TMI BlogFinance Act, 2002—Explanatory Notes on provisions relating to direct taxesX X X X Extracts X X X X X X X X Extracts X X X X ..... 1961 ; Inserted new sections 50C, 80M, 92CA, 115BBB, 174A, 206CA, 269UP, 272B, 272BBB and 275B by the Income-tax Act, 1961 ; Substituted new sections for sections 43A, 70, 89, 92, 132B, 194K, 269T and 271F of the Income-tax Act, 1961 ; Omitted section 245HA of the Income-tax Act, 1961 ; Amended sections 18, 18C, 22D and 34 of the Wealth-tax Act, 1957 ; Omitted section 22HA of the Wealth-tax Act, 1957 ; Amended sections 3 and 5 of the Expenditure-tax Act, 1987 ; Omitted section 44 of the National Dairy Development Board Act, 1987 ; Omitted section 22 of the Prasar Bharati (Broadcasting Corporation of India) Act, 1990 ; Omitted section 22A of the Oil India (Development) Act, 1974 ; Omitted section 43A of the Life Insurance Corporation Act, 1956 ; Omitted section 35A of the General Insurance Business (Nationalisation) Act, 1972. 3. Provisions in brief 3.1 The provisions of the Act in the sphere of direct taxes relate to the following matters : (i) Prescribing the rates of income-tax on income liable to tax for the assessment year 2002-2003, the rates at which the tax will be deductible at source in the financial year 2002-2003 from interest (including inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment under section 147 or rectification under section 154 shall be made for any assessment year beginning on or before 1st April, 2001 ; —make perquisites non-taxable in the case of low-paid salaried employees ; —modify provisions relating to income from house property ; —tax the receipts in the nature of non-compete fees and exclusivity rights ; —provide for additional depreciation on new machinery and plant ; —provide for fiscal incentives for modernisation and fleet expansion of the shipping business ; —tax amounts/donations received as income in cases of withdrawal of approval to associations/institutions or withdrawal of notification in respect of eligible projects or schemes ; —provide a sunset clause for expenditure by way of payment to associations and institutions for carrying out programmes of conservation of natural resources ; —provide that balance instalments of expenditure incurred under voluntary retirement scheme to be allowed to the resulting entity ; —enhance fiscal incentive for provisioning in respect of bad and doubtful debts in the case of banks and financial institutions ; —rationalize interest paid to partner from 18% to 12% ; —provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax deduction at source ; —provide for tax not to be deducted at source from dividends and interest on securities in certain cases ; —provide for individuals and Hindu undivided families to deduct tax in cases where total turnover or gross receipts exceed the specified limit under section 44AB ; —reduce the rate of tax deduction at source on commission or broker-age ; —provide that provisions of section 197A will not apply in certain cases ; —insert provision for requirement to apply for tax collection account number ; —provide limitation of time for admission of application and passing of orders by the Settlement Commission ; —modify provision relating to appointment of President of Appellate Tribunal ; —abolish the scheme of pre-emptive purchase of immovable properties under Chapter XX-C ; —modify the provisions relating to mode of repayment of certain deposits ; —clarify provision relating to penalty for concealment of income, etc., under section 271 ; —modify provisions relating to penalty for late filing of return, and defaults relating to PAN ; —provide for issue of notice in respect of payment of advance-tax ; —modify provisions relating to interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the case of a domestic company, has been prescribed as ten per cent. The rate of deduction of tax in respect of income of a foreign company other than those, for which specific rates are prescribed in Part II, has been reduced to forty per cent. from the existing rate of forty-eight per cent. The tax deducted at source in each case (including a foreign company) shall be enhanced by a surcharge of five per cent. Surcharge is also applicable in the case of a foreign company. 4.3 Rates for deduction of income-tax at source from "salaries", computation of "advance tax" and charging of income-tax in special cases during the financial year 2002-2003. The rates for deduction of income-tax at source from or payment of tax on "salaries" during the financial year 2002-2003 and also for computation of "advance tax" payable during that year in the case of all categories of tax payers have been specified in Part III of the First Schedule to the Act. These rates are also applicable for charging income-tax during the financial year 2002-2003 on current incomes in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping profits arising in India to nonr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arge in the case of individuals, Hindu undivided families, etc., at different income levels would be as under : Total income Existing tax liability New tax liability Additional tax liability Additional tax Rs. Rs. Rs. Rs. (%) 50,000 Nil Nil Nil Nil 55,000 500 500 Nil Nil 60,000 1,000 1,000 Nil Nil 60,010 1,010* 1,010* Nil Nil 60,020 1,020* 1,020* Nil Nil 60,050 1,030 1,050* 20 1.94 60,100 1,040 1,071 31 2.98 60,200 1,061 1,092 31 2.94 5,000 2,040 2,100 60 2.94 5,000 4,080 4,200 120 2.94 1,50,000 19,380 19,950 570 2.94 2,00,000 34,680 35,700 1,020 2.94 3,00,000 65,280 67,200 1,920 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Clarification in the definition of persons 5.1 Under the existing provision contained in clause (31) of section 2, the expression "person" includes an individual, a Hindu undivided family, a company, a firm, an association of persons or a body of individuals, whether incorporated or not, a local authority and every other artificial juridical person, not falling within any of the above definitions. Although, the definition of "person" is inclusive and starts with the qualifying words "unless the context otherwise requires", in some cases, a claim has been made that certain bodies do not fall within any of the definition of "person" provided in clause (31) of section 2 due to the sole reason that they are not supposed to have any income or profits and gains. 5.2 To clarify the correct legal position, an Explanation in clause (31) of section 2 has been inserted through the Finance Act, 2002, so as to provide that an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not, such person or body or authority or juridical person, was formed or established or incorporated with the object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessment year 2003-2004 and subsequent assessment years. [Section 4(b), 4(c), 4(k)(i) and 4(k)(ii)] 8. Withdrawal of exemption of grossing up of tax in certain cases 8.1 Under the existing provision contained in clause (5B) of section 10, the tax paid by an employer (being the Government, local authority, any corporation set up under any special law or any approved institution or body carrying on scientific research), on remuneration payable to a technician (being an individual not resident in India in any of the four financial years immediately preceding the year in which he arrived in India) is not included in computing the total income of the technician. 