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TMI BlogFinance Act, 2002—Explanatory Notes on provisions relating to direct taxesX X X X Extracts X X X X X X X X Extracts X X X X ..... ions 50C, 80M, 92CA, 115BBB, 174A, 206CA, 269UP, 272B, 272BBB and 275B by the Income-tax Act, 1961 ; Substituted new sections for sections 43A, 70, 89, 92, 132B, 194K, 269T and 271F of the Income-tax Act, 1961 ; Omitted section 245HA of the Income-tax Act, 1961 ; Amended sections 18, 18C, 22D and 34 of the Wealth-tax Act, 1957 ; Omitted section 22HA of the Wealth-tax Act, 1957 ; Amended sections 3 and 5 of the Expenditure-tax Act, 1987 ; Omitted section 44 of the National Dairy Development Board Act, 1987 ; Omitted section 22 of the Prasar Bharati (Broadcasting Corporation of India) Act, 1990 ; Omitted section 22A of the Oil India (Development) Act, 1974 ; Omitted section 43A of the Life Insurance Corporation Act, 1956 ; Omitted section 35A of the General Insurance Business (Nationalisation) Act, 1972. 3. Provisions in brief 3.1 The provisions of the Act in the sphere of direct taxes relate to the following matters : (i) Prescribing the rates of income-tax on income liable to tax for the assessment year 2002-2003, the rates at which the tax will be deductible at source in the financial year 2002-2003 from interest (including interest on securities), winnings from lotte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 shall be made for any assessment year beginning on or before 1st April, 2001 ; —make perquisites non-taxable in the case of low-paid salaried employees ; —modify provisions relating to income from house property ; —tax the receipts in the nature of non-compete fees and exclusivity rights ; —provide for additional depreciation on new machinery and plant ; —provide for fiscal incentives for modernisation and fleet expansion of the shipping business ; —tax amounts/donations received as income in cases of withdrawal of approval to associations/institutions or withdrawal of notification in respect of eligible projects or schemes ; —provide a sunset clause for expenditure by way of payment to associations and institutions for carrying out programmes of conservation of natural resources ; —provide that balance instalments of expenditure incurred under voluntary retirement scheme to be allowed to the resulting entity ; —enhance fiscal incentive for provisioning in respect of bad and doubtful debts in the case of banks and financial institutions ; —rationalize interest paid to partner from 18% to 12% ; —provide that addition or deduction to the actual cost of a capital asset on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on securities in certain cases ; —provide for individuals and Hindu undivided families to deduct tax in cases where total turnover or gross receipts exceed the specified limit under section 44AB ; —reduce the rate of tax deduction at source on commission or broker-age ; —provide that provisions of section 197A will not apply in certain cases ; —insert provision for requirement to apply for tax collection account number ; —provide limitation of time for admission of application and passing of orders by the Settlement Commission ; —modify provision relating to appointment of President of Appellate Tribunal ; —abolish the scheme of pre-emptive purchase of immovable properties under Chapter XX-C ; —modify the provisions relating to mode of repayment of certain deposits ; —clarify provision relating to penalty for concealment of income, etc., under section 271 ; —modify provisions relating to penalty for late filing of return, and defaults relating to PAN ; —provide for issue of notice in respect of payment of advance-tax ; —modify provisions relating to interest payable to the assessee ; —withdraw exemption for National Dairy Development Board, Prasar Bharati and Oil Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come of a foreign company other than those, for which specific rates are prescribed in Part II, has been reduced to forty per cent. from the existing rate of forty-eight per cent. The tax deducted at source in each case (including a foreign company) shall be enhanced by a surcharge of five per cent. Surcharge is also applicable in the case of a foreign company. 4.3 Rates for deduction of income-tax at source from "salaries", computation of "advance tax" and charging of income-tax in special cases during the financial year 2002-2003. The rates for deduction of income-tax at source from or payment of tax on "salaries" during the financial year 2002-2003 and also for computation of "advance tax" payable during that year in the case of all categories of tax payers have been specified in Part III of the First Schedule to the Act. These rates are also applicable for charging income-tax during the financial year 2002-2003 on current incomes in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping profits arising in India to nonresidents, assessment of persons leaving India for good during that financial year or assessment of persons who are likely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Nil 60,010 1,010* 1,010* Nil Nil 60,020 1,020* 1,020* Nil Nil 60,050 1,030 1,050* 20 1.94 60,100 1,040 1,071 31 2.98 60,200 1,061 1,092 31 2.94 5,000 2,040 2,100 60 2.94 5,000 4,080 4,200 120 2.94 1,50,000 19,380 19,950 570 2.94 2,00,000 34,680 35,700 1,020 2.94 3,00,000 65,280 67,200 1,920 2.94 4,00,000 95,880 98,700 2,820 2.94 5,00,000 1,26,480 1,30,200 3,720 2.94 10,00,000 2,79,480 2,87,700 8,220 2.94 25,00,000 7,38,480 7,60,200 21,720 2.94 1,00,00,000 30,33,480 31,22,700 89,220 2.94 *Marginal relief would be provided to ensure that the additional income-tax payable, including surcharge, on the excess of income over Rs. 60,000 is limited to the amount by which the income is more than Rs. 60,000. 4.3.3 Co-operative societies In the case of co-operative societies, the rates of income-tax have been specified in Paragraph B of Part III of the First Schedule to the Act. These rates are the same as those specified in the corresponding Paragraph of Part I of the First Schedule to the Act. However, the tax payable would be enhanced by a surcharge for the purposes of the Union at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not, such person or body or authority or juridical person, was formed or established or incorporated with the object of deriving income, profits or gains. 5.3 This amendment takes effect retrospectively from 1st April, 2002 and applies in relation to the assessment year 2002-2003 and subsequent assessment years. [Section 3(b)] 6. Casual and non-recurring receipts to become taxable 6.1 Under the existing provisions contained in clause (3) of section 10, any receipt below Rs. 5,000, which is of casual and non-recurring nature is exempt from payment of income-tax. In the case of winnings from horse races, the exemption is available for Rs. 2,500 only. This clause does not apply to receipts arising from business or profession or receipts by way of addition to the remuneration of an employee or to the capital gains income. 