9911796707
TMI BlogExplanatory Notes on the provisions of the DTL (Amendment) Act, 1989 [excluding those discussed in the Explanatory Notes on the provisions of the DTL (Amendment) Act, 1987]--Parts I to III issued under Circulars Nos. 545, 549 and 551X X X X Extracts X X X X X X X X Extracts X X X X ..... lanatory notes on the provisions of that Act, issued under Circular No.s. 545, 549 and 551. Abbreviations used 1.2 In these explanatory notes following abbreviations have been used:- (i) The Direct Tax Laws (Amendment) Act, 1987 has been referred to as the "Amending Act, 1987". (ii) The Direct Tax Laws (Amendment) Act 1989 has been referred to as the "Amending Act, 1989". (iii) The various provisions of the Income-tax, Wealth-tax and Gift-tax Acts, as they stood before amendments by the Direct Tax Laws (Amendment) Act, 1989 have been referred to as the "old provisions". Objects of the Amending Act, 1989 2. The main objectives sought to be achieved are:- (i) To withdraw the following new provisions introduced by the Amending Act, 1987:- (a) Scheme of taxation of firm and partners. (b) Scheme of tax treatment of charitable and religious trusts, etc., scientific research and sports associations and institutions of national importance. (c) Charging of additional tax in lieu of penalty for concealment of income/wealth/gift (ii) To further amend those provisions of the Income- tax, Wealth-tax and Gift-tax Acts, which were earlier amended by the Amending Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... F INDIA Insertion of a new clause (6C) in section 10 4.1 Foreign companies, which provide technical assistance in accordance with agreements entered into with the Government of India, are taxable in India in respect of fees for technical services received by them. The tax leviable is 30% of the gross fees for technical services received by them. Accordingly, foreign companies providing technical assistance in connection with defence projects were also liable to similar tax. It was felt that foreign companies hesitated to provide such technical assistance due to hassles of taxation procedure. Therefore, the Amending Act, 1989 has inserted a new clause (6C) in section 10 to provide that income by way of fees for technical services received by a foreign company, which the Central Government may, by notification in the Official Gazette, specify in this behalf, shall not be included in the total income of such a company, where such income is received in pursuance of an agreement entered into with the Central Government for providing services in or outside India in projects connected with security of India. 4.2. This amendment comes into force with effect from 14-1989 and will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o been provided that for the purposes of this exemption the expression "non-resident Indian" shall have the meaning assigned to it in section 115C(e). 5.5 It may be mentioned that in exercise of the powers conferred by the said new sub-clause (iid), the Central Government notified the "NRI Bonds, 1988" issued by the State Bank of India for purposes of exemption under the said sub-clause vide Notification No. SO 847(E) 24-10-1989, issued under No. 8474/F. No. 132/1/ 89-TPL. 5.6 Corresponding exemptions under the Wealth-tax and the Gift-tax Acts are discussed in Paras 11.2 and 20 of these explanatory notes. 5.7 These amendments come into force with effect from 1-4-1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Clause (b) of section 4 of the Amending Act, 1989] REINTRODUCTION OF INVESTMENT ALLOWANCE AS AN OPTION TO THE EXISTING INVESTMENT DEPOSIT ACCOUNT SCHEME Amendments to section 32A to revive investment allowance 6.1 It was decided in the year 1986 to discontinue the deduction for investment allowance and substitute it by the new provisions of investment deposit account, where the deduction was linked with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where the assessees had taken steps to acquire such assets prior to the date of notification (i.e., 12-6-1986), but were not able to obtain timely delivery of these assets from the foreign or Indian manufacturers or dealers for reasons beyond their control, so that these could be acquired or installed only after 31-3-1987. These assessees would have been denied the benefit of deduction for no fault of theirs. It was, therefore, decided to make provisions to allow investment allowance to such assessees also. 6.4 In order to implement the decision for re-introduction of investment allowance, as indicated in Paras 6.2 and 6.3 above, the Amending Act, 1989 has made the following amendments to section 32A:- (I) A new sub-section (8B) has been substituted in the section to provide that, notwithstanding anything contained in sub-section (8) or Notification No. GSR 870(E) 12-6-1986 issued thereunder, the provisions of the section shall apply in respect of