INCOME TAX
Explanatory Notes on the provisions relating to direct taxes
Circular No. 684
Dated 10/6/1994
Introduction
The Finance Act, 1994, as passed by the Parliament, received the assent of the President on 13th May, 1994, and has been enacted as Act No. 32 of 1994 (See [1994] 207 ITR (St.) 53). This Circular explains the substance of the provisions in the Act relating to direct taxes.
Changes made by the Finance Act, 1994
2. The Finance Act, 1994 (hereinafter referred to as the Finance Act) has, _
amended sections 2, 6, 10, 10B, 12A, 13, 17, 24, 33AB, 35, 36, 37, 44AB, 44D, 55, 57, 64, 71, 80CC, 80CCA, 80CCB, 80D, 80G, 80HHD, 80HHE, 80-IA, 80L, 88, 88A, 88B, 112, 115A, 115K, 115N, 116, 139, 143, 154, 194C, 196A, 197, 198 to 200, 202 to 205, 211, 234C, 246, 269, 273A and 296 of the Income-tax Act, 1961 ;
inserted new sections 5A, 44AD, 44AE, 80E and 194-I in the Income-tax Act, 1961 ;
substituted new section for section 71A in the Income-tax Act, 1961 ;
omitted section 80V in the Income-tax Act, 1961 ;
amended sections 2, 4 and 46 of the Wealth-tax Act, 1957 ;
amended sections 2 and 5 of the Gift-tax Act, 1958 ;
amended section 3 of the Interest-tax Act, 1974 ;
amended sections 4, 6 and 17 of the Expenditure-tax Act, 1987.
Provisions in brief
3. The provisions in the Finance Act, 1994, 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 1994-95 ; the rates at which tax will be deductible at source during the financial year 1994-95 from interest (including interest on securities), dividends, winnings from lotteries or crossword puzzles, winnings from horse races, commission and other categories of income liable to deduction of tax at source under the Income-tax Act ; rates for computation of "advance tax", deduction of income-tax from "Salaries" and charging of income-tax on current incomes in certain cases for the financial year 1994-95.
(ii) Retaining the provisions for levy of surcharge at the rate of 15 per cent. in the case of domestic companies having total income exceeding seventy-five thousand rupees ; abolishing the levy of surcharge in the case of resident non-corporate assessees (it may be clarified that surcharge does not apply in the case of non-residents and foreign companies).
(iii) Amendment of the Income-tax Act, 1961, with a view to,
_ creating a new class of income-tax authorities ;
_ reducing the period of holding in the case of securities and units of Mutual Funds for being treated as long-term capital assets ;
_ rationalising the provisions of capital gains arising from transfer of rights shares and rights renouncements ;
_ inserting special provisions for persons governed by the Portuguese Civil Law ;
_ extending the period of stay in India in the case of non-resident Indians without their losing the non-resident status ;
_ extending the tax exemption on payments under voluntary retirement schemes to employees of co-operative societies, universities, etc. ;
_ providing income-tax exemption on the income of specified news agencies ;
_ providing income-tax exemption on the income of bodies established for promoting the interests of members of backward classes ;
_ restricting five-year tax holiday under sections 10B to 100 per cent. EOUs exporting at least 75 per cent. of their turnover ;
_ providing tax holiday for 100 per cent. EOUs producing computer software ;
_ raising the monetary limit for the purposes of compulsory audit in the case of trusts claiming exemption under sections 11 and 12 and of substantial contribution to the trusts by interested persons ;
_ liberalising the provision of income-tax exemption in respect of perquisite in the form of medical facilities provided by the employers ;
_ enhancing the limit of deduction in the case of self-occupied house property ;
_ extending the scope of benefit under section 33AB ;
_ widening the ambit of tax concession for scientific research ;
_ amending the provision in respect of deduction relating to provision made for bad and doubtful debts relating to rural branches of banks ;
_ introducing estimated income method for taxpayers engaged in the business of civil construction and in the business of plying, leasing or hiring trucks ;
_ amending the provisions relating to capital gain on transfer of assets where there is no cost of acquisition ;
_ excluding income of handicapped minor from the clubbing provisions ;
_ amending the provisions regarding set-off and carry forward of losses under the head "Income from house property" ;
_ providing deduction in respect of repayment of loan taken as a student for pursuing higher studies ;
_ providing 100 per cent. deduction for donations to the Chief Minister's Earthquake Relief Fund, Maharashtra ;
_ removing the minimum limit for claiming deduction under section 80G ;
_ rationalising the provisions relating to incentive to tourism ;
_ extending tax concession in respect of profits from export of computer software for one more year ;
_ withdrawing restrictions in respect of new industrial undertakings set up in backward States ;
_ extending the five-year tax holiday to new industrial undertakings set up in extremely backward districts ;
_ liberalising provisions relating to tax rebate in respect of certain savings ;
_ bringing contributions to pension funds of the UTI within the ambit of section 88 ;
_ providing further relief to senior citizens ;
_ reducing rates of income-tax on long-term capital gains in certain cases ;
_ providing uniform tax rate on income by way of interest, dividends, etc., in the case of non-residents ;
_ extending the simplified procedure for small businessmen beyond assessment year 1994-95 ;
_ changing the due date for filing returns of income by com-panies ;
_ providing direct appeal against prima facie adjustments ;
_ enlarging the scope of the provision regarding deduction of income-tax at source on payments by contractors to sub-contractors ;
_ prescribing deduction of income-tax at source from income by way of rent ;
_ changing the number of instalments of advance tax and the amount payable thereunder in the case of companies ;
_ enlarging the scope of levy of interest for deferment of advance tax ;
_ delegating powers to the Chief Commissioners and Directors-General to approve reduction or waiver of penalty ;
_ laying the rules of procedure framed by the Income-tax Appellate Tribunal, etc., in Parliament.
(iv) Amendment of the Wealth-tax Act, 1957, with a view to,_
_ extending the period for which urban land can be held as stock-in-trade without attracting tax liability ;
_ creating a new class of wealth-tax authorities.
(v) Amendment of the Gift-tax Act, 1958, with a view to,_
_ creating a new class of gift-tax authorities ;
_ raising the exemption limit for gifts made to dependent relatives.
(vi) Amendment of the Interest-tax Act, 1974, with a view to creating a new class of interest-tax authorities.
(vii) Amendment of the Expenditure-tax Act, 1987, with a view to,_
_ reducing the rate of expenditure-tax ;
_ creating a new class of expenditure-tax authorities.
INCOME-TAX
Rate structure
I. Rates of income-tax in respect of incomes liable to tax for the assessment year 1994-95
4. In respect of incomes of all categories of taxpayers (corporate as well as non-corporate) liable to tax for the assessment year 1994-95, the rates of income-tax (including surcharge thereon) have been specified in Part I of the First Schedule to the Finance Act and are the same as those laid down in Part III of the First Schedule to the Finance Act, 1993, for the purposes of computation of "advance tax", deduction of tax at source from "salaries" and charging of tax payable in certain cases during the financial year 1993-94.
II. Rates for deduction of income-tax at source during the financial year 1994-95 from income other than "salaries"
5. The rates for deduction of income-tax at source during the financial year 1994-95 from incomes other than "Salaries" have been specified in Part II of the First Schedule to the Finance Act. These rates apply to income by way of interest on securities, interest other than "interest on securities", dividends, insurance commission, winnings from lotteries or crossword puzzles, winnings from horse races and income of non-residents (including non-resident Indians). These rates are basically the same as those specified in Part II of the First Schedule to the Finance Act, 1993, for the purposes of deduction of income-tax at source during the financial year 1993-94, except that, _
(i) the income by way of dividends, interest payable by the Government or an Indian concern on monies borrowed or debt incurred by the Government or the Indian concern in foreign currency and income payable in respect of units (except in the case of a non-resident individual), purchased in foreign currency, of the Unit Trust of India, shall be subject to deduction of income-tax at the rate of 20 per cent., in the case of non-resident non-corporate assessees and foreign companies ;
(ii) income by way of long-term capital gains in the case of non-resident non-corporate assessees and foreign companies, shall be subject to deduction of income-tax at the rate of 20 per cent., and
(iii) the income of foreign companies which was hitherto subject to deduction of income-tax at the rate of 65 per cent., shall now be liable to deduction of income-tax at the rate of 55 per cent.
Reference to interest payable on a tax free security, has been omitted as no such security has been issued in the last thirty years.
The amount of income-tax so deducted at source shall be increased in the case of a domestic company, by a surcharge calculated at the rate of 15 per cent. of such income-tax. In the case of resident non-corporate assessees, no surcharge is to be levied on the amount of income-tax.
III. 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 1994-95
6. The rates for deduction of income-tax at source from "salaries" during the financial year 1994-95 and also for the computation of "advance tax" payable during that year in the case of all categories of taxpayers, have been specified in Part III of the First Schedule to the Finance Act. These rates are also applicable for charging income-tax during the financial year 1994-95 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 the financial year 1994-95, assessment of persons who are likely to transfer property to avoid tax or where an order has to be passed in case of search and seizure for calculating the amount of tax on the estimated undisclosed income, etc. The salient features of the rates prescribed in the said Part III are indicated in the following paragraphs.
III. A. Individuals, Hindu undivided families, etc.
7. Sub-paragraph I of Paragraph A of Part III of the First Schedule to the Finance Act specifies the rates of income-tax in the case of individuals, non-specified Hindu undivided families (i.e., other than those having at least one member with independent total income exceeding the exemption limit), associations of persons, etc.
Raising of exemption limit. _ The exemption limit in the case of individuals, non-specified Hindu undivided families, associations of persons, etc., has been raised from Rs. 30,000 to Rs. 35,000.
Modification in the rates of income-tax. _ The rate schedule applicable in the case of individuals, non-specified Hindu undivided families, associations of persons, etc., has been restructured. The Table below gives the rates of income-tax applicable to the aforesaid categories of taxpayers (a) as specified in Part I of the First Schedule to the Finance Act, i.e., for the assessment year 1994-95 ; and (b) as specified in Part III of the First Schedule to the Finance Act, i.e., for the financial year 1994-95.
