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TMI BlogExplanatory Notes on the provisions relating to direct taxes.X X X X Extracts X X X X X X X X Extracts X X X X ..... — inserted new sections 10C, 35DD, 46A, 50B, 80HHF, 115ACA, 115R, 115S, 115T and 194L in the Income-tax Act, 1961 ; — substituted new sections for sections 3, 43D, 72A, 80-IA of the Income-tax Act, 1961 ; — omitted section 194H and Tenth Schedule of the Income-tax Act, 1961 ; — amended sections 2, 16, 23A, 24, 27, 27A and 35 of the Wealth-tax Act, 1957 ; — amended sections 4 and 22 of the Expenditure-tax Act, 1987 ; and — amended section 76 of the Finance (No. 2) Act, 1998. 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 incomes liable to tax for the assessment year 1999-2000 ; the rates at which tax will be deductible at source in the financial year 1999-2000 from interest (including interest on securities), winnings from lotteries or crossword puzzles, winnings from horse races, insurance commission and other categories of income liable for tax deduction at source under the Income-tax Act, rates for computing "advance tax", deduction of income-tax from "salaries" and charging of income-tax on current incomes in certain cases for the financial year 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to deemed dividend and insert a new section 46A to deal with the tax issues arising on buy-back of shares by companies ; — enhance the limit of deduction for medical insurance premium on the health of senior citizens under section 80D ; — modify the provisions of section 80DD to allow deductions on the basis of any expenditure incurred for the handicapped persons ; — enhance the limit of deductions under section 80DDB for expenditure incurred on treatment of chronic and protracted diseases ; — modify the provisions of section 80G to allow 100% deductions for donations made to the fund for technology development and application; — modify the provisions of section 80G to allow deduction for donations made to funds or institutions for charitable purposes ; — modify the definition of small scale industry for the purpose of section 80HHA ; — modify the provisions of sections 80HHB, 80HHC, 80HHD, 80HHE, 80-O, 80R, 80RR and 80RRA providing deduction on the basis of foreign exchange earnings, to allow deductions on receipt of money beyond the period of six months with the approval of the Reserve Bank of India ; — amend the provisions of section 80HHC to clarify that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... — amend section 206C to enable the assessee to file tax collection at source (TCS) returns on computer media ; — amend section 206C to provide for issue of certificate by the Assessing Officer for collection of tax at a lower rate in appropriate case ; — provide for time-limit for disposal of appeals by the Commissioner (Appeals) and the Appellate Tribunal and empowering the latter to award costs ; — rationalise provisions relating to reduction of litigation and other allied issues ; — rationalise certain provisions by omission of the transitory provisions and modification of certain existing provisions ; — introduce provisions relating to business re-organisation, rationalising the existing provisions concerning amalgamation, making demergers tax neutral and taxing profits and gains in a case of slump sale as capital gains ; — exempt interest on Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999, and also capital gains arising from their transfer. (iii) Amendment of the Wealth-tax Act, 1957 with a view to : — exempt Gold Deposit Bonds from the purview of wealth-tax ; — simplify the procedure of processing of return under section 16(1) of the Wealth-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "salaries" during the financial year 1999-2000 and also the computation of "advance tax" payable during that year in the case of various categories of taxpayers, 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 1999-2000 on current incomes in cases where accelerated assessments have to be made, e. g., provisional assessment of shipping profits arising in India to non-residents, assessment of persons leaving India for good during that financial year or assessment of persons who are likely to transfer property to avoid tax, etc. The salient features of the rates specified in the said Part III are indicated in the following paragraphs : 4.31 Individuals, Hindu undivided families, etc. : Paragraph A of Part III of the First Schedule specifies the rates of income-tax in the case of individuals, Hindu undivided families, association of persons, etc. There is no change in the rate structure. However, the tax payable would be enhanced by a surcharge for the purposes of the Union at the rate of 10 per cent. of the tax payable (after allowing rebate under Chapter VIII-A of the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,00,000 9,000 9,900 900 10 1,50,000 19,000 20,900 1,900 10 1,75,000 26,500 29,150 2,650 10 2,00,000 34,000 37,400 3,400 10 2,50,000 49,000 53,900 4,900 10 3,00,000 64,000 70,400 6,400 10 4,00,000 94,000 1,03,400 9,400 10 5,00,000 1,24,000 1,36,400 12,400 10 **Marginal relief would be provided to ensure that the additional amount of 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 rate of ten per cent. of the tax payable. 4.3.4 Firms : In the case of firms, the rate of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ashment of earned leave up to a period of eight months was exempt under section 10(10AA) of the Income-tax Act. Pursuant to recommendations of the Fifth Pay Commission, the limit has been raised to leave encashment of ten months in cases of employees of the Central or State Government. 6.2 With a view to bring parity for non-Government employees, the Act enhances the existing exemption limit applicable to such employees from eight months to ten months. 