the following assets: - (a)(i) A new ship or new aircraft acquired after 31-3-1987 but before 1-4-1988, if the assessee furnishes evidence to the satisfaction of the Assessing Officer that he had entered into a contract for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted in sub-section (2) of the section, which specifies the assets on which deduction for investment allowance is allowable, to clarify that the deduction shall not be allowed on a new ship or new aircraft acquired or any new machinery or plant installed after 31-3-1987 but before 1-4-1988 unless such assets are acquired /installed in the circumstances specified in clause (a) of sub-section (8B) of the section and the assessee furnishes evidence to the satisfaction of the Assessing Officer as specified in that clause. (V) Sub-section (2C) of the section allows a special rate of investment allowance, being 35 per cent, in respect of new machinery or plant which would assist in control of pollution or protection of environment and which is installed after 31-5-1983 in any industry specified in sub-section (2) of the section. This sub-section has been amended to provide that investment allowance at the enhanced rate of 35 per cent shall be allowed only in respect of such machinery or plant installed before 1-4-1987. Where such, machinery or plant is installed on or after 1-4-1987, it will be entitled to investment allowance at the nominal rate of 20 per cent under the amended provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year and a block of further period of four years beginning with the assessment year immediately succeeding the initial-assessment year. Combined effect of the provisions of section 32A(8C) and section 32AB(10) 6.7 Since the investment allowance (section 32A) has been re-introduced as an alternative to the investment deposit account scheme (section 32AB) the combined effect of the provisions of sub-section (8C) of section 32A and sub-section (10) of section 32AB is that if the assessee exercises option to claim either of them in an assessment year (called as the initial assessment year), he will have to stick to that allowance for the said initial assessment year and a block of four subsequent assessment years. Thus, once the assessee avails of the claim under section 32A in the assessment year 1989-90 (which will become the initial assessment year for claim under section 32A), he will have to continue claiming the same allowance in the block of next four assessment years, i.e., assessment years 1990-91 to 1993-94. During these five assessment years (i.e., assessment years 1989-90 to 1993-94) he cannot claim deduction under section 32AB, for which he can opt only in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce (section 32A) has been reintroduced with effect from the assessment year 1989-90 and an option between section 32A and section 32AB has been made available for the first time from the assessment year 1989-90 only, the assessment year 1989-90 shall be the first initial assessment year for the purposes of exercising the option between the two sections. Thus an assessee, who had claimed deduction under section 32AB during the assessment year 1987-88 or assessment year 1988-89, can exercise the option for claiming deduction either under section 32A or under section 32AB in the assessment year 1989-90. Where any such option is exercised in the assessment year 1989-90, that will be the initial assessment year for the claim for which option is exercised. Consequential amendment of section 155(4A)(b) 6.10 The amending Act, 1989 has also made an amendment of consequential nature in clause (b) of sub-section (4A) of section 155 pursuant to the insertion of a proviso in sub-section (1) of section 32A, as discussed at Sl.No.(II) in Para 7.4 ante. 6.11 These amendments Come into force with effect from 1-4-1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 80HHD are briefly explained below:- (i) Sub-section (1) of the section provides that in computing the total income of an assessee, being an Indian company or a person (other than a company) resident, who is engaged in the business of a hotel, or of a tour operator, approved by the prescribed authority in this behalf or of a travel agent, deduction shall be allowed, subject to the provisions of this section, of a sum equal to the aggregate of- (a) 50 per cent of the profits derived by him from services provided to foreign tourists; and (b) so much of the amount out of the balance profits as is debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised by the assessee for the purposes of his business in the manner laid down in sub-section (4). Thus 100 per cent of the profits derived by such hotels, tour operators and travel agents from services rendered to foreign tourists can be allowed as a deduction. However, only 50 per cent of such profits is allowed as a deduction