Table
|
Income slab |
Rates as specified in Part I of the First Schedule to the Act(i.e., for A.Y. 1994-95) |
Income slab |
Rates as speci- fied in Part III of the First Schedule to the Act(i.e., for F.Y. 1994-95) |
|
Up to Rs.. 30,000 |
Nil |
Up to Rs 35,000 |
Nil |
|
Rs. 30,001 - Rs 50,000 |
20% |
Rs. 35,001 - Rs. 60,000 |
20% |
|
Rs. 50,001 - Rs 1,00,000 |
30% |
Rs 60,001 - Rs. 1,20,000 |
30% |
|
Above Rs.. 1,00,000 |
40% |
Above Rs. 1,20,000 |
40% |
In the case of a Hindu undivided family which at any time during the previous year has at least one member whose total income of the previous year relevant to the assessment year commencing on the 1st day of April, 1995, exceeds Rs. 35,000, the rates of income-tax have been specified in sub-paragraph II of Paragraph A of Part III of the First Schedule to the Finance Act. These rates are the same as those specified in the corresponding Paragraph of Part I of the First Schedule to the Finance Act.
III. B. Co-operative societies
8. 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 Finance Act. These rates are the same as those specified in the corresponding Paragraph of Part I of the First Schedule to the Finance Act.
III. C. Firms
9. In the case of firms, the rate of income-tax has been specified in Paragraph C of Part III of the First Schedule to the Finance Act. This rate is the same as that specified in the corresponding Paragraph of Part I of the First Schedule to the Finance Act.
III. D. Local Authorities
10. In the case of local authorities, the rates of income-tax have been specified in Paragraph D of Part III of the First Schedule to the Finance Act. This rate is the same as that specified in the corresponding Paragraph of Part I of the First Schedule to the Finance Act.
III. E. Companies
11. Paragraph E of Part III of the First Schedule to the Finance Act specifies the rates of income-tax in the case of companies. In the case of a domestic company, the rate of income-tax has been reduced to 40 per cent. of the total income. The existing distinction between domestic companies in which the public are substantially interested and those in which the public are not substantially interested, for the purpose of tax rates, has been abolished. In the case of a company other than a domestic company (i.e., a foreign company), the rate of income-tax will be 55 per cent. of the total income, as against the earlier rate of 65 per cent. However, on income (i) by way of royalties in pursuance of agreements approved after 31st March, 1961, but before 1st April, 1976, and (ii) by way of fees for technical services in pursuance of agreements approved after 29th February, 1964, but before 1st April, 1976, the rate of income-tax shall continue to be 50 per cent. The Table below gives the rates of income-tax applicable to the domestic companies and foreign companies (a) as specified in Part I of the First Schedule to the Finance Act, i.e., for the assessment year 1994-95 ; and (b) as specified in Part III of the First Schedule to the Finance Act, i.e., for the financial year 1994-95.
Table
|
Rates as specified in Part I of the First Schedule to the the Act (i.e., For f.y. 1994-95) |
|
Rates as specified in Part III of the First Schedule to Act (i.e., For a.y. 1994-95) |
|
|
Domestic companies |
: |
Domestic companies |
: |
|
(I) in which the public are substantially interested |
: 45 per cent |
(I) in which the public are substantially interested |
: 40 per cent |
|
(Ii) in which the public are not substantially interested |
: 50 per cent |
(Ii) in which the public are not substantially interested |
: 40 per cent |
|
Foreign companies |
: 65 per cent |
Foreign companies |
|
III. F. Surcharge
12. In the case of resident non-corporate assessees referred to in Paragraphs A, B, C and D of Part III of the First Schedule to the Finance Act, the levy of surcharge on the amount of income-tax has been abolished. However, in the case of domestic companies, surcharge will continue to be levied at the rate of 15 per cent. of the amount of income-tax where the total income exceeds seventy-five thousand rupees.
III. G. Effect of changes in the rate structure
13. The impact of increase in the exemption limit, widening of the slabs of income and removal of surcharge in the case of individuals, etc., referred to in sub-paragraph I of Paragraph A of Part III of the First Schedule to the Finance Act, at different income levels, is as under :
Table
|
Total income |
Tax liability for F.Y 1993-94 |
Tax liability for F.Y 1994-95 |
Relief |
|
|
|
|
|
Amount |
Col. (4) as percentage of Col. (2) |
|
(1) |
(2) |
(3) |
(4) |
(5) |
|
Rs. |
Rs. |
Rs. |
Rs. |
Rs. |
|
35,000 |
1,000 |
Nil |
1,000 |
100 |
|
40,000 |
2,000 |
1,000 |
1,000 |
50 |
|
50,000 |
4,000 |
3,000 |
1,000 |
25 |
|
60,000 |
7,000 |
5,000 |
2,000 |
28.6 |
|
75,000 |
11,500 |
9,500 |
2,000 |
17.4 |
|
1,00,000 |
19,000 |
17,000 |
2,000 |
10.5 |
|
1,20,000 |
30,240* |
23,000 |
7,240 |
23.9 |
|
1,50,000 |
43,680* |
35,000 |
8,680 |
19.9 |
|
2,00,000 |
66,080* |
55,000 |
11,080 |
16.8 |
|
5,00,000 |
2,00,480* |
1,75,000 |
25,480 |
12.7 |
*Income-tax liability including surcharge.
IV. Partially integrated taxation of non-agricultural income with income derived from agriculture
14. As in the past, the Finance Act provides that in the case of individuals, Hindu undivided families, association of persons, etc., the net agricultural income will be taken into account for the computation of "advance tax" and charging of income-tax. The net agricultural income will be computed in accordance with the rules contained in Part IV of the First Schedule.
[ Section 2 and the First Schedule ]
Creation of a new class of income-tax authorities
15. At present, the classes of income-tax authorities specified in Chapter XIII of the Income-tax Act include the class of Deputy Directors of Income-tax, Deputy Commissioners of Income-tax and Deputy Commissioners of Income-tax (Appeals). The income-tax authorities referred to in this class perform different kinds of functions such as, _
(i) supervising the work of Assistant Commissioners/Income-tax Officers,
(ii) doing assessment functions,
(iii) handling internal audit of the completed assessments,
(iv) disposal of appeals,
(v) representing Departmental cases in the Appellate Tribunal,
(vi) handling search and seizure matters, etc.
The above shows that some of the Deputy Commissioners and Deputy Directors have been assigned duties of higher responsibility. Therefore, there is need to recognise the aforesaid distinction in responsibility by making an appropriate change in the designation of such authorities.
15.2 The Finance Act has, therefore, amended the relevant provisions of the Income-tax Act in order to create a new class of income-tax authorities, namely, Additional Directors of Income-tax, Additional Commissioners of Income-tax and Additional Commissioners of Income-tax (Appeals). Similar changes have been made to the Wealth-tax Act, the Gift-tax Act, the Interest-tax Act and the Expenditure-tax Act.
15.3 These amendments take effect from 1st June, 1994.
[Sections 3, 35, 51, 54, 56, 58 and 59]
Period of holding in the case of securities and units of Mutual Funds
16. Long-term capital assets enjoy certain tax concessions vis-a-vis short-term capital assets. The Income-tax Act defines long-term capital assets as those assets which are not short-term. Short-term capital assets are those capital assets which are held for a period of up to 36 months. However, the Finance Act, 1987, through an amendment to the provisions of section 2(42A), reduced the maximum period of holding in respect of company shares from 36 months to 12 months for being treated as short-term capital assets.
16.2 There are many financial instruments, other than company shares, through which the investors are entering the capital market. The units of the Unit Trust of India and Mutual Funds specified under section 10(23D) of the Income-tax Act are the instruments through which the small investors are increasingly getting the benefit of investment in the capital market. In order to provide such units and all the securities traded in the recognised stock exchanges a level playing field with company shares, the Finance Act has amended the provisions of section 2(42A) so that the maximum holding period for which such instruments are to be considered as short-term will be 12 months in the place of 36 months. In other words, such assets are to be considered long-term capital assets if they are held for more than 12 months. The expression "securities" will have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956.
16.3 This amendment takes effect from 1st April, 1995, and will, accordingly, apply in relation to assessment year 1995-96 and subsequent years.
[Section 3]
Rationalisation of capital gain arising from transfer of rights shares and rights renouncements
17. The Income-tax Act prescribes broad provisions on computation of income under the head "Capital Gains". Specific methods of computing the cost of the asset have been provided only in respect of certain types of assets. However, there is no specific provision dealing with determination of the cost of financial instruments such as rights shares, rights entitlement, etc. In the absence of any such provisions, courts have laid down certain methods for determining the cost which are not strictly in accordance with commercial principles.
17.2 For the purpose of avoiding complicated calculations, the Finance Act has introduced a simple and unambiguous set of provisions for computation of the cost of acquisition of financial assets, including shares, where there is an entitlement to subscribe to additional financial assets on rights basis. It has been provided that the cost of rights entitlement in the hands of the original shareholder is to be deemed as nil. Of course, the cost of the rights share acquired by the original shareholder is the price actually paid by him to the company for acquiring the rights share. But where the rights renouncee acquires the rights share, the cost of the rights share is equal to the cost incurred by him for purchasing the rights entitlement plus the price paid by him to the company for acquiring the rights share. The amount realised by the original shareholder by selling his rights entitlement will be short-term capital gains in his hands (as the cost is taken as nil). The period of holding of the rights entitlement is to be reckoned from the date of offer made by the company to the date of renouncement.
17.3. These amendments will enable the taxpayers to compute the tax liability easily and prevent proliferation of litigation.
17.4. The aforesaid amendments take effect from 1st April, 1995, and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years.
[Sections 3 and 18]
Special provisions for persons governed by Portuguese Civil Law
18. A large number of persons residing in the State of Goa and the Union Territories of Dadra and Nagar Haveli and Daman and Diu are governed by the Portuguese Civil Code of 1860. According to this law, when a person gets married, the property of the spouses gets blended and each spouse becomes a 50 per cent. shareholder in the combined property. Similarly, each spouse is legally entitled to 50 per cent. of the income of the other spouse. Such a system referred to as community of property (in Portuguese language "COMMUNIAO DOS BENS") had been posing problems in the assessment of income as there were doubts whether the income was to be assessed in the hands of the community of property or in the hands of the husband and wife separately.