6.3 This amendment will take effect retrospectively from 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years. [ Section 6 ] 7. Benefit of tax-exemption for interest payable extended to hedging transaction charges : 7.1 Clause (15) of section 10 of the Income-tax Act, exempts interest payable in certain cases and includes interest paid by industrial undertakings for specified foreign borrowings. 7.2 The Act has inserted a new Explanation in sub-clause (iv) of this clause so as to extend the scope of this exemption also to hedging transaction charges on account of currency fluctuations. 7.3 This amendment will take effect from 1st April, 2000, and will, according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gains from investments made by way of equity shares in a venture capital undertaking (VCU). 10.2 With a view to rationalise the existing exemption available to income from venture capital, the Act has inserted a new clause (23FA) in section 10 to provide that any income by way of dividends (other than dividends referred to in section 115-O) or long-term capital gains of a venture capital fund or a venture capital company from investments made by way of equity shares in a venture capital undertaking will not be included in computing the total income. 10.3 To be eligible for this exemption, the venture capital fund or the venture capital company would require the approval of the Central Government in accordance with the rules made in this behalf and would also be required to satisfy the prescribed conditions. Such approval of the Central Government will have effect for the number of assessment years prescribed in the order of approval. However, at one time the approval can be granted for a maximum number of three assessment years. 10.4 The expression "venture capital fund" has been defined to mean a fund operating under a registered trust deed established to raise moneys by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facility would now be eligible for the exemption. With this amendment, it is made clear that any enterprise engaged in developing, maintaining and operating the infrastructure facility or maintaining and operating the infrastructure facility or only developing the infrastructure facility would also be eligible for exemption under this clause. 11.3 The Act has also expanded the scope for infrastructure facility defined for the purpose of this clause in Explanation 1 , by including within its ambit the undertaking which starts transmission or distribution of power by laying a network of new transmission or distribution lines at any time between 1st April, 1999 and 31st March, 2003. 11.4 An undertaking or a project for (i) developing, (ii) developing and operating, or (iii) maintaining and operating an industrial park which has been notified by the Central Government under clause (iii) of sub-section (4) of section 80-IA is also included in the definition of infrastructure facility and is, thus, within the scope of exemption under this clause. 11.5 This amendment will take effect from 1st April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin fourteen days from the date of declaration or distribution or payment of such income, whichever is earlier. No deduction under any other provision of the Income-tax Act shall be allowed to the fund in respect of the amount of income which has been charged to tax under sub-section (1) or the tax paid thereon. 13.6 The term "open-ended equity oriented funds" has been defined for the purpose of this Chapter so as to mean US-64 scheme of UTI and such funds whose more than 50% of the investible funds are invested by way of equity shares in domestic companies. The percentage equity holding of such mutual funds will be computed as an annual average of the monthly averages based on monthly opening and closing figures. 13.7 "Mutual fund" for the purposes of this Chapter means a mutual fund specified under clause (23D) of section 10 of the Income-tax Act and "Unit Trust of India" means the Unit Trust of India established under the Unit Trust of India Act, 1963. 13.8 Section 115S, provides that if the principal officer and the fund fail to pay the whole or part of the tax on distributed income to the credit of the Central Government, he or it shall be liable to pay simple interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the exemption is claimed under this section, deduction under section 32 and the expenditures under sections 35 and 36(1)(ix) would be considered as had been given full effect to for the period covered under the period of exemption. Thus, unabsorbed allowances or deductions are not allowed to be carried forward and set off against the income of the assessment years following the period of exemption. 14.4 The losses under section 72(1) or 74(1) or 74(3) are not allowed to be carried forward in assessment years succeeding the period of exemption. The deductions under section 80-IA or 80-IB or 80JJA shall also not be available to such undertakings. 14.5 In the assessment year following period of exemption, the depreciation will be computed on the written down value of the asset as if the depreciation had actually been allowed in respect of each assessment year falling in the period of exemption. 14.6 It has also been provided that the profits may be recomputed where inter-group transfers are made at prices other than market prices or where the profits computed by the assessee are higher than the ordinarily expected profit owing to the close connection of the assessee and other e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o file an appeal before the ITAT against an order passed under section 12AA. 15.4 These amendments take effect from 1st June, 1999.