6.2 Through the Finance Act, 2002, clause (3) of section 10 has been omitted so as to bring all the casual and non-recurring receipts including windfall gains from betting, horse racing, lotteries, etc., under the tax net. 6.3 This amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf the tax is paid. 8.3 Under the existing provision of clause (6B) of section 10, the tax paid by the Government or an Indian concern, under certain conditions, is not included in computing the total income of the non-resident/foreign company, on whose behalf the tax is so paid. 8.4 Since the tax paid by another person on behalf of an assessee is a part of the total income of the assessee and in a moderate tax regime, such exemptions are not required, clause (5B) has been deleted and a sunset clause has been provided in clauses (6A) and (6B) of section 10 through the Finance Act, 2002 so that exemptions will not be made available with respect to agreements entered into on or after 1st June, 2002. 8.5 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. [Section 4(d), 4(f) and 4(g)] 9. Withdrawal of exemption on certain remuneration received by an employee who is a foreign citizen 9.1 Under the existing provisions contained in sub-clause (i) of clause (6) of section 10, passage money or the value of any free or concessional passage, received by or due to an employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchange risk premium from any person borrowing in foreign currency from such institutions is exempt, provided the premium is credited by the institution to the ERAFs. 11.2 These exemptions were introduced in 1989 for providing exchange risk protection to borrowers of foreign currency loans from the financial institutions. The operations of these ERAFs are commercial in nature, wherein they collect an exchange risk premium to meet the actual losses on account of exchange fluctuation. The ERAFs have been in existence for a considerable period now and the tax exemptions have outlived their utility. However, any sum paid by a public financial institution by way of contribution to any such Exchange Risk Administration Fund shall continue to get deduction under section 36(1)(x). 11.3 In view of this, through the Finance Act, 2002, clauses (14A) and (23E) of section 10 have been deleted so as to withdraw exemption on income of Exchange Risk Administration Funds and also on income received as exchange risk premium by a public financial institution. 11.4 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come in the hands of the donors. Since clause (20A) of section 10 has been deleted, donation to the housing authorities, etc., would not be eligible for deduction in the hands of the donors and this may result in drying up of donations. To continue the incentive to donation made to housing authorities, etc., section 80G has been amended so as to provide that 50% of the sum paid by an assessee to an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both, shall be deducted from the total income of such assessee. 13.4 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. [Sections 4(m) and 30] 14. Power to withdraw approval or rescind notification issued in the cases of scientific research association, news agency, notified trust or institution, educational and medical institution, etc. 14.1 Through the Finance Act, 2002, clauses (21), (22B), (23A), (23B) and (23C) of section 10 hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amended to provide that any sum paid by a corporate assessee as donations to the Indian Olympic Association or to any other association or institution established in India as the Central Government may, having regards to the prescribed guidelines, by notification in the Official Gazette, specify in this behalf for— (i) the development of infrastructure for sports and games ; or (ii) the sponsorship of sports and games, in India ; shall be deducted from the total income of that corporate assessee. The guidelines in this regard will be prescribed by the Central Government. 15.4 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. [Sections 4(p) and 30] 16. Modified conditions for accumulation of income of any fund, trust or institution, university or other educational institution and hospital or other medical institution and restriction on payment or credit out of such accumulation. 16.1 The existing provisions contained in sub-clauses (iv) or (v) or (vi) or (via) of clause (23C) of section 10, inter alia, permit accumulation of twenty-five per cent. of the income fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained in clause (29) of section 10, in the case of an authority constituted under law, for marketing of commodities, any income derived from the letting of godown or warehouses for storage, processing or facilitating the marketing of commodities, is exempt from payment of income-tax. 18.2. Through the Finance Act, 2002, clause (29) of section 10 has been omitted to withdraw the exemption provided to these marketing authorities. The income of Central Warehousing Corporation and the State Warehousing Corporations which was hitherto exempt under clause (29), will therefore, become taxable. 18.3 This amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. [Section 4(y)] 19. Amendment in the provisions relating to deduction under section 10A to units in Free Trade Zones, Special Economic Zones, etc. and under section 10B to 100% Export Oriented Units. 19.1 Under the existing provisions of section 10A, a deduction is given of 100% of profit and gains from export earnings of new undertakings established in Free Trade Zones, Software Technology Parks, Electronic Hardware Technology Park ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19.7 The above provision was introduced by the Finance Act, 2000, to prevent trading in incentives by shell companies formed only for that purpose. However, the above provision was not intended to bring within its purview cases of genuine business reorganization while maintaining the major portion of ownership or beneficial interest with the same persons who were the owners of the business before such reorganization. 19.8 Exceptions were made by the Finance Act, 2001, in the case of private limited companies becoming companies in which public are substantially interested as also disinvestment of equity shares by venture capital companies or funds. It was also clarified that cases of change in shareholding pattern in the case of public limited companies will also not affect the deduction. 19.9 The Finance Act, 2002, has introduced sub-section (9A) to provide that in case of genuine reorganization of business whereby a proprietary concern or a partnership is succeeded by a company, the prohibition of sub-section (9) will not apply if the beneficial ownership of not less than 51% continues to be held by the original promoters. Since undertakings can be owned by body corporate al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther trusts and institutions out of income from property held under trust in the year of receipt will continue to be treated as application of income. However, any such payment out of the accumulated income shall not be treated as application of income and will be taxed accordingly. 