8.2 Under the existing provision of clause (6A) of section 10, the tax paid by the Government or Indian concern, on royalty/or fees for technical services paid by them under an agreement, which either relates to a matter included in the industrial policy of the Government and is in accordance with that policy or is approved by the Central Government, is not included in computing the total income of the person on whose behalf the tax is paid. 8.3 Under the existing provision of clause (6B) of section 10, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of section 10 has been amended through the Finance Act, 2002, so as to extend the exemption to employees of an institution having importance throughout India or throughout any State or States, as may be specified by the Central Government by notification in the Official Gazette. 10.3 Through Notification No. 151 of 2002, dated 19th June, 2002, rule 2BA of the Income-tax Rules, 1962, has been amended so as to provide the exemption to employees of institutions having importance throughout any State or States only if the conditions mentioned in the said rule 2BA are satisfied. 10.4 These amendments take effect retrospectively from 1st April, 2002 and apply in relation to the assessment year 2002-2003 and subsequent assessment years. [Section 4(h)] 11. Withdrawal of exemption on exchange risk premium received by public financial institutions 11.1 Under clause (23E) of section 10, the income of a notified Exchange Risk Administration Fund (ERAF) set up by public financial institutions is exempt from payment of income-tax. Under clause (14A) of section 10, any income received by a public financial institution as exchange risk premium from any person borrowing in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as local authorities under any other Central or State legislation. Exemption under this clause would not be available to port trusts also. 12.4 This amendment will take effect from 1st April, 2003 and will, accordingly, applies in relation to the assessment year 2003-2004 and subsequent assessment years. [Section 4(l)] 13. Income of certain Housing Boards, etc., to become taxable 13.1 Under the existing provisions contained in clause (20A) of section 10, income of the Housing Boards or other statutory authorities set up for the purpose of dealing with or satisfying the need for housing accommodations or for the purpose of planning, development or improvement of cities, towns and villages is exempt from payment of income-tax. 13.2 Through the Finance Act, 2002, clause (20A) of section 10 has been deleted so as to withdraw exemption available to the abovementioned bodies. The income of Housing Boards of the States and of Development Authorities would, therefore, also become taxable. 13.3 Under section 80G, donation made to housing authorities, etc., referred to in clause (20A) of section 10 is eligible for 50% deduction from total income in the hands of the donors. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to the abovementioned bodies. 15.3 Under section 80G, donation made to sports associations and institutions notified under clause (23) of section 10, is eligible for 50% deduction from total income in the hands of the donor subject to fulfilment of certain conditions. In addition, sums donated to Indian Olympic Association or to associations or institutions notified under that clause, for development of sports and games in the country and for their sponsorship, is eligible for 100% deduction from total income in the hands of the donor provided the amount received is applied for purposes of development of infrastructure or for sponsoring of games and sports. Even after the omission of clause (23) of section 10, if a sports body is registered as a charitable organisation under section 12AA, the donor will be entitled to deduction under section 80G at 50% in respect of the donation made to such sports body. However, donations for the purposes of development of infrastructure for sports and games and for their sponsorship would not be eligible for 100% deduction after omission of clause (23) of section 10. In order to continue this benefit, section 80G has been amended to provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome to the objects for which such entity is established. 16.4 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. [Section 4(s)] 17. Exemption of the income of the Credit Guarantee Fund Trust for Small Industries. 17.1 Through the Finance Act, 2002, a new clause (23EB) has been introduced in section 10 of the Income-tax Act so as to exempt the income of the Credit Guarantee Fund Trust for Small Industries being a trust created by the Government of India and the Small Industries Development Bank of India established under sub-section (1) of section 3 of the Small Industries Development Bank of India Act, 1989, for a period of five previous years relevant to the assessment years beginning on 1st day of April, 2002 and ending on the 31st day of March, 2007. 17.2 This amendment takes effect retrospectively from 1st April, 2002 and applies in relation to the assessment years 2002-2003, 2003-2004, 2004-2005, 2005-2006 and 2006-2007. [Section 4(v)] 18. Withdrawal of exemption to the authorities for marketing of commodities. 18.1 Under the existing provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hings or computer software. 19.5 Under the existing provisions of section 10A, the deduction is available for a maximum period of ten consecutive assessment years starting from the year of commencement of production. After the assessment year commencing on or after 1st April, 2010, no deduction shall be available irrespective of the year of commencement of production. However, in respect of undertakings commencing operation in the notified Special Economic Zones (SEZs) on or after 1st April, 2002, the Finance Act, 2002, intends to provide a separate tax holiday for a total period of seven assessment years, comprising a deduction of 100% of export profits for five years followed by deduction of 50% of export profits for subsequent two years. The proposal shall have the effect of extending the deduction under section 10A beyond the assessment year 2010-2011, in respect of undertakings operating from the notified Special Economic Zones (SEZs). 19.6 Sub-section (9) of section 10A and sub-section (9) of section 10B provide that no deduction under those sections shall be available where during any previous year the ownership or the beneficial interest in the undertaking is transferr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trust as against the existing limit of 25%, can be accumulated for an indefinite period, without any condition. 20.3 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assessment years. [Section 7] 21. Restriction on the application of accumulated income of the charitable or religious trusts. 