[ Sections 8, 9 and 85 ] 16. Provisions to tax perquisites in case of stock options and sweat equity plans : 16.1 Many corporate bodies are offering stock option plans to their employees. In such schemes, the stock is often offered to the employee free of cost or at a value less than the prevailing market value. In such a situation, a benefit accrues to the employee. To remove any uncertainty on the taxability of such benefits, it is now provided that when any such share, security is directly or indirectly, offered to any assessee by the company or any other person on behalf of such company, the difference between the market value of stock and the cost at which it is offered to the employee shall be taxed as perquisite. This benefit shall be taxed in the year in which the right for such option is exercised by the employee or is exercised and transferred in the name of any other person by him. It is further provided that the difference between the market value on the date of exercise of option and the sale consideration in the event of sale by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant loan must have been taken after 1-4-1999 and the acquisition or construction of residential unit must be completed before 1-4-2001. There is no stipulation regarding the date of commencement of construction. Consequently, the construction of the residential unit could have commenced before 1-4-1999 but, as long as its construction/acquisition is completed before 1-4-2001, the higher deduction would be available. Also, there is no stipulation regarding the construction/acquisition of the residential unit being entirely financed by loan taken after 1-4-1999. It may be so in part. However, the higher deduction of Rs. 75,000 towards interest can be claimed only in relation to that part of the loan which has been taken and utilised for construction/acquisition after 1-4-1999. The loan taken prior to 1-4-1999 will carry deduction of interest up to Rs. 30,000 only. 17.3 This amendment will take effect from 1st day of April, 2000, and will, accordingly, apply to the assessment year 2000-2001 and subsequent years. [ Section 11 ] 18. Weighted deduction for scientific research and development expenditure : 18.1 Under the existing provisions of clauses (ii) and (iii) of sub-sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xisting provisions of section 35ABB of the Income-tax Act, a deduction is allowable in respect of any capital expenditure incurred for acquiring any right to operate telecommunication services, for which the payment has actually been made to obtain a licence. This deduction is allowable in equal instalments during the relevant previous years. The expression "relevant previous years" is defined to mean the previous years beginning with the previous year for which the licence fee is actually paid and the subsequent previous year or years during which the licence, for which the fees are paid, is in force. 19.2 In order to clarify that the deduction is allowable in respect of the entire capital expenditure incurred and actually paid by the assessee, whether before the commencement of the business or thereafter, the Act amends section 35ABB to provide that in a case where the licence fee is actually paid before the commencement of the business, the "relevant previous years" would mean the previous years beginning with the previous year in which such business commenced and the subsequent previous year or years during which the licence is in force. The Act also provides that no deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said section. Consequently, the references of requirement of such approval in sections 80L(1)(x) and 194A(3)(i) have also been omitted. 21.3 These amendments will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Sections 22, 52 and 69 ] 22. Deduction of Y2K expenditure : 22.1 The change in the millennium is expected to create a major software problem in respect of the computer systems which are not Y2K compliant, that is, which are not programmed to correctly reckon dates within and between the 20th and 21st centuries. In order to ensure that the business entities run their businesses smoothly without hindrance and to avoid possible disruption in the economic activities of the country as a whole at the time of entering the new millennium, it is essential that the existing computer systems being used by the business entities are made Y2K compliant. 22.2 With a view to encourage the business entities to make their existing computer systems Y2K compliant at the earliest, the Act inserts a new clause (xi) in sub-section (1) of section 36 of the Income-tax Act to provide for allowabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . With a view to rationalise the determination of actual cost of an asset acquired outside India by a non-resident assessee, the Act inserts a new Explanation 11 to section 43(1) of the Income-tax Act. This Explanation provides that in case an asset, which was acquired outside India by an assessee, being a non-resident, is brought by him to India and used for the purposes of his business or profession, the actual cost of the asset to the assessee shall be the actual cost to the assessee, as reduced by an amount equal to the amount of depreciation calculated at the rate in force that would have been allowable had the asset been used in India for the said purposes since the date of its acquisition by the assessee. 23.2 This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 26 ] 24. Deduction of interest payable to co-operative banks to be allowed on actual payment basis : 24.1 Clause (e) of section 43B of the Income-tax Act, inter alia, allows deduction in respect of interest payable on any term loan from a scheduled bank on actual payment basis and not on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year 2000-2001 and subsequent years. [ Section 28 ] 26. Amendments to sections 44AD, 44AE and 44AF to provide for claiming lower profits : 26.1 Under the existing provisions of sections 44AD, 44AE and 44AF of the Income-tax Act, presumptive tax schemes are provided for computing the profits and gains of the business of civil construction, the business of plying, hiring or leasing goods carriages, and retail trade in any goods or merchandise, respectively. There is no requirement for the assessees to maintain books of account for such businesses and to get them audited, if the deemed profits and gains are taken as taxable profits of such businesses. 