INCOME TAX
Finance Act, 1997--Explanatory Notes on provisions relating to Direct Taxes
Circular 763
Dated 18/2/1998
Introduction
The Finance Act, 1997, as passed by Parliament, received the assent of the President on May 14, 1997, and has been enacted as Act No. 26 of 1997. This circular explains the substance of the provisions of the Act relating to direct taxes.
Changes made by the Finance Act, 1997
2. The Finance Act, 1997 (hereinafter referred to as the Act), has amended sections 10, 16, 35, 36, 37, 41, 44AA, 44AB, 44AD, 44AE, 44B, 47, 47A, 48, 55, 57, 80AB, 80G, 80-IA, 80L, 80-O, 88, 115A, 115AC, 115AD, 115C, 115JA, 132, 139, 143, 167A, 172, 193, 194, 194B, 195, 196C, 196D, 206, 271C, 273B, 281B and Schedule IV to the Income-tax Act, 1961 ;
--inserted new sections 35ABB, 44AF, 115JAA, 271F and Chapter XII-D in the Income-tax Act, 1961 ;
--substituted new sections for sections 88B, 115E, 276B of the Income-tax Act, 1961 ;
--omitted sections 80AA, 80GG, 80JJ, 80M and Chapter XII-C of the Income-tax Act, 1961 ;
--amended sections 4 and 21 of the Interest-tax Act, 1974 ;
--amended section 4 of the Expenditure-tax Act, 1980 ; and
--introduced the Voluntary Disclosure of Income Scheme, 1997.
Provisions in brief
3. The provisions of the Act, in the sphere of direct taxes relate to the following matters :--
(i) Prescribing the rates of income-tax on incomes liable to tax for the assessment year 1997-98 ; the rates at which tax will be deductible at source in the financial year 1997-98 from interest (including interest on securities), dividends, winnings from lotteries or crossword puzzles, winnings from horse races, insurance commission and other categories of income liable for tax deduction at source under the Income-tax Act ; rates for computing "advance tax", deduction of income-tax from "salaries" and charging of income-tax on current incomes in certain cases for the financial year 1997-98.
(ii) Amendment of the Income-tax Act, 1961, with a view to,--
including the power and telecommunication sectors within the scope of tax exemption under sub-clause (iv) of clause (15), clause (23F) and clause (23G) of section 10 and sub-clause (vii) of sub-section (1) of section 36 ;
--removing certain exemptions ;
--revising monetary ceiling in respect of exemption of allowances received by Members of State Legislatures ;
--exempting dividend income and levying new tax on distributed profits of domestic companies ;
--enhancing standard deduction for the salaried taxpayers ;
--providing weighted deduction in respect of expenditure on in-house R & D ;
--amortising telecom licence fees ;
--amending section 36 of the Income-tax Act for allowance of bad debts in the case of financial corporations ;
--amending section 36(1)(viii) to incorporate the condition of maintenance of special reserve ;
--amending section 37 of the Income-tax Act ;
--introducing provisions for maintenance and audit, etc., of accounts in certain cases ;
--amending section 44AD and section 44AE to allow deduction for salary and interest paid by a firm to its partners ;
--introducing special provision for computing profits and gains of retail traders ;
--amending provision for computing profits and gains of shipping business in the case of non-residents ;
--exempting capital gains arising on sale of land by a sick industrial company managed by a workers' co-operative from tax ;
--encouraging corporatisation of stock broker's card ;
--modifying provisions relating to mode of computation of capital gains in certain cases ;
--determining cost of acquisition and cost of improvement of certain capital assets ;
--raising standard deduction for recipients of family pension ;
--providing 100 per cent. deduction to donations made to a Chief Minister's/Lieutenant Governor's relief fund ;
--omitting section 80GG relating to deductions in respect of rents paid ;
--providing tax holiday to enterprises providing telecommunication services ;
--providing tax holiday to industrial parks ;
--providing tax concessions to hotels in pilgrimage centres, hilly, rural and other remote areas ;
--providing tax holiday to commercial production of mineral oil ;
--omitting section 80JJ regarding deduction from the business of poultry farming ;
--providing higher deduction in respect of interest income from Government securities ;
--rationalising section 80-O in respect of foreign income from patents, etc. ;
--providing rebate on subscription to shares and debentures in the telecommunication sector ;
--increasing rebate of income-tax in the case of senior citizens ;
--reducing tax rate applicable to payments of royalty and technical services fees in case of foreign companies ;
--reducing the rate of long-term capital gains tax in the case of non-residents ;
--modifying Minimum Alternative Tax on companies ;
--providing that approvals by the Chief Commissioner or Commissioner will include Director-General or Director ;
--providing for obligatory filing of return based on certain economic indicators ;
--amending section 143 of the Income-tax Act ;
--amending provisions relating to charge of tax in the case of a firm ;
--removing tax deduction at source (TDS) on interest on Government securities ;
--providing for TDS from winnings from lottery, etc., in kind ;
--providing for TDS returns on magnetic media ;
--increasing the exemption limit on the employer's annual contribution to recognised provident fund ;
(iii) Amendment of the Interest-tax Act, 1974, with a view to,--
--reducing the rate of interest-tax ;
--removing doubt regarding power of the Board to issue instructions.
(iv) Amendment of the Expenditure-tax Act, 1987, with a view to,--
--exempting new hotels in remote areas from the levy of expenditure-tax.
(v) Introduction of the Voluntary Disclosure of Income Scheme, 1997.
Income-tax
Rate structure
I. Rates of income-tax in respect of income liable to tax for the assessment year 1997-98
4. In respect of incomes of all categories of taxpayers (corporate as well as non-corporate) liable to tax for the assessment year 1997-98, the rates of income-tax (including surcharge thereon in the case of domestic companies) have been specified in Part I of the First Schedule to the Act. These rates are the same as laid down in Part III of the First Schedule to the Finance (No. 2) Act, 1996, 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 1996-97.
II. Rates for deduction of income-tax at source during the financial year 1997-98 from income other than "salaries"
5.1 The rates for deduction of income-tax at source during the financial year 1997-98 from incomes other than "salaries", have been specified in Part II of the First Schedule to the 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 broadly the same as those specified in Part II of the First Schedule to the Finance (No. 2) Act, 1996, for the purposes of deduction of income-tax at source during the financial year 1996-97. However, there are some important changes also, e.g. :--
(i) in the case of foreign companies, the rate of deduction of tax from royalty and fees for technical services has been reduced from 30 per cent. to 20 per cent. in cases where the relevant agreement in pursuance of which the said royalty and fees are received has been entered into on or after the 1st day of June, 1997 ;
(ii) in the case of non-resident Indians, the rate of deduction of tax from long-term capital gains relating to a foreign exchange asset, as referred to in Chapter XII-A of the Income-tax Act, has been reduced from 20 per cent. to 10 per cent.
(iii) no surcharge will be levied on deduction of income-tax at source.