21.2 Through the Finance Act, 2002, a new clause (d) has also been inserted in sub-section (3) of section 11 so as to provide that if any income referred to in sub-section (2) of the said section, is paid or credited to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or (v) or (vi) or (via) of clause (23C) of section 10, such payment or credit shall be deemed to be the income of the person making such payment or credit, of the previous year in which such payment or credit is made. 21.3 A proviso in sub-section (3A) has also been inserted so as to provide that the Assessing Officer shall not allow application of accumulated income by way of payment or credit made for the purposes referred to in clause (d) of sub-section (3) of sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons 4(s) and 9] 23. Amendment of section 14A 23.1 Through the Finance Act, 2001, a new section namely 14A was inserted in the Income-tax Act retrospectively with effect from 1st April, 1962 to clarify the intention of the Legislature that no deduction shall be allowed in respect of any expenditure incurred by an assessee in relation to income which does not form part of the total income under the Income-tax Act. The intention of inserting the new section retrospectively was to set the existing controversy on this issue at rest and not to unsettle the cases by raising the issue afresh. 23.2 Through the Finance Act, 2002, a proviso to section 14A has been inserted so as to clarify that the Assessing Officer shall not reassess the cases under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. 23.3 This amendment takes effect retrospectively from 11th May, 2001, that is, the date on which the Finance Bill, 2001, received the assent of the President of India. [Section 10] 24. Perquisites not to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct from 1st April, 2003, and will accordingly apply in relation to the assessment year 2003-04 and subsequent years. [Section 12] 26. New provisions for taxing the receipts in the nature of non-compete fees and exclusivity rights 26.1 For the purpose of giving certainty to taxation of receipts in the nature of non-compete fees and fees for exclusivity rights, the Finance Act, 2002, has included within the scope of "profit and gains of business or profession", any sum received or receivable in cash or in kind under an agreement for not carrying out activity in relation to any business ; or not to share any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services. However, the provisions clarify that receipts for transfer of right to manufacture, produce or process any article or thing or right to carry on any business, which are chargeable to tax under the head "Capital gains", would not be taxable as profits and gains of business or profession. 26.2 With a view to facilitate the implementation of the Mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed as deduction, either by way of depreciation or otherwise in any one previous year. "Installed capacity" has been defined to mean the capacity of production as existing on the 31st March, 2002. 27.4 The Income-tax Rules, 1962, have been, suitably amended. The substituted rule 5A provides that the report from the accountant as required under section 32(1)(iia) shall be in Form No. 3AA. The earlier Form No. 3AA relating to audit report under section 32AB has been renumbered as Form No. 3AAA. 27.5 The amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent years. [Section 14] 28. Fiscal incentives for modernisation and fleet expansion of the shipping business 28.1 Under the existing provisions of section 33AC of the Income-tax Act, a Government company or a public company formed and registered in India with the main object of carrying on the business of operation of ships is allowed a deduction of an amount not exceeding hundred per cent. of the profits derived from the business of operation of ships and carried to a reserve account, subject to certain conditions. The first proviso to sub-sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he approval granted by it to an association or institution on the ground that the project or scheme is not being carried out in accordance with all or any of the conditions subject to which the approval was granted or the notification through which a project or scheme was notified is withdrawn, the entire amount of contribution or donation received by the company or authority or association or institution, as the case may be, or the deduction claimed by a company in respect of any expenditure incurred directly on the eligible project or scheme, the notification for which is withdrawn by the National Committee, shall be deemed to be the income of the company or authority or association or institution, as the case may be, of the year in which such approval or notification is withdrawn. Such income will be taxed at the maximum marginal rate as if such income was not exempt under any provision of the Income-tax Act. This will be notwithstanding the exemption, if any, otherwise available to such company or authority or association or institution under any provision of the Income-tax Act. 29.3 The amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e time of his voluntary retirement under any scheme of voluntary retirement, one-fifth of the amount so paid is deducted in computing the profits and gains of the business for that previous year and the balance amount is allowed to be deducted in equal instalments for each of the four immediately succeeding previous years. 31.2 The Act has amended the said section so as to provide that where the undertaking of an Indian company entitled to deduction for amortised voluntary retirement expenses is transferred before the expiry of the period specified to another Indian company in a scheme of amalgamation or demerger, the deduction shall continue to be available to the amalgamated company or the resulting company as if the amalgamation or demerger had not taken place. 31.3 Similarly, in case of re-organisation of certain forms of business, whereby a firm or a proprietary concern is succeeded by a company, the deduction shall continue to be available to the successor-company. 31.4 In the year of transfer, however, no deduction shall be available to the amalgamating company, the demerged company or to the firm or proprietary concern. 31.5 The amendment will take effect retrospective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1st April, 2003 and ending before 1st April, 2005. 32.6 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent years. [Section 19] 33. Rationalization of interest paid to partner 33.1 Under the existing provisions of sub-clause (iv) of clause (b) of section 40, payment of interest by a firm to any partner which is authorised by, and is in accordance with the terms of the partnership deed, is allowed as a deduction subject to the maximum rate of eighteen per cent. simple interest per annum. 