26.2 The Act amends these sections to provide for enabling provisions so as to allow an assessee to claim his income to be lower than the deemed profits and gains, subject to the condition that the books of account and other documents are kept and maintained as required under section 44AA(2) and the assessee gets his accounts audited and furnishes a report of such audit as prescribed under section 44AB. 26.3 These amendments will take effect retrospectively from the 1st day of April, 1998, and will, accordingly, apply in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent for cost inflation index will be made for non-depreciable assets and for depreciable assets, the written down value of such assets will be reduced from the block of assets as provided for in section 43(6). Also, the benefits of provisions contained in section 54EA/54EB, etc., would be available to the consideration, thus, received. 27.4 This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply to the assessment year 2000-2001 and subsequent years. [ Section 32 ] 28. Clarification of tax issues arising out of the provision to allow buy-back of shares by the companies : 28.1 The Companies (Amendment) Ordinance, 1998 [subsequently enacted as the Companies (Amendment) Act, 1999], inserted section 77A in the Companies Act, 1956, which allows a company to purchase its own shares subject to certain conditions. The shares bought back have to be extinguished and physically destroyed and the company is precluded from making any further issue of securities within a period of 24 months from such buy-back. 28.2 The above newly introduced provisions of buy-back of shares threw up certain issues in relation to the existing provisions of the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 40,000. Reservations were expressed that the provision in this form might create difficulties for such assessees as it may lead to a situation where evidence for such expenditure may be difficult to be kept. In order to mitigate any such hardship of the guardians of a handicapped person, it is now provided that where the assessee incurs any expenditure on maintaining a handicapped dependant or makes payment of any amount under a specified scheme of LIC or UTI framed in this behalf, he shall be allowed deduction of the lump sum amount of Rs. 40,000. 30.2 This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Clause 41 ] 31. Limits under section 80DDB revised : 31.1 Under the existing provisions of section 80DDB, a deduction of Rs.15,000 was allowed in the computation of total income of an individual suffering from chronic and protracted diseases and terminal ailments or of any individual or HUF, on whom such individual is dependent. Considering the expensive nature of treatment involved in diseases specified in the provisions, this limit is raised to Rs. 40,000 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " does not include any purpose the whole or substantially the whole of which is of a religious nature. These provisions have been interpreted to deny the benefit to even such funds or institutions as are predominantly engaged in charitable activities but are either inspired to do charity by tenets of religion or spend a negligible amounts on purposes other than charitable. It would be harsh to deny the benefits to the institutions which are engaged in activities, the whole or substantially the whole of which are of charitable nature. 33.2 In order to mitigate hardship to such funds or institutions, the provisions of section 80G are amended so as to provide that in case such institutions or funds spend upto five per cent. of their income during the relevant previous year for religious purpose, the benefit of deduction will not be denied to them. 33.3 This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 43 ] 34. Modification of the definition of small scale industry : 34.1 Under the existing provisions of section 80 HHA, a deduction of 20% for a period of te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect that deductions under these sections have been claimed correctly. The provisions of section 155 have been amended by inserting a new sub-section (13) therein to provide that the Assessing Officer may amend the order of assessment consequent upon bringing in of such convertible foreign exchange into India with the approval of the Reserve Bank of India or the competent authority, as the case may be. 35.3 These amendments take effect from the 1st day of June, 1999.[ Sections 45, 46, 47, 48, 53, 54, 55, 56 and 66 ] 36. Amendment of section 80HHC : 36.1 Forty per cent. of income derived from the sale of tea grown and manufactured by the sellers in India is chargeable to tax and the balance is regarded as agricultural income not chargeable to tax. In some cases where the assessee is exporting tea, the deductions under section 80HHC are claimed with reference to the composite income, including the income not chargeable to income-tax. For removal of doubts, it has now been clarified that for the purposes of computing deduction under section 80HHC, the amount of income not being charged to tax under the Act shall not be eligible for deduction under this section. 36.2 This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be hundred per cent. of the profits from such earning from exports. In case the profits of the companies includes profits from other activities also, the profits eligible for this benefit will be worked out as per following formula. Export profits Total profit x Export turnover/total turnover profits of any branch, office, warehouse or any other establishment of assessee outside India and 90% of receipts by way brokerage, commission, interest, rent, charges or any other receipt of similar nature which is included in profit, are to be excluded from the computation of profits for the purpose of this section. 