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TMI BlogThe Finance Act, 1984-Explanatory Notes on the provisions relating to direct taxesX X X X Extracts X X X X X X X X Extracts X X X X ..... ended section 32 of the Unit Trust of India Act, 1963. PROVISIONS IN BRIEF 3. The provisions in the Finance Act, 1984, in the sphere of direct taxes relate to the following matters:- (i) Prescribing the rates of income-tax (including surcharge thereon) on incomes liable to tax for the assessment year 1984-85; the rates at which income-tax will be deductible at source during the financial year 1984-85 from interest (including interest on securities), dividends, salaries, insurance commission, winnings from lotteries and crossword puzzles, winnings from horse races and other categories of income liable to such 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 1984-85. (ii) Amendment of the Income-tax Act, 1961 with a view to providing for compulsory audit of accounts of certain persons carrying on business or profession; prohibition against taking or accepting certain loans and deposits in cash; tightening of provisions relating to furnishing of information in respect of properties held benami; imposition of restrictions on contribution by employers to n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to partners of registered firms engaged in specified professions and computation of tax payable in certain cases during the financial year 1983-84. 4.2 It may be noted that in an Explanation below Paragraph E of Part III of the First Schedule to the Finance Act, 1983, an 'industrial company" was defined to mean a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the carriage, by road or inland waterways, of passengers or goods or in the construction of ships or in the execution of projects or in the manufacture or processing of goods or in mining. The said definition has now been incorporated in section 2(8)(c) of the Finance Act. 4.3 The Finance Act, 1983 had allowed companies required to pay advance tax during the financial year 1983-84 to make a deposit with the Industrial Development Bank of India in lieu of one-half of the amount of surcharge payable by them. The Finance Act, 1984 has made a provision that where a company has made a deposit during the financial year 1983-84 with the Industrial Development Bank of India under the Companies Deposit (Surcharge of Income-tax) Scheme, 1983 framed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egistered firms, etc. 6.2 The rates of income-tax in the case of individuals, Hindu undivided families (other than those having at least one member with independent total income exceeding Rs. 15,000), unregistered firms, associations of persons, bodies of individuals and artificial juridical persons have been specified in Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Finance Act. These rates are lower than the rates as specified in Sub-Paragraph I of Paragraph A of Part I of the First Schedule to the Finance Act. The Table below gives the comparative rates of income-tax (a) as specified in Sub-Paragraph I of Paragraph A of Part I of the First Schedule to the Act, and (b) as specified in Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Act on various slabs of income. COMPARATIVE RATES ON VARIOUS SLABS OF INCOME IN THE CASE OF INDIVIDUALS, ETC. Income slab Rates as specified in Part I of the First Schedule to the Finance Act (i.e., the old rates) Rates as specified in Part III of the First Schedule to the Finance Act (i.e., the new rates) Up to Rs.15,000 Nil Nil Rs. 15,001-20,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases where accelerated assessments are required to be made during the financial year 1984-85. These provisions are broadly on the same lines as those contained in the Finance Act, 1983. [Section 2 and the First Schedule to the Finance Act] AMENDMENTS TO INCOME-TAX ACT (i) Enlargement of the scope of exemption in respect of subsidy received by persons engaged in the business of growing and manufacturing tea. 7.1 Under section 10(30) of the Income-tax Act, the amount of subsidy received by a person who carries on the business of growing and manufacturing tea in India, from or through the Tea Board, under a scheme for replacement or replantation of tea bushes specified by the Central Government in the Official Gazette, is exempt from income-tax. 7.2 The Finance Act has enlarged the scope of this concession to include any subsidy received from or through the Tea Board under a scheme for rejuvenation or consolidation of areas used for cultivation of tea. This exemption will apply only if such scheme is specified in this behalf by the Central Government in the Official Gazette. 7.3 The amendment take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 Having regard to the fact that most of the industrial undertakings are adequately insured, the insurance money received by an assessee on the destruction of his industrial assets would ordinarily be more than their written down value. In such cases, no terminal allowance will be admissible to the assessee and he will, therefore, also not be entitled to any rehabilitation allowance under section 33B of the Income-tax Act. Besides, the deduction under section 33B can be availed of by an assessee only when he starts earning profits from the industrial undertaking after it has been re-established, re-constructed or revived. The cash benefit of this concession is, therefore, deferred until the industrial undertaking starts earning adequate profits. Thus, the provision in section 33B does not confer any significant benefit on the assessees. 