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 1997-98
6. The rates for deduction of income-tax at source from "salaries" during the financial year 1997-98 and also for 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 Act. These rates are also applicable for charging income-tax during the financial year 1997-98 on current incomes in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping profits arising in India to non-residents, assessment of persons leaving India for good during that financial year, assessment of persons who are likely to transfer property to avoid tax, etc. The salient features of the rates prescribed in the said Part III are indicated in the following paragraphs.
A. Individuals, Hindu undivided families, etc.
7.1 Paragraph A of Part III of the First Schedule specifies the rates of income-tax in the case of individuals, Hindu undivided families, association of persons, etc.
7.2 There is no change in the exemption limit which remains at Rs. 40,000. However, the tax rates have been significantly reduced at all income levels and the income slabs have also been changed. The Table below gives the income slabs and the rates of income-tax (a) as specified in Paragraph A of Part I of the First Schedule to the Act, i.e., the existing slabs and rates ; and (b) as specified in Paragraph A of Part III of the First Schedule to the Act, i.e., the new slabs and rates.
Table
|
Income slab |
Rates specified in Paragraph A of Part I of the First Schedule to the Act (i.e. existing rates) |
Income slab |
Rates specified in Paragraph A of Part III of the First Schedule to the Act (i.e. new rates) |
|
Upto Rs. 40,000 |
Nil |
Upto Rs. 40,000 |
Nil |
|
Rs. 40,001 - Rs. 60,000 |
15% |
Rs. 40,001 - Rs. 60,000 |
10% |
|
Rs. 60,001 - Rs. 1,20,000 |
30% |
Rs. 60,001 - Rs. 1,50,000 |
20% |
|
Above Rs. 1,20,000 |
40% |
Above Rs. 1,50,000 |
30% |
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 Ill of the First Schedule to the Act. These rates are the same as those specified in the corresponding Paragraph of Part I of the First Schedule to the Act.
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 Act. This rate is now 35 per cent.
D. Local authorities
10. In the case of local authorities, the rate of income-tax has been specified in Paragraph D of Part III of the First Schedule to the Act. This rate is the same as that specified in the corresponding Paragraph of Part I of the First Schedule to the Act.
E. Companies
11. In the case of companies, the rates of income-tax have been specified in Paragraph E of Part III of the First Schedule to the Act. The new rates will be 35 per cent. in the case of a domestic company and 48 per cent. in the case of a foreign company.
F. Surcharge
12. The surcharge hitherto levied in the case of a domestic company having income exceeding seventy-five thousand rupees has been discontinued. This will further reduce the tax burden of companies by 3 percentage points.
[Section 2 and First Schedule]
Inclusion of power and telecommunication sectors within the scope of tax exemption under sub-clause (iv) of clause (15), clause (23F) and clause (23G) of section 10 and deduction under sub-clause (viii) of sub-section (1) of section 36
13.1 The existing sub-clause (iv) of clause (15) of section 10 of the Income-tax Act provides for tax exemption to interest payable by, inter alia, an "industrial undertaking" in India on any moneys borrowed or debt incurred by it in a foreign country subject to fulfilment of certain conditions. An "industrial undertaking" for this purpose has been defined to mean any undertaking which is engaged in specified activities. The list of specified activities includes power generation and distribution but does not include telecommunication services.
13.2 Clause (23F) of section 10 provides for tax exemption to any income by way of dividend or long-term capital gains of a venture capital fund or venture capital company from investments made in the equity shares of a "venture capital undertaking". A "venture capital undertaking" has been defined to mean a company whose shares are not listed in a recognised stock exchange and which is engaged in the manufacture or production of such articles or things (including computer software) as may be notified. Since power and telecommunication are not covered within the ordinary meaning of "manufacture or production of articles or things", the companies engaged in generation or distribution of power or in telecommunication services remain outside the purview of the exemption under this clause.
13.3. Clause (23G) of section 10 provides tax exemption to any income by way of dividends, interest or long-term capital gains of an infrastructure capital fund or an infrastructure capital company from investments made by way of shares or long-term finance in any enterprise carrying on the business of developing, maintaining and operating any "infrastructure facility" subject to fulfilment of certain conditions. The definition of "infrastructure facility" does not include generation or distribution of power or telecommunication services.
13.4 Clause (viii) of sub-section (1) of section 36 provides for deduction in respect of any special reserve created by a financial corporation which is engaged in providing long-term finance for, inter alia, development of "infrastructure facility". The definition of "infrastructure facility" given in this clause also does not include generation or distribution of power and telecommunication services.
13.5 Both power and telecommunication sectors are among the most vital sectors of the infrastructure on which the country's rapid economic advancement depends. Both these sectors also require massive investments for development. It is, therefore, necessary to provide tax exemption under the aforesaid provisions of section 10 and section 36 to attract investment in these areas.
13.6 The Act, therefore, amends--
(i) the definition of "industrial undertaking" given in the Explanation below sub-clause (iv) of clause (15) to include therein any undertaking engaged in the business of providing telecommunication services.
(ii) clause (23F) to extend the benefit of exemption to specified incomes from investments made in companies which are engaged in the business of generation or generation and distribution of electricity or any other form of power or business of providing telecommunication services.
(iii) clause (23G) to extend the benefit of exemption to specified incomes of an infrastructure capital fund or company from investments made in enterprises carrying on the business of developing, maintaining and operating projects for generation or generation and distribution of electricity or any other form of power where such projects start generating power on or after 1st April, 1993, or projects for providing telecommunication services on or after 1st April, 1995. The exemption under clause (23G) will be available to any infrastructure capital company so long as the investee is an enterprise carrying on the business of developing, maintaining and operating any infrastructure facility as defined in this clause. No approval from the Central Board of Direct Taxes is required for getting exemption under this clause or for inviting investments in terms of this clause. The investment could be by way of shares or long-term finance. The term "long-term finance" will have the same meaning as assigned to it in clause (viii) of sub-section (1) of section 36. Thus it would mean any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereon during a period of not less than five years. For the purposes of this clause, investment by way of bonds and debentures will be treated as long-term finance.
(iv) the definition of "infrastructure facility" in clause (viii) of sub-section (1) of section 36 with a view to including therein projects for generation or generation and distribution of electricity or any other form of power or projects for providing telecommunication services. The amended definition will be as given in clause (23G) of section 10.
13.7 These amendments will take effect from 1st day of April, 1998, and will accordingly apply in relation to the assessment year 1998-99 and subsequent years.
[Sections 3 and 7]
Removal of certain exemptions
14.1 Clause (15A) of section 10 provides for tax exemption in respect of payments made by Indian companies for acquiring aircraft or aircraft engines on lease. Insertion of this clause was necessitated by the strike of pilots of Air India and Indian Airlines in 1989 when a number of aircrafts had to be taken on lease from foreign sources by these two State-owned airlines.