38.4 The total turnover for this purpose does not include export incentives covered under sections 28(iiia), 28(iiib) and 28(iiic), freight, telecommunication charges or insurance attributable to delivery of software or software rights outside India and expenses, if any, incurred in foreign exchange in providing technical services outside India. 38.5 The export turnover does not include freight, telecommunication charges or insurance attributable to delivery of software or software rights outside India. 38.6 Where a deduction is claimed and allowed for any assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 50 ] 39.3 Tax benefits for generation of power or generation and distribution of power to be extended to any undertaking laying new transmission and distribution lines for transmission activities. 39.3-1 Under the provisions of section 80-IA, a five year tax holiday and a deduction of 25% (30% in the case of companies) of profits in the subsequent five years is allowed, to an undertaking engaged in the business of generation, or generation and distribution of power, provided it commences generation of power between 1-4-1993 and 31-3-2003. 39.3-2 To augment transmission and distribution of power in the country, similar benefits are also extended to undertakings setting up new transmission or distribution lines on or after 1-4-1999 on profits derived therefrom, as are available for generation or generation and distribution of power. The profits thereof shall be eligible for deduction if the undertaking sets up network of new transmission or distribution lines on or after 1-4-1999 but before 31-3-2003 under the restructured provisions of section 80-IA of the Income-tax Act. The deduction shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her encourage private sector participation, it is now provided in the newly inserted proviso to clause (i) of sub-section (4) of section 80-IA that any person other than a developer (i.e., the O and M contractor) may undertake operation and maintenance before handing such facility to the Central Government, State Governments or statutory body, if the terms of agreement so provide. The benefits and concession under section 80-IA in such cases, for the remaining period out of the period of ten consecutive years, may be availed of by the undertaking operating and maintaining such facility. Other conditions would remain the same in the amended provision. 39.5-2 The new provision contained in clause (iii) of sub-section (4) of restructured section 80-IA also provides that in the case of industrial parks, the developer and operator or the developer or the operator may avail of the benefit in a similar manner. In case of industrial parks, if an undertaking develops it and transfers its maintenance and operation to another to make management of such parks participatory, the deduction for the remaining period of ten assessment years may thereafter be availed of by the transferee undertaki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing and processing of bio-degradable waste was allowed upto a limit of rupees five lakhs. To facilitate and give further impetus to the entry of the non-Government sector in waste management, such units (irrespective of location), which are collecting, processing or treating bio-degradable waste for generating power or producing bio-fertilizers, bio-pesticides, biological agents or for producing or making pellets or briquettes for fuel or organic manure will be allowed a hundred per cent. deduction of profits and gains derived from such activities subject to a limit of rupees five lakhs, for a period of initial five years. 40.2 The amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 51 ] 41. Reduction of tax rate on long-term capital gains in regard to securi-ties : 41.1 Under the existing provisions, long term capital gains are taxed at the rate of 20% after giving the benefit of cost inflation index. However, certain categories of non-residents and non-resident Indians are required to pay tax at the rate of 10% on long term capital gains on securities and speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation technology services. 42.3 It further provides that in the case of the aforesaid resident employee, no deduction shall be allowed under any other provision of the Income-tax Act in respect of such dividend income and long term capital gains. 42.4 It also provides that while computing such long term capital gains, the first and second provisos to sub-section (1) of section 48 relating, inter alia, to indexation, will not apply. 42.5 In the Explanation to the new section the expressions "global depository receipts", "information technology software", "information technology service" and "overseas depository receitps" have been defined. 42.6 This amendment will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Section 59 ] 43. Exclusion of two-wheelers from the purview of "motor vehicle" for the purpose of filing return under first proviso to section 139(1) : 43.1 The first proviso to section 139(1) casts an obligation on a person to file return of income on the basis of six specified economic criteria. One such criterion is the ownership or lease of a motor vehicle. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... search and seizure cases. There is also no corresponding provision in Chapter XIV-B for payment of self-assessment tax at the time of filing of the return. Therefore, the tax on the admitted income declared in the return cannot be collected till the assessment is completed. The Act has, therefore, amended section 140A of Income-tax Act to provide for the statutory requirement of payment of self-assessment tax at the time of filing the return under section 158BC relating to block assessment of search cases. 45.2 This amendment takes effect from the 1st day of June, 1999.