straightaway, while profits up to the balance 50 per cent is allowed only to the extent it is credited to a reserve account and subsequentl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc. (iv) Sub-section (3) lays down that for the purposes of claiming deduction under this section profits derived from services provided to foreign tourists shall be determined as follows: - (a) Where assessee's business consists exclusively of services provided to foreign tourists resulting in receipt in convertible foreign exchange, the entire profits of the business as computed tinder the head "Profits and gains of business or profession" shall be treated as such profits. (b) Where assessee's business does not consist exclusively of services provided to foreign tourists resulting in receipts in convertible foreign exchange, only the proportionate profits computed under the head "Profits and gains of business or profession" shall be entitled to the deduction. The proportion shall be the same as the receipts in convertible foreign exchange bear to the total receipts of assessee's business. (v) Sub-section (4) lays down the manner in which the amount credited to the reserve account, referred to in sub-section (1), is to be utilised. It is laid down that the said amount shall be utilised by the assessee, before the expiry of a period of five years from the year in which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D [Refer new sub-rule (4) inserted in rule 18BBA by the Income-tax (Fifth Amendment) Rules, 1989 issued under Notification No. SO 362(E) 18-5-1989]. 'Prescribed authority' for the purpose of section 80HHD 7.6 The "prescribed authority" for the purposes of section 80HHD shall be the Director General in the Directorate General of Tourism, Government of India [Refer new sub- rule (5) inserted in rule 18BBA by the Income-tax (Eleventh Amendment) Rules, 1989 issued under Notification No. SO 975(E), 30-11-1989]. 7.7 These amendments come into force with effect from 1-4-1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Sections 14 and 16 of the Amending Act, 1989] TAX CONCESSIONS TO FOREIGN COMPANIES WHO RECEIVE INCOME IN RESPECT OF UNITS, PURCHASED IN FOREIGN CURRENCY, OF A MUTUAL FUND SET UP BY PUBLIC SECTOR BANKS, ETC. Amendments of section 115A, which prescribes special rates or tax on certain incomes of foreign companies 8.1 Under the old provisions of section 115A of the Income-tax Act, the following special rates of tax were prescribed in respect of certain income of foreign companies:- (i) On interest recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f "foreign company" contained in section 115A, as the same is now provided in section 2(23A) of the Income-tax Act. Amendment of section 196A to provide for deduction of tax at source at the rate of 25 per cent from any income payable to a foreign company in respect of units of a Mutual Fund 8.5 Under the old provisions of section 196A, as inserted by the Amending Act, 1987, with effect from 1-4-1988, no tax was to be deducted at source from any sums payable to the unit holders of a Mutual Fund specified under section 10(23D). Thus, even foreign companies, which do not enjoy exemption under section 80L in respect of the income from the units of such Mutual Fund and which are straightaway taxable at the rate of 25 per cent under the amended provisions of section 115A, were excluded from the provisions of tax deduction at source. This made the realisation of tax in respect of such income of the foreign companies difficult. The Amending Act, 1989 has, therefore, substituted a new section 196A in the Income-tax Act to provide that tax shall not be deducted at source from any income payable in respect of units of a Mutual Fund, specified under section 10(23D), to its unit holders, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourism related industry and thus watered down the encouragement which was to be provided to such foreign exchange earning activities. Since the intention was that 100 per cent of such profit should be exempt, it was decided that the profits, which are exempt under sections 80HHC and 80HHD, should be excluded from the purview of section 115J. It was also decided that section 115J should not apply to companies engaged in the business of generation or distribution of electricity. Amendments of section 115J 9.3 To achieve the objectives outlined in para 9.2 above, the Amending Act, 1989 has carried out the following amendments in section 115J: - (i) Sub-section (1) of the section has been amended to provide that the provisions of the sub-section relating to the taxability of 30 per cent of the "book profits" of companies shall not apply in the case of a company engaged in the business of generation or distribution of electricity (ii) An Explanation in the section provides for the manner of computation of "book profits" for the purposes of the section. The Amending Act, 1989 has carried out the following amendments in the said Explanation: - (a) A new clause (iii) has been i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consumption (other than foreign liquor) 40% of the purchase price. 