21.1 Through the Finance Act, 2002, an Explanation has been inserted below sub-section (2) of section 11 so as to provide that any amount paid or credited out of income from property held under trust referred to in clause (a) or clause (b) of sub-section (1), read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, either during the period of accumulation or thereafter, shall not be treated as application of income for charitable or religio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r other educational institution or any hospital or other medical institution referred to in sub-clauses (iv), (v), (vi), (via) of the said clause, whose gross receipts exceed one crore rupees, is not exempt, unless the said trust or fund or institution or university or other educational institution or hospital or other institution, publishes its accounts in a local newspaper and furnishes a copy of such newspaper, along with the form of application for exemption or continuance thereof. 22.3 Since the trusts or institutions registered under section 12AA are already filing their returns, and the entities exempt under sub-clauses (iv), (v), (vi) and (via) are now also required to file their return of income, the requirement of publishing accounts in a local newspaper and furnishing a copy of such newspaper along with the return of income or along with the form of application for exemption or continuance thereof, as the case may be, has been dispensed with by omitting clause (c) of section 12A and the ninth proviso to clause (23C) of section 10 through the Finance Act, 2002. 22.4 These amendments take effect retrospectively from 1st April, 2002 and apply in relation to the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est payable on capital borrowed on or after 1st April, 1999, for acquiring or constructing one self-occupied house is deductible up to one lakh fifty thousand rupees where such acquisition or construction is completed before 1st April, 2003. 25.2 To sustain the pace of investment in the housing sector, the Finance Act, 2002, has amended the section to allow this deduction even where the acquisition or construction is completed on or after 1st April, 2003, so long as the acquisition or construction is completed within three years from the end of the financial year in which the capital was borrowed. 25.3 The Finance Act, 2002, has also inserted a proviso after the second proviso and the Explanation under section 24 with a view to prevent the unintended benefit of deduction of interest paid on amounts not actually used in acquiring or constructing the house. It stipulates that no such deduction shall be allowed in respect of such interest unless the person extending the loan certifies that such interest was payable in respect of the amount advanced for acquisition or construction of the house, or as refinance of the principal amount outstanding under an earlier loan taken for such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent. of the actual cost of such machinery or plant acquired and installed after 31st day of March, 2002— (i) in the case of a new industrial undertaking, in the previous year in which it begins to manufacture or produce any article or thing ; or (ii) in the case of an industrial undertaking existing before 1st April, 2002, in the previous year in which it achieves substantial expansion by way of increase in the installed capacity by not less than twenty-five per cent. 27.3 Such further sum shall be deductible from the written down value of the asset. The deduction shall be allowed only if the assessee furnishes the details of plant and machinery and the increase in installed capacity of production in the prescribed form along with the return of income and a report from an accountant certifying that the deduction has been correctly claimed in accordance with the provisions of the clause. No deduction will be admissible in respect of machinery or plant installed in any office premises or any residential accommodation, including any accommodation in the nature of guest house or in respect of any office appliances or road transport vehicles. Further, no deduction will be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e projects or schemes 29.1 Under the existing provisions of section 35AC, a deduction of the amount of expenditure incurred during the previous year by way of payment of any sum to a public sector company or a local authority or to an association or institution approved by the National Committee for carrying out any eligible project or scheme is allowed. Eligible project or scheme means a project or a scheme for promoting the social and economic welfare of, or upliftment of, the public as the Central Government may, by notification in the Official Gazette, specify in this behalf on the recommendations of the National Committee. Sub-section (4) of the said section provides that where the National Committee is satisfied that the project or scheme is not being carried on in accordance with all or any of the conditions subject to which approval was granted, it may withdraw the approval earlier granted to the association or institution. Sub-section (5) also provides for withdrawal of the notification where the project or scheme is not being carried out in accordance with all or any of the conditions on the basis of which such project or scheme was notified. 29.2 The Act has amended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrying out any approved programmes of conservation of natural resources or of afforestation, qualify for deduction in computation of taxable income of an assessee not carrying on business or profession. Similar deduction is also available in case the sums are paid to a fund notified by the Central Government for the purposes of afforestation. 30.3 The Act has amended the said sections to provide that no deduction under section 35CCB and under section 80GGA shall be allowed in cases where sums are paid after 31st March, 2002. However, rule 11K of the Income-tax Rules, 1962, relating to guidelines for recommending projects or schemes for the purpose of section 35AC has been amended to include, within the list, programmes of conservation of natural resources and of afforestation with effect from 1st April, 2002. 30.4 The amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent years. [Sections 17 and 31] 31. Balance instalments of expenditure incurred under voluntary retirement scheme to be allowed to the resulting entity 31.1 Under the existing provisions of sub-section (1) of section 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal income. 32.3 The first proviso to section 36(1)(viia)(a) gives an option to a scheduled bank or a non-scheduled bank to claim deduction in respect of any provision made by the bank to the extent of five per cent. of the amount of any assets classified by the Reserve Bank of India as doubtful assets or loss assets shown in the books of account of the bank on the last day of the previous year. This option is available for five consecutive assessment years commencing on or after 1st April, 2000 and ending before 1st April, 2005. 