[ Section 63 ] 46. Simplification of procedure of processing of return under sub-section (1) of section 143 and doing away with prima facie adjustment : 46.1 Under the existing provisions of the Income-tax Act, all the returns filed are processed under sub-section (1) of section 143 for payment of tax and issue of refund. Certain powers are available with the Assessing Officer to rectify arithmetical mistakes and to make prima facie adjustments regarding allowable and disallowable claims and deductions. These are known as prima facie adjustments. In addition to tax on income as a result of prima facie adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his provision was introduced with a view to encouraging the development of indigenous know-how. 47.3 These provisions constituted significant tax incentives earlier in a tax regime which was based on the philosophy of imposing higher rate of taxes progressively as the slab of income became higher. But, after rationalisation of the structure of income slabs for rate purposes and significant reduction in tax rates in recent years, these provisions have outlived their utility. Otherwise also they have a narrow applicability. The expert group set up for simplification and rationalisation of income-tax law also recommended the omission of these sections. Therefore, the Act has amended sections 180 and 180A to provide that the provisions shall not be applicable for the previous year relevant to the assessment year commencing on or after the 1st day of April, 2000. 47.4 These amendments will take effect from the 1st day of April, 2000, and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. [ Sections 67 and 68 ] 48. Tax deduction at source on payment of compensation relating to compulsory acquisition of a capital asset : 48.1 With a view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees : 50.1 Under the existing provisions of the Income-tax Act, rates of interest chargeable from the assessee for various defaults vary from 15% to 24% per annum. The interest for defaults in furnishing the return of income under section 234A and for default in payment of advance tax under section 234B is chargeable at the rate of 2% for every month or part of a month. The interest for failure to deduct and pay tax at source is chargeable at 15% per annum under section 201(1A). 50.2 In order to rationalise these rates, the Act prescribes a uniform rate of interest at 18% per annum for various defaults under the above sections. Accordingly, the Act reduces the rate of interest chargeable under sections 234A and 234B from 2% for every month or part of a month to 1.5% for every month or part of a month and enhances the rate of interest chargeable under sub-section (1A) of section 201 from 15% per annum to 18% per annum. 50.3 These amendments take effect from the 1st day of June, 1999. [ Sections 79, 81 and 82 ] 51. Filing of TCS returns on computer media : 51.1 Section 206C(5A) of the Income-tax Act provides for filing of returns of tax collection at source by persons re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or collection of tax at such lower rate than the relevant rate specified in sub-section (1). 52.3 Sub-section (10) provides that the person responsible for collecting the tax shall collect the same at the rates specified in such certificate until the certificate is cancelled by the Assessing Officer. Sub-section (11) confers upon the Board, power to make rules for all matters connected with the issuance of such certificate. The relevant rules have since been notified by the Board vide S. O. No. 515(E), dated 29-6-1999 (see [1999] 238 ITR (St.) 33). 52.4 These amendments take effect from the 1st day of June, 1999.[ Section 80 ] 53 Time limit for disposal of appeals by the Commissioner (Appeals) and the Appellate Tribunal and empowering the latter to award costs : 53.1 Under the existing provisions, there was no time limit for disposal of appeals filed before the Commissioner (Appeals) or the Appellate Tribunal under the Income-tax Act or other direct tax enactments. In the absence of any statutory provision, there is considerable delay in the disposal of appeals. It is also seen that there is disinclination to take up the old appeals for disposal. To ensure accountability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed income. [ Sections 83 and 85 ] (ii) The orders passed by the Appellate Tribunal are final, subject to the provisions of section 256 of the Income-tax Act relating to reference to the High Court. The Act has amended section 256 of the Income-tax Act to provide that the finality of orders passed by the Appellate Tribunal shall also be subject to provisions of section 260A of the Income-tax Act providing for direct appeal to the High Court. Section 260A was inserted by the Finance (No. 2) Act, 1998. [ Section 86 ] (iii) Under the existing provisions brought about by the Finance (No. 2) Act, 1998, an appeal filed by an assessee before the High Court is to be accompanied by a fee of Rs. 10,000 in income-tax appeals. A debate arose about the nature of the above payment as to whether it is a tax on litigation or a court fee. Therefore, the Act has amended section 260A(2) of the Income-tax Act to omit the requirement to pay any fee. After its omission, the fee for filing the appeal to the High Court shall be such fee as may be specified in the relevant law relating to court fees for filing appeals to the High Court. [ Section 87 ] (iv) Sub-section (2) of section 260A has been amen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such enquiry as it deems fit before the University or other educational institution or a hospital is approved for exemption under clause (23C) of section 10. This amendment takes effect from the 1st day of April, 1999, and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years. [ Section 6 ] (vii) Section 33ABA which relates to Site Restoration Fund is amend-ed