2 Timber obtained under a forest lease 35% of the purchase price. 3 Timber obtained by any mode other than under a forest lease 15% of the purchase price. 4. Any other forest produce, not being timber 35% of the purchase price. 10.2 It was, however, pointed out that in some of the States the contracts for sale of liquor are not given by auction or any similar mode, but licences to sell the liquor are issued to the contractors by the State Government more or less on a permanent basis. The licences are renewable every year automatically on payment of the prescribed fees. Both the purchase and sale prices are regulated by the State Government. Thus indirectly the entire profit in such cases is regulated by the State laws and this leaves little scope of manipulation for tax evasion. It was, therefore, pointed out that the application of the rate of presumptive profits operated very harshly in such cases. To remove this hardship, the Amending Act, 1989 has amended section 44AC to provide that the provision for the application of rate of presumptive profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to provident fund, etc., to rationalise certain provisions of the section 10.6 Section 80C of the Income-tax Act provides for deductions to be made in computing the total income of an assessee in respect of payments made by him towards life insurance premia, contributions to provident fund, etc. The Amending Act, 1989, has made amendments to certain provisions of the section to rationalise the same. These amendments are discussed below: - (i) Amendment of section 80C(2)(d) - Under the old provisions of clause (d) of sub- section (2) of the section, an employee participating in a recognised provident fund was allowed deduction under the section on his contributions to the provident fund subject to the limit of 1/5th of his salary or Rs. 10,000, whichever was less. The monetary ceiling of Rs. 10,000 was not very necessary and had also lost its relevance in view of the increased salary now being paid to the Government as well as non-Government employees. The said clause (d) has, therefore, been amended to remove this monetary ceiling of Rs. 10,000 therefrom. Thus the qualifying amount for deduction under the section for contributions by an employee to the recognised provident f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merchandise to the Export House or the Trading House. The wordings of sub-sections (1), (1A) and (4A), according to which deduction was computed on the basis of "income" from the export activity, created confusion, as under the Income-tax Act as well as in accountancy principal income from business or profession is normally referred to as "profits". Even sub-sections (3) and (3A) of section 80HHC itself provides for determination of export "profits" of the exporter or the supporting manufacturer and not export "income" for the purposes of deduction under the section. Therefore, to rationalise the provisions of section 80HHC and to remove the confusion, the words "whole of the income" used in sub-sections (1), (1A) and the word "income" used in sub-section (4A) of the section have been substituted by the word "profits" in each case. (ii) Sub-section (4) of the section provides that in order to claim deduction under the section an exporter should furnish, along with the return of income, the report of a chartered accountant in the prescribed form. Under the old provisions of the said sub-section (4), the chartered accountant was to certify that the deduction had been correctly clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t provides that no appeal shall be admitted unless, at the time of filing the appeal, the assessee has,- (a) where a return has been filed by him, paid the tax due on the income returned by him, or (b) where no return has been filed by him, paid an amount equal to the amount of advance tax which was payable by him. Under the old provisions of a proviso to the said sub-section (4), discretion was allowed to the first appellate authority, i.e., any Deputy Commissioner (Appeals) or the Commissioner (Appeals) to waive the above requirement for good and sufficient reasons. 