33.2 With a view to rationalise the provisions, the Act has amended the said sub-clause so as to reduce the above maximum rate of interest from eighteen per cent. to twelve per cent. 33.3 The amendment will take effect from 1st June, 2002. [Section 20] 34. Addition or deduction to the actual cost of a capital asset on account of change in the rate of exchange to be allowed on actual discharge of the liability 34.1 Under the existing provisions contained in section 43A, where an assessee has acquired any capital asset from a country outside India for the purposes of his business or profession on de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2003, the adjustment to that extent shall not be made again at the time of actual payment. 34.5 The amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent years. [Section 21] 35. Presumptive income for truck owners revised for inflation-adjustment 35.1 Under the existing provisions of section 44AE of the Income-tax Act, 1961, a presumptive scheme of taxation is available to assessees engaged in business of plying, hiring or leasing goods carriages. The scheme applies to an assessee, who owns not more than ten goods carriages. Under this scheme, which is optional for the assessee, a fixed amount of income per vehicle is presumed to accrue to the owner of the vehicle and charged to tax at applicable tax rates for the year. Under the existing provisions, income under this section is presumed to be Rs. 2,000 per month, per vehicle for owners of heavy goods vehicles, and Rs. 1,800 per month, per vehicle for the owners of light goods vehicles. An assessee opting for this scheme is exempted from maintaining books of account and other details to substantiate the income. 35.2 With a view to rationalize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee claims that the value adopted or assessed for stamp duty purposes exceeds the fair market value of the property as on the date of transfer, and he has not disputed the value so adopted or assessed in any appeal or revision or reference before any authority or court, the Assessing Officer may refer the valuation of the relevant asset to a Valuation Officer in accordance with section 55A of the Income-tax Act. If the fair market value determined by the Valuation Officer is less than the value adopted for stamp duty purposes, the Assessing Officer may take such fair market value to be the full value of consideration. However, if the fair market value determined by the Valuation Officer is more than the value adopted or assessed for stamp duty purposes, the Assessing Officer shall not adopt such fair market value and shall take the full value of consideration to be the value adopted or assessed for stamp duty purposes. 37.4 This amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-04 and subsequent years. [Section 24] 38. Exemption under section 54EC in case of investment in bonds issued by Small Industries De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gains" can be carried forward and set off against capital gains in the following eight assessment years. 40.2 Since long-term capital gains are subject to lower incidence of tax, the Finance Act, 2002 has rectified the anomaly by amending the said sections to provide that while losses from transfer of short-term capital assets can be set off against any capital gains, whether short-term or long-term, losses arising from transfer of long-term capital assets, will be allowed to be set off only against long-term capital gains. It is further provided that a long-term capital loss shall be carried forward separately for eight years to be set off only against long-term capital gains. However, a short-term capital loss, may be carried forward and set off against any income under the head "Capital gains". 40.3 The existing provisions of sub-section (3) of section 74 are transitory provisions with regard to carry forward of capital losses relating to assessment year 1987-88 and earlier years. Since these provisions have become redundant, the Finance Act, 2002, has omitted this sub-section. 40.4 These amendments will take effect from 1st April, 2003, and will accordingly apply in relatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were to be taxed in the hands of such funds, institutions, or trusts, in terms of provisions of clause (23C) of section 10 or section 12 of the Income-tax Act, 1961. Further, such trusts, funds and institutions, had to maintain separate accounts in respect of such funds and had to render the same to the prescribed authority by 30th June, 2002. 42.3 With a view to allow adequate time for the completion of the relief work required due to wide-scale extent of the damage, the Finance Act, 2002, extends the time limit for utilization of eligible donations and transfer of un-utilized funds to the Prime Minister's National Relief Fund from 31st March, 2002 to 31st March, 2003. The date of submission of separate accounts to the prescribed authority has been extended upto 30th June, 2003. 42.4 Further, in order to ensure fiscal discipline, amendment has been made in clause (23C) of section 10 and section 12, so as to provide that if no accounts are submitted to the prescribed authority within the prescribed time-limit, the amount of donations received by the trusts, funds or institutions for relief of earthquake victims, would be treated as the income of such trusts, funds or institution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial park or a Special Economic Zone or of generating power or generation and distribution of power. 44.2 Section 80-IB of the Income-tax Act, 1961, provides for a deduction at specified percentage from profits and gains of an undertaking/enterprise, carrying on an eligible business for such number of assessment years as may be specified. 44.3 For availing of the deduction under sections 80-IA and 80-IB of the Income-tax Act, 1961, a separate audit report in respect of the eligible undertaking is to be furnished by an eligible assessee, other than a company or a co-operative society. 44.4 The Finance Act, 2002, makes the requirement of furnishing separate audit report (in the prescribed form and in the prescribed manner), mandatory for companies or co-operative societies as well, for claiming deduction under sections 80-IA and 80-IB. 44.5 The Finance Act, 2002, has also amended sub-section (2) of section 80-IA of the Income-tax Act, 1961, to make reference to the undertaking or enterprise which develops, develops and operates, or maintains and operates a Special Economic Zone, which is clarificatory in nature. [Section 33] 45. Tax holiday for convention centres and multiplex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s equal to 100% of profits and gains of the undertaking for five years commencing from the initial assessment year and thereafter, twenty-five per cent. (or thirty per cent. for companies) for further five years. In respect of certain notified industries in North-Eastern Region, the amount of deduction is equivalent to hundred per cent. of profit and gains of the undertaking for ten assessment years. 