14.2 The cause which gave rise to this exemption has since ceased to exist. A number of private airlines have also started operating and they are also enjoying the benefit of this exemption. The revenue loss on account of the exemption is significant.
14.3 The Government have reviewed various exemptions provided under the Income-tax Act, particularly in view of steep reduction in tax rates and has felt that it is not necessary to subsidise air travel. The Act, therefore, amends clause (15A) to restrict this exemption to lease payments made under lease agreements entered into before the 1st day of April, 1997. Thus the exemption stands withdrawn in respect of payments made under lease agreements entered into on or after the 1st day of April, 1997. At the same time, to remove hardship due to grossing up of payments made by Indian companies, a new clause (6BB) has been inserted in section 10 to provide that tax paid on the lease rent shall be exempt from tax.
14.4 The Act also deletes clause (26AA) relating to exemption in respect of any income of a resident of the State of Sikkim by way of winnings from any pre-1989 lottery of the Sikkim Government and clause (28) relating to any amount in respect of tax credit certificates under the provisions of Chapter XXII-B as these provisions have since become redundant.
14.5 These amendments will take effect from the 1st day of April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 3]
Revision of monetary ceiling in respect of exemption of allowances received by Members of State Legislatures
15.1 Sub-clause (iii) of clause (17) of section 10 provides for exemption of any income by way of "all other allowances not exceeding six hundred rupees per month in the aggregate received by any person by reason of his membership of any State Legislature or of any Committee thereof, which the Central Government may, by notification in the Official Gazette, specify in this behalf".
15.2 The limit of Rs. 600 was fixed in 1986 keeping in view that Members of Parliament received at that time tax exempt constituency allowance of Rs. 1,250 and that the area of the constituency of a member of a State Legislature is generally much smaller than that of a Member of Parliament. However, with the increase in the quantum of allowances of Members of Parliament since 1986, the limit of Rs. 600 per month also requires upward revision.
15.3 The Act, therefore, substitutes the ceiling of Rs. 600 per month by Rs. 2,000 per month.
15.4 This amendment will take effect from 1st day of April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 3]
Exemption of dividend income and levy of new tax on distributed profits on domestic companies
16.1 According to the existing provisions of the Income-tax Act, corporate dividends are taxed in the hands of shareholders under the head "Income from other sources". The companies, while paying dividend, deduct tax at source at the rates in force and issue certificates for tax deducted to the shareholders. The shareholders, in turn, show dividend income in their return of income and claim credit for tax deducted on the basis of these certificates. Many a time, the tax deducted becomes refundable to the taxpayer.
16.2 The existing method involves a lot of paperwork. There have also been demands that tax on dividends should be abolished as it tantamounts to double taxation, once in the hands of the company and again in the hands of the shareholders.
16.3 The Act, therefore, introduces a new system of collecting tax on profits distributed by companies by way of dividends. A new Chapter XII-D has been inserted in the Income-tax Act which brings to charge the profits distributed by domestic companies at a modest rate of 10 per cent. The new tax will be in addition to the income-tax chargeable in respect of the total income of the company. The new tax will be payable by the domestic company even if there is otherwise no income-tax liability.
16.4 The tax will be paid by the domestic company to the credit of the Central Government within 14 days from the date of (a) declaration of dividend, or (b) distribution of dividend, or (c) payment of dividend, whichever is earliest.
16.5 The tax so paid by the company shall be treated as final payment of tax in respect of profit distributed and no further credit for tax so paid shall be claimed or allowed. No deduction under any other provision of the Income-tax Act shall also be allowed either to the company or to a shareholder in respect of the amount on which tax has been charged.
16.6 Failure to pay the tax within the time allowed will attract penal interest at the rate of 2 per cent. per month and the company shall also be deemed to be an assessee in default.
16.7 Section 271C has also been amended to provide for penalty in cases of failure to pay the whole or any part of the tax on distributed profit. Similarly, section 276B has been amended to provide for prosecution for failure to pay to the credit of the Central Government the tax on distributed profits.
16.8 A new clause, namely clause (33), has been inserted in section 10 to exempt the dividend income in the hands of shareholders. The exemption will, however, be available only in respect of dividends distributed by domestic companies and not by any other entity, say, the Unit Trust of India or any mutual fund. In order to remove any doubt on this account, sub-section (3) of section (32) of the Unit Trust of India Act, 1963, which provided for treating UTI as a company and the income distributed by it as dividend has been omitted with effect from 1st day of June, 1997.
16.9 Other consequential amendments have also been made at several places in the Income-tax Act, e.g., omission of sections 80AA, 80M, etc.
16.10 The new provisions regarding payment of tax on distributed profits shall take effect from the 1st day of June, 1997. Section 194 of the Income-tax Act will apply to dividends paid between 1st April and 31st May, 1997. The provisions regarding exemption of dividend income in the hands of shareholders shall take effect from the 1st day of April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Sections 3, 21, 22, 27, 28, 32, 33, 34, 35, 40, 47, 49, 50, 51, 53 and 56]
Enhancing of standard deduction for the salaried taxpayers
17.1 Under the existing provisions of section 16 of the Income-tax Act, a standard deduction of a sum equal to 33-1/3 per cent. of the salary or Rs. 15,000, whichever is less, is allowed. A higher deduction of Rs. 18,000 is allowed to women whose total income does not exceed Rs. 75,000. A similar deduction is also available to other persons, if their gross salary is not more than Rs. 60,000.
17.2 The Act enhances the upper limit of standard deduction to twenty thousand rupees in the case of all persons, thus removing different ceilings which existed prior to the date of amendment.
17.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 4]
Weighted deduction in respect of expenditure on in-house R & D
18.1 Under section 35 of the Income-tax Act, certain deductions are allowed in respect of expenditure on scientific research.
18.2 A new sub-section (2AB) has been introduced in section 35 to allow a deduction of a sum equal to 1-1/4th times the sum paid on any expenditure incurred by a company on scientific research, including an expenditure of capital nature related to the business. This deduction will be available to companies having in-house research and development facility approved for the purpose of this section by the prescribed authority and engaged in the business of manufacture or production of any drugs, pharmaceuticals, electronic equipment, computers, telecommunication equipment, chemicals or any other article or thing notified in this behalf. No deduction shall, however, be allowed in respect of expenditure on land and building. The company shall have to enter into an agreement with the prescribed authority for co-operation in such research and development facility and for audit of the accounts maintained for that facility.