18.2. The Income-tax Department was following the decision of the Bombay High Court rendered in the case of Addl. CIT v. Mr. and Mrs. Valentino F. Pinto [1984] 150 ITR 408, in which it had been held that income under the heads "Income from house property", "Profits and gains from business or profession" and "Income from other sources" should be allocated in the ratio of 50 : 50 and taxed separately in the hands of each spouse and no separate assessments should be made in the hands of the community of property. In a recent decision in the case of CIT v. Modu Timblo, decided on 23rd April, 1993, [1994] 206 ITR 647, the Bombay High Court has held that income under the head "Profits and gains from business or profession" earned by the husband and wife should be combined and the combined income should be assessed in the hands of the single entity of community of property, in the status of association of persons or body of individuals. The decision not only poses considerable administrative problems for the Income-tax Department but also is very harsh to the assessees inasmuch as the combined assessment deprives them of two separate exemption limits as also of other incentives and deductions which otherwise would have been allowable to each spouse, if they were to be assessed separately as individuals.
18.3. The Finance Act, therefore, has incoporated in the Income-tax Act the principle which has all along been accepted for the determination of the income of persons residing in the State of Goa and the Union Territories of Dadra and Nagar Haveli and Daman and Diu and governed by the Portuguese Civil Code of 1860. A new section 5A has been inserted in the Income-tax Act so as to set at rest the controversy. Section 5A provides that income from all sources, except from salary, should be apportioned equally between the husband and wife and such income shall not be assessed as income of the community of property (whether treated as an association of persons or as a body of individuals). Even the income from profession will be apportioned equally between the husband and the wife. The income so apportioned will be included separately in the total income of the husband and of the wife and the remaining provisions of the Income-tax Act shall apply accordingly. Salary income will, however, continue to be assessed in the hands of the spouse who has actually earned it. References to the association of persons consisting of the husband and wife governed by the system of community of property in force in Goa and other places in the provisions of the Income-tax Act have been deleted so that the husband and wife can claim deduction under the provisions of Chapter VI-A and rebate under Chapter VIII separately.
18.4. These amendments take effect, retrospectively, with effect from 1st April, 1963, and will, accordingly, apply in relation to assessment year 1963-64 and subsequent years.
[ Sections 4 and 50 ]
Extending the period of stay in India in the case of non-resident Indians without their losing the non-resident status
19. Under the provisions of clause (1) of section 6 of the Income-tax Act, an individual is said to be resident in India in any previous year, if he has been in India during that year, _
(i) for a period or periods amounting to one hundred and eighty-two days or more, or
(ii) for a period or periods amounting to sixty days or more and has also been in India within the preceding four years for a period or periods amounting to three hundred and sixty-five days or more.
However, the period of sixty days was increased to one hundred and fifty days in the case of a non-resident Indian, i.e., a citizen of India or a person of Indian origin within the meaning of the Explanation to clause (e) of section 115C of the Act, who, being outside India, comes on a visit to India. The said Explanation provides that a person shall be deemed to be of Indian origin if he, or either of his parents or any of his grandparents, was born in undivided India.
19.2. Suggestions had been received to the effect that the aforesaid period of one hundred and fifty days should be increased to one hundred and eighty-two days. This is because the non-resident Indians who have made investments in India, find it necessary to visit India frequently and stay here for the proper supervision and control of their investments. The Finance Act, therefore, has amended clause (b) of the Explanation to section 6(1)(c) of the Income-tax Act, in order to extend the period of stay in India in the case of the aforesaid individuals from one hundred and fifty days to one hundred and eighty-two days, for being treated as resident in India, in the previous year in which they visit India. Thus, such non-resident Indians would not lose their "non-resident" status if their stay in India, during their visits, is up to one hundred and eighty-one days in a previous year.
19.3. This amendment takes effect from 1st April, 1995, and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years, i.e., each previous year commencing on or after 1st April, 1994.
[Section 5]
Extending the tax exemption on payments under voluntary retirement schemes to employees of co-operative societies, universities, etc.
20. Under the existing provisions of section 10(10C) of the Income-tax Act, any amount received by an employee of a company or a statutory authority or a local authority at the time of his voluntary retirement, in accordance with the scheme of voluntary retirement, is exempt from income-tax up to five lakh rupees. Such a scheme has to be in accordance with the guidelines prescribed by the Central Board of Direct Taxes in this behalf. In the case of the schemes of companies other than public sector companies, it is also necessary that these are approved by the concerned Chief Commissioner or Director-General in this behalf.
20.2. Representations had been received to the effect that the benefit of income-tax exemption under section 10(10C) should be extended to employees of co-operative societies also. Suggestions had also been received that the employees of the Universities, Indian Institutes of Technology and Indian Institutes of Management, should also be covered under the provisions of section 10(10C). This would help them to rationalize their staff structure and reduce cost on salaries.
20.3. The Finance Act has, therefore, extended the scope of the income-tax exemption under section 10(10C) to the employees of co-operative societies, Universities, Indian Institutes of Technology and such institutes of management as may be specified by the Central Government for the purposes of that section. It has further been provided that the schemes of co-operative societies governing the payment of amounts on voluntary retirement, are to be approved by the concerned Chief Commissioner or Director-General in this behalf.
20.4. This amendment takes effect from 1st April, 1995, and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years.
[Section 6]
Provision for income-tax exemption on the income of specified news agencies
21. The Finance Act has inserted a new clause (22B) in section 10 of the Income-tax Act. This clause provides that any income of such news agency, set up in India solely for collection and distribution of news, as the Central Government may specify in this behalf by notification in the Official Gazette, will be exempt from income-tax. This will be subject to the condition that the news agency applies its income or accumulates it for application solely for collection and distribution of news and it does not distribute its income in any manner to its members. The notification granting exemption under this clause shall, at any one time, have effect for not more than three assessment years (including an assessment year or years commencing before the date of issue of such notification), as may be specified in the notification.
21.2. This amendment takes effect from 1st April, 1994, and will, accordingly, apply in relation to the assessment year 1994-95 and subsequent years.
[ Section 6 ]
Provision of income-tax exemption on the income of bodies established for promoting the interests of members of backward classes
22. Section 10(26B) of the Income-tax Act provides income-tax exemption on any income of a statutory corporation or of any other body, institution or association, wholly financed by the Government, where such corporation or body, etc., has been established for promoting the interests of the members of Scheduled Castes and/or Scheduled Tribes. Similar bodies, established for promoting the interests of the members of backward classes, have been functioning for some time now. The National Backward Classes Finance and Development Corporation, a wholly owned Government company set up for the benefit of backward classes, has been functioning at the national level and there are State level corporations performing similar functions. There is a need to exempt the income of such bodies also from income-tax.
22.2 The Finance Act, therefore, has amended clause (26B) of section 10 in order to extend the benefit of exemption to income of a corporation established by a Central, State or Provincial Act or of any other body, institution or association (being a body, institution or association wholly financed by Government) where such corporation or other body or institution or association has been established or formed for promoting the interests of the members of the backward classes. The expression "backward classes" has been defined so as to mean such classes of citizens, other than Scheduled Castes and Scheduled Tribes, as are notified by the Central Government or any State Government from time to time.
22.3. This amendment takes effect retrospectively from 1st April, 1993, and will, accordingly, apply in relation to the assessment year 1993-94 and subsequent years.
[Section 6]
Restricting five-year tax holiday under section 10B of the Income-tax Act to 100% EOUs exporting at least 75 per cent. of their turnover
23. Under section 10B of the Income-tax Act, a five-year tax holiday is allowed to a 100% export oriented undertaking (100% EOU) which manufactures or produces any article or thing and is approved by the prescribed Board. This tax holiday is in operation since the assessment year 1989-90.
23.2. 100% EOUs, as the name signifies, get special treatment by virtue of the fact that they export their entire produce. However, in order to provide economic flexibility to them and allow them to dispose of the export rejects and by-products, they are allowed to sell 25% of their product in the domestic market. In effect, such units get exemption for five years even in respect of profits from the 25% domestic sales allowed to them.
23.3. As long as domestic sales of 100% EOUs are within reasonable limits, such sales getting exempt can be justified as a concession incidental to export. Recently, however, it has come to notice that several units approved as 100% EOUs export less than 75 per cent. of their turnover and sell the balance amount in the domestic market. Such units are, thus, getting the five-year tax holiday even on the profit generated from domestic sales forming more than 25 per cent. of the total sales.
23.4. With a view to ensuring that 100% EOUs avail of the tax exemption only if the exports are substantial, section 10B has been amended restricting the five-year tax holiday to 100% EOUs which export at least 75% of their turnover. Units which, in any previous year, export less than 75% of their turnover will not be allowed the exemption under section 10B in respect of that previous year. They can, in such a case, avail of the normal 100 per cent. deduction under section 80HHC on the export profits. The restriction will apply prospectively to 100% EOUs which commence production on or after 1st April, 1994.
23.5. This amendment takes effect from 1-4-1995 and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years.
[Section 7]
Tax holiday for 100% EOUs producing computer software
24. Section 10A of the Income-tax Act provides for a five-year tax holiday to an industrial undertaking which manufactures or produces any article or thing and is set up in notified Free Trade Zones (FTZs). Through the Finance Act, 1993, the tax holiday under section 10A was extended to industrial units set up in approved Electronic Hardware Technology Parks (EHTP) or the Software Technology Parks (STP). Simultaneously, the scope of the term "produce" was enlarged to include production of computer programmes.
24.2. Under the provisions of section 10B of the Income-tax Act, a five-year tax holiday is allowed to approved 100 per cent. export oriented undertakings (EOUs) which manufacture or produce any article or thing.
24.3. With a view to enlarging the scope of the tax holiday to approved 100 per cent. EOUs established under the EHTP/STP Schemes for export of computer hardware and software and approved by the prescribed Board, an Explanation for the term "produce" has been inserted in section 10B to include production of computer programmes.
24.4. This amendment takes effect from 1-4-1994 and will, accordingly, apply in relation to the assessment year 1994-95 and subsequent years. It will accordingly coincide with similar concession extended last year in section 10A to the Computer Hardware and Software Parks.
[Section 7]
Raising of the monetary limit for the purposes of compulsory audit in the case of trusts claiming exemption under sections 11 and 12 and of substantial contribution to the trusts by the interested persons
25. In order to claim exemption from income-tax in respect of income derived from property held under trust or by way of voluntary contributions by charitable or religious trusts or institutions, section 12A of the Income-tax Act specifies certain conditions. One such condition was that where the total income of the trust or institution, but for the exemption under sections 11 and 12, exceeded twenty-five thousand rupees in any previous year, the accounts of the trust or institution for that year should have been audited by a chartered accountant or any other accountant entitled to be appointed as an auditor of companies.