46.2 Under sub-section (5) of section 80-IB of the Income-tax Act, 1961, industrial undertakings which begin to manufacture or produce articles or things or to operate cold storage plant or plants during the period beginning on the 1st day of October, 1994 and ending on 31st March, 2002, in certain notified industrially backward districts, are eligible for deduction of its profits for ten years. For co-operative societies the deduction is available for a period of twelve assessment years compared to ten years for others. 46.3 The deduction for Category A districts is available for ten assessment years and is equal to 100% of profits and gains of the undertaking for five years commencing from the initial assessment year and thereafter, twenty-five per cent. (thirty per cent. for comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... April, 2003 and will, accordingly, apply in relation to the assessment year 2003-04 and subsequent years. [Section 35] 48. Rationalization of tax rebate under section 88 48.1 Section 88 of the Income-tax Act provides for a deduction from the amount of income-tax payable by individuals and Hindu undivided families, in respect of sums paid or deposited out of the income chargeable to tax during the previous year in certain specified schemes, at a fixed percentage of the aggregate of such investments or contributions. 48.2 The eligible investments/contributions include life insurance premia, provident fund contributions, subscriptions to National Savings Certificates, investments in specified mutual funds and pension funds, repayment of principal amount of housing loans or co-operative housing instalments, investment in specified infrastructure bonds, etc. 48.3 The aggregate amount of investment eligible for the tax rebate is subject to an overall limit of Rs. 60,000. In case of certain specified infrastructure bonds, the eligible limit of investment gets enhanced to Rs. 80,000. The deduction is equal to 20% of the aggregate amounts invested in specified instruments. In the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on account of receipt of salary, profits in lieu of salary, etc., being paid in arrears or in advance, in the year of such receipt. The tax relief is computed by working out the extent to which the tax liability would have been lower, had such income been received in the years it relates to. The proposed amendments seek to provide similar relief to family pension received in arrears by family members of the deceased employee. 49.2 The amendment shall be retrospectively effective from 1st April, 1996 and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 38] 50. Clarification regarding provisions of transfer pricing 50.1 Under the existing provisions contained in section 92 of the Income-tax Act, any income arising from an international transaction shall be computed having regard to the arm's length price. 50.2 The intention underlying the provision is to prevent avoidance of tax by shifting taxable income to a jurisdiction outside India by an associate enterprise controlling the prices charged in intra-group transactions. With a view to further clarify this intention, the Finance Act, 2002, has substituted section 92 so as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 92CA has been introduced by the Finance Act, 2002. It provides that where an assessee has entered into an international transaction in any previous year, the Assessing Officer may, with the previous approval of the Commissioner, refer the computation of the arm's length price in relation to the said international transaction to a transfer pricing officer. The transfer pricing officer, after giving the assessee an opportunity of being heard and after making enquiries, shall determine the arm's length price in relation to the international transaction in accordance with sub-section (3) of section 92C. The Assessing Officer shall compute the total income of the assessee under sub-section (4) of section 92C having regard to the arm's length price determined by the Transfer Pricing Officer. 50.7 Section 92F of the Income-tax Act provides definitions of certain terms relevant to computation of arm's length price. The Finance Act, 2002, has amended the definition of "enterprise" contained in section 92F to include "in carrying out any work in pursuance of a contract" as one of the activities in which an enterprise may be engaged. 50.8 A separate definition of "permanent establish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 2002-2003 and subsequent assessment years. [Section 46] 52. Taxation of dividends 52.1 Under the existing provisions contained in section 115-O, in addition to the income-tax chargeable in respect of the total income of a domestic company, any amount declared, distributed or paid by way of dividends is charged to additional income-tax at the rate of 10 per cent. The tax so paid by the company is treated as the final payment of tax in respect of the amount declared, distributed or paid by way of dividend. Such dividend referred to in section 115-O is exempt in the hands of the shareholders under sub-clause (i) of clause (33) of section 10. The incidence of tax is, thus, on the payer company and not on the recipient. 52.2 Through the Finance Act, 2002, the earlier system of taxing dividend has been reverted to and the incidence of tax has been shifted on to the shareholder receiving the dividends, by omitting sub-clause (i) of clause (33) of section 10 and amending section 115-O so as to make the provisions of this section applicable only in respect of the profits distributed by the domestic companies before the 31st day of March, 2002. 52.3 To prevent cascading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rates are specified in Part II of the First Schedule to the Finance Act. 52.6 Since provisions of section 115-O would now be inoperative, references to "other than dividends referred to in section 115-O" in sections 10(23FA), 10(23G), 115A, 115AC, 115ACA, 115AD and 115C have also been omitted. The provisos to sections 196C and 196D have also been omitted so that the tax shall be deducted at source with respect to incomes referred to in sections 115AC and 115AD, where the income is received in the form of dividends referred to in section 115-O also. 52.7 These amendments will take effect from 1st April, 2003, and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. However, the provisions relating to tax deduction at source under sections 194, 195, 196C and 196D will take effect from 1st June, 2002. [Sections 4(w), 4(x), 4(y), 35, 36, 45, 46, 47, 48, 50, 53, 73, 80, 83 and 84] 53. Amendments in Minimum Alternate Tax (MAT) on companies under section 115JB 53.1 Section 115JB of the Income-tax Act, 1961 provides for a Minimum Alternate Tax (MAT) on companies. Under the provisions of this section, a company is required to pay at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Income-tax Act, 1961, with retrospective effect from the 1st day of April, 1997. 