18.3 This amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 5]
Amortisation of telecom licence fees
19.1 In order to give a fillip to the telecom sector, a new section 35ABB has been inserted in the Income-tax Act. The section provides that any capital expenditure, incurred by an assessee on the acquisition of any right to operate telecom services and for which payment has actually been made to obtain a licence, will be allowed as a deduction in equal instalments over the period for which the licence remains in force. It further provides that where the licence is transferred and proceeds of the transfer are less than the expenditure remaining unallowed, a deduction equal to the expenditure remaining unallowed as reduced by the proceeds of transfer, shall be allowed in the previous year in which the licence has been transferred. It also provides that where the licence is transferred and proceeds of the transfer exceed the amount of expenditure remaining unallowed, the excess amount shall be chargeable to tax as profits and gains of business in the previous year in which the licence has been transferred. It further provides for amortisation of unallowed expenses in a case where a part of the licence is transferred and to which provisions of sub-section (3) do not apply. The provisions of sub-sections (2), (3) and (4) pertaining to transfer shall not apply in relation to a transfer in a scheme of amalgamation whereby the licence is transferred by the amalgamating company to the amalgamated company, the latter being an Indian company.
19.2 This amendment will take effect retrospectively from the 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years.
[Section 6]
Amendment of section 36 of the Income-tax Act for allowance of bad debts in the case of financial corporations
20.1 Clause (vii) of sub-section (1) of section 36 of the Income-tax Act, provides for a deduction of the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of an assessee in the previous year. Clause (viia) of the same section provides for a deduction in respect of any provision for bad and doubtful debts made by a bank. To preclude the possibility of a double deduction of the same amount being claimed in the case of a bank, a proviso was added to clause (vii) by the Finance Act, 1985, and it was provided that in the case of a bank to which clause (viia) applies, the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause. Simultaneously, clause (v) was added to sub-section (2) of section 36 which provided that no deduction for bad debt shall be allowed unless the bank has debited the amount of such debt or part thereof in that previous year to the provision for bad and doubtful debts account made under clause (viia) of sub-section (1).
20.2 The scope of clause (viia) was expanded by the Finance (No. 2) Act, 1991, with effect from April 1, 1992. By this amendment, provision for bad and doubtful debts made by a public financial institution or a State financial corporation or a State industrial investment corporation was also allowed as a deduction. However, inadvertently proviso to clause (vii) of sub-section (1) and clause (v) of sub-section (2) remained to be amended. Hence, these provisions have been amended retrospectively so as to bring the provisions regarding allowance of bad debt in the case of a financial corporation at par with the provision regarding allowance of bad debt in the case of a bank.
20.3 These amendments will take effect retrospectively from the 1st April, 1992, and will, accordingly, apply in relation to the assessment year 1992-93 and subsequent years.
[Section 7]
Amendment of section 36(1)(viii) to incorporate the condition of maintenance of special reserve
21.1 Clause (viii) of sub-section (1) of section 36 permits the deduction of an amount not exceeding forty per cent. of the profits derived from the business of providing long-term finance carried to any special reserve, created by a financial corporation or a public company. The deduction is admissible provided that the corporation or the company is approved by the Central Government for this clause and the aggregate of the amounts carried over to the special reserve from time to time does not exceed twice the amount of paid up share capital and general reserves. While this clause imposes a condition of creation of a special reserve, it does not impose any condition on the maintenance of the reserve.
21.2 In order to incorporate the condition regarding maintenance of the reserve, clause (viii) has been amended by substituting the words "special reserve created" with the words "special reserve created and maintained". An amendment has been made in section 41 in order to bring to tax any amount withdrawn from such special reserve in the year in which the amount is withdrawn. For this purpose, a new sub-section (4A) has been introduced in this section, and a reference to this sub-section is also made in sub-section (5) of this section.
21.3 This amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Sections 7 and 9]
Amendment of section 37 of the Income-tax Act
22.1 Sub-section (1) of section 37 is a residuary section, which allows any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession as a deduction in computing the income under the head "Profits and gains of business or profession". Sub-sections (2), (2B), (3), (4) and (5) provide exceptions to the aforesaid general rule of allowance.
22.2 Sub-section (2) deals with expenditure in the nature of entertainment expenditure.
22.3 Sub-section (2B) disallows any expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.
22.4 Sub-section (3) read with sub-sections (4) and (5) deals with any expenditure incurred by an assessee on advertisement, or on maintenance of any residential accommodation including any accommodation in the nature of a guest house or in connection with travelling by an employee or by any other person.
22.5 Rule 6B of the Income-tax Rules, 1962, lays down the amount deductible in respect of articles intended for presentation.
22.6 Rule 6D lays down the limits on deduction of expenditure incurred on hotel or allowance during the course of travel.
22.7 The restrictive provisions as contained in sub-sections (2), (3) and (4) were introduced with a view to discourage ostentatious expenditure. There has been frequent litigation in interpretation of these provisions. In order to simplify the Act and to bring the concept of income nearer to the concept of "profit", these provisions have been deleted. However, the provisions of sub-section (2B) regarding disallowance of expenditure on advertisement in any souvenir etc., published by a political party will continue to be in force.
22.8 This amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 8]
Introduction of provisions for maintenance and audit, etc., of accounts in certain cases
23.1 Two schemes of computing presumptively the profits and gains of business of civil construction, and plying, hiring or leasing goods carriages were introduced under section 44AD and section 44AE respectively by the Finance Act, 1994, with effect from April 1, 1994. Under section 44AD, the income from business of civil construction or supply of labour for civil construction work is presumed at eight per cent. of gross receipts, provided the gross receipts from such a business do not exceed Rs. 40 lakhs. Under section 44AE the income from business of plying, hiring or leasing of goods carriages is presumed at the rate of Rs. 2,000 per month or part thereof from a heavy vehicle and Rs. 1,800 per month or part thereof from other vehicles, provided an assessee does not own more than ten goods carriages. Both the schemes are optional to the assessee. He can declare income higher than the income calculated presumptively on the aforesaid bases or he can declare lower income and substantiate his return in the assessment proceedings. The assessees, who opt for these schemes, are not required to maintain books of account.
23.2 Public response to these schemes has been below the expected level. A large number of assessees falling in the ambit of these schemes tend to file returns with lower income. In order to ensure that a larger number of taxpayers opt for these simple presumptive schemes instead of declaring lower incomes without maintaining proper accounts, it has been made obligatory on the part of such assessees to maintain accounts under section 44AA, get these accounts audited under section 44AB and submit the report of audit within the prescribed time limit. Simultaneously, the requirement of compulsory scrutiny of such cases under section 143(3) has been removed.
23.3 This amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Sections 10, 11, 12 and 13]
Amendment of section 44AD and section 44AE to allow deduction for salary and interest paid by a firm to its partners
24.1 In implementing these presumptive income schemes, there has been controversy as to whether salary and interest paid to a partner of an assessee-firm is deductible from the presumptive income determined in accordance with the provisions of section 44AD and section 44AE. Respecting the claims of taxpayers, it has been specifically provided that the salary and interest paid to the partners of the assessee-firm shall be deducted while computing the income of such firm subject to the conditions and limits prescribed in clause (b) of section 40.
24.2 The proposed amendment will take effect retrospectively from the 1st April, 1994, and will, accordingly apply in relation to the assessment year 1994-95 and subsequent years.