9.3 In view of the aforesaid considerations and with a view to simplifying the tax law by reducing the number of tax concessions which are not essential, the Finance Act has inserted a proviso to section 33B of the Income-tax Act to the effect that no deduction will be allowed under the said section in relation to the assessment year 1985-86 and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum so paid is to be used for a scientific research programme approved by the prescribed authority in this behalf, having regard to the social, economic and industrial needs of the country. Under an amendment made by the Finance Act, 1983 with effect from 1st April, 1984, the deduction under this provision is to be allowed only if the sum is paid by the taxpayer with the specific direction that it shall not be used for acquisition of any land or building or construction of any building. 11.2 Under section 35(2B) of the Income-tax Act, where a taxpayer, incurs any expenditure on scientific research under a programme approved in this behalf by the prescribed authority, a weighted deduction of one and one-fourth times the amount of such expenditure is allowed in computing the taxable profits. Expenditure of a capital nature for acquisition of land or building or construction of any building is not eligible for this deduction. 11.3 Experience has shown that an expenditure-linked concession for weighted deduction leads to a tendency to inflate expenditure. On this consideration and with a view to simplifying the tax law, the Finance Act has discontinued the tax concession under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction are liable to misuse and with a view to simplifying the tax law, the Finance Act has discontinued the tax concession contained in section 36(1)(iia) of the Income-tax Act in relation to any salary paid for any period of employment after 29th February, 1984. 13.3 The amendment takes effect from 1st April, 1984, and will, accordingly, apply in relation to the assessment year 1984-85 and subsequent years. [Section 8 of the Finance Act] (viii) Modification of provisions relating to managerial remuneration. 14.1 Under section 40(c) of the Income-tax Act, expenditure incurred by a company on the provision of any remuneration or benefit or amenity to a director or person who has a substantial interest in the company or to a relative of the director or of such person, and expenditure or allowance in respect of any assets of the company which are used by such person for his own purposes or benefit, is not allowable as a deduction in computing the taxable profits of the company, to the extent such expenditure or allowance is, in the opinion of the Income-tax Officer, excessive or unreasonable. The aggregate of such expenditure and allowance is further subject to an overa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e during the twenty-four months immediately preceding the relevant year, the ceiling limit in respect of any expenditure by way of fees for services rendered is Rs. 60,000. Where the taxpayer has also incurred, in relation to such person, any expenditure by way of salary, the aggregate of such expenditure by way of fees and salary is also restricted to Rs. 60,000 per annum. 15.2 Having regard to the guidelines issued by the Company Law Board in regard to managerial remuneration, the Finance Act has raised the monetary limits contained in sections 40A(5) and 40A(6) of the Income-tax Act as under:- (i) The monetary ceiling under section 40A(5) in respect of expenditure or payment of salary has been raised from Rs. 5,000 to Rs. 7,500 per month, that is, Rs. 90,000 per annum. (ii) In the case of a former employee, who ceases or ceased to be an employee of the assessee during the relevant previous year or any earlier previous year, the annual ceiling in respect of allowable expenditure on payment of salary has been raised from Rs. 60,000 to Rs. 90,000. 15.3 Expenditure incurred on payment of any salary to a research worker engaged in scientific research during any one or more of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , etc. 16.2 With a view to discouraging creation of such trusts, funds, companies, association of persons, societies, etc., the Finance Act has provided that no deduction shall be allowed in the computation of taxable profits in respect of any sums paid by the assessee as an employer towards the setting up or formation of or as contribution to any fund, trust, company, association of persons, body of individuals, or society or any other institution for any purpose, except where such sum is paid or contributed (within the limits laid down under the relevant provisions) to a recognised provident fund or an approved gratuity fund or an approved superannuation fund or for the purposes of and to the extent required by or under any other law. 16.3 With a view to avoiding litigation regarding the allowability of claims for deduction in respect of contributions made in recent years to such trusts, etc., the amendment has been made retrospectively from 1st April, 1980. However, in order to avoid hardship in cases where such trusts, funds, etc., had before, 1st March, 1984, bona fide incurred expenditure (not being in the nature of capital expenditure) wholly and exclusively for the welf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and claims for deduction are correctly made by him. Such audit would also help in checking fraudulent practices. It can also facilitate the