a rate in excess of the notified rate is deemed to be the income received by the employee in the previous year and is charged to tax accordingly. The notified rate of interest at present is 8-¼ per cent. 34.2 The Finance Act has amended rule 6 of Part A of the Fourth Schedule so as to omit the provision relating to the taxation of interest credited to the account of an employee where it exceeds one-third of his salary. Accordingly, while interest credited to the account of the employee in excess of the notified rate of interest will continue to be chargeable to tax, the alternative ceiling limit on the exempt amount of interest which restricts the exemption to one-third of the salary will no longer be applicable. 34.3 This amendment will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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