[Sections 12 and 13]
Introduction of special provision for computing profits and gains of retail trades
25.1 In order to simplify the procedure of computation of income of retail trades, a new scheme for computing profits and gains of such businesses presumptively at five per cent. of the gross receipts has been introduced. This scheme is similar to the presumptive schemes of computation of income under section 44AD or section 44AE. A new section 44AF has been inserted in the Income-tax Act. Consequently, Chapter XII-C which provided for a flat tax of Rs. 1,400 for small businesses has been deleted.
25.2 This amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 14]
Amendment of provision for computing profits and gains of shipping business in the case of non-residents
26.1 The Finance Act, 1975, introduced section 44B in the Income-tax Act, 1961, regarding computation of profits and gains of shipping business in the cases of non-residents. It provided that a sum equal to seven and a half per cent. of the receipts shall be taken to be profits and gains of such business. The following amounts are taken as receipts :--
(i) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf ; and
(ii) the amount received or deemed to be received in India by or on behalf of the assessee.
26.2 It has come to the notice that the non-resident assessees, carrying on shipping business, are splitting their receipts in such a manner that the receipts in respect of carriage of passengers, livestock etc., which are the subject-matter of computation of profits under this section, are reduced and receipts in respect of other charges such as demurrage or handling charges, etc., are inflated. The result is that while the liability of the clients remains the same, the amount on which profits and gains are computed under section 44B gets reduced.
26.3 In order to avoid loss of revenue on this account, it has been clarified that the meaning of the expression "the amount paid or payable etc. on account of carriage" shall include any charges by way of demurrage or handling etc., by whatever name called, and any other charges of similar nature. Corresponding amendment has been made in section 172, which deals with profits of non-residents from occasional shipping business.
26.4 These amendments will take effect retrospectively from the 1st April, 1976, and will, accordingly, apply in relation to the assessment year 1976-77 and subsequent years.
[Sections 15 and 45]
Exemption of capital gains arising on sale of land by a sick industrial company managed by a workers' co-operative from tax
27.1 Under section 50 of the Income-tax Act, 1961, short-term capital gains become chargeable to tax on sale of a depreciable asset if the sale consideration exceeds the written down value of the block of assets. In the case of a sick industrial company, there should not normally be any capital gains on the sale of any asset except land. Capital gains tax arising on the sale of land slows the process of revival of such companies.
27.2 The Act has, therefore, amended section 47 of the Income-tax Act to provide that the capital gains arising from the transfer of land of a sick industrial company managed by its workers' co-operative, under a scheme prepared and sanctioned under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985, will be exempt from tax. It has also been provided that the exemption on such transfers shall be available if made within the period commencing from the previous year in which the said company has become a sick company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985, and ending with the previous years during which the entire net worth of such company becomes equal to or exceeds accumulated losses.
27.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 16]
Encouraging corporatisation of stock broker's card
28.1 Under the existing provisions of section 45 of the Income-tax Act, 1961, corporatisation of membership of recognised stock exchanges involves transfer of a capital asset and is, therefore, subject to capital gains tax.
28.2 In order to encourage more brokers to corporatise, increase their liquidity and consequently their volume of trading resulting eventually in giving a boost to the capital markets, the Act exempts from tax capital gains arising on corporatisation of membership of a recognised stock exchange by inserting clause (xi) in section 47 of the Income-tax Act. A new sub-section 47A(2) has been inserted providing for withdrawal of such exemption if the transferor retains shares allotted on transfer of membership for less than three years. This exemption will be allowed only in respect of corporatisation effected on or before the 31st December, 1997.
28.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 only.
[Sections 16 and 17]
Modification of provisions relating to mode of computation of capital gains in certain cases
29.1 Under section 48 of the Income-tax Act, 1961, capital gains arising from the transfer of a capital asset are computed by deducting from the full value of consideration,
(a) the indexed cost of acquisition and the indexed cost of any improvement of the asset ; and
(b) the amount of expenditure incurred in connection with such transfer.
29.2 The purpose of indexation was to tax the real rather than the nominal gains arising from the transfer of a long-term capital asset.
29.3 However, in the case of transfer of bonds and debentures, there is normally a capital loss since these are sold at a discount in the stock market. This capital loss is further enhanced because of the benefit of indexation resulting in a loss of revenue to the exchequer.
29.4 In order to plug this loophole, the Act has inserted a third proviso to section 48 of the Income-tax Act. This proviso excludes bonds and debentures other than capital indexed bonds issued by the Government from the list of capital assets eligible for the benefit of indexation.
29.5 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 18]
Cost of acquisition and cost of improvement of certain capital assets
30.1 Up to the assessment year 1988-89, the gains arising on the transfer of goodwill were not liable to tax. This was on account of the judicial view approved by the Supreme Court in CIT v. B. C. Srinivasa Shetty [1981] 128 ITR 294. The rationale of the decision was that goodwill being a self-generated asset and not costing anything in terms of money, the gains could not be computed in accordance with the provisions of the Act. By the Finance Act, 1987, the method of computing the cost of acquisition as well as the cost of improvement of goodwill was provided for. Where goodwill is purchased by the transferor, the cost of acquisition is taken to be the purchase price and in all other cases it is taken to be nil. The cost of improvement in either case is taken to be nil.
30.2 Instances have come to light where rights to manufacture, produce or process any article or thing have been extinguished for a consideration and claimed to be not taxable.
30.3 The Act has, therefore, amended sections 55(1) and 55(2) of the Income-tax Act in order to bring extinguishment of such a right to manufacture, etc., within the ambit of capital gains tax. Capital gains tax would be leviable only where such an extinguishment of right to manufacture, etc., is for any consideration. Such receipts will be subjected to capital gains tax on the same basis as already adopted for taxing transfer of goodwill and tenancy rights. The cost of acquisition and cost of improvement will be determined in the same manner as for goodwill.
30.4 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 19]
Raising of standard deduction for recipients of family pension
31.1 Under the existing provisions of clause (iia) of section 57 of the Income-tax Act, a standard deduction of a sum equal to 33-1/3 per cent. of the family pension or Rs. 12,000, whichever is less, is allowed.
31.2 The Act enhances the upper limit of the deduction from twelve thousand rupees to fifteen thousand rupees.
31.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 20]
100 per cent. deduction to donations made to a Chief Minister's/Lieutenant Governor's relief fund
32.1 Under the existing provisions of section 80G of the Income-tax Act, ordinarily a deduction of fifty per cent. of the donation is allowed in the computation of income of the donor. However, in respect of donations to certain funds, hundred per cent. deduction is allowed.
32.2 In order to encourage donation of funds for relief efforts, the Act amends section 80G to provide for hundred per cent. deduction in respect of donations made to the Chief Minister's Relief Fund/Lieutenant Governor's Relief Fund in respect of any State or Union Territory, as the case may be. The deduction will be available to only one fund of its kind for each State or Union Territory.