10.10 In a case where the assessee has filed a return of income, there is no reason as to why he should not have paid the tax due on the basis of income declared in the return. This is all the more necessary now under the new procedure of assessment, which has become effective from 1-4-1989, according to which the assessee must pay at the time of filing the return, not only the tax due on the basis of the returned income, but also the interest due, if any, for late filing of the return and for defaults in the payment of advance tax. In view of this, there is no justification for the said proviso to sub-secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lost its relevance, especially in view of the fact that the basic exemption limit had been raised from Rs. 5,000 in the year 1971 to Rs. 16,000 at present. It had, therefore, become necessary to suitably raise this monetary limit of Rs. 40,000. The Amending Act, 1989, has, therefore, amended the said sub-section (3) of section 255 to raise the monetary limit of Rs. 40,000 mentioned therein to Rs. 1,00,000. Thus, a Single Member Bench of the Appellate Tribunal can now hear appeals arising from orders of assessment where the assessed income is up to Rs. 1,00,000. Amendments of sections 269A and 269B of Chapter XXA relating to acquisition of immovable properties in certain cases of transfer, to remove an anomaly 10.13 Under the old provisions of clause (b) of section 269A and clause (a) of sub- section (1) of section 269B of Chapter XXA of the Income-tax Act relating to acquisition of immovable properties in certain cases of transfer to counteract evasion of tax, an "Assistant Commissioner of Income-tax" was referred to as a competent authority for the purposes of performing the functions under the Chapter. This referred to the "Assistant Commissioner of Income-tax", before ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ords or other documents in his custody. 10.15 Amendment of section 44AC (Para 10.2), section 80C (Para 10.6) and section 80HHC (Para 10.7) came into force with effect from 1-4-1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. 10.16 Amendments of section 206C (Para 10.5), various sections of Chapter XVII [Item (ii) of Para 10.8], section 249(4) [Para 10.10], section 253 (Para 10.11), section 255(3) [Para 10.12], and insertion of a new section 279B (Para 10.14) come into force with effect from 1-4-1989. 10.17 The following amendments come into force retrospectively, with effect from the dates mentioned against them:- ( i ) Amendment of section 190 [Item ( i ) of Para 10.8] 1-6-1988 ( ii ) Amendment of section 206C (Para 10.4) 1-6-1988 ( iii ) Amendment of sections 269A and 269B (Para 10.13) 1-4-1988 [Sections 10,13, 15, 29, 33, 34, 45 to 49 and 53 of the Amending Act, 1989] AMENDMENTS TO THE WEALTH-TAX ACT, 1957 AMENDMENTS CORRESPONDING TO THE AMENDMENTS MADE IN THE INCOME-TAX ACT Table indicating the corresponding amendments 11.1 The Amending Act, 1989 has eithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of such Bonds is available to all those individuals who enjoy the exemption under the Income-tax Act, i.e., to the following:-- (i) An individual, who is a non-resident Indian, who acquires or holds such Bonds during the year. (ii) A nominee or survivor of such non-resident Indian. (iii) An individual, receiving the Bonds by way of gift from such non-resident Indian. (iv)An individual, who is a non-resident Indian during the year in which such Bonds are acquired, but who becomes a resident in India in any subsequent year. AMENDMENTS TO ENSURE PROPER DEDUCTION OF DEBTS SECURED OR INCURRED IN RESPECT OF ASSETS WHICH ARE EXEMPT UNDER CERTAIN PROVISIONS OF THE WEALTH-TAX ACT Amendment of the definition of 'net wealth' in section 2(m) 12.1 Clause (m) of section 2 of the Wealth-tax Act defines 'net wealth' to mean the aggregate value of the assets computed in accordance with the provisions of the Act minus the aggregate value of debts owned by the assessee on the valuation date. However, certain categories of debts are not deductible. Under the provisions of sub-clause (ii) of the said clause (m), debts, which are secured on or which are incurred in relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 58 and clause (b) of section 60 of the Amending Act, 1989] AMENDMENTS TO SECURE PROPER VALUATION OF INTEREST OF A PARTNER OR A MEMBER IN THE FIRM OR ASSOCIATION OF PERSONS Amendments of the provisions of section 4 dealing with inclusion of certain assets in the net wealth 13.1 Section 4 of the Wealth-tax Act deals with the inclusion of the value of certain assets in the net wealth of an assessee. Under the provisions of clause (a) of sub-section (1) of the section, the value of assets transferred by an individual to his or her spouse, minor, etc., is included in the net wealth of that individual, while under the provisions of clause (b) of the said sub-section (1), the value of interest of a partner or a member in the firm or association of persons, as the case maybe, is included in the net wealth of that partner or member. Under the old provisions of the said sub-section (1), both its clauses (a) and (b) were governed by the same opening words which referred to an "individual". This let to an interpretation that clause (b) dealing with inclusion of the value of interest of a partner or a member in the firm or association of persons in his net wealth was applicabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of persons, exemption under sub-section (1) of the section in respect of assets held by the firm or association of persons shall be given in the hands of that partner or member in the same proportion in which that partner or member is entitled to share in the profits of the firm or the association of persons. 