25.2. Section 13(1)(c) of the Income-tax Act provides that where any income of a charitable trust, etc., enures for the benefit of an interested person, the exemption from income-tax under section 11 or 12 of the Income-tax Act will be forfeited, with a few exceptions. Section 13(3) of the Act specifies the interested person to mean, inter alia, any person who has made a substantial contribution to the trust or institution. The expression "substantial contribution" had been explained as meaning total contribution exceeding twenty-five thousand rupees up to the end of the relevant previous year.
25.3. As a measure of rationalisation, the Finance Act has amended section 12A(b) and section 13(3)(b) of the Income-tax Act to raise the aforesaid limit of twenty-five thousand rupees to fifty thousand rupees.
25.4. These amendments take effect from 1st April, 1995, and will accordingly, apply in relation to the assessment year 1995-96 and subsequent years.
[Sections 8 and 9]
Exemption from tax in respect of perquisite in the form of medical facilities provided by the employers
26. Under the proviso to clause (2) of section 17 of the Income-tax Act, the perquisite value of medical benefit provided by the employer to an employee or any member of his family is exempt from tax subject to certain conditions. Exemption from tax is available, inter alia, in respect of reimbursement, by the employer, of expenditure incurred by the employee in hospitals, dispensaries, etc., maintained by the Government or by a local authority or in a hospital approved by the Government for the purposes of medical treatment of its employees. However, in respect of treatment of prescribed diseases in private hospitals approved by the Chief Commissioner, this concession is allowed only where the payment is made directly by the employer to the hospital.
26.2. In order to further liberalise the provision and reduce hardship, it has been provided that expenditure incurred for treatment in any hospital approved by the Chief Commissioner will be exempt even where the payment is in the form of reimbursement of expenditure. This will, however, be subject to the condition that the employee attaches with the return of income a certificate from the approved hospital specifying the prescribed disease or ailment for which hospitalisation was required as well as receipt for the amount paid.
26.3. This amendment takes effect from 1-4-1993, i.e., the date from which expenditure on treatment in hospitals approved by the Chief Commissioner has been made exempt. It will, accordingly, apply in relation to the assessment year 1993-94 and subsequent years. Accordingly, persons who were hospitalised during any previous year relevant to the assessment year 1993-94 and onwards can claim exemption of any amount reimbursed by the employer for such hospitalisation provided the certificate and the receipt are attached.
[Section 10]
Enhancement of the limit of deduction in case of self-occupied house property
27. Under the provisions of section 24(2) of the Income-tax Act, a deduction up to five thousand rupees was allowed in respect of interest payable on borrowed capital used for acquisition, construction, repair, renewal or reconstruction of a self-occupied house property. This limit of deduction was fixed by the Finance Act, 1986, with effect from 1-4-1987. Keeping in view the increase in the cost of construction since 1986, the Finance Act has raised the limit of deduction in respect of such interest from five thousand rupees to ten thousand rupees. The amount of interest payable on borrowed capital to the extent of ten thousand rupees, will be allowable from the annual value of the property. As the annual value of the self-occupied property is taken at nil, the deduction up to ten thousand rupees will result in a loss. Such loss will be allowed to be set off against income under any other head in terms of the provisions of sub-section (1) and sub-section (2) of section 71.
27.2. This amendment takes effect from 1st April, 1995, and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years.
[Section 11]
Additional scheme for deposit by tea growers and manufacturers
28. Section 33AB of the Income-tax Act provides that where a person who carries on the business of growing and manufacturing tea in India has, during the previous year, deposited with the National Bank for Agriculture and Rural Development (NABARD) any amount in a Tea Deposit Account maintained by such person with that Bank in accordance with the scheme approved in this behalf by the Tea Board, such person shall be allowed a deduction of the amount so deposited during the previous year or twenty per cent. of the profits from the business of growing or manufacturing tea in India, whichever is less.
28.2. The benefit of section 33AB has been extended to such tea growers and manufacturers also who make deposits in the Tea Deposit Account in accordance with and for the purposes specified in any other scheme framed by the Tea Board, and approved by the Central Government.
28.3. This amendment takes effect from 1st April, 1995, and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years.
[ Section 12 ]
Ambit of tax concessions for scientific research widened
29. Under section 35(2AA) of the Income-tax Act, any sum paid by an assessee carrying on business or profession to a "National Laboratory" for carrying out programmes of scientific research, as are approved by the prescribed authority, are eligible for weighted deduction of one and one-fourth times of the sum so paid.
29.2. "National Laboratory" had been defined to mean a scientific laboratory functioning at the national level under the aegis of the Indian Council of Agricultural Research, the Indian Council of Medical Research or the Council of Scientific and Industrial Research and which was approved by the prescribed authority for this purpose. The prescribed authority is the Director-General (Income-tax Exemptions) in concurrence with the Secretary, Department of Scientific and Industrial Research (DSIR).
29.3. The Finance Act has widened the ambit of the definition of "National Laboratory" to include scientific laboratories functioning at the national level under the aegis of the Department of Electronics, Defence Research and Development Organisation, Department of Bio-Technology and Department of Atomic Energy. This deduction shall now also be available to laboratories carrying on scientific research in Universities and the Indian Institutes of Technology.
29.4. This amendment takes effect from 1st April, 1995, and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years.
[Section 13 ]
Deduction in respect of provisions made for bad and doubtful debts relating to rural branches of banks
30. Under the provisions of section 36(1)(viia)(a) of the Income-tax Act, all scheduled banks [except banks incorporated by or under the laws of a country outside India and a bank approved by the Central Government for the purposes of clause (viiia)] and non-scheduled banks are entitled to a deduction in respect of a provision for bad and doubtful debts of an amount not exceeding five per cent. of the total income computed before making any deduction under section 36(1)(viia) and Chapter VIA, and also of an amount not exceeding four per cent. of the aggregate average advances made by their rural branches. Having regard to the need for stepping up provisioning by these banks, the Finance Act has raised the limit of four per cent. to ten per cent. The reference to a bank approved by the Central Government for the purposes of clause (viiia) has also been omitted so as to entitle such banks to avail of deduction under section 36(1)(viia)(a).
30.2. Under clause (viiia) of section 36(1), a scheduled bank (other than a bank incorporated by or under the laws of a country outside India) which is engaged in banking operations outside India, and is approved by the Central Government, is entitled to a deduction in respect of any special reserve created of an amount not exceeding forty per cent. of the total income (computed before making any deduction under the said clause and Chapter VIA). The Finance Act has omitted this clause in view of the amendment to section 36(1)(viia).
30.3. These amendments take effect from 1st April, 1995, and will accordingly, apply in relation to the assessment year 1995-96 and subsequent years.
[Section 14]
Estimated Income Method of taxpayers engaged in the business of civil construction
31. The Estimated Income Method of assessment for certain categories of businesses is prevalent in several countries. The Tax Reforms Committee has also recommended gradual introduction of the Estimated Income Method in certain areas to facilitate better tax compliance. Accordingly, a new section 44AD has been inserted in the Income-tax Act with a view to providing for a method of estimating income from the business of civil construction or supply of labour for civil construction work. The new section is applicable to all assessees whose gross receipts from the above-mentioned business do not exceed Rs. 40 lakhs, gross receipts are the amount received from the clients for the contract and will not include the value of material supplied by the client. The income from the above-mentioned business will be estimated at 8 per cent. of the gross receipts paid or payable to an assessee. A taxpayer can voluntarily declare a higher income in his return.
31.2. The expression "civil construction" will include the construction or repair of buildings, dams, bridges or other structures, or of roads or canals. It will also include the execution of any other works contract. It will, thus, include work related to electrical fittings, plumbing job, landscaping work, etc.
31.3. The rate of 8 per cent. is comprehensive. All deductions under sections 30 to 38 including depreciation, will be deemed to have been already allowed and no further deduction will be allowed under these sections. The written down value will be calculated, where necessary, as if depreciation as applicable has been allowed. In the case of firms, the normal deductions to the extent allowed under clause (b) of section 40 will be allowed.
31.4. The assessees who file the return, estimating income at 8 per cent. of gross receipts, or a higher income, will neither be required to maintain books of account under the provisions of section 44AA, nor required to get accounts audited under the provisions of section 44AB, in respect of their income from the business of civil construction. However, even such an assessee has to comply with the requirements of both sections 44AA and 44AB in respect his businesses which are not covered by this scheme. For instance, a person may have gross receipts of Rs. 30 lakhs from civil contruction business and of Rs. 25 lakhs from trading in scrap and Rs. 10 lakhs from garment manufacture. Although his total gross receipts are Rs. 65 lakhs, he will not be required to have his accounts audited, since his gross receipts after excluding those from the business of civil construction are still less than Rs. 40 lakhs, the limit provided in section 44AB.
31.5. The income from the business of civil construction, estimated in accordance with this provision, will be aggregated with other incomes of the assessee, from any other business or under other heads of income, in accordance with the normal provisions of the Income-tax Act. Accordingly, all deductions under Chapter VIA and rebate under Chapter VIII will be available to the assessee, if the conditions therein are fulfilled.
31.6. The scheme is optional. A system of rebuttal has been provided. A person can claim that his income in respect of the above-mentioned business is lower than the specified estimate of income. In such a case, he must produce necessary evidence to prove his case. Such a case will be scrutinised for regular assessment under section 143(3).
31.7. This amendment take effect from 1st April, 1994, and will, accordingly, apply in relation to the assessment year 1994-95 and subsequent years. Accordingly, a person can file his return based on the estimated income method for the current assessment year also.
[Section 16]
Estimated Income Method for taxpayers engaged in the business of plying, leasing or hiring trucks owned by them
32. A new section 44AE has been inserted in the Income-tax Act with a view to providing for a method of estimating income from the business of plying, hiring or leasing trucks owned by a taxpayer. The scheme applies to persons owning not more than ten trucks. It is not applicable to the persons who do not own any truck but operate trucks taken on hire. The income from each truck, being a heavy goods vehicle, will be estimated at Rs. 2,000 for every month or part of a month during which the truck is owned by the assessee. The income from each truck, other than a heavy goods vehicle, will be estimated at Rs. 1,800 for every month or part of a month during which the truck is owned by the assessee. In either case, the taxpayer can declare his income from trucks at a higher amount than that specified above.