so as to omit the proviso in sub-section (7). This amendment is consequential to the omission of clauses of sub-section (3) of this section by the Finance (No. 2) Act, 1998. This amendment takes effect from the 1st day of April, 1999, and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years. [ Section 13 ] (viii) Section 115AD of the Income-tax Act relates to tax on income of the foreign institutional investors from securities or capital gains arising from their transfer. With a view to harmonise with the provisions of section 115-O, clause (a) of sub-section (1) of section 115AD is amended so as to exclude the income by way of dividends referred to in section 115-O from the income mentioned in this clause. This amendment takes effect from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relates to deduction of tax at source from interest other than interest on securities. Clause (ii) of sub-section (3) of section 194A provides that the provisions of sub-section (1) of section 194A shall not apply in case of income credited or paid before the 1st day of April, 1967. As this clause has outlived its utility, it has been omitted. This amendment will take effect from the 1st day of April, 2000.[ Section 69 ] (xiii) Section 194B of the Income-tax Act relates to deduction of tax at source from any payment made on account of winnings from lottery or crossword puzzle. The first proviso to this section provides that no deduction at source shall be made under this section from any payment made before the 1st day of June, 1972. As this proviso is no longer applicable, it is omitted by the Act. Consequential changes have also been made in the second proviso. This amendment will take effect from the 1st day of April, 2000.[ Section 7 0] (xiv) Section 194BB of the Income-tax Act relates to deduction of tax at source from any payment made on account of winnings from horse races. The proviso to this section provides that no deduction at source shall be made under this sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough schemes of compromise or arrangement under sections 391 to 394 of the Companies Act and these are sanctioned by the High Courts. A slump sale is a form of reorganization where an undertaking or a division is transferred from one person to another for a lump sum consideration without values being assigned to the individual assets and liabilities transferred. 56.3 Extensive amendments in the Income-tax Act have been carried out on the basis of the following broad principles : (a) The restructuring shall not attract additional liabilities to tax and also not result in the withdrawal of relief and concessions available to the existing unit. (b) The tax benefits and concessions available to an undertaking of a company shall continue to be available to the undertaking on transfer of the same while concessions and benefits that are available to the transferor company as an entity and not to the undertaking of the company proposed to be transferred, should remain with the transferor-company. (c) Tax benefits to such business reorganizations should be limited to the transfer of business as a going concern and not to the transfer of specific assets which would amount to sale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible liabilities are to be determined in a proportionate manner in the ratio to the value of assets being transferred in a demerger to the total value of the assets of the demerged company. According to Explanation 3 , the change in value of the assets upon their revaluation shall be ignored. According to Explanation 4 , the splitting up or reconstruction of any authority or a body constituted under a Central, State or Provincial Act or a local authority or a public sector company into separate authorities or bodies or companies shall be deemed to be a demerger, if these fulfil the conditions specified in sub-clauses (i) to (vii). [ Clause (c), section 3 ] (iii) A new clause (19AAA) has been inserted in section 2 of the Income-tax Act to define "demerged company" as being a company whose undertaking is transferred, pursuant to a demerger, to a resulting company. [ Clause (c), section 3 ] (iv) A sub-clause (v) has been inserted in clause (22) of the Income-tax Act to specify that dividends shall not include any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company whether or not there is a reduction of the capital i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... volving demerged and resulting companies.[ Section 12 ] (ix) The Act has amended section 33AC of the Income-tax Act which allows deduction of 50% of profits from shipping business to be credited to a reserve account which has to be utilised in a prescribed manner. There is a stipulation that the ship acquired out of the reserve is not transferred within eight years. The amended section provides that transfer of a ship pursuant to a scheme of demerger shall not constitute a transfer. [ Section 14 ] (x) A new sub-section (7) has been inserted in section 35A of the Income-tax Act which provides for the deduction of expenditure on acquisition of patent rights and copyrights. Sub-sections (3) and (4) prescribe the manner in which expenditure allowed or yet to be allowed is to be treated for the purpose of deduction or write-back in the year such rights came to an end or were sold with reference to the proceeds from such sale. The newly inserted sub-section (7) provides that provisions of sub-sections (3) and (4) shall not apply to damerged company in a case of demerger and the provisions of this section shall apply to the resulting company as they would have applied to the demerged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not apply in the case of the amalgamating or demerged company. [ Section 25 ] (xvii) Section 43 of the Income-tax Act has been amended by inserting Explanation 7A in clause (1) to provide that the actual cost of the transferred assets to the resulting