32.4 Further, under sub-clause (c) of clause (viia) of sub-section (1) of section 36, a deduction to the extent of five per cent. of the total income (computed before making any deduction under this clause and Chapter VI-A) is allowed to a public financial institution, a State Financial Corporation and a State Industrial Investment Corporation in respect of any provision for bad and doubtful debts made by such institutions or corporations. 32.5 The Act has increased the limit of five per cent. given under the proviso to sub-clause (a) to ten per cent. and also extended this facility to a public financial institution, State Financial Corporation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r transfer of a capital asset acquired by him from abroad on deferred payment terms or against a foreign loan, the additional rupee liability incurred by him in repaying the instalments of the cost or the foreign loan, as the case may be, after the date of devaluation of the rupee, is to be added to the original actual cost of the asset. The section also secures that where there is a decrease in the rupee liability of the assessee in respect of assets acquired by him from abroad, due to change in the rate of exchange of the rupee, the original actual cost of the asset will have to be correspondingly reduced. 34.3 With a view to rationalize the provisions of the said section, the Act has substituted the existing section 43A to provide that where a capital asset has been acquired from a foreign country, the adjustments to the actual cost of the asset on account of change in the rate of exchange shall be allowed to be made only on the basis of rupee liability at the time of actual payment by the assessee towards the cost of the asset or repayment of the foreign loan or interest irrespective of the method of accounting adopted by the assessee. 34.4 It has also been provided that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tlement of transactions in money, government securities and forex markets, the RBI has established the Clearing Corporation of India Limited (CCIL). Since the settlement process may involve lending of securities, the Finance Act, 2002, has extended the benefit of exemption from capital gains tax also to any transfer in a scheme for lending of any securities under an agreement or arrangement, which is subject to the guidelines issued by the Reserve Bank of India. 36.3 This amendment will take effect from 1st April, 2003, and will accordingly apply in relation to assessment year 2003-04 and subsequent years. [Section 23] 37. Computation of capital gains in real estate transactions 37.1 The Finance Act, 2002, has inserted a new section 50C in the Income-tax Act to make a special provision for determining the full value of consideration in cases of transfer of immovable property. 37.2 It provides that where the consideration declared to be received or accruing as a result of the transfer of land or building or both, is less than the value adopted or assessed by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 003-04 and subsequent years. [Section 25] 39. Amendment of section 55 of the Income-tax Act, 1961 39.1 Under section 45, any capital receipts arising out of transfer of any business or commercial rights are taxable under the head "Capital gains". The amount of "capital gains" is computed according to section 48 of the Income-tax Act, 1961. For this purpose, "cost of acquisition" and "cost of improvement" are defined under section 55. At present, in case of receipts for transfer of right to manufacture, produce or process any article or thing the "cost of acquisition" and "cost of improvement" are taken as "nil" under section 55. 39.2 The Finance Act, 2002, has amended section 55 so as to provide that the "cost of acquisition" and "cost of improvement" for working out "capital gains" on capital receipts arising out of transfer of right to carry on any business would also be taken as "nil". [Section 26] 40. Modifications of provisions relating to set off of long-term capital loss 40.1 The existing provision contained in section 70 of the Income-tax Act provides that where the net result for any assessment year in respect of any source falling under any hea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oviding telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services. 41.3 This amendment will take effect from 1st April, 2003 and will accordingly apply in relation to assessment year 2003-04 and subsequent years. [Section 27] 42. Extension of date for utilisation of donations received for Gujarat earthquake relief 42.1 As per the existing provisions of section 80G of the Income-tax Act, 1961, an assessee is allowed a deduction from his total income in respect of donations made to specified charitable funds and institutions. The amount of deduction is 100% of donation, in respect of donations to certain funds of national importance, while deduction on account of donation to other approved funds/institutions is available at 50%. 42.2 In view of the enormity of the earthquake in Gujarat, donations to trusts, funds and institutions received up to 30th September, 2001, to be utilized for relief of victims of the earthquake were allowed 100% deduction, by the Taxation Laws (Amendment) Act, 2001. Such donations were to be utilized for relief of earthquake victims in Guja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l to 10% of eligible profits and a further 10% of profits, as are transferred to the reserve account. 43.2 In view of the slowdown in the tourism sector subsequent to the recent global events, as a measure to provide fiscal support to this sector, the Finance Act, 2002, enhances the rate of deduction in the following manner : (i) For the assessment year 2003-04, 25% of profits from services to foreign tourist, and further 25% of the profits, as are transferred to the reserve, thereby raising the overall deduction from 40% to 50%. (ii) For the assessment year 2004-05, 15% of profits from services to foreign tourist, and further 15% of the profits as are transferred to the reserve, thereby raising the overall deduction from 20% to 30%. 43.3 This amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-04 and subsequent years. [Section 32] 44. Separate audit for undertakings claiming deduction under sections 80-IA and 80-IB mandatory for companies and co-operative societies also 44.1 Section 80-IA of the Income-tax Act, 1961 provides for a ten-year period (out of initial fifteen years) hundred per cent. tax hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... April, 2002 to 31st March, 2005 and should be of approved norms. The deduction commences from the year the multiplex starts commercial operation. 45.3 With a view to encourage construction of large-scale modern convention centres, the Finance Act, 2002, provides a deduction of 50% from the profits of the business of building, owning and operating a convention centre for a period of 5 years. For availing of the deduction, the convention centre should be of approved norms and should be constructed during 1st April, 2002 to 31st March, 2005. The deduction commences from the year the convention centre starts commercial operation. 