Illustration (1) : An assessee owns a light commercial vehicle for 9 months 15 days, a medium goods vehicle for 9 months and a medium goods vehicle for 12 months during the previous year. His profits and gains from the three trucks shall be deemed to be (Rs. 1,800 x 10) + (Rs. 1,800 x 9) + (Rs. 1,800 x 12), i.e., Rs. 55,800.
Illustration (2) : An assessee owns a heavy goods vehicle for 9 months 7 days, a medium goods vehicle for 9 months and a light commercial vehicle for 12 months during the previous year. His profits and gains from the three trucks shall be deemed to be (Rs. 2,000 x 10) + (Rs. 1,800 x 9) + (Rs. 1,800 x 12), i.e., Rs. 57,800.
32.2. The estimated income is comprehensive. All deductions under sections 30 to 38 including depreciation, will be deemed to have been already allowed and no further deduction will be allowed under these sections. The written down value will be calculated, where necessary, as if depreciation as applicable has been allowed. In the case of firms, the normal deductions to the extent allowed under clause (b) of section 40 will be allowed.
32.3. An assessee who files the return, estimating income on the basis of the specified amount per truck or estimating a higher income, will neither be required to maintain books of account under the provisions of section 44AA, nor required to get accounts audited under the provisions of section 44AB, in respect of his income from the business of plying, hiring or leasing trucks. However, even such an assessee has to comply with the requirements of both sections 44AA and 44AB in respect of his businesses which are not covered by this scheme.
32.4. The income from the truck business, estimated in accordance with this provision, will be aggregated with the other incomes of the assessee, from any other business or under other heads of income, in accordance with the normal provisions of the Income-tax Act. Accordingly, all deductions under Chapter VIA and rebate under Chapter VIII will be available to the assessee, if the conditions therein are fulfilled.
32.5. The scheme is optional. A system of rebuttal has been provided. A person can claim that his income in respect of the above-mentioned business is lower than the specified estimate of income. In such a case, he must produce necessary evidence to prove his case. Such a case will be scrutinised for regular assessment under section 143(3).
32.6. This amendment takes effect from 1st April, 1994, and will, accordingly, apply in relation to the assessment year 1994-95 and subsequent years. Accordingly, a person can file his return based on the estimated income method for the current assessment year also.
[Section 16]
Capital gain on transfer of assets where there is no cost of acquisition
33. By virtue of the provisions of section 45 of the Income-tax Act, capital gains arising on transfer of a capital asset is subjected to income-tax. Section 48 lays down the method of computing capital gains. The cost of acquisition and expenditure relating to the transfer are deducted from the full value of consideration to arrive at the capital gains. Section 2(14) defines "capital asset" to include all kinds of property except a few specified ones.
33.2. In a number of cases, the courts have decided that in the case of self-generated assets like goodwill or where the cost of assets to an assessee (not covered by situations mentioned in section 49) is nil, no tax on capital gains consequent to transfer of such assets could be charged. They have interpreted that only if an asset did cost something to the assessee in terms of money that the provisions relating to the levy of tax on any capital gains under section 45(1) read with section 48(ii) would apply. A transaction to which these provisions cannot be applied has been held to be one never intended by section 45(1) to be the subject of the charge. The courts have further interpreted that the intent of levying capital gains tax goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on expenditure of money to a person seeking to acquire it. The courts have held that none of the provisions pertaining to the head "Capital gains" suggests that "capital assets" include an asset in the acquisition of which no cost at all can be conceived. The leading case propounding this interpretation is CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC).
33.3. In order to overcome the judicial interpretation, the Finance Act, 1987, with effect from 1-4-1988, has provided in section 55(2)(a) that cost of acquisition in case of self-generated goodwill will be taken to be nil. For the purpose of bringing the capital gains arising from transfer of any of the following assets, in the acquisition of which the assessee has not incurred any expenditure, the Finance Act has amended the provisions relating to capital gains and provides that the cost of acquisition of the following assets is to be taken at nil :
(1) Tenancy rights
(2) Route permits.
(3) Loom hours.
33.4. This amendment takes effect from 1st April, 1995, and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years.
[Section 18]
Exclusion of handicapped minor from the clubbing provisions
34. Under the provisions of section 64(1A) of the Income-tax Act, in computing the total income of an individual, all income of his minor child (barring a few exceptions) is to be clubbed with his income. The provisions for clubbing of a minor's income with that of the parent were introduced through the Finance Act, 1992, on the ground that the minor children cannot administer their property nor can they take decisions on the disposal of income arising from their property as also on the ground that exclusion of minor children's income from that of the parent was resulting in tax avoidance.
34.2. It has been felt that a handicapped minor is in a special category. With a view to providing appropriate relief to handicapped minors, the Finance Act has provided that the entire income of a handicapped minor child shall be kept out of the purview of the clubbing provisions contained under section 64(1A). Consequently, section 80V of the Income-tax Act which provides for deduction of a sum to the extent to which the minor child would have been entitled to the deduction under section 80U had the total income of such minor child been computed separately, has been omitted. Hereafter, the handicapped minor child will be entitled to the deduction under section 80U in his own assessment.
34.3. Corresponding amendments have been made to section 4 of the Wealth-tax Act.
34.4. These amendments take effect from 1st April, 1995, and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years.
[Sections 20, 28 and 52]
Modifications relating to house property income
35. The Finance Act, 1992, had inserted section 71A as well as sub-section (4) in section 71 in the Income-tax Act. The effect of these amendments is that loss from let-out house property cannot be set off against any other head of income. Further, the carried forward loss of any year from house property in so far as it relates to interest on borrowed capital, is allowed set off only against "Income from house property" of subsequent years. These provisions apply to the assessment year 1993-94 and subsequent years.
35.2. It has been represented that these provisions have a dampening effect on housing activity. Consequently, the legal position prior to the amendments of 1992 has been restored. The Finance Act has made amendments to ensure that losses as have been carried forward under the head "Income from house property" for the assessment years 1993-94 and 1994-95, are allowed to be set off against any head of income in the assessment years 1995-96 and 1996-97, as a transitional measure. This is necessary because there may be cases where the combined carried forward loss under the head "Income from house property", for the assessment years 1993-94 and 1994-95, is more than the total income of the assessee for the assessment year 1995-96. A set-off of the balance of carried forward loss relating to the assessment years 1993-94 and 1994-95 is to be allowed against income for the assessment year 1996-97 also (i.e., one more assessment year). No further carry forward, for set off against income for assessment year 1997-98, will be allowed. The priority for set-off of losses under the head "Income from house property" for these transitional years will be as follows :
For both the assessment years 1995-96 and 1996-97, the current year's loss under the head "Income from house property" will, in the first instance, be set off against the income under other heads as provided in section 71(1) and section 71(2). Only thereafter, the brought forward loss under the head "Income from house property" (to the extent it consists of interest on borrowed capital) computed for the assessment years 1993-94 and 1994-95 will be set off.
35.3. These amendments take effect from 1st April, 1995, and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years.
[Sections 21 and 22]
Deduction in respect of repayment of loan taken as a student for pursuing higher studies
36. Deserving, yet poor and needy, students often require loans from banks or other financial institutions or from charitable organisations for pursuing higher education. The repayment of such loans becomes a heavy charge on the person's resources.
36.2. With a view to sustaining high quality human resources in the country and to encourage talented young men and women to take up higher studies despite the constraints of resources, a new section 80E has been inserted in the Income-tax Act to provide for relief to students taking loan for such studies. The relief is not allowed to the parent or guardian but to the student himself when he starts repaying the amount. Any repayment of the principal amount of loan taken for higher studies and interest thereon will be allowed as a deduction from the gross total income up to a maximum amount of Rs. 25,000 in a year. The repayment can be in respect of loan taken from a financial institution or a charitable organisation which is approved for the purposes of section 10(23C) or 80G(2)(a). This relief will be available for those who have undertaken graduate or post-graduate courses, in any branch of Engineering (including Technology), Medicine or Management or Post-graduate courses in any university in pure sciences or applied sciences including Mathematics or Statistics. It will not be available, for instance, for courses in Humanities, Social Sciences, Commerce, Accountancy or Law. The first year in which the deduction will be available will be the year in which the person starts repaying the loan. The deduction will be allowed for a maximum period of eight years or till the principal amount of such loan together with interest are liquidated, whichever is earlier.
36.3. This amendment will take effect from 1-4-1995 and will, accordingly, apply to the assessment year 1995-96 and subsequent years.
[Section 23]
100 per cent. deduction for donations made to the Chief Minister's Earthquake Relief Fund, Maharashtra
37. Section 80G of the Income-tax Act provides that the sums paid as donations, inter alia, to any fund or institution established in India for charitable purposes are entitled to deduction at the rate of 50 per cent., in computing the total income of the donors. In the case of certain funds and institutions specified in the said section, donations are allowed deduction at the rate of 100 per cent.
37.2. The recent earthquake in parts of Maharashtra required a gigantic relief effort and co-operation of all. In view of this, section 80G has been amended in order to allow 100 per cent. deduction for donations to the Chief Minister's Earthquake Relief Fund, Maharashtra. The same concession has been extended to all donations made to the existing Maharashtra Chief Minister's Relief Fund, after the earthquake in Maharashtra, but before the setting upon the Chief Minister's Relief Fund, Maharashtra, i.e., between 1-10-1993 and 6-10-1993.
37.3. This amendment takes effect from 1-4-1994, and will, accordingly, apply in relation to donations made in the previous year relevant to the assessment year 1994-95 and subsequent years.
[Section 24]
Removal of the minimum limit of donation for deduction under section 80G
38. The deduction under section 80G is allowed only if the aggregate of the donations in a year is Rs. 250 or more. This restriction deprives many small, yet generous, taxpayers of the deduction. Therefore, the minimum limit of Rs. 250 for qualifying for deduction under section 80G has been removed.
38.2. This amendment takes effect from 1-4-1994 and will, accordingly, apply in relation to donations made in the previous year relevant to assessment year 1994-95 and subsequent years.
[Section 24]
Rationalisation of provisions relating to incentive to tourism
39. Under the existing provisions of section 80HHD, a resident taxpayer engaged in the business of a hotel or of a tour operator or of a travel agent is allowed a deduction, in computing its total income, of an amount equal to _
(i) 50 per cent. of the profits derived from services provided to foreign tourists ; and
(ii) so much of the remaining profits as are credited to a reserve fund to be utilised in the manner prescribed.