administration of tax law laws by a proper presentation of the accounts before the tax authorities and considerably saving the time of assessing officers in carrying out routine verifications, like checking correctness of totals and verifying whether purchases and sales are properly vouched or not. The time of the assessing officers thus saved could be utilised for attending to more important investigational aspects of a case. 17.3 Having regard to the foregoing considerations, the Finance Act has inserted a new section 44AB in the Income-tax Act making it obligatory for a person carrying on business to get him accounts audited before the "specified date" by an "accountant" if the total sales, turnover or gross receipts in business for the previous year or years relevant to the assessment year 1985-86 or any subsequent assessment year exceed or exceeds forty lakh rupees. A person carrying on profession will also have to get his accounts audited before the "specified date", if his gross receipts in profession for a previous year or years rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (xi) Modification of provision relating to deduction in respect of investment in certain new shares. 18.1 Under the existing provisions of section 80CC of the Income-tax Act, individuals, Hindu undivided families and associations of persons or bodies of individuals consisting only of husband and wife governed by the system of community of property in force in the Union Territories of Dadra and Nagar Haveli, Goa, Daman and Diu who acquire any equity shares forming part of the eligible issue of capital of new industrial companies or public housing finance companies are, entitled to a deduction, in the computation of their taxable income, of an amount equal to 50 per cent. of the cost of such shares, subject to a maximum amount of investment of Rs. 20,000. 18.2 The tax deduction under this section was allowed to stimulate investment in certain categories of new equity shares. The Finance Act has amended section 80CC to provide that the reduction under the said section will not be available in respect of shares offered for subscription by the company after 31st March, 1987. [Section 12 of the Finance Act]. (xii) Withdrawal of deduction in respect of medical treatment of ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20.3 Having regard to the foregoing considerations and with a view to simplifying the tax laws, the Finance Act has amended section 80E to secure that payments made after 29th February, 1984, will not qualify for deduction under the said section. 20.4 The amendment takes effect from 1st April, 1984, and will accordingly, apply in relation to the assessment year 1984-85, and subsequent years. However, as stated above, deduction in respect of payments for securing retirement annuities will not be available in respect of payments made after 29th February, 1984. [Section 14 of the Finance Act] (xiv) Exemption in respect of income from specified financial assets. 21.1 Under section 80L of the Income-tax Act, income derived by a taxpayer from investments in specified categories of financial assets is exempt up to an aggregate amount of Rs. 7,000. The financial assets specified for this purpose include shares in Indian companies, units in the Unit Trust of India and deposits with banking companies. 21.2 In addition, under a separate provision contained in the Unit Trust of India Act, 1963, a further deduction up to Rs. 3,000 is allowed in respect of income received on units ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income by way of dividends received by a domestic company from a company formed and registered under the Companies Act, 1956, after 28th February, 1975, and engaged exclusively or almost exclusively in the manufacture or production of any one or more of the specified priority articles. In respect of other dividends received from a domestic company, deduction is allowed at the rate of 60% of such income. 22.2 On the consideration that there is little justification for continuing to provide complete exemption in respect of dividend income from certain companies as aforesaid, the Finance Act has amended section 80M to provide a uniform rate of deduction at 60% for all dividends received by a domestic company from another domestic company. 22.3 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Sections 16 and 33 of the Finance Act] (xvi) Modification of provision relating to deduction in respect of dividends received from certain foreign companies. 23.1 Section 80N of the Income-tax Act provides for a deduction in the computation of the total income of the whole of the income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction of Rs. 10,000 in the computation of his taxable income. In order to avail of this deduction, such individual has to produce before the Income-tax Officer, in the first assessment year for which the deduction is claimed, in a case of total blindness, a certificate from a registered medical practitioner being an oculist, and in the case of any other permanent physical disability, a certificate from a registered medical practitioner. 