53.8 The amendments in section 115JB shall take effect retrospectively from the 1st day of April, 2001. [Sections 51 and 52] 54. Taxation of income received in respect of units of UTI and mutual funds 54.1 Under the existing provision contained in section 115R, any amount of income distributed by the Unit Trust of India (UTI) or a Mutual Fund to its unitholders is chargeable to tax and the UTI or the Mutual Fund is liable to pay additional income-tax on such distributed income at the rate of ten per cent. Such income is, however, exempt in the hands of the unitholders under sub-clauses (ii) and (iii) of clause (33) of section 10. 54.2 In the case of dividends distributed by a domestic company, the incidence of tax has been shifted to shareholders receiving the dividends. In a similar way, sub-clauses (ii) and (iii) of clause (33) of section 10 have been omitted through the Finance Act, 2002, so as to shift the incidence of tax on to the unitholders of the UTI and mutual funds. Section 115R has also been made inoperative so that the UTI and the mutual funds will not be required to pay tax on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uilding, place, vessel, vehicle or aircraft where he has reason to suspect that incriminating books of account or documents, or undisclosed assets are kept. The authorised officer is also empowered, inter alia, to seize any such books of account or documents or assets found as a result of the search. 55.1.1 It has been noticed that, books of account or documents are often found stored in electronic form on computers, and in many cases, the authorised officer is unable to open or have access to computer files containing books of account or documents suspected to be of incriminating nature, as such files are protected by secret codes or passwords, and the persons-in-charge of the premises do not make available such computer codes or passwords to the officer. 55.1.2 To overcome such difficulties, the Finance Act, 2002, has inserted a new clause (iib) in sub-section (1) of section 132 to provide that in addition to the powers specified therein, the authorised officer shall also have the power to require any person who is found to be in possession or control of any books of account or other documents maintained in the form of electronic records, to afford him the necessary facility t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks of account or documents seized under section 132(1)(iii) shall not be retained beyond 30 days after completion of the relevant block assessment under Chapter XIV-B, unless the approval of the Chief Commissioner, Commissioner, Director-Gene- ral or Director is obtained on the basis of reasons to be recorded in writing. 55.4 Under the provisions of sub-section (3) of section 132, the authorised officer, in the course of search, is empowered to pass an order prohibiting the owner or any person who is in immediate possession or control of any books of account, documents or assets, from removing or dealing with them in any manner except with the permission of the officer. Under the existing provisions of sub-section (8A), such a prohibitory order can remain in force for a period of 60 days from the date of the order, and thereafter, the period of operation of the order can be extended with the approval of the Commissioner or Director for any period up to 30 days after the completion of all relevant assessments, appeals and penalty proceedings, etc. 55.4.1 The Finance Act, 2002, has amended sub-section (8A) to provide that under no circumstances a prohibitory order passed under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility determined on completion of the assessment under Chapter XIV-B for the block period ; and (iii) The liability in respect of which the assessee is in default or is deemed to be in default. 56.3 It is further provided that where the nature and source of acquisition of seized assets is explained to the satisfaction of the Assessing Officer, he may after recovering the existing liability, release the remaining portion of these assets with the prior approval of the Chief Commissioner or Commissioner within a period of 120 days from the date on which the last of the authorisations for search under section 132 or for requisition under section 132A was executed. 56.4 The rate at which interest is payable under sub-section (4) by the Central Government has been reduced to eight per cent. per annum. Such interest shall be payable for the period commencing on the expiry of one hundred and twenty days from the date on which the last of the authorisations for search or for requisition was executed and ending on the date on which the assessment under Chapter XIV-B is made. 56.5 The Explanation has been inserted at the end of the section to clarify the meaning of block period and of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordance with a scheme to be notified by the Central Board of Direct Taxes for bulk filing of returns on computer readable media, will be deemed to be a return furnished under that section by the employee. The Board has notified the scheme vide Notification No. GSR S. O. No. 661(E), dated 24th June, 2002. 58.3. This amendment will take effect retrospectively from 1st April, 2002. [Section 59] 59. Providing for assessment of income on limited issues under section 143. 59.1 Under the existing procedure of assessment laid down in section 143 of the Income-tax Act, the Assessing Officer if he considers it necessary or expedient, issues a notice under sub-section (2) of section 143 of the Income-tax Act, requiring the assessee to produce any evidence which he may rely on in support of the return. Sub-section (3) provides that after hearing such evidence and after taking into account all relevant material which he has gathered, the Assessing Officer shall pass an order of assessment determining the total income or loss, and the sum payable or refundable to the assessee. 59.2 Since a miniscule percentage of returns filed are taken up for scrutiny under the existing procedure, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of clause (b) of section 158B define undisclosed income to include income or property which has not been or would not have been disclosed for the purposes of the Act, and which is represented by any money, bullion, jewellery or other valuable article or thing, or by any entry in the books of account or other document or any other transaction. It has been noticed that in some cases the appellate authorities have taken a view that this definition covers only property or receipts which have not been disclosed and does not cover income represented by entries in respect of false claims of expenses or deductions. Such view is contrary to the intention underlying the provision of bringing to tax the entire undisclosed income, including income which has been suppressed by making false claims of expenses or deduction, which have been discovered as a result of search or requisition. 