company in the case of a demerger shall be taken to be the same as it would have been if the demerged company had continued to hold the assets. A new sub-item (C) in item (i) of sub-clause (c) of clause (6) has been inserted to provide that in the case of slump sale the written down value of any block of assets shall be reduced by the amount of actual cost of the asset as falling within that block as decreased by depreciation allowed upto assessment year 1987-88 and depreciation allowable thereafter, as if the asset was the sole asset in the block. However, such decrease shall not exceed the written down value. The Act has also inserted two new Explanations , namely, Explanation 2A and Explanation 2B , in clause (6) in section 43. Explanation 2A provides that where in the previous year, any asset forming part of a block of asset is transferred by the demerged company to the resulting company, the written down value of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... define the expression "net worth". Net worth shall mean the aggregate of the paid-up share capital and general reserves as appearing in the books of account of the demerged company immediately before the demerger. [ Section 35 ] (xx) A new section 50B has been inserted in the Income-tax Act containing special provision for computation of capital gains in the case of slump sale. It provides that the profits and gains arising from slump sale shall be chargeable to income-tax as capital gains arising from transfer of long-term capital assets in the previous year in which the transfer takes place. However, the profits and gains arising from such transfer of one or more undertakings held for less than 36 months shall be deemed to be short-term capital gains. It is further provided that the net worth of the undertaking or the division shall be deemed to be the cost of acquisition and cost of improvement for the purpose of sections 48 and 49 and the provisions contained in the second proviso to section 48 relating to adjustment for cost inflation index shall be ignored. The "net worth" of the undertaking shall be determined with reference to the net worth of the company. It is also pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onditions are not complied with. It has also provided that in the case of demerger, the accumulated loss and unabsorbed depreciation directly relatable to the undertaking being transferred shall be allowed to be carried forward and set-off in the hands of the resulting company. If the accumulated loss or unabsorbed depreciation is not directly relatable to the undertaking, the same shall be apportioned between the demerged company and the resulting company in the same ratio in which the value of the assets have been transferred. Power has also been conferred on the Central Government to notify such conditions as it considers necessary to ensure that the demerger is for genuine business purposes. The cumulative conditions of holding of assets and the continuance of the same business for a period of five years for the amalgamation suggest that assets in question would be fixed assets only as the continuance of business would necessarily entail change of inventories, etc. The term "value" connotes "book value". The existing conditions regarding the carry forward and set-off of accumulated losses or unabsorbed depreciation in the case of reorganization of business whereby a firm or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year 2000-2001 and subsequent years. 57. Gold Deposit Scheme : 57.1 In the Finance Act, 1999, a Gold Deposit Scheme, 1999, has been proposed to be started this year. Under this scheme, interest earned on the bonds and capital gain arising from their transfer or redemption would be exempt from the income-tax. These bonds would also be exempt from the wealth-tax. 57.2 In order to provide the above immunities from the income-tax, clause (14) of section 2 of the Income-tax Act has been amended to exclude the Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999, from the definition of capital assets so as to exempt the capital gain arising from their transfer or redemption. Clause (15) of section 10 has also been amended so as to provide that the interest on Gold Deposit Bonds issued under the said scheme shall not be included in computing the total income. 57.3 In order to provide immunity from the wealth-tax, section 2 of the Wealth-tax Act has been amended by inserting an Explanation to clause (ea) to clarify that jewellery does not include the Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government. 57. 4 These ame ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oviding for direct appeal to the High Court which were inserted through the Finance (No. 2) Act, 1998. [ Section 94 ] (iii) Section 27A of the Wealth-tax Act inserted by the Finance (No. 2) Act, 1998, provides for direct appeal to the High Court. Earlier, provisions regarding making a reference to the High Court were contained in section 27 of the Wealth-tax Act. The Act has inserted a sun-set clause in section 27 of the Wealth-tax Act whereby the provisions of the section would cease to be applicable in respect of orders passed on or after 1-6-1999 under section 24 or section 26 or clause (e) of sub-section (1) of section 35 of the Wealth-tax Act. [ Section 95 ] (iv) The Act has amended section 27A(3) of the Wealth-tax Act to omit the requirement of paying a fee of Rs. 5,000 in the case of wealth-tax appeals filed by the assessee. After its omission, the fee for filing the appeal to the High Court shall be such fee as may be specified in the relevant law relating to court fees for filing appeals to the High Court. [ Section 96 ] (v) The Act has inserted sub-section (8) in section 27A of the Wealth-tax Act to provide that the relevant provisions of the Code of Civil Procedure ..... X X X X Extracts X X X X X X X X Extracts X X X X
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