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TMI BlogExplanatory Notes on the provisions thereofX X X X Extracts X X X X X X X X Extracts X X X X ..... provides that save as otherwise provided in this Act, it shall come into force at once. AMENDMENTS TO THE INCOME-TAX ACT (i) Exemption by notification of allowances received by Members of Parliament and also by members of State Legislatures 4.1. Under the existing provisions of clause (17) of section 10 of the Income-tax Act, the following were exempted: (a) any daily allowance received by any person by reason of his Membership of Parliament or of any State Legislature or of any Committee thereof. (b) the allowance (initially Rs.500 per month but later increased to Rs.1,000 per month) which the Members of Parliament were entitled to receive, in lieu of additional facilities, under the Members of Parliament (Additional Facilities) rules, 1975. 4.2 In so far as (b) above is concerned, the Members of Parliament (Additional Facilities) Rules, 1975, have been repealed and have been replaced by the Members of Parliament (Constituency Allowance) Rules 1986, with effect from January 3, 1986, under which the Members of Parliament are entitled to a constituency allowance of Rs.1,250 per month. Since the existing provisions refer to the earlier rules which have been repealed, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits and gains derived from an industrial undertaking set up in any free trade zone for a period of five initial assessment years. The tax exemption is granted with reference to the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce any article or thing and each of the four immediately succeeding assessment years. 5.2 As pointed out by various trade associations, such undertakings in the free trade zones do not always earn profit during all the five initial years. In such cases, they cannot avail of the full tax benefit. In order to get over the problem, the exemption for five assessment years has been permitted to be availed of within a longer time frame as per the amending Act by providing in sub-section (3) that a tax payer would be entitled to avail of the exemption, at his option, in respect of any five consecutive assessment years falling within a period of eight years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things. The proviso to this new sub-section stipulates that in no case shall the tax holiday exten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r non-residential buildings." 6.2 Pursuant to the above announcement, amendments have been made to section 2, 32A, 34, 35, 38, 41, 43, 50, 55, 57, 59, and 155 of the Income-tax Act. 6.3 As mentioned by the Economic Administration Reforms Commission (Report No.12, para 20), the existing system in this regard requires the calculation of depreciation in respect of each capital asset separately and not in respect of block of assets. This requires elaborate book-keeping and the process of checking by the assessing officer is time consuming. The greater differentiation in rates, according to the date of purchase, the type of asset, the intensity of use, etc., the more disaggregated has to be the record-keeping. Moreover, the practice of granting the terminal allowance as per section 32(1)(iii) or taxing the balancing charge as per section 41(2) of the Income-tax Act necessitate the keeping of records of depreciation already availed of by each asset eligible for depreciation. In order to simplify the existing cumbersome provisions, the Amending Act has introduced a system of allowing depreciation on block of assets. This will mean the calculation of lump sum amount of depreciation for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e thereof. (d) The provisions of clause (iia) in sub-section (1) of section 32 had been inserted by the Finance (No.2) Act, 1980, to provide for additional depreciation in respect of new plant or machinery installed before 1-4-1985 in certain cases. These provisions have lost their relevance as they were applicable for the limited period of the Sixth Five Year Plan. Hence, they have been omitted by the Amending Act. (e) The objective underlying the terminal adjustment is to ensure that the total depreciation in relation to any particular item of asset is limited to 100 per cent. This is achieved by the existing provisions of section 32(1)(iii) allowing a deduction for the shortfall in the year of sale, etc. Conversely section 41(2) of the Income-tax Act provides for taxing in the year of sale, etc. the excess depreciation allowed in the past. Because of the introduction of the system of allowing depreciation on blocks of assets at enhanced rates, both these provisions have lost their relevance and hence they have been omitted by the Amending Act. Under the new system the moneys payable in respect of the assets sold, discarded, demolished or destroyed will be reduced from the wr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereunder relating to balancing charge in respect of discarded assets have been omitted. Further, the existing Explanation below section 41(4) of the Income-tax Act has been substituted by another Explanation defining the expressions "moneys payable" and "sold". The former shall include any insurance, salvage or compensation moneys payable in respect of a discarded asset. The latter expression shall include a transfer by way of exchange or a compulsory acquisition under any law but it will not include a transfer of an asset by the amalgamating company to the amalgamated company in a scheme of amalgamation. (k) By an amendment to Explanation 1 to section 43 of the Income-tax Act, it has been provided that where an asset is used for the purposes of business after it ceases to be used for scientific research related to that business, the actual cost to the assessee for depreciation purposes shall be the actual cost to the assessee as reduced by any deduction allowed under section 35 (1)(iv). (l) By an amendment to Explanation 2 to section 43(1) of the Income-tax Act, it has been provided that where an asset is acquired by way of gift or inheritance, its actual cost shall be the act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that block which is sold, discarded, demolished or destroyed during that previous year. (o) Under the new system, the written down value of any block of assets may be reduced to nil for any of the following reasons:- (A) the moneys receivable by