25.2 This concession has led to litigation as claims for deduction under this provision have been made by persons with a physical disability of a relatively minor nature. With a view to preventing disputes and litigation on this issue, the Finance Act has amended section 80U and empowered the Central Board of Direct Taxes to frame rules for specifying the various categories of permanent disabilities for the purposes of this section. A person who is suffering from one of the specified disabilities will alone be eligible for the tax concession under this provision. In specifying the categories of permanent physical disabilities, the Board will have to take into account the nature of such disability and the effect such disability is likely to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inance Minister in his speech moving the Finance Bill, 1984, for consideration in the Lok Sabha, the provisions of new sub-section 1(A) of section 161 are applicable only in the case of private trusts and not public charitable and religious trusts. 26.4 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 20 of the Finance Act] 27.1 Under section 164(1) of the Income-tax Act, income received by trustees of discretionary trusts is charged to tax at the maximum marginal rate of income-tax. [A trust is regarded as a "discretionary trust" if the income or any part thereof is not specifically receivable by the trustee on behalf of or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or part is receivable are determinate or unknown.] However, the proviso to section 164(1) lays down that income received by discretionary trusts will not be charged to tax at the maximum marginal rate, but at the normal rates of tax applicable to individuals, association of persons, etc., in cases where any one of the follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rusts, which may otherwise be eligible for tax exemption, are liable to forfeit this exemption in the following circumstances, namely:- (a) Where the trust is created after 31st March, 1962, and any part of the income of the trust ensures, under the terms of the trust deed, directly or indirectly, for the benefit of specified categories of persons, such as, the author of the trust, trustee or manager of the trust, substantial contributor to the trust and any relative of such author, trustee, etc. (b) Any part of the income or any property of the trust (whenever created) is used or applied during the relevant year, directly or indirectly for the benefit of specified categories of persons. (c) The trust funds (with certain exceptions), are invested in contravention of the investment pattern for such funds as laid down under the Income-tax Act. 28.3 Where the whole or any part of the income of a charitable or religious trust is not eligible for exemption or the trust forfeits tax exemption in the circumstances indicated at (a) to (c) of the preceding paragraph, tax is charged on such income under the rate schedule applicable to individuals, associations of persons, etc. As the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) or clause (b) of section 11(4A) of the Income-tax Act. As the maximum marginal rate of tax under the new proviso to section 164(2) applies to the whole or a part of the relevant income of a charitable or religious trust which forfeits exemption by virtue of the provisions of the Income-tax Act in regard to investment pattern or use of the trust property for the benefit of the settlor, etc., contained in section 13(1)(c) and (d) of that Act, the said rate will not apply to the business profits of such trusts which are otherwise chargeable to tax. In other words, where such a trust contravenes the provisions of section 13(1)(c) or (d) of the Act, the maximum marginal rate of income-tax will apply only to that part of the income which has forfeited exemption under the said provisions. 28.7 The amendments take effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 21(b) and (c) of the Finance Act] (xxi) Relaxation of provisions relating to deduction of tax at source from interest on debentures and dividends up to specified limit. 29.1 Under section 193 of the Income-tax Act, income-tax is deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... President of the Appellate Tribunal shall exercise such of the powers and perform such of the functions of the President of the Appellate Tribunal as may be delegated to him by the President by a general or special order in writing. 30.2 The amendment takes effect from 1st April, 1984. [Section 24 of the Finance Act] (xxiii) Modification of provisions relating to acquisition of immovable properties. 31.1 Under section 269C of the Income-tax Act, the Central Government is empowered subject to the fulfilment of certain conditions, to acquire any immovable property having a fair market value exceeding Rs. 25,000 in cases where the declared consideration for the transfer of the property is less than the fair market value of the property on the date of transfer. 31.2 With a view to eliminating unproductive work in handling a large number of relatively smaller cases, the Finance Act has amended section 269C to raise the aforesaid monetary limit to Rs. 1,00,000. 31.3 Section 269F of the Income-tax Act lays down the procedure for hearing of objections by the competent authority before an order of acquisition may be made by him. One of the conditions to be fulfilled before a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or deposit is proposed to be taken is Rs. 10,000 or more. 32.3 The prohibition will, however, not apply to any loan or deposit taken or accepted from, or any loan or deposit taken or accepted by, the following, namely:- (a) Government; (b) any banking company, post office savings bank or any co-operative bank; (c) any corporation established by a Central, State or Provincial Act; (d) any Government company a defined in section 617 of the Companies Act, 1956; (e) such other institution, association or body or class of institutions, associations or bodies which the Central Government, may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette. 32.4 For the purposes of the provision, the expression "banking company" shall have the meaning assigned to it in clause (a) of the Explanation to section 40A(8) of the Income-tax Act and the expression "co-operative bank" shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949. The expression "loan or deposit" for the purposes of this provision, would mean loan or deposit of money. 