45.4 These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-04 and subsequent years. [Section 34] 46. Tax holiday for new industrial undertakings set up in industrially backward States industrially backward district extended for two years 46.1 Under sub-section (4) of section 80-IB of the Income-tax Act, 1961, industrial undertakings which begin to manufacture or produce articles or things or to operate cold storage plant or plants during the period beginning on the 1st d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cified incomes such as interest on securities, etc., are deductible from gross income up to Rs. 9,000. In addition, income in the nature of interest on any Government security is eligible for a further deduction of Rs. 3,000. 47.2 By the Finance Act, 1997, a new clause (33) was added to section 10, whereby the income from dividend, units of Unit Trust of India (UTI) and Mutual Funds specified under section 10(23D) was made exempt from taxation in the hands of shareholders with effect from 1st April, 1998. As a corollary, deduction under section 80L was withdrawn on such incomes with effect from 1st April, 1998. However, prior to 1st April, 1998, when such incomes were taxable in the hands of the shareholders, it was eligible for deduction under section 80L. 47.3 The Finance Act, 2002, has reversed the taxability of dividend income, and accordingly the exemption provided by clause (33) of section 10 to the income from dividend, units of Unit Trust of India (UTI) and Mutual Funds specified under section 10(23D) was withdrawn with effect from 1st April, 2003. In view of the same, income from dividend, units of Unit Trust of India (UTI) and Mutual Funds specified under section 10(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yers having gross total income, (before deduction under Chapter-VI-A) not exceeding Rs. 1,50,000. Keeping in account the needs of the low cash salaried taxpayers, the rebate shall be higher at the rate of 30% for salaried taxpayers having gross salary income not exceeding Rs. 1 lakh (before allowing deduction under section 16) and where gross salary income is not less than 90% of the gross total income from all other sources. The rebate shall not be available in case of persons having gross total income (before deduction under Chapter VI-A) more than Rs. 5 lakhs. 48.5 The special rate of 25% of tax rebate for sportspersons, artists, etc., is also being withdrawn for the sake of rationalization. 48.6 Also, the requirement of making investment out of income chargeable to tax of the previous year has also been withdrawn, if the amount of investment does not exceed the total income of the assessee. 48.7 Further, the general limit of eligible investment has been increased from Rs. 60,000 to Rs. 70,000 and in case of investment in infrastructural securities, etc., specified in clauses (xvi) and (xvii) has been increased from Rs. 80,000 to Rs. 1,00,000. 48.8 The amendments will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the proviso to the sub-section (2) of section 92C of the Income-tax Act, if the application of the most appropriate method leads to determination of more than one price, the arithmetical mean of such prices shall be taken to be the arm's length price in relation to the international transaction. 50.4.1 With a view to allow a degree of flexibility in adopting an arm's length price, the Finance Act, 2002, has amended the proviso to sub-section (2) of section 92C to provide that where the most appropriate method results in more than one price, a price which differs from the arithmetical mean by an amount not exceeding five per cent. of such mean may be taken to be the arm's length price, at the option of the assessee. 50.5 Under the existing provisions contained in the second proviso to sub-section (4) of section 92C, where the total income of an enterprise is computed by the Assessing Officer on the basis of the arm's length price as computed by him, the income of the other associated enterprise shall not be recomputed by reason of such determination of arm's length price in the case of the first mentioned enterprise, where the tax has been deducted under the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion (1) of section 115AC, in the case of an assessee who is a non-resident, income by way of dividend and long-term capital gains arising from Global Depository Receipts (GDRs), "re-issued" in accordance with a scheme notified by the Central Government, against the existing shares of an Indian company purchased by him in foreign currency, through an approved intermediary, is taxed at a concessional rate of ten per cent. However, the GDRs "issued" against the existing shares are not covered by these provisions. 51.2 Through Finance Act, 2002, the said sub-clause (iii) has been amended so as to extend the concessional rate of tax on income by way of dividend and long-term capital gains arising from GDRs issued or re-issued in accordance with a scheme, as specified by the Central Government, against the existing shares of an Indian company, and purchased by the assessee in foreign currency through an approved intermediary. 51.3 In view of the above amendment, even the GDRs issued against the existing shares of an Indian company would be covered by the provisions of section 115AC. The condition that the Indian company issuing such GDRs should be listed on a recognised stock excha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion at source have also been revived through the Finance Act, 2002. The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payments of dividends within India before making any payment in cash or before issuing any cheque or warrant in respect of any dividend or before making any distribution or payment to a shareholder, who is resident in India, of any dividend, would now be required to deduct from the amount of such dividend, income-tax at the rates in force. These rates are specified in Part II of the First Schedule to the Finance Act. With a view to avoid hardship to small investors and also to reduce the avoidable infructuous paperwork and issue of refund in non-taxable cases, a threshold limit of Rs. 1,000 has been provided below which no tax would be required to be deducted at source from payments by way of dividends. 