the assessee in regard to the assets sold or otherwise transferred during the previous year together with the amount of scrap value may exceed the written down value at the beginning of the year as increased by the actual cost of any new asset acquired, or (B) All the assets in the relevant block may be transferred during the year. Section 50 of the Income-tax Act prescribing the manner in which the cost of acquisition in the case of depreciable assets may be computed for the purposes of determining the capital gains has been substituted by new provisions by the Amending Act to take care of both the above situations. The particulars of these provisions, overriding section 2(42A) of the Income-tax Act, are as under:- (A) The newly substituted section 50(1) provides that in a case where any block of assets does not cease to exist but the full value of the consideration received or accruing as a result of the transfer of the deprec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. Rs. Item 1 22,500.00 1,27,500.00 Item 2 30,000.00 1,70,000.00 Item 3 45,000.00 2,55,000.00 Aggregate WDV at the beginning of the as assessment year 1988-89 5,52,500.00 Since the items of plant and machinery which currently qualify for depreciation at the rate of 15 per cent. are proposed to be classified into a block of assets which will be entitled to depreciation at the rate of 33-1/3 per cent. for the assessment year 1988-89 and subsequent years, in this example the aggregate written down value of the block of assets at the beginning of the previous year will be Rs.5,52,500. Presuming that during the financial year 1987-88, the assessee sold item I for a consideration of Rs.2,00,000 and bought a new item (item 4) falling in the same block of assets during the said financial year for a consideration of Rs.2,50,000, the depreciation to be allowed in respect of the assessment year 1988-89 will be as follows:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Add : Actual cost of new asset acquired 2,00,000 12,00,000 Less : Sale proceeds received in respect of all the assets from that block sold during the year 9,00,000 Loss deemed to be short-term capital loss under section 50(2) 3,00,000 6.6 The above amendments to sections 2, 32, 32A, 34, 35, 38, 41, 43, 50, 55, 57, 59, 155 of the Income-tax Act shall come into force with effect from the 1st April, 1988, and will, accordingly, apply to the assessment year 1988-89 and subsequent years. [Sections 2, 5, 6, 7, 8, 9, 31 and 32 of the Amending Act] (iv) Declaration of an area as a backward area for the purposes of tax holiday 7.1 As per the existing provisions of section 80HH of the Income-tax Act, all categories of taxpayers are entitled to a deduction equal to 20 per cent. of the profits derived by them from new industrial undertakings or hotels in backward areas. In terms of Explanation to this section, "backward area" means an area specified in the list of the Eighth Schedule. This list needs frequent updating in conformity with the notifications issued by the Ministry of Industry inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year 1984-85 and onwards. [Sections 10 and 30 of the Amending Act] (v) Liberalisation of the provisions relating to deduction in respect of the profits retained for export business 8.1 Under the existing provisions of section 80HHC of the Income-tax Act, an assessee, being an Indian company or any other person resident in India, who exports outside India any goods or merchandise, excepting mineral oil and minerals and ores, is allowed deduction of an amount not exceeding 50 per cent. of the profits derived by him from the export of such goods or merchandise. Earlier to the assessment year 1986-87, the deduction allowed was an amount equal to one per cent. of the export turnover plus a further amount equal to five per cent. of the incremental export turnover. In the context of the low profitability of Indian exports, various exporters' organisations had been suggesting that a shift be made back to the deduction based on turnover on the ground that the new profit-based deduction operates harshly on exporters. A profit-based incentive is administratively simple and it awards greater efficiency. A turnover based incentive, on the other hand, takes care of the need ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Advance, Special Imprest and Replenishment licences as also Import Export Pass Books, if any, issued during the relevant year or for which an exporter is eligible during these years. The import replenishment licence related to the free on board value of exports is issued to registered exporters to enable them to import inputs where domestic substitutes are not adequate in terms of price, quality or delivery dates. This is based on import content of the export production. The imprest licence issued to the trading houses is issued to the extent of hundred per cent of the value of replenishment licence earned against their own exports made during the previous year. Every imprest licence is subject to an export obligation. The duty free advance licences are also issued ex-ante, i.e., in anticipation of exports. The additional licences are issued to export houses and trading houses as a proportion of the free on board value of their exports from the small scale industrial sector and as a proportion of the net foreign exchange earnings from the non-small scale industrial sector. The Import and Export Pass Book Scheme is applicable only to registered manufacturer-exporters to pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss was sustained. Further, as per clause (d) of the proviso to the newly inserted sub-section (10) to section 139 of the Income-tax Act, which overrides anything contained in any other provision of the Income-tax Act, a return of loss which has been furnished after the thirty first day of July of the assessment year during which the loss was sustained, shall be deemed never to have been furnished. 9.2 The above amendment shall come into force with effect from 1st April, 1987, and will, accordingly, apply to the assessment year 1987-88 and subsequent years. 