39.2. Earlier, the tax concession was available only to the first recipient of convertible foreign exchange. It was then pointed out in representations that foreign groups often make payments in foreign exchange, in one lumpsum, to the first recipient for subsequent payment to other hotels, tour operators or travel agents, as the case may be. Accordingly, through the Finance Act, 1991, a provision was made in section 80HHD, with a view to securing that the hotel/tour operator/travel agent receiving payments for services to the foreign tourists from the first recipient, would also be eligible for deduction under section 80HHD, subject to the condition that the payment in Indian currency was made out of conversion of foreign exchange brought into India by the foreign tourists.
39.3. The first recipient (hotel/tour operator/travel agent), thus, got the deduction in relation to the entire amount of foreign exchange received by him while the second recipient (another hotel/tour operator/travel agent) got the deduction in relation to that portion of it which the first recipient passed on to him for providing service to foreign tourists.
39.4. Logically, the deduction, in such cases, should be allowed only on sharing basis, proportionate to the value of service rendered by each segment.
39.5. With a view to removing the duplication of the incentive for the same amount of foreign exchange remittance, section 80HHD has been amended so as to provide that the first recipient of foreign exchange would be entitled to deduction under section 80HHD in respect of the amount retained by him and not in respect of amount which represents payments passed on to the other assessee.
39.6. Accordingly, in a case where a group of foreign tourists pays $10,000 to a tour operator A and the tour operator pays in converted rupee, the value of $2,500 to hotel B, $1,500 to hotel C and $700 to travel agent D, the concession to each will be computed on the basis of the following receipts :_
(a) to the tour operator A, in respect of $5,300, i.e., [10,000, i.e., (2,500 + 1,500 + 700)] ;
(b) to hotel B, in respect of $2,500 ;
(c) to hotel C, in respect of $1,500 ;
(d) to travel agent D, in respect of $700.
39.7. The same method will be applied where the first recipient is a hotel or a travel agent.
39.8. This amendment takes effect from 1-4-1995 and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years.
[Section 25]
Tax concession in respect of profits from export of computer software
40. According to the provisions of section 80HHE, 100 per cent. deduction is allowed to Indian companies and resident non-corporate taxpayers on the profits derived for export of computer software.
40.2. The provisions of section 80HHE were introduced by the Finance (No. 2) Act, 1991, for the assessment years 1991-92, 1992-93 and 1993-94. The Finance Act, 1993, extended the period for one more year, i.e., for the assessment year 1994-95. Software export has considerably increased in the last four years and the sector deserves fiscal incentive for another year to maintain the momentum gained.
40.3. Accordingly, the deduction under section 80HHE has been made available for one more year, i.e., assessment year 1995-96.
40.4. This amendment takes effect from 13-5-1994, i.e., the date on which the Finance Act received the assent of the President.
[Section 26]
Withdrawal of restrictions in respect of new industrial undertakings set up in backward States
41. In the Budget of 1993, a special five-year tax holiday was introduced under section 80-IA, for new industrial undertakings located in backward States. One of the conditions for availing of the tax concession under section 80-IA is that the new industrial undertaking does not manufacture or produce certain articles of low priority specified in the Eleventh Schedule. This condition, however, does not apply to small scale industrial undertakings.
41.2. The Eleventh Schedule was introduced in 1977 and contains a list of low priority articles, manufacture of which is reserved for the small scale sector. This restriction in section 80-IA is inconsistent with the urgent need to promote the growth of industry and employment in the backward States.
41.3. Accordingly, section 80-IA has been amended to provide that the condition that the concession will be allowed only if the industrial unit did not manufacture any item listed in the Eleventh Schedule, will not operate for units set up in backward States. In effect, a new industrial unit, whether small scale or not, located in a backward State, will get the full tax holiday for five years beginning from the assessment year relevant to the year of commencement of production and, thereafter, will be allowed the normal deduction under section 80-IA at 25 per cent. (30 per cent. for companies) for the balance period of five years (seven years of co-operative societies), even if it produces an item listed in the Eleventh Schedule.
41.3.2. The aforesaid condition will continue to hold good in the case of industrial undertakings set up in States other than the backward States specified in the Eighth Schedule to the Income-tax Act.
41.4. This amendment takes effect from 1-4-1994 and will, accordingly, apply in relation to the assessment year 1994-95 and subsequent years.
[Section 27]
Extension of the five-year tax holiday to new industrial undertakings set up in extremely backward districts
42. The Finance Act, 1993, introduced a five-year holiday under section 80-IA for new industrial undertakings which start production after 1-4-1993 but before 31-3-1998 in any of the backward States specified in the Eighth Schedule to the Income-tax Act. These backward States are those in which all the districts have been classified as industrially backward in Notification No. S.O. 165, dated 19-12-1986 (165 ITR (St.) 294).
42.2. With a view to providing fiscal support for industrialisation of the industrially backward districts in States not mentioned in the Eighth Schedule, the five-year tax holiday under section 80-IA has been extended to new industrial undertakings located in backward districts notified by the Central Government on the basis of guidelines prescribed. A Group has been set up in the Finance Ministry to prescribe the guidelines and identify the backward districts.
42.3. The five-year tax holiday will be available to undertakings set up in notified backward districts and beginning production after 1-10-1994, but before 31-3-1999. The deduction under section 80-IA will be available at the rate of 100 per cent. of profits in respect of the first five assessment years starting from the assessment year relevant to the previous year in which the industrial undertaking starts manufacture or production. After the initial five assessment years, deduction from the profits will be allowed at the normal rate of 30 per cent. in the case of companies and 25 per cent. in the case of non-corporate assessees. The deduction, at the enhanced rate and the normal rate together, will be limited to twelve assessment years in the case of co-operative societies and ten assessment years in the case of other assessees, as in the existing provisions. The incentive already available to industrial units set up in the States or Union Territories specified in the Eighth Schedule will continue.
42.4. This amendment takes effect from 1st April, 1995, and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years.
[Section 27]
Liberalisation of provisions relating to tax rebate in respect of certain savings
43. The Finance Act, 1990, omitted section 80C and introduced a new section 88 allowing tax rebate on specified savings, including savings through life insurance, provident funds, etc. Sub-section (4) of section 88 stipulates that for availing of the rebate, the contribution to the notified provident fund should be made to an account standing in the name of either the individual claiming the deduction or a minor child of whom he is the guardian. Under section 88, rebate on amount paid in the name of spouse is allowed only in the case of life insurance or deferred annuity on the life of such spouse.
43.2. Under the earlier provisions, i.e., under section 80C, there was no stipulation on whether deduction would be allowed if the provident fund account was in the name of the spouse. However, Board's D. O. No. 178/110/83-ITA-I dated 10-11-1983, clarified that deduction under section 80C would be available both in the case of the husband contributing to the wife's account and the wife contributing to the husband's account. The only condition was that the deduction would be given to that spouse from whose chargeable income the contribution to the provident fund had been made.
43.3. The tax rebate, in any case, is allowed only to the person from whose income the contribution has been made to the specified savings. Often accounts are kept in the spouse's name merely for the purpose of convenience in the case of an untimely death. The same applies to other social security instruments like unit-linked insurance plans.
43.4. In view of this, section 88 has been amended in order to remove the hardship and to make it possible to claim rebate even when contribution is made, in the name of the spouse of the taxpayer, in a notified provident fund. Similar provision is being made in respect of amount paid, in the name of spouse, in unit-linked insurance plans of the Unit Trust of India or of the LIC Mutual Fund.
43.5. This amendment takes effect retrospectively from 1-4-1991, i.e., the date from which section 88 took effect. It will, accordingly, apply in relation to the assessment year 1991-92 and subsequent years. Thus, persons who were getting deduction under section 80C in respect of amounts paid to any notified provident fund, in their spouse's name, will, with effect from the assessment year 1991-92, get rebate under section 88 in respect of that amount.
[Section 29 ]
Extending the rebate under the provisions of section 88 to pension funds of UTI
44. Under clause (xiiic) of section 88, rebate is allowed in respect of any amount paid by an individual to any pension fund set up by any Mutual Fund notified under clause (23D) of section 10, as the Central Government may, by notification in the Official Gazette, specify in this behalf.
44.2. This benefit has been extended to a pension fund to be set up by the Unit Trust of India. The rebate in respect of contributions to this fund will be allowed from the assessment year 1995-96 and onwards.
[Section 29]
Relief for senior citizens
45. Under the provisions of section 88B, any person aged 65 years or above, having gross total income not exceeding Rs. 75,000, is allowed a special rebate of 20 per cent. of the tax chargeable on his total income.
45.2. The Finance Act has increased the tax rebate for senior citizens under section 88B from 20 per cent. to 40 per cent. and enhanced the qualifying limit of total income from Rs. 75,000 to Rs. 1 lakh.
45.3. This amendment takes effect from 1-4-1995 and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years.
[section 30]
Reduction in the rates of income-tax on long-term capital gains in certain cases
46. Under the provisions of section 112 of the Income-tax Act, prior to their amendment by the Finance Act, income-tax was leviable on the long-term capital gains in the case of the domestic companies at the rate of forty per cent. As the general rate of income-tax in the case of domestic companies has been reduced from fifty per cent. (applicable to closely held companies) and forty-five per cent. (applicable to widely held companies) to forty per cent., the Finance Act has amended section 112 to provide that the long-term capital gains in the case of domestic companies will be taxed at the reduced rate of thirty per cent.
46.2. Similarly, prior to this amendment, the foreign companies were taxed on long-term capital gains at the rate of forty per cent. and the non-resident partnerships, etc., were taxed at the rate of thirty per cent. thereof. In the case of the non-resident individuals and Hindu undivided families, the income-tax rate on long-term capital gains is twenty per cent. As taxation at the uniform tax rate of twenty per cent. has been provided on the income by way of interest, dividends, etc., in the case of the foreign companies and the non-resident non-corporate assessees, section 112 has further been amended to provide that in their case, the income-tax rate on long-term capital gains will be twenty per cent.