52.5 As per the second proviso to sub-section (1) of section 195, no tax is required to be deducted at source in the case of a shareholder, who is a nonresident, or a foreign company, in respect of dividends referred to in section 115-O. Consequent upon the change in the scheme of taxation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 33AC are added back to the book profits under section 115JB. 53.3 With a view to provide necessary fiscal support to the shipping industry, the Finance Act, 2002, provides that the amounts transferred to a reserve specified under section 33AC of the Income-tax Act, 1961, shall not be added to the book profit, under section 115JB. 53.4 For the sake of rationalization, the Finance Act, 2002, makes further amendment to section 115JB, to provide that in case the tax liability of a company is less than 7.5% of the book profits, such book profits shall be deemed to be the "total income", chargeable to tax at the rate of seven and one-half per cent. 53.5 Further, the Finance Act, 2002, provides that the amounts withdrawn from reserves, in the nature of revaluation reserve, if credited to the profit and loss account, shall not be reduced from the book profit. It also provides that any amount withdrawn from a reserve or a provision created on or after 1st day of April, 1997, and which is credited to the profit and loss account shall not be reduced from the book profit, unless the book profits in the year of creation of such reserves or provisions were increased by the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mutual fund specified under clause (23D) of section 10, or of the UTI, the person responsible for making the payment shall, at the time of credit of such income to the account of payee or at the time of payment thereof, in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent. With a view to avoid hardship to small investors and also to reduce the avoidable infructuous paperwork and issue of refund in non-taxable cases, a threshold limit of Rs. 1,000 has been provided below which no tax would be required to be deducted at source from payments by way of income from units of UTI and mutual funds. 54.5 The provisions of section 196A has also been revived so as to provide that tax shall be deducted at source from any income paid to a non-resident, not being a company, or to a foreign company, in respect of units of UTI or Mutual Funds at the rate of twenty per cent. 54.6 Consequential amendment has also been made in clause (23D) of section 10. 54.7 These amendments will take effect from 1st April, 2003, and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded against for such offence except with the previous sanction of the Commissioner. 55.2 The Finance Act, 1995, had inserted a new procedure of block assessment in search cases in Chapter XIV-B of the Income-tax Act, and the provisions of sub-section (5) of section 132 which required an estimate of the undisclosed income to be made in a summary manner, were made inoperative for any search initiated on or after the 1st day of July, 1995. As the provisions of sub-section (5) have now become redundant, the Finance Act, 2002, has omitted the said sub-section and has also omitted sub-sections (6), (7), (11), (11A) and (12) of section 132, being specifically related to the estimate of undisclosed income made under sub-section (5). 55.3 Under the existing provisions of sub-section (8) of section 132, the books of account or documents seized during search cannot be retained by the authorised officer or the Assessing Officer beyond a period of 180 days from the date of the seizure, unless the approval of the Chief Commissioner, Commissioner, Director General or Director is, obtained for such retention, on the basis of reasons to be recorded in writing. 55.3.1 It has been noticed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (9A) to provide that the authorised officer shall hand over the seized books of account, documents and assets to the Assessing Officer having jurisdiction over the person searched within a period of 60 days from the date on which the last of the authorisations for search was executed. 55.6 Sub-section (10) of section 132 was amended to provide that where an assessee makes an application to the Board for the return of the books of account or other documents, the Board may, after giving the applicant an opportunity of being heard, pass such orders as it thinks fit. 55.7 These amendments will take effect from 1st June, 2002, and will, accordingly, apply in relation to a search initiated or requisition made on or after that date. [Section 56] 56. Rationalisation of provisions relating to application of seized or requisitioned assets. 56.1 The existing provisions of section 132B of the Income-tax Act provide for the manner in which assets seized during search and retained under section 132(5) are to be dealt with in the discharge of any existing liability as well as the amount of the liability arising on assessments or reassessments made as a result of search. 56.2 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... article or thing and recording the statement of any person which may be useful for, or relevant to any proceedings under the Act. 57.2 With a view to prevent the destruction or misappropriation of any evidence found during survey, the Finance Act, 2002, has amended the provisions by inserting a new clause (ia) and proviso thereunder in sub-section (3) of section 133A to empower the income-tax authority to impound and retain in his custody books of account or other documents inspected by him during survey, after recording his reasons for doing so. Such books of account or other documents shall not be retained for more than fifteen days without obtaining the approval of the Chief Commissioner or Director General or Commissioner or Director therefor : 57.3 This amendment will take effect from 1st June, 2002. [Section 58] 58. Bulk filing of returns in computer readable medium by certain salaried taxpayers. 58.1 Under the existing provisions contained in section 139 of the Income-tax Act, every company whether it has a profit or loss and every person other than a company, if the total income in respect of which he is assessable under this Act during the previous year exceeded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (i) of sub-section (3) of section 143, limiting himself to the claims he had set out to verify. If he feels that the case requires further scrutiny on other issues, he will be free to issue a notice initiating comprehensive scrutiny of the return, as is being done presently. 59.3 These amendments will take effect from 1st June, 2002. [Section 60] 60. Consequential amendment of section 158A 60.1 The Finance (No. 2) Act, 1998, had inserted section 260A in the Income-tax Act to provide for direct appeal to High Court against the order of the Appellate Tribunal. By the same Act, sections 256 and 257 which required the Tribunal to refer a case to the High Court or the Supreme Court, became inoperative. The Finance Act, 2002, has made consequential changes in section 158A of the Income-tax Act relating to procedure for avoiding repetitive appeals by including therein references to appeals to High Court under section 260A, and omitted references to sections 256 and 257, wherever necessary. 60.2 Amendments on similar lines are made in section 18C of the Wealth-tax Act. 60.3 These amendments will take effect from 1st June, 2002. [Sections 63 and 111] 61. Rationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me which can be included in the block assessment is only such income which is directly evidenced by material found during the search and does not include income which has been discovered on the basis of post-search inquiries made during the block assessment proceedings. This is contrary to the intention that any undisclosed income discovered as a result of search is to be included in the block assessment as long as such income has been detected as a result of evidence gathered during the search. 