13.5 These amendments come into force with effect from 1-4-1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Section 59 and clause (c) of section 60 of the Amending Act, 1989] CONSEQUENTIAL AMENDMENTS OF THE PROVISIONS RELATING TO DETERMINATION OF THE VALUE OF ASSETS PURSUANT TO INCLUSION OF RULES FOR VALUATION IN SCHEDULE III TO THE WEALTH-TAX ACT Substitution of new section for section 7 dealing with determination of the value of assets 14.1 Under the old provisions of section 7 of the Wealth-tax Act, the value of any asset, other than cash, was taken, subject to any rules made in this behalf, as the price it would fetch if sold in the open market on the valuation date. Sub-sections (1) to (3) contained provisions for determination of this "open market value" of the asset. Sub-section (4) gave an option to the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -section (1) of section 16A, a reference cannot be made to the Valuation Officer only where the market value of any asset is to betaken into account for purposes of assessment, either under the provisions of section 7 read with rules made under the Act or under the provisions of rules in Schedule III. 14.5 These amendments come into force with effect from 1-4-1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Section 62 and 65 of the Amending Act, 1989] AMENDMENTS OF THE PROVISIONS RELATING TO POWER OF THE COMMISSIONER TO REDUCE OR WAIVE PENALTY IN CERTAIN CASES Amendment of section 18B 15.1 Under the old provisions of sub-section (1) of section 18B of the Wealth-tax Act, the Commissioner was empowered to reduce or waive the following penalties:-- (i) Penalty under section 18(1)(i) for failure to furnish return of wealth under section 14(1). (ii) Penalty under section 18(1)(iii) for concealment of wealth or furnishing inaccurate particulars of wealth. 15.2 The provisions regarding levy of penalty for default in filing the return of wealth were omitted and replaced by charge of mandatory interest under a new section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lating to any proceedings or prosecutions under the Act in respect of such assessees. With the revival of wealth-tax on companies, as per the provisions of section 40 of the Finance Act, 1983, it had become necessary to provide that in the case of companies names of its principal officers could also be published. Similar provisions exist in the Income-tax Act. The Amending Act, 1989 has, therefore, inserted an Explanation in the said section 42A to provide that in the case of a company, the names of the directors, secretaries and treasurers, or managers of the company, may also be published if, in the opinion of the Central Government, the circumstances of the case justify it. 16.3 These amendments come into force with effect from 1-4-1989. [Section 70 and 77 of the Amending Act, 1989] AMENDMENTS TO REMOVE ANOMALIES RELATING FROM CERTAIN PROVISIONS OF THE AMENDING ACT, 1987 OF WITHDRAWAL THEREOF 17.1 The Amending Act, 1989 has amended certain sections of the Wealth-tax Act to remove some anomalies which had resulted from some provisions of the Amending Act, 1987, or on account of omission of certain provisions introduced by that Amending Act. The sections so amended and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... house, unquoted preference shares, unquoted equity shares of companies other than investment companies, interest in partnership or association of persons, determination of net value of assets of business as a whole, etc. This did not solve problem to any appreciable extent, as the determination of the value of accordance with these rules was often challenged in the courts on the ground that such determination did not correspond to the market value concept envisaged in the Wealth-tax Act and, therefore, the rules were ultra vires the main provisions of the Act. Thus, it was held by several High Courts that the rules are not mandatory. [Smt. Kusumben D. Mahadevia vs CWT [1980] 124 ITR 799 (Bom) and K. M. Mammen vs WTO [1983] 139 ITR 357 (Mad)], such interpretations made the rules for valuation ineffective. Therefore, in order to eliminate litigation on the subject and also to made the said rules mandatory so that there is certainty and uniformity in the matter of valuation of assets, the Amending Act, 1989 has incorporated the rules for valuation in the wealth-tax itself, by inserting a new Schedule III in the Act. Simultaneously section 7 has also been suitably amended (refer par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ussed in the following paras. Valuation of immovable property (rule 3) 18.7 Rule 3 provides that the value of a house property shall be determined by multiplying the net maintainable rent by the figure 12.5. First proviso to this rule provides that in the case of a house property constructed on leasehold land, the multiplying factor of 12.5 shall be substituted by 10 if the unexpired period of the lease of such land is 50 years or more, and by 8 if the unexpired period of the lease is less than 50 years. 