32.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 23]
Omission of section 80GG relating to deductions in respect of rents paid
33.1 Section 80GG provides for a deduction to all assessees (salaried as well as non-salaried), who do not receive any special house rent allowance covered by section 10(13A), in respect of actual expenditure on rents paid for residential accommodation. The amount of deduction available is two thousand rupees per month or twenty-five per cent. of the total income of the year, whichever is less subject to certain conditions.
33.2 However, since the income-tax rates have now been reduced substantially, any special relief on account of rents paid by a taxpayer is no longer considered necessary. The Act, therefore, omits section 80GG of the Income-tax Act.
33.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 24]
Tax holiday to enterprises providing telecommunication services
34.1 Under the provisions of section 80-IA of the Income-tax Act, a five-year tax holiday and a deduction of 25 per cent. (30 per cent. in the case of companies) in the subsequent five years is allowed to an undertaking engaged in the business of generation, or generation and distribution, of power or to an industrial undertaking set up in backward States or districts.
34.2 The country needs huge investments in the area of telecommunication services. In order to attract a large number of commercial enterprises to engage in these services, the Act provides for hundred per cent. deduction from the profits and gains of an enterprise carrying on the business of providing telecommunication services, whether basic or cellular, for the initial five assessment years and thereafter twenty-five per cent. (thirty per cent. in the case of companies) of such profits and gains for subsequent five years. The deductions shall be available to an undertaking which begins to provide the telecommunication services (whether basic or cellular) at any time during the period beginning on the 1st April, 1995, and ending on 31st March, 2000.
34.3 The amendment will take effect retrospectively from the 1st April, 1996, and will, accordingly, apply in relation to the assessment year 1996-97 and subsequent years.
[Section 25]
Tax holiday to industrial parks
35.1 Under the provisions of section 80-IA of the Income-tax Act, a five year tax holiday and a deduction of 25 per cent. (30 per cent. in the case of companies) in the subsequent five years is allowed to an undertaking engaged in the business of generation, or generation and distribution, of power or to an industrial undertaking set up in backward States/districts.
35.2 The Act extends the tax holiday to industrial parks notified for this purpose in accordance with any scheme to be framed by the Central Government. This tax holiday is expected to encourage investments in industrial infrastructure. Those industrial parks which start operating during the period beginning on 1st April, 1997, and ending on 31st March, 2002, will be eligible for 100 per cent. deduction for the initial five assessment years followed by 25 per cent. (30 per cent. in the case of companies) deduction from profits for the next five years.
35.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 25]
Tax concessions to hotels in pilgrimage centres, hilly, rural and other remote areas
36.1 Under section 80-IA of the Income-tax Act, deduction was allowed, in computing the taxable income, in respect of profits derived from the business of a hotel which started functioning during the period from the 1st April, 1990, to 31st March, 1995.
36.2 With a view to further encouraging the development of tourism infrastructure in remote regions where such facilities either do not exist or are scarce, the Act provides for a tax concession of 50 per cent. of the profits for ten assessment years to be given to hotels which start functioning at any time during the period from 1st April, 1997, to 31st March, 2001. The deduction shall be available to hotels which are located in a hilly or rural area or a place of pilgrimage or a specified place of tourist infrastructure. These hotels will also be exempted from the levy of expen-diture-tax for a period of ten years. In respect of hotels located in any other place, the deduction shall be 30 per cent. of the profits. The hotels located in the metropolitan cities of Calcutta, Chennai, Delhi and Mumbai will not be eligible for the tax deduction.
36.3 The amendments will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 25]
Tax holiday to commercial production of mineral oil
37.1 Under the provisions of section 80-IA of the Income-tax Act, a five-year tax holiday and a deduction of 25 per cent. (30 per cent. in the case of companies) in the subsequent five years is allowed to an undertaking engaged in the business of generation, or generation and distribution, of power or to an industrial undertaking set up in backward States or districts.
37.2 The Act extends the tax holiday to undertakings commencing commercial production of mineral oil in the North-Eastern Region. Such undertakings are eligible for 100 per cent. deduction for seven assessment years.
37.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 25]
Omission of section 80JJ regarding deduction from the business of poultry farming
38.1 Section 80JJ provides for a deduction up to 33-1/3 per cent. of profits from the business of poultry farming. The poultry industry has since grown considerably. The concession has been reviewed in this context.
38.2 The Act omits section 80JJ of the Income-tax Act in respect of deductions from the profits and gains from the business of poultry farming.
38.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 26]
Higher deduction in respect of interest income from Government securities
39.1 Section 80L of the Income-tax Act provides for deduction from the income received from interest on certain securities, dividends, etc., from the gross total income of the assessee. The deduction available is Rs. 12,000 in a normal case. In respect of dividends from any Indian company and income received from the units of the UTI or approved mutual funds, further deduction of Rs. 3,000 is allowed.
39.2 The Act amends section 80L so that any income by way of interest on any security of the Central Government or a State Government referred to in clause (i) of sub-section (1) of section 80L, will also be eligible for the additional deduction of three thousand rupees.
39.3 This amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 27]
Rationalisation of section 80-O in respect of foreign income from patents, etc.
40.1 Section 80-O provides for deduction in respect of royalty, commission, fees or any similar payments received by an assessee from a foreign Government or foreign enterprise or in consideration of technical or professional service rendered outside India, up to 50 per cent. of such income. This tax incentive was provided in order to encourage the export of Indian know-how and skills abroad.
40.2 The Act amends section 80-O to restrict the deduction available under this section only to any income received from the Government of a foreign state or foreign enterprise in consideration for the use outside India of any patent, invention, design or registered trademark. This incentive will now be focused on genuine resident taxpayers and will encourage them to exploit their patent rights, trade marks and technical know-how abroad.
40.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 29]
Rebate on subscription to shares and debentures in the telecommunication sector
41.1 Under the existing provisions of the Income-tax Act, a tax rebate of twenty per cent. of the sums paid towards life insurance premia, provident fund, etc. is available to an individual or a Hindu undivided family, subject to a maximum of twelve thousand rupees.
41.2 The Finance (No. 2) Act, 1996, amended section 88 of the Income-tax Act, through new clauses (xvi) and (xvii), to include investments in debentures of, and equity shares in, a public company or units of mutual fund, as the case may be, engaged in infrastructure including power sector for rebate under this section. By investing in such shares or debentures, a maximum rebate of fourteen thousand rupees may be claimed.
41.3 The Act, now, includes subscription to equity shares and debentures of a public company for the purpose of providing telecommunication services (whether basic or cellular), also as forming part of eligible issue of capital, for availing of the tax rebate under clauses (xvi) and (xvii) of the section.
41.4. The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in respect of the assessment year 1998-99 and subsequent years.
[Section 30]
Rebate of income-tax in the case of senior citizens
42.1 Under the existing provisions of section 88B of the Income-tax Act, a special tax rebate of forty per cent. of the net tax payable is allowed to persons who have attained the age of 65 years and have a gross total income not exceeding one hundred twenty thousand rupees. The maximum tax rebate available is Rs. 8,400 at present.