61.3.2 The Finance Act, 2002, has amended section 158BB to clarify that the block assessment of undisclosed income is to be based on the evidence found in the search and material or information gathered in post-search inquiries made on the basis of evidence found in the search. 61.4 As per clause (a) of sub-section (1) of section 158BB as it existed, the aggregate total income of the block period including the undisclosed income was to be adjusted by the income or loss already assessed in regular assessments. However, the clause does not specify the date by which such assessments should be completed. 61.4.1 The Finance Act, 2002, has amended clause (a) to clarify that the aggregate t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable, undisclosed income shall not include such total income. 61.7 The existing provision of the Explanation to section 158BB provides that the total income of the block period for the purpose of aggregation is to be computed without giving effect to set-off of brought forward losses under Chapter VI or unabsorbed depreciation under section 32(2). In many cases it is being claimed by the assessees that the deduction allowable under Chapter VI-A for any previous year should also be computed on the total income before giving effect to set off of brought forward losses and depreciation. In such cases the amount of deduction under Chapter VI-A admissible in computing aggregate total income comes out to be more than the deduction actually allowed in regular assessments resulting in underassessment of undisclosed income for the block period. It has also been noted that the computation of aggregate total income under section 158BB is required to be made in accordance with the provisions of Chapter IV of the Act. This has given rise to doubts as to whether deductions under Chapter VI-A are to be allowed in computing the aggregate total income. 61.7.1 The Finance Act, 2002, has car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings are stayed by any court and the time taken by the assessee for furnishing an audit report under section 142(2A). There could be other circumstances beyond the control of the Assessing Officer which could delay the completion of assessment proceedings, In fact, section 153 which lays down time limits for completion of regular assessments refers to several other time periods apart from the periods mentioned above which may be excluded in computing the time limit. 62.3.1 With a view to align the provisions of section 158BE relating to block assessment with the provisions of section 153 relating to regular assessments, the Finance Act, 2002, has amended Explanation 1 below section 158BE to further exclude from the period of limitation the time taken in giving an opportunity to be reheard under section 129 on change in incumbent and the time taken by the Settlement Commission for passing an order rejecting or not allowing an application to be proceeded with. It is further provided as in section 153 that the minimum time available with the Assessing Officer after excluding any of the periods specified in the Explanation shall be sixty days. 62.4 Surcharge in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of section 192 of the Income-tax Act, 1961, an employer is required to deduct tax at source on income under the head "Salaries", inclusive of the value of perquisites. In case, such tax is paid by an employer on behalf of an employee, the same being in the nature of an obligation which, but for such payment, would have been payable by the employee, is considered a perquisite, and is chargeable to tax. 64.2 The Finance Act, 2002, provides for a new scheme of taxation of perquisites, wherein an employer has been given an option to pay tax on the whole or part-value of perquisite (not provided for by way of monetary payments), on behalf of an employee, without making any deduction from the income of the employee. 64.3 To bring into effect this new scheme, a new clause (10CC) has been inserted in section 10, to exempt the amount of tax actually paid by an employer, at his option, on the income in the nature of a perquisite, (not provided for by way of monetary payment) on behalf of an employee, from being included in perquisites. 64.4 Such tax paid by the employer shall not be treated as an allowable expenditure in the hands of the employer under section 40 of the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4, I94A, 194B, 194BB, 194C, 194D, 194E, 194EE, 194F, 194G, 194H, 194-I, 194J, 194K, 194L, 195, 196A, 196B, 196C and 196D and paid to the account of Central Government is treated as a payment of tax on behalf of the person from whose income the deduction was made or the owner of the security or depositor or owner of property or of unitholder or of the shareholder, as the case may be, and credit is given to such person for the amount so deducted on the production of a certificate furnished under section 203 in the assessment made under this Act for the assessment year for which such income is assessable. 65.2 With a view to mitigate this hardship being faced by the assessee due to non-furnishing of TDS certificates, the Act has inserted a new sub-section (14) in section 155 to provide that where in the assessment for any previous year or in any intimation or deemed intimation under sub-section (1) of section 143 for any previous year, credit for tax deducted in accordance with the provisions of section 199 has not been given on the ground that the TDS certificate was not filed with the return and subsequently such certificate is produced before the Assessing Officer within two year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax Act to provide that no tax shall be deducted at source under the said sections in respect of any interest or dividend payable to the Life Insurance Corporation of India or the General Insurance Corporation of India or to any of the four companies formed by virtue of the schemes framed under sub-section (1) of section 16 of the General Insurance Business (Nationalisation) Act, 1972, or any other insurer in respect of any securities or shares owned by them or in which they have full beneficial interest. 66.6 These amendments will take effect from 1st June, 2002. [Sections 72, 73, 157 and 158] 67. Individuals and Hindu undivided families to deduct tax in cases where total turnover or gross receipts exceed the specified limit under section 44AB 67.1 Individuals and Hindu undivided families are not required to deduct tax at source under the existing provisions of sections 194A, 194C, 194H, 194-I and 194J. 67.2 Individuals and Hindu undivided families whose sales turnover or gross receipts of the business or profession exceed rupees forty lakhs or rupees ten lakhs, as the case may be, are required to maintain books of account and other documents and get their accounts aud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax. 69.3 The amendment will take effect from 1st June, 2002. [Section 85] 70. Requirement to apply for tax collection account number 70.1 Under the existing provisions of section 206C, every person, being a seller shall, at the time of debiting of the amount payable by the buyer to the account of the buyer or at the time of receipt of such amount from the said buyer in cash or by the issue of the cheque or draft or by any other mode, collect from the buyer a sum equal to the percentage specified in the Table under sub-section (1) of the said section, of such amount. 