9.3 Section 139(1) of the Income-tax Act provides that every person, if his total income or the total income of any other person in respect of which he is assessable during the previous year exceeded the maximum amount which is not chargeable to income-tax, shall furnish a return of his income or the income of such other person in the prescribed form and verified in the prescribed manner. This return has to be furnished within the specified period. It was held by the Supreme Court in the case of C.I.T. v. Ranchhoddas Karsondas (36 ITR 369) (SC), that a return disclosing income below taxable limit submitted voluntarily unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of interest payable - and not interest paid - can be reduced or waived as per one interpretation. such an interpretation put a defaulter in a better position than the person who manages somehow to pay the interest even though it has caused him considerable hardship. The Amending Act has removed this anomaly by providing that the provisions will apply whether the interest is paid or is payable by an assessee. 10.2. The amendment shall come into force retrospectively with effect from 1st October, 1984, that is, the date on which sub-section (2A) of section 220 of the Income-tax Act came into force. 10.3. Further, in cases where the amount of interest under the above provisions is small, the assessees are inhibited from filing a petition to the Central Board of Direct Taxes for reduction or waiver. The interest leviable for other default under the Income-tax Act, such as, for late filing of return can be reduced or waived by the officers in the field formations irrespective of the amount involved. Hence, by the Amending Act, the power to reduce or waive the interest paid or payable under section 220 has been conferred on the Commissioner of Income-tax. 10.4 This amendment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions relating to penalties impossible for various defaults under the Act. Chapter XXII of the Income-tax Act contains provision relating to offences and prosecutions under the Act. One of the reasons for the unsatisfactory performance of the Income-tax Department in the matter of successfully levying penalty and of prosecuting the defaulters is that invariably appellate authorities and the courts have cast upon the Department the near impossible burden of proving the existence of a culpable state of mind on the part of the defaulters. 12.2 On a consideration of the relevant factors in this regard, it was announced by the Long Term Fiscal Policy [para 5.31(ii)] that in order to effectively tackle the problem of tax evasion, the Income-tax Department will implement a strategy consisting, inter alia, of removing weaknesses in the law which hinder effective prosecution of tax evaders and that it was intended to incorporate certain provisions in the direct tax laws similar to those which already exist in the Customs Act and the Gold (Control) Act. For example, under section 123(1) of the Customs Act, 1962, when any gold, diamonds, or any other class of specified goods are seized in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 133B, under section 272B for non-compliance with the provisions of section 139A, under section 273(1)(b) for failure to furnish a statement of advance tax, under section 273(2)(b) for failure to furnish estimate of advance tax and under section 273(2)(c) of the Income-tax Act for failure to furnish higher estimate of advance tax. Penalty is leviable under these provisions if the above defaults are committed without reasonable cause for (or excuse under section 270). By omitting the words "without reasonable cause" from these provisions ("without reasonable excuse" from section 270) it has been provided that the default by itself will attract penalty. At the same time, it has been provided by a new section 273B, inserted by the Amending Act, that notwithstanding anything contained in the provisions of section 270, clause (a) or clause (b) of sub-section (1) of section 271, section 271A, section 271B, sub-section (2) of section 272A, sub-section (1) of section 272AA, sub-section (1) of section 272B or clause (b) of sub-section (1), or clauses (b) and (c) of sub-section (2) of section 273, no penalty shall be imposable on the person or the assessee, as the case m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty if such explanation is bona fide and all facts relating to the same are disclosed by him. The Amending Act in clause (B) of this Explanation has substituted for the words "not able to substantiate", the words " not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him". Further, the proviso making the existing Explanation in applicable to a case where in respect of any amount added or disallowed as a result of the rejection of any explanation offered by such person if the explanation is bona fide and all the facts relating to the same and material to the computation of his total income have been disclosed by him, has been cast on the person who has committed the default. (c)(B) As per the existing Explanation 5 to section 271(1) of the Income-tax Act, if at the time of search, assets which are not recorded in the books of account are found, a taxpayer is liable to penalty for concealment even if he declares the full value of those assets as his income in the return filed after the search. This provisions has been found to operate even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had no such mental state with respect to the act charged as an offence in that prosecution. The Explanation provides that "culpable mental state" includes intention, motive or knowledge of a fact or belief in, or reason to believe a fact. Further, that a fact is said to be proved only when the court believes it to exist beyond a reasonable doubt and not merely when its existence is established by a preponderance of probability. By this amendment, a court has to presume the existence of a criminal mental state on the part of the accused in any prosecution requiring such a mental state. However, this presumption can be rebutted by the accused to prove that there was no intention, motive or knowledge of a fact or belief in or reason to believe a fact in respect of the act charged as an offence in that prosecution. As regards the degree or proving the absence of a culpable mental state, it has been provided that a fact is said to be proved only when the court believes it to exist beyond a reasonable doubt and not merely when its existence is established by a preponderance of probability. This provision is based on the provisions contained in several other enactments dealing with econo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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