46.3. This amendment takes effect from 1st April, 1995, and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years.
[Section 31]
Taxation of income by way of interest, dividends, etc., at uniform rate in the case of the non-residents
47. Prior to the amendment made by the Finance Act, the income by way of dividends, interest and income in respect of units of the Unit Trust of India and other specified mutual funds, was taxed at different rates in the case of non-residents. These items of income were taxed at the rate of twenty-five per cent. in the case of foreign companies, on gross basis, i.e., without deduction of any expenditure or allowance while computing the income. In the case of non-resident non-corporate persons, such items of income were taxed at the rates prescribed in the annual Finance Acts applicable to different categories of persons. In their case, the taxation of these items of income was on net basis, i.e., after allowing expenditure or allowances, as per the Income-tax Act, while computing the income. The taxation of these items of income in the case of non-resident non-corporate assessees is also needed to be done on gross basis in order to remove the complexity involved in determining the net income. Further, the tax rate provided on the aforesaid items of income in most of India's tax treaties with other countries is below twenty per cent. India has tax treaties with as many as forty countries.
47.2. Therefore, as a measure of rationalisation, the Finance Act has amended section 115A of the Income-tax Act, in order to provide that the income of a non-resident non-corporate assessee or a foreign company, by way of _
(i) dividends,
(ii) interest received from Government or an Indian concern on monies borrowed or debt incurred by Government or the Indian concern in foreign currency, or
(iii) income received in respect of units, purchased in foreign currency, of a Mutual Fund specified under clause (23D) of section 10 or of the Unit Trust of India, shall be taxed at the rate of twenty per cent.
47.3. Prior to this amendment, section 115A of the Income-tax Act provided for the taxation of the aforesaid items of income, except in respect of units of the Unit Trust of India, at the rate of twenty-five per cent. in the case of the foreign companies.
47.4. It has also been provided that no deduction in respect of any expenditure or allowance shall be allowed under any provision of the Income-tax Act in computing the aforesaid income of non-resident non-corporate assessees and foreign companies. Further, where the gross total income of these assessees consists only of the incomes mentioned at (i) to (iii) in para 47.2, no deduction shall be allowed to them under Chapter VI-A of the Income-tax Act. However, where the gross total income includes the aforesaid incomes, the deduction under Chapter VI-A shall be allowed from the gross total income as reduced by the said incomes.
47.5. It has further been provided that it shall not be necessary for the aforesaid assessees to furnish a return of their income under sub-section (1) of section 139 if, _
(a) the total income in respect of which they are assessable under the Act during the previous year consists only of the incomes referred to at (i) to (iii) in para 47.2, and
(b) the tax deductible at source under the provisions of Chapter XVII-B of the Act has been deducted from such income.
47.6. Consequential amendments have been made to sections 44D, 57 and 196A of the Income-tax Act, in view of the amendments made to section 115A of the Income-tax Act.
47.7. These amendments, except amendment to section 196A, take effect from 1st April, 1995, and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years. The amendment in respect of section 196A applies from 1st June, 1994.
[Sections 17, 19, 32 and 41]
Extension of the simplified procedure for small businessmen beyond the assessment year 1994-95
48. A simplified procedure for small businessmen, carrying on certain specified businesses or any vocation, was introduced by the Finance Act, 1992. The Finance Act, 1993, extended the scheme to transport operators also. Under the scheme as it stood prior to the amendment made by the Finance Act, the income of a person was deemed to be Rs. 37,000. No deduction under Chapter VI-A (except section 80L) and rebate under Chapter VIII is allowed. The scheme was originally applicable for two assessment years, viz., assessment years 1993-94 and 1994-95.
48.2. A person was eligible to opt for the scheme if _
_his income from such business or vocation did not exceed Rs. 37,000 ; and
_ taxable income from any source other than the business or vocation did not exceed Rs. 5,000.
48.3. The tax in respect of the deemed income of Rs. 37,000 amounted to Rs. 1,400 and for income up to Rs. 5,000 from any other source (as reduced by deduction under section 80L) is required to be paid at the appropriate rate, i.e., 20 per cent.
48.4. The simplified procedure is an important measure to widen the tax base. It mobilises resources from small assessees without much compliance cost to them and administrative cost to the Government.
48.5. With a view to continuing the simplified procedure beyond the two assessment years (1993-94 and 1994-95) for which it is applicable at present, section 115K has been amended to make the scheme open-ended. Power has now been given to prescribe in the rules any other business to which the scheme may be made applicable. This will prevent frequent amendment of the provision merely to extend the simplified procedure to other businesses.
48.6. In order to widen the scope of the simplified procedure the qualifying amount and the deemed income and the simplified procedure have been raised from Rs. 37,000 to Rs. 42,000.
48.7. Some other amendments in the provisions have been made to avoid repeated mention of the specified businesses in several clauses. Reference to the business of plying trucks has been omitted in view of the specific provisions in this regard, introduced in the new section 44AE.
48.8. These amendments take effect from 1-4-1995 and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years.
[Sections 33 and 34]
Change in the due date for filing returns of income by companies
49. The Explanation to section 139(1) of the Income-tax Act, as it stood with effect from 1st April, 1989, provided that the due date for furnishing returns of income in the case of companies was to be the 31st day of December of the relevant assessment year. Prior to 1st April, 1989, the due dates by which the returns of income were required to be furnished by all the taxpayers, including the companies, were only two, i.e., 30th June and 31st July of the relevant assessment year. The staggering of the due date for furnishing returns in the case of companies to the end of the month of December of the relevant assessment year, had resulted in delay in the realisations by way of self-assessment tax. Further, the work of processing of returns of the companies could be taken up only towards the end of the assessment year.
49.2. The Finance Act has, therefore, amended the Explanation to section 139(1) of the Income-tax Act to provide that the due date for furnishing returns of income in the case of companies shall be the 30th day of November, instead of the 31st day of December.
49.3. Section 44AB of the Income-tax Act contains provisions relating to audit of accounts of certain persons carrying on business or profession. As the "due date" specified in section 139 for companies has been amended and the period within which the accounts are required to be got audited is linked to the "due date" for furnishing returns, a consequential amendment has been made in the definition of "specified date" as contained in clause (ii) of the Explanation to section 44AB.
49.4. These amendments take effect from 1st April, 1994, and will, accordingly, apply in relation to the assessment year 1994-95 and subsequent years.
[Sections 36 and 50]
Direct appeal against prima facie adjustments
50. Under the provisions of sections 143(1) or 143(1B), the Assessing Officer can make certain prima facie adjustments to the income or loss declared in a return of income. The assessee is required to pay tax on the enhanced income and is also liable to pay additional tax under section 143(1A) where there is such an enhancement of income or reduction of loss. There was, however, no right of appeal against the prima facie adjustments and consequential levy of tax and additional tax. The taxpayer was entitled to claim that the adjustments made to vary the income or loss were not correct and needed to be rectified as a mistake apparent from the record. The assessee had been given a right to file an appeal against the order on the rectification petition. In case the Assessing Officer had not disposed of the petition for rectification within three months from the end of the month in which the petition was filed, then only the assessee could file an appeal against the original adjustments contained in the intimation.
50.2. To simplify this cumbersome procedure, the Finance Act has provided that an intimation sent to the assessee under section 143(1) or 143(1B) shall be deemed to be an appealable order for the purposes of section 246 of the Income-tax Act. In view of this amendment, the proviso to section 154(2) relating to filing of appeal against intimation in respect of which no order of rectification is passed by the Assessing Officer within the specified period, has been omitted.
50.3. These amendments take effect from 1st June, 1994, and will, accordingly, apply to all intimations under section 143(1) or 143(1B) received by the assessees on or after 1st June, 1994.
[Sections 37, 38 and 46]
Enlarging the scope of the provision regarding deduction of income-tax at source on payments by contractors to sub-contractors
51. Section 194C(2) of the Income-tax Act contains provisions relating to deduction of income-tax at source from payments made to a sub-contractor by a contractor. Prior to the amendment made by the Finance Act, these provisions were applicable only where the contractor was a resident person referred to in section 194C(1) of the Act, that is to say, he had taken a contract for carrying out any work, or for supply of labour for carrying out any work, from the Central Government or any State Government, a local authority, a statutory corporation or a company, etc. [i.e., the agencies specified in section 194C(1)]. In the recent past, certain instances had come to notice where the resident contractors entered into contracts with the Government of a foreign State, etc., and parcelled out the work of such contracts to sub-contractors who were also residents. In such cases, the payments made by the contractors to sub-contractors were not subject to the requirement of deduction of income-tax at source. The need is to bring these payments also within the scope of deduction of income-tax at source.
51.2. The Finance Act has, therefore, amended section 194C(2) of the Income-tax Act, in order to provide that the expression "contractor" shall also include a contractor who is carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the Government of a foreign State or a foreign enterprise or any association or body established outside India.
51.3. This amendment takes effect from 1st June, 1994.
[Section 39]
Provision for deduction of income-tax at source from income by way of rent
52. An effective method of widening the tax base is to enlarge the scope of deduction of income-tax at source. Apart from bringing in more persons in the tax net, it also helps in the reporting of correct incomes. An item of income which needs to be covered within the scope of deduction of income-tax at source is the income by way of rent. In a number of countries, such income is subject to deduction of income-tax at source.
52.2. The Finance Act has, therefore, inserted a new section 194-I in the Income-tax Act relating to deduction of income-tax at source from rent. The new section provides that income-tax has to be deducted at source at the rate of twenty per cent. on payments of rent beyond one hundred and twenty thousand rupees in a financial year made by any person other than an individual or a Hindu undivided family. The expression "rent" has been defined in the Explanation to the section, to mean any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land or any building (including factory building), together with furniture, fittings and the land appurtenant thereto, whether or not such building is owned by the payee.
52.3. Section 197 of the Income-tax Act, relating to certificate for deduction of income-tax at lower rate or for no deduction of income-tax in appropriate cases, has been amended to include income by way of rent within the scope of the said section. The application for such certificate has to be made in Form No. 13. The certificate by the concerned Assessing Officer has to be given in Form No. 15AA.
52.4. Sections 198 to 200 and 202 to 205 of the Income-tax Act, relating to provisions in respect of deduction of income-tax at source, have been amended in consequence to the insertion of new section 194-I in the Act. The certificate of tax deducted at source from rent has to be given in Form No. 16A. The annual return of tax deducted at source from rent, has to be furnished in Form No. 26J.