70.2 The Act has inserted a new section 206CA to provide that every person collecting tax at source in accordance with the provisions of section 206C shall apply to the Assessing Officer for the allotment of a tax collection account number. It has also been provided that such tax collection account number shall be quoted in all challans for payment of any tax collected at source, in all certificates for tax collected and in all returns to be furnished under the provisions of section 206C. Such tax collection account number would also be required to be quoted in all other documents pertaining to suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vance tax but also in cases of short payment of advance-tax where the first instalment of advance-tax has been paid but subsequent instalments are not being paid as per the provisions of sections 208 to 210 of the Income-tax Act. 71.3 The amendment will take effect from 1st June, 2002. [Section 92] 72. Modification of provisions relating to interest payable to the assessee 72.1 Under the existing provisions of the Income-tax Act, interest is payable to the assessee at the rate of three-fourths per cent. for every month or part of a month or nine per cent. per annum. 72.2 The Act has reduced the aforesaid rate of interest from three-fourths per cent. to two-thirds per cent. for every month or part of a month and from 9% to 8% per annum, as the case may be. Accordingly, section 244A and sub-rule (3) of rule 68A of the Second Schedule to the Income-tax Act have been amended. 72.3 Similar amendment has been made in section 34A of the Wealth-tax Act. 72.4 The amendments will take effect from the 1st day of June, 2002. [Sections 93, 109 and 114] 73. Providing limitation of time for admission of application and passing of orders by the Settlement Commission 73. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t thereof. 74.2 With the creation of the posts of Vice-Presidents and Senior Vice-President, and considering the functions performed by them, the Finance Act, 2002, has substituted the said sub-section to provide that the Central Government shall appoint the Senior Vice-President or one of the Vice-Presidents of the Tribunal to be the President thereof. 74.3 This amendment will take effect retrospectively from 1st April, 2002. [Section 94] 75. The scheme of pre-emptive purchase of immovable properties under Chapter XX-C abolished 75.1 Under the existing provision contained in Chapter XX-C of the Income-tax Act, any person intending to transfer immovable property in specified areas at values exceeding specified amounts is required to file a statement in Form 37-I before the Appropriate Authority within the prescribed time before the intended date of transfer. The transfer can be registered only if the Appropriate Authority does not pass an order of pre-emptive purchase of the property, and issues a no-objection certificate. 75.2 Since these provisions were causing procedural delays in registration of transfers, and with a view to remove source of hardship for the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of assessment proceedings and cases in which particulars of income have been concealed or inaccurate particulars furnished. 77.2 The Finance Act, 2002, has amended the section to include a reference to the Commissioner as being an authority who can initiate and levy penalty under sub-section (1) of the said section. Similar reference is made in Explanation 1 and Explanation 7 to the said sub-section. 77.3 Amendment on similar lines is made in section 18 of the Wealth-tax Act. 77.4 These amendments will take effect from 1st June, 2002. 77.5 The existing provisions of clauses (ii) and (iii) of sub-section (1) of the said section provide for levy of the penalty specified therein, in addition to any tax payable. Certain courts have held that unless some tax is payable, no penalty can be levied. 77.6 The Finance Act, 2002, has amended the said clauses to clarify that the penalty specified in them can be levied even if no tax is payable on the total income assessed. 77.7 The Finance Act, 2002, further amended Explanation 4 which defines the expression "the amount of tax sought to be evaded" in different circumstances, to clarify that in cases where the income in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilure to comply with the provisions of section 139A of the Income-tax Act relating to permanent account number (PAN). 78.4 In view of the importance of complying with the provisions relating to PAN, the Finance Act, 2002, has omitted the said clause from section 272A and inserted a new section 272B in the said Act, to provide for penalty of ten thousand rupees for failure to comply with the provisions of section 139A or for quoting or intimating a PAN which is false. An opportunity of being heard shall be given to the assessee before imposing any such penalty. 78.5 A reference to section 272B has been inserted in section 273B of the Income-tax Act to provide that such penalty shall not be imposed if it is proved that there was reasonable cause for the failure. The proposed amendment is consequential in nature. 78.6 These amendments will take effect from 1st June, 2002. [Sections 102, 103,104 and 106] 79. National Dairy Development Board, Prasar Bharati and Oil Industry Development Board to pay income-tax 79.1 Certain statutory bodies have been exempted from payment of income-tax by having a provision for the same in the Act through which these bodies were set up. 79. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le only to room charges, and only where such charges for any unit of residential accommodation are three thousand rupees or more per day. 80.3 It was also noticed that some hotels have been claiming that where a room is occupied by more than one person, the room charges should be divided amongst the occupants and only the charges per occupant should be considered for determining whether the threshold limit is crossed in such cases. The intention underlying section 3 was always to levy the tax with respect to the room charges for a unit of accommodation and the room charges cannot be split up in case of more than one occupant. This intention has been endorsed in a recent judgment of the Himachal Pradesh High Court in the case of H. P. Tourism Development Corporation v. Union of India [1999] 238 ITR 38. With a view to clarify the intention, sub-section (1) of section 3 of the Expenditure-tax Act has been amended to provide that expenditure tax shall be chargeable per unit of accommodation where the room charge is three thousand rupees or more per day. 80.4 These amendments have taken effect from 1st June, 2002 and shall accordingly apply in relation to expenditure incurred on or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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