61.2.1 The Finance Act, 2002, has amended the definition of undisclosed income in section 158B to specifically include therein income based on entries in books of account or other documents which represent a false claim of any expense, deduction, or allowance under the Income-tax Act. 61.3 The existing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urns have been filed in response to notice under section 142(1) and assessment has not been completed till the date of search. 61.5.1 The Finance Act, 2002, has amended the said clause (b) to include a specific reference to such returns filed in response to notices issued under section 142(1). 61.6 Under the existing provisions of clause (c) of section 158BB(1), where no return has been filed and the due date has expired, no adjustment is to be made to the aggregate total income for computing undisclosed income of block period. There could be cases where the regular books of account of the assessees reflected losses but no returns were filed by the due dates. While filing the return for block period, the assessee, in such cases used to consider such losses in computing the aggregate total income of the block period and used to claim that no adjustment should be made in view of clause (c) of section 158BB(1) and such losses should not added back for computing undisclosed income of the block period. 61.6.1 There could also be cases where returns were not filed for some years by reason of the total income of those years being below the minimum taxable limit. The aggregate total in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er shall proceed to determine the undisclosed income, and the provisions of sections 142, 143 and 144 relating to issue of notices, calling for certain information and making best judgment assessment shall apply to the extent possible. The clause does not refer to section 145, which requires that income from business or profession and income from other sources is to be computed in accordance with the method of accounting regularly followed by the assessee. This gave rise to disputes as to whether provisions of section 145 applicable in block assessments. 61.8.1 The Finance Act, 2002, has made a clarificatory amendment to the said clause to include a reference therein to section 145, so as to make the provisions of that section applicable in block assessments. 61.9 These amendments take effect retrospectively from 1st day of July, 1995 and accordingly apply to block assessments in cases of search under section 132 or requisition under section 132A made on or after 1st day of July, 1995. [Sections 64, 65 and 66] 62. Other amendments relating to block assessments. 62.1 The Finance Act, 2002, has amended clause (d) of section 158BC under Chapter XIV-B to provide that the assets sei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4B and 234C relating to charging of interest in cases of regular assessments. With a view to align the provision of block assessments with the cases of regular assessment in respect of charging of interest, clause (a) of sub-section (2) of section 119 of the Income-tax Act was also amended to enable the Central Board of Direct Taxes to issue such directions as it deems fit for relaxing the provisions of section 158BFA relating to charging of interest in block assessments. 62.6 These amendments will take effect from 1st June, 2002. [Sections 44, 55, 67 and 68] 63. Special provision for early assessment of bodies formed for short duration 63.1 Through the Finance Act, 2002, a new section 174A has been inserted to provide that where it appears to the Assessing Officer that any association of persons or a body of individuals or an artificial juridical person formed or established or incorporated for a particular event or purpose, is likely to be dissolved in the same assessment year in which it was formed or established or incorporated, or immediately after such assessment year, the total income of such person or body or juridical person, for the period from the expiry of the prev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot provided for by way of monetary payment). The employer shall, also continue to have the option to deduct the tax on whole or part of such income. 64.7 Section 200 is also amended to provide that such tax shall be paid within the prescribed time, to the credit of the Central Government or as the Board directs. 64.8 Amendment in section 203 has been made, to provide that where any such tax has been paid by an employer, on behalf of an employee, the employer shall provide to an employee, a certificate in the prescribed form, giving details of the amount of tax paid, the rate at which the tax paid and other particulars, within the prescribed time. 64.9 The Finance Act, 2002, also makes amendment in section 199, in order to give credit to the employee in respect of tax paid by the employer on behalf of the employee, on the income in the nature of perquisites (not provided for by way of monetary payment). 64.10 Amendment is also made in section 195A of the Income-tax Act, 1961, so as to exclude the tax paid by the employer on behalf of the employee, on the income in the nature of perquisites, (not provided for by way of monetary payment) for calculating the income of the employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act has amended sub-section (9) of section 139 to provide that where the return is not accompanied by proof of the tax, if any, claimed to have been deducted at source, the return of income shall not be regarded as defective if such certificate was not furnished under section 203 to the person furnishing his return of income and such person produces the certificate within a period of two years specified under sub-section (14) of section 155. 65.5 The amendment will take effect from 1st June, 2002. [Sections 59 and 62] 66. Tax not to be deducted at source from dividends and interest on securities in certain cases 66.1 Special provisions have been made in the Act through which certain statutory bodies were created regarding no deduction of tax at source under sections 193 and 194 from interest or dividend paid to the respective bodies. 66.2 Section 43A of the Life Insurance Corporation Act, 1956, provides that no deduction of income-tax shall be made on any interest or dividend payable to the Corporation in respect of any securities or shares owned by it or in which it has full beneficial interest. 66.3 Section 35A of the General Insurance Business (Nationalisation) Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [Sections 74, 75, 76, 77 and 78] 68. Reduction in the rate of tax deduction at source on commission or brokerage. 68.1 Under the existing provisions contained in section 194H of the Income-tax Act, tax is required to be deducted at source at the rate of ten per cent. on income by way of commission (other than insurance commission referred to in section 194D) or brokerage. 