32.5 Fears have been expressed in certain quarters that the provision will adversely af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the prescribed particulars in respect of the property acquired benami, within a period of one year from the date of acquisition of the property, to the Commissioner of Income-tax. The information thus received by the Commissioner of Income-tax will enable the Income-tax Officer to take appropriate action under the provisions of the Income-tax Act and the Wealth-tax Act in respect of such benami acquisition of property well before the limitation for such action expires. Failure to comply with this requirement will result in the real owner forfeiting his right to institute a suit in respect of such property. 33.4 In cases where the benami acquisition of property is made before 1st March, 1984, the aforesaid requirement will be deemed to have been fulfilled if notice in the prescribed form and containing the prescribed particulars in respect of the property is given by the claimant within a period of one year from the said date, that is, by 1st March, 1985, to the Commissioner of Income-tax. 33.5 The aforesaid time-limit for giving notice to the Commissioner of Income-tax will not apply in cases where the value of any suit relating to any immovable property does not exceed Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntral Government and notified by it in this behalf in the Official Gazette. As in the case of other financial assets, exemption in respect of the aforesaid assets will be available only where such assets have been held by the assessee for a period at least six months* ending with the relevant valuation date. 35.3 The Finance Act has inserted two new provisos to sub-section (1A) of section 5 of the Wealth-tax Act. Under the first proviso, a special exemption up to Rs. 35,000 in the aggregate has been allowed in respect of deposits under the National Deposits Scheme referred to in the preceding paragraph and units of the Unit Trust of India. Hitherto, a special exemption up to Rs. 35,000 was allowed under section 32(1)(ba) of the Unit Trust of India Act, 1963, in respect of the units of the Unit Trust of India. As stated in paragraphs 37.1 and 37.2 of this circular, the relevant provisos of section 32 of the said Act have, in consequence, been omitted by the Finance Act. 35.4 Under the second proviso, a further exemption up to Rs. 25,000 has been allowed in respect of deposits in such National Deposits Scheme as may be framed by the Central Government and notified by it in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame extent as if the property were held by an individual who is a citizen of India and resident in India and at the rates specified in Part II of Schedule I to the Wealth-tax Act in the case of an individual, or at the rate of 1.5 per cent. whichever is more beneficial to the revenue. 36.3 With a view to ensuring that trust funds are not invested in contravention of the investment pattern laid down in the Income-tax Act, the Finance Act has amended section 21A of the Wealth-tax Act to secure that, in addition to the two circumstances mentioned in paragraph 36.1 above, a charitable or religious trust will also forfeit tax exemption in cases where the funds of the trust are not invested in accordance with the investment pattern laid down under the Income-tax Act. 36.4 As explained in paragraph 28.5 above, charitable and religious trusts which forfeit exemption under the Income-tax Act will be charged to tax at the maximum marginal rate of income-tax. In conformity therewith, the Finance Act has further amended section 21A to provide that the net wealth of charitable and religious trusts which forfeit exemption under the aforesaid provisions of the Wealth-tax Act would also be cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled to exemption under section 10 of that Act. The distinction is that whereas trusts which seek exemption under section 11 have to fulfil various conditions (including the condition relating to investment of funds in specified modes) the trusts, institutions, etc., falling under certain clauses of section 10 enjoy complete exemption without any obligation to comply with the conditions applicable to trusts covered by section 11 of the Act. The Finance Act has provided that the provisions relating to forfeiture of exemption contained in section 21A of the Wealth-tax Act will not apply to trusts, institutions, etc., which are entitled to tax exemption under clause (22), clause (22A), clause (23B) or clause (23C) of section 10 of the Income-tax Act. 36.8 These amendments take effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 34(b) of the Finance Act] AMENDMENTS TO THE UNIT TRUST OF INDIA ACT 37.1 Section 32(1)(b) of the Unit Trust of India Act provides for a separate exemption of Rs. 3,000 in respect of any income received by a taxpayer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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