42.2 The Act increases the rate of rebate available to the senior citizens to hundred per cent. of the tax payable subject to a limit of ten thousand rupees. Further, the Act extends this rebate to all senior citizens irrespective of any income limit.
42.3 The amendments will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 31]
Reduction in tax rate applicable to payments of royalty and technical services fees in the case of foreign companies
43.1 Section 115A, inter alia, provides for a concessional rate of 30 per cent. tax in respect of income by way of royalty and fees for technical services received by foreign companies from Government or an Indian concern in pursuance of an agreement made after the 31st day of March, 1976, which fulfils the specified conditions.
43.2 The Act amends section 115A to reduce the tax rate on royalty and fees for technical services received by foreign companies in pursuance of agreements made after the 31st day of May, 1997, to 20 per cent. Other conditions which the agreements are required to fulfil will remain the same. There will be no change in the tax rate applicable to payments of royalty and technical service fees in relation to agreements made prior to the 31st May, 1997.
43.3 The amendment will take effect from the 1st day of April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 32]
Reduction in the rate of long-term capital gains tax in the case of non-residents
44.1 Under section 112 of the Income-tax Act, 1961, long-term capital gains arising to non-resident Indians are subjected to tax at the rate of 20 per cent. Foreign Institutional Investors are subjected to a tax of 10 per cent. in respect of long-term capital gains arising from the transfer of securities listed in a recognised stock exchange in India under the provisions of section 115AD of the Income-tax Act.
44.2 In order to give a level playing field as also to give a boost to foreign capital inflow, the Act reduces the rate of long-term capital gains tax arising to a non-resident Indian to 10 per cent. from the existing level of 20 per cent. by amending section 115E of the Income-tax Act.
44.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 36]
Minimum alternative tax on companies
45.1 The minimum alternative tax (MAT) on companies was introduced by the Finance (No. 2) Act, 1996, with effect from the 1st April, 1997. This was necessary due to a rise in the number of zero-tax companies in view of tax preferences granted in the form of exemptions, deductions and high rates of depreciation. The rate of minimum tax was kept at a modest figure by deeming 30 per cent. of book profits as total income. This modest amount is likely to go down further with the downward revision of corporate tax rate to 35 per cent. and abolition of surcharge.
45.2 The Act exempts the export profits that are eligible for deduction under section 80HHC or under section 80HHE from the purview of the minimum alternative tax.
45.3 This amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
45.4 The Act also inserts a new section 115JAA to provide for a tax credit scheme by which the MAT paid can be carried forward for set-off against regular tax payable during the subsequent five-year period subject to certain conditions, as under :--
(1) When a company pays tax under MAT, the tax credit earned by it shall be an amount which is the difference between the amount payable under MAT and the regular tax. The regular tax in this case means the tax payable on the basis of normal computation of total income of the company.
(2) MAT credit will be allowed carry forward facility for a period of five assessment years immediately succeeding the assessment year in which MAT is paid. Unabsorbed MAT credit will be allowed to be accumulated subject to the five-year carry-forward limit.
(3) In the assessment year when regular tax becomes payable, the difference between the regular tax and tax computed under MAT for that year will be set off against the MAT credit available.
(4) The credit allowed will not bear any interest.
45.5 The rationale for allowing credit in respect of taxes paid under MAT in the aforesaid manner is that a company should always pay a minimum tax. The above method will ensure that the company will always pay a minimum tax even while offsetting the MAT credit against the regular tax.
45.6 The amendment will take effect from the 1st April, 1997, and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years.
[Sections 37 and 38]
Approvals by Director-General or Director
46.1 Under section 132(8) of the Income-tax Act, books of account and other documents seized as a result of a search can be retained beyond a period of 180 days only with the approval of the Chief Commissioner or Commissioner and a person who objects to the approval so granted by the Chief Commissioner or Commissioner may apply to the Board for release of the books, etc. It has been provided that provisional attachment of any property belonging to an assessee can be done only with the previous approval of the Chief Commissioner or Commissioner.
46.2 By the Finance (No. 2) Act, 1996, the Director of Income-tax has been empowered to approve the assessments made by the Assistant Director or Deputy Director of Income-tax. However, the ancillary powers of approving retention of books beyond a period of 180 days and approving provisional attachment of property have not been given to the Director-General or Director resulting in difficulties in cases where the Assessing Officer is the Assistant Director or Deputy Director.
46.3 In order to remove this difficulty, sections 132(8), 132(10) and 281B have been amended to provide that the approval as required under these sections may be granted by the Director-General or Director also.
46.4 The amendment will take effect retrospectively from the 1st October, 1996.
[Sections 41 and 57]
Obligatory filing of return based on certain economic indicators
47.1 One of the possible ways by which a large number of persons can be brought under the tax net is to identify potential taxpayers through economic indicators. There could be a number of such economic indicators which may be employed for this purpose.
47.2 The Act has, therefore, inserted a proviso to section 139 of the Income-tax Act as a result of which it has become mandatory for all persons who satisfy two of the following economic criteria to furnish their returns of income :--
(a) are in occupation of immovable property exceeding a specified floor area whether by way of ownership, tenancy or otherwise ; or
(b) are the owners or lessees of a motor vehicle ; or
(c) are subscribers to a telephone ; or
(d) have incurred expenditure for themselves or for any other person on travel to any foreign country.
47.3 A new section 271F has been inserted providing for a levy of penalty of Rs. 500 in cases where the return which was required to be filed under the proviso to section 139(1) is not furnished.
47.4 The amendment will take effect from the 1st April, 1997, and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years.
47.5 The urban agglomerations of cities where this provision will be applicable have been notified. These are Mumbai, Delhi, Chennai, Calcutta, Bangalore, Ahmedabad, Kanpur, Jaipur, Ludhiana, Hyderabad, Pune and Chandigarh. The floor area of the immovable property, both for residential and commercial use has also been specified by way of a notification. A new return form (Form No. 2C) has been devised for this category of persons.
[Sections 42 and 54]
Amendment of section 143 of the Income-tax Act
48.1 Under section 143(1)(a) of the Income-tax Act, 1961, intimation is sent to an assessee only where there is a prima facie adjustment or additional demand. This leads to difficulties on two accounts. First, assessees who do not receive intimation remain in suspense about the fate of their assessment. Secondly, as has been pointed out by the Comptroller and Auditor General in his report for the year ended March, 1995, at para 4.35, remedial action by way of rectification is not possible in cases where no intimation was sent to the assessee. The levy of additional tax is not possible in such a case, leading to loss of revenue.
48.2 The Act, therefore, amends the second and third provisos to clause (a) of sub-section (1) of section 143 making it mandatory for the Assessing Officer to send intimation in all cases processed under section 143(1).