68.2 With a view to rationalise the rate at which tax is required to be deducted at source under the said section, the Act has reduced the rate from ten per cent. to five per cent. 68.3 The amendment will take effect from 1st June, 2002. [Section 76] 69. Provisions of section 197A not to apply in certain cases 69.1 Under the existing provisions of section 197A, no tax is to be deducted at source from certain incomes if a declaration is furnished by the payee that the tax on his estimated total income of the relevant previous year would be nil. The provisions of sub-section (1) of the said section apply to deduction of tax at source from payments by way of dividends and payments in respect of deposits under National Saving Schemes, etc. The provisions of sub-section (1A) apply in respect of income from inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation for the allotment of tax collection account number is to be furnished to the Assessing Officer who has been assigned by the Chief Commissioner or Commissioner to discharge these functions, as in any other case, to the Assessing Officer having jurisdiction to assess the applicant. The form for the purpose shall be form No. 49B which has also been substituted. 70.4 The Act has also introduced a new section 272BBB to provide for levy of a penalty of ten thousand rupees in cases where the persons who are required to apply for such account number have failed to do so without a reasonable cause. Consequent to the insertion of section 272BBB, section 273B has also been amended to provide that the penalty shall not be imposed if it is proved that there was reasonable cause for the failure. 70.5 The amendment will take effect from 1st June, 2002. [Sections 91, 105 and 106] 71. Notice in respect of payment of advance-tax 71.1 Under the existing provisions contained in sub-section (3) of section 210, the Assessing Officer is empowered to issue a notice to the assessee who has already been assessed by way of regular assessment in respect of the total income of any previous year an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thinks fit. Further, the Commission has been vested with the powers to send a case back to the Assessing Officer if the assessee does not co-operate in the proceedings before the Commission. 73.2 In order to ensure early settlement of such applications, and speedy recovery of taxes at low cost, the Finance Act, 2002, has amended section 245C to provide that the Settlement Commission may, where it is possible, pass an order either allowing or rejecting the application to be proceeded with within a period of one year from the end of the month in which such application is made. 73.3 The Finance Act, 2002, has further amended section 245D of the Income-tax Act to provide that in every application admitted, the Settlement Commission may, wherever it is possible, pass a final order within a period of four years from the end of the financial year in which such application was allowed to be proceeded with. 73.4 The Finance Act, 2002, has also withdrawn the power of the Settlement Commission given under section 245HA of sending back the case to the Assessing Officer, thereby requiring the Settlement Commission to finally decide and settle all applications admitted by it. 73.5 Similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an account payee cheque or an account payee draft drawn in the name of the person who has made the deposit, in cases where the amount of deposit or the aggregate of the deposits held, is twenty thousand rupees or more. The Explanation below sub-section (2) of the said section defines "deposit" to mean any deposit of money which is repayable after notice or repayable after a period and, in the case of a person other than a company includes deposit of any nature. 76.2 It has been noticed that the provisions of this section are being circumvented by terming deposits as loans and contending that the section applies only to deposits and not to loans. In a judgment of a High Court it was held that the meaning of word "deposit" occurring in section 269T cannot be stretched to include loans. In order to clarify the intention of the Legislature, the Finance Act, 2002, has substituted the existing section by a new section so as to extend its scope to loans also, and delete provisions contained therein which have become obsolete. However, it is clarified that the provision of section 269T will not be attracted in case of repayment of credit facilities availed of by depositing money in cash ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued to him till the expiry of the period during which an assessment could have been made, it will be deemed that the person has concealed the particulars or furnished inaccurate particulars of his income for that year. 77.10 The Finance Act, 2002, has amended the said Explanation 3 so as to provide that even where a person who has been assessed earlier, fails to furnish a return till the end of the specified period, he shall be deemed to have concealed the particulars or furnished inaccurate particulars of his income. 77.11 Amendment on similar lines is made in section 18 of the Wealth-tax Act. 77.12 This amendment will take effect from 1st June, 2003. [Sections 101 and 110] 78. Modification of provisions relating to penalty for late filing of return, and defaults relating to PAN 78.1 Section 271F of the Income-tax Act provides for penalty of five thousand rupees for failure to furnish return of income under section 139(1) before the end of the relevant assessment year, or to furnish a return as required by the first proviso to section 139(1) before the due date. 78.2 In order to remove the disparity between the penalties relating to returns filed under section 139(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment of income-tax on its income, profits or gains under section 22A of the Oil Industry (Development) Act, 1974. 79.3 Through the Finance Act, 2002, section 44 of the National Dairy Development Board Act, 1987, section 22 of the Prasar Bharati (Broadcasting Corporation of India) Act, 1990, and section 22A of the Oil Industry (Development) Act, 1974, have been omitted with effect from 1st day of April, 2003 so as to make the income of National Dairy Development Board, Prasar Bharati (Broadcasting Corporation of India) and Oil Industry Development Board taxable. As income of the previous year becomes taxable next year, the income of these Boards for the financial year 2002-2003 and subsequent financial years will be subject to tax. 79.4 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. [Sections 159, 162 and 163] Expenditure-tax 80. Relief to hotel industry under the Expenditure-tax Act 80.1 Under the existing provisions of the Expenditure-tax Act, tax is levied on expenditure incurred in, or payments made to a hotel, where the room charges are two thousand rupees o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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