52.5. The aforesaid amendments take effect from 1st June, 1994.
[Sections 40, 42 and 43]
Change in the number of instalments of advance tax and the amount payable thereunder in the case of companies
53. Section 211 of the Income-tax Act, prior to its amendment by the Finance Act, provided that advance tax on the current income, calculated in the manner laid down in section 209 of the Act was payable by all the assessees who are liable to pay the same in three instalments during each financial year. The due date of, and the amount payable in, each such instalment, were as follows :
|
Due date of instalment |
Amount payable |
|
On or before 15th September |
Not less than thirty per cent of such advance tax. |
|
On or before 15th December |
Not less than sixty per cent of such advance tax, as reduced by the amount, if any, paid in the earlier instalment. |
|
On or before 15th March |
The whole amount of such advance tax, as reduced by the amount or amounts, if any, paid in the earlier instalment or instalments. |
Thus, the first instalment of advance tax is payable only in the sixth month of the financial year and that instalment constitutes only thirty per cent. of the total advance tax. The entire amount of advance tax is payable during the last seven months of the financial year. About two-thirds of the collection of advance tax comes from the companies. The spread of the payment of advance tax during the financial year, therefore, needs to be made more even in the case of companies.
53.2. The Finance Act has, therefore, amended section 211 of the Income-tax Act to provide that all the companies, who are liable to pay advance tax, will, hereafter, pay advance tax in four instalments. The advance tax so payable in a financial year, _
(a) on or before 15th June, shall not be less than fifteen per cent. ;
(b) on or before 15th September, shall not be less than forty-five per cent. ;
(c) on or before 15th December, shall not be less than seventy-five per cent. ;
(d) on or before 15th March, shall be the whole amount
of such advance tax.
53.3. In the case of other assessees, who are liable to pay advance tax, the advance tax shall be payable in three instalments as earlier, i.e., on 15th September, 15th December and 15th March, the amount of each instalment also remaining unchanged.
53.4. This amendment takes effect from 1st April, 1994, and will apply to payment of advance tax during the financial year 1994-95 and subsequent years.
53.5. In consequence of the aforesaid amendment, sub-section (1) of section 234C of the Income-tax Act, relating to interest for deferment of advance tax, has also been amended. It has been provided that the shortfall for the purpose of charging interest for deferment of advance tax in the case of companies, which are liable to pay advance tax, shall be the difference between, _
(i) fifteen per cent. of the tax due on the returned income and the advance tax paid by the company on or before the 15th day of June.
(ii) forty-five per cent. of the tax due on the returned income and the advance tax paid by the company on or before the 15th day of September, and
(iii) seventy-five per cent. of the tax due on the returned income and the advance tax paid by the company on or before the 15th day of December.
It has also been provided that where the advance tax paid by the companies on or before the 15th day of June is not less than twelve per cent. of the tax due on the returned income and the advance tax paid on or before the 15th day of September, is not less than thirty-six per cent. of the tax due on the returned income, then, the companies will not be liable to pay any interest on the amount of the shortfall on the aforesaid dates.
53.6. The aforesaid amendment takes effect from 1st April, 1995 and will, accordingly, apply to the assessment year 1995-96 and subsequent years.
[Sections 44 and 45]
Enlarging the scope of levy of interest for deferment of advance tax
54. The whole amount of the advance tax payable is required to be paid on or before 15th March during the financial year. The proviso to section 211(1), however, provides that any amount paid by way of advance tax on or before the 31st day of March, is also to be treated as advance tax paid during the financial year. This proviso was inserted as certain High Courts had held that payment made after the 15th March during the financial year would not cease to be payment of advance tax. There is no penal provision in the law to enforce payment of the last instalment of advance tax by 15th March. The aforesaid proviso and the absence of a penal provision, have generated a tendency among the assessees to make payment of advance tax only towards the last day of the financial year.
54.2. The Finance Act has, therefore, amended section 234C(1) of the Income-tax Act to provide that where the whole amount of advance tax paid by an assessee on or before the 15th day of March in the financial year is less than the tax due on the returned income, the assessee shall be liable to pay simple interest at the rate of one and one-half per cent. on the amount of the shortfall from the tax due on the returned income.
54.3. The calculation of interest as a result of the aforesaid amendment, may be illustrated by means of the following examples :
Example I : Where an assessee has paid sums of Rs. 300 on 15th September, Rs. 300 on 15th December and Rs. 400, on 20th March by way of advance tax and the tax due on his returned income is Rs. 1,000, he will be liable to pay interest of Rs. 6, i.e., at the rate of one and one-half per cent. on the amount of shortfall of advance tax paid on or before 15th March from the tax due on the returned income, i.e., Rs. 400 (Rs. 1,000 - Rs. 600).
Example II : Where an assessee, who is liable to pay advance tax, has failed to pay such tax during the financial year and the tax due on his returned income works out to Rs. 1,000, he will be liable to pay interest of Rs. 15, i.e., at the rate of one and one-half per cent. on the amount of shortfall of advance tax payable on or before 15th March from the tax due on the returned income, i.e., Rs. 1,000 (Rs. 1,000 - 0). Further, he shall also be liable to pay interest under section 234C on the amount of the shortfall on the other specified dates, i.e., 15th June (in the case of a company only), 15th September and 15th December.
54.4. This amendment takes effect from 1st April, 1995 and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years.
[Section 45]
Amendment of section 269 of the Income-tax Act relating to definition of High Court
55. Section 269 of the Income-tax Act defines "High Court". Sub-clause (i) defines High Court, in relation to any State, as the High Court for that State. Sub-clauses (ii) to (vii) define High Court in relation to Union Territories. As the Union Territories of Arunachal Pradesh, Mizoram and Goa have become States, the Finance Act has amended section 269 in order to omit clause (iii) and amend clause (vi) thereof.
55.2. This amendment takes effect from 1st April, 1995.
[Section 47]
Delegation of power to Chief Commissioners and Directors-General to approve reduction or waiver of penalty
56. For the assessment year 1988-89 and earlier years, the provisions of section 273A, as these stood prior to the amendment by the Finance Act, allowed the Commissioner or the Chief Commissioner to reduce or waive penalty under section 271(1)(i) or section 271(1)(iii) or section 273 or interest under section 139(8) or section 215 or section 217. Where the quantum of penalty exceeded certain monetary limits, the provisions of sub-section (2) and sub-section (4) of section 273A provided that the Commissioner or the Chief Commissioner could pass the order reducing or waiving the penalty on satisfaction of certain conditions specified in sub-section (1) and sub-section (4) of section 273A, only with the previous approval of the Board.
56.2. For the purpose of facilitating quicker disposal of cases (relating to the aforesaid assessment years) covered under section 273A, the Finance Act provides that when the Commissioner passes the order of reduction or waiver of penalties wherever the previous approval is necessary in terms of sub-section (2) or sub-section (4), such approval is to be given by the Chief Commissioner or, as the case may be, the Director-General and not by the Board. Only the Commissioner is to pass the order. Similar provisions already exist for the cases covered under section 273A pertaining to the assessment year 1989-90 and subsequent years. The Board will, therefore, not be required to give any approval for passing an order under this section for any assessment year. As a result of this amendment, the cases pending with the Board for approval stand transferred to the Chief Commissioners and Directors General.
56.3. This amendment takes effect from 1st June, 1994.
[Section 48]
Laying of rules of procedure framed by Income-tax Appellate Tribunal, etc.
57. Section 255(5) of the Income-tax Act gives power to the Appellate Tribunal to regulate its own procedure and the procedure of its Benches in all the matters arising out of the exercise of its power or of the discharge of its functions including the places at which the Benches shall hold their sittings. In exercise of this power, the Appellate Tribunal made its rules called the Income-tax Appellate Tribunal Rules, 1963, by notification No. 1-IT/63, dated 17-4-1963*.
57.2. The Committee on Subordinate Legislation had recommended an amendment to the Income-tax Act to incorporate a provision for laying of the rules of procedure framed by the Income-tax Appellate Tribunal before both the Houses of Parliament. In pursuance of this recommendation, the Finance Act has amended the provisions of section 296 to provide that the rules of procedure framed by the Appellate Tribunal under section 255 shall be laid before both the Houses of Parliament.
57.3. Since the Settlement Commission as also the Authority for Advance Rulings, have similar powers to regulate their own procedure, under sections 245F(7) and 245V of the Income-tax Act respectively, in all matters arising out of the exercise of their powers or of the discharge of their functions, section 296 has been amended to provide that the rules of procedure framed by the Settlement Commission and by the Authority for Advance Rulings shall also be laid before both the Houses of Parliament.
57.4. Corresponding amendment has been made to section 46 of the Wealth-tax Act.
57.5. This amendment takes effect from 1st June, 1994.
[Sections 49 and 53]
WEALTH-TAX
Urban land held as stock-in-trade
58. Under the provisions of the Wealth-tax Act, prior to the amendment made by the Finance Act, urban land held by an assessee as stock-in-trade was not subject to wealth-tax for a period of three years from the date of acquisition of such land by him. It has been represented that the period of three years was not sufficient to acquire, develop and sell the land. The Finance Act has, therefore, raised this period of three years to five years.
58.2. This amendment takes effect from 1st April, 1995 and will, accordingly, apply in relation to assessment year 1995-96 and subsequent years.
[Section 51]
GIFT-TAX
Raising of exemption limit for gifts made to dependent relatives
59. Under the provisions of the Gift-tax Act, prior to the amendment by the Finance Act, gifts made on the occasion of the marriage of a relative, dependent on the donor for support and maintenance, were exempt from gift-tax, subject to a limit of Rs. 30,000. The Finance Act has raised this limit to Rs. 1,00,000.
59.2. This amendment takes effect from 1st April, 1995 and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years.
[Section 55]
EXPENDITURE-TAX
Reduction in the rate of Expenditure-tax
60. Prior to the amendment made by the Finance Act, expenditure-tax was charged at the rate of 20 per cent. on the chargeable expenditure incurred in a hotel wherein the room charges for any unit of residential accommodation at the time of incurring of such expenditure is Rs. 1,200 or more per day per individual. Representations had been received from a number of individuals, business associations and federations for a reduction in the rate of tax on chargeable expenditure under the Expenditure-tax Act. Reduction in the rate of expenditure-tax is likely to encourage tourism in the country. The Finance Act has, therefore, amended section 4 of the Expenditure-tax Act, 1987, to bring down the rate of expenditure-tax from 20 per cent. to 10 per cent.
60.2. This amendment takes effect from 1st June, 1994, and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years.
[Section 57]
(Sd.) Sunil Chopra.
Director (TPL).