48.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 43]
Charge of tax in the case of a firm
49.1 The existing section 167A provides that in the case of a firm, tax shall be charged on its total income at the "maximum marginal rate". The term "maximum marginal rate" has been defined in section 2(29C) to mean the rate of income-tax (including surcharge on income-tax, if any) applicable in relation to the highest slab of income in the case of an individual, an association of persons or, as the case may be, body of individuals as specified in the Finance Bill of the relevant year.
49.2 The new tax rate applicable to individuals, association of persons, etc., in the highest slab of income is 30 per cent. whereas the new rate applicable to firms is 35 per cent. Since these two rates are now different unlike in the past, an amendment of section 167A is necessary.
49.3 The Act, therefore, amends section 167A to substitute the words "maximum marginal rate" by the words "rate as specified in the Finance Act of the relevant year."
49.4 This amendment will take effect from the 1st day of April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Sections 44]
Removal of tax deduction at source (TDS) on interest on Government securities
50.1 Section 193 of the Income-tax Act provides for tax deduction at source (TDS) at the rates in force on the amount of any interest payable on any income by way of interest on securities. The proviso to section 193 provides for exceptions to this requirement and lists cases where TDS is not required to be made.
50.2 With a view to attract investment in Government securities, the Government has decided to exempt such securities from the provisions of TDS.
50.3 The Act, therefore, inserts a new clause (iv) in the aforesaid proviso, in lieu of the existing clauses (iiia) and (iv), to exempt interest payable on any security of the Central Government or a State Government from the requirement of tax deduction at source.
50.4 This amendment will take effect from the 1st day of June, 1997.
[Section 46]
TDS from winnings from lottery, etc., in kind
51.1 According to the provisions of section 194B, any person responsible for paying any income by way of winnings from any lottery or crossword puzzle exceeding Rs. 5,000 is required to deduct tax at the rates in force. The tax is required to be deducted irrespective of whether the winnings are in cash or in kind. However, in cases where the winnings are either wholly in kind or where they are partly in cash and partly in kind but the part in cash is not sufficient to meet the liability for tax deduction in respect of the whole of the winnings, difficulties arise in complying with these provisions. By a beneficial circular, it was hitherto provided that tax need not be deducted in cases where the winnings are wholly in kind. However, instances have come to the notice of the Government where the lottery winnings in kind have escaped taxation.
51.2 Therefore, to safeguard the interest of revenue, the Act amends section 194B to provide that in cases where the winnings are wholly in kind or where they are partly in cash and partly in kind but the part in cash is not sufficient to meet the liability for tax deduction in respect of the whole of the winnings, the person responsible for paying the winnings shall, before releasing such winnings either in cash or in kind, ensure that tax has been paid in respect of the aggregate winnings. He can do so, for example, by collecting from the winner a sum equal to the tax deductible at source on the winnings in kind and thus meeting the liability for TDS, before releasing the winnings. For this purpose, the value of the winnings in kind shall be taken as the cost incurred by the payer in acquiring the said winnings in kind.
51.3 Amendments have also been made in section 271C and section 276B to provide for penalty and prosecution for failure to comply with the amended provisions of section 194B.
51.4 These amendments will take effect from the 1st day of June, 1997.
[Sections 48, 53, and 56]
TDS returns on magnetic media
52.1 Section 206 of the Income-tax Act provides for filing of returns of TDS by persons responsible for deducting tax in accordance with the provisions of Chapter XVII-B.
52.2 The returns filed under section 206 contain voluminous data, particularly in the cases of large organisations. Preparing these returns as also processing the data contained therein for checking its correctness requires substantial manual effort.
52.3 Therefore, in order to make filing of returns and processing of data easier, the Act amends section 206 to provide for filing of returns on magnetic media such as floppies, diskettes, etc., as may be specified by the Board. It has also been provided that a return on magnetic media shall fulfil the specified conditions, namely (i) the return will be checked and authenticated by the Assessing Officer, and (ii) he shall take due care to preserve the computer media by duplicating, transferring, mastering or storage without loss of data.
52.4 It has also been provided that the information in the returns on magnetic media shall be admitted in evidence in any proceeding under the Income-tax Act.
52.5 These amendments will take effect from the 1st day of April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 52]
Increasing the exemption limit on the employer's annual contribution to recognised provident funds
53.1 Rule 6 of Part A of the Fourth Schedule to the Income-tax Act provides for conditions relating to exemption of the employer's annual contributions to recognised provident funds, etc.
53.2 The Act increases the exemption limit of eligible contribution made by an employer from ten per cent. of the salary of the employee to twelve per cent. of the salary. Any contribution in excess of this limit only will be liable to tax.
53.4 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 58]
Interest-tax
Reduction in the rate of interest-tax
54.1 Under section 4 of the Interest-tax Act, 1974, credit institutions including banks are charged interest-tax in respect of interest receivable by them on loans at the rate of three per cent. of the chargeable interest.
54.2 In order to provide greater liquidity to the banking companies, public financial institutions, State financial corporations and any other public financial company, the Act has inserted a new proviso to section 4 reducing the rate of tax to two per cent. of the chargeable interest.
54.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 59]
Power to the Board to issue instructions
55.1 Under section 21 of the Interest-tax Act, various sections of the Income-tax Act as specified therein, apply with suitable modifications with regard to the administration of the Interest-tax Act also. However, section 119 of the Income-tax Act, which gives powers to the Board to issue instructions, etc., is not specified under section 21 of the Interest-tax Act. In order to remove any doubt on this issue, the Act has amended section 21 of the Interest-tax Act to provide that the provisions of section 119 of the Income-tax Act shall apply with necessary modifications to the Interest-tax Act also.
55.2 The amendment will take effect retrospectively from the 1st October, 1991.
[Section 60]
Expenditure-tax
Exemption from the levy of expenditure-tax in the case of new hotels in remote areas
56.1 Under section 3 of the Expenditure-tax Act, 1987, tax is charged on expenditure incurred in a hotel where the room charges for any unit of residential accommodation are Rs. 1,200 or more per day per individual.
56.2 The Act has inserted a second proviso to section 4 of the Expenditure-tax Act to secure that expenditure-tax will not be charged during the period of ten years commencing from April 1, 1998, on any expenditure incurred in a new hotel in a hilly or rural area or a place of pilgrimage or such other place as the Central Government may specify in accordance with the provisions of section 80-IA of the Income-tax Act, 1961. This concession will be available to eligible hotels which start functioning during the period from April 1, 1997, to March 31, 2001. However, hotels located in metropolitan cities of Calcutta, Chennai, Delhi and Mumbai will not be eligible for exemption from the expenditure tax.
56.3 The amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years.
[Section 61]
Voluntary Disclosure of Income Scheme, 1997
57.1 A new scheme titled the Voluntary Disclosure of Income Scheme, 1997 has been introduced with effect from the 1st day of July, 1997. The substance of the provisions of the new scheme have already been explained in Board's Circular No. 753, dated 10th June, 1997.
[Sections 62 and 78]
(V. K. Bhatia),
Director (TPL).
[F. No. 153/46/97-TPL]