18.8 Second proviso to the said rule 3 further provides that where the house property is acquired or constructed after 31-3-1974, its value shall be taken to be the cost of acquisition or the cost of construction plus the cost of any improvement thereto, if the value so determined is more than the value arrived at by the method of multiplying factor envisaged in the main rule and the first proviso. Third proviso to the rule, however, provides that the provisions of the second proviso shall not apply for determining the value of one house belonging to the assessee, even before the house is acquired or constructed after 31-3-1974, if the house is exclusively used by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tenant are included in the annual rent. Thus where the owner takes a deposit (except advance rent for three months or less) from the tenant, 15 per cent per annum of such deposit (minus interest per annum if any paid by the owner on the deposit) is included in the annual rent. Where the tenant bears the taxes levied by any local authority in respect of the House, the amount of such taxes borne by the tenant is also included in the annual rent. Again, where the tenant bears the expenditure on repairs, 1/9th of the annual rent is further included in the annual rent. Adjustments to the value of house property arrived at under rule 3 (rules 6 and 70) 18.13 Rule 6 provides for adjustments to the value arrived at under rule 3 for unbuilt area of plot of land. Rule 7 provides for adjustments for unearned increase in the value of the land, where the house property is constructed on leasehold land and the terms of the lease entitle the Government or any local authority to claim and recover a specified part of the unearned increase in the value of the land at the time of the transfer of the house property. The provisions of rules 6 and 7 are on the same lines as the provisions of sub-ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those of the erstwhile rule IC of the Wealth-tax Rules, 1957 except that the words 'market value' have been substituted by the word 'value'. Valuation of unquoted equity shares in companies other than investment companies (rule 11) 18.18 Rule 11 provides for the method of valuation of unquoted equity shares in companies other than investment companies. The provisions of this rule, which provide from valuation of such shares at a percentage of the break-up value of the share, are on the same lines as those of the erstwhile rule 1D of the Wealth-tax Rules, 1957 subject to the following modifications: (i) Under the provisions of the erstwhile rule 1D, the value was determined at 85 per cent of the break-up value determined in the manner laid down in that rule. However, where no dividend was paid by the company for three years or more, the percentage was varied from 82.5 per cent to 75 per cent depending upon the number of years for which dividend was not paid. Under the present provisions of rule 11, the value is determined in all cases at 80 per cent of the break-up value irrespective of whether the dividend has been paid or not. The method of determining the break-up value, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en into account in rule 11. (Refer para 22 of the explanantory notes on that Act issued under Circular No. 554 dated 13-2-1990. Valuation of unquoted equity shares in interlocked companies (rule 13) 18.20 Rule 13 provides for the method of valuation of unquoted equity shares in interlocked companies. An Explanation to this rule clarifies that for the purposes of this rule, 'interlocked companies' means any two investment companies, each of which holds shares in the other company. The provisions of this rule are as follows:-- (i) Sub-rule (1) provides that the value of an unquoted equity share in one of the two interlocked companies held by the other interlocked company for the purposes of this rule shall be equal to the paid up value of such share or the value determined under sub-rule (2), whichever is higher. (ii) Sub-rule (2) provides the method for determining the value of such share for the purposes of sub-rule (1), as follows: (1) First arrive at the 'aggregate value of all the equity shares' in an interlocked company as follows: (a) In a case where 50 per cent or more of the gross total income of the company consists of income chargeable under the head 'Income fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicable to that asset. (This corresponds to the erstwhile rule 2C of the Wealth-tax Rules, 1957 with appropriate modifications). (iii) Clause (d) enumerates certain assets disclosed in the balance-sheet, which are not to be taken into account. (This corresponds to the erstwhile rules 2D and 2G of the Wealth-tax Rules, 1957, with appropriate modifications). (iv) Clause (e) enumerates certain liabilities shown in the balance-sheet, which are not to be taken into account. (This corresponds to the erstwhile rules 2E and 2G of the Wealth-tax Rules, 1957, with appropriate modifications). 18.24 It may be clarified that there is no provision in rule 14 for allowing deduction on account of liabilities relating to business, but which have not been disclosed in the balance-sheet corresponding to the erstwhile rule 2F of the Wealth-tax Rules, 1957. Consequently, if any debt owed by the assessee and relating to the business is not disclosed in the balance-sheet, no deduction for the same shall now be allowed while determining the net value of the assets of business. PART E : INTEREST IN FIRM OR ASSOCIATION OF PERSONS [RULES 15 AND 16] 18.25 Rules 15 and 16 provide for the manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the term 'jewellery' is given in rule 2(7). Adjustment in the value of jewellery for subsequent assessment years (rule 19) 18.29 Rule 19 provides that the value of any jewellery determined under clause (b) of rule 18, i.e., in cases where the value declared by the assessee is more than Rs. 5,00,000 and the value is determined by the Valuation Officer for any assessment year (hereinafter referred to as the first assessment year) shall be taken to be the value of such jewellery for the subsequent four assessment years. This will, however, be subject to the following adjustments: (a) Where the jewellery includes gold or silver or any alloy containing gold or silver, the value of such gold or silver or such alloy as on the valuation date relevant to the concerned subsequent assessment year shall be substituted for the value of such gold or silver or alloy on the valuation date relevant to the first assessment year. (b) Where any jewellery or part of jewellery is sold or otherwise disposed of by the assessee, or any jewellery or part of jewellery is acquired by him, on or before the valuation date relevant to the concerned subsequent assessment year, the value of the jewe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The Table below shows the provisions of the Gift-tax Act that have been so inserted/amended and the corresponding provisions in the Income-tax Act, that has also been indicated. The Table also indicates the sections of the Amending Act, 1989, which have carried out the necessary amendments to the Gift-tax Act and the subject-matter of amendments in brief. Sl. No. Section of the Amending Act, 1989 Section of the Gift-tax Act that has been amended/ inserted Corresponding section of the Wealth-tax Act/Income-tax Act Subject-matter of the amendment in brief 1 2 3 4 5 1. 79 3 - Consequential amendment of section 3 pursuant to insertion of a new Schedule II in the Gift-tax Act. 2. 80 5(1)(iiie) (i) 5(1)(xvig) of the W.T. Act. (ii) 10(15)(iid) of the I.T. Act Exemption from gift-tax in respect of non-repatriable NRI Bonds. 3. 81 6 7 of the W.T. Act Substitution of new section for section 6 dealing with determination of the value of gifts, pursuant to insertion of a new Schedule II in the Gift-tax Act. 4. 82 10 11 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the non-resident Indian. Thus gifts made to persons other than relatives will not be exempt from gift-tax. The term 'relative' shall have the same meaning as defined in section 2(41) of the Income-tax Act, i.e., it would mean the husband, wife, brother or sister or any lineal ascendant or descendant of the individual. (iii) The gift of such bonds should be made after a period of three years from the date of their purchase by the non-resident Indian. Thus gifts made before the expiry of the said period of three years would be liable to gift-tax. Insertion of Schedule II containing rules for determining the value of property gifted 21. The Amending Act, 1989 has inserted a new Schedule II in the Gift-tax Act, which incorporates the rules for determining the value of the property gifted in the Act itself, as has been done in the Wealth-tax Act. The new Schedule II provides that the value of any property, other than cash, transferred by way of gift shall be determined for the purposes of the Act, in accordance with the provisions of Schedule III to the Wealth-tax Act, which shall apply for the valuation of the gifted property subject to certain modifications mentioned in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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