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TMI BlogExplanatory Notes on the provisions of the Direct Tax Laws (Second Amendment) Act, 1989X X X X Extracts X X X X X X X X Extracts X X X X ..... e- tax Act; (iii) substituted section 241 of the Income-tax Act; (iv) amended sections 15B, 16, 34A and Schedule III of the Wealth-tax Act, and (v) amended sections 14B, 15 and 33A of the Gift-tax Act. Objects of the Act 3. The main objective of the Second Amending Act is to help the taxpayers by removing the difficulties and anomalies relating to the new assessment procedure as also to grant certain tax concessions so that the taxpayers can avail of them during the current financial year. It also incorporates provisions which are meant to reduce litigation and to withdraw a few unintended tax benefits. Thus, this Act contains provisions to,-- (i) remove certain anomalies and difficulties relating to the new assessment procedure which has come into force from 1st April, 1989; (ii) insert definition of the term 'security' in order to resolve problems of interpretation of the said term and to regularise the tax concessions hitherto enjoyed by the National Savings Certificates VI and VII Issues; (iii) liberalise the criterion for determining the residential status so as to facilitate non-resident Indians to stay in India for a longer period in orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain points of time due to speculative tendencies. Amendments to the Income-tax Act, the Wealth-tax Act and the Gift-tax Act The following amendments have been made to the Income-tax Act, the Wealth-tax Act and the Gift-tax Act through the Second Amending Act, 1989:-- Deemed registration of firms: 4.1 Under the provisions of section 185 of the Income-tax Act, as they existed prior to their amendment through this Act, it was obligatory for an Assessing Officer to pass an order, on receipt of an application for the registration of a firm, either registering the firm or refusing to register it. Such order was based on an enquiry into the genuineness of the firm and its constitution. However, under the new assessment procedure which has come into force with effect from April 1, 1989, it is not necessary to pass an order of assessment on receipt of a return of income. Only in a limited number of cases which are selected for scrutiny, an order of assessment is to be made under section 143(3) of the Income-tax Act. Therefore, in those cases in which no order of assessment is required to be made, there will be no occasion to make enquiries as are specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.1 The term 'security' which has been used in a number of provisions of the Income-tax Act, had not been defined in section 2 of the said Act. This had given rise to problems of interpretation of the said term. For example, National Savings Certificates VI Issue and VII Issue, issued under the Government Savings Certificates Act, 1959, were notified as securities for the purposes of section 80C of the Income- tax Act. Clarifications were also issued that the interest on these certificates was exempt under section 80L subject to specified limits, as these certificates were in the nature of securities. An opinion has now been expressed that the term 'security' which has been defined in the Public Debt Act, 1944, does not cover the National Savings Certificates issued under the Government Savings Certificates Act, 1959. Thus, the notification issued earlier specifying the National Savings Certificates VI and VII Issues as securities for the purposes of section 80C of the Income-tax Act is not in conformity with the said opinion. In order to resolve the problems of various possible interpretations of the term 'security', section 2 of the Income-tax Act has been amended and a definitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ident Indians had been representing that the period of 90 days or 60 days was too short, especially for those who had to supervise their investments in India. In order to enable the non-resident Indians to stay in India for a longer period for looking after their investments without losing their 'non-resident' status, clause (b) of the Explanation to clause (c) of sub-section (1) of section 6 has been amended. The period of 90 days provided thereunder has been increased to 150 days. The amended provision will apply not only to a citizen of India but also to a person of Indian origin within the meaning of Explanation to clause (e) of section 115C of the Income-tax Act. Accordingly, a person shall be deemed to be of Indian origin, if he, or either of his parents or any of his grandparents, was born in undivided India. The effect of the amended provision is that, subject to the other conditions prescribed in section 6 of the Income-tax Act, such persons can stay in India on a visit for 149 days as against 89 days earlier in the case of citizens of India and 59 days earlier in the case of those who were not citizens of India during a previous year without losing their 'non-resident' st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditions for the purpose of the said sub-section. With the deletion of the first proviso to sub-section (5) of section 10 of the Income-tax Act, the rule-making-power of the Board would have become unfettered. Hence, in the substituted sub-section (5) of section 10, it has been provided that the conditions to be prescribed for the grant of exemption from income-tax thereunder shall be framed having regard to the conditions of the leave travel concession scheme applicable in the case of the employees of the Central Government. 7.2 The above amendment shall come into force with effect from 1st April, 1989, and will, accordingly, apply to the assessment year 1989-90 and subsequent years. [Section 4 of the Second Amending Act, 1989] Clarification regarding the nature of allowances which can be exempted under section 10(14)(ii): 8.1 Clause (ii) of sub-section (14) of section 10 of the Income-tax Act, 1961, which was inserted by the Direct Tax Laws (Amendment) Act, 1987, with effect from 1st April, 1989, provides for exemption from income-tax on the allowances which are granted to an assessee either to meet his personal expenses at the place where he performs th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, it shall be deemed to be the income of the assessee in the year immediately following the period of eight years and charged to tax accordingly. Within the aforesaid period of eight years and before the acquisition of a new ship, the amount credited to the reserve account can be utilised for the business of the assessee, except for distribution of dividends or profits or for remittance outside India either as profits or for creation of any asset. In cases where the amount of reserve is utilised in violation of the aforesaid condition, it will be deemed to be the income of the assessee for the year in which the amount has been so misutilised. Further, if a new ship acquired out of the reserve account is sold or otherwise transferred by the assessee within the period of eight years from the end of the previous year in which it was so acquired, the amount utilised out of the reserve account for the acquisition of the ship shall be deemed to be the income in the year in which the sale or the transfer takes place. 9.2 For purposes of section 115J of the Income-tax Act, the book profits of a company are, inter alia, increased by amounts carried to any reserves by whatever name called ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the expenditure incurred in connection with such transfer into the foreign currency in which the investment was made. The capital gains as computed in such foreign currency shall be reconverted into Indian currency. The conversion of Indian currency into foreign currency and the reconversion of foreign currency into Indian currency shall be at the rate of exchange prescribed by the Board in this behalf. The above method of computation of capital gains shall apply in respect of capital gains accruing or arising for every reinvestment made thereafter in the shares in and debentures of the Indian companies. The term 'non- resident Indian' shall have the meaning as given to it in clause (e) of section 115C of the Income-tax Act. Therefore, it will cover not only the non-resident citizens of India but also non-resident persons of Indian origin who are not citizens of this country. For the purpose of this section, a person shall be deemed to be of Indian origin if he, or either of his parents or any of his grandparents, was born in undivided India. 10.2 The following example will make the impact of the new provision clear: Assume that Mr. X, a non-resident Indian, remits US $2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the previous year in which such investment was made. On the other hand, section 80C of the Income-tax Act also provides for tax concession in respect of contributions to effect or to keep in force a contract for a deferred annuity on the life of the taxpayer or his spouse or child. The Jeevan Dhara Scheme of the Life Insurance Corporation, which is one of the two schemes of the Life Insurance Corporation notified for the purposes of section 80CCA, is also a deferred annuity scheme. A number of instances had come to notice wherein taxpayers had claimed deduction from their total income in respect of contributions to the Jeevan Dhara Scheme of the Life Insurance Corporation both under the provisions of section 80C and section 80CCA of the Income-tax Act. This was against the legislative intent. Hence, section 80C of the Income-tax Act has been amended to provide that the contributions to the annuity plans covered under section 80CCA will not qualify for deduction under section 80C of the Income-tax Act. 11.2 This amendment shall come into force with effect from 1st April, 1990, and will, accordingly, apply to the assessment year 1990-91 and subsequent years. [Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s taking place in India is liable to be taxed in India. Under section 195 of the Income-tax Act, it is also necessary to deduct tax at source at the time of payment/ credit of such income. On the other hand, in countries like the United Kingdom, Australia and New Zealand, the income of the visiting non-resident sportsmen or sports bodies is either not taxes or taxed at lower rates. Further, practical difficulties were being experienced in enforcing the provisions of the Income-tax Act with regard to the payments to be made to the non-resident sportsmen or sports bodies. Therefore, as a measure of reciprocity and rationalisation, a new section 115BBA has been introduced in the Income-tax Act, providing that the income of the non-resident sports boides and non-resident sportsmen (who are not citizens of India) other than the income chargeable under section 115BB will be chargeable to tax at a flat rate of 10# of the gross payments due to them. This rate will also be applicable in respect of income derived by non-resident sportsmen from their other activities like participating in advertisements and writing in newspapers, etc. It has also been prescribed that, in such cases, there wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partnership firm whose accounts are required to be audited under the Income-tax Act or any other law, the due date for filing of the income-tax return is the 31st day of October of the assessment year. However, in the case of the partners of such a firm, the due date specified in section 139 was the 31st day of August of the assessment year. This created difficulties in the case of the partners because their correct share in the profits of the firm could be known only towards the end of the month of October by which time the audit of the accounts of the firm would have normally been completed. Hence, as a measure of rationalisation, section 139 has been amended to provide that in the case of partners of a firm whose accounts are required to be audited under the Income-tax Act or any other law, the due date for filing the return of income will be the 31st day of October of the assessment year. 15.2 This amendment shall come into force retrospectively with effect from 1st April, 1989, and will, accordingly, apply to the assessment year 1989-90 and subsequent years. [Section 13 of the Second Amending Act, 1989] Specifying the effective date of application of the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation for their service had lapsed. To overcome these difficulties, Removal of Difficulties Order under section 298(3) of the Income-tax Act was passed on 23rd March, 1989. In this order, it was specified that the provisions of section 143 of the Income-tax Act as they stood before the commencement of the Direct Tax Laws (Amendment) Act, 1987, were to apply in respect of assessments for the assessment year commencing on the 1st day of April, 1988, and any earlier assessment year. A provision to this effect has now been incorporated in section 143 itself, as sub-section (5) thereof. 16.3 Amendments to the above effect have also been made to sections 140A, 142 and 144 of the Income-tax Act which are connected with the assessment procedure contained in section 143 to provide that the provisions of these sections as they stood immediately before their amendment by the Direct Tax Laws (Amendment) Act, 1987, shall apply to and in relation to any assessment for the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year. 16.4 Amendments in the assessment procedure under the Wealth-tax Act and the Gift-tax Act on the lines of the new section 143 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year, there was any variation in the carried forward loss, deduction, etc., claimed in the return, then the necessary adjustments could be made in the said return. However, this provision did not cover the variations resulting on account of the orders under section 143(3) or section 144 for an earlier assessment year made subsequent to the filing of the return for a later assessment year. It was necessary to include this eventuality also in the aforesaid clause. Hence, clause (b) of sub-section (1) of section 143 has been amended to include therein reference to orders made under section 143(3) and section 144 also. 17.4 Section 16 of the Wealth-tax Act and section 15 of the Gift-tax Act have also been amended on the above lines. 17.5.1 Further, in sub-section (1) of section 143, there was no provision to vary the share income or loss of the partners of the firm or members of an association of persons or body of individuals if there was a variation in their share as a result of variation in the returned income/loss of that assessment year of such a firm, association of persons or body of individuals subsequent to the filing of the returns by them. The variation in the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er can be issued in all cases where a return has been made under section 139 or in response to a notice under sub-section (1) of section 142. 17.7 Section 16 of the Wealth-tax Act and section 15 of the Gift-tax Act, have also been amended on the above lines. 17.8 Under the provisions of section 143, there was no provision enabling adjustment of the tax or interest collected or the refund issued under sub-section (1) of section 143 against the demand created on regular assessment under sub-section (3) of section 143 or section 144. This had created an anomalous situation as returns, on the basis of which tax or interest had been collected or refund issued under the provisions of section 143(1), could be subsequently picked up for regular assessment under sub- section (3) of section 143 or section 144. To overcome this anomaly, sub-section (4) has been added to section 143 which provides that any tax or interest collected from the assessee or any refund issued to him under the provisions of section 143(1), shall be adjusted against the demand of tax and interest created as a result of the regular assessment, if any, made under the provisions of section 143(3) or section 144 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endment situation in respect of deduction of tax at source out of payments of interest to the accounts of the non-residents by the Government or a public sector bank or a public financial institution. Hence, section 195 of the Income-tax Act has been amended to provide that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode. 19.2 The above amendment shall come into force retrospectively with effect from 1st June, 1987. [Section 23 of the Second Amending Act, 1989] Amendment of provisions relating to withholding or refunds: 20.1 Under the provisions of section 241 of the Income-tax Act, incorporating the power to withhold refunds in certain cases, a refund could be withheld only if it arose as a result of an order passed under the Income-tax Act. Therefore, refunds due under the provisions of sub-section (1) of section 143 could not be so withheld as no order is required to be passed under this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 1st April, 1989. [Section 26 of the Second Amending Act, 1989] Valuation of shares of companies--Amendments in Schedule III to the Wealth-tax Act: 22.1 Under the provisions of rule 9 of Schedule III, the value of an equity share in any company which was a quoted share was taken on the basis of its quoted value in the stock exchange as on the date of valuation. If no such quotation was there on the valuation date, the quotation on the date closest to the valuation date immediately preceding it was taken as its value. Representations had been received to the effect that in the case of equity shares of certain companies, the quoted value was very high at certain points of time on account of speculative tendencies. It was represented that valuing the equity shares of such companies on the basis of their quoted value on a single date caused hardship in the case of shareholders of these companies. To remove this hardship, rule 9A has been inserted in Schedule III to the Wealth-tax Act, which provides an alternative method of valuation of such shares. Such shares can now be valued, at the option of the assessee, either on the basis of their quoted